Just imitate it! A copycat path to strategic agility

by: Issues: May / June 2012. Tags: Strategy. Categories: Innovation and Strategy.

When a product that has been in development for one year can be copied and brought to market in days, first mover advantage has lost its…well, advantage. Once stigmatized, imitation is now acceptable. In fact, this author says that to stay in the game and not fall behind, firms must imitate. In this article, he describes why imitation is as valuable as innovation, and why imitation can and should be strategically conceived and systematically executed.

 

Strategic agility requires an ability to respond to the innovations and pioneering moves of competitors. Crucially, such responses must include not only the ability to prevent others from imitating you, but also the ability to imitate others, a capability that companies and business scholars have been neglecting for years. Theodore Levitt observed fifty years ago that even well managed companies approached imitation in a haphazard, random way rather than in a strategic fashion; not a single one of the firms he researched had an imitation strategy in place.[1] This remains very much the case today. The vast majority of firms have no imitation strategy to speak of, and their approach to this critical challenge, if they have one at all, tends to be extremely narrow and largely limited to legal defenses of intellectual property-rights’ (IPR) violations by competitors. This approach greatly limits the strategic repertoire of firms and their ability to monitor, assess and respond to environmental changes. In other words, it severely limits their strategic agility.

A comprehensive look at the evidence will show, to the surprise of many, that the economic return to innovation is quite meager and that it has been progressively declining over time, as an extensive review of the literature has shown.[2] Rosenberg, for instance, concluded that the economic returns from innovation were overrated.[3] Mansfield and his associates complained about the tendency “to assume that the innovator receives all the benefits from an innovation and that imitation can be ignored…we understand how convenient such assumptions may be, our results suggest how considerably they depart from reality. [4] Teece reported that “a fast second or even a slow third might outperform the innovator.”[5] Other studies concluded that “although the hypothesis of a positive association between profit rates and new product introductions is widely presumed, (there is) lack of any strong and direct empirical support in the published literature”.[6] Others similarly opined that “the academic literature has been unable to provide conclusive empirical evidence to support or refute the existence of first mover advantage.”[7] Even those reporting more positive studies for an innovator’s advantage are skeptical, noting that “the average effect (of innovativeness and new product performance) is not as dramatic as some have implied…analysis does not offer sufficient evidence to support claims of innovativeness being a key driver of new product success on a per se basis.”[8]

How can this evidence be reconciled with the overarching belief in innovation as a marketplace winner? There are a number of explanations for the apparent contradiction. First, companies that do imitate but do it the wrong way end up with negative results, leading to the erroneous conclusion that imitation is not a road to profits but, at best, a temporary fix and an eventual path to oblivion. Second, many of the studies supporting innovation and pioneering advantage suffer from fundamental methodological errors such as survival bias (failed innovators are not sampled) and, even more glaringly, from the common practice of lumping together “early movers”, where in reality only the first mover is a pioneer/innovator, while the other members of this group are actually fast imitators. Third, the studies touting the innovation advantage seldom factor in the cost and risk associated with it, leading to a gross overestimation of economic return. Fourth and most importantly, the apparent disregard of the evidence is the result of the almost divine value attached to innovation in our society versus the stigma associated with imitation. Apparently many of us cannot overcome the potential dissonance associated with admitting that imitation can, and often does produce a more positive outcome than innovation.

To argue that imitation can be strategic seems almost blasphemous in the current scholarly climate. But I would venture that imitation can be strategic and should be part of the strategic repertoire of any agile firm. Contrary to popular belief, imitation can be unique if it consists of a set of activities that is distinct in its derivative form or combinative architecture. Together with complementary capabilities and other organizational features such as corporate culture, imitation can be a differentiating factor and has the potential to deliver unique value. Even if a replica of an existing product, process or model is not a meaningful variant, it can be unique in another product market or region.

Not only can imitation be unique, but it is, based on overwhelming scientific evidence, a rare and valuable capability.[9]  The supporting evidence comes from virtually every discipline. In art, early scholars labeled imitation mechanical and reproductive but eventually developed a more complex and sophisticated view of the phenomenon.[10]  Historians too started with a negative view of imitation, but in time came to see it as a creative and intellectual effort.[11]  Biologists and cognitive scientists began by deriding imitation as a low-level ability typical of the mentally weak and the childish. But by the end of the nineteenth century they had already proposed that imitation was “the rarer and more cognitively demanding ability.”  Today, biologists agree that imitation fills a vital niche between genetically predisposed “species typical” behavior and individual trial and error, enabling adaptation to major shifts such as climatic change as well as avoidance of fatal errors resulting from self experimentation.[12] A similar transformation is evident in the cognitive sciences, where imitation has come to be viewed as an intelligent search for cause and effect, and, crucially, a rare capability unevenly distributed across species, subspecies and individuals.[13] Unfortunately, business scholarship has lagged behind, clinging to the idea that only innovation is rare and valuable, hence failing to regard imitation as a vital component of strategic agility.

Developing strategic imitation

Developing and deploying the strategic potential of imitation should be a systematic process; however, because it is often done in the dark, this is rarely the case. As a result, many imitators do not clearly define their strategic intent, starting with one target and ending up pursuing another. This is what happened to Continental Airlines when it spun off its Lite subsidiary as a copycat of Southwest Airlines. As Gordon Bethune, then Continental’s CEO recalled, Continental Lite “started as a pilot project that should have been proven before it was expanded. But once this thing started rolling, it was awfully hard to turn it around.”[14]

One way of looking at imitation strategically is to ask some customary questions, such as where, what, who, when and how. To be of value, however, those questions need to be applied within a clear context, including nation and industry. For instance, according to Peter Drucker, imitation works best in the high-tech sector because of its tendency to focus on technology rather than on the market, creating opportunities for an imitator who is more tuned to market demands or a quick learner who has learned from the marketing missteps of the pioneer/innovator.[15] Should we say Apple? The company did not invent the digital music player, the cellular phone or the tablet computer, but it placed them within the necessary market ecosystem. Even the decision of what to imitate is nontrivial and should be driven by strategic intent, the ability to leverage other inputs, and the potential to form and defend key differentiators. It may be enticing to manage inventory like Wal-Mart, simplify processes like Southwest Airlines, and design products like Apple. But it does not make much sense because firms vary in their underlying features, resources and information processing capabilities, and because multiple models often contradict. The backers of now defunct Skybus wanted the airline to be ruthless on costs like Ryanair and good to customers like JetBlue, but the two models were incompatible.

Strategic types

Time and space variations can be used as a basis on which to form three strategic types of imitators, including the pioneer importer, an imitator which is the pioneer in another place (another country, industry, or product market); the fast second, which is a rapid mover arriving quickly after an innovator or pioneer; and the come from behind, a late entrant which typically relies on pronounced differentiating factors.

The Pioneer Importer is a pioneer in a different market, using, in essence, an arbitrage strategy. This is what Ryanair has done in Europe, importing the Southwest model to the continent. Pioneer Importer imitators can usually afford to move slowly, especially where other imitators, as well as the innovator, are not likely to pursue a similar entry.  For example, Ryanair benefitted from Southwest’s decision not expand beyond the American market so as to maintain the simplicity of its model. Indeed, the Pioneer Importer strategy tends to be vulnerable in highly concentrated industries in which firms rapidly follow the moves of their competitors into a new market.

The Fast Second follows the pioneer / innovator before the latter has had an opportunity to establish an entrenched monopoly, and before other imitators, sometimes called “rabbits” to denote the speed at which they multiply, erode the prospective benefits. [16] This strategy seeks, in essence, to capture the bulk of pioneer advantages at a lower cost and with a higher probability of success. Some studies show that the fast second can capture as much as seventy five percent of the pioneer’s share.[17] The strategy works especially well where a firm can penetrate a market while barriers for entry block other potential entrants from following, as is the case of the first generic drug maker who is granted a brief monopoly period of its own. Due to the need to move fast, the Fast Second strategy requires advanced imitation capabilities, an infrastructure for reverse engineering or analysis, flexible operations, and a platform on which to connect outside knowledge and resources. The strategy requires close knowledge of the marketplace and works especially well for established firms in related markets who have versatile manufacturing capabilities and resources.[18]  Some early followers have been shown to invest in R&D as much as pioneers.[19] Fast seconds with more limited capabilities can utilize lagging technologies as a substitute.[20] To cut time to entry, fast seconds use “time compression” tactics such as linking with the suppliers who have worked with the early movers, or resort to technology transfer and leapfrogging.[21]

The Come from Behind is a latecomer entry by a firm that had to wait because of legal protections, technical difficulties in building a replication, or because it has made a deliberate decision to enter the market at a later time for reasons of consumer comfort with a new technology, or to allow for sufficient differentiation from the first entry. It is thus not surprising that latecomers tend to focus on marketing aspects.[22] A smart imitator benefits from the trial and error of the innovator, parlaying knowhow and complementary assets, as Korean chip maker Samsung did by using its broad manufacturing knowledge to halve the time it takes to build a semiconductor plant.[23] By leveraging superior strength in key areas such as quality, reputation, design or geographic coverage, a firm can leapfrog the innovator and early imitators, transforming its lead into a liability. Honda and Toyota waited for both the pioneer, Chrysler, and the first imitators, GM and Ford, to come up with their model of the passenger minivan, all the while gauging customer preferences and behavior and eventually launching their own version. This is also what Wal-Mart has done when it leveraged its financial and information resources to dominate the warehouse club segment and push out earlier imitators of Sol Price’s original formula.[24]  The come-from-behind strategy necessitates superior knowledge and understanding of an imitated product or model, its usage, and its market; it also needs to be backed by considerable resources, something legacy carriers failed to do when imitating Southwest, until the pioneer was too entrenched in the segment. The strategy can be cheaper because it is slow moving: in one experiment, cost increased, on average, by 0.7 for every one-percent time reduction.[25] Latecomers can lower costs by learning from the pioneer’s missteps, taking over idle production lines and distribution channels when it exits the market.

Solving the correspondence problem

To cognitive scholars, the correspondence problem is the central scientific puzzle in imitation.[26] This challenge of converting the imitation target into a copy that will preserve the favorable outcome observed in the original is as relevant for business as it is for the sciences, and no company can hope to become strategically agile without being able to decipher it. For instance, many firms copied General Electric’s three-rung, performance- evaluation system, only to find out that what worked for GE did not work for them. In other words, there was no correspondence that would make the model relevant and applicable in the imitator’s context. Without deciphering causality in the model, it is impossible to establish causality in the recipient system. But the causal chain then needs to be reconfigured to fit the recipient, which may necessitate plugging in substitute elements to replace those that are unavailable or those that do not fit into the imitating environment.

To do that, firms need to be able to answer the same question posited by cognitive scientists: “How is the perceived action of another agent translated into similar performance by the observer?”[27]  To be able to answer this question, firms need to develop the corporate equivalent of “mirror neurons,” identified by neuroscientists as critical to the conversion of coding parameters from the observed model to a newly acquired capability, which leads to intelligent and successful imitation.[28] In the world of business, this conversion requires having staff with highly developed cognitive skills, and, no less important, a culture that enables one to view the world from someone else’s perspective. This is an ability that can be found, for instance, among firms with extensive multinational experience or those with a record of establishing and managing strategic alliances, especially those that are cross-border.

The value proposition

As with all strategic decisions, the value proposition is the most fundamental of all. In this case, it involves the value projected from an intended imitation based on cost, risk and obstacle parameters, as judged against potential benefits, the probability of success, and the availability of existing resources ranging from capital, geographical spread and reputation that can be marshaled to enhance the value of the imitation. While the cost of imitation is most often lower than that of the corresponding innovation, it is not trivial. Research shows a ratio of imitation to innovation costs of about 65 to 75 percent.[29] This is because the imitator needs to retrace many of the innovator’s steps, from research and product specification to investment in plant and equipment, developing prototypes, manufacturing and marketing. Similarly, imitation is not risk-free. It essentially shifts the risk from one of investing in dead-end projects to failing to recreate a working product, or to reaching a market already flooded with imitators. Imitation also carries a legal risk, which varies, among other variables, by the nature of the product, the fidelity of the copy, and the bargaining power of the actors. For example, it was found that while eighty percent of firms took legal action against the manufacturers of infringing products, only forty percent initiated legal action against the retailers that sold them.[30] Also, as with all strategic moves, the imitator, by investing in an imitation, limits its future options.

Potential imitators should assess the scope of the partial monopoly profits they may capture, which partially depends on how long it will take before other imitators enter the market, and the cost of defending against them. They should also calculate the potential premiums from a differentiated entry and consider if the imitation can be a bridgehead into a market that will be followed up with other imitations as well as with innovative products or services. Japanese car makers entered global markets with imitated vehicles but later expanded into innovative products, using infrastructure such as dealer networks that were built for the early imitated offerings and customers that were introduced to the entry-level models but were then ready to upgrade.  Related benefits should also be considered. For example, SanDisk’s imitation of the iPod not only provided it with meaningful revenues as a distant second, but has also posited its flash memory as the industry standard, eventually creating demand for the Company’s IPR and other products.

Overcoming imitation defenses

The final question for an agile imitator is whether it can permeate the defenses put up by innovators and pioneers to deter its entry. Fortunately for imitators, no deterrence is fool- proof.

Legal protection is weak in many markets, giving imitators the leeway to circumvent them and even use the disclosure that often follows patent registration and litigation. Imitators may “invent around” and rush to register patents and trademarks in foreign locations. Likewise, business intelligence can often overcome secrecy defenses, which are often especially weak among innovative companies who believe in open communication. History shows that so called complex and “tacit” knowledge ends up diffusing fairly rapidly.[31] Causal ambiguity can be deciphered more often than thought by a determined imitator, as Wal-Mart’s Sam Walton did when studying the pioneers and early imitators of discount retailing, reconstructing the causal chain underpinning operational profitability. And when visible and well understood, even a network of internal and external relationships can be penetrated or substituted, as Ryanair did when copying Southwest’s.

Other common defenses are also vulnerable to a smart imitator. Signaling, where a pioneer/innovator shows its superiority as a way to deter imitators from contesting it, will not work with an imitator undertaking a low-price strategy. Similarly, the building of overcapacity can easily backfire when an imitator enters with a product that is better adapted to market requirements. And complementary assets, presumably resting with the pioneer, can reside with the imitator. This is what Coca Cola and Pepsi have done when they quickly pushed the innovator of the diet cola, RC, into a corner. Switching costs too are low or nonexistent when an imitator comes up with an interchangeable product, say a PC. Even branding is an increasingly weak defense in such markets, as consumer products where private labels are increasingly present.

Summary

Imitation is a critical capability for any strategically agile firm. In a global age where innovations can and do sprout anywhere, it is unrealistic for any firm to innovate anywhere, anytime. To stay in the game and not fall behind, firms must imitate; however executives must do so with the understanding that imitation is as rare and valuable as innovation, and that imitation can and should be strategically conceived and systematically executed. They should also realize that many of the traditional defenses against imitation are oversold and seem to have weakened over time. Failing to do so will deprive companies of the economic return on imitation, a return which is much more real than the current strategy literature would lead you to believe. In other words, it is time to be innovative about imitation.

 

Notes




[1] Levitt, T. 1966. Innovative imitation. Harvard Business Review, September – October, 1966, 63-70 (direct cite p. 65).

[2] Shenkar, Oded. 2010. Copycats: How smart companies use imitation to obtain a strategic edge. Boston: Harvard Business Press.

[3] Rosenberg, N. 1976. Perspectives on technology. Cambridge, UK: Cambridge University Press.

[4] Mansfield, E., Schwartz, M. and Wagner, S. 1981. Imitation costs and patents: an empirical study. The Economic Journal, 91 (December), 907-918.

[5] Teece, D.J. 19XX. Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. In D.J. Teece (editor), The competitive challenge: Strategies for industrial innovation and renewal. Cambridge, MA: Ballinger.

[6] Bayus, B.L., Erickson, G. and Jacobson, R. 2003. The financial rewards of new product introductions in the personal computer industry, Management Science, 49, 2, 197-210.

[7] Suarez, F. F. and Lanzolla, G. 2007. The role of environmental dynamics in building a first mover advantage theory. Academy of Management Review, 32, 2, 377-392.

[8] Szymanski, D.M., Kroff, M.W., and Troy, L. 2007. Innovativeness and new product success: insights from the cumulative evidence. Journal of the Academy of Marketing Sciences, 35, 35-52. The study finds that innovation is “a relevant driver of new product success under selected conditions.” Thus, innovativeness has a contribution to performance for products (rather than services) that are new to the marketplace (rather than new to the firm).

[9] Shenkar, O. 2010. Copycats: How smart companies use imitation to gain a strategic edge. Boston: Harvard Business Press, 2010.

[10] Gombrich, E.H. 2002. Art and illusion: a study in the psychology of pictorial representation. NY: Phaidon; Danto, A.C. 1981. The transfiguration of the commonplace: a philosophy of art. Cambridge, MA: Harvard University Press; Olson, E. 1952. The poetic method of Aristotle. In A.S. Downer (ed.), English Institute Essays. New York, the English Institute (which notes that Aristotle was more appreciative of imitation); Jenkins, I. 1942. Imitation and expression in art. The Journal of Aesthetics and art criticism, 2, 5, 42-52; Harkness, B. 1954. Imitation and theme. The Journal of Aesthetics and art criticism, 12, 4, 499-508; Coomaraswamy, A.K. 1945. Imitation, expression, and participation. The Journal of Aesthetics and Art Criticism, 3, 11/12, 62-72 (quote on p. 64).

[11] Child, A. 1952 History as imitation, The Philosophical Quarterly, 2, 8 (July), 193-207; Berg, M. 2002. From imitation to invention: Creating commodities in eighteenth century Britain. Economic History Review, LV, 1, 1-30.

[12] Galef, B. 2005. Breathing new life into the study of imitation by animals: What and when do chimpanzee imitate? In S. Hurley and N. Chater, Perspectives on imitation. Boston: MIT Press, p. 296; Hurley, S. and Chater, N. 2007. Introduction: The importance of imitation. In S.Hurley and N. Chater (editors), Perspectives on imitation: From neuroscience to social science, volume 2; Meltzoff, A.N. and Docety, J. 2003. What imitation tells us about social cognition: a rapprochement between developmental psychology and cognitive neuroscience. Philosophical Transactions: Biological sciences, 358, 1431, 491-500; Byrne, R.W. and Russon, A.E. 1998. Learning by imitation: a hierarchical approach. Behavioral and Brain Science, 21, 667-721; Iacoboni, M. 2008. Mirroring people. NY: Farrar, Straus and Giroux; Byrne, R.W. 2005. Detecting, understanding, and explaining imitation by animals. In S. Hurley and N. Chater (eds.), Perspectives on imitation. Boston, MA: MIT Press, 1-52; Byrne, R.W. and Russon, A.E. 1999. Learning by imitation: a hierarchical approach. Behavioral and Brain Science, 21, 667-684; Zentall, T.R.2006. Imitation: definitions, evidence, and mechanisms, Animal cognition, 9, 335-353.

[13] Byrne, R.W. 2003. Imitation as behavior parsing, Philosophical Transactions: Biological Sciences, 358, 1431, 529-536;  Byrne, R.W. 2005. Social cognition: imitation, imitation, imitation, Current Biology, 15, 13, R498-500; Meltzoff, A.N., and Prinz, W., eds., 2002. The imitative mind: development, evolution, and brain bases. Cambridge: Cambridge University Press; Chaminade, T.J., grezes, J. aand Meltzoff, J. 2002. A PET exploration of neural mechanisms involved in reciprocal imitation, NeuroImage, 15, 265-272; Kymissis, E. and Poulson, C.L. 1990. Journal of the Experimental Analysis of Behavior. , 54, 113-127; Hurely, S. 2004, Imitation, media violence, and freedom of speech, Philosophical Studies, 117, 165-218, Yando, R., Seitz, V., and Zigler, E. Imitation: a developmental perspective. Hillsdale, NJ: Lawrence Elbaum.

[14] Bryant, A. 1995. Continental is dropping ‘Lite’ service, The New York Times, April 14, 1995.

[15] Drucker, P.F. The essential Drucker. Harper Business, 2001.

[16] Aaker, D. A. and Day, G.S. The perils of high growth markets. Strategic Management Journal, 7, 5, 409-421. Also cited in Robinson, W.T., Fornell, C. and Sullivan, M. 1992. Are market pioneers intrinsically stronger than later entrants? Strategic Management Journal, 13, 609-624.

[17] Urban, G.L., Carter, T., Gasin, S. and Mucha, S. 1986. Market share rewards to pioneering brands: an empirical analysis and strategic implications. Management Science, 32, 645-659, cited in, A. 1997. Bryman, A. 1997. Animating the pioneer versus late entrant debate: An historical case study. Journal of Management Studies, 34, 3, 415-438.

[18] Robinson, W.T., Fornell, C. and Sullivan, M. 1992. Are market pioneers intrinsically stronger than later entrants? Strategic Management Journal, 13, 609-624; Robinson, W.T. and Chiang, J. 2002. Product development strategies for established market pioneers, early followers, and late entrants. Strategic Management Journal, 23, 855-866.

[19] Robinson, W.T. and Chiang, J. 2002. Product development strategies for established market pioneers, early followers, and late entrants. Strategic management Journal, 23, 855-866.

[20] Zeng, M. and Williamson, P. J. 2007. Dragons and your door: How Chinese companies will disrupt global competition. Cambridge, MA: Harvard Business School Press.

[21] Cho, D.S., Kim, D.J. and Dong, K.R. 1998. Latecomer strategies: Evidence from the semiconductor industry n Japan and Korea. Organization Science, 9, 4, 489-505.

[22] Robinson, W.T., Fornell, C. and Sullivan, M. 1992. Are market pioneers intrinsically stronger than later entrants? Strategic Management Journal, 13, 609-624.

[23] Cho, D.S., Kim, D.J. and Rhee, D.K. 1998. Latecomer strategies: Evidence from the semiconductor industry in Japan and Korea. Organization Science, 9, 4, 489-505.

[24] Ortega, B. 1998. In Sam we trust. Times Business / Random House

[25] Mansfield, E., Schwartz, M. and Wagner, S. 1981. Imitation costs and patents: an empirical study. The Economic Journal, 91 (December), 907-918

[26] Whiten, A. 2005. The imitative correspondence problem: solved or sidestepped? In S. Hurley and N. Chater (editors), Perspectives on imitation. Boston: MIT. P. 220.

[27] Harley, S. and Chater, N. 2007. Introduction: The importance of imitation. In S. Harley and N. Chater (eds.), Perspectives on imitation: From Neuroscience to social science, volume 2, p. 2; Byrne, R.W. Imitation as behavior parsing. Philosophical Transactions: Biological Sciences, 358, 1431, 529-536.

[28] Rizzolatti, G. and Sinigaglia, C. 2008. Mirrors in the brain – how our minds share actions and emotions. Oxford, UK: Oxford University Press (translation F. Anderson).

[29] Levin, R. et al. 1986. Survey research on R&D appropriability and technological opportunity. Yale University.

[30] Collins-Dodd, C. and Zaichkowsky, J.L. 1999. National brand responses to brand imitation: retailers versus other manufacturers. Journal of Product and Brand Management, 8, 2, 96-105.

[31] Diamond, J. 2005 (1997). Guns, germs and steel. NY: Norton.

About the Author

Oded Shenkar is the Ford Motor Company Chair in Global Business Management and Professor of Management and Human Resources, The Ohio State University.