In 1977, two professors, John Panzar and Robert Willig, introduced a term that would redirect how and where companies look for strategic innovation: economies of scope. Until that time, winning was mostly about being big and using your size to make stuff cheaper than the competition. Panzar’s and Willig’s new concept began opening up the creativity with which companies can look for innovation, but it has only been in the last few years, I believe, that we are beginning to glimpse the true potential of their idea.
Consider the cup of coffee you had this morning (or perhaps you are having it right now!). First discovered in Ethiopia, coffee spread to Egypt, the Middle East, Persia, and eventually the entire world, influencing the contours of global trade for perhaps 500 years.
Yet it was not until it spread to Starbucks in the U.S. that coffee became the high-margin, high-value resource it is today. In a pre-Starbucks world, the Colombia coffee farmer cooperative that created the Juan Valdez brand was happy, proud even, to tout that its beans commanded a 10% market premium over others.
But in the early 2000s, it realized it had missed perhaps its greatest opportunity of all. Why settle for 10% premiums on coffee beans when Starbucks is charging $5 for a latte?!?! Frustrated by the opportunity lost, it pulled itself together to coordinate a bold, strategic response.
Jeremy Dann knows the story intimately. A former disciple of Clayton Christensen (author of The Innovator’s Dilemma) and now adjunct professor at the University of Southern California’s business school, he spent years studying Juan Valdez’s response to Starbucks, particularly its launch of the Juan Valdez coffee shops. He just published a Harvard Business School case on the subject, in which he outlines the journey. I got a chance to sit down with him to break down Juan Valdez’s approach, and I think it outlines a textbook example of what it takes for any company–for your company–to find the courage to launch a bold, disruptive strategy.
First: Hit bottom
Until your people get, on a deep emotional level, that your current path is not acceptable, there will always exist the resistance to trying something new. That resistance is tricky. It doesn’t raise its head early in the stage, when you are brainstorming and dreaming, but pops up only toward the end, ready to kill your idea when you are seeking funding. Juan Valdez in early 2000 realized they should have owned the Starbucks opportunity and that their miss was a loss for the entire Colombian coffee industry (Juan Valdez is run by an industry association of farmers).
Second: Bring in an outside perspective
They gathered a group, mostly of non-coffee experts, to explore their situation and options. Most importantly, they put their trust in Gabriel Silva, a former Colombian ambassador to the U.S., political advisor, and investor, who took over as chairman and, between 2002 and 2009, pushed a bold vision.
Third: Explore your economies of scope
Here is where Panzar and Willig come in. You look at what you have and explore how you can apply it to win a new area. Panzar and Willig called this “economies of scope.” An ancient Chinese stratagem calls it “besiege Wei to rescue Zhao” (you can read more in my book Hide a Dagger Behind a Smile if you really want more). The principle is simple. You “look where you have technical capabilities, brand permission, or unique consumer understanding,” Dann explains, to explore new opportunities. We just won an exciting project with a major consumer packaged goods company to explore exactly this kind of thinking.
Fourth: Find the courage
What is most fascinating to me about the Juan Valdez story is that they brushed off much of the standard innovation advice. “Did they do design thinking with Ideo? No. Did they create a separate SWAT team or incubator? No,” Dann said. Instead, they found the courage to make a bold choice. They measured and managed the risks (e.g., of their customers worrying Juan Valdez was now competing with them, of experts saying they can never learn the coffee business). They didn’t dive in blind. They didn’t simply accept more risk. They really looked at, understood, and smartly managed the risk.
Since their launch in 2002 the Juan Valdez coffee shop chain now has over 200 locations throughout the U.S., Latin America, and the Middle East. Starting next year, Harvard Business School MBAs will be studying the case to learn how they can use its insights to find new strategic innovations for their companies. Get ahead of them now: Ask yourself what unique technical capabilities, brand permission, unique consumer understanding do I have … and into what new sector/industry/business could I project these?
[Image: Flickr user Michael Camilleri]