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Fast Second How Smart Companies Bypass Radical Innovation to Enter and Dominate New Markets

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Introduction

Fast Second is ideal for those who want to rethink their strategies for innovating or entering new markets. The authors Constantinos Markides and Paul Geroski face a curious challenge: They have a lot of data to support their claim that the way to make big profits, if you’re quick enough, is to be the second company to take an innovation to market.

However, the myth of the first mover – the idea that being first to market is the way to make money – is pervasive enough that they have to spend a lot of time convincingly debunking it. They also show the challenges and risks of trying to become a successful “fast second.” The authors explain the complicated, almost organic, interaction among innovators, competitors, markets and consumer demands that tug at the marketplace. They do a fine job of documenting the collective act of creation.The possibilities of being a second mover will appeal to anyone who is interested in innovation, planning, new product marketing, or social and economic change.

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In a Tweet

— You’re better off being a strategic second, You don’t have to absorve the risks of being first to market.

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In two Minutes

You don’t have to be first to market. In fact, you’re better off being a strategic second.

One set of factors produces radical innovation. A different set of factors consolidates those innovations and profits from them.

It is almost impossible for the forces driving innovation and the forces driving profitable consolidation to coexist within the same organization.

Radical innovations emerge from fundamental scientific discoveries.

Efficiency and an awareness of consumer needs drive profitable consolidation.

No one can predict the direction of radical innovation early in the discovery process. Moving profitably into an emerging market requires focused timing.

The best time to enter a market is when a dominant design is crystallizing.

If you are an established firm, it may not work for you to try to create radical innovation. Instead, find ways to outsource innovation and harvest the results. When markets change, they put different stresses on organizations.

Fast Second

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Fast Second in 10 Minutes

Misconceptions about Radical Innovations

Which firm created the innovation of selling books online? Amazon.com? Wrong. Amazon is just one example of a common misconception about innovative firms: that you have to be the first to enter a new market to profit from it. In truth, the innovators who introduce fundamentally new products – and create “radically new markets” – are not the firms that profit. Instead, later firms make the money; organizations that consolidate the innovations and scale them up are the ones who profit from them. History and memory combine to fool the mind. People forget the individuals who created cars and failed before Henry Ford found ways to bring them to market. Generally, innovation takes four forms:

  1. Incremental innovation – Minor, small improvements made to a known product.
  2. Major innovation – Larger variations made to a known product.
  3. Strategic innovation – Relatively minor changes, but ones that “destroy” existing markets.
  4. Radical innovation – Major change that fundamentally disrupts your understanding of your business and your product.

Radical innovations matter most, because they create such sweeping change, and because so few people understand the principles involved. Many established business leaders dream of creating new markets and being the first ones there. They shouldn’t. Established companies usually can’t create new markets (and would be wasting their energies trying), since their cultures are not geared for it. In fact, creating new radical markets should not be among their goals, because truly radical innovations share some dangerous traits. First, their development path zigzags because new products emerge from basic research and production, not from customer demand. Second, radical innovations involve many specialists, such as scientists, all working on different elements of the emerging technology alone and for their own ends. They often don’t even know they are part of a generalized revolution because radical innovations pass through a lengthy “gestation process” during which you can’t tell that anything is happening. After that, the innovation emerges, often explosively, and disrupts the surrounding market. Other misconceptions about innovation are that pioneering new markets is where the money is (it isn’t) or that profiting from a market requires creating it (it doesn’t).

Radical Innovation

When radical innovations enter a market, they disrupt it and spread through the “value chain.” Customers have to figure out what to do with these innovations; competitors have to decide if the innovation is a real change or just a fad, how and when to change to adapt to it, and what these changes will cost. What’s more, radical innovations don’t just create new markets; they create new problems and new kinds of problems, so it is hard to tell where their changes will lead and how to plan for them.

Radical innovations don’t come from consumer demand. How can people want things they don’t know exist and don’t know can exist? Consumer demand might stimulate general innovation, set a research agenda, spur funding, articulate priorities or create a market category, but, ultimately, radical innovation comes from producers. For example, research institutions and the military created the first Web networks, but they had no sense of the changes the Internet might spawn.

This “supply-push” of innovation is hard to anticipate. In fact, many major discoveries are accidental byproducts of other investigations. Instead of consciously seeking a specific end, the research community works on specific problems that challenge their entire paradigm. Then a breakthrough happens and a kind of “gold rush” occurs as people hurry to capitalize on it. This creates a situation completely distinct from a “demand-pull” market in which consumers know exactly what they want and demand it. You can target your efforts in such markets, but a supply-push situation creates niche markets, where a minority of specialized users – the early adopters, the rich and the specialists – will use the new product, but most consumers won’t.

You’re essentially guessing where a supply-push market will go. It is difficult to convert new theoretical breakthroughs to technologies, and harder still to anticipate how those hypothetical technologies will match consumer desire. As a result, when a new innovation emerges, a lot of firms rush into the field. In fact, “more than 1,000 firms” have tried their luck in the American auto market, the vast majority between 1885 and 1920. These early manufacturers offered extensive variety, right down to cars with three wheels, and disappeared.

During a market’s early years, competing firms learn from each other, trying to figure out what works best in the face of sudden changes. Companies start and fail quickly. An “information cascade,” in which people suddenly become aware of undefined possibilities, powers the rush. Would-be visionaries can inflate the possibilities, but don’t know the risks. People contribute massive investments to build a competitive infrastructure and then rush in, mostly having bought the myth of the first mover. All these patterns played out in the’90s Internet boom.

Companies that move into new markets enter from either “horizontally linked markets,” where their experience gives them a sense of the opportunities, or from integral “markets that are linked vertically,” from the supply lines to the technological support staff. Most new entrants fail quickly and leave the field during the consolidation phase of the market. This passage is marked by the emergence of a “dominant design,” which both allows and creates mass marketing.

Dominant designs emerge as markets learn what a product can do, and settle on shared definitions. These parameters create a “platform” that producers can use as the base for other innovations. Competing designs can both become dominant if they blend low consumer risk, reliable function, good support and low price. Because a proposed design has to serve different consumers, the producer has to pour investment into establishing it. If you can establish the dominant design first, you’ll be “well-placed to take control of the market.” Being first lets you exploit learning curves and economies of scale, and build a brand. Yet these advantages don’t come from being the first to offer a product for sale, but from being the first to succeed in reaching a mass market.

Colonists and Consolidators

Two kinds of firms enter new markets: colonists and consolidators. Their traits are so markedly different that it would be hard for a single firm to contain both sets of characteristics. Colonizing companies are at ease with change, willing to experiment (and fail often), and enthusiastic about the core technology driving their pet innovation. They want to be first or best, and don’t emphasize money or consumers. By contrast, consolidators establish or build on the dominant design. They move more slowly and are not as flexible. They focus on market realities, listen to customers and can persuade entire marketplaces of the value of their product. Where colonists wanted to create the best of an item, consolidators want to make a good-enough item that is cheap enough to sell to everyone. Colonizers’ and consolidators’ cultures differ even more than their functions. Colonists like their firms to be “small and agile,” able to move from breakthrough to breakthrough. They prefer flat organizational structures and emphasize generating new concepts, without rigidity about finances. Consolidators work best replicating known successes. They prefer a defined hierarchy, and tightly control their processes and costs.

If you try to be both a colonist and a consolidator, your organization can get stuck and conflicted, unable to move either way. You have other options, though. If your firm is established, you can embark on “radical cultural change,” which incorporates the mindset of the colonist. You can spin off a linked, but independent, unit to colonize new markets. If you know, as an established consolidator, that you’re unlikely to innovate radically, you can outsource that function. In 2003, Procter & Gamble committed itself to drawing half of its innovation from outside sources.

Rather than trying to create radical new innovations in-house, identify your goal, then form relationships with firms that are small, lively and fertile with new ideas. Colonizing and consolidating require different strategies, but you can address them by dividing the labor. Recognize the organizational needs of each part of the process, understanding that the two may be in conflict because emergent technologies disrupt established product lines. Pay attention to how they relate, so you can determine where and how they conflict, and decide how to best manage their interaction.

When colonists test different versions of a new product, they emphasize its “technical attributes.” They get excited about what it can do. When they improve new products, they really do make them better, but in the process, they also risk devising innovations that surpass what consumers need and the price the market is likely to pay. To shift to the consolidation phase, try to identify the average consumer’s needs and meet them more cheaply. As more people adopt the emerging design, they produce a bandwagon effect. This starts some economies of scale, but they won’t really come fully into play until your design is dominant, so dominance is your new goal. You don’t have to win directly; you could merge with a competitor and focus on the new firm’s best design. Reduce “customers’ risks” by making the design reliable. Educate potential customers, so they aren’t taking a stab at the unknown. Get your new product into a distribution system, so customers who want it can get it. Subsidiary goods markets will emerge as you succeed (as having cars generates the needs for gas stations, for example), and you may want to help them.

Entering the Market with the Fast Second Strategy

Many people cherish the idea of being a first mover. This seems partly due to the exhilaration of competition (“We’re Number One!”), partly due to misconceptions about innovation, and partly due to the understandable fear of arriving too late to seize an opportunity and forever playing catch-up. That last fear, of falling into the “second-mover” position, is understandable – but it isn’t the only alternative to being a first mover. Instead of being a radical who creates a market but doesn’t benefit from it because there’s too much risk and cost, or being a second mover who follows along gathering crumbs, follow a “fast-second strategy.”

With this tactic, the second mover waits for just the right moment. Closely track the competition for a dominant design, so you enter the market as the platform crystallizes. Often, speedy second movers are well-established in related fields and poised to move. Other “imitative entrants” don’t offer much that’s new, but instead copy the emergent designs. They offer lower prices or some product variation. Timing is essential. To enter the market at just the right time, watch “the rate of innovation.” Experimentation slows as a dominant design emerges. Heed public discussion of the market; when the public treats it with more “legitimacy,” the time to move is coming. When “complementary goods producers” start to emerge, that’s a sign that the colonizing period is over, and it is time to move in and consolidate. This lets you reduce your “time-cost trade-off.” When you rush to develop a new product, the price is high because you’re innovating so quickly you have no time for the reflection that would make processes more economical.

When Markets Change

When a new market shifts from the first mover’s niche market to the consolidator’s mass market, new pressures emerge. First, as the market grows, you can’t serve everyone. Instead, focus on being the best in your “unique strategic position.” Let go of the things you aren’t going to do. Second, once the dominant design emerges, the nature of innovation and competition changes. Innovation is strategic, rather than radical, and competition is based on processes being efficient and price. New markets tend to be vertically integrated; when small radical firms compete for dominance, they do everything in-house. The shift to a mass market produces “vertical disintegration”: companies specialize in one element or component, and others outsource production to them. This produces a “locked in” state that is useful and dangerous. It’s useful because you can invest in the gear you now know is needed to complete identified processes. It’s dangerous because when you commit to those products and processes, you will resist

change .

Image courtesy of and with Some rights reserved by e53

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