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A Message for the Print Market

Why Good Companies Fail to Grow Innovatively

By Steve Aranoff & Robert FitzPatrick

Why do large companies find a need to buy smaller companies? And, what is occurring in larger companies that seems to prevent them from achieving the innovations and agile management of dynamic smaller companies?

There are many well-managed larger companies that have their antennas up, do listen acutely to their customers, and invest heavily in new technologies. Yet, they still may lose market share dominance, or fail. The key question to consider is that perhaps there is something about the way that successful companies make decisions that actually causes subsequent failure.

Looking around us, we have to wonder why large companies continue to buy smaller ones. All things being equal, youíd think that larger companies have the money, personnel, and market knowledge to succeed far more easily than smaller companies. And yet, in this industry we have seen it happen multiple times.

For example, HPís purchase of Indigo and Scitex Vision; EFIís purchase of Best and Vutek; Fujiís purchase of Sericol; and Agfaís reliance upon Mutoh technology for their wide format printer lines and purchase of the Dot Factory.

What is it about larger companies that makes it easier to buy innovation from outside, rather than to develop it internally? Why wouldnt they depend on themselves to create and invent? We believe that it comes down to management choices that the culture of larger companies will not allow.

For example, at times, perhaps it is right not to listen to customers. We believe that most customers find it easy to make small leaps from what they know and use, but larger leaps require more knowledge about what new technology can achieve. Without that insight, it isnít possible to see the larger opportunities that may now be available.

Also, sometimes it isnít right to plan better, work harder, become more customer driven, or take a longer time horizon. At times, it may be more important to invest in lower performance products, have lower margins as you get started, pursue smaller markets, or test different approaches. All counter intuitive to large company styles, sometimes these approaches are necessary to make strategic moves forward.

Sustaining Technology
Perhaps, true new market and product development for smaller initial opportunities requires a much more disruptive way of operation than larger companies are able to tolerate. Disruptive innovation requires more leaps of faith and beliefs rather than verifiable knowledge.

Market research from prominent business economists such as Clayton Christensen, indicates that it is rare for even the most radically difficult sustaining technologies to cause the failure of leading firms.

These new technologies, for the established firm, or market leader, may result in worse performance in the short term. They have features that are radically different, perhaps, and appeal to the fringe market, and/or to the emerging market players, or to markets insignificant to the larger company, rather than to the mainstream customers that have been valued in the polled customer base. These products also tend to be less expensive, smaller, and more convenient to use or deliver significantly better performance, but with a learning curve.

The larger company is rarely able to build a strong business case for products that donít add greater profitability or larger market growth until it is too late. On the other hand, new smaller companies, with no customer base, just new ideas, can be well satisfied by small growing markets and running at a loss for the first few years of operation. Larger companies canít show quarterly growth by doing so. A two million dollar contribution the first year of sales for a small company may be fantastic, but for a 500-million-dollar company, it doesnít rise to the top line fast enough to be seen.

The best they can do is milk maturing markets that provide high margins to get the cash to develop new markets without apparent loss of revenue or profits. This approach has a major flaw for larger companies, however. They often make the correct decision to provide better products than their competitors and earn higher price margins for them. But in doing so, they tend to overshoot the market need, providing more capability than the customer is willing to pay for. Sometimes they also overshoot in timing, completing the new product too late to meet the window of opportunity. Disruptive technologies are able to deliver better performance at a competitive lower price more quickly and efficiently, and therefore they beat the large company more often than not.

The Large Company Dilemma
The infrastructure in the large organization tends to work against threatening technologies. It takes strong leadership and alternative plans to pull this off. It takes questioning the meaning of research and asking questions of customers differently.

If a manager doesnít let the requirements of the status quo overpower him, perhaps by thinking outside the box, there are ways to handle this, such as through development of an independent organization with a lower cost structure and a planned budget.

One of the pitfalls of this approach is that new markets do tend to develop quickly after they cross the chasm and provide reliable and cost effective results. New choices for customers change the value proposition so that the disruptive technology is now useful to the mainstream and begins to challenge the value of the older and more established product lines.

Rather than fight to the death to sell obsolete products at lower prices, some companies have both the foresight and the opportunity to use their financial strength to buy the competition, taking advantage of the work already done to prove market need and to show the value proposition. Although in a different, but parallel market space, EFIís purchase of Vutek, a company with a large installed base and continuing market opportunity, is a good example of this in practice.

It was no longer uncertain that Vutek had profitably filled a market need; Vutek was already profitable. Justification of the investment was certain as it immediately brought in additional profits, but even more so, product integration between the companies provides additional value with little risk to the larger company.

At this time in a new companyís existence, it stops being a threat to the structure in the larger company and begins to fit right in.

Feb2006, Digital Output

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