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This summer join Inukshuk on a virtual road trip through some of 2017's hottest topics in business management.
At the wheel is the change management lead and our scheduled stops include the informative and insightful destinations of: innovation, creativity, disruption and agility before catching the checkered flag at change leadership. There are lots of stories to tell and the mercury is rising so grab your shades, hold on to your hat and join us for Part 1: It's Better to Steal Ideas than Innovate?
Part 1 of Inukshuk’s summer blockbuster road trip trilogy rips a page out of Thelma and Louise’s book by looking at the darker side of innovation – stealing business ideas. Intellectual Property (IP) theft is a growing threat and much of it takes place overseas where laws are often lax and enforcement is more difficult. According to the FBI, IP theft costs U.S. businesses billions of dollars per year and robs the nation of jobs and tax revenues.[1]
IP theft is big business and it’s not just about stealing. It’s about a highly organized, worldwide network of felonious production and concealed distribution that has infiltrated legitimate and illegitimate markets around the world. To scope the size of the problem - by comparison – the organizations that profit from stolen business ideas have a worth comparable to companies like Exxon Mobil, Microsoft and Apple.
Globally, imports of counterfeit and pirated goods are worth nearly half a trillion dollars per year, or around 2.5% of global imports. US, Italian and French brands the hardest hit and many of the proceeds are connected to organized crime, according to a new report by the OECD and the EU’s Intellectual Property Office.[2]
In 2016 Alibaba founder Jack Ma infuriated luxury goods makers who accused the Chinese ecommerce giant of profiting from the sale of counterfeit goods. “We have to protect intellectual property, we have to do everything to stop the fake products, but OEMs are making better products at a better price,” Mr. Ma said, referring to original equipment manufacturers that typically make products for branded sellers.
He added “The problem is the fake products today are of better quality and better price than the real names…..they are exactly the same factories, exactly the same raw materials but they do not use the [brand] names.” Alibaba is expected to nearly double transaction volumes to more than $900 billion by 2020. Mr. Ma said he expected Alibaba to become the fifth largest global economy after Japan by 2020, measured in the company’s total transaction volume. [3]
When it comes to IP theft there is a school of thinkers who believe that there are very few unique and innovative business ideas left in this world. This group includes Mr. Ma and he argues that the most disruptive business models are merely introducing technology to modernize an old way of doing business.
Consider the technology trend and retail: stores are in trouble. Foot traffic is down and with few exceptions sales are underwhelming. Online and mobile are eating up market share and the changes that established retailers are making are incremental at best – even omnichannel investments are struggling because they don’t address the underlying shifts in customer behavior that are putting stores in trouble. Today’s reality in fact, is that most consumers start their shopping experience online before they visit (if ever) traditional brick and mortar retail.
Let’s make a pit stop and think about that for a moment – it is difficult to come up with a recent example of industry game changer or revolutionary idea worthy of the label “disruptive” that does not involve technology. Can you?
Uber, Airbnb, Netflix and Alibaba are good examples of industrial disruption that are visible in our proverbial rear view mirror but if we look even further back, hundreds of years back – there is ample evidence of substantial technology driven disruption – it’s not a recent phenomenon. Further, the threat to business is just the tip of the iceberg; the downstream effect of technological disruption can change the socio-economic path of entire nations and influence the course of world history.
During the 18th century tremendous gains in science and technology fueled the Industrial Revolution which led to Britain and subsequently the US becoming the most dominant economic and political powers on the planet.
Like their modern day counterparts, technological advancements like the steam engine, cotton gin, sewing machine and the telephone were a source of colossal disruption. The new inventions triggered a shift from rural home or shop based production to mass manufacturing and the development of urban industrial centers with factories, assembly lines and warehouses that made work easier and cheaper. The inventions were the root cause of wide scale migration to city centers as people wanted to live closer to their jobs. The early days of industrialization were a time of very rapid change with pervasive impacts and collateral fallout that we continue to deal with today – like globalization in a world of large cities.
Today, 86% of GDP growth is generated in cities [4] and we are on the brink of a new revolution fueled by technology which will again change the world. Projections for a global economic power shift away from the established advanced economies cite great potential for sustainable long-term growth in the coming decades for countries like India, Mexico, Indonesia, Poland, Nigeria and Vietnam. China has already overtaken the US to become the largest economy in purchasing power parity (PPP) terms.[5]
Pit stop is over; let’s get back on the road.
According to Mr. Ma “The way of doing business has changed for the brands. It’s not the fake products; it’s not the IP that is destroying them. It’s the new technology driven business model that has revolutionized the whole world. This is simply my observation of the issues facing brands and OEMs. Counterfeiting is not a quality problem; counterfeiting is an intellectual property problem,” says the founder and executive chairman of Alibaba Group.
Red light: so what exactly is IP and what is the problem?
According to the World Intellectual Property Organization, “intellectual property” refers to creations of the mind such as inventions; literary and artistic works; designs; and symbols, names and images used in commerce. IP is protected in law by patents, copyright and trademarks which enable people to earn recognition or financial benefit from what they invent or create. By striking the right balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish[6].
The brands and OEMs to which Mr. Ma makes reference spend vast fortunes on research, development and advertising to create demand for their products. These costs are added to cost of goods sold and are ultimately passed on to the consumer – but only if they are buying the legitimate product. [7] That’s where the rubber hits the road: the producers of counterfeit goods reap the benefit of the demand for their products without having to pay for it. And the consumerists that love a deep discount are OK with it.
They visit the fake markets which exist alongside the genuine ones. And to the average consumer it may seem slightly far-fetched that their cash goes straight to the mob, a drug cartel or gun-runners. It may or may not, but some advocates argue that that the fake markets actually help the brands, by quickening the fashion cycle and raising brand awareness.
So is it really stealing revenue from a company if you pick up a “Chanel” handbag on a foreign beach – when you would never buy a genuine Chanel bag in the first place? We say yes. Just because something is legal doesn’t mean it is ethical.
A growing number of high-end names from Gucci to Moncler and Alexander Wang agree, and are suing sellers of fakes, both in China and the West. In 2016 Wang sued the owners of 459 websites believed to be selling counterfeit handbags, footwear and clothing and won a $90 million judgement in a New York district court. The court froze the websites and transferred their domain names – many of which are believed to originate in China – to the designer.[8]
For the counterfeiters the judgement is an example of cost of doing business and it’s a bargain compared to what the real IP owners spend on marketing and celebrity endorsement. And so when it comes to counterfeit, knockoffs or pirated goods it seems that the vast majority of consumers know exactly what they are getting when they pay a fraction of retail price.
The real issue is when people think they’re getting the real thing and they’re not – those people need to be protected.
In 2016 Volkswagen AG agreed to a nearly $15 billion US settlement for installing secret software in its diesel cars to cheat exhaust emissions tests and make them appear cleaner in testing than they really were.[9] Although the precedent setting VW scandal wasn’t really about stealing business ideas, it was innovative, creative and demonstrated that unethical business models are not merely limited to foreign beaches. The decision to operate legally and/or ethically or not is a strategic one.
Inukshuk defines ‘business strategy’ as the identification of long-term business objectives and the means of sustaining a competitive advantage to achieving them. The strategic sweet spot exists where a company meets customer needs in a way that rivals cannot, given the context in which it operates.
At the end of the day stealing business ideas via counterfeits, knockoffs or pirating expands the sweet spot and blurs the lines between competitor offerings, customer needs and company capabilities. Is it a competitive advantage? Sure is. But the profits are dirty money and the means of obtaining them are unethical.
It’s getting late; we should stop for the night. But before we roll the credits give some thought to where your competitors are competing, what your customers will need and your strategic sweet spot.
The quintessential strategic competitive advantages like price and quality can be amplified by adding differentiating elements that are increasingly important to customers like social good, sustainability or locally sourced suppliers. Depending on your current business model and objectives it may also be time for a strategic re-calibration to defend against threats from technology or IP theft. Or even better, think about how you could become a disruptor and use technology as a competitive advantage yourself. But keep it clean!
Next month we continue the journey and further examine the interdependence between strategy, innovation and change management by unpacking a real-life use case that highlights how a wildly successful tech company innovated, created and disrupted it's way to the top with an irresistable strategic sweet spot.
Coming up next: Inukshuk's summer blockbuster road trip trilogy Part Two - The Early Bird Gets the Worm, but the Second mouse gets the cheese.
[1] https://www.fbi.gov/investigate/white-collar-crime/piracy-ip-theft
[2] http://www.oecd.org/industry/global-trade-in-fake-goods-worth-nearly-half-a-trillion-dollars-a-year.htm
[3] https://www.ft.com/content/6700d5cc-3209-11e6-ad39-3fee5ffe5b5b
[4] https://mckinsey.com/global-themes/urbanization/urban-world-meeting-the-demographic-challenge-in-cities
[5] https://www.pwc.com/gx/en/issues/the-economy/assets/world-in-2050-february-2015.pdf
[6] http://www.wipo.int/about-ip/en/
[7] https://share.america.gov/whats-wrong-with-buying-counterfeit-goods/
[8] https://blogs.wsj.com/chinarealtime/2016/08/16/luxury-brands-get-tough-with-counterfeiters/
[9] http://fortune.com/2016/10/26/settlement-vw-diesel-scandal/
