Five Favorite Books on Innovation and Competitive Strategy
*Originally published on LinkedIn on Sep 14th, 2020
I'm stuck inside on a smoky weekend and thinking about a handful of books on innovation and competitive strategy that provide great clarity and never sit on my shelf for long. If you want a crash-course in innovation and competitive strategy, these are the five I strongly recommend. As a bonus, they are all available as audiobooks and are packed with interesting examples that bring the concepts to life.
I've been fairly ruthless in narrowing the list to five and have tried to focus on the foundation of innovation and competitive strategy. The subject matter expands significantly when you move to the execution phase because execution can look very different across industries (e.g. internet software vs industrial manufacturing) and types of organizations (start-ups, established companies, nonprofits,and governments.) As an aside, this is the reason that The Startup Owner's Manual didn't make this list but I do strongly suggest that book as well.
I've summarized my personal highlights of the books below.
As I use these frameworks, they remind me of an unsolved problem in physics. Quantum mechanics and relativity both work flawlessly when applied to the right problems but appear incompatible with each other and neither is sufficient to explain everything that can be observed. As a result, we are still missing a so-called theory of everything. There is a similar situation here. Do you need to decide if you are faced with a Crossing the Chasm or Innovator's Dilemma situation before proceeding with analysis? How do you reconcile multiple frameworks that may suggest alternative paths of action? I think of the framework as lenses. Looking at the same situation through multiple lenses will provide additional perspective and a richer understanding of the situation.
Despite the differences in the frameworks, a few common themes emerge:
1) Spend time in the field with real customers and prospects. This is the most important data to use when applying any framework.
2) But be careful about not taking customer feedback too literally. Customers ask for incremental improvements. Dig deeper and take away more nuanced insights if you are looking for opportunities to introduce disruptive innovation.
3) Companies that find ways to gather feedback continuously instead of discretely and to iterate rapidly have a higher chance of innovating successfully.
4) Innovation doesn't happen in a vacuum. Draw inspiration from other markets and industries.
5) A company should compete to earn a share of the possible profits. This is often different from competing to beat another vendor.
6) All good strategies involve trade-offs.
7) Innovation requires humility. Innovation can't exist without an open mind and a willingness to change paths. This may be easier said than done in environments where managers are judged on forecasting accuracy and ability to hit pre-determined objectives.
8) Innovation should be a structured and managed activity. Don't bank on a stroke of genius.
Book 1: Innovation and Entrepreneurship by Peter Drucker
(Focus on part 1 of the book for this subject matter)
The seven sources of innovation from Peter Drucker provide a great framework when searching for innovative ideas. Drucker, the founder of modern management, also emphasizes that innovation can and should be managed as a systematic process.
"Entrepreneurship is "risky" mainly because so few of the so-called entrepreneurs know what they are doing. They lack the methodology. They violate the elementary and well-known rules. This is particularly true of high-tech entrepreneurs. To be sure, high-tech entrepreneurship and innovation are intrinsically more difficult and risky than innovation based on economics and market structure, on demographics, or even on something as seemingly nebulous and intangible as Weltanschauung - perceptions and moods. But even high-tech entrepreneurship need not be "high-risk," as Bell Lab and IBM prove. It does need, however, to be systematic. It needs to be managed. Above all, it needs to be based on purposeful innovation."
The Seven Sources of Innovation:
1) The unexpected
Key idea: When something unexpected happens, it should be investigated and understood because it may reveal an opportunity for innovation. Companies are particularly bad at failing to dig deeper into the root cause of the unexpected success.
Types of unexpected events that may point to an opportunity for innovation:
The unexpected success
The unexpected failure
The unexpected outside event
2) Incongruities
Key idea: "An incongruity is a discrepancy, a dissonance between what is and what "ought" to be, or between what is and what everybody assumes to be."
Types of incongruities that may point to an opportunity for innovation:
Incongruous economic realities
The incongruity between reality and the assumptions about it
The incongruity between perceived and actual customer values and expectations
Incongruity within the rhythm or logic of a process
3) Process need
"In innovations that are based on process need, everybody in the organization always knows that the need exists. Yet usually no one does anything about it. However, when the innovation appears, it is immediately accepted as "obvious" and soon becomes "standard."
"....successful innovations based on process needs require five basic criteria:
A self-contained process;
One "weak" or "missing" link;
A clear definition of the objective;
That the specifications for the solution can be defined clearly;
Widespread realization that "there ought to be a better way," that is, high receptivity"
4) Industry and Market Structures
"Actually, market and industry structures are quite brittle. One small scratch and they disintegrate, often fast. When this happens, every member of the industry has to act. To continue to do business as before is almost a guarantee of disaster and might well condemn a company to extinction. At the very least the company will lose its leadership position; and one lost such leadership is almost never regained. But a change in market or industry structure is also a major opportunity for innovation."
5) Demographics
"What makes demographics such a rewarding opportunity for the entrepreneur is precisely its neglect by decision makers, whether businessmen, public-service staffs, or governmental policymakers. They still cling to the assumption that demographics do not change - or do not change fast. Indeed, they reject even the plainest evidence of demographic changes."
6) Changes in perceptions
"When a change in perception takes place, the facts do not change. Their meaning does. The meaning changes from "the glass is half full" to "the glass is half empty."
7) New Knowledge
"Knowledge-based innovation differs from all other innovation in its basic characteristics: time span, casualty rate, predictability, and in the challenges it poses to the entrepreneur. And like most "superstars," knowledge-based innovation is temperamental, capricious, and hard to manage."
Book 2: Understanding Porter by Joan Magretta
I'm usually not a fan of books that summarize other books but I definitely make an exception here. Magretta collaborated closely with Porter in preparing this book. It succinctly captures the key concepts of his life's work in the areas of competition and strategy.
A core principle underlying Porter's work is the idea of competing to be unique vs competing to be the best:
"Competing to be unique is unlike warfare in that one company's success does not require its rivals to fail. It is unlike competition in sport because every company can choose to invent its own game. A better analogy than war or sports might be the performing arts. There can be many good singers or actors - each outstanding and successful in a distinctive way. Each finds and creates an audience. The more good performers there are, the more audiences grow and the arts flourish. This kind of value creation is the essence of positive-sum competition.
While zero-sum competition is rightly depicted as a race to the bottom, positive sum competition produces better outcomes."
The book includes the Five Forces Framework which is a powerful tool for evaluating an existing industry or the potential opportunities and challenges when trying to create a new industry.
Source: https://hbr.org/2014/11/how-smart-connected-products-are-transforming-competition
There are a number of other useful tools in the book including:
Value Chain Analysis: The collection of (ideally differentiated) activities that a company performs which ultimately allow it to operate at a lower cost, charge a higher price, or both.
Three fundamental questions that define value proposition: Which customers? Which needs? What relative price?
The importance of trade-offs and the ways that trade-offs create barriers to potential imitators.
Fit and the use of an Activity System Map to look for ways that activities reinforce each other and work together.
Strategy Continuity: "Paradoxically, continuity of strategy actually improves an organization's ability to adapt to changes and to innovate."
Book 3: Crossing the Chasm by Geoffrey Moore
This book is about a common problem faced by companies that are trying to introduce a discontinuous innovation to the market. The technology adoption lifecycle proceeds from Innovators to Early Adopters (Visionaries) to the Early Majority (Pragmatists) to the Late Majority to Laggards. Historically, it had been presented as a continuous process and shown as a bell curve. In reality, there are some gaps (e.g. between Innovators and Early Adopters) that can create challenges for companies. There is also a large chasm between the Early Adopters and Early Majority that can cause companies that appeared to be on a promising trajectory to fail completely and go bankrupt. The book focuses on analysis of that chasm and provides specific advice on how to bridge it.
Moore defines a market in high tech as:
"- a set of actual or potential customers
- for a given set of products or services
- who have a common set of needs or wants, and
- who reference each other when making a buying decision."
The challenge presented by the chasm is that pragmatists rely heavily on references and prefer to buy from market leaders. However, at the point in time when the company is attempting to transition from visionaries to pragmatists, they have no reference customers and lack a market leadership position.
Moore describes a specific strategy for crossing the chasm which has been become a well-used playbook for high tech marketing for almost three decades:
1) Choose a beachhead. Choose a very narrow market niche in which it is practical for you to establish a market leadership position in a reasonable amount of time.
2) Assemble the whole product for that beachhead. Visionaries are willing to assemble the whole product themselves but pragmatists want to buy the whole product. Assembling the whole product may require specific new features or capabilities and may involve partnerships with other companies.
3) Pragmatists will not buy from you if you have no competitors. They need to know that there are alternatives they can fall back on if needed. When crossing the chasm, the book recommends framing the competition using a market alternative (what they are doing today) and a product alternative (a similar technology that has been deployed in a different market):
"To sum up, your market alternative helps people identify your target customer (what you have in common) and your compelling reason to buy (where you differentiate.) Similarly, your product alternative helps people appreciate your technology leverage (what you have in common) and your niche commitment (where you differentiate.) Thus you create the two beacons that triangulate to teach the market your positioning."
4) The claim is a critical part of positioning while crossing the chasm. Moore recommends the following template.
"- For (target customers - beachhead segment only)
- Who are dissatisfied with (the current market alternative)
- Our product is a (new product category)
- That provides (key problem-solving capability).
- Unlike (the product alternative),
- We have assembled (key whole product features for your specific application.)"
5) It may be tempting to use discount pricing to try to more rapidly establish your beachhead but discount pricing sends the wrong signal. You can't claim you are the market leader if you don't price accordingly.
Book 4: Innovator's Dilemma by Clayton Christensen
(Focus on part 1 of the book for this subject matter)
The framework presented in the Innovator's Dilemma is incredibly simple and powerful. For large companies, it's a warning that if they are not actively taking steps to disrupt themselves then someone else will. For small companies, it fuels the optimism that there are ways to take meaningful market share from even the largest and most established incumbents.
"Simply put, when the best firms succeeded, they did so because they listened responsively to their customers and invested aggressively in the technology, products and manufacturing capabilities that satisfied their customers' next-generation needs. But, paradoxically, when the best firms subsequently failed, it was for the same reasons - they listened responsively, to their customers and invested aggressively in the technology, products, and manufacturing capabilities that satisfied their customers' next-generation needs. This is one of the innovator's dilemmas: Blindly following the maxim that good managers should keep close to their customers can sometimes be a fatal mistake."
A summary of the dilemma is as follows:
Successful companies listen to their existing customers.
In the pursuit of growth, successful companies expand by moving up-market (more complex and advanced products).
Successful companies are very good at deploying sustaining technology to continuously improve the performance of their products.
Technology often improves more quickly than a given class of customers requires it to improve. The lower tier of customers does not fully benefit from the incremental improvements made by the company.
From the perspective of the incumbent, disruptive technologies initially under-perform in the key areas that are important to their customers.
Despite the shortcomings, disruptive technologies are often more affordable and may have additional capabilities that make them uniquely compelling to small and unattractive markets that the incumbent is not interested in pursuing.
After a number of years in the small and unattractive markets, the disruptive technology from the startup will improve to the point where it meets the minimum performance requirements of the incumbent's lower tier of customers while also delivering lower price or other improvements.
At this point, the incumbent starts to rapidly lose market share to the startup company and it is too late to catch up.
Book 5: Blue Ocean Strategy by Chan Kim and Renée Mauborgne
The idea of a Blue Ocean Strategy is to create your own playing field where you have no direct competitors and where you can tap into demand that didn't previously exist.
"...imagine a market universe comprised of two sorts of oceans: red oceans and blue oceans. Red oceans represent all the industries in existence today. This is the known market space. Blue oceans denote all the industries not in existence today. This is the unknown market space.
In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share of existing demand. As the market space gets crowded, prospects for profits and growth are reduced. Products become commodities, and cutthroat competition turns the red ocean bloody.
Blue oceans, in contrast, are defined by untapped market space, demand creation and the opportunity for highly profitable growth."
Kim and Mauborgne recommend creating a Strategy Canvas and then using the Four Actions Framework to develop a Blue Ocean Strategy. The Strategy Canvas plots the performance of the average company in a given industry on the y axis in a number of categories. These categories will be specific to the industry (e.g. "seat comfort" for an airline.) There may be multiple plots on the same canvas if there are multiple groups of competitors (e.g. premium hotels vs motels.)
The Four Actions Framework asks four key questions to create a unique plot of a different value curve.
"- Which of the factors that the industry takes for granted should be eliminated?
- Which factors should be reduced well below the industry's standard?
- Which factors should be raised well above the industry's standard?
- Which factors should be created that the industry has never offered?"
Source: https://www.blueoceanstrategy.com/tools/strategy-canvas/
In order to create a Blue Ocean Strategy, you need to break through traditional market boundaries. The book offers six patterns for doing that:
1) Look across alternative industries
For this pattern, you are encouraged to think very broadly. Fast food may be a substitute for fine dining. On the other hand, an alternative to fine dining may be going out to the theater.
2) Look across strategic groups within industries
Strategic groups in this context refers to "a group of companies within an industry that pursue a similar strategy."
3) Look across the chain of buyers
For this pattern, you are encouraged to consider the needs of a different buyer. For example, in an industry that traditionally focuses on selling to the IT department, there may be an opportunity to instead address the priorities of the end-users and create a situation where the end-users are telling the IT department to buy your solution.
4) Look across complimentary product and service offerings
The collection of complimentary products and offerings is similar to the whole product concept in Crossing the Chasm. By considering all of the complimentary products and services, there may be new ways to define the offering.
5) Look across functional or emotional appeal to buyers
The authors observe that in any given industry, there is a tendency for competition to converge around functionality or emotions. Breaking this paradigm can create new opportunities.
6) Look across time
If it is inevitable that a trend will continue, there may be an opportunity to think ahead and to enter that space proactively.
Conclusion
The books are full of great examples. When reading the books, I personally recommend that you have one or two companies in mind and try to apply the thinking to those specific examples.
Those are my top five. Please let me know what book you would have added to expand this list.
Cheers,
Steve