Classic Innovation Strategy (Part 3 of 3)
Innovation is defined as the art and science of introducing a novel technology, product, or application to the marketplace. Successful innovation relies upon a well-constructed innovation strategy that lays out the firm’s mission, vision, and values. Strategic planning may take several forms, yet a company must determine its internal and external objectives in order to effectively concentrate energy on the “right” activities.
Engineering management describes strategic planning as the processes to establish, implement, monitor, and control a set of corporate or business goals. In contrast, strategic management utilizes various tools and techniques to implement the given strategic plan and to quickly respond to external environmental factors (opportunities or threats) that can influence outcomes of business that fall outside of the normal planning processes or time frames. Implementing strategy includes identifying the firm’s approach to innovation and business.
As described in Chapter 1 of NPDP Certification Exam Prep: A 24-Hour Study Guide, three standard frameworks guide development of an innovation strategy: classic, technology/market, and response to change. We continue this series on the classic strategy framework.
Classical Strategies Framework
The classical strategy framework is built from the work of Michael Porter of Harvard Business School. In this strategic planning process, an organization will focus its efforts based on a broad or narrow market scope and organizational competencies. In the case of a cost leadership strategy, the market served is broad in nature, not discriminating toward a particular segment based on quality or functionality. Firms following a cost leadership strategy have a specific approach to production and distribution that leads them to profitability and market share advantages.
In the differentiation strategy, a firm still attempts to serve the broad market but capitalizes on product or service features. Differentiation is normally based upon unique quality of the product or a value-added customer service component for which consumers perceive distinction among competitors.
Finally, the focus or segmentation strategy is categorized “separately” as it concentrates efforts for innovation success on a narrow scope of the market. Companies that are successful with a segmentation strategy may emphasize competencies in cost or quality.
A clear element of decision for a segmentation strategy is the area of focus. Target markets may be defined as:
- Geographic locations,
- Narrow demographics,
- A particular industry, or
- A single product line.
The focus strategy works when a company has a natural advantage in comparison to competitors within a particular market segment. A company may be located in a key geographical area that lends itself to advantages in raw materials or it may hold proprietary technology that yields an advantage in manufacturing.
Focus strategies produce high profit margins while serving a relatively low volume of customers. A retail example of a company following a segmentation strategy is REI (compare to Wal-Mart with cost leadership strategy and Macy’s with a differentiation strategy). REI is a high-end cooperative with stores across North America providing outdoor equipment to amateur enthusiasts and professionals. Prices are kept affordable (but not inexpensive) through the coop structure while both product and service quality are exceptional. REI has selected the industry focus strategy by serving a limited target market.
Benefits of Focus Strategy
Companies that deploy a segmentation strategy are able to realize high profit margins while remaining small enough to avoid large-scale, head-to-head competition. Because the firm is serving a narrow scope of the overall market, it is able to retain customers through brand loyalty and higher switching costs.
Customers often exhibit high loyalty to a firm with a focus strategy since it is difficult to find a competitor offering similar product quality and customer service. Target customers also provide greater levels of feedback and willingly participate in co-creation efforts. Thus, a company with a focus strategy realizes new product development (NPD) benefits with these lead users as well.
Disadvantages of Focus Strategy
Long-term success of a business following the classical segmentation strategy depends on the health of the market. Focus on a single product line may be disrupted by new technologies that draw customers away from the company. A geographic advantage may be foiled by new discoveries or substitutes elsewhere. In some cases, the industry may falter in general.
Consider, for instance, Kodak professional photography film. Kodak had an exclusive relationship with professional photographers and offered the highest quality products available to this narrow target market. Unfortunately, a new technology – digital photography – disrupted the product line by offering a new business model. Focus strategies are most threatened by external effects that are not anticipated by the firm.
Attacking a Focus Strategy
There are several approaches for a firm that wishes to compete against a focus strategy. First, low priced entry is devastating to a firm capitalizing on quality. A low priced entrant can steal market share even though a customer’s switching costs might be high. Global conglomerates can move into a local area and underprice the competition.
Next, marketing “specials” can disturb the special relationship between a smaller firm and its target customers. A smaller firm concentrating on quality and customer service may not have the resources to counter a massive marketing campaign or to survive “special pricing” situations (similar to the low-priced market entry attack).
Finally, a competitor to a focus strategy may employ distribution and sales of a full product line, going both down-market and up-market. This method of attack also works against a firm with a differentiation strategy. A “one-stop shop” for products spanning value-priced, mass-market, and luxury customers can directly interfere with a firm’s focus in providing high-quality, high-performance goods to a narrow customer base.
The Focus Strategy in Innovation
Classical business and innovation strategies are categorized by the scope of the market and competency of the firm. The cost leadership strategy seeks a broad customer base while maintaining the lowest cost of production and distribution. A differentiation strategy will attempt to serve the same broad market, but will set the firm apart from competitors with higher quality products and enhanced customer service.
The focus strategy is similar to a differentiation strategy with a strong concentration on quality and service, but instead, serves a narrow target market. This focus can yield high profits yet the firm must be cautious of external threats since the size of the market is small.
To learn more about managing innovation strategy, please contact Global NP Solutions at email@example.com or by phone at 281-280-8717 for additional details. You may also enjoy learning more about managing projects in an NPDP workshop. Workshops address the processes and best practices leading to successful NPD strategies. NPDP workshops are held monthly through guided webinars or at your own pace in a cost-effective self-study format. We are also offering project management training through our partner, Leap University. Use code GNPS2015 to save $50 on your registration.
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