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Management Report

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Lessons from Number Two Companies

Lessons from Number Two Companies

CHO Won-Young

Apr. 29, 2011


Welcome to our video program. I’m Won-Young Cho from the Technology and Industry Research Department.

Companies want to be the leader in their field and pioneer new technologies. What are the odds of a company with new technology becoming the industry leader? 50%? 30%? In fact the real odds are grim, at only 11%. One study has shown that 47% of pioneering firms withdraw from the market, with only 11% surviving to be the leader in the industry.

This is well illustrated by the fact that Proctor and Gamble now rules the disposable baby diaper market, which was pioneered by Johnson and Johnson. Amazon, today’s preeminent Internet retailer, was also not the first company that opened an online bookstore. Online bookselling was pioneered by Charles Stack.

In practice the real challenge in business begins after you become number one. We have seen many long-time market leaders succumb to late comers since 2000. P&G took Unilever’s crown in the consumer goods market, while Toyota defeated GM in the auto industry. In chemicals, Dow Corning has now overtaken Du Pont. This shows that no company can hold on to the top spot forever.

How can number two companies chase after number ones?

A latecomer needs to decide when to enter a market after a pioneering company removes uncertainties regarding a technology’s viability, or after watching how the market responds to a pioneering new product.

EMI, the well-known music company, is actually the inventor of computer tomography or CT, and won a Nobel Prize for the technology. EMI’s complicated manual, however, made many medical institutions stay away from it. GE did not miss the chance and snapped up the opportunity. Based on EMI’s technology, GE came up with an easy-to use product and became the market leader in the CT market in 1978.

Crown Holdings’, America’s largest packaging products manufacturer, scored a notable success when it adopted aluminum packaging. In the 1970s, the largest can manufacturer in the US was Continental, followed by Crown Holdings. When the aluminum can was invented, the market paid keen attention to who was going to put the technology into practice. Manufacturing facilities for aluminum cans were over 13 times more costly than ones for steel cans. Despite the high price tag, Continental swiftly adopted the facility, while Crown Holdings was uncertain whether the share for aluminum cans could expand and continued making steel cans.

The outcome? Continental, which had dominated the market, soon faced bankruptcy, pressured by price cuts from bottling companies. Crown Holdings acquired it for a rock- bottom price and then became the biggest packaging manufacturer in the US.

Professor Constantinos C. Markides at London Business School thus said, “big, established companies should aim to be a “Fast Second” rather than pioneers of radically new markets.

This means that you need to enter a new market at the right time, rather than just try to be the first in the market. All companies I have mentioned today were able to reduce risks by observing market reactions to technologies introduced by others before deciding to enter the market.

A second strategy that number two companies can leverage is to focus on fields that yield high returns.

Have you ever heard of “cream skimming?”

It refers to the business practice of a company aiming to attain high profits by avoiding price competition with a market leader and focusing on value added sectors instead.

For example, Xerox avoided competition with Canon in the copy machine arena and sought to achieve a competitive edge in document management solutions and office efficiency consulting.

RIM has focused on smartphones like Blackberry and mobile office computing to separate itself from Nokia.

In retail, Costco has distinguished itself by introducing VIP memberships. The retailer selects and focuses on businesses and individuals with high purchasing power. By doing so, it has succeeded in distinguishing itself from Walmart, the all-time number one retailer. As of 2010, purchases per person at Costco totaled US$1,310, more than Walmart, and it is now emerging as the fastest rising retailer in the US.

The last ingredient for success for a number two is something dubbed “disruptive innovation.”

This concept is behind P&G’s victory against Unilever in the consumer goods industry. The company aimed to change things that are complicated and performed by experts into something that can be done at home for lower prices, by inventing products that fit the concept of disruptive innovation. As a result, P&G launched easy-to-use detergents like Tide and disposable goods like Pampers and the Swiffer mop. The odor remover Febreeze is also a brainchild from P&G’s disruptive innovation.

You can also create a new market by reducing some functions that are over-supplied in the market and increasing things that fall short of demand.

Danish company Novo Nordisk noticed that the insulin product market dominated by Eli Lilly had over-supplied purity but lacked injection convenience. The company soon made an insulin pen that maximizes convenience and led the market.

The three strategies I mentioned about number two companies do not hold true only for number twos.

Market leaders and late comers can learn lessons from them and leverage them to create new business opportunities.

What is most important is to adjust strategies to respond to changes in the business environment and pursue continuous innovation. In other words, strategic agility is the key to your success.

Thank you for watching. I’m Won-Young Cho.

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