Hidden in Plain Sight Summary: How Design Thinking Creates Competitive Advantage

Hidden in Plain Sight Intro

Erich Joachimsthaler says that identifying customer need is a surefire recipe for being in a blind spot, and not seeing your biggest opportunities for innovation and growth. Instead of focusing on making a tastier cupcake or a faster automobile, he recommends understanding the serial and behavioral episodes that make up people’s lives.

Then build on that reasoning when you go to the marketplace. Joachimsthaler offers plenty of business stories as evidence to support his assertion that the leaders of thriving, cutting-edge companies try to understand and analyze the structure, pattern and emotional code of consumer behavior in context.

Instead of studying needs and wants, market leaders first study behaviors. Progressive organizations understand the ecosystem of products or services, and how they intersect in the context of episodic behavior to help people take care of what matters to them: their daily projects, tasks and activities.

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Hidden in Plain Sight - Summary  in 2 Minutes

1. Corporate success breeds failure. Success creates a smokescreen.


2. It hides – in plain sight – the biggest and most obvious opportunities for growth. Study consumers’ routine behavioral episodes to discover the context and ecosystem of products and services in their daily lives.


3. Learn a new way to understand what really matters to customers, the “Episodic Reconstruction Method.”


4. Look “beyond” your current clientele, brands, category and industry, and your internal silos and divisions.


5. Use the “demand-first innovation and growth” model to detect new opportunities.


6. It can help you identify breakthrough innovations and set your strategy.


7. Make innovation and growth a systematic and repeatable process.


8. Formulate strategies around demand-centric growth platforms, not technologies or new products.


9. Build strong brands and engage customers by creating total experiences around the behavioural episodes that define peoples’ lives.

Amazon Book Page:
Hidden in Plain Sight: How to Find and Execute Your Company's Next Big Growth Strategy

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Hidden in Plain Sight - Summary  in 10 Minutes

Looking at the Big Picture

Corporations spend “gazillions” of dollars in research and development, hoping to deliver the next hugely successful product or service. But, in many cases, the answer to consistent innovation and growth is right in front of you, “hidden in plain sight.” Even companies with impressive track records frequently fail to see their biggest opportunities. When companies grow accustomed to doing business a certain way and get cozy in their customer relationships, comfy success can keep them from innovating. Many organizations depend on tried-and-true formulas, hoping that meeting basic customer expectations will somehow ensure growth.

Instead, push the envelope by using the “demand-first innovation and growth” model, a method of objectively examining the structure and patterns of behavior, instead of just studying people as consumers or potential accounts. Try to understand what makes them tick as they go through the day. Today’s consumer is less motivated by a desire to fulfill a need or want, and more driven to take care of pressing tasks, projects and activities in the behavioral episodes of daily life. This changes some customer-courting basics. The days of “building it and they will come” are over.

Netflix and Starbucks understand this idea. Netflix co-founder and CEO Reed Hastings recognized that customers found it inconvenient to return DVDs to stores and so they frequently incurred painful late fees. He devised a way for people to order movies through the Internet and receive them by mail – without ever leaving home. Netflix also encourages customers to rate movies and provide feedback, enabling it to tailor its offerings to individual tastes.

Starbucks does not just sell a better coffee or store experience. It sells a “third place,” a place between home and work where people can take care of their tasks, projects, activities and priorities: read the paper, do e-mails, meet people, or simply relax and unwind. Starbucks creates a total experience around people’s daily behavioral routines. It does not merely satisfy a need or want that has not already been satisfied by another coffee shop. It understands that its success lies in innovating around people’s routines and not in merely creating a better store experience.

To Break Through, Look Beyond

Demand-first innovation and growth can help any company expand its horizons. In fact, CEOs and top managers who refuse to think “from the outside in” may be condemning their companies to falling profits and customer dissatisfaction. Growth demands a wider perspective, which means embracing these “seven beyonds”:

1. “Beyond existing customers” – While existing customers are good informants for market research, they are not the sources for identifying new growth opportunities. If you study the behavioral episodes of people, customers and potential customers, you can see entirely new opportunities for growth.

2. “Beyond existing brands” – Studying brands and brand portfolios is an “inside-out perspective” that limits your ability to see what really matters to your consumers: the tasks, projects and routines that make up their work and their lives.

3. “Beyond the category” – Products and services no longer fit neatly into separate categories. Once, people looked at their wristwatches for the time. Now people look  at their cell phones, computers and dashboards.

4. “Beyond the industry” – Cell phone companies no longer really compete against one other. They compete against technology. Few consumers are satisfied with cell phones that just make calls; the bells and whistles really matter. The challenge is producing innovations that add to your customers’ quality of life.

5. “Beyond silos and function” – Every member of a company, from the salespeople to the CEO, must commit to creating and capitalizing on opportunities, and sharing information. Always relay consumer observations and comments to the right people or departments.

6. “Beyond the boundaries of the strategic business unit” – Companies can follow the lead of General Electric, which encourages its unit leaders to identify and pursue opportunities company-wide. This requires studying customers’ work processes and seeing GE’s opportunities from this outside-in perspective.

7. “Beyond habitual domains” – Organizations – and consumers – benefit when specialists see things from one another’s perspective. That is, a firm’s public- relations professional should try to understand how its engineers attempt to develop consumer advantage.

A Sleeping Giant Awakens

Procter & Gamble (P&G) was going nowhere when A.G. Lafley became CEO in 2000. Profits had tumbled, investor confidence was waning, and P&G’s best-known brands and long-time market leaders, such as Tide and Crest, had fallen to No. 2. In addition to cutting costs by $1.7 billion, Lafley insisted that half of P&G’s new products should be developed outside of its labs.

Seeing the opportunities from the perspective of people’s routine, daily behavioral episodes, P&G created notable successes with the “Crest SpinBrush,” the “Mr. Clean Magic Eraser” and “Glad Press’n Seal.” “Crest Whitestrips” mark a collaborative effort between P&G’s oral-care specialists, home-care experts and corporate researchers. The Crest brand, once exclusively associated with “dental care,” is now synonymous with “dental cosmetics.” In formulating its innovation and growth strategy, P&G does not rely heavily on traditional methods such as focus groups. The company tries to put itself in its consumers’ shoes at home and in the supermarket. P&G’s marketers endeavor to understand exactly how the customer behaves, and to use the structure of consumers’ behavioral routines as opportunities for growth.

Staying Ahead of the Pack

Frito-Lay had little to complain about by the end of 2003. It controlled 65% of the salty- snacks market and projected 2004 revenues of more than $9 billion. Frito-Lay built its business by following consumer trends. It removed trans-fats from its snacks and debuted a “natural” line – both positive moves. But unit sales were falling because consumers had more snack options.

Facing the challenge of energizing Frito-Lay’s sales and charting a future course, marketing vice president Carlos Veraza decided to find out why consumers ate his company’s snacks. Video cameras in convenience stores revealed that customers did not purchase Fritos or Doritos as “impulse buys” off racks near cash registers – a long- held theory – but headed directly to the shelves. This realization motivated Frito-Lay to apply a new strategy, the “Episodic Reconstruction Method,” to study its consumers’ daily routines and their snack choices. The study, conducted mainly by having respondents keep 30-day diaries of “food-related activities,” found that customers associated certain brands with socializing, and saw other brands as side dishes to eat with sandwiches. Frito-Lay ultimately revamped its entire marketing strategy including refocusing its advertisements on the concept of enjoying its corn chips during life’s special moments or behavioral episodes. The company added substance to its brand identity, and boosted sales without raising prices or cutting the size of its portions.

The Nuts and Bolts

The three basic components of the demand-first innovation and growth model are:

1. “Creating the demand landscape” – Rather than categorizing customers according to income level, age or social standing, find out how they lead their lives. Learning that one out of every 20 individuals exercises two times a week is more important than determining the type of sneakers they wear. The ultimate purpose of products and services is to enhance customers’ experiences during specific episodes of behavior.


2. “Reframing the opportunity space” – Forget for a moment about creating offshoots of your successful products. Instead, imagine the context of a customer’s behavioral routine, and ask how your products or other products fit that person’s life. Apple could have marketed the iPod as a computer by-product. Instead, it promoted the iPod as a fun, essential item – part of an entire ecosystem of breakthrough innovations that are changing how people learn, buy, listen to and store music.


3. “Formulating the strategic blueprint for action” – Define your strategy based on how to fit your product or service into a repeated behavioral episode in your customers’ lives by activating demand-centric growth platforms. Don’t define strategy in terms of differentiation and a bigger, better, faster arms race. Don’t just build brands around attribute differences, but connect with and engage your consumers.

“Axing” the Competition

Axe, a line of deodorants and related products that Unilever introduced in Europe 25 years ago, is now the world’s leading brand in the “male grooming aids category.” More impressively, Axe climbed to number one in the U.S. only five years after its American launch. Are Axe’s products that much more effective than competing potions? Probably not. But Axe’s brilliant strategy is based on understanding the behavioral episodes in young men’s daily lives. Its marketers mapped exactly what young men do in the course of a month: how they prepare for dates, how they meet and approach girls. Then, they targeted several specific episodes in the lives of 17- to 20-year-old guys that centered around the goal of getting girls. Instead of targeting demographic differences or touting Axe’s product superiority, it focused on helping guys attract girls.

This let to Axe’s highly innovative programs and experiences, such as holding “dark parties,” where people experience their first touch at a totally dark gathering. Axe developed a strong digital presence, including numerous Web sites that tell young men how to be better Casanovas. It created social-networking tools so that the large community of young males can share tips about what works and what does not work when pursuing girls. Axe doesn’t saturate the marketplace with new products, variants and line extensions. Instead, Unilever spends its money on fitting into the behavioral episodes of the Axe’s loyal market and staying relevant about what really matters to them: getting help in the mating game.

Making the Connection

Axe demonstrates the five factors of success in innovation and growth:

1. “Challenging assumptions and held beliefs” – Axe challenged the fundamental belief that what really matters to guys is dry underarms. A behavioral, episodic perspective on demand can unleash new ways of positioning your brand and connecting with consumers.

2. “Making the brand part of culture” – By focusing on the behavioral episodes that

are important in people’s lives, the brand integrates into their culture and daily routine. It becomes part of the cultural currency. This creates an advantage beyond merely being the best product or the most differentiated brand.

3. “Find customers where they are” – Studying people with ethnographic methods, like observation, is insufficient. Such studies don’t capture all the relevant experiences in people’s lives. Episodic reconstruction measures all the episodes that drive demand.

4. “Leverage the contextual and cultural code” – Study relevant, repeated behavioral episodes and then leverage their emotional code by innovating around them, and using them to connect with and engage consumers. MasterCard did this by capturing priceless moments and leveraging their emotional code to connect its card with pay-off events.

5. “Activate a driving idea around growth platforms” – A growth platform is a group of behavioral episodes around which a company can innovate. Apple spurred the iPod by activating the growth platform of “managing music,” including its behavioral episodes: finding, evaluating, selecting, buying, listening to and storing music. This approach leads to innovative opportunities far beyond the product itself.

 l'image courtesy of milliped

The Design of Business Summary: How Design Thinking Creates Competitive Advantage

[heading subtitle=" Logic and intuition are not enough to achieve long-run success for a business."] Your company needs design thinking. [/heading]

 

The Design of Business Summary

How Design Thinking Creates Competitive Advantage

(amazon book page)

Roger Martin’s book on business design is subtle yet profound. He guides you to rethink the way you conceptualize business decisions so you can shift to “design thinking.” Using an approach rooted in both practice and theory, Martin cites examples ranging from Cirque du Soleil to McDonald’s.

He urges you to reconsider your leadership model and organizational structures, and to exercise “abductive logic,” thinking that moves through “logical leaps of the mind.” Martin’s call for action is bold and enjoyable. He offers innovation and regeneration as the rewards for accepting his challenge to balance validity and reliability.

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Two Minutes

1. Business leaders often believe they must choose between analysis and intuition. “Design thinking” offers a third path.


2. Design thinkers observe the world, imagine alternatives and bring them into being.


3. Innovations start as intriguing “mysteries.” To unfold them, first develop workable “heuristics” and then derive predictable “algorithms.”


4. Think of the learning and discovery process as moving through a “knowledge funnel.”.


5. People need analysis and creative thinking at different points in that funnel.


6. New firms emphasise “exploration.” As they mature, they shift to exploiting known ideas, but if they stop at that point, other innovators will surpass them.


7. Your organisation must balance predictable or “reliable” production with “validity,” experimentation that leads to new ideas and commercial success.


8. To protect a company, leaders must protect the exploration that leads to its validity.


9. However, over time, organisations tend to emphasise reliability instead.


10. To develop your design mind, broaden your “personal knowledge system.” Cultivate the “stance, tools and experiences” that build enhanced “sensitivities and skills.”

 

—10 Minute Summary

“Design Thinking” and the “Knowledge Funnel”

Two common perspectives prevail on how to create value in business. One side attaches importance to “analytical thinking,” logic and certainty. The other side emphasizes “intuitive thinking” and raw creativity. On the surface, the two seem irreconcilable. The solution is a third option using a “dynamic interplay” between these two worldviews to create design thinking. To understand design thinking and to see why neither analytical nor intuitive thinking is sufficient alone, consider the metaphor of a new idea moving through a knowledge funnel. This is one method for visualizing how a problem is solved in ways that create value, profit and greater ease of application.

The knowledge funnel begins with a “mystery,” since mysteries large and small can emerge in all fields. The mystery begins when you notice something, like an apple falling to the ground, and wonder about it. People who study why the apple fell move into the second stage, developing “heuristics.” A heuristic articulates an “incomplete yet distinctly advanced understanding” of a problem. Someone like Isaac Newton can use a heuristic to explain that gravity made the apple fall. In this case, Newton carried his deduction forward into the third stage, the “algorithm.” Algorithms provide “step-by-step” guidance for solving problems. In the mystery stage, no one can solve the problem and competing explanations abound. In the heuristic stage, though some people still don’t understand the problem, experts can use heuristics to begin to derive powerful solutions. Once you push a problem through the knowledge funnel to the algorithm stage, anyone can address it. Traditionally, this meant recipes, formulas, and so on. Now, the most extreme kind of algorithm is computer code, which may not even need human involvement to do a task.

When visionary individuals or corporations derive an algorithm from a heuristic, they create tremendous value. For instance, a new algorithm can eliminate waste by allowing workers to focus on executing precisely the steps they need, and no more. Take McDonald’s. The McDonald brothers successfully addressed a mystery: how to prepare good food the way that people want it. Ray Kroc took their heuristic and pushed it to an algorithm, standardizing portion sizes, cooking times, processes, restaurant design, and so on, for maximum effect. When you look at the knowledge funnel, you can see that the battle between analytical thinking and creative thinking is somewhat misguided. There’s no war: People need to use both kinds of thought, but at different points in the knowledge funnel. Both are valuable, and both can disrupt the process if applied incorrectly. If you use analytical thinking without foundational knowledge, you’ll kill discovery. But if you work with a well-established algorithm, you don’t want people to seek intuitive breakthroughs in that area, because it might disrupt your predictable flow of work and profits.

Moving Beyond Existing Binaries

Generally, businesses emphasize either “exploration,” that is, seeking, creating and generating something new, or they focus on “exploitation,” making all the money they can from what they already know. Both are legitimate ways to generate value, but each carries risks. If you overemphasize exploration, your firm won’t be stable, because breakthroughs don’t happen on a timeline. On the other hand, emphasizing exploitation, which at first increases efficiency and cuts costs, eventually reaches a point of diminishing returns. Someone else will create a new product and displace you. Businesses often begin by exploring, making a breakthrough and exploiting it. A few firms avoid this path, so they don’t have to choose between exploration or exploitation. Instead, they make a “second intuitive breakthrough,” regenerating themselves as innovators.

Exploration emphasizes intuitive thinking, while exploitation relies on analytical thinking. A third approach also exists: “abductive logic,” the key to design thinking. American philosopher Charles Sanders Peirce, a pragmatist, articulated the case for abductive thinking. He said that pragmatic thought moves beyond inductive reasoning (from specific examples to general principles) and deductive reasoning (from general precepts to specific truths), and focuses on how people generate new ideas, how they “come to know and understand” fresh concepts. Peirce argued that neither inductive nor deductive logic could generate anything truly new, because both depend on the past. Instead, he offered abductive reasoning, which moves ahead through “logical leaps of the mind.”

You don’t use abductive logic to determine if something is true or false; you employ it to indicate a new path to a possible truth. Once you make a leap of abductive logic, you look for data that test your hypothesis and, perhaps, spur original ideas that still make business sense. Mike Lazaridis, founder of Research in Motion (RIM), exemplifies this sort of thinking. When other phone companies were focused on analog phones, he came to realize that the future lay in “digital processing.” He couldn’t prove that idea with traditional logic, since his concept was new, so his stance was risky. Yet he believed that to lead the market, he had to go beyond what seemed possible. So RIM plunged into digital, but not blindly. Its researchers studied the pager market, looked at e-mail’s growth and conceptualized the “personal digital assistant”: the BlackBerry.

Businesses face another decision they may not even recognize: the choice between “reliability” and “validity.” A reliable process is predictable, the realm of algorithms and binary code. Such a process replicates itself every time. Conversely, validity means producing the results you want. If you seek a medical breakthrough, the path to validity calls for gathering data and doing analyses that can lead to discovery. You can’t make validity predictable, because you’re trying something new. Leaders say they value innovation, but most firms are biased toward reliability. Reliable systems let them apply lessons from the past, prove that their ideas work, move quickly and defeat time pressure. Since systems such as Six Sigma depend on known steps, you can apply them to strip away fat and clarify processes. Reliability is attractive, but it is not enough by itself. Without validity, the flow of new products via your knowledge funnel will trickle to a halt.

The Leader’s Role

As businesses grow, they become more complicated. Leaders, who once dealt with everything firsthand, have to work at a distance. Lacking a direct view of every detail, they use organizing systems grounded in “analytical reasoning” and plan for the future based on the past. This pushes growing companies toward reliability and away from validity. Outside forces, like investors, also push firms toward reliability. Various areas of the company feel this “inclination toward reliability” with different levels of intensity. Sales and other departments that deal directly with customers and markets strongly favor validity, since they must stick with effective, current methods. Human resources, finance and other areas that don’t have to please outside markets push strongly for reliability. As your company grows, lead it to balance reliability with validity. Consciously resist the slide toward reliability, correct for everyone’s bias in that direction and help the company emphasize validity to protect its “long-run sustainability.”

Take the lead in redesigning your company’s structure. Rather than keeping people in set positions with specific titles and known tasks – which is reassuring but reliability-driven – consider organizing around projects and functions, as design firms do. Redesign financial systems. Rather than insisting on highly specific (and reliable) budgets, set goals and spending limits, and let people work toward their goals within those constraints. Don’t give the highest performance awards to the biggest departments, but rather to those that solve the most “wicked” problems. In general, establish cultural norms that support validity.

Design Thinking in Action

Design thinking can take many forms. Some mysteries will yield completely to exploration and lead to predictable algorithms. Companies that stop with only one solution will find that competition arises from unexpected directions as others find new paths or the market shifts. That happened to McDonald’s in the 1990s, when consumer demand changed and no longer matched its profitable fast-food algorithm. Market demand for healthier menus and more choices let other restaurants, like Subway, carve away some of McDonald’s customer base.

However, organizations don’t have to fall back on known formulas. When A. G. Lafley became CEO of Procter & Gamble (P&G) in June of 2000, it had spent a decade “restructuring” and still hadn’t regained its former glory. Lafley knew P&G needed

innovation to bring consumers back, but innovation balanced by efficiency. That made design thinking crucial. Lafley hired Claudia Kotchka for the new position of vice president for design strategy, because he saw design as central to rejuvenating P&G. Kotchka brought in outside experts, including the famed design firm IDEO, to redesign how P&G worked. They added designers to its business teams, retrained the workforce in design thinking and set out to inject design into Procter & Gamble’s DNA.

Lafley shook up the company’s processes. He changed its formal, predictable annual reviews to active question-and-answer sessions. Disappointed by P&G’s innovation record, he set a bold goal: Rather than developing most innovations in-house, P&G would contract for half of its innovations from outside sources. This “Connect + Develop” program gave P&G access to a global network of innovators, and it used the firm’s existing algorithm-level marketing and distribution skills. The result was growth, with profits that doubled even as research spending fell.

Other leaders built design thinking into their organizations from the beginning. Take Guy Laliberté, a “high school dropout, accordion player and fire-breather” who joined a group of Quebec performers in the 1980s. The group staged a successful street festival, but the members wanted to put on a circus as it was meant to be, with all the wonder and no intrusion of “tacky” reality or questionable treatment of animals. The group redesigned the entire idea of a circus, and positioned it to target an upscale market. The result was Cirque du Soleil. Its novelty produced some initial confusion: How do you market something that’s the first of its kind? Once Cirque succeeded, the pressure was to keep repeating itself, to crystallize success. Laliberté and Cirque have avoided stagnation by taking shows to various locales and adding new productions, like one based on the Beatles’ music. Cirque needed strong managers to handle performers in many different places. That strain would push any group to reliability, but Cirque funnels 70% of “profits back into R&D and new shows.” Laliberté is essential to Cirque, not because he’s a design genius, but because he works hard to balance validity with reliability.

Develop Your Design Mind

CEOs may have the most influence over an organization’s direction, but developing your design-thinking skills is valuable and productive, no matter what your role is. First, pay heed to your “personal knowledge system,” which has three interacting components:

1. “Stance” – Your stance is the widest, least concrete element of your knowledge. It is your definition of yourself, how you see the world and how you approach it. Your stance determines which tools you use and what actions you take.


2. “Tools” – Your tools include the concepts, theories, “analytical frameworks” and heuristics that you use to make sense of the world.


3. “Experience” – As you act, you add up experiences, which form your practical knowledge. You also develop tools through your experiences.

As you build experiences, you develop “sensitivities and skills.” Sensitivities help you distinguish between related conditions; skills enable you to do things the way you want. They work together: Being able to see fine gradations in execution helps you develop deeper skills and reach higher. Design thinkers look ahead, eagerly anticipating the next project. They try to balance reliability and validity. The three tools they value most are “observation, imagination and configuration.” That is, they observe the world around them. They look at what people do with products. They watch like anthropologists, taking notes over time in various situations. They imagine how the world might be different and practice configuration, building action systems to make ideas real.
As you consciously strengthen your knowledge system, you can become more adept at working with those who think differently. Practice shifting your conceptual frames, and even play with that as simply another design constraint. Treat your colleagues as the end

users of a project you’re designing, and adapt your communication style to their needs. In particular, show how your projects will address both the need for validity and the need for re liability.

The only way to beat the competition is to stop trying to beat the competition.

In two minutes

 

1. Most corporate strategies grew from military models featuring direct confrontations.


2. When businesses directly compete, the battlefield becomes over-crowded so all participants suffer from reduced market share, growth and profits.


3. The blue ocean strategy builds new businesses where none existed, giving innovative entries clear sailing.


4. These businesses, such as cell phones and biotechnology, barely existed 30 years ago .


5. Blue ocean industries are more profitable than fields with head-to-head competitors.


6. Offer your customers a blue ocean "value innovation," that is, tangible product advancements accompanied by demonstrable savings.


7. Wear a life jacket: the six steps of blue ocean implementation each carry a risk.


8. The six steps are: "Reconstruct market boundaries;" "Focus on the big picture;" "Reach beyond existing demand;" "Get the strategic sequence right;" "Overcome key organizational hurdles" and "Build execution into strategy."


9. Use a "strategy canvas" to chart the competition and exploit their shortcomings.


10. Developing a blue ocean strategy requires all hands on deck.

 

[caption id="" align="alignnone" width="986"] Blue Ocean Strategy[/caption]

 

 

Blue Ocean Strategy Summary

Avoiding Blood-filled Waters

Traditional business strategies originate from military models. They swashbuckle, emphasizing engaging the enemy to conquer or capture a competitive stronghold. Even key business terms - "headquarters," "officers," "front lines" - are borrowed bits of military argot. As companies shape their strategies and plot their corporate objectives, warlike metaphors abound: your business must confront its opponents, render them harmless and gain the advantage. Translated into strategy, this language generates a model for competing in a fixed market and gaining the advantage over other entrants in the same field. This cutthroat competition damages corporate combatants and bloodies the waters, creating a "red ocean" marred by losses in market share, profits and growth. However, while bold competition may be essential in business, it is not the only corporate strategy.

Set your course, instead, for an open "blue ocean strategy," based on the idea of creating new markets where none previously existed. This may seem like a novel concept, but many modern industries - cars, recorded music, petrochemicals, even aviation - did not exist a century ago. The past 30 years have given birth to new, multi- billion dollar industries, including mobile telecommunications and biotechnology. What far- sighted strategist can predict the blue ocean industries that will emerge in the next few decades?

That is not a hypothetical query. Rather, it is today's breakthrough question. Blue ocean thinking has not only created new industries - it has created exceptionally profitable new industries. Among 108 companies, 86% of business expansion emanated from existing competitive business. This type of expansion produced 62% of total revenues but only 39% of total profits. Blue ocean businesses almost reverse the figures: their expansions accounted for 38% of total revenues and 61% of total profits. The corporate quest for profitable innovation drives the need to develop a blue ocean strategy. Innovations occur today at a blistering pace due to globalization, overcapacity and technology, which make it easier and faster to create look-alike products. Major brands face extra encroachment from new competitors, while buyers base more decisions solely on price.

To escape this "red ocean" cycle of intense direct competition, some companies have created profitable new operations using a blue ocean strategy. These firms began by creating a "value innovation" to fuel their blue ocean thinking. Think of Starbucks, which made coffee a neighborhood treat, or Southwest Airlines, which made budget flying fun and profitable. Notice The Body Shop, whose natural, affordable cosmetics established a new blue ocean in a high-end industry swimming with pricey competitors. The coffee, the fun flights and the natural-scented hand creams were all value innovations. Any company, unlimited by size, history, budget, location or nationality, can exploit a value innovation. But to succeed, a value innovation must demonstrate actual savings and an appreciable benefit that a customer can use immediately. Be sure your value innovation is accessible enough for most customers to grasp its technological benefit and put it to use promptly.

From the perspective of strategy, blue ocean plans are most viable when they are part of a corporation's intrinsic process, involving improvements in operations, functionality and price. This sharply contrasts with the usual, straightforward product introduction, which does not improve company operations and has no impact on overall corporate strategy.

Lessons from the Circus

The Canadian entertainment company, Cirque du Soleil, is a vivid blue ocean success. Cirque du Soleil introduced an entirely new form of live entertainment based on a more limited model, the traditional circus. By redefining the purpose of every element of the old.

model, from the tent to the animals to the acrobatic acts, Cirque du Soleil essentially recreated its business and devised a new mode of entertainment. To do this it:

Cultivated an entirely new audience of adults who preferred live theater to circus. Developed a new intellectual, dramatic entertainment format.

Reduced its cost structure and increased its ticket prices beyond those charged by traditional circuses to compete with Broadway Theater prices.

Created entirely new stage, visual and musical acts in a new venue.

As a result of this novel approach, Cirque du Soleil took less than 20 years to exceed the revenues achieved by Ringling Bros. and Barnum & Bailey Circus in 100-plus years of circus performances worldwide. Without any direct competition, Cirque du Soleil succeeded by entirely redefining its corporate function, audience and market. This approach directly contrasts with the concept of "environmental determinism," mandating that businesses in any given industry must accept their existing realities and compete within industry boundaries. That kind of thinking produces red ocean situations where companies compete on price and minor product differentiation. Compare that to Cirque du Soleil's accomplishment: building an entirely new form of entertainment that defied traditional classifications.

Six Principles of the Blue Ocean Strategy

The risks inherent in a traditional, red ocean-based business strategy are well known. Managers now need to know the principles - and risks - that underlie the blue ocean strategy.

One: "Reconstruct Market Boundaries"

Re-evaluate the premises that form your industry's assumptions and shape your company's business model. Strategically examine your industry's key competitive drivers (such as customer preferences, product qualities, price and industry standards) to create a "strategy canvas" that displays each factor graphically. For a fresh perspective, probe which industry and market standards you could omit, minimize, elevate or rebuild.

Casella Wines of Australia used this analytic process to make its Yellow Tail brand the fastest growing label in the history of U.S. and Australian vintners, and the best-selling red wine in the U.S. in August 2003. Based on its analysis, Casella streamlined its wine's taste, making it fruitier and sweeter. It reached out to beer and cocktail drinkers by promoting its wine as fun. Breaking all marketing habits, Casella completely jettisoned wine's traditional elitist appeal based on complex taste, aging and vineyard location. Instead, it built the brand with a targeted, differentiated intriguing blue ocean strategy. Today, the brand swims "in the clear blue waters of new market space."

Red ocean strategies are predicated on finite markets. To expand your market boundaries into the wide blue ocean, look at your key competitors. Determine their limitations. Don't be myopic. Curves, the women-only health club that offers a zippy half- hour exercise program, capitalized on price, location and ease of use to create a new market and compete against full-service health clubs. Today, a new Curves mini-gym opens every four hours worldwide.

Novo Nordisk, the Danish insulin producer, supplied physicians until it reframed its market and began to provide individual diabetes care. To sell your product, evoke consumers' emotions and enumerate your end user benefits. Follow the examples of QB House, a Japanese barbershop chain that advertised cheap, sanitary haircuts, or Cemex, a Mexican cement producer, which promoted affordable room additions. Look at the horizon. Apple Computers recognized an emerging trend when it captured the music downloading market. To exploit a trend, be sure it pertains to your business, has momentum and cannot be reversed.

Two: "Focus on the Big Picture, Not the Numbers"

Keep your eye on the overall view and don't get lost in the statistics. Many strategists get bogged down in data, so they often miss where they - and their competition - are headed. To maintain your sense of direction, use a "strategy canvas," a graphic representation of your competitor's products, prices and industry position. The canvas reveals your "value curve," and clarifies possible opportunities. This exercise helps you consider the competitive environment through your customers' eyes, so you hone factors that matter to them. It can blunt the risk of investing time and effort in the wrong direction. When Samsung Electronics of Korea prepares new products, such as 40-inch LCD TVs and the world's top-selling mobile phone, it uses interdepartmental teams trained in using the strategy canvas approach. The teams improve existing technologies so the innovative company can deliver new benefits that its customers can readily and quickly appreciate.

Three: "Reach Beyond Existing Demand"

Businesses naturally focus on current customers, a process that invariably leads to greater market segmentation analysis. But real growth lies beyond existing demand. To get to the open water, focus on potential future customers. To attract new customers to its outdoor advertising business, the French firm JCDecaux theorized that municipalities would be more interested in outdoor ad space if they could get it for free and without any maintenance worries. To meet these criteria, the firm built durable ad-bearing street furniture and signed long-term contracts with cities. This attracted more advertisers. Today, the firm operates in 33 countries and profitably dominates this specialized advertising sector.

Four: "Get the Strategic Sequence Right"

Execute your strategy sequentially to achieve your "value innovation." Just having a fancy new technology does not mean that you have a blue ocean product. Technological innovation is not necessarily "value innovation." To be compelling, the technology must provide convenience, safety and entertainment. Chart the experience you want buyers
to have at several stages. Assess your product's usefulness, ease, handiness, safety, entertainment value and "environmental friendliness" in light of how each factor affects the customer upon buying it, bringing it home, using it, adding to it, keeping it working and eventually, disposing of it. To develop your blue ocean strategy, follow four logical steps. Ask, in this order:

1. Why should anyone buy your product? Does it have "exceptional utility?"
2. Is it fairly priced to appeal to a large audience?
3. Can you create it at the right cost to earn a profit?
4. Are there any impediments to discourage the market from accepting your product?

Five: "Overcome Key Organizational Hurdles"

Successful execution demands that your company must resolve internal departmental differences. Like swimmers on the shore of a new sea, many corporate participants feel significant trepidation upon entering a blue ocean market. Managers may fret about why significant change is needed, what problems will arise from reallocating resources, whether new practices will function properly and how this transition will upset the existing social hierarchy. To implement change with minimal disruption, use "tipping point leadership." This form of leadership stems from observations by author Malcolm Gladwell in his book, The Tipping Point. He writes that certain actions have a disproportionate influence if they happen at exactly the right time. The key is using resources when they are most powerful.

Six: "Build Execution into Strategy"

Reduce your management risk by incorporating blue ocean implementation into your company's ongoing processes. Since building a blue ocean strategy involves uncertainty and risk, creating trust among all participants is essential. A successful blue ocean launch requires extra effort from a unified crew. Link the three "Es" - engagement, explanation and expectation - with the actual process of developing the strategy and acting upon it at all levels of your organization. Then, set sail.

 

 Image Courtesy of martinteschner 

Fast Second Summary

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Introduction

Fast Second is ideal for those who want to rethink their strategies for innovating or entering new markets. The authors Constantinos Markides and Paul Geroski face a curious challenge: They have a lot of data to support their claim that the way to make big profits, if you’re quick enough, is to be the second company to take an innovation to market.

However, the myth of the first mover – the idea that being first to market is the way to make money – is pervasive enough that they have to spend a lot of time convincingly debunking it. They also show the challenges and risks of trying to become a successful “fast second.” The authors explain the complicated, almost organic, interaction among innovators, competitors, markets and consumer demands that tug at the marketplace. They do a fine job of documenting the collective act of creation.The possibilities of being a second mover will appeal to anyone who is interested in innovation, planning, new product marketing, or social and economic change.

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In a Tweet

— You're better off being a strategic second, You don’t have to absorve the risks of being first to market.

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In two Minutes

You don’t have to be first to market. In fact, you’re better off being a strategic second.

One set of factors produces radical innovation. A different set of factors consolidates those innovations and profits from them.

It is almost impossible for the forces driving innovation and the forces driving profitable consolidation to coexist within the same organization.

Radical innovations emerge from fundamental scientific discoveries.

Efficiency and an awareness of consumer needs drive profitable consolidation.

No one can predict the direction of radical innovation early in the discovery process. Moving profitably into an emerging market requires focused timing.

The best time to enter a market is when a dominant design is crystallizing.

If you are an established firm, it may not work for you to try to create radical innovation. Instead, find ways to outsource innovation and harvest the results. When markets change, they put different stresses on organizations.



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Fast Second in 10 Minutes

Misconceptions about Radical Innovations

Which firm created the innovation of selling books online? Amazon.com? Wrong. Amazon is just one example of a common misconception about innovative firms: that you have to be the first to enter a new market to profit from it. In truth, the innovators who introduce fundamentally new products – and create “radically new markets” – are not the firms that profit. Instead, later firms make the money; organizations that consolidate the innovations and scale them up are the ones who profit from them. History and memory combine to fool the mind. People forget the individuals who created cars and failed before Henry Ford found ways to bring them to market. Generally, innovation takes four forms:

1. Incremental innovation – Minor, small improvements made to a known product.


2. Major innovation – Larger variations made to a known product.


3. Strategic innovation – Relatively minor changes, but ones that “destroy” existing markets.


4. Radical innovation – Major change that fundamentally disrupts your understanding of your business and your product.

Radical innovations matter most, because they create such sweeping change, and because so few people understand the principles involved. Many established business leaders dream of creating new markets and being the first ones there. They shouldn’t. Established companies usually can’t create new markets (and would be wasting their energies trying), since their cultures are not geared for it. In fact, creating new radical markets should not be among their goals, because truly radical innovations share some dangerous traits. First, their development path zigzags because new products emerge from basic research and production, not from customer demand. Second, radical innovations involve many specialists, such as scientists, all working on different elements of the emerging technology alone and for their own ends. They often don’t even know they are part of a generalized revolution because radical innovations pass through a lengthy “gestation process” during which you can’t tell that anything is happening. After that, the innovation emerges, often explosively, and disrupts the surrounding market. Other misconceptions about innovation are that pioneering new markets is where the money is (it isn’t) or that profiting from a market requires creating it (it doesn’t).

Radical Innovation

When radical innovations enter a market, they disrupt it and spread through the “value chain.” Customers have to figure out what to do with these innovations; competitors have to decide if the innovation is a real change or just a fad, how and when to change to adapt to it, and what these changes will cost. What’s more, radical innovations don’t just create new markets; they create new problems and new kinds of problems, so it is hard to tell where their changes will lead and how to plan for them.

Radical innovations don’t come from consumer demand. How can people want things they don’t know exist and don’t know can exist? Consumer demand might stimulate general innovation, set a research agenda, spur funding, articulate priorities or create a market category, but, ultimately, radical innovation comes from producers. For example, research institutions and the military created the first Web networks, but they had no sense of the changes the Internet might spawn.

This “supply-push” of innovation is hard to anticipate. In fact, many major discoveries are accidental byproducts of other investigations. Instead of consciously seeking a specific end, the research community works on specific problems that challenge their entire paradigm. Then a breakthrough happens and a kind of “gold rush” occurs as people hurry to capitalize on it. This creates a situation completely distinct from a “demand-pull” market in which consumers know exactly what they want and demand it. You can target your efforts in such markets, but a supply-push situation creates niche markets, where a minority of specialized users – the early adopters, the rich and the specialists – will use the new product, but most consumers won’t.

You’re essentially guessing where a supply-push market will go. It is difficult to convert new theoretical breakthroughs to technologies, and harder still to anticipate how those hypothetical technologies will match consumer desire. As a result, when a new innovation emerges, a lot of firms rush into the field. In fact, “more than 1,000 firms” have tried their luck in the American auto market, the vast majority between 1885 and 1920. These early manufacturers offered extensive variety, right down to cars with three wheels, and disappeared.

During a market’s early years, competing firms learn from each other, trying to figure out what works best in the face of sudden changes. Companies start and fail quickly. An “information cascade,” in which people suddenly become aware of undefined possibilities, powers the rush. Would-be visionaries can inflate the possibilities, but don’t know the risks. People contribute massive investments to build a competitive infrastructure and then rush in, mostly having bought the myth of the first mover. All these patterns played out in the’90s Internet boom.

Companies that move into new markets enter from either “horizontally linked markets,” where their experience gives them a sense of the opportunities, or from integral “markets that are linked vertically,” from the supply lines to the technological support staff. Most new entrants fail quickly and leave the field during the consolidation phase of the market. This passage is marked by the emergence of a “dominant design,” which both allows and creates mass marketing.

Dominant designs emerge as markets learn what a product can do, and settle on shared definitions. These parameters create a “platform” that producers can use as the base for other innovations. Competing designs can both become dominant if they blend low consumer risk, reliable function, good support and low price. Because a proposed design has to serve different consumers, the producer has to pour investment into establishing it. If you can establish the dominant design first, you’ll be “well-placed to take control of the market.” Being first lets you exploit learning curves and economies of scale, and build a brand. Yet these advantages don’t come from being the first to offer a product for sale, but from being the first to succeed in reaching a mass market.

Colonists and Consolidators

Two kinds of firms enter new markets: colonists and consolidators. Their traits are so markedly different that it would be hard for a single firm to contain both sets of characteristics. Colonizing companies are at ease with change, willing to experiment (and fail often), and enthusiastic about the core technology driving their pet innovation. They want to be first or best, and don’t emphasize money or consumers. By contrast, consolidators establish or build on the dominant design. They move more slowly and are not as flexible. They focus on market realities, listen to customers and can persuade entire marketplaces of the value of their product. Where colonists wanted to create the best of an item, consolidators want to make a good-enough item that is cheap enough to sell to everyone. Colonizers’ and consolidators’ cultures differ even more than their functions. Colonists like their firms to be “small and agile,” able to move from breakthrough to breakthrough. They prefer flat organizational structures and emphasize generating new concepts, without rigidity about finances. Consolidators work best replicating known successes. They prefer a defined hierarchy, and tightly control their processes and costs.

If you try to be both a colonist and a consolidator, your organization can get stuck and conflicted, unable to move either way. You have other options, though. If your firm is established, you can embark on “radical cultural change,” which incorporates the mindset of the colonist. You can spin off a linked, but independent, unit to colonize new markets. If you know, as an established consolidator, that you’re unlikely to innovate radically, you can outsource that function. In 2003, Procter & Gamble committed itself to drawing half of its innovation from outside sources.

Rather than trying to create radical new innovations in-house, identify your goal, then form relationships with firms that are small, lively and fertile with new ideas. Colonizing and consolidating require different strategies, but you can address them by dividing the labor. Recognize the organizational needs of each part of the process, understanding that the two may be in conflict because emergent technologies disrupt established product lines. Pay attention to how they relate, so you can determine where and how they conflict, and decide how to best manage their interaction.

When colonists test different versions of a new product, they emphasize its “technical attributes.” They get excited about what it can do. When they improve new products, they really do make them better, but in the process, they also risk devising innovations that surpass what consumers need and the price the market is likely to pay. To shift to the consolidation phase, try to identify the average consumer’s needs and meet them more cheaply. As more people adopt the emerging design, they produce a bandwagon effect. This starts some economies of scale, but they won’t really come fully into play until your design is dominant, so dominance is your new goal. You don’t have to win directly; you could merge with a competitor and focus on the new firm’s best design. Reduce “customers’ risks” by making the design reliable. Educate potential customers, so they aren’t taking a stab at the unknown. Get your new product into a distribution system, so customers who want it can get it. Subsidiary goods markets will emerge as you succeed (as having cars generates the needs for gas stations, for example), and you may want to help them.

Entering the Market with the Fast Second Strategy

Many people cherish the idea of being a first mover. This seems partly due to the exhilaration of competition (“We’re Number One!”), partly due to misconceptions about innovation, and partly due to the understandable fear of arriving too late to seize an opportunity and forever playing catch-up. That last fear, of falling into the “second-mover” position, is understandable – but it isn’t the only alternative to being a first mover. Instead of being a radical who creates a market but doesn’t benefit from it because there’s too much risk and cost, or being a second mover who follows along gathering crumbs, follow a “fast-second strategy.”

With this tactic, the second mover waits for just the right moment. Closely track the competition for a dominant design, so you enter the market as the platform crystallizes. Often, speedy second movers are well-established in related fields and poised to move. Other “imitative entrants” don’t offer much that’s new, but instead copy the emergent designs. They offer lower prices or some product variation. Timing is essential. To enter the market at just the right time, watch “the rate of innovation.” Experimentation slows as a dominant design emerges. Heed public discussion of the market; when the public treats it with more “legitimacy,” the time to move is coming. When “complementary goods producers” start to emerge, that’s a sign that the colonizing period is over, and it is time to move in and consolidate. This lets you reduce your “time-cost trade-off.” When you rush to develop a new product, the price is high because you’re innovating so quickly you have no time for the reflection that would make processes more economical.

When Markets Change

When a new market shifts from the first mover’s niche market to the consolidator’s mass market, new pressures emerge. First, as the market grows, you can’t serve everyone. Instead, focus on being the best in your “unique strategic position.” Let go of the things you aren’t going to do. Second, once the dominant design emerges, the nature of innovation and competition changes. Innovation is strategic, rather than radical, and competition is based on processes being efficient and price. New markets tend to be vertically integrated; when small radical firms compete for dominance, they do everything in-house. The shift to a mass market produces “vertical disintegration”: companies specialize in one element or component, and others outsource production to them. This produces a “locked in” state that is useful and dangerous. It’s useful because you can invest in the gear you now know is needed to complete identified processes. It’s dangerous because when you commit to those products and processes, you will resist

change .

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