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The Contrarian: Innovate for the Right Reasons

 

Maximizing the Value of Technology Innovations

Jianwen Liao

 

The Fallacy of Functionality

 

Companies try to out-compete their competitors by continuously improving product functionality and quality. But more often than not, they merely end up creating products that are over-engineered and unnecessarily complicated. Take cell phones. Cell phone makers are on a constant drive not only to improve existing features, such as making screens larger and improving resolution, but also to add entirely new features to the handset. Yet the average cell phone user only uses a small fraction of the available functions on a phone.

 

In the meantime, the financial performance of major domestic and international players such as TCL, Haier, Lenovo, Nokia and Motorola continues to deteriorate, partly due to product commoditization and the emergence of low-end copycat (山寨) versions of their products. While the major cell phone makers fixate on improving phone functionality, copycat manufacturers are creating handsets with the same or even better functions at a much lower price. In the end, there may be few points of differentiation between the two types of phones.

 

A product or service is only as good as the value it creates – value for the customers and value for the company. Consequently, instead of seeking to generate innovations in features and product or service quality, a company should ask itself two important questions:

 

To what extent do our improved features and quality create value for customers?

What kind of innovation could better serve to maximize value for end users?

 

The Rise of Copycats (山寨) and Their Competitive Advantage

 

In the early days of cell phones in the early 90s, handsets resembled solid bricks, earning them the well-deserved nickname "DaGeDa (大哥大)." Target customers were early adopters who were not price sensitive, but appreciated the convenience a mobile phone could provide. The handsets themselves, though physically big, had only limited functions.

 

Because phone makers at the time competed on the basis of improving phone functions, the major players adopted vertically integrated models to create seamless integration across the value chain. As the industry has matured, however, a certain level of functionality has become standard. The handset has become a commodity product for the mass market – one in which style, price and speed of response outweigh other factors.

 

As a result, the industry has seen the emergence of many specialists at each stage of the industry value chain, focusing on everything from chips to design to integration. The growth of integrative solution providers such as Taiwan's MediaTek have further reduced barriers to entry, enabling small new players to roll out products faster and produce cell phones at much lower cost than before. Over time, these upstart phone makers have fine tuned their low-cost and quick-response business models at the low end of the market. They have gradually moved up the chain into territory once dominated by the major domestic and international cell phone players, forcing the latter into a defensive position.

 

Cell phone makers' continuing efforts to innovate at the hardware level represent a strategic mistake, since value has increasingly migrated from hardware to software.

 

Innovations with Greatest Value

 

The experience of the PC industry in the 1980s offers an instructive comparison. In the early 80s, after IBM prevailed in the market share fight against Apple, it decided to focus on being an integrator (the box), ceding the market in operating systems (OS) to Microsoft and chips to Intel. But over time, the OS and semiconductors came to capture the lion's share of profits in the computer industry. The value of hardware gradually migrated to software, and eventually, IBM had to exit the very industry it helped create.

 

A similar situation holds for cell phones today. Cell phone makers that continue to focus on innovations in hardware stand merely to increase their operating costs, while failing to create value for their customers.

 

In a mark of the sweeping shift underway, a few major players have already begun remapping their strategy. For example, Apple's aggressive decision to cut the iPhone's entry-level price to $199 was clearly aimed at pushing the product into the mass market. Mainstream users' increased adoption of iPhones has encouraged the growth of a large number of independent application developers, and today the iPhone claims more than 25000 applications. As a result, Apple's phones have become a platform for delivering high-value applications.

 

We can see similar strategic changes afoot at Nokia, reflected in its recent acquisitions of Trolltech and OZ. The cell phone maker bought Trolltech in January 2008 in a new bid to develop Linus-based applications, expanding beyond the Symbian applications it already used in its smartphones. OZ, purchased in September 2008, provides additional support for Nokia's Ovi email and instant messenger applications.  

 

History suggests that companies must anticipate value migration and orient their innovative efforts towards those areas with the greatest emerging value. Recall the words of the famous hockey player, when a reporter asked him to explain the source of his talent: "A good hockey play runs as fast as he can trying to catch the puck. But a great hockey player anticipates where the puck will be next and gets there in advance to intercept it."

 

Jianwen Liao, Ph.D., is a visiting professor of strategy at the Cheung Kong Graduate School of Business. He also teaches at the Illinois Institute of Technology's Stuart School of Business.