How companies can battle copycats

How did Yamaha - an unknown upstart in the 1960s - come to dominate the piano-making business, displacing the iconic brand Steinway? What enabled the Swiss drugmakers of Basel - the likes of Novartis and Roche - to stave off copycats and maintain pole position in the pharmaceutical industry for more than two centuries? How did American consumer firm Procter & Gamble (P&G) prosper for over 150 years, even though it made mundane products like soap and detergent?

These are some of the questions Professor Howard Yu addresses in his new book, Leap: How To Thrive In A World Where Everything Can Be Copied.

A former banker from Hong Kong, he is Lego professor of management and innovation at the IMD business school in Switzerland. The Thinkers50 radar list, which scans the world for pioneers in management thinking, ranks him among the 30 thought leaders who are most likely to shape the future of how companies are managed and led.

A live-wire personality with a boyish look that makes him appear younger than his 38 years, Prof Yu is an expert on corporate disruption - why it happens, what it means and how companies can prevent it from happening to them.

"In my book, I go back to industrial history over the last 200 years to extract some of the lessons learnt, and I try to apply them to today," he explains.

"If you look at history, what is stunning is that whether it's textiles or automobiles or the PC, the main story is about the race to the bottom. Textiles started with Manchester in the UK, then moved to Massachusetts in the US in the 19th century, from there to the US south, then to Asia - starting with the US$1 blouses made in Japan - on to Taiwan and Hong Kong and then China, India and now Bangladesh. It's the story of industrial bases constantly moving across borders."

The same is true of autos, he adds: Detroit got deindustrialised as a lot of car manufacturing moved elsewhere. The theme was replicated in industry after industry, from ships to motorcycles, to solar panels to machine tools and thousands of consumer goods.

His book begins with the story of the piano business. At one time, New York-based Steinway was the undisputed leader, favoured by 90 per cent of concert pianists. It built exquisitely crafted grand pianos, one at a time, by hand. They were so hardy and durable that their main competition was vintage Steinways.


The Thinkers50 radar list, which scans the world for pioneers in management thinking, ranks Professor Howard Yu among the 30 thought leaders who are most likely to shape the future of how companies are managed and led. PHOTO: IMD, SWITZERLAND

STAYING AHEAD

Companies need to continually reinvent themselves. The only way for companies to stay on top and fend off copycats is not through low-cost competition - it's not about building another factory in China. It's about developing and incorporating new knowledge disciplines into your core business to reinvent the rules of the game of your business.

PROFESSOR HOWARD YU, whose new book is titled, Leap: How To Thrive In A World Where Everything Can Be Copied.

But in the late 1950s, Yamaha of Japan - once known for its harmonicas - decided to enter the business. As an unknown entity, it had a hard time even persuading retailers to stock its pianos. But it persisted, reverse-engineering Steinways, meticulously codifying the knowledge and automating production. Its grand pianos got better and better and the time needed to make them went down from two years to three months. By 1966, Yamaha's production was 17 times Steinway's. Even top concert pianists began to use Yamahas.

"History has repeatedly proved," says Prof Yu, "that what begins as an act of human creativity by a world-class expert usually ends up in machine automation."

Why didn't Steinway automate too? One problem was the fear of cannibalising its handmade masterpieces. As Prof Yu puts it, Steinway "retained a myopic obsession with craftsmanship at the expense of technological advancement and automation".

Another problem - common among companies facing disruption - was the obsession with marginal cost: It seems always more attractive to upgrade an existing process (by, for instance, adding another production shift in the case of Steinway) rather than create a completely new process - the better to leverage what they already have rather than reinvent. But that hands the advantage to competitors who don't have to bother with legacy systems.

DEFYING THE COPYCATS

But the copycats don't always win.

Sometimes, incumbents are able to perpetuate their supremacy. The Swiss pharmaceutical industry, centred on the city of Basel, is a case in point.

Prof Yu, who lives in Switzerland, decided to investigate. "I was curious to find out how come Basel's industrial base stayed intact for 200 years," he says. "Why are some industries so stable while others are so transient?"

He found that all the big pharma companies in Basel started out as makers of chemical dyes for textiles. The chemists noticed that some of the chemicals had medicinal properties. Thus was born the first anti-fever medicine, Antipyrine. A runaway success in the early 20th century, it was the world's first blockbuster drug. The knowledge base for Antipyrine was organic chemistry. But after World War II, with the introduction of penicillin, drugs were based on microbiology. Today, new drugs are based on genetics.

The Swiss companies were able to stay on top for two centuries because they kept pace with the shifting knowledge base for drugmaking - which is difficult for copycats to do.

"Think of it like mountaineering," Prof Yu explains. "Many companies will try to reach the summit, but when the industry moves from one knowledge base to another, the most experienced will win - the others will get pushed down, as if by mudslides."

This is because mastering a new knowledge base needs an understanding of what came before. "For example, in order to understand microbiology, you need to be a very good chemist to begin with - you need to know the past to reinvent the future."

The story of P&G's resilience is different. Besides automating soapmaking (which copycats could also do), it pioneered new ways to reach consumers. It was the first company to advertise on radio, and went beyond simple advertising to create drama programmes targeted at housewives - "content marketing" in today's jargon. Thus was the "soap opera" born; it is so named because of P&G.

But P&G also did something else: it shifted the knowledge base of its own industry by inventing synthetic detergents that could wash in hot water, such as the bestseller Tide - in the process cannibalising its own range of soap-based detergents. At the time, the company's then chairman William Procter famously said: "This synthetic detergent may ruin the soap business. But if anybody is going to ruin the soap business, it had better be Procter & Gamble."

A combination of automation, savvy marketing and cannibalising innovation enabled P&G to stay on top of a low-tech industry crowded with competition.

Other successful companies cannibalised themselves too, Prof Yu points out. For example, Apple launched the iPod nano in 2004 when the iPod mini was still doing well. Its iPad risked cutting into sales of its laptops and desktops. Then the iPhone threatened the iPod - as well as changed the "knowledge base" of the mobile phone industry.

Self-cannibalisation played a key role in Apple's success.

"So companies need to continually reinvent themselves," says Prof Yu. "The only way for companies to stay on top and fend off copycats is not through low-cost competition - it's not about building another factory in China. It's about developing and incorporating new knowledge disciplines into your core business to reinvent the rules of the game of your business."

THE CEO'S VITAL ROLE

So who is responsible for innovation within companies? Certainly, lower-level employees should be recognised as champions of change, says Prof Yu, noting that a lot of innovation has come from the rank and file - for example, at Google, which has created a structured process for this to happen, staff are allowed one day a week (aka "20 per cent time") to work on their own projects. This has led to several innovations, including Gmail, Google Maps and Google News.

But taking the bold and brave decisions that enable innovations to be adopted often falls to CEOs. This is because, as behavioural economists have found, mid-level managers are typically "loss averse". If they approve a new investment and it succeeds, they might get an additional bonus, but if it fails, they could be fired. Thus, saying "no" is always the safer option.

"So CEOs must sometimes absorb the career risks that managers don't want to take," Prof Yu points out. Steve Jobs did it at Apple, which cannibalised itself repeatedly; Jeff Bezos did it at Amazon by launching products that failed, such as the Fire Phone and Amazon Destinations (a hotel booking platform, now long forgotten); and P&G's top management did it when they decided to develop synthetic detergents.

"At critical times, the people at the top need to roll up their sleeves," he says. "And they must be able to say: 'The money is not important. We've just got to do this.' "

COUNTRIES MUST ALSO REINVENT

Like companies, countries too need to reinvent themselves - or at least their economies, says Prof Yu, and this is especially true of small countries like Singapore.

"No small country can sustain prosperity by relying only on foreign MNCs," he points out. "If you look at examples elsewhere, Denmark is a small nation, but it has national champions. Switzerland is also small, with six million people - and it has a huge number of national champions.

"The imperative of having national champions is the fact that domicile does matter - it has a bearing on where a company locates its most critical activities, such as the highest-end R&D.

"Take the semiconductor industry. I know there are many fabs in Singapore as well. But the most cutting-edge part of the work is always located in the home countries. So, for example, TSMC's latest fab is located in Taiwan and nowhere else. Samsung's latest fab is in South Korea and nowhere else. The same is true of Intel, IBM and others.

"Why are the Chinese so obsessed about building national champions? Why don't they just open their doors and let foreign companies drive innovation? Why do they spend so much on rocket science?"

If countries want to use their talent in the best possible way, it's important not just to have industrial clusters, he says, but also to ensure that they have capabilities that are so leading edge that they can't be found anywhere else.

"Singapore does have some national champions. DBS, for example, is a leader in digital banking. There are also other big successes. But the question is: Can Singapore scale them while time is still on its side? The window of opportunity is fleeting."