What Can We Learn from Market Driving Firms?

independent-thinking

#1

While working on the Aravind Eye Case Study, I stumbled across a wonderful paper on Market Driving firms authored by Nirmalaya Kumar, Lisa Scheer and Philip Kotler. Even though it was written in 2000, the paper contains a number of important insights which might help students of business. In writing this post, I draw heavily on the article.

In their research on 25 pioneering firms across industries including healthcare, airlines, media, etc, the authors came across a shared set of unique features and business practices which can only be described as market driving as opposed to market driven. Excellent, established companies like Unilever, P&G and Nestle implement the market driven approach – which starts with careful market research, investigating the customers’ needs, and developing differentiated products or services for a well-defined segment. But pioneering companies like Amazon, Ikea, Aravind Eye, etc create new markets by revolutionizing existing industries through radical business innovation, although it must be said that the base rates for success for this strategy is not high.

The authors observed that market driving firms succeeded due to radical innovation on two dimensions –

  1. A discontinuous leap in value proposition
  2. Implementation of a unique business system

Value proposition refers to the combination of benefits, acquisition efforts/costs, and price offered to customers. Market driving firms tend to overwhelm the customer expectations through their value proposition. To better understand the jargon discontinuous leap in customer value proposition, consider this excerpt from the Aravind Case Study:

In 1970s, for most of rural India the mere concept of a doctor or clinic would have been alien, let alone the concept of a surgery. Most were not literate and were daily wage earners, earning less than a dollar a day. Life was cruel, and continues to be cruel today as well. If a person in the rural region is unable to contribute to feeding his / her family, there is an unfortunate expression in the poor families of India - he / she is considered a ‘mouth with no hands’. Thus, many end up starving to death by choice or by circumstances.

Thus the thought of a cataract cure is as much beyond their psychological reach as it is beyond their economic reach. Thus blindness is a fatal disease in India, even curable blindness like cataract.

It is in this context that Aravind’s value proposition should be understood– Aravind not only performed the operations required for the poor for free, but also provided free transport, accommodation and food. In giving back sight to its patients, it was not only returning access to probably the most important sense of sight, but also returning their dignity & independence, and at the same time increasing their life expectancy.

By providing this leap in value proposition the market driving firms tend to re-draw the existing industry structure and generate new price points. Consider Southwest Airlines – whenever it entered a new city, it priced itself against ground transportation there. This resulted in prices which were around 60% lower than competing airfares. When a shareholder asked the CEO ‘Could you not raise the price two or three dollars?’ the response was, ‘We are not competing against other airlines but ground transportation.’

Because these firms offer a leap in customer value, their customers are delighted and eager to notify others about their ‘find.’ The customers become the most ardent brand ambassadors. One needs to go no further than Aravind to understand this. Aravind’s patients get their eyesight back, for free. It is hard to overestimate the power of the tremendous customer goodwill that the organization generates.

Business system refers to the configuration of the various activities required to create, produce, and deliver the value proposition. Consider the example of Ikea -

In the furniture industry, traditional channels were beset by expensive independent designers, high work-in-progress inventory, labor intensive handicraft manufacturing considerable transportation and inventory of finished goods, fragmented marketing, costly high street retail locations, elaborate displays, and expensive delivery to the consumer. To deliver the discontinuous leap in value, IKEA had to radically reconfigure the industry business system. IKEA’s unique business system uses cost-conscious in-house design, interchangeable parts, high volume component manufacturing, parts inventory (rather than more expensive finished product inventory), extensive computerization of logistics, its Scandinavian image, relatively inexpensive peripheral locations, and simple display facilities, leaving final transportation and assembly to the consumer.

To profitably copy IKEA’s value proposition, firms in the traditional furniture channel would need to dismantle the existing business system while migrating to a new IKEA type business system. Not many organizations would be willing or able to go through with this amount of pain and reconfiguration.

It is important to note here that both the discontinuous leap in value proposition and a hard to replicate business system are important. While the leap in value is easily observable, it is the unique business system that creates a barrier to entry. In the absence of a hard to replicate business system, a leap in customer value is easily copied by the competitor. The unique business system creates a more sustainable advantage, as it takes time for a would-be competitor to assemble the intra-organizational and inter-organizational players needed to replicate that unique system architecture.

Visionaries - The Drivers Behind Market Driving Firms

One of the major common features observed was that the inspiration for the radical business ideas of these market driving firms came from a visionary such as Dr. V of Aravind Eye, who saw the world differently and whose vision addressed some latent or emerging need. Rather than focusing on obtaining market share in existing markets, these market drivers created new markets (e.g. CNN, Federal Express) or redefined the category in such a fundamental way that competitors were rendered obsolete (none of the top 10 discounters of 1962, the year Wal-Mart was born, are in business today).

The generation and development of ‘the idea’ was a combination of serendipity, inexperience, and persistence. Frequently, visionaries’ relative inexperience with the industry meant they had not yet been inoculated with that industry’s received wisdom. Often, these visionaries persisted in the face of many failures and rejections to realize the dream such as Fred Smith of FedEx who developed the guaranteed overnight delivery idea in a business school term paper as a junior at Yale. He received a ‘C’ for the paper because the instructor was not convinced about its practicality!

Some spent years muddling through refining their vision until everything clicked and they perfected their strategies. Wal-Mart’s initial attempts were underwhelming. David Glass, the erstwhile CEO of Wal-Mart reportedly opined after checking out the first Discount City (at a time when he was employed with a competing store), ‘Those guys will never make it.’ Sam Walton continued to tinker with the formula until he got it right. Few of these visionaries expected that their business idea would achieve the level of success that was ultimately attained.

And in order to achieve this vision, the founders generally hired people with little to no experience in the industry- those unaware of the industry’s conventional wisdom about what can and cannot be done. These employees are chosen for the way they subscribe to the values of the organization. The employees are motivated strongly by their belief that they are on a mission, not simply by money, which allows them to tap deeper motivational energies. For example, in the early days at FedEx, there were couriers who pawned their watches to pay for gasoline.

Obstacles in Existing Firms to Implement Market Driving Strategy

Since radical innovation is key in market driving firms, such firms are generally new entrants to industry. There are a number of cultural, behavioural and organizational impediments which disincentives established firms from implementing market driving strategies.

Impediment 1 – Vast experience of incumbents: The maverick ideas that drive market driving firms involve a certain amount of serendipity. But in established firms, surprises are generally seen as negative events. Individuals often feel pressure to hide market driving ideas as they rebel against the prevailing industry and incumbent wisdom. The vast industry experience of established firms therefore becomes a barrier to being market driving. An instance here is Sam Walton, originally a Ben Franklin franchisee, who had his idea for starting big stores in small towns turned down by the Ben Franklin franchise.

Impediment 2 – Negative asymmetricity: The base rates for success of a market driving firm is low. An entrepreneur chasing a market driving dream generally has low downside risk as far as capital is concerned and huge upside potential. In contrast, in most organizations, the originator of a successful market driving idea may, at best, receive a nice bonus or promotion (limited upside potential), but a public failure may be the end of one’s career within the organization or even beyond.

Impediment 3 – Newton’s first law or the love for the status quo: Established firms believe they have too much invested in the status quo to risk destroying the the existing industry and market. The greater the threat of cannibalization, the more intense is the resistance to market driving ideas. One needs go no farther than Kodak to understand the outcome of this approach.

To counter such impediments in market driven firms, the authors suggest a series of measures which can help a market driven firm develop at least some amount of market driving characteristics. Some of the approaches include allowing space for serendipity, empowering latent entrepreneurs, selecting employees for creativity and cannibalization. One such commonly embraced approach is ‘skunkworks’.

Skunkworks: In early stages of the development of a radical new concept, it is difficult to project as to which technology or format would become successful. Therefore, Motorola encourages its wireless divisions to compete against each other on the assumption that the marketplace will select the winner. IBM had about half a dozen parallel development teams for the PC. Often when selecting a particular new technology as its main focus, Sharp maintains small R&D projects on the alternative technologies.

To help overcome organizational resistance and inertia, firms can set up ‘skunk works,’ physically and organizationally independent, self-contained entities with dedicated members. Skunk works bring a sense of urgency to the project, harness the entrepreneurial zeal of members, and concentrate the effort of those involved; importantly, they also protect the fledgling business from entrenched interests who have motives to kill the project.

At the end of the paper, there is a fascinating example of how Sony in its heyday used certain market driving strategies to stumble into the video game industry through the Sony PlayStation. And this entry was spearheaded by an employee who had gone through repeated failures in his career in Sony.


If you enjoyed this article, you should become an Intelligent Fanatics member. As a member, you get our current and future Intelligent Fanatics books, online courses, case studies, and transcripts for free, as well as the ability to participate here on our community. [JOIN HERE]

Sources:
From market driven to market driving,

Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses (2016),

Aravind Eye case study

Disclaimer: We may/may not have positions in the companies mentioned in the blog. This case study/article is not a stock recommendation. We are not SEBI registered investment advisors. Our Intelligent Fanatics Case Studies and Articles are meant to retell the stories and strategies used to create exceptional businesses so that we can learn from them.