Innovating Beyond the Familiar

By Patrick Barwise & Seán Meehan

Don’t be overawed by Apple – your company too can innovate beyond the familiar. This isn’t about “blue-sky thinking”, “blue ocean strategy” or pioneering completely new-to-the-world product categories: Apple doesn’t actually do that. It’s about being a user-focused fast follower and a relentless improver. Every company can successfully innovate beyond the familiar, although it does mean being willing to go beyond your comfort zone. We offer a general framework to help you do it.

Apple is widely seen as the most innovative company in the world and is now the most valuable one too, at over $500 billion. What can your company learn from its success? There are two possible mistaken responses:

• The first is simply to be overawed, to assume that Apple is so unusual in the way it operates – that there’s so much magic in its brand and its innovation and design process – that there are no practical lessons for ordinary companies. That’s far too defeatist.
• The other is to note – correctly – that Apple is a serial disrup­tive innovator and to assume – incorrectly – that this means that its success is based on first-mover advantage through pi­oneering new-to-the-world product and service categories, what Kim and Maubourgne call ‘blue ocean strategy’¹. The reality is more down-to-earth and more relevant to your company than that.

In this article, we first show you the real lessons from Apple’s success and then provide a general framework to help you apply them to your own company.

The real lessons from Apple’s success
Much of Apple’s success is about execution. Apple puts in a lot of unseen grunt work to deliver its brand promise reliably day after day and continuously improve it year after year. This aspect doesn’t grab many headlines, but provides the founda­tion for all the glamorous stories that do.

When Apple enters new categories to the company, it does so, not as a pioneer, but as a ‘user-centric fast follower’. It did not give the world the first online music store, integrated music offering, smart-phone, or tablet computer. Yet Apple dominates these markets with premium-priced high-end offers which combine features and capabilities initially developed by others, backed by solid investments in brand communications, product and service design and innovation, and world-class execution. All its products benefit from the Apple brand and further reinforce it, boosting sales of the other products.

The brand was first established beyond electronics hobby­ists with the 1977 Apple II personal computer, but it was the 1984 Apple Mac that turned it into a global icon. The Mac ex­emplifies Apple’s approach to innovation.

Apple:

• did not invent the key technologies – it copied them from Xerox PARC and then added numerous minor improvements
• was not the pioneer: Lisa (precursor of the Mac) launched two years after the Xerox Star
• did not succeed first time. It learned from Lisa’s failure and quickly followed up with the Mac, a much better product
• was followed with a continuing stream of new Mac products over more than 25 years, all based on incremental innova­tion, including today’s iMacs, MacMinis, and MacBooks.

The last point reflects the other under-appreciated aspect of Apple: having entered a new market as a user-centric fast fol­lower, it then enthusiastically embraces incremental improve­ment. It studies the initial market response to the pioneers’ products and then trumps them by delivering the benefits more simply and reliably, adding more benefits, and offering a much better user experience, well beyond what customers have had before. It isn’t a pioneer but it does innovate Beyond the Familiar. You can do the same.

Consider the iPod. It was not the world’s first MP3 player. Apple learned from the many earlier offers that had failed to take off that yes, compactness was good, but not at the expense of capacity, battery life, ease of use or attractive design. The iPod did not create a new-to-the-world category – it was a fol­lower. But it was the first to succeed in bringing the real – unfamiliar – benefits of an MP3 player to the premium end of the mass consumer electronics market.

The original iPod was beset with problems. While this shook consumer confidence, Apple quickly introduced im­proved versions, expanded into closely related services such as music downloads and movie rentals, and added a range of better and cheaper variants such as the ‘shuffle’, the ‘nano’, and the ‘touch’. The iPod’s family of products and services, including iTunes, the iPhone and the iPad, now account for most of Apple’s revenue and profit.

The iPad follows the same pattern. It was certainly not the world’s first tablet computer but, through better execution, it was the first to achieve large-scale adoption and usage. Like the iPod and iPhone, it brought consumers benefits beyond their previous experience. Again, within a year, Apple launched the iPad2 with a camera and lighter, faster and thinner than its predecessor. A year on, the iPad3 offers a higher resolution screen, faster chips and the option of connection to the latest high-speed 4G networks. The iPad drives and dominates the growing market for portable electronic media consumption – but it has achieved that success as a user-focused follower and relentless improver.

No-one knows how long Apple will manage to keep hitting the sweet spot – it has failed to keep its eye on the ball a few times and is now facing tough new competition from Google and others. But every company can learn from it. Apple’s brand promise is clear, relevant and emotionally compelling; a focus on meeting user needs is part of its DNA; its delivery is usually impeccable; it relentlessly invests in fast incremental improvement; and every new product builds on and reinforces its brand and its earlier products – the iPad on the iPhone on the iPod on the iMac (and on the failed Apple Newton).

Apple’s playbook is straightforward. Every executive should examine it and ask, “What would it take to be the Apple of our industry?”. We think these lessons can be gen­eralised. Inspired by our analysis of Apple and other world-beaters such as Google, GE, P&G, Toyota, Hilti, Infosys and Aggreko, we developed a simple framework to help compa­nies master Innovation Beyond the Familiar.

The general framework for innovating beyond the familiar
In our twenty plus years examining the nature and effective­ness of customer orientation, we’ve observed many change initiatives fail – customer orientation is elusive. Common or­ganisational barriers are poor framing, fear, vested interests, complacency, and denial. These intervene to block the free flow and discussion of market information and ideas that power customer-focused execution and innovation, and, ulti­mately, long-term growth. An open organization is therefore essential for long-term success. It sits at the heart of the frame­work, enabling the company to execute the four direct drivers of long-term organic profit growth (Figure 1):

• Offer and communicate a clear, rele­vant customer promise.
• Build customer trust and brand equity by reliably delivering that promise
• Drive the market by continuously im­proving the promise, while still reli­ably delivering it
• Get further ahead by occasionally in­novating beyond the familiar

As straightforward as these steps sound, the evidence is that clarity on the customer promise, delivering it consis­tently, and improving it relentlessly, are actually weak spots for many compa­nies. These must be addressed in order to provide the platform for the final step – the focus of this article – Innovation Beyond the Familiar. With these other pieces in place, you probably have a very healthy business. The greatest risk you then face is in not going the extra mile. To ensure you do that, we suggest you:

• look beyond your comfort zone
• focus on adjacencies
• manage the risks
• follow fast.

Look beyond your comfort zone
When a disruptive new technology or competitor appears from nowhere, like Apple and Google bursting into the mobile handset market, established players like Nokia obviously need to respond urgently, almost certainly going outside their strategic comfort zone. Doing this is never easy, but the ten­dency to stay within the firm’s comfort zone is greatest when the business is doing well and there are no obvious storm clouds in the sky. To counter it, George Day and Paul Shoemaker rec­ommend firms to ask themselves ques­tions such as: What have been our past blind spots? What are the mavericks and troublemakers within the company trying to tell us? What future surprises could really hurt us – or help us?²

Eric Von Hippel at MIT offers an ad­ditional way to help companies look outside their comfort zones: learning from lead users and unfamiliar usage contexts, that is, new, extreme, or unusual customer problems and how people are already solving them. Especially in B2B markets, some customers are repeated­ly ahead of their competitors in adopt­ing new products and processes. To find novel opportunities beyond the famil­iar, talk to these leading-edge custom­ers about their longer-term aims, the capabilities they will need to build and the problems they will need to solve to achieve them, and how your company might help.³

A somewhat similar mentality also applies to ‘open’ research and innova­tion. R&D-driven organic growth has long been a priority at Procter & Gamble, but in 2000, incoming CEO AG Lafley challenged its proud ‘invented here’ culture, initiating a new era with ‘Connect and Develop’ (C&D). By 2006, 35% of new products had elements originat­ing from outside the company (up from 15% in 2000). C&D successes include Olay Regenerist, Swiffer Dusters and the Crest SpinBrush. These innovations were enabled by important technical breakthroughs and commercialised by leveraging and enhancing existing P&G brands.⁴

In service markets, you must ask which of the generally accepted parts of the offer could be either dramatical­ly improved or omitted altogether. An example of the first type is Cemex’s promise of same-day on-site cement delivery within twenty minutes of the specified time.⁵ A classic example of the second is Southwest Airlines’ pioneer­ing ‘no frills’ concept, further developed by European operators such as Ryanair and EasyJet.

Focus on adjacencies
As the unfamiliarity of an innovation in­creases (for the industry, the firm, and its customers), the risks increase dis­proportionately. Moving away from what the firm knows and its sources of competitive advantage introduc­es unknown unknowns on top of the known unknowns. Further, there is evi­dence that demand-side risk (uncertainty about customer value) tends to be even higher than supply-side risk (uncertain­ty about whether the industry/firm can deliver at an acceptable cost) although there are many exceptions. The practi­cal implication is that, on a risk-adjusted basis, the main innovation opportunities beyond incremental improvement are in adjacent markets rather than new-to-the-world markets that represent a major discontinuity in technology and/or cus­tomer behaviour.⁶

GE maps opportunities against two dimensions: technologies and markets. It labels technologies as core, new, or systems, and markets as core and new, while accepting that these are fuzzy dis­tinctions. As with all companies, much of GE’s innovation is incremental (Box 1: core technology, core market). But its main innovation effort is in Box 2 (new technology and/or new market), sometimes referred to as the adjacen­cy sweet spot. Beyond these, GE also looks selectively for opportunities in Box 3 representing new systems think­ing aimed at both core and new markets. According to Anubhav Ranjan, Director of Strategic Marketing, the distinctions are as follows:

• Box 1: Core new product innovations. Fill the gaps with better products/ser­vices at more price points
• Box 2: Adjacencies. Launch and build adjacencies that leverage brand and distribution
• Box 3: Systems thinking. Problem solving on a bigger scale… ecosystem level.⁷

One reason to focus on adjacencies rather than on areas where the company has no competitive advantage is so that you can use your existing brand. A strong brand reduces the cost and risk of launching new products and services, which – provided they deliver the customer promise – then reinforce the parent brand. This works both for line ex­tensions within the brand’s current category and for brand ex­tensions into new categories to the brand – but only up to a point. If the new product tries to stretch the brand too far, not only will it lack credibility, it may also dilute and weaken the parent brand. The alternative – creating a new brand – avoids these risks but greatly increases the launch and support costs of the new product.

Manage the risks
All innovation is risky. Even innovating within a target market and category you know well can be risky. Market research can reduce but not eliminate that risk. Consider Mattel’s ex­perience with ‘Earring Magic Ken’, a new outfit for Barbie’s boyfriend in 1991. It was developed using focus groups of 9-year-old girls, became known as ‘Gay Ken’ and was adopted by the gay community, attacked by the religious right, and withdrawn from the market amid protests from both groups. In this case, the risks came not from potential rejection by the target market but from other unintended consequences.⁸

Often, the main known unknowns are on the supply side. The initial development and 1946 launch of Tide involved numerous supply-side risks but, on the consumer side, P&G already knew that there would be a big demand for a product with greatly superior cleaning power. It didn’t know quite how big the market would be, nor how much more consumers would pay for a better product, but these known unknowns were relatively minor and could themselves be reduced through market research.

Probably more often, the main risks are on the demand side. For instance, how far an existing brand can be stretched beyond what is familiar to the customer varies between brands – some (like Virgin) being much more elastic than others (like Levis) – and involves subtle issues around perceived fit. Market research on customers’ perceptions of the brand and whether they would see a particular extension as appropriate can again reduce but not eliminate this uncertainty. The more radical the innovation (the more it takes customers beyond their current level of familiarity) the less the company can use reliable, quantitative research and has to rely on qualitative research, judgment and luck.

Follow fast
‘It is better to be a follower than a pioneer. The pioneers get scalped’.
– Andrew Carnegie, Robber baron and philanthropist⁹

Most of the time, you should drive the market by relentless­ly raising your game ahead of the competition. But what about the case of radical, new-to-the-world categories, should you also aim to be first to market?

Early research suggested that the answer is yes. The main evidence came from the ‘order-of-entry effect’, the correla­tion between market shares within established markets and the order in which the competing brands had launched. The brand or company that had been longest on the market had, on average, a higher market share than the one that had been second longest on the market, and so on. Of course there was a lot of variation between markets, but there was a clear correlation between market shares and order of entry, suggesting a significant and long-lasting first-mover (pioneer) advantage.¹⁰

People liked this conclusion, which encouraged bold, heroic innovation. Being a successful pioneer is hugely appealing: think of the fame and fortune achieved by companies such as FedEx, Southwest Airlines, Sony (with the Walkman), Dell, Starbucks, and Nintendo (with the Wii). What’s not to like? Alas, these are exceptions. More recent research has shown that most of today’s market leaders, often widely believed to be pioneers, were in fact fast followers, the actual pioneers having long since gone bust or exited the market.¹¹ Pioneer ad­vantage turned out to be largely a myth because the failure rate is so high. For the pioneer in a new-to-the-world category to succeed, all of four things must happen:

• Once launched, the new product or service must turn out to meet a significant customer need
• It must be possible to supply it at a price enough customers are willing to pay to make it profitable for at least one supplier
• You must be willing and able to invest on a sufficient scale both to create the market and to build a winning lead
• You must get the execution ‘roughly right’ first time and ‘really right’ before a fast follower (like P&G, Apple or Google) does so. Given these four hurdles, it’s hardly surprising that there are so few success­ful category pioneers, although the ro­mantic myth of pioneer advantage, per­petuated in books such as Blue Ocean Strategy, lives on.¹²

Conclusion: Re-interpret ‘inno­vation’ and raise your ambition
Innovating Beyond the Familiar is not an everyday imperative, but, for most companies, it is essential for long-term success. It is neither an alternative to doing the basics nor an optional extra: incremental innovation is also essential but unlikely to be enough to deliver long-term market-leading organic growth and will even, typically, be riskier than oc­casionally venturing beyond the famil­iar. In practice, however – and contrary to much popular advice – most of the best risk-adjusted opportunities beyond the familiar are in adjacent areas rather than in blue-sky areas such as new-to-the-world categories, where demand is unknown and the firm has few sources of competitive advantage. As we showed earlier in the article, even Apple – rightly renowned as a serial disruptive inno­vator – is in reality a user-focused fast follower and relentless improver, not a category pioneer.

Successful innovation by established companies almost always exploits ex­isting assets and competitive advantag­es and involves much that is already fa­miliar on the supply side and/or the demand side. In contrast, heroic ‘blue sky’ pioneering innovation into an area where the business has no knowledge or competitive advantage is like gambling shareholders’ money at the casino: great when it works but more likely to end in tears. The evidence is that for ‘really new’ markets and technologies, the best strategy is usually to be a fast follower, not the pioneer.

About the authors
Patrick Barwise is emeritus professor of management and marketing at London Business School. He joined LBS in 1976 after an early career at IBM and has published widely on management, mar­keting and media.

Seán Meehan is the Martin Hilti professor of marketing and change management at IMD. Through his re­search and customised programme development and delivery he helps com­panies enhance their customer focus effectiveness.

The authors’ book Simply Better: Winning and Keeping Customers by Delivering What Matters Most won the American Marketing Association’s 2005 Berry-AMA Prize and has been trans­lated into seven other languages. Their second book Beyond the Familiar: Long-Term Growth through Customer Focus and Innovation (www.beyond-the-familiar.com) was published in 2011.

References
1.W Chan Kim and Renee Maubourgne, Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, Harvard Business School Press, 2005.
2.George S. Day and Paul J. H. Shoemaker, ‘Scanning the Periphery’, Harvard Business Review, November 2005, 135-148.
3.Eric Von Hippel, ‘Lead users: A source of novel product concepts’, Management Science 32, 7 (July 1986), 791-805. This is different from what most people mean by ‘co-creation’, which typically involves existing, mainstream customers participating in product or promotion innovation. This, too, has its place, but tends to generate more incremental innovations, such as new potato chip flavours at PepsiCo’s UK company Walkers. Tapping into customers’ creativity also underlies the iPhone App Store and customisation services such as Nike’s NIKEiD shoe store.
4.Larry Huston and Nabil Sakkab, ‘Connect and Develop: Inside Procter & Gamble’s New Model for Innovation’, Harvard Business Review, March 2006.
5.Patrick Barwise and Seán Meehan, Simply Better: Winning and Keeping Customers by Delivering What Matters Most, Boston, MA: Harvard Business School Press, 2004, 79-80.
6.George S Day, Closing the Growth Gap: Balancing ‘Big I’ and ‘small I’ Innovation, MSI working paper 06-004 (2006), Cambridge MA: Marketing Science Institute, pages 5-6.
7.Personal communication with authors, including Figure 2.
8.Matt Haig, Brand Failures: The Truth About the 100 Biggest Branding Mistakes of All Time, Kogan Page, 2011.
9.Robert Smith ‘Main Features in Management Information Systems”, article click, 15 March 2008, http://www.articleclick.com/Article/Main-Features-in-Management-Information-Systems/980141
10.Huff, LC and WT Robinson (1994), ‘The impact of lead time and years of competitive rivalry or pioneer market share advantage’, Management Science, 40, 10, pp 1370-77. Szymanski, D, L Troy and S Bharadwaj (1995), Order of Entry and Business Performance: An Empirical Synthesis and Reexamination, Journal of Marketing, 59, 4 (October), pp 17-33.
11.Gerard J. Tellis and Peter N. Golder, ‘First to Market, First to Fail? Real Causes of Enduring market Leadership’, MIT Sloan Management Review, Vol. 37, No. 2, pp. 65-75, 1996, http://ssrn.com/abstract=906021. Peter N. Golder and Gerard J. Tellis, ‘Pioneer Advantage: Marketing Logic or Marketing Legend?’, Journal of Marketing Research 30, 2 (May 1993), 158-170.
12.Barney Jopson, ‘The first-mover advantage myth’, Financial Times, March 6, 2012, p14 http://www.ft.com/cms/s/0/6c65423a-63c5-11e1-8762-00144feabdc0. html#axzz1oLKJV1S7