By Terry R. Bacon, Cofounder and President, and David G. Pugh, Cofounder and Executive Vice President, Lore International Institute
Do you believe in innovation? Most leaders of high-technology firms do. But, as a business model, innovation alone virtually assures bankruptcy. Let's clarify what we mean here by a challenge in the form of a business proposition:
Proposition - As a business practice, the creation of new products, services, or gadgets constitute a futile and a useless exercise.
If that did not raise the hairs on the back of your neck and make your blood boil, then let us amplify this challenge by suggesting that: innovation-by and of itself-will not keep the high-tech industry viable.
A Case in Point:
On the day the bankruptcy court sold the assets of his firm, Joe (not his real name) stood by in amazement. He was a sophisticated hardware and software developer with a background that included a degree from a leading computer technology school and the success of having developed a number of new PC technologies.
Initially, Joe's genius got recognized for his work on the Sol-20 computer. Two of Joe's colleagues proposed the idea for the Sol-20. Although Joe credited his friends with the concept of the Sol-20, he is credited with actually designing the system. The Sol-20 was introduced about six months before the Apple II computer, so it actually predated the Apple II as a complete computer system. It also included the VDM-1 alpha/numeric video display adapter that Joe had also designed, which let the Sol-20 display alpha/numeric on a television. It was so fast that the adapter enabled the first interactive computer game using symbol characters built into the alpha/numeric display chips of the time. Joe's VDM-1 design set the architecture for personal computers and video because it was designed to handle part of the display processing, instead of relying entirely on the CPU. But only about 10,000 of the Sol-20 systems were produced, either as complete units or as kits.
Another design request realized by Joe was the portable computer in 1981. This innovation of Joe's was considered the first portable computer ever. From this design job, Joe was named founder and vice president for engineering at the company. Unfortunately, the firm went bankrupt in 1983.
Joe was able to continue his work, including the founding of Upstart, a company he formed to create a workstation-on-a-card product. That effort and the company failed. Joe is also known for his invention of the Pennywhistle 103 kit modem he developed in 1976. The Pennywhistle 103 made it affordable for personal computers to have a modem. Additionally, Joe invented a wearable CD-ROM-based computer in 1991, but it was never produced.
As an innovator, Joe was an unqualified genius. But almost none of his superior inventions were able to keep any of Joe's multiple business enterprises solvent. Why-given Joe's excellence as a designer and systems innovator-did almost every business Joe attempted to develop end in collapse? Joe, like most in the high-tech sector, seemed to have pinned his business success only on his ability to innovate and not on savvy and effective business practices.‡
Are High-Tech Customers 'Special'?:
Most readers of The Sterling Report are leaders like Joe who oversee innovation-driven firms, interested in creating and using "new" things. In the world of technology, the creation, development, and marketing of the newest versions seems like the very life-blood of the industry. However, we would like to challenge readers by suggesting that, as a business practice, the creation of new products, services, or gadgets will not sustain your competitive advantage nor ensure the survival of your business.
High-tech firms generally assume that their customers are in a different category than other consumers. You may say that your buyers insist on innovation. Don't innovate and you will lose the whole market. Clearly, this is probably true. It's not that innovation isn't a key part of every business. Indeed, every enterprise and industry sector has a need to develop new products and services. Our issue isn't innovation, per se, but a bedrock belief that innovation alone will sustain the market. If innovation-new products and new features-equated to high profits and the capture of more market share, then today Apple computers should be the biggest retailer of personal computers in the world. Right?
Consider that Apple has a very user-friendly platform; it is graphically superior to its PC competitors; and it has continued to offer new product lines and new programs designed to attract customers driven to purchase cutting-edge products. Yet, year-by-year, Apple continues to represent a smaller segment of the market. If the innovation business model worked, the IBMs and the Microsofts shouldn't have had a chance. They do, but not solely because of innovation. Other market forces have driven the customer to the PC and away from the Mac.
The Role of Supply Chain Economics:
Some of those forces have to do with supply chain economics. Microsoft and IBM foresaw that their business relationships with suppliers and vendors would drive this market every bit as much as technical innovation. As much as anything, Apple's loss of market share may be attributed to supply chain management. Microsoft, especially, was at the forefront of creating a supply chain management system with both its suppliers (i.e., Intel) and its vendors (i.e., Dell or HP). There have been some repercussions for firms like Microsoft for too aggressively leveraging their supply relationships, but the overall business effect has been to maximize market dominance.
One key difference in this kind of supply chain management is the significance of customer relationships in the process. Firms like Microsoft understood that as important as the technical excellence of their software, it would only become the product of choice if adopted by vendors. To get vendors aligned with Microsoft, the business relationship took on equal significance with technical innovations. To be sure, Microsoft has continued to innovate. But the reason it now dominates the market isn't solely because of their technical innovations. The relationships-both good and questionable-that MS developed with its vendors have served to move the firm ahead of nearly every other competitor.
Why Relationships and Behavior Matter:
That is our point. In business-high tech or otherwise-innovations only get you so far. Your relationships up and down your supply chain, but especially with your vendors or those you sell to, are the other keys to success. Consider how easily technical innovations are erased in the software world. One developer brings a new product or service into the market. A competitor will quickly copy that innovation, get around the patent and/or copyright issues by outsourcing the development and manufacture, and come back into the market with a clone product that they can sell more cheaply. As a result, key buying decisions are driven by price. Your competitor has co-opted your invention or innovation and is selling their version more cheaply. To stay in the game, you also have to lower your price and your margins. This remains the pattern in nearly every sector of the high-tech industry.
Conversely, Dell has captured a significant portion of the PC sales market, mostly because of its ability to create a dynamic relationship with consumers. Are there other PC manufacturers out there who may have an equal or possibly even a superior product? You bet. But Dell's success has not been driven by its technical expertise alone. Dell moved to make direct contact with its markets. Rather than taking the traditional innovator/builder approach, where selling occurs through a network of store-front-type vendors, Dell opted to go directly to customers. As Dell moved to reach customers, the message they gave buyers was not technical.
Instead, Dell offered reliable, functional, and even rather low-feature PCs that would have appeal to a broad market segment. The firm also provides higher-end products, but its mainstay focused on customer-friendly products and an approachable style of doing business-including in-house financing-that served to position Dell as a partner with its customers, not merely as a seller of equipment.
Low- to High-End Markets:
You may say that's just fine for the low-end market, but for those of us who are high-end users of this technology, the level and degree of innovation really does count. But does it really? Consider the case of EMC. In the highly competitive business of information storage technology, competitors like IBM and Compaq have a much broader array of products and services than EMC. Instead of creating new products or services in a vacuum, EMC only develops new technologies in direct response to the needs of its customers.
In this effort, EMC employs a process that draws on customer advisory councils. These councils bring together not one customer, and not for one application, but as many as 80-100 selected customers from different backgrounds. These customers make up to an 18-month commitment to participate in collaborative forums to create innovations that impact business results. As a consequence, EMC has one of the highest levels of customer loyalty in their industry. Loyalty-from a business perspective-is significant for creating profitable and sustainable relationships. Customer satisfaction is no guarantee of loyalty. A company like EMC takes that notion of satisfaction beyond the technology. By involving customers at the development stages, and by sticking with them throughout the implementation processes, EMC is securing a long-term position within the information storage technology sector. Beyond merely creating a new solution that is then marketed, EMC's approach focuses less on the innovation and more on the customer.
That kind of customer focus is extended for EMC in its service delivery. EMC views customer service as an investment, not as a profit center. Consequently, their field and technical support concentrate on finding the right and best solution, regardless of the cost impact on EMC. Rapid escalation of a problem is one characteristic of the EMC approach. Problems not solved in eight hours get escalated to the vice president of their Global Services Division; if not solved in ten hours, they get bumped up to the CEO.
This policy includes a "Guilty Until Proven Innocent" way of working on problems. EMC does not waste time debating the cause of a customer's problems. A technician is sent to resolve the problem, and if the source can be attributed to any other supplier's product, EMC will work directly with that supplier to get the problem resolved so that the customer does not have to make a second call. EMC boasts a more rapid escalation up some other suppliers' service chains than the suppliers themselves do.
In this way, a technical issue is backed by a proactive involvement with the customer. This kind of focus is a clear differentiator for EMC, above and beyond any innovations or technological features of their systems. It makes a significant impact on every EMC client and results in that high level of customer loyalty.
Sustainable Advantage:
As long as the high-tech business sector clings to a business philosophy that embraces innovation as the sole way to success, enterprises in this sector will continue to experience floods of cheap imitation products and services, coupled with erratic revenue cycles. Coming to see that business-including the high-tech business-is all about differentiating your company in terms of how you deal with customers will change this cycle and result in sustainable growth.
‡ This case is based on the biography of a pioneering hardware and software developer, as reported by Smart Computing.
Terry R. Bacon, Ph.D., is a cofounder and president of Lore International Institute. He is a prolific author, having written or co-written nearly eighty books, film scripts, simulations, assessments, and white papers. His most recent book publications include "The Behavioral Advantage: What the Smartest, Most Successful Companies Do to Win in the B2B Arena"; "Adaptive Coaching: The Art and Practice of a Client-Centered Approach to Performance Improvement"; "Winning Behavior: What the Smartest, Most Successful Companies Do Differently"; and "Selling to Major Accounts". Terry can be reached for feedback at bacon@lorenet.com.
David G. Pugh, Ph.D., is a cofounder and executive vice president of Lore International Institute. He is an internationally respected authority on marketing, sales, and proposal training. He is the architect of Lore's proposal training and consulting services, as well as the author of Proposing To Win. David is a coauthor of "The Behavioral Advantage" and also of "Winning Behavior". This fall, he and Terry Bacon will publish a new book, "Powerful Proposals: How to Give Your Business the Winning Edge". David can be reached at pugh@lorenet.com.
