7: Create Something Out of Nothing
The traditional strategy begins with assets, taking account of the resources that you have and seeing what opportunities they can be used to pursue. The innovator first considers the opportunities he wishes to pursue, then acquires the resource he needs to pursue it.
(EN: This is a very significant weakness in "strategy," particularly the use of "SWOT" analysis, which is often done wrong: analysts who start with a firm's existing strengths and weaknesses guide a firm to do what it currently does, and assumes its assets to be unchangeable, and often causes opportunities to be overlooked and threats to be accepted as inevitable.)
The author fumbles a bit with the concepts of invention and innovation, but seems to arrive at the right general idea: an invention creates something that never existed before (the man who tries using using oxen to drag a stick to create a furrow in the earth invented the plow) whereas innovation improves something that already exists (the man who changed the shape of the plow or the material from which it is made to make an existing thing more effective).
In either case, it begins with an intangible idea - that things could be better if they were done differently than the way they presently are done. The author calls these "invisible inventions" - even if they resulted in a physical artifact or an observable practice, they began with a concept in the mind.
All invention comes from pain: whether a person suffers a loss and thinks of a way to restore their position, or merely feels the pain of longing for something that he cannot presently obtain. And to dispel that pain, he must "create something out of nothing" an bring into existence something that does not presently exist.
Business, and all businesses, are ultimately based on the same concept, though many do not invent/innovate to solve their personal problems, they do so to solve other peoples' problems on the faith that they will be rewarded with money for doing so.
However, business often stop innovating after their first good idea: they find something they can do to help others and are rewarded in return, and then seek to keep doing the very same thing to receive the very same reward. Very seldom do they ever think about solving a different problem.
And to go back to the chapter opening, business very often imposes on itself imaginary rules for what it may or may not do - the most pernicious of which is that you have to play the game with the pieces that are already on the board - and you cannot place a new piece on the board, or move an existing one in any but the prescribed way.
The metaphor the author uses is chess, but it is also the same of any game or sport - and in many cases, the challenge of the game is to do the best you can with what you have within the boundaries of the rules.
Companies that fail to innovate often accept this metaphor. But it is flawed because business is not a game; you are not constrained by rules or equipment; you can get more equipment and change or ignore many of the rules. Companies that make bold and effective moves are able to surprise their competitors because the industry accepted these imaginary rules and the innovator rejected them.
A quick list of such innovators is provided:
- Apple rose in consumer electronics because they ignored the industry's rule that customers wanted more features, more functions
- Gatorade created the sports drink category by ignoring the rule that beverages were consumed for pleasure and had no functional benefits
- Ticketmaster rejected the rule that venues paid a flat fee to services to sell tickets rather than sharing revenue
- Zynga generates significant revenue because they ignored the gaming industry's rules that people must pay to play and that players didn't want to cheat
These are merely examples, as there are many firms that became successful because they did things in a different way, ignoring the "rules" that others accepted.
Anatomy of the Strategy
The author outlines the manner in which innovation strategies unfold:
- The industry stops thinking and accepts a number of imaginary rules and constraints that govern how they will do business
- Someone questions a common assumption, recognizing that it is an unnecessary constraint
- That person creates a new product or practice that ignores the constraint
- Competitors dismiss the idea as being unconventional and do not consider it to be a threat
- If the practice succeeds, competitor wakes up and attempts to imitate, often without understanding why it is successful
- Eventually, all get the right idea, the innovation becomes a standard practice, and the rules are changed
- Return to step one as the "new" rules for business become the "old" and firms stop thinking again.
Along the way, the author briefly mentions research that is used to dismiss ideas. Research is a very effective innovation-killer because it depends on evidence that was gathered from what was done in the past - and since a new idea has never been done, there is no evidence it will be effective. So all the research suggests it is a bad idea, or at least that there is insufficient proof it will be a good one.
Case Study: Tourism
The author considers the tourism is a kind of innovation. Most cities, and countries, are merely mundane and uninteresting places that ordinary people live and work and go about their mundane lives. It takes creative thinking to transform a place into a tourist destination.
Destinations gain brand value when they are associated to specific ideas - and ones that are not unique. Costa Rica means jungles and parrots; Jamaica means tropical beaches; Las Vegas means gambling and nightlife; New Orleans means food and jazz; Europe means history; and the like. There are many other places that have these things, but certain locations are uniquely associated to them.
Some places became tourist destinations accidentally: the Chinese never considered tourism when building their Great Wall, nor did Paris when it built the Eiffel Tower. But in the present day, tourist destinations are created: Las Vegas and Goa are places that came into existence with the notion of attracting tourists.
Attempting o drag this musing back to his topic, the author asserts that customers are often less interested in what a product is and does than to the image they have constructed in their minds. Most premium and luxury class products are not significantly better than standard and economy versions of the same thing - taken on its functional value, a Rolex is just a watch and a Bentley is just a car and neither is significantly better at its task than those that cost one-hundredth of the price - but the ideas attached to them are what stimulates demand.
(EN: It's an interesting observation, and likely qualifies as "creating something out of nothing" but does not follow the strategy the author outlined. How do tourist destinations break the imaginary rules?)
Case Study: Aflac
A little known fact about Aflac, the insurance company known for their duck mascot, is that 70% of their revenue and 80% of assets come from the Japanese market.
It is an American company, but saw an opportunity in the 1970s, when the Japanese people were concerned that there was an epidemic of cancer deaths (which was statistically true, but only because their life expectancy jumped from 59 to 84, so more people were living long enough to get cancer).
While traditional life insurance companies offered an all-perils policy that included, but did not emphasize, death by cancer, Aflac saw the opportunity to create a cancer insurance policy that paid about ten times the amount of general life insurance - simply because of the nature of the disease: cancer is actually quite rare, and tends to affect the very old - so many customers, fueled by irrational fear, would pay premiums over a long period of time and few would collect.
It's also noted that the company "convinced" the Japanese government to give it a seven-year monopoly on this kind of policy, which made them the only company that could offer such a thing for a long enough period of time to dominate the market. Its market share grew even after the protection ended: to a 90% share of cancer insurance in 1990 to a 94% share in 1992.
(EN: The author doesn't explain how this is "breaking the rules" but my sense is it's self-evident that competitors kept selling all-perils policies rather than specializing on a specific peril that had heightened appeal.)
Conclusion
The strategy of innovation has been a reliable and effective method for innovative companies because it catches the competition by surprise:
- They never imagined, or never seriously considered, that what they imagined was a hard-and-fast rule could simply be ignored
- They must significantly re-tool their operations and culture to follow suite
- By the time they catch on, the innovator has already taken a significant lead in the market
In the present day, innovations are faster and more frequent than ever before - and they are harder to see in a service economy because there is no tangible good to inspect. Or even when there is a tangible good, it is the business processes behind the scenes and invisible that are the cause of competitive advantage.
(EN: This runs contrary to the earlier advice, to wait it out and let others fail first. But my sense is that the two can be reconciled by considering many firms "test" market and do pilot programs, thus failing to capture a lead in the market before their competitors catch on.)