The Albatross Of Product

Innovation
Tasadduq Shervani and Philip C, Zerrillo

P
roduct innovation is the driving force dering how they
behind many of today’s most successful are ever going to
companies. These firms have devoted make meaningful
tremendous resources to the new product devel- and sustained
opment process in a dynamic attempt to meet the gains in competi-
needs of the marketplace. New products are, in tive position. The
fact, a central element of their competitive strat- firm’s business
egy. The potential benefits of successful product partners are left
innovation-prolonged growth, superior returns, expressing a simi-
strong investor interest, esprit de corps among lar sentiment,
employees-are undeniable. However, the ques- reducing the like-
tion arises: Are there conditions under which lihood of much
product innovation can detract from corporate support for any
performance? future new prod-
In our opinion, a narrow focus on product uct introductions.
innovation can detract from firm performance A case in point is the experience of Sara Lee
under two conditions. First, the ability of an orga- Corporation, which introduced the Wonderbra in
nization to profit from new products can be se- 1994. This product innovation, a much bally-
verely hampered if it has neglected other func- hooed departure from conventional products
tions and business processes that allow it to ex- available in the lingerie business, was already a
tract greater profits from innovative products. huge success in British markets. Not only did
Second, these “other” functions and business Sara Lee have a new product, it also had all the
processes can themselves be arenas for innova- public relations opportunities inherent in intro-
tion, suggesting that firms should focus on broad- ducing a novel new product. The Wonderbra had
based innovation, or innovation in multiple func- immediate product and, more important, brand
tions and business processes. The two scenarios recognition.
described below capture the situations in which Competitor VF Corporation did not begin to
product innovation either does not or cannot sell its copycat product until after Sara Lee had
deliver results for a firm. already established sales in the U.S. market.
However, despite Sara Lee’s early presence in the
Scenario 1: “All we need is a new product.” market, VF attained national distribution of its
copycat product five months ahead of Sara Lee.
A company has developed a new product that is This it did by concentrating on advances in using
superior to and differentiated from the competi- information technology, streamlining its distribu-
tion. Believing they have created a “winner” and tion system, and managing available stocks at the
that “the job is done,” management awaits the retail level. Although VF did not invent the prod-
rewards associated with their Herculean product uct and did not enter the market until after Sara
innovation effort. Unfortunately, the firm is un- Lee had tested the waters, its superior business
able to capitalize on the new product’s potential. system allowed it to match the needs of the mar-
Competitors rapidly develop knock-off products ketplace better.
and take away market share, leaving the firm Relying on new products alone, to the exclu-
demoralized and shaken. Managers are left won- sion of investments aimed at strengthening the

The Albatross Of Product Innovation 57

 entire business system can leave a firm vulner-
able to competitors. While such firms are invest-
ing extensively in new product development,
their competitors may be strengthening other
functions and business processes, such as mar-
keting systems, information systems, accounting
and financial systems, employee compensation
and reward systems, and so on. By exploiting
their advantages in these “other” functions and
business processes, such competitors are often
able to thwart the product innovator.
Scenario 2: “Our product is a commodity.”
Often, companies look at their products and ser-
vices and see commodities. Despite a strong de-
sire to develop new products, management per-
ceives that the opportunity for a dramatically
superior product is fleeting. So the firm gives up
and continues with business as usual, concluding
that innovation cannot occur in that industry. As
prices fall and margins erode. rnanagement even-
tually finds that the firm no longer has the re-
sources to sustain product innovation, thus fur-
ther reinforcing the commodity status of its prod-
ucts.
A case in point is the experience of the air-
line industry. Asking airline executives in the
early 1980s about innovation in their industry
would have brought many groans but few sug-
gestions. Most managers believed a seat was a
seat, and airlines that wished to prosper would
have to tend to business better than their com-
petitors to survive. Analysts and managers de-
clared that the competitive battle would be fought
on the ability to manage the major elements of
airlines’ cost structures-fuel, labor, and capital.
To most firms, cost-cutting is a fairly straight-
forward exercise in which investments and ex-
penditures are trimmed. However, the experience
of Southwest Airlines is an exception to this rule.
Southwest focused on cutting costs through inno-
vation in human resource development, finance,
marketing, and operations. To increase opera-
tional efficiency, Southwest standardized the type
of plane it flew. This meant that pilots, mainte-
nance personnel, and ground crew required
training on only one type of aircraft, thereby
cutting staffing and training costs. Ground crews
were able to shorten turnaround cycles for air-
craft, enabling Southwest to fly its planes about
15 percent more than the industry average. The
increased use of aircraft reduced Southwest’s fleet
size relative to competitors, thereby lowering its
capital requirements.
Southwest Airlines has also been a leader in
several marketing innovations, such as bypassing
travel agents to reduce the cost of ticket handling
and being first to market with ticketless travel.
And it has made tremendous strides in capitaliz-
58
ing on good management-labor relations-some-
thing quite atypical of the airline industry. In
1994, it reached a pioneering agreement with its
pilots’ union: In exchange for 700 stock options
per pilot per year over a ten-year period, South-
west pilots agreed to a five-year pay freeze, with
only three raises (of 3 percent each) in the fol-
lowing five-year period. The net result of this
agreement will be to stabilize Southwest’s labor
cost and lower it relative to competitors. With
predictably lower costs, Southwest can cut prices,
increase market share, and enhance the probabil-
ity that the stock options held by pilots will even-
tually be worth more than the potential salary
increases they have forgone. In fact, Southwest
pilots stand to make approximately half a million
dollars each if the value of their stock appreciates
at about 20 percent annually-considerably be-
low the historical average.
The bottom line is that Southwest Airlines
practices broad-based innovation in its develop-
ment of such novel compensation practices, mar-
keting, finance, and operations. Southwest took
an industry with a commodity product and found
ways to innovate in other aspects of the business
system. Other airlines do not appear to be able to
match this competitive advantage. A seat may
indeed be a seat, but Southwest realized that the
battle will be won by the competitor with the
best overull business system.
BROAD-BASED INNOVATION
he two scenarios discussed above gener-
ally occur because firms possess a decid-
T edly narrow concept of innovation. They
suffer from what could be termed product paraly-
sis, continually looking to new products as the
starting point for innovation. Succinctly stated,
companies focused on product innovation expe-
rience difficulties both when they Carz develop
new products (“An innovative product is all we
need”) and when they camot (“Our product is a
commodity”).
Unfortunately, product innovators are often
unable to see beyond mere products. The fallacy
of this approach can best be articulated by re-
peating the advice Compaq CEO Eckhard Pfeiffer
gave to the executive team at Microsoft. As re-
counted by Microsoft Vice President Jeff bikes
(Schlender 19951, Pfeiffer told them that
if we [Microsoft] are serious about
taking on the responsibility of driving the
whole computer industry to the next
level, [then] a great vision and great
products won’t be enough. We have to
master all the nuts and bolts of husi-
ness-manufacturing, sales and market-
ing, and product support operations-
 and we must have a business plan that
matches the new marketplace.
E.M. Rogers (1983) defined the term “innova-
tion” as an idea, practice, or object that is per-
ceived as new. Innovation in business goes much
farther than just inventing new products; it can
occur in every business process or functional
area of a firm. Indeed, consistent and effective
innovation requires excellence throughout the
entire organization. Firms can innovate by devel-
oping
l new products (product innovation),
l new manufacturing processes and tech-
niques (manufacturing innovation),
l new ways to reach customers or new cus-
tomers to reach (marketing innovation),
l new approaches to rewarding and empow-
ering employees (human resource innovation),
l new ways of approaching financing and
investment decisions (financial innovation),
l new methods of acquiring, storing, trans-
forming, and transmitting information (informa-
tion innovation),
l new types of organization structures and
processes (organizational innovation), and
l new tools and techniques for measuring
and allocating costs (accounting innovation).
Companies that restrict their definition of
innovation to include only new products are, in
effect, limiting their opportunities to achieve a
sustainable competitive advantage.
firms consciously target or avoid certain competi-
tors based on the weakness or strength of their
entire business system.
Third, other functions and business processes
can themselves be areas in which innovation
takes place. The reality of today’s marketplace is
that product innovation affords firms less and less
insulation from their competitors. It has become
clear that the ultimate battle in any industry will
be won not at the level of product versus prod-
uct, but rather at the level of business system
versus business system. Some of today’s most
successful corporations downplay the importance
of product-only innovation, focusing instead on
innovating all facets of the business system. Put
differently, a focus on broad-based innovation
should be seen as a way of enabling a firm to
achieve market leadership, not just as a way of
introducing and supporting new products. As in
the case of Southwest Airlines, recognizing that
innovation may not involve new products at all is
the first step in developing a truly competitive
business system.
Figure
Forms Of Innovation And The Shortcomings They Address

Benefits Of Broad-Based Innovation

The benefits of broad-based innovation are three-

fold. First, new and improved functions and busi- unng process
ness processes provide firms with a systemwide
supporting infrastructure for their product inno-
ration structures and physical/financial
vation. By developing competitive advantages, or
resources efficient1
at least parity, across the entire business system,
firms are better able to launch and support new
products. Developing systemwide competencies
allows the product innovator to extract greater
revenues and profits from new products. On the
other hand, firms that emphasize product innova-
tion and neglect the systems can be victimized by
smart competitors who copy their products and human resources

then use their superiority in other functions and

Information New WdyS to use Lack of speed, efficiency;
business processes to gain a competitive advan-
Technology information lack of information for
tage. making decisions
Second, developing a competitive business
system often acts as an entry barrier to would-be Accounting New tools and tech- Unable to decide
competitors. A formidable advantage in any as- niques for assessing/ appropriately on
pect of the business system can deter potential allocating costs resource commitments
competitors just as much as a new product or
technological advantage. On the other hand, as Financial New ways to approach LJnable to maximize
displayed in the Figure, pockets of weakness in financing/investment/ shareholder value
dividend decisions
the business system render a company vulnerable
to competitive activity, It is no secret that some

The Albatross Of Product Innovation

Persistence Of Product-Only Innovation sourcing relationships. Historically, companies
that emphasize internal new product research
Why do we continue to see so much emphasis and development often have great difficulty in
on product novelty? At least three factors contrib- managing outsourcing relationships. They are
ute to the creation of a product-only approach to seldom able to outsource effectively because
innovation in many firms: cultural issues, incre- their culture emphasizes internal development.
mental decision making, and erroneous attriku- This orientation also makes it more difficult to
tions. justify investment in areas other than product
Cultural Issues. Remarkably, the organiza- innovation.
tional culture of product innovators can often be Incremental Decision Making. Managers
their undoing in the marketplace. Such compa- constantly cite a “core competency of product
nies create incentive structures that favor devel- development” as the reason for neglecting efforts
oping new products to the exclusion of many in systemwide innovation. But they also fail to
other areas. A quick survey of such companies invest in supporting infrastructure because of
would reveal a preponderance of incentives for incremental decision processes. They may be
employees, such as time off, cash bonuses, inter- aware of their firm’s shortcomings in several
nal recognition, and promotions for their product functional areas or processes. However, when
discoveries. Meanwhile, purchasing agents, chan- decisions are made to invest marginal dollars,
nel managers, information support teams, and their natural inclination is to invest in new prod-
human resource coordinators often have limited ucts.
incentives to go beyond present circumstances. Investment in product innovation is not only
Within these de-emphasized processes and func- politically palatable within their organization, it is
tions, employees often suffer from low self-cs- also demanded by outside constituents as a tan-
teem and diminished morale, which only serves gible signal of the firm’s desire to be an industry
to filrther stifle creative initiatives. leader. The pressure for immediate results and
Measurement systems within firms can also the tenuous employment picture for many corpo-
create a bias in favor of investing in new prod- rate managers has only reinforced their focus on
ucts. Returns from new products are perceived to product innovation. New product introductions
be- more immejiate. more serve as a material rallying point for mobilizing
directly measurable, more organizational resources. And when they work
quantifiable, and easier to they stand as shining examples for management,
interpret than are invest- shareholders, and employees to behold.
ments in the “support” ele- Erroneous Attributions. Adding further to
ments of the business sys- this problem is the self-inspection process so
tem. For instance, the ac- often encountered at product-oriented firms. In
counting systems of most diagnosing a product failure, a common attribu-
firms are set up to detail the tion is that the new products are unsuccessful
costs and revenues of each because of some inadequacy in either the R&D
new product. But it is more process or in the end product. In a knee-jerk
difficult to measure the reaction, firms reinvest in the new product devel-
effects of information ad- opment process with a vengeance. R&D budgets
vances or changes in the are often raised while investment in supporting
organizational structure on processes and functions is slashed. IJnfortunately,
^
revenues and costs. Consequently, firms are re- this only serves to exaggerate the deficiencies
luctant to make investments in these “non-rev- found in ‘*other” functions and processes of the
enue producing” areas. Returns from such invest- business system. As they continue to fall behind,
ments are often less immediate and harder to such firms ultimately are unable to compete in
justify because potential contributions to the bot- the marketplace-not because their products are
tom line are much less obvious. inadequate, but because the rest of their business
In recent years, it has been suggested that system does not allow them to interact efficiently
firms should focus their finite resources on devel- with their potential market partners.
oping a limited number of core processes or func-
tions and seek to cooperate with partners who Consequences Of Product-Only Innovation
may be better suited to provide “other” services.
Although we are not suggesting that firms s’lould A failure to dedicate resources to systemwide
ignore this advice, we wish to inject the follow- innovation exacerbates the problems of many
ing note of caution. If a firm’s strategy is to focus product innovators by further isolating them from
on developing a core competency in product the marketplace. The firm’s customers can be
innovation, it is imperative that the firm concomi- under competitive pressures of their own, and
tantly develop a competency in managing out- increasingly want suppliers who are strong across

Business Horizons / January-February 1997

the entire business system, not just those who customers. Over time, companies that interact on
can make great new products. In other words, only a limited number of the elements of the
threshold levels of competency in every aspect of business system will jeopardize their understand-
the business system are needed to conduct busi- ing of customers’
ness with customers who have developed state- needs and the poten-
of-the-art business systems of their own. Today, tial for developing
these customers are dictating how business will new markets and solu-
be transacted; they have limited patience with tions. By reducing
suppliers whose antiquated processes do not their points of contact
allow for the creation of systemwide efficiencies with customers, their
in the value chain. opportunities for busi-
A rather simple illustration occurred recently ness expansion in the
when Wal-Mart sent notice to a number of large relationship are lim-
manufacturers stating it would no longer accept ited. Furthermore, this
invoices from multiple divisions. Several wonder- detachment can re-
ful product innovators had tremendous difficulty duce the number of
trying to coordinate their supply chains with dif- internal advocates
ferent product divisions that historically had op- within a customer
erated autonomously. Specialized divisions within buying center. By distancing their functional con-
firms were often unaware of the marketing, or- tacts, product-focused firms can find their cus-
dering, delivery, billing, and collection processes tomer relations becoming unstable.
employed by their counterpart divisions. This

failure to develop internal information flows is an
outgrowth of both a lack of information technol-
ogy and a failure to modify organizational design.
Consequently, this lack of internally coordinated
processes adversely affected the bargaining posi-
tions of these multi-division firms in their nego-
tiations with Wal-Mart.
Just as the lack of systemwide infrastructure
isolates businesses from their customers, it also
inevitably reduces their new product success rate.
The probability of successful innovation is re-
duced for three reasons. First, the inability to
interact with customers across the entire business
system reduces the opportunity to develop inno-
vative ideas. Innovations generally emerge from
the interactions between buyers with needs and
sellers with potential solutions. Second, interac-
tion among exchanging firms leads to a combina-
tion of skill sets and allows for the interplay of
corporate knowledge structures. This exchange
of corporate knowledge may enable the interact-
ing firms to achieve objectives that would not be
possible for either firm acting individually. Third,
such interplay is generally necessary for success-
ful innovation if for no other reason than it helps
to develop a ready market for the eventual inno-
vation. By innovating in concert with the mem-
bers of the firm’s value chain, the creation of an
immediate market is more likely. Innovating in
isolation leads to a nail-biting experience for
managers as they anxiously wait to see whether
their expectations of customer intentions are
realizable.
By specializing in a limited number of pro-
cesses and functions and failing to develop a
threshold level of competence in others, a com-
pany can run the risk of steadily reducing the
scope of activities it is capable of performing for
W
e have chronicled just a few in-
stances of companies that have be-
come innovative in their “other”
business functions and processes. Although these
innovations may be short-lived, such advances
have rapidly become the standard for survival.
Consider the process of software development. In
this industry, time-to-market is the paramount
concern, given short product life cycles and rapid
technological advances. Initially, several firms
began to use project teams around the globe as a
means of reducing development times. Teams are
set up in several separate time zones. At the end
of each business day the team forwards work to
counterparts located in a distant time zone, there-
by reducing the real time development cycle.
This initiation of a new organizational design was
used to better employ human resources and re-
duce response time to market demands. Firms
that fail to rethink their organizational designs in
light of developments such as this are in danger
of being left behind.
Companies must realize that competition in
the twenty-first century will not be product ver-
sus product but rather business system versus
business system. As such, it is essential for man-
agers to consider all the functions and processes
performed by a business as potential opportuni-
ties for innovation.
The 1990s have brought new challenges for
business as globalization has created a new class
of competition. Many of these competitors have
extensive financing, protected domestic markets,
and lower costs of labor and capital. But most
important, they have displayed an appetite for
growth that belies a willingness to sacrifice cur-
rent returns in order to dominate markets over
time. These competitors are often willing to

The Albatross Of Product Innovation

modify their business systems in a manner that B. O’Brian, “Southwest Wins Pilot Accord Offering No
allows them to thrive in multiple types of mar- Wage Boost In First Five Of Ten Years,” Wall Street
kets. They forsake the initial high margins avail- Journal, November 38, 1994, p. A2.
able to product developers, but they are then
E.M. Rogers, Ilt@sion Of Innovations, 3rd ed. (New
able to enter markets during the early stages of
York: The Free Press, 1983).
expansion with minimal risk. A focus on broad-
based business system innovation allows firms to B. Schlender, “What Bill Gates Really Wants,” Fortune.
create the nimbler organizations that are required January 16, 1995. pp. 35-63.
in today’s marketplace. 0
J, Weber, “Just Get It To The Stores On Time: VF’s
References Clothes Aren’t Trendy But Its Delivery System Is A
Wow,” Business Week, March 6, 1995, pp. 66-68.
H. Hakansson, Industrial Technological Development:
A Network Approach (London: Groom Helm, 1987).

T. Levitt. “Marketing Myopia,“ Harvard Business Re- Tasadduq Shervani and Philip C. Zerrillo are
view, July-August 1960, pp. 24-47. assistant professors of marketing at the
University of Texas at Austin, They would like
R. Mitchell, “Virtual Worker: Any Place I Hang My to thank Raj Srivastava and Kate Gillespie
Modem Is Home.” Business Week. October 17, 19%. for their encouragement and comments.
pp. 96-97.