David against Goliath: How can Estonian companies grow by challenging bigger global competitors and conquering new markets

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David against Goliath How can Estonian companies
grow by challenging bigger global competitors and
conquering new markets
Professor Costas Markides London Business School

March 2006
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My First Key Point
A tree will not grow tall unless it has healthy
roots and a solid foundation
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My First Key Point
A tree will not grow tall unless it has healthy
roots and a solid foundation The same applies to
a company A company will not succeed in growing
unless it first puts in place healthy roots.
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My First Key Point
A tree will not grow tall unless it has healthy
roots and a solid foundation The same applies to
a company A company will not succeed in growing
unless it first puts in place healthy roots. By
healthy roots I mean the companys strategy
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My First Key Point
A tree will not grow tall unless it has healthy
roots and a solid foundation The same applies to
a company A company will not succeed in growing
unless it first puts in place healthy roots. By
healthy roots I mean the companys strategy A
company will not succeed in growing unless it has
a healthy strategy in place
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My First Key Point
A tree will not grow tall unless it has healthy
roots and a solid foundation The same applies to
a company A company will not succeed in growing
unless it first puts in place healthy roots. By
healthy roots I mean the companys strategy A
company will not succeed in growing unless it has
a healthy strategy in place This healthy strategy
is the platform from which a company can grow
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Therefore
Before I talk to you about Growth, Id like to
spend a few minutes talking about the
characteristics of a good (or healthy) strategy.
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What Makes for a Healthy Strategy?
Strategy is nothing more than the choices you
have made on 3 issues
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1. WHO shall we target as customers and who shall we
   not?

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1. WHO shall we target as customers and who shall we
   not?
2. WHAT shall we offer these customers and what
   shall we not?

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• WHO shall we target as customers and who shall we
  not?
• WHAT shall we offer these customers and what
  shall we not?
• (3) HOW can we do all this effectively? (what
  activities do we perform and what activities do
  we not perform)

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The answers to these questions are not
immediately obvious and there are no right or
wrong answers. You must therefore make choices
what to do and what not to do.
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Please Note

• Strategy is not a Goal (e.g. we aim to be the
  best or no.1 in our Business)
• Strategy is not motherhoods (e.g. our strategy is
  to be a Leading-Edge Provider to our customers, a
  good employer to our employees and a responsible
  citizen in our community)
• Strategy is not plan or budget.

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Strategy is all about Making Difficult
Choices
(1) The Who decision is all about customer
segmentation and geography. (2) The What
decision is all about what products/services to
offer and what product characteristic to
emphasize. (3) The How decision is all about what
activities to perform.
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Traps to Avoid

1. The worst strategic mistake that companies make
   is failure to make choices
2. The second worst strategic mistake is to dilute
   your choices in an attempt to grow
3. The third worst strategic mistake is failure to
   differentiate ourselves to be successful a
   company must find a unique position in the market.

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What is a Unique Position?
Nothing in life is 100 unique but your goal
should be to create as much differentiation
relative to your competitors as possible.
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Creativity is Difficult!
Unfortunately, most human beings and companies
find it difficult to be creative We are all
blinded by our own assumptions, beliefs and
things that we take for granted.
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Can you think of a word?

• __ ANY

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Can you think of a word?
MANY
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Can you think of a word?

• MANY
• __ENY

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Therefore
Think creatively about the Who-What-How questions
and come up with a unique positioning for you.
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A Test for You

• Can you write down your strategy (that is, your
  WHO-WHAT-HOW choices) in half a page?
• If you ask your employees, can they write down
  your strategy in half a page?

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And Now, Lets Talk about Growth
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After Making your Strategic Choices, how
do you Grow?

• Very few companies actually have the courage to
  make the difficult choices that strategy
  requires.
• Even those that succeed in their markets by
  making the necessary choices will eventually face
  the question How do I grow my business?

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There are Many Ways that you Can Grow

• Grow with the Market (even if you dont increase
  your market share)

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There are Many Ways that You Can Grow

• Grow with the Market (even if you dont increase
  your market share)
• Grow by increasing your market share relative to
  competitors (by being better than them)

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There are Many Ways that you Can Grow

1. Grow with the Market (even if you dont increase
   your market share)
2. Grow by increasing your market share relative to
   competitors (by being better than them)
3. Grow by diversifying into other product markets

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There are Many Ways that you Can Grow

1. Grow with the Market (even if you dont increase
   your market share)
2. Grow by increasing your market share relative to
   competitors (by being better than them)
3. Grow by diversifying into other product markets
4. Grow by going into foreign markets

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There are Many Ways that you Can Grow

• Grow with the Market (even if you dont increase
  your market share)
• Grow by increasing your market share relative to
  competitors (by being better than them)
• Grow by diversifying into other product markets
• Grow by going into foreign markets
• Grow by Acquisitions

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There are Many Ways that you Can Grow

• Grow with the Market (even if you dont increase
  your market share)
• Grow by increasing your market share relative to
  competitors (by being better than them)
• Grow by diversifying into other product markets
• Grow by going into foreign markets
• Grow by Acquisitions
• Grow by Creating New Markets
• .. and so on

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Many Ways to Grow
There is no right or wrong way! Each one of the
options that I listed on the previous page has
advantages and disadvantages. I could spend days
talking about each one of these!
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For Example

1. What do we know about the strategy of growing
   through Acquisitions?

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THE TRACK RECORD
Cumulative Abnormal Return
30 0 -20
Acquirors
Acquirees
Three years Date of Three Years
Before Acquisition After
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What Do We Know about Acquisitions?
Acquirers on average do NOT gain anything from
acquisitions!
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RULES for the acquiring firm to beat the market
Rule 1 Search for UNIQUE synergies Rule 2
Keep information away from other bidders Rule
3 Keep information away from target about its
full value Rule 4 Never win a bidding war Rule
5 Close the deal quickly ( but integration
problems!) Rule 6 Search for thinly traded
markets
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On Average, These are the Acquisitions that
Create Value

• Friendly ones
• No other competitive bids
• Unique synergies exist
• Targets have had good corporate governance
• Smaller targets
• Acquirer has experience in acquisitions
• Acquirer comes from concentrated industries
• Cash acquisitions
• Acquirer has good corporate governance
• Acquisitions made in countries where the market
  for corporate control is weak.

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What Do we Know about the Strategy of Entering
New Markets?
You can enter a new market by diversifying from
one industry to another You can enter a new
market by moving into another country
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Market entry Attack
1. On average, MANY firms enter a given industry
in any given year (200 - 400 firms per
year) 2. A large number also exits in any given
year (150 - 300) 3. Most entrants FAIL within a
year (85 in 4 years) 4. Average market share
penetration of about 5 in 5 years The
probability that the No. 1 firm will survive as
No. 1 was about 96 -- an almost certainty Why
such a bad record?
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First-mover advantages

1. LEARNING!
2. Economies of scale
3. Control of scarce assets (e.g tech. space)
4. Switching costs
5. Resources to attack

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Successful Market Entry

• To successfully attack an industry leader
• Do not attack head-on
• Re-define the market (e.g USA today)
• Create competitive variety by changing the value
  chain (e.g. Canon)
• Exploit opponents weaknesses
• Attack opponents blind spots
• Attack areas where competitor cannot respond
• Be focused and consistent
• Get allies
• Do not imitate
• Be very good in something
• Impede retaliation
• It takes time
• Get to know your competitor
• It takes time to build up skills and competencies
• Focus your efforts by having a clear
  superordinate goal, that has been communicated to
  your employees
• Size is not important. It is momentum that
  counts.

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The Global Organization

• Values drive behaviour (e.g. Charles Schwabs
  e.schwab decision) and values get diluted as we
  expand abroad
• adapt values abroad
• grow by making compromises
• Physical distance out of sight, out of mind
• Other priorities
• It takes time to build an international operation
  you will not do in 5 years what took you 50
  years to do at home
• Inappropriate mindsets
• Inappropriate measurements time-frames

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The Global Organization

• Yes, you have a successful strategy at home but
  we need to adapt to the local environments
• Yes, you need to adapt to the local environments
  but beware of the NOT invented here syndrome (e.g
  Dove soap)
• Companies make the same mistakes again and
  again! (Why? What drives behaviour is the
  underlying structure of the system.
• People will make all the difference give your
  people the freedom and autonomy to challenge the
  status quo and take the initiative BUT
• all this must take place within certain
  parameters (values strategic decisions) which
  are (few) and clear to all AND
• these parameters get diluted as you go global!

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Lets Focus on One of these Growth Options
Like I said, I can spend days on each one of
these strategies for growth but Id like to focus
on one of them. One option that you have is to
create new markets. The question is How can you
adopt this Growth Strategy Successfully?
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How Can you Create New Markets?

1. The first point to appreciate is that to create a
   new market, you do not necessarily have to
   discover a new product or service!
2. Often, companies create huge new markets using
   the same product as everybody else.

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Consider this Example
Which company is the biggest car-rental company
in the world?
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Hertz/Avis
Enterprise
Value-chain activities Location Airports Downtown
Push Marketing by Travel Agents Mechanics and
Insurance Companies Delivery Airport
Parking Lots Home Pick-up Car Drop-off Airport Ho
me Organisation Centralized Decentralized Custom
er Segmentation Business and Pleasure Replacement
and Travellers Discretionary Age of cars in
fleet Mainly New High Average age Price On
average, high Low
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The Secret of Success
Compared to the traditional car-rental
companies, Enterprise has a different
customer in mind. They have strategically
innovated because they discovered a new WHO
(customer segment)
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Enterprise Rent-A-Car
replacement
travellers
discretionary
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Creating Huge Markets by Redefining Who Really is
the Customer

1. Enterprise
2. Bright Horizons
3. Canon
4. Honda
5. IKEA
6. CNN
7. Edward Jones
8. Wal Mart
9. Progressive
10. easyJet

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How Can You Create New Markets?

1. Obviously you can create new markets by
   redefining who the customer is in an existing
   market.
2. But you can also create new markets by redefining
   what you really offer the customer.

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For Example

1. Did Swatch discover the watch?
2. Did Starbucks discover coffee?
3. Did LVMH discover handbags?
4. Did Nespresso discover the coffee machine?

These companies did not discover new products!
Yet, they created huge markets by redefining what
benefits they were offering the customer.
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Other Examples of companies that Created New
Markets by Redefining what they offered the
Customer

1. Charles Schwab
2. The Body Shop
3. Apple i-Mac
4. Krug Champagne
5. Rosenbluth Travel
6. USA Today
7. Federal Express

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How Can You Create New Markets?

• So far, Ive said that you could create new
  markets by redefining who the customer is and
  what you offer the customer.
• But you can also create new markets by redefining
  how you play the game in your market.

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How Do You Play the Game?
Dell Computers Toyota Taco Bell
restaurants Cemex Wal-Mart K-Mart (in the
1960s) General Motors (in the 1940s) Apollo
Synthetic Diamonds easyCinema
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Summary So Far

• So far, I have said that you can create new
  markets by thinking creatively and redefining
• a) Who really is your customer?
• b) What really you offer the customer?
• c) How you play the game in your industry?
• From now on, I will refer to this way of creating
  new markets as Strategic Innovation
• But obviously, this is not the only way to create
  new markets!

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How Can you Create New Markets?

• Sometimes markets get created in a supply-push
  manner when we discover a new technology which is
  then used to create a new product
• examples
• The Television Market
  The Post-It note market The
  i-pod Market
  The handheld computer market
  The car
  market
• Please note that this is a different kind of
  innovation from Strategic Innovation.
• I will call this kind of innovation Radical
  Product Innovation.

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How to Create New Markets

1. What you need to do to create new markets through
   strategic Innovation is different from what you
   need to do to create new markets through radical
   product innovation.
2. Lets examine each one in turn.

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How to Achieve STRATEGIC INNOVATION
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How to Achieve Strategic Innovation

1. There are many things you can do to help your
   company become more innovative.
2. Probably the most crucial thing you can do is to
   put in place an Organizational Environment that
   promotes innovative behaviors from everyone in
   the company
3. Let me explain what I mean

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To Understand How you Could Promote Innovation in
your companies, consider the following exercise
You have a cake and a knife. You are allowed to
cut the cake four times in straight lines. What
is the maximum number of pieces that you could
cut the cake into (in one minute)?
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What Determines Behaviours?
Time-pressure
Mindsets, assumptions, beliefs
Solving the exercise individually
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Incentives
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Putting it all Together
There is a reason why people behave the way they
do. If we want people to change their behaviours,
we should not just tell them. We should change
the underlying reasons that drive their
behaviours. The question, then, is What drives
human behaviour in organizations?
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What Drives Behaviours in Organizations?
Sumantra Ghoshal

• Downtown Calcutta
• Versus
• Downtown Fontainebleau

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The Moral of the Story
The underlying environment of your organization
creates the behaviours that we/you see in your
organization.
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The Right Underlying Environment for your
Organization
Culture and Values
How we Behave in our company
Structures and Processes
Measurement and Incentives
People, (skills, attitudes, mindsets
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The Importance of Incentives
What gets measured gets done
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The Importance of Values
Imagine being behind enemy lines. Would you
shoot innocent children women?
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The Importance of Structures Processes
The priest experiment
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The Importance of People
(a) Attitudes
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Attitude
They will do it OR We will do it OR I thought
somebody else will do it
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Social Loafing
5 4 3 2 1
shouting
X
clapping
Sound pressure per person
X
X
X
X
X
1 2 3 4 5 6 7 8
9
Group Size
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Examples of Social Loafing

1. The murder of Kitty Genovese, New York City, 1964
2. The death of Marco Moretti in an Italian tunnel
   and the adventures of his 6-year old daughter,
   Vanessa
3. Experiments by Latané Dabbs (1975) in elevators

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The Importance of People

1. Attitudes
2. Mindsets

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By the Way The Answer to the Cake Exercise is
not 8 Pieces!
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It is Not Eleven Pieces!
1
2
11
10
3
4
7
9
8
5
6
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It is Not Twelve Pieces!
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It is Not Sixteen Pieces!
Cut the cake into two pieces.
Put one piece on top
of the other and cut in two again. Put all
pieces on top of each other and cut in two again.
Put all pieces on top of each other and cut
in two again.
24 16 times
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SUMMARY

• What have I really said so far
• The Underlying Environment of your organization
  drives the behaviours that you see in your
  organization.
• The underlying Environment is made up of four
  inter-related components incentives, culture,
  structure and people.

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Why is this Important for Innovation?
You will not get innovation in your companies
unless you first put in place an Organizational
Environment that supports Innovation
Culture and values Measurement and
Incentives Structures and Processes
Mindsets and Attitudes
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A LAUNDRY LIST OF IDEAS

1. Allow people to experiment
2. Do not punish failure
3. Learn from mistakes
4. Remove bureaucracy
5. Reward good ideas
6. Work in project teams
7. Flat structures
8. Facilitate the flow of info
9. Risk-taking attitudes
10. Open questioning culture
11. Make your strategy process democratic
12. Bring capitalism inside
13. Encourage ambidextrous mindsets

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What innovative companies do?
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Innovation at 3M
Culture

• 3M policy allows employees to spend 15 percent
  of their time developing projects of their own
  choosing
• Employees are encouraged to take the initiative
  and are empowered to make decisions. Failure is
  accepted.
• The pervading culture is characterized by the
  rule that you have to kiss a lot of frogs to find
  one prince
• A flat hierarchy makes people feel responsible
  for everything that goes on in their divisions.

Structure

• 3M utilizes cross-functional teams to work on
  research projects
• Each team is headed by a product champion who
  is responsible for building culture.
• One of 3Ms top managers becomes a management
  sponsor who helps the team secure resources and
  overcome bureaucratic obstacles
• Divisions within 3M are run as separate
  companies. Divisional VPs have the same
  responsibility as a CEO in many other companies.
• Hierarchies within divisions are kept flat.
• The Annual Technology Fair allows scientists to
  showcase their latest research findings and
  exchange ideas and information.

People

• By virtue of its incentives and culture, 3M
  attracts top scientists and engineers
• The company is able to recruit and retain
  creative people with an entrepreneurial mindset
• Because of its dual career ladder, top scientists
  can coexist with top managers without internal
  competition

Innovation
Incentives

• The company has established career ladders for
  scientists that are separate from those for
  managers
• Teams that introduce successful new products are
  rewarded.
• Successful new products can be spun off as
  separate divisions with their own profit and loss
  statements. The original product champion
  becomes divisional president
• 3M has set a formal goal that 25 percent of sales
  must come from new products. Managerial
  performance is measured and rewarded according to
  this goal.

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What Else Can You Do to Promote Innovation?
Remember from the cake exercise how the
assumptions that we make condition how we think
and how we behave. To promote Innovation, we
must challenge and question the things that we
take for granted in our markets (i.e. question
our assumptions and sacred cows).
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Remember the Cake Exercise?
How many Assumptions Did we Make in thinking
about this exercise?
This is an individual exercise The pieces have to
be equal The cuts are vertical You cannot move
the pieces The shape of the cake The shape of the
knife
Just Think In such a simple exercise, we made
all these assumptions! Can you imagine how many
assumptions we carry in our heads every day?!
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Exercise

• Arm-wrestle for 30 seconds. The winner will be
  the one that manages to push his/her opponents
  hand down most times in the 30 seconds.

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The Winner is
Those people who do not compete with one another
but cooperate instead.
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Assumptions or corporate orthodoxies are not
necessarily bad. They simply act as the filters
through which information passes. As a result,
they determine what we hear or see and so
influence how we behave.
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Strong Assumptions and Beliefs

• Help us decide quickly (and act). In other
  words, they make us Efficient.

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Unfortunately, Strong Assumptions also have
negative side effects
For example, answer the following question in 30
seconds.
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30 SECOND EXERCISE
If I count between 1 and 100, how many times will
I find a number that has a 9 in it?
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A Simple Exercise
A father and his son are driving on the motorway.
They are involved in a terrible accident. The
father is killed and the son is in critical
condition. The son is rushed to the hospital and
prepared for an operation. The doctor comes in,
sees the patient and exclaims I cannot operate
on this boy he is my son! Is this scenario
possible?
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What Effect Do Assumptions have on Us?
They make us efficient They make us passive
thinkers They make us reject information that
does not fit with what we already believe in.
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Organisational Mental Models

• Just like individuals have mental models, so do
  organisations.
• Over time, members of an organisation come to
  believe similar things and begin to take the same
  things for granted (e.g. LBS faculty).
• These shared, unquestioned beliefs and
  assumptions exist, even though nobody tried to
  teach them to us.
• These unquestioned beliefs and assumptions are
  the organisations orthodoxies. They allow
  employees to behave like monkeys.

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Problem How can we overcome our pre-existing
mindsets and assumptions
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Think Outside the Box
Is this useful advice?
Question your Assumptions
Is this useful advice?
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Antony and Cleopatra

• Antony and Cleopatra are lying dead on the floor
  in an Egyptian villa. Nearby is a broken bowl.
  There are no marks on the bodies and they were
  not poisoned. No person was in the villa when
  they died. How did they die?

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My Point

• We cant question what we cannot see!
• We cannot think outside the box if we are not
  even aware that we are in the box!
• Before we can question our assumptions, we must
  find out what these assumptions are!

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Summary Killer Assumptions
We make assumptions without even thinking This
means that we are not aware of the assumptions we
make. This implies that the advice Question
your Assumptions or Think Outside the Box is
not useful advice! We cannot question what we
cannot see.
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The Biggest Sacred Cows of Any Company

1. The definition of its Business
2. Its company policies
3. Who it thinks its customer is
4. What it thinks it is offering that customer
5. How it thinks it should play the game in its
   industry

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Question Your WHO-WHAT-HOW
Companies that strategically innovate in their
businesses are those that question the things
that the rest of us take for granted. In
particular, strategic innovators question what
business they are in and their existing
WHO-WHAT-HOW.
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How to Achieve Radical Product Innovation
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Creating Radical New Products

1. Most radical new products are supply-pushed onto
   the market (rather than being demand-driven)
2. Think, for example, how television or the walkman
   got created.
3. This implies that to create new radical products,
   a company must spend money on RD.
4. However

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RD is not always necessary!
The evidence shows that for many new radical
products, the companies that discovered the
product were not the ones that created the market
for the product. For examples, who discovered
the computer and who created the market for
computers? Who discovered the handheld
computer (Apple) and who created the market for
it (Palm)
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Innovation is two things
Creating a new product, that if successful, grows
to become a niche.
Scaling up this niche into a big mass market
Examples Apple vs Palm Osborne vs IBM ? vs Ford
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SCALING UP
Its not just imitation! You need to get the idea
of somebody else and convert it from a niche into
a big mass market.
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Scaling up a market

• Build the product economically and sell at
  mass-market price (it doesnt have to be
  technologically the best!)
• Build consumer confidence in the product
  (Brands!)
• Build the distribution for the mass market
• Help grow complementary products

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What Do We Know

• Innovation requires two activities (a) coming up
  with a new idea and creating the initial market
  niche and (b) scaling up the idea into a mass
  market

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What Do We Know

• Innovation requires two activities (a) coming up
  with a new idea and creating the initial market
  niche and (b) scaling up the idea into a mass
  market

• Both activities are equally innovative.
  Unfortunately, there is a cultural bias in favour
  of creation
• The skills needed for creation are different and
  often conflict with the skills needed for scaling
  up. The two cannot co-exist in the same
  organization

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A Proposition
Small, start-up firms are good at creation
Big established companies are good at scaling up
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A division of labour
Big established companies should focus on
exploiting their existing businesses
At the same time, they should develop a network
of feeder firms these are the small, start-up
firms, all trying to discover new markets.
When promising new markets gets discovered, the
big established firm should move in and scale
them up.
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An Example
Procter Gamble in 2005 Fifty percent of all
new discoveries in PG must come from outside PG
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Such Division of Labour Already Exists in
Creative Industries

• Film/Movies
• Theatre
• Music
• Art Galleries
• Book Publishing

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Implications for you
If you come from a small firm, dont try to be a
big one.
If you come from an established firm, dont try
to be a small one act your age!
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My final word on Innovation
This does not mean that you should not keep on
trying to make your firms more innovative. But
when it comes to creating new markets through
radical product innovation, you should focus your
firms on that component of innovation (creation
versus scaling up) that you are good at.
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And Now for my Last Word
I have told you many things about growing your
businesses and about innovation. Hopefully, you
now know some new things that you did not know
when you came here. However .
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Will you Do Any of this?
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MESSAGE
Even though I know that you accept many of my
previous messages you are still NOT going to
anything!
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Knowing is not Enough!
Most times, we know what we have to do. We simply
do not do it.
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The Knowledge - Doing Gap
Profits
A
Time
B
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The Sources of this Disease
(1) Spies that prevent us from doing what we
already know we should do.
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The Sources of this Disease

1. Spies
2. Time Pressures Priorities

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The Sources of this Disease

1. Spies
2. Priorities
3. Downtown Calcutta vs Downtown Fontainebleau

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creates the behaviours of people in that
organization
The Underlying Environment of an organisation

• Culture/values
• Incentives
• Structure/processes

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From Knowing to Doing
Successful organisations talk a lot about
changing but dont do anything. To get action,
you must create a sense of urgency in your
organisation.
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Creating a Sense of Urgency
Exercise 30 seconds
Add all the numbers from 1 to 100 and tell me the
sum total
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Stretch Goals

1. If you give people an impossible task, most of
   them will say My God, this is impossible and
   stop doing it
2. Some people will say My God, this is impossible
   to do if we use the same old ways. Maybe there
   is another way to do it.

The art of leadership is to get people to go from
attitude (a) to attitude (b).
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Create a Sense of Urgency
(or a positive crisis)

• (1) Develop a challenge for your people
• (2) Sell it!

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Building Commitment in Steps

• I know
• I understand
• Yes I think I can
• I will

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What are the physical symptoms when you have
actually been successful in winning your peoples
emotional commitment?

• Energy
• Passion
• Fun
• Pride
• Working together as a strong team

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Is this Enough?
Of course it is not enough! But it is a
start. And Remember The future belongs to those
who dare take chances!