Compete on Know-Why, Not Know-How 2012-04-18

Do you know why you make the products or offer the services you do? Too often I find that companies don't have a clear enough sense of why they do what they do. They get stuck making incremental improvements that are rooted in existing competencies, markets, and business models.

This is especially problematic when companies decide to innovate. If you don't have a clear understanding of why you are pursuing an innovation, you risk being wasteful and ineffective, and could lack strong differentiators from incumbents. On the other hand, clear, deep, relevant insights help you stay one step ahead of competitors who may try to imitate your creations. If they can't replicate the thinking driving your innovations, they'll be doomed to "me too" status.

I call these types of insights core insights, a concept which I first introduced in my book, Innovation X. Core insights are a complement to the familiar notion of core competencies, which were first advocated by Gary Hamel and the late C.K. Prahalad. But whereas core competencies are about know-how, core insights are about know-why.

A case in point: The Prius has become such a strategic product that Toyota is in the process of turning it into a full sub-brand and a range of vehicles. In fact, the Prius is currently the third best-selling car in the U.S. market.

But the success of the Prius wasn't a slam dunk. Toyota faced two market challenges with the Prius: It would cost a lot more than other economy cars, due to the brand-new, sophisticated drivetrain, and economy cars are typically pitched to economy-oriented buyers who by definition are cost-conscious.

So how do you sell a more expensive economy car, especially one with an unfamiliar, unproven technology?

After the economy-focused first generation car proved the viability of the technology, Toyota had a core insight for the second generation car that cracked this conundrum. The answer was to shift the focus from "economy" to "environment."

Toyota had industry survey data showing that customers said they would pay up to 20% more for hybrid cars. Externally, there was skepticism whether this would be true, but internally, Toyota executives believed that there was a growing awareness about environmental challenges. In the end, Toyota took the emphasis off saving money and put it on saving the environment.

The second generation Prius launched in 2004 and included premium technology and convenience features not normally associated with an "economy" car, such as a large dashboard LCD screen showing animations of the hybrid engine at work, and doors and an ignition that respond to a Bluetooth-equipped key. When combined with a smart marketing campaign, the car became a symbol of the whole environmental movement. This outweighed "rational" evaluation of how it stacked up against competitors, which were in fact superior on conventional criteria — performance, comfort, driving enjoyment, and cost.

Toyota's idea seems obvious in hindsight. So why have competitors struggled to replicate it? The answer lies in the leverage provided by core insights. Core insights have three key attributes:

1. Logical, yet unexpected. A core insight is the quintessential "Aha!" — a realization about how your customers think or where a business opening lies that emerges out of connecting the dots between various other findings (customer research, technology trends, demographics, economics, brand, etc.) in a new way. Toyota's counterintuitive realization about what would motivate buyers came from understanding cultural, behavioral, economic, and technologic trends, and this insight drove development choices as well as marketing.

2. Forward-looking. A core insight provides forward-looking understanding of customer needs, behaviors, and market trends. Core insights should address the current state of the world and also point to how the world will be in the future. In recognizing the phenomenon of eco-friendly products becoming status symbols, Toyota was picking up on a pioneering mind-set with emerging eco-conscious buyers that seemed likely to expand into the mainstream. The fact that they are now turning Prius into a brand and product line is testament to the durable nature of their insight.

3. Hard to follow. The core insights you've discovered should be hard for competitors to perceive based on the offerings you put into the market. "Make it faster" or "add another blade to the razor" are obvious; reliance on such easily deduced "insights" makes you predictable and easy to compete against. The real trick is that even if competitors can eventually understand your core insight, their ability to respond is often constrained by their own competencies, customers, and business model.

Competitors took several years to recognize and act on the implications of Toyota's core insight. For example, Honda's strategy was to quickly absorb its hybrid technology into models that looked no different than standard gasoline-powered ones. Their hybrids failed to catch people's imaginations. Honda could not quickly change course and create its own halo vehicle, and lost early market momentum, while Toyota established precious brand equity with hybrid technology.

Ask yourself, "Does my organization know why it does what it does? What are our core insights that will lead us to market-shaping innovations?" Are you ready to compete based on know-why, or are you stuck on a treadmill of incremental improvements based on know-how?