Quarterly Journal on Management
From the publishers of THE HINDU BUSINESS LINE

Vol. 2 :: No. 2 :: August 1998

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The Difference

R. Dante Vilardi

Most small businesses today attempt to jump start growth by focusing exclusively on pulling "the conventional levers of growth" -- cutting costs, developing incrementally better products and services, tapping the organisation's supply of human knowledge and digital information, pursuing more profitable customers, and strengthening and perfecting distribution chains. Such actions no doubt are essential to long-term growth.

But a rapidly emerging, new breed of enterprise has made an additional organisational commitment - one which every small business would do well to consider. These not only are able to pull the conventional growth levers; they also establish themselves as global thought leaders in an abstractly defined "opportunity space." This is innovation-based competition.

Some examples:

* The National Basketball Association has in the last 15 years helped transform the conception of sports entertainment from a one-way expression of competition and local loyalties to a richer and more diverse kind of two-way, global, theme-based entertainment;

* Palo Alto, Calif.-based Virtual Vineyards -- among the most successful Internet commerce sites in history -- continuously takes the enjoyment of wine to new levels by exploiting the personality and down-to-earth style of its owners, and by making smart use of the Web;

* Through observation of profound shifts in the nature of work and production, parcel packing and shipping franchiser Mail Boxes, Etc. constantly introduces innovations that redefine the meaning of business convenience;

* Intuit, maker of Quicken software, continuously redesigns and enriches the marketplace's interpretation of personal finance by offering new and potentially more efficient ways of meeting financial needs; and

* Discovery Communications, parent company of The Discovery Channel, has brought new meaning to the educational adventure of discovery by making this concept the organizing principle behind the firm's software development, retailing, adventure camps, television productions, and other initiatives.

A close analysis of innovation-based competition will deliver a form of strategic insight normally unavailable to your competitors, who no doubt are focusing solely upon pulling the conventional growth levers. The conventional-thinking firm often perceives the admitted fuzziness and abstract, indefinite quality of opportunity space as a distraction from "the core business;" innovators, on the other hand, use these abstract qualities as the critical yardstick and detection device for growth, which:

* enables quicker exploitation of emerging opportunities;

* draws the attention of potential collaborators from other industries;

* keeps traditional competitors off balance;

* helps explain and define as-yet unseen new business opportunities;

* enables up-and-coming firms to sidestep industry leaders, rather than face them head on; and

* communicates difference to the marketplace at large -- the essence of brand building.

Today's path-breaking firms have proven that innovation can be attacked much like other more conventional points of management concern. In fact, we have found that enterprises competing on innovation usually take aim at a very specific thing - an abstract, but sufficiently specific, market-defining concept. Just as process improvement goes to work on processes, innovation goes to work on redefining and reorganizing around these formative marketplace ideas. Fortunately for the innovators, the conventional marketplace frequently fails to recognize such bedrock concepts as significant, much less market-shaping.

When Intuit founder Scott Cook started selling Quicken personal finance software back in 1983, his company faced a cluttered marketplace of 43 competing products -- most of which were designed as extensions of ancient accounting practices and record-keeping standards flowing from US tax laws.

But Cook understood that most people don't think or act in their financial lives under such rigid, counterintuitive constraints. Operating consistently from a simple, yet precisely defined mission of "revolutionizing the way people manage their financial lives," the company's three top products - Quicken, Quick Books and TurboTax -- each now command over a 70 per cent share of sales in their category at retail.

Operating under the equally ambitious tagline, "Making business easier, worldwide" Mail Boxes, Etc. has helped create the marketplace for business services that support new ways of working. Anthony W. DeSio, the company's president and chief executive officer, writes that "Coupled with the impact of network expansion are the effects of dramatic shifts in how work and production are defined."

He sees the company's top opportunities in the rapid rise of small offices and home offices, telecommuters, field service workers and "virtual" offices. Now consisting of more than 3,300 centers business throughout the world, MBE has been ranked the number one "Postal and Business Services" franchise by Entrepreneur Magazine, and 11th overall.

Management at Discovery Communications, parent company of The Discovery Channel among others, focuses both on broadcasting and moving forward its discovery-oriented brand as the keys to growth. It asserts that the organisation's opportunity space "encompasses a deep commitment to helping people satisfy their natural curiosity and basic need to know." Today the network is broadcast in 18 languages, reaches over 39 million homes internationally in 144 countries and 71 million households in the United States.

Each of these three companies has pinpointed a conceptual -- rather than market-, industry- or competency-based -- field of opportunity. This is enormously significant to future strategic commitments because it explains to people inside the organisation and out, in very few words, where to look for opportunity.

This has the critical effect of stimulating the imagination of firms and individuals who might not otherwise picture themselves as potential collaborators or customers. It also directs the company's own managers and associates towards an intuitively appealing, but never finally attainable, goal. Perhaps most importantly, marking off the organisation's opportunity space acts as a yardstick executive management uses to measure the strategic significance of every future competitive challenge or new product initiative that comes the organisation's way.

As mentioned, conventional competition seeks growth solely by pulling at the conventional levers of growth. In contrast, what drives innovation-based opportunity is making a significant impact or transformation upon the market-shaping concept first, and the marketplace second. Such concept shifts disrupt the status quo and position the organisation for thought leadership in a marketplace that is suddenly capable of fundamentally new dynamics.

Intuit shook up conventional notions of personal finance by modeling its software after the simple, everyday checkbook, and creating processes that saved consumers the trouble of having to master accounting principles. Now the company is transforming personal finance again, this time playing the role of "intelligent matchmaker" with third-party online resources, giving its software the ability to absorb critical personal financial data from the Internet and creating an online marketplace for financial products and services once sold primarily on a face-to-face basis.

Among the company's recent efforts to redefine personal finance:

* QuickenMortgage, a Web-based service offering consumers one-stop shopping for mortgages and apples to apples comparisons from some of the nation's leading lenders;

* easy online access to customers' brokerage and mutual fund account information through Quicken software;

* a totally Web-based tax preparation service, TurboTax Online;

* alliances with companies such as Financial Times Electronic Publishing, CNN and Excite to provide leading-edge finance information on the Web; and

* electronic bill presentment capabilities in the new version of its best-selling personal finance software program, Quicken 98 for Windows.

When Miami, Fla.-based Carnival Cruise Lines launched its first ship in 1972, cruising was known as a luxury excursion for the rich, or an "old-folks vacation." The company's founders took aim at this conception and began developing the "Fun Ship" concept, offering a shipboard experience so vibrant that it appealed to people of all ages and backgrounds. Today the company continually redefines this concept by putting a cruising spin on significant societal trends, including:

* "Camp Carnival" entertainment and activities for children, whose presence on board has grown by 60 per cent since 1995;

* on-board work outs: the company owned the first cruise ships to sport enormous on-board health spas;

* alternative dining areas, after finding that 70 per cent of its guests opted for casual, cafe-like settings at least once during a typical week-long cruise; and

* a new style of shipboard gathering spot called The Musical Cafi, which plays on the contemporary popularity of coffee houses;

The history of sports entertainment might today be justifiably separated into pre- and post-NBA. Few would dispute that the National Basketball Association of the 1990s has emerged as the first truly global sports league. Hoops are seen on TVs worldwide, the league has a growing stable of global sponsors, and sold nearly USD500 million of NBA-licensed merchandise outside the US last year.

How did the league accomplish this? Sports entertainment used to mean local -- or at best national -- teams, loyalties and personalities enjoyed through one-way mass media. In contrast:

* the league will open its first NBA-owned retail store this September in New York City, offering a number of multimedia attractions;

* Hard Rock Cafe International Inc. and the NBA recently agreed to create 10 NBA basketball-themed restaurants within the next three years, in such international locations as Tokyo, Mexico City, Rio de Janeiro, Paris and London;

* the league ran a series of NBA mini-theme parks at state fairs across the country during the summer of 1997 to give potential NBA customers a new, more direct experience of the brand; and

* (Speaking of direct experience,) the league's brand-building commissioner David Stern has spoken of interest in partnering with an entertainment resort leader to build an NBA-themed attraction in an existing resort facility.

The reason innovators don't limit their strategic initiatives to an existing core technical capability, industry "rules" or even a market-defined profit formula is that innovation involves something fundamentally new. It happens in the "opportunity space" that arises around some abstractly defined concept, not in the operating realm of day-to-day business necessity.

This is precisely the reason innovation-based competition has not been fully explained in the strategy literature, and why it represents such a significant opportunity for both new and established enterprises. Researchers have tended to explain competitive advantage along two or three basic lines: theories of the fundamental importance of industry structures; resource-based theories, which posit that strategy should flow from the organisation's core competencies; and market-based theories, which look to customer needs, customer relationships and customer profitability.

Contrast these views of strategy with the innovation agenda of Discovery Communications, a company that does not appear to define growth opportunities solely in terms of its current broadcasting and video production capabilities - or its current viewers. While the groundwork for exploiting more abstractly defined, "discovery-related" growth surely has been laid by The Discovery Channel itself, it has not been limited by it.

* This winter the company launched its flagship Discovery Channel Store in Washington, D.C. The four-story, 30,000 square foot facility takes visitors on a journey that begins deep beneath the surface of the Earth and continues through an exploration of animal habitats and diverse world cultures. "Retail allows us to explore the material world as well as the world of knowledge and ideas," says Greg Moyer, the company's president and chief creative officer. "Now we have the medium to tell stories about objects that you can actually touch, see, hear and feel."

* The company's multimedia division specializes not just in broadcasting, but in productions that engage the marketplace's penchant for exploration and discovery. The division recently produced EVOLUTION: a CD-ROM strategy game that helps players learn about evolution by competing to create the first intelligent species on earth - and not necessarily the human race!

* Discovery Channel School is a major digital initiative of the company's Education division, which supports teachers who need discovery-oriented educational materials. The Web site contains an online index of lesson plans, for-sale classroom videos from seasons past and present, bulletin board discussions on discovery-based curricula, and "School Stories" -- videos which showcase the new ways teachers are teaching and students are learning across America.

* This year The Discovery Channel and Voyager will launch Pre+Med '98, a medical science-based summer school adventure camp. The partners essentially are attempting to create a medical school for K-6th graders which includes significant reading, writing, and new media-based content. Sessions take place at school facilities and are designed for multi-age, multi-skilled student teams.

Clearly these Discovery Communications initiatives - and undoubtedly the many to come - flow not from some central core technical capability unique to the organisation, nor from some narrowly defined focus upon current customer relationships or markets. Instead, Discovery moves the growth levers by advancing opportunities for new people to experience discovery and exploration in new and exciting ways.

Some small business owners will rightfully wonder whether such new thinking will really work for the emerging enterprise the way it clearly has for the innovation leaders. In our observation, the great divide stretching between those that compete on innovation and those that don't is primarily one of organisational commitment.

According to the corporate mythology growing up around online commerce pioneer Virtual Vineyards, desire, interest and commitment actually turned out to be the essential qualities that made its version of innovation-based competition a reality. In fact, company co-founders Robert Olson -- who left Silicon Graphics -- and Peter Granoff -- who had logged almost two decades as a master sommelier -- both risked successful and satisfying careers with established companies for the opportunity to push the state of the art in wine enjoyment.

The pair actually say they were having dinner together -- Olson is Granoff's brother-in-law -- discussing what type of product would be a good match for Internet commerce. When they found an information-scarce, knowledge-intensive, poorly distributed item in the bottle of wine standing on the table between them, Virtual Vineyards was born.

It's significant to note that neither Olson nor Granoff started with any exceptional financial resources, profound understanding of the electronic marketplace for wine, or a special knack for mail distribution-as do many in the small business community. Rather, Olson understood the potential of the underlying technologies, and Granoff understood the way the wine business was changing. What appears to have brought them together was simply the opportunity to transform and expand the then-shrinking portfolio of ways in which people purchased and enjoyed wine.

Today the pair continue in their commitment to pushing the cutting edge of wine enjoyment through:

* "Peter's Tasting Chart," a Virtual Vineyards original, which provides instant, online visual representations of the taste characteristics of each wide offered by Virtual Vineyards;

* a 12-hour self-paced online wine tasting seminar that aims to demystify the subject and take the intimidation out of learning about wine. Enrollees may purchase a 10-bottle sample pack directly from Virtual Vineyards;

* the Web store's noticeable rejection of the conventional Internet wisdom on enabling multiple voices, discussion areas and popular sovereignty. Instead, visitors are drawn in by the chance to get to know Peter personally and develop trust in his judgement and taste; and

* the commitment to educating visitors as they shop, through Peter's recommendations, comments on producers and serving suggestions -- services noticeably lacking in the dominant wine superstore retailing format.

While it's easy to be impressed by these innovation efforts, it's equally easy to overlook a simple but compelling fact: none of these potentially giant leaps forward in wine enjoyment flows from the urgent press of marketplace necessity. If anything, they reflect open resistance to the tightening limitations of the retail wine market, as well as a sincere desire on the part of the organisation's key executives -- Olson and Granoff -- to push the state of the art so that more people can learn about and enjoy wine.

"The idea is not to spend effort improving something, even if it might make the product or system twenty per cent better," notes Olson. "Instead, take some risks and do something with perhaps profound and lasting impact. That is what we are trying to do here at Virtual Vineyards."

Of course, asserting this kind of market-changing thought leadership frequently results in profitable growth, and Virtual Vineyards apparently is no exception. Since its launch in 1995, the privately held company has raised more than USD11 million in private investment capital, employs 20 people and claims its online sales are still growing at more than 20 per cent per month.

It should be clear at this point that managing your company's "opportunity space" can be just as important as focusing on the more conventional levers of growth. Just as the six model companies above have done, the right candidates for innovation-based competition stand to gain through: quicker recognition and seizing of emerging opportunities; a greater array of possible collaborative alliances, both inside "the industry" and out; more strategic options; and a way of standing out in an increasingly crowded and undifferentiated marketplace.

Whether your firm has the capacity to seize and maintain thought leadership in a newly discovered "opportunity space" will likely depend on a number of preconditions: Does your firm have positive experience with organisational change? Can it collaborate effectively with outside partners? Is it capable of organisational "multi-tasking" -- pursuing multiple opportunities at once? Each is a part of the basic organisational skill set of the innovation-based competitor.

The characteristics and leadership style of the person at the top is no less important. Do top managers try to understand the connection between societal change and business? Are they capable of separating from day-to-day business priorities and focusing on less defined but equally important factors? And do they genuinely desire to operate within a significantly larger "opportunity space" - a field of play not defined by the current business? Since innovation-based competition starts with a conceptual shift in top management thinking, answers to these questions will be critical as well.

Lest these factors seem overly burdensome, we offer the reminder that it's not "perfect" organisations that stand to reap the greatest benefits from innovation-based competition. Rather, it is those that commit to it.

Wine enjoyment, educational discovery and business convenience would have been none the worse off without organisations such as Virtual Vineyards, Discovery Communications or Mail Boxes, Etc. However, through the constant innovation efforts of the enterprises mentioned above, each market-shaping idea has been profoundly improved and advanced - to the great enrichment of shareholders, managers, workers, customers, suppliers and society at large. This is the opportunity awaiting every organisation that has the resources and leadership to pursue innovation-based competition.