Innovation as a Strategic Advantage and its Importance Today

Chess Strategy Advantage

“A company can outperform rivals only if it can establish a difference that it can preserve.” Michael E. Porter

The motto at the top of this article is taken from Michael Porter’s immortal article “What is a Strategy?” [1]. In the article, Porter explains that a strategy is to create a unique and valuable position, which requires a different set of activities from the competitors, while matching between the company’s activities. Here the question arises as to why a business should have a strategy and what value it gives. Porter’s answer is that strategy creates a positive difference from competitors in the exact same market segment, thus enabling the business to consistently make more money, grow and prosper. Such a difference is called a “sustainable competitive advantage.” Sustainable in the sense that it can be preserved, strengthened, and maintained over time.

In order to create a sustainable competitive advantage, Porter explains, operational efficiency is not enough, even if it would be the best among its competitors. Because operational efficiency has no uniqueness (although it is essential in itself). Every business can improve and compare with its competitors’ production capacity, through its inventory management, its service speed, its website design, and scope, and even the smile of its marketers.

Therefore, beyond the constant pursuit of good operational efficiency of the business (which of course should not be underestimated), every business should find, invent, nurture and praise its mix of unique activities, and turn them into a sustainable competitive advantage in its unique market. When creating such a mix, there is always a chance that competitors will be able to copy, compare and even surpass one activity or another. However, if the resulting mix is ​​perfectly tailored to the needs of the customer to whom the business addresses, competitors will have a hard time mimicking all of its components well. Here’s why: Suppose competitors have an 80% chance of copying each component; If our mix of activities has 10 different components, then the chance that they can imitate it well drops to about 10%. Moreover, the more components we add, the more we adapt to others, and the better we will be able to protect them, the less likely our competitors will be able to catch up with us, and the greater the amount of investment required to do so. This is where various tools for protecting innovation come into play, which we will demonstrate below.

# Innovation as a Strategic Advantage

On an interesting example of a winning mix and innovation in its field that has created a sustainable competitive advantage, Tom Peters recounts in his old book “The Pursuit of the WOW” [2]: De-Mar operates in California and deals in an old and unglamorous field – plumbing. But the small company managed to become a market leader within a few years by combining a wide mix of activities: guaranteed day-to-day service, one-year warranty, price warranty, round-the-clock service, uniform price list, discounts for elders, after-hours telephone survey, strict dress and appearance rules , unique vehicles, high investment in employee training and certification, weekly briefing sessions with all employees, high commissions and bonuses, high selectivity in employee selection, and more. All of these have led to positive social pressure and the creation of an environment of excellent performance, rapid growth of the company and a glamorous bottom line.

The phenomena that Porter described twenty years ago and more, are becoming more significant as we delve deeper into the age of social networks and the Internet in general. This is where the “long tail” phenomenon becomes apparent, which becomes very significant when it comes to products and services that can be sold on the Internet. This phenomenon, which was clearly named and first described by Chris Anderson in 2004, is the ability of the contemporary business environment to use network technologies to meet the exact needs of countless very small groups of customers. Thus, today an independent and eccentric jeweler sitting for example in individual farms in Texas, can sell through eBay and provide through FedEx its very unique product, to several hundred women scattered around the world and want exactly these special jewels, which 99.999% of women will never wear.

# “The Strategy of Blue Ocean”

As the effects of the need for uniqueness and innovation become more and more significant, we also develop and learn better and better tools to address these. One of the more interesting approaches, was developed after extensive academic research by Chan Kim and Rena Muborn and is presented in the book “The Strategy of the Blue Ocean” [3]. Kim and Muborne liken all those industries that exist today in the market to red oceans, in which business companies sail like battleships fighting each other for each customer and reddening the sea in each other’s blood. On the other hand, other business companies create their own oceans, which are new markets that they invented and created, for the special requirements of customers that they understood, identified and were the first to give them an optimal answer. These are the blue oceans. It is too short to list the structured methods used by the authors to help businesses create the same oceans, but it can largely be said that these methodologies are part of a diverse group of orderly methods that are becoming the central basis for innovation and creating a sustainable competitive advantage today.

In the past it was common to think of innovation as a gift given to individuals of virtue; Inventors or artisans of all ages. Today, innovation is a drug of life for emerging businesses, and as such can no longer be left in the hands of virtuous individuals and is increasingly becoming a central managerial paradigm and basis for decision-making. This, while innovation is less accidental and increasingly relies on systematic tools such as those mentioned above.

# Innovation as an Investment

Here we come to perhaps the most significant point – the efficiency of investment in innovation. Innovation is based on a new idea, around which a change is created that ultimately translates into value for the customer (lowering the price or improving the product service). Detecting and screening the new ideas with the help of appropriate methodologies, whether carried out by internal professionals or with the help of external consulting, their price is generally zero compared to the scope of the business activity. The implementation of the innovation may cost a significant amount, but it is invested only after a clear recognition of the viability of the investment. Even then, the scope of the investment will often be much smaller than the investments required to emulate in a good and powerful way from the competitors what they are doing, and the competitive advantage that will be created will be easier to maintain, and therefore more sustainable.

As a general example, if the competitors produce a product of high quality and low cost in their factory, we will have to upgrade general systems in our factory, at huge costs, in order to surpass them. On the other hand, if we change the product a little so that it is more suitable for a certain group of customers (especially new customers), we will be able to increase our revenue significantly at much smaller costs.

# A True Story of Innovation

A classic story in this regard is the story of Minnetonka Corp., a small soap maker from Minnesota, USA. Liquid soap was invented in the nineteenth century, but until the early 1980s it was used almost exclusively with dispensers. Minnetonka had an innovative and brilliant idea – to use plastic bottles with small and cheap pumps and sell liquid soap for home use. It was not possible to patent anything, since all the elements in the idea exist, and a simple combination of this type is not patentable. The small company had no financial basis for price competition, and with the start of the successful distribution, it was clear that the market giants would soon come out with parallel products and run over its innovation. Deep and creative thinking has led to an amazing solution – the pumps that suited its needs were well patented and manufactured by only two manufacturers. After noticing the immediate success of the product in the market, Minnetonka made a big bet and acquired the entire production capacity of the two manufacturers for about two years – 100 million pumps. In doing so, it closed the market to competitors, and acquired vital time to build excellent product and brand loyalty. This value building led a few years later to the sale of this product division to the huge Colgate at a huge price. Colgate maintains and nurtures to this day and in full force the brand that Minnetonka built – SoftSoap.

# Summary

As we have seen, for the past two decades, innovation has gradually turned from a vague will and accidental result into an orderly and structured managerial paradigm. Along with the methodological development, the need for the market and the technology that enables efficient global trade, more and more businesses are recognizing that innovation is no longer an option worth implementing if possible, but a strategic tool essential for survival and prosperity. Moreover, it is a tool that can be used effectively to create and maintain a sustainable competitive advantage, thus consistently achieving good results.

 

 

[1] “What is Strategy?”, Michael E. Porter.
[2]”The Pursuit of WOW!”, Tom Peters
[3]”Blue Ocean Strategy”, W.Chan Kim, Renée Mauborgne

 

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