So far, I have written a lot about how innovations sometimes go rogue and instead of creating value threaten to destroy value for established firms. The devastation caused by such innovations was apparent in the Swiss Watch industry where thousands of firms went out of business and large scale value destruction took place due to the innovation of quartz watches.
Although the havoc caused by Quartz technology for Swiss watch makers was utterly painful, the same situation demonstrated one way in which established firms could tame a rogue innovation. For background information on this rogue innovation, you can refer to my prior post.
Since the lenders in Switzerland were deeply affected by large scale exit of hundreds of firms and deep losses of surviving firms, they began searching for solutions. They found a messiah in a consultant named Nicholas Hayek. Hayek came up with a creative turnaround plan for the industry.
Hayek created Swatch and saved the Swiss watch industry from the brink of destruction. He changed the way watches were perceived and used from then onwards. A watch became a fashion accessory instead of a jewelry item.
This was no mean feat for several reasons. First, when the mindset of an entire population views a watch as a jewelry item it is hard to break out of that box. Second, to create a new concept and deliver it flawlessly, it required several new capabilities such as design skills, new marketing and positioning skills, and new distribution channels. Third, doing something heretic (selling cheap watches) is in any situation very hard to pull off.
Hayek figured out that “Made in Switzerland” label commanded a premium. Using new skills with this major advantage allowed him to charge a premium on quartz watches on the one hand and create a a demand explosion on the other hand. Since the industry was under a major threat, he could pull off such a feat. Had the industry not been going through a large scale destruction, I very much doubt he could have pulled this off.
In the end, people began to buy several swatch watches for different occasions and this allowed the Swiss watch makers to regain significant market share in the global watch industry.
In effect, Hayek broke out of the existing choice set (embrace quartz or avoid it) by creating a third option (watch as a fashion accessory). This is a critical lesson for incumbents facing rogue innovations. Designing a third option is the key to taming rogue innovations. However, it is almost impossible for incumbent firms to do a great job in designing the third option. I will share the key barriers to designing option ‘C’ in future. I have also created a systematic way of creating this third option that I will elaborate upon in future. Stay tuned for more.
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