By Professor Nirmalya Kumar, Professor Lisa Scheer and Professor Philip Kotler

Firms are constantly exhorted to become more market driven. However, our study of 25 pioneering companies (e.g. Body Shop, IKEA, Tetra Pak) whose success has been based on radical business innovation indicates that such companies are better described as market driving. While market driven processes are excellent in generating incremental innovation, they rarely produce the type of radical innovation, which underlies market driving companies. Market driving companies, who are generally new entrants into an industry, gain a more sustainable competitive advantage by delivering a leap in customer value through a unique business system. Market driving strategies entail high risk, but also offer a firm the potential to revolutionise an industry and reap vast rewards. Although established companies face four major obstacles in developing and launching radical market driving business ideas, we offer several recommendations to help established companies overcome these obstacles and become more market driving.

The value of being market driven is unquestioned in companies today. Current practice dictates that success starts with careful market research, investigating the customers' needs, and developing differentiated products or services for a well-defined segment. Various excellent companies such as Nestle, Procter & Gamble, and Unilever effectively employ this market driven approach. However, many successful pioneering companies, who have created new markets and revolutionised existing industries through radical business innovation like Amazon.com, Body Shop, CNN, IKEA, Starbucks, and Swatch, are better described as market driving. Although market driving involves inherently high risk and many would-be market drivers fail spectacularly, when market driving strategies are successfully devised and implemented they rewrite industry rules and offer the potential to reap vast rewards. By studying the elements that contribute to the success of these market drivers, we can glean insights about the cultivation of successful market driving innovations.

Consider Aravind Eye Hospital of Southern India. In 1976, a 58-year-old retired eye surgeon, Dr. Venkataswamy, devised a plan to serve the 15 million residents of India who were blind as a result of cataract. Venkataswamy's vision was to market cataract surgery, a relatively straightforward operation, like McDonald's hamburgers. Hospitals in India typically fell into one of two categories — private hospitals that served the small, wealthy segment of the population with state-of-the-art facilities or charitable hospitals that served the poor, vast majority of the population with inadequate, out-dated, overcrowded facilities. In addition, most of the poor, who reside in the countryside, were unable to access most hospitals, which were usually located in urban areas.

To implement his vision of giving eyesight to the blind, regardless of ability to pay, Dr. Venkataswamy set up hospitals in South India that serve both the rich, who pay for the state-of-the-art cataract surgery, and the poor, who receive almost identical services for free. The salesforce, advertising, and promotion of Aravind Eye Hospital focus on attracting free rather than paying patients. For example, the sales force has annual targets for the number of free patients they must generate; weekly 'sales meetings' monitor individual performance towards these targets. Aravind's sophisticated salespeople scour the Indian countryside looking for poor patients within their assigned territories and then transport them to the hospital at no cost to the patient. Think what customer satisfaction must be like among these poor patients who regain their ability to see - for free! By focusing on eye-care and routinising procedures, Aravind's surgeons are so productive that this non-profit organisation has a gross margin of 50 per cent despite the fact that over 65 per cent of the patients served do not pay! And unlike most non-profit organisations in the developing world, it is not dependent on donations and attempts to maximise the number of free patients served.

What Aravind Eye Hospital shares with other market driving firms such as Amazon.com, Benetton, Body Shop, Charles Schwab, Club Med, CNN, Dell, FedEx, Hennes and Mauritz, IKEA, SAP, Sony, Southwest Airlines, Starbucks, Swatch, Tetra Pak, Virgin, and Wal-Mart is the inability of the market driven approach to explain their success. These market driving firms did not use traditional market research to devise their path-breaking strategies that challenge the status quo. Market research, while useful in generating incremental innovation, seldom leads to breakthrough innovations. The inspiration for the radical business ideas of these market driving firms came from a visionary such as Dr. Venkataswamy, Anita Roddick of Body Shop, or Richard Branson of Virgin who saw the world differently and whose vision addressed some deep-seated, latent, or emerging need of the customer. Rather than focusing on obtaining market share in existing markets, these market drivers created new markets (e.g. CNN, Federal Express, SAP, Tetra Pak) or redefined the category in such a fundamental way that competitors were rendered obsolete (e.g. none of the top 10 discounters of 1962, the year Wal-Mart was born, are in business today). Ultimately, these firms revolutionised their industries by changing the rules of the game and 'driving' their markets.

Our research indicates that the success of market driving firms is based in radical innovation on two dimensions - a discontinuous leap in the value proposition and the implementation of a unique business system. Value proposition refers to the combination of benefits, acquisition efforts/costs, and price offered to customers. For example, IKEA offers the benefits of clean Scandinavian design and image, tremendous assortment, immediate delivery, a pleasant shopping atmosphere, and low prices, while asking the consumer in return to engage in self-service, self-assembly, and self-transportation, often from peripheral locations. This was a dramatically different value proposition from the traditional, full service, expensive, high street furniture store.

The leap in customer value provided by market driving firms may involve either breakthrough technology or breakthrough marketing. The success of Body Shop, FedEx, Starbucks, and even CNN and Wal-Mart is less about new technology than about aggressively exploiting existing technology to see the marketplace differently and to serve the customer in an unconventional manner. The key to the success of these market driving firms is that they create and deliver a leap in benefits, while reducing the sacrifices and compromises that customers make to receive those benefits (e.g. having to organise your schedule around when the networks wish to broadcast the news). They create a product/service experience that overwhelms customer expectations and existing alternatives. As a result, the landscape of the industry is substantially altered.

Business system refers to the configuration of the various activities required to create, produce, and deliver the value proposition to the customer. IKEA could not deliver its discontinuous value proposition by just improving on the existing business system of the traditional furniture store.

Traditional furniture 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 customer 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 computerisation of logistics, its natural 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 — a Herculean task indeed!

Because the value proposition is visible in the marketplace while the business system is harder to discern, competitors often miss the importance of the latter. For example, Dell delivers built-to-order customised PCs which incorporate the latest technological advances faster than its competitors and at reasonable prices. To deliver this value proposition, Dell invented a radically different business system combining minimal R&D expenditures,made-to-order flexible manufacturing systems (which give them a slight manufacturing cost disadvantage), one week of inventory consisting mostly of parts, minimal end-user advertising, and efficient direct distribution channels. In contrast, Dell's primary competitors, Compaq and IBM, have high R&D expenditures, large run low variety (but low cost) manufacturing systems, one month of mostly finished goods inventory, extensive end-user advertising, and expensive third-party distribution channels. When Compaq and IBM tried to copy Dell's value proposition by setting up their own direct channels, their existing business systems proved too 'sticky' to do so profitably. It is difficult to deliver customised products at competitive prices with high volume, low variety manufacturing systems and unhappy, bypassed channel members. In the absence of a unique business system, any advantage gained from a discontinuous leap in the value proposition can be copied fairly quickly by existing players. The unique business system creates a more sustainable advantage, as it takes time for a would-be competitor to assemble the intra-organisational and inter-organisational players needed to replicate that unique system architecture.

We describe these firms as market driving for three reasons. First, market driving companies trigger industry breakpoints or what Andy Grove of Intel calls 'strategic inflexion points' which change the fundamentals of the industry through radical business innovation. Second, instead of being inspired by traditional market research as conventional wisdom recommends, the inspiration for their radical business concept usually comes from a visionary. Third, rather than learn from existing customers, they often have to teach potential customers to consume their discontinuous value proposition.

The plan of the paper is as follows. First, we contrast market driving with three other possible orientations that a firm can have towards the marketplace. We describe how market driving firms compete and seize advantage. Then, we discuss why most market driving companies are new entrants to an industry and explore the barriers and risks that large, established firms face in successfully developing and launching radical market driving innovations. Finally, we conclude with some recommendations for how established companies can become more market driving.

How market driving firms seize advantage
Market driving can be distinguished from three other orientations that a company can have towards the marketplace: sales driven, market driven,
and customer driven. These four categories represent ideal types, no large organisation adopts a single orientation throughout all of its business units. A sales-driven orientation characterises those firms who view marketing as a tool to sell whatever their factory produces. Marketing and selling are interchangeable in such companies. Public utilities, monopolies and some large manufacturing firms often display a sales orientation. Market driven companies instead place the customers at the start of the process and through careful market research build appropriate products for, and develop the desired image for their target segments. Most successful consumer packaged goods companies such as L'Oreal fall in this category. Customer driven companies, on the other hand, target 'segments of one' and deliver customised value configurations to each customer. This is sometimes referred to as relationship marketing. The Swiss private banking industry, which serves high net worth individuals, is populated with several such customer driven firms. Table 1 outlines and summarises the key distinctions between these four marketplace orientations on various elements of marketing strategy.

Given the focus of this paper, we concentrate on how the market driving firm competes. Our in-depth study of 25 market driving firms indicates that they share certain common features as described below.

Guided by vision rather than traditional market research
Consumers and organisation buyers are excellent at motivating and evaluating incremental innovation. However, customers are usually unable to conceptualise or readily visualise the benefits of revolutionary products, concepts, and technologies. Consider the experience of Swatch. The Swatch models that received the highest intention to purchase in consumer research were those that looked the most like traditional watches. Those watches, however, ultimately generated very few sales. Instead, the more radically different Swatch models, which were rated in traditional pre-launch consumer research as the least likely to be bought, were subsequently the best selling ones. Had Swatch been guided by that market research, it would not have been a runaway success. Similarly, customers weren't clamoring for Starbucks coffee, CNN, or overnight small package delivery prior to their introduction.

Market driving firms instead coalesce around visionaries who saw opportunity where others did not — an opportunity to fill latent, unmet needs or to offer an unprecedented level of customer value. In our research, we discovered that generation and development of 'the idea' was a combination of serendipity, inexperience, and persistence. For example, Starbucks was founded in 1983 after Howard Schultz, charmed by the Italian coffee culture of Verona and Milan, promised to bring it to America. Frequently, visionaries' relative inexperience with the industry meant they had not yet been inoculated with that industry's received wisdom. Nike's Bowerman was a college track coach, Club Med's Gerard Blitz was a diamond cutter, and Ingvar Kamprad, the founder of IKEA, began his entrepreneurial career selling fish. Often, these visionaries persisted in the face of many failures and rejections to realise 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 under-whelming. David Glass, today the CEO of Wal-Mart was at that time employed with a competing store; he reportedly opined after checking out the first Discount City, '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. As Hasso Plattner, the co-founder of SAP, observed: "When people ask how we planned all this, we answered, 'We didn't. It just happened.'" (Plattner, 1996). Even when industries are revolutionised, the market driver may not be profitable or successful in the long term. For example, Amazon.com has dramatically altered the landscape in the marketing of books, forcing industry leaders like Barnes and Noble to venture into e-tailing, even though Amazon has yet to come near an operating profit.

Because they are trying to change the rules of the game and face many obstacles on the way to success, market driving companies recruit and select people who subscribe to the values of the organisation. There is often an attempt to attract those with little experience in the industry, individuals who have not been infused with the industry's conventional wisdom about why the market driving idea is doomed to fail. Such employees are motivated strongly by their belief that they are on a mission, not simply by money, allowing them to
tap into deeper motivational energies. A compelling vision enthusiastically articulated by a charismatic leader turns their employees into crusaders:

• Sam Walton believed that Wal-Mart stores would 'lower the cost of living for everyone, not just America… We'll give the world an opportunity to see what it's like to save and have a better lifestyle, a better life for all' energised his employees.
• Ninety per cent of Body Shop franchisees are women who have no formal business training but are instead chosen on the basis of personality tests, home visits, and attitudes towards the environment and people. They are motivated by founder Anita Roddick's idea that they can make a difference in people's lives and in the world through Body Shop.
• In the early days at FedEx, there were couriers who pawned their watches to pay for gasoline.

Such historic, sometimes mythic, stories become part of the organisational culture of most market driving firms.Re-draw Industry Segmentation.

By attracting their customers from a variety of previously-defined market segments, a new market coalesces around the market driving firm's product-service offering and marketing strategy. This creates havoc in the industry by destroying the segmentation followed by the industry prior to the market driver's entry and replacing it with a new set of segments reflecting the new, altered landscape.

• Aravind Eye Hospital did not accept the normal segmentation between rich and poor patients.
  
• Southwest Airlines destroyed the segmentation between ground transportation and airlines, attracting many who would not otherwise have flown at all.
  
• Swatch, with its cheap and fashionable watches, bridged the chasm between the segments for cheap, utilitarian watches and expensive, fashionable ones.
  
• Wal-Mart demonstrated that small rural towns could support huge discount stores which previously had located only in large urban areas.
  While existing software vendors concentrated on developing different software packages for different departments (e.g. manufacturing, sales, human resources), SAP destroyed these distinctions by developing enterprise software that could integrate and run the entire business.
  

Value creation through new price points
To deliver a leap in customer value, market driving firms establish new industry price points for the quality or service levels they deliver. Swatch, Aravind Eye Hospital, Southwest Airlines, and Charles Schwab - all set prices much lower than those previously available for similar products. This puts existing competitors under tremendous pressure. The competitors must make dramatic changes in operations and product lines to survive, but they are unable to swiftly meet the challenge because they cannot quickly and successfully reproduce the innovative business system that enables the lower price point. Continental learned this the hard way when it tried to compete against Southwest Airlines with 'Continental Lite':

• When Southwest Airlines enters a new city they price against ground transportation as much as against existing air service. This typically results in prices at least 60 per cent below competitive airfares - sometimes over 75 per cent lower. For example, Southwest Airlines charged $15.00 for a trip from Dallas to San Antonio when Braniff, the next most inexpensive competitor, was charging $62.00. A shareholder asked the CEO, 'Could you not raise the price two or three dollars?' and received the response, 'We are not competing against other airlines but ground transportation.'
  
• Swatch adopted a simple introductory pricing strategy - $40 in United States, 50 CHF in Switzerland, 60 DM in Germany, and 7000 yen in Japan - and kept those prices unchanged for the first 10 years despite high demand.
  

While the trend is towards higher performance at lower price points, there are market driving firms who have established elevated price points that are higher than typical in an industry. CNN, Starbucks, and FedEx set prices considerably above what customers had been paying. Inducing the buyer to pay these higher prices requires that these market driving firms have a value proposition that is significantly more compelling than the available alternatives.

Sales growth through customer education
Given the radical new concept, the sales task for market driving firms is not to sell but rather to educate the customer on the existence of, and how to consume, their radical value propositions:

• Aravind Eye Hospital has to continuously educate its 'free' patients, who are predominantly illiterate, that their vision can in fact be restored and that the necessary surgery is available to them free of charge.
  
• IKEA had to teach consumers the benefits of transporting furniture components home for self-assembly instead of buying it pre-assembled and delivered. When IKEA entered Switzerland, they ran advertisements, which joked about the Swiss unwillingness to transport and assemble furniture, even for lower prices. The advertisements poked fun at the self-delivery and self-assembly aspects saying "That is a stupid thing" and "You can't do that to the Swiss."

Channel reconfiguration
In almost every market driving firm, channel reconfiguration appears to play a critical role in generating the architectural innovation that results in
a unique business system. Market driving firms have unleashed a wide range of innovative distribution and channel management practices within their industries:

• FedEx transported packages using its own planes via a 'hub and spokes' air-freight system rather than the 'point-to-point' commercial flights used by competitors such as Emery. The result was that FedEx was twice as likely as Emery to deliver a package on time.
  

• On the other hand, Southwest Airlines does not employ the hub and spoke system used by the rest of the passenger airline industry, but rather concentrates on point-to point short haul flights. Southwest flies into major cities' less congested smaller airports, which improves their on-time performance vis-à-vis major carriers. They used only Boeing 737s, reducing the costs of maintenance and pilot training. Furthermore, Southwest Airlines does all of its own ticketing and does not make seats available through the standard industry computerised reservation systems like Sabre and Apollo. As a result, only 55 per cent of Southwest's tickets are sold through travel agents compared to 90 per cent for the industry, adding up to substantial savings on travel agents' commissions.
  
  
• Benetton has set up a unique system where they subcontract simple, non essential tasks. Only crucial quality-maintenance tasks such as dyeing are done in-house. Furthermore, by knitting products prior to dyeing rather than vice versa they can respond faster to sales data than the rest of the industry.
  
• Wal-Mart revolutionised manufacturer-retailer relationships by 'forcing' Procter & Gamble as well as its other suppliers to rationalise their product lines, adopt Everyday Low Prices, eliminate wholesalers, present one invoice per company, and establish electronic links with their stores. This helped eliminate considerable costs in the value chain.
  
  

Brand attachment by capitalising on the 'buzz network'
Market driving firms often place greater reliance on the 'buzz network' to get their message across. Because these firms offer a leap in customer value, their customers are delighted and eager to notify others about their 'find'. Reporters in trade publications and popular press also often publicise the radical new innovation. The commitment and enthusiasm of early adopters and opinion leaders generates excitement and an intangible brand cachet that the market driving firm strives to maintain. Consequently, market drivers don't find it as necessary to spend a lot of money on traditional advertising; their advertising-to-sales ratio is often less than that of their established competitors.

• Benetton is a classic example of a market driving firm leveraging its controversial advertising to generate loads of free publicity and develop an image which arouses strong feelings among both, those who love and those who hate them.
  
  
• Southwest Airlines boasts: 'We have a lot of ambassadors out there, our Customers'. Every year, representatives from dozens of cities beg Southwest to launch services in their cities.
  
  
• A 1958 13-page Life magazine photo spread on Club Med led to many more customers than capacity. In 1962, 12 years after the first village, they turned away more than a 100,000 applicants as they could only accommodate 70,000 members.
  
  
• Nike didn't run a single national television ad until they had 1 billion dollars in sales. Phil Knight observes they instead 'used word-of-foot advertising' by getting the best athletes to wear their products.
  
  
• Virgin's Richard Branson generates constant free press through his hot air balloon expeditions, highly public media wars against the established players (such as having all planes painted with a banner against the proposed BA-AA merger) and even making public appearances in 'drag'.

next page >>