Innovation in New Markets

In yesterday's post I described how innovation must be managed to get the right balance between customer satisfaction and the cost of operating complexity based on a recent HBR article by Mark Gottfredson and Keith Aspinall. One off the most difficult places to control the rate of innovation is in new markets where customer satisfaction is often a continuously changing variable.

How have cell phones evolved to meet changing customer needs over the last 5 years? From early analog technology that carried only voice transmissions to today’s digital cell phones that provide instant digital messaging and e-mail services along with digital camera features. Could Motorola have limited innovation and survived in the changing cell phone market?

How have liquid crystal display (LCD) televisions evolved to meet changing customer needs over the last 5 years. From small screens with limited resolution and viewing angle to today’s 50 inch high resolution HDTV units. Could Sony not offer the wide range of features available in today’s LCDTV market and still survive?

You could say that these are unique situations where changing technology has driven changes to customer expectations, but not expanding product lines to include new industry wide innovation could leave any competitor on the side lines in these new and evolving markets. Not innovating in markets with evolving technology can lead to higher profits in the short run; we call this “harvesting” the business. Not an option for the market leaders.

However, now that these markets have matured a little, you could claim there is real opportunity to reduce product line complexity and improve margins. I for one don’t think you need a camera in most cell phones. In a recent study of Philips LCDTV’s, I found more product models than the average viewer could ever discriminate between in satisfying their purchase objectives. After a new market has matured there is real opportunity to improve margins and sales by limiting product offerings to a targeted set of customer needs, but in new markets it is a perilous strategy.

Market Inertia Kills New Products

A small publicly traded company, Cell Robotics International, has developed a laser device to replace the steel lancet diabetics must use to take blood samples several times a day. Their product has been through clinical testing, has been featured in several publications for diabetic patients and touted as a safer and less painful way to take blood samples than the market alternative steel lancet.

Although the company has had over $35 million of investment in this and other product lines and good media coverage, they reported a little over $20,000 in sales for the first quarter of this year. Why isn’t the market rushing to embrace this new safer and less painful alternative product? We call this market inertia.

Market Inertia: Consumers tend to do what they have been doing unless acted upon by an overwhelming external force. All of us that have introduced revolutionary new products face the same dilemma. The customers refuse to change to our better market alternative product.

In the case of Cell Robotics International there are several possible reasons for this market inertia:

• Does the diabetic patient want to deal with the allegedly safer and less painful product that is not covered by their health insurance benefits?

• Does the diabetic patient change any part of their test procedure without a doctor recommending it?

• Can a doctor recommend any new procedure if it costs more and does not offer a significant reduction in risk to their patient’s health?

I look at lots of "neat new ideas" every year and fall in love with new technology faster than most. My first question before investing in a new technology-based product is whether it is significantly advantaged enough to overcome the market inertia of the existing products.

Kodak Listens to Customers in Transition

The Eastman Kodak Company founded by George Eastman in Rochester NY in 1888 became the undisputed leader in silver halide film photography; his motto: “You press the button, we do the rest”. With the introduction of low cost digital cameras in 1995 it looked like the end of film photography and some said the demise of Kodak.

If you look closely at Kodak today you will find that more than half of their 3rd quarter 2005 revenue came from digital products not from silver halide photography. The management recently described how they have segmented their business into four major market areas and will reorganize the company around these businesses ending many years of centralized structure around a traditional business.

Each of these businesses will be managed to build market share in the growth areas and harvest cash from those older segments where no growth opportunity exists. Although they lost over $1 billion in the third quarter of 2005 they are on there way out of a massive restructuring effort and winning market share in the process. They have been the market leader in digital cameras for the last four quarters; a feat most would have said was impossible only three years ago as they began their assault against electronic giants like Sony and Cannon.

They did this by listening to customers and addressing their need to “Take, keep and share pictures”. They addressed all aspects of the customer value chain from providing the highest quality (resolution) cameras, to offering on-line storage, to printing the highest quality images while their competitors focused on making cameras.

Don’t count Kodak out. They know what their customers want, and they are focused on dominating the digital photography world in the same way they dominated the film photography world.

All Strategy is Local

In the September issue of Harvard Business Review, Bruce Greenwald and Judd Kahn wrote an excellent article entitled All Strategy is Local. The essence of their article is that the more local the company’s strategies are, the better the execution tends to be.

In a competitive environment described as increasingly “flat” with access to most markets by low cost foreign competitors, the one advantage local competitors have is their ability to better understand, and hence serve, local customer needs. When faced with foreign price competition, remember...

Those non-WALMART buyers have other needs to be satisfied. The locally focused competitor is more likely to understand the need priority of their customer and be flexible enough to respond to those needs.

According to Greenwald and Kahn:

“For all the talk of the convergence of global consumer demand, separate local environments are still characterized , in both obvious and subtle ways, by different tastes, different government rules, different business practices, and different cultural norms”.

Hence, all strategy is local. The more we segment our markets to meet these local differentiated needs, the greater chance we have of surviving foreign price competition.

Is GM Listening to Customer Needs?

In a recent blog post, I compared Toyota’s aggressive pursuit of fuel-efficient autos to GM’s delayed reaction to this customer need. I suggested that GM was not listening to the changing priorities of customer needs. There is a great article in the Wall Street Journal (subscription) that describes the current industry battle over hybrid designs.

What struck me most about the article?

"GM's hybrid design, by contrast, is designed to rely on the gasoline engine over a wider range of speeds. Engineers can thus use smaller electric motors and batteries. The drawback: Fuel-economy gains are less dramatic.

The full-size SUV hybrid GM plans to launch in late 2007 is expected to achieve 25 miles per gallon in highway-city driving, a 25% improvement in fuel economy over the gasoline-powered version. By comparison, the redesigned hybrid Honda Civic is supposed to achieve around 50 mpg, about a 45% improvement over a comparable gasoline-powered Civic model."

In all fairness, Toyota has it’s own share of challenges. First, its hybrid engine does not easily scale up into large SUV’s. Second, it is more costly than the GM approach.

This information begs the following questions… How will customer need priorities shift over the next

few years as fuel goes from $3.00 per gallon to the $6.00 per gallon price paid in Europe? What happens if it goes back to $1.50?

As a practical matter most of us drive 10,000 miles a year. If we get 20 miles per gallon, we will use 500 gallons a year of fuel. If we get 40 miles per gallon, we will use 250 gallons per year or a 250 gallon difference. If gas is $1.50 a gallon, we save $375/year with the more fuel efficient auto. If gas is $6 per gallon, we save $1500/year.

Toyota's design adds $3000 to the selling price of its hybrid vehicle. GM's design may add half that amount to selling price, but only save half as much fuel. A rational buyer may be indifferent at low fuel prices but lean toward the more fuel efficient Toyota design at higher fuel prices where there is little difference between additional purchase price and cumulative fuel savings.

Maybe GM believes that U.S. auto purchasers' need hierarchy is not rationally organized. Look around, maybe they are right.