Innovation at the Competition's Expense

By Jesse Torres, entrepreneur.com, 30-06-2014

Steve Jobs once said, “Innovation distinguishes between a leader and a follower." And there’s no question that Apple Computer co-founder Steve Jobs will go down as one of the greatest innovators of modern times.

Graham Flower, Phil Fawcett and Stuart Harle in their 2012 book, Banking: In Search of Relevance, defined three levels of strategic positioning: leading edge, fast follower and laggard.

We all know where Steve Jobs and Apple Computer rank. And while being the market leader is sexy and can bring great admiration, rewards and satisfaction, it is not right for every company.

Competition is fierce regardless of the industry. There’s no easy layup when it comes to business. Most organizations are in a constant state of change as they seek to improve performance and profitability. As such, seeking a competitive edge is a way of life for entrepreneurs.

For many, the key to competitive advantage is innovation. And innovation is definitely a way to stay a step or two ahead of the competition. Great innovators such as Steve Jobs, Bill Gates and Mark Zuckerberg have demonstrated what can be achieved with cutting-edge development.

The leading-edge crowd reward the rewards and costs of innovation. The problem for many entrepreneurs pursuing innovation is their inability to anticipate and manage the challenges that come with being an innovator. Leading-edge organizations take on an oversize amount of risk because they are exploring new territory without a map. And risks come from everywhere. They can be production, market or regulatory related. They exist in the wild. They are hiding and pop out when you don’t expect them.

Innovation is based on repeated failure. Jobs and Steve Wozniak built, failed, rebuilt, failed again and rebuilt many times before the first Apple computer was sold.

Mike Maddock, CEO of innovation agency Maddock Douglas, encourages entrepreneurs to celebrate failure.  “Failure is OK as long as you do it quickly, inexpensively and your whole team learns from it,” according to Maddock. The problem is that many entrepreneurs and their teams do not have the ability to fail quickly and cheaply. This poses a dilemma: to innovate or not to innovate.

The fast followers can piggyback on others' initiative. Fortunately, entrepreneurs who cannot afford to take on the cost of innovation have the ability to harvest most of the upside of innovation without necessarily experiencing the downside. These companies are the "fast followers."

Fast followers monitor their leading-edge competitors closely. They live by the mantra “Keep your friends close, competitors closer.” Rather than take on all the risk and expense of being a leading-edge company, fast followers rely on their nimbleness and choose to adopt a new innovation quickly and soon after the hits have been taken and the bugs are worked out by the competition.

This approach requires that the fast follower implement a strategy before the leader builds too much of market share. But in reality, sometimes letting the competition build a little market share can help --particularly when significant education of the buying universe is required.

For example, several years ago the large banks began to market their new ATM machines that no longer needed a deposit envelope: “Deposit your checks and cash -- no envelope needed. And our machine will do all the counting for you!”

After the large banks invested millions in marketing and advertising to train consumers on how to use the new envelope-free ATM machines, along came the smaller, more nimble community banks. For them, there was no need to advertise the new technology. The big guys had already done that.

This same phenomenon has occurred with mobile banking, remote-deposit capture, online banking and every other significant innovation in banking. The key is to be there ready to pounce when the customers come asking, “Hey, when are you going to … ?”

The obvious advantage for fast followers is the lack of cost associated with being a leading- edge organization. Fast followers learn from the competition’s mistakes and take advantage of the innovation. This strategy brings a risk of its own -- being second to market. But it can act to mitigate the risks of being on the bleeding edge that may be beyond the entrepreneur’s risk appetite or budget.

The laggards end up with lackluster performance. The final group is the laggards. This group is ultraconservative -- and afraid of its shadow. Laggards generally do not implement anything new until it has been broadly adopted by the industry and all the risks have been clearly identified and resolved. Laggards are slow to adopt changes because they lack the sophistication to monitor the competition or because they believe their customers are not interested in innovation.

While the latter may be true, it is generally not a long-lived customer trait as consumers slowly become attracted to the shiny new toy. The laggards' problem then becomes the fact that old customers die off (literally and figuratively) and new customers have not been attracted due to their lack of sophistication and innovation. These companies wake up one day and realize their industry has passed them by and thus begins the eventual death of the organizations.

Every company's managers must decide where they want to be along the strategic-positioning spectrum. Being on the front lines has its advantages. It gets the blood pumping and creates legends out of entrepreneurs and their companies. But entrepreneurs must take an honest look at their appetite for risk, their human capital and their ability to sustain the costs associated with exploring the new frontier. Whether an entrepreneur plays on the leading edge or acts as a fast follower, the outcome can be satisfying and rewarding.

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