In the past, imitation was more often than not a product of pure chance: Ray Krok stumbled on the original McDonald's restaurant while making sales calls for milk-shake machines. On a cursory visit to U.S. supermarkets, Japanese automobile executives noticed how merchandise was automatically replenished and were inspired to introduce a just-in-time production system.
These happy coincidences were anything but a thought-out, planned process, and, not surprisingly, in other cases opportunities were missed. When Theodore Levitt surveyed leading firms he found that “not a single one had any kind of policy to guide its responses to innovations of others.”
As a result, even when imitation is initiated, it often falls short, as happened to Remington and L.C. Smith, two companies that failed to wrestle a substantial share from market leader Underwood, whose revolutionary typewriter design they copied.
Many imitators arrive after pioneers or early followers have established an insurmountable lead or have flooded the market. Others stumble as they blindly follow the formula of a competitor whose capabilities they cannot match. Explaining why Merrill Lynch and Citigroup suffered huge losses in the subprime loan market while Goldman Sachs and J.P. Morgan avoided much of the carnage, the Wall Street Journal suggested that it was because Merrill and Citi wanted to imitate Goldman's success — but lacked Goldman's skills and experience. Other imitators fail to unearth the intricacies of a model, producing imitations that are not up to par, as happened to Delta in its twice-failed attempts to clone a variant of Southwest Airlines.
The promise, as well as the challenge, of imitation can be illustrated via a quick look at the PC industry and its two leaders: Hewlett-Packard (HP) and Dell. HP, an innovation-driven company, often was criticized for not taking full advantage of its innovation prowess. When competitive pressures mounted, it put a lid on R&D expenditures, leveraged partner technology, switched from proprietary to industry-standard components, and extracted supply chain savings. It moved to harvest technology from other parts of the business and merged with Compaq, reducing innovation expenditures. HP turned away from innovation to “focused innovation,” with a goal “to invent technologies and services that drive business value.”
Although the firm did not say as much, this meant that innovation was to be chosen over imitation only when it could produce better business results.
Dell also sought focused innovation, but for opposite reasons. Lacking a competitive advantage in technology, it chose to “innovate in time to market” by using direct sales and lowering product innovation expenditures. Its R&D spending came to one-quarter that of HP, with Dell's then CEO, Kevin Rollins, wondering aloud, “If innovation is such a competitive weapon, why doesn't it translate into profitability?”
To compensate, Dell relied heavily on imitating product design and technology, or, as one analyst commented, “They innovate where creativity will buttress their core advantages, and they imitate elsewhere.”
Dell's strategy unraveled when competitors replicated its direct sales model without giving up retail channels and when they started outsourcing production to factories in Asia, undercutting Dell's cost advantage. Dell then turned to the retail channels favored by HP, but, as one analyst lamented, “the problem is that they are taking on the king of the sales channel and their cost and capabilities are out of whack.”
This story tells us that imitation is, or at least should be, part of any overarching strategy. It must be weighed in terms of underlying context and capabilities, and it is closely intertwined with innovation.
Establishing the balance between innovation and imitation is challenging, because this kind of balance is a moving target. It was not until the early twentieth century, for example, that the pharmaceutical industry split between innovators and imitators, and decades passed before a regulatory change created a generic category that eventually captured more than half the U.S. prescription drug market. This change frayed the innovators' business model and pushed them to embrace imitation as a complementary strategy. In an interview explaining Pfizer's decision to enter generics, David Simmons, general manager of the company's newly formed Established Products unit, said, “We're always about innovation, and it will always be the lifeblood and sustaining element of Pfizer, but we don't see it as the be-all and end-all.”
Other innovators — such as Sandoz and Daichi Sankyo (which acquired a controlling interest in Indian generics maker Ranbaxy) — have made inroads into generics, and some have reduced their R&D outlays. The market seems to like the idea: when Valeant announced that it was cutting its R&D budget in half, its shares rose 60 percent.
At the same time, imitators like Israel-based Teva, the world's leading generics maker, are expanding into innovative drugs, including hybrids such as so-called biosimilars, which mimic newer biotechnology drugs.