• Strategy
  • The Economist

Don’t Laugh at Gilded Butterflies

Rather than chasing wonder new products, big companies should focus on making lots of small improvements.

Tetra Pak’s strategic innovation involved moving from the production of packages for its customers to the design of packaging solutions for them. Instead of delivering ready-made containers, the company increasingly provides the machinery for its customers to make their own packages: the fishing rod, not the fish.

But customers can then use only Tetra Pak’s own aseptic materials to make their containers. This strips out all sorts of transport and inventory costs from the production process, for both Tetra Pak and its customer. It also makes it very difficult for the customer to switch suppliers.

Southwest’s innovative strategies include its bold decision to increase capacity in the immediate aftermath of September 11th 2001, and its carefully timed rolling out this May of competitively priced routes focused on Philadelphia, an important hub for the ailing US Airways, an airline lumbered with an expensive legacy (such as highly paid crews). The low-cost carrier “is coming to kill us,” said US Airways chief executive David Siegel shortly before his recent resignation. And he was not exaggerating.

In his recent book, “How to Grow When Markets Don’t” (Warner Books, 2003), Mr Slywotzky and his co-author Richard Wise recommended another form of innovation. “A handful of far-sighted companies”, they claim, have shifted their focus from product innovation to what they call “demand innovation”. They cite examples such as Air Liquide and Johnson Controls, which have earned profits not by meeting existing demand in a new way but “by discovering new forms of demand” and adapting to meet them.

The French company Air Liquide, for example, was a market leader in the supply of industrial gases. But by the early 1990s gas had become a commodity, with only price differentiating one supplier from another. As its operating income plunged, Air Liquide tried to behave like a far-sighted company: it almost doubled its R&D expenditure. However, it reaped few fruits. An ozone-based alternative to the company’s environmentally unfriendly bleach for paper and pulp, for example, required customers to undertake prohibitively expensive redesigns of their mills.

The company’s saviour came serendipitously in the form of a new system for manufacturing gases at small plants erected on its customers’ sites. This brought it into closer contact with its customers, and led it to realise that it could sell them skills it had gained over years — in handling hazardous materials and maximising energy efficiency, for example.

After exclusively selling gas for decades, Air Liquide became a provider of chemical- and gas-management services as well. In 1991, services accounted for 7% of its revenues; today they are close to 30%. And because service margins are higher, they account for an even bigger share of profits. An ozone-based bleach could never have done half so well.

The Dilemma Solved?

In his latest book, “The Innovator’s Solution”, published late last year, Mr Christensen argued that established companies should try to become disruptive innovators themselves. He cites, for example, Charles Schwab, which turned itself from a traditional stockbroker into a leading online broker, and Intel, which reclaimed the low end of the semiconductor market with the launch of its Celeron chip.

There are, says Mr Christensen, things that managers can do to make such innovations more likely to happen within their organisations. For example, projects with potential should be rapidly hived off into independent business units, away from the smothering influence of the status quo. The ultimate outcome of any one disruptive innovation may still be unpredictable; the process from which it emerges is not.

In the end, though, “no single innovation conveys lasting advantage,” says Mr Hammer. In the toys and games business today, up to 40% of all products on the market are less than one year old. Other sectors are only a little less pressured. Innovation and, yes, invention too, have to take place continually and systematically.


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