|Book Review: Fast Second|
Fast Second: How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets
Written by: Constantinos C. Markides and Paul A. Geroski. San Francisco: Jossey-Bass, 2005. 200+vii pages.
A seasoned new product practitioner can read this skillfully written book from cover to cover on a four-hour plane ride. If you have responsibility for your business unit's growth through new products you should book that plane ride now. This book contains unconventional wisdom and insights that practitioners can quickly put to use.
The authors, Constantinos Markides and Paul Geroski, professors at the London Business School, bridge research and practice for both innovation and economics. Their basic premise is that new products management first needs to grasp what happens in creating radical innovation. This understanding becomes a key to forecasting what will happen to the new-to-the-world market created by a radical innovation.
They explore how new-to-the-world markets emerge, how they evolve, how some firms colonize them, and how smart firms consolidatethem. From the evidence they uncover and their analysis, the authors conclude that most large, established firms cannot create radically new markets. Large established firms do not have the skills and attitudes necessary for such creation.
The authors also conclude that large firms should not want to create radically new markets. Large firms that successfully scale up a radically new market into a mass market make more money than the individual or firm that created the radical innovation. Mass markets are where most large firms already have the skills, people, and money for successful scale-up and consolidation.
Early in chapter 1, “Spotting the Real Innovators,” the authors provide a valuable service to the product innovation community by clearly defining four different types of innovation: radical, strategic, major, and incremental. They consider innovations radical if they meet two conditions. First, radical innovations introduce major new value propositions and disrupt current consumer habits and behaviors. Second, they create markets that undermine the competencies and complementary assets on which existing competitors have built their success. New technologies provide the foundation for radical innovations. Examples of radical innovations include television, mobile phones, and cars.
Strategic innovations produce seemingly modest changes to an existing product's value proposition but, as with radical innovations, create markets that undermine the competencies and complementary assets of established firms. Other terms for strategic innovations are architectural (Henderson and Clark, 1990) or disruptive (Christensen, 1997). New business designs provide the foundation for strategic innovations. Examples of strategic innovations include steel minimills, generic drugs, and low-cost point-to-point airlines.
Major innovations introduce major new value propositions and build on a firm's existing competences and capacities. Incremental innovations introduce minor changes in a current product's value proposition and build on a firm's existing competences and capacities.
The authors pose two questions they later answer in the book: (1) Why is it that firms who create radical new markets are rarely the ones that scale them up into mass markets? (2) What does the answer to the first question suggest for firms that aspire to create the markets of the future?
Chapter 2, “Where Do Radical Innovations Come From?” and chapter 3, “From New Technologies to New Markets,” describe how radically new markets are created. Technological supply-side push propels most radical innovations onto the market rather than pulls from clear customer demand. Most radically new markets cannot carry the huge number of early entrants or the wide range of products offered by the early entrants, and a shakeout of both early entrants and product offerings results. What emerges is a well-characterized product, thedominant design, which defines the market and shapes the nature of future competition.
In chapter 4, “Colonists and Consolidators,” the authors deduce from the evidence that firms who win the dominant design battle are almost never the first into the new market. They state, “It is one of the great myths of business history that the first movers in a new market end up dominating the market. Nothing could be further from the truth when it comes to new-to-the-world markets that are created by radical innovation” (p. 65). It is gratifying that their first piece of evidence (p. 2) is a table of unsuccessful pioneers of radically new technologies from an article published in JPIM (Olleros, 1986).
The authors show that first-mover firms arrive and try to colonize the radically new market. Colonists enjoy playing with the latest technologies, and their goal is to develop the best new products—even if they do not sell many. Colonists need an organizational culture that promotes experimentation and risk taking without hierarchical control. Experimenters, such as technologists and innovators, are the heroes in colonist organizations. Task-oriented project teams do the work. Managers act as sponsors and coaches.
By contrast, the consolidators' goal is to develop a new product good enough in performance and inexpensive enough to attract the masses. They need an organizational culture that promotes cost cutting and manufacturing excellence. Integrators, such as marketing and manufacturing people, are the heroes in consolidator organizations. Bureaucratic organizations with a clear hierarchy and division of labor do the work.
The skills needed to be an effective colonist and the skills needed to be an effective consolidator are so different that it is difficult for the same company to do both colonization and consolidation simultaneously. Companies that try, through organizational infrastructures such as intraprenuring or ambidexterity, find themselves stuck in the middle.
Markides and Geroski argue in favor of outsourcing colonization as the most profitable option for established firms to take part in radically new markets. Using this option, established firms focus on creating, aiding, and nurturing a network of feeder firms—young, entrepreneurial firms busily colonizing new-to-the-world niche markets. When it is time to consolidate the market, the established firm brings inside the most promising market platform provided by a feeder firm and champions the dominant design.
Network strategy has advantages over a growth-inside strategy for an established firm. It allows the firm to cover more technologies and more market niches. It bypasses the problems of trying to manage two conflicting business cultures concurrently and of becoming stuck in the middle.
“From Colonization to Consolidation,” chapter five, lists five strategies and actions a firm needs to scale up a promising market platform: (1) target the average consumer—rather than early adopters—by stressing product attributes with mass appeal; (2) win the dominant design race by creating bandwagon effects; (3) reduce customer risk through branding and communication; (4) build distribution that can serve the mass market; and (5) create alliances with key suppliers and producers of complementary goods.
Chapter 6, “Racing to Be Second: When to Enter New Markets,” contains advice for consolidators planning entry into a radically new market. When employing a fast-second strategy, a consolidator times its market entry to coincide with the dominant design's emergence. It actively influences which design will emerge as the winner. Second movers who wait until a dominant design emerges before entering the market have to face formidable and entrenched competitors. The authors state, “Contrary to prevailing beliefs, first movers into radically new markets rarely survive the market's consolidation—most disappear, never to be heard from again. Despite all the evidence pointing to this fact, most of us still believe in first-mover advantages and the beauty of pioneering! The problem is the pioneers of the new-to-the-world markets die quickly and without first growing the market to a size respectable enough to win them attention. As a result they quickly vanish from people's memories” (p. 121).
Chapter 7, “The Changing Basis of Competition,” takes a detour from radical innovation. It is a quick review of issues arising from the impact of strategic innovations on established firms who have become locked into a dominant design in an existing market. Readers interested in these issues and their resolution will find additional information in Markides (2000).
The final chapter, “Creating the Markets of the Twenty-First Century,” sums up the authors' prescription for large, established firms to exploit radical innovations. They know the advice they offer on how to dominate new markets arising from radical innovations does not sit well with established orthodoxies on pioneering, creating new markets, and the role of internal research and development (R&D) in established firms. However, they believe the book will have served its purpose if it challenges readers to question these orthodoxies and their destructive effect on their business unit's growth through new products.