Where innovators should aim in a ‘winner take all’ market
by Mitchell Osak — Mar 20 '14
Companies could learn much about innovation from the Spanish general, Hernan Cortes. In 1518, Cortes was instructed to sail to Mexico and overthrow the Aztec empire. According to the story, he proceeded to scuttle his boats after putting down a mutiny of some of his staff. This sent a powerful message to his soldiers that there was no retreat. They would conquer Mexico or die in their efforts. History judged his decision successful (if not immoral). His small army of 500 soldiers conquered the country in a mere two years. What management lessons can be gleaned from this historical episode?
An “all or nothing” strategy seems counter-intuitive when looking at the best way to commercialize risky innovations. Conventional wisdom says that launching small, measurable experiments or pilots is the best, lowest risk approach to introducing new products or technologies. Though this seems like a prudent tack, it has not necessarily produced market wins. Numerous studies show that the success rate for new products has stubbornly hovered around 10-20%. Fortunately, there may be a better way to commercialize innovation.
Anita Elberse
A professor at Harvard Business School, Anita Elberse, has studied creativity-driven industries like music, sports, movies and publishing. In her book Blockbusters, Elberse found that the companies with superior financial returns had strategically focused their efforts and capital on producing movie blockbusters, recruiting superstar athletes or signing popular authors. To use a baseball metaphor, these firms always swing for the fences instead of playing it safe trying for singles and doubles. According to her data, these industries exhibit a ‘winner take all’ dynamic; less than 10% of projects, teams or entertainers produced more than 90% of industry revenue and profit.
In “winner take all” markets, the best strategy is to singlehandedly aim for blockbuster products. The best way to do this is to focus investment and management attention on proven entities, assets or projects, like a movie sequel, a superstar free agent athlete or a popular book franchise. Funding a limited number of major innovations is not enough. You also need to front-load your sales and marketing effort to boost initial channel distribution and trigger word-of-mouth effects. Elberse considers a blockbuster strategy a lower risk approach because it improves the odds of success early on and enables firms to cut their losses if results do not pan out.
Applicability to other markets
While Elberse studied the creative and sporting industries, other information-driven sectors may experience similar blockbuster dynamics. Industries with high fixed costs, a low marginal cost (when producing more) and a high marginal profit (on each additional sale) can quickly evolve into “winner take all” markets, particularly when digital technologies reduce customer search costs and eliminate the need for physical proximity between the buyer and seller. There are many reasons for all CEOs to consider this approach for their business:
Rallying the troops
Big innovation bets focus employee and supplier attention, create positive urgency and prevent individual or departmental agendas from stealing resources.
Many R&D projects, particularly small ones, can develop institutional momentum making them difficult to cancel. Managing this portfolio can generate significant complexity, increasing organizational cost and diffusing effort. A blockbuster strategy eliminates these wasteful costs plus allows managers to best leverage scale economies in areas like media buying and raw material purchases.
Movie studios concentrate investment and time on stories, actors and directors with proven consumer appeal (e.g., a sequel). The discipline of only targeting key customer needs in profitable segments with real innovation improves the chances of market success.
Elberse’s learnings are relevant to many other industries including education, training, professional services and software. However, not every firm is a good fit. We believe enterprises should have three characteristics:
1. Self-awareness
Companies that are good at placing the right innovation bets tend to have a good sense of what their core competencies are and where they need to partner or bypass.
2. Decisiveness
Though having a good innovation evaluation process is important, management still needs to make tough calls quickly in periods of uncertainty. Moreover, following a blockbuster strategy requires firms to have a culture and performance measurement system that is tolerant of failure.
3. Nimbleness
Rigid plans lead to risky, binary decisions. Even in the movie industry, extensive consumer research still takes place. Producers don’t hesitate to make edits or change endings based on focus group research.
Utilizing a blockbuster approach goes against conventional wisdom. However, there are many examples of hurting companies like Apple, IBM and Xerox that followed this strategy and have re-emerged as winners. Managers should understand their operational dynamics, consider the strong financial business case, and analyze the impact of digital tools like search bots or recommendation engines that create “winner take all” effects.
photo credit: Bogdan Suditu via photopin cc
