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BY AMY MULLER AND LIISA VALIKANGAS
Extended Innovation in Established Industries
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established industries, the industry structure has long remained unchanged.
For the following reasons, the innovation opportunities that do exist
are most likely to exist in the "white spaces" between companies:
- Opportunities that fall within corporate boundaries have already been studied and exploited relatively well.
- The industry structure inevitably lags changes in the marketplace, thus leaving white-space opportunities unexplored.
- Corporate boundaries and corporate orthodoxies—the deeply held beliefs of managers about the scope and capabilities of their firm—act as blinders that prevent managers from identifying opportunities outside the company's traditional business. And whereas corporate boundaries are becoming increasingly permeable by means of virtual or Internet technology, free-agent workers, and open-source movements, such boundaries still often serve as relatively rigid business demarcations.
Home Depot is a good example of a company that has exploited extended innovation, exploring white-space opportunities by recombining its own assets and competencies with those of other companies. For instance, the retailer of home-improvement and hardware supplies has leveraged its competence in branding to establish a line of Home Depot-branded tools for young children. Home Depot is selling these toy tools through a partnership with Toys "R" Us, which contributes competence in marketing to children as well as an enormous distribution channel through its stores.
But Home Depot's innovation extends beyond alliances in the retail industry to include alliances with real-estate developer, an insurance company, and a provider of consumer credit. Home Depot is helping real-estate developers in Southern California to publicize their residential developments. In return, the developers allow Home Depot to demonstrate painting techniques, window treatments, landscape design, and other projects at show homes.
In another partnership, Home Depot and insurance company Allstate are collaborating to drive traffic to Home Depot stores while reducing home repair costs for Allstate. Under the arrangement, Allstate insurance adjusters encourage contractors to buy replacement materials from Home Depot stores, where prices are low. The benefits to Home Depot are significant: Allstate paid an estimated $100 million in claims for carpet damage alone in 2000, and Home Depot can now expect to gain a significant share of that business.
Meanwhile, Home Depot customers can now receive on-the-spot approval for major home-improvement loans in Home Depot stores through an alliance between Home Depot and GE Capital Financial. Loans are available for use on products and services at any Home Depot store. Customers can charge purchases to their Home Depot loan account for a period of up to six months after their first purchase.
Established companies are most likely to undertake extended innovation in pursuit of white-space opportunities when they feel under threat from disruptive technologies. For example, the U.K.-based grocery chain Tesco has purchased a 35% equity stake in GroceryWorks, the online grocery channel of U.S. grocer Safeway. Tesco, which already operates the profitable Tesco.com online grocery site in the United Kingdom, plans to apply its model in the United States through GroceryWorks. In this way, Tesco will contribute competence in combining brick-and-mortar and online grocery retail businesses, and Safeway will contribute assets and capabilities such as established procurement relationships, brand recognition in the United States, and a distribution channel of more than 1500 store locations from which orders will be filled to customers' homes.