Author Howard Yu discusses ways incumbents can thrive despite facing copycats.

61CkQ-IxVxLThe threat of copycats is constant in business. Despite intellectual property laws, patent filings and market dominance, competitors will find ways to offer cheaper versions of a product. Rapidly advancing technology has served to accelerate the pace of replication, making it even harder for a company to maintain the top spot in any sector. Howard Yu, management and innovation professor at the IMD business school in Switzerland, offers some helpful insights in his new book, Leap: How to Thrive in a World Where Everything Can Be Copied. He joined the Knowledge at Wharton radio show on Sirius XM to discuss his book.

An edited transcript of the conversation follows.

Knowledge at Wharton: Copycats have long been a problem for business, but has the replication ramped up even more because of technology?

Howard Yu: That’s right. One of the biggest complaints that I’ve heard from executives in my education program is that they find any type of innovation they put out in the marketplace gets easily copied overnight. While they’re seeing their cost structure continue to ramp up, the lifespan of the new product easily gets copied. As a result, the ability to capture value and revenue continues to decrease. This is really the main thrust that made me write this book and explore these issues.

Knowledge at Wharton: In some cases, the first iteration of a product isn’t successful. Other companies may be able to do it better and more cheaply.

Yu: There’s this so-called first-mover advantage, meaning you move into a market and secure a dominant position. But what my research has revealed is that’s often not the case, particularly when the underlying knowledge is commonplace and people can learn from you. Then there is almost this latecomer advantage, that the copycat can produce something similar or good enough with a much lower price point. As a result, they surpass the early incumbent or pioneering companies.

In most of the paradigms, what we see is there is almost this tendency of incumbents being disrupted by copycats. In any kind of industry — from personal computers to mobile phones to wind turbines to solar panels — oftentimes it’s the latecomer, particularly from Asia, who dominates those markets.

“There is almost this tendency of incumbents being disrupted by copycats.”

I have also been observing industries where, despite the risks of being copied, the early incumbent continues to prosper and survive and makes a lot of money over a long period of time. One example is very close to where I teach in Switzerland. It’s the pharmaceutical industry. Novartis, Roche — these big pharmaceutical firms continue to command a leading position on a worldwide basis. I thought I should look deeper into it and extract some of the key lessons learned; perhaps we could apply these to other industry settings.

Knowledge at Wharton: You say there are some core principles that companies should rely on to be successful in these situations. What are they?

Yu: There are around five principles that I try to explore in the book. First, for a business leader to be effective, they have to understand what kind of world they’re living in. In many ways, they have to do a very honest assessment in terms of the maturity of the fundamental knowledge that built the enterprise. For example, if your company is making heavy machinery, let’s look at the fundamental knowledge around mechanical engineering. The more mature that knowledge, the more widely disseminated across a few, the more at risk you become.

The second principle is: Let’s look forward. Let’s not just look at the past, but look forward. What I found was a seismic shift happening around the landscape, so you as a company can leverage those seismic shifts to reinvent yourself. This is why when people are talking about data analytics, it’s key. People talking about artificial intelligence is key. The creativity of human beings is absolutely critical for reinvention over the long haul.

Knowledge at Wharton: You also mentioned that there is a historical element to copying that goes back a couple of centuries, correct?

Yu: I’m a history buff, so I like to look at industrial history beyond just pharmaceutical companies. Sometimes my audience would ask, “This is great, but what if my industry is mundane, low tech. Does that mean that I’m going to always get copied?” That is why in part of the book I explore the mundane categories of laundry detergent, disposable diapers, consumer goods. Procter & Gamble started off in Cincinnati over 150 years ago. Now, personal computers, green cars, all these high-tech sectors are getting disrupted by the Chinese. By conventional logic, P&G has no chance. Yet if you look across their global footprint, they are still continuing to command a leading position in these categories…. [There] are ways that you could tap into new knowledge disciplines and reinvent yourself. The key is how do you balance the short-term goal as well as the long-term reinvention?

Knowledge at Wharton: Are the approaches different for different sectors?

Yu: Yes, there are certain sector or industry specifics. But there are certain elements that, regardless of what sector you’re in, you have to think about. For example, the rise of smart machines. Artificial intelligence truly is the steam engine for the second half of the 21st century. If you are making a tractor for farmers for harvesting, you’ve got to tell the farmers how to embrace precision farming as a way to increase farm yield. If you are providing legal services, you’ve got to think about how to automate the narrowly defined knowledge of lawyers so that you get your cost correct. If you’re a logistics organization, nobody’s caring about how big your ship is but about getting things from point A to point B. Across all the factors I have investigated, there are uniform seismic shifts that you simply have to embrace. This is great because you can then draw on inspiration from other sectors to inform your strategic choices going forward.

“You can no longer just be an app from Silicon Valley and roll out across the globe.”

Knowledge at Wharton: You give the example of what occurred long ago between Steinway and Yamaha. Can you tell us about that?

Yu: That is an interesting story precisely because executive managers sometimes push back on my argument and say, “I don’t care about copycats. As long as I can provide the best product in the world, I will be all right.” So, I explored Steinway & Sons. They make the best concert piano, no doubt. Yet if we’re looking at the historical financial return of the company, it is a disaster. The company was listed, went private again, was listed again and was forced to go private again. They went from a peak of 6,000 pianos sold per year down to 2,000. Today, they are reduced to one single factory. They still make the best piano. Their workers are passionate, and yet they were disrupted by Japan’s Yamaha.

A note to this story is there is no change of technology. It’s not like digital photography destroying Kodak. A piano is still a piano — it’s a hammer striking a string. But if the knowledge is stagnating; no matter how good you are, the latecomer can come in and leverage the scale of the economy, automation and lower cost structure, disassembling your product and reverse engineering. Over time, they would surpass the industry pioneer. I thought it was a cautionary tale: Try to avoid getting trapped in a golden cage.

Knowledge at Wharton: How does artificial intelligence change this path of needing to leap for some companies?

Yu: Right now, what we see in terms of artificial intelligence is still quite nascent, so most of the focus is really on reduction of cost — either automate certain human jobs, or one person can do more jobs guided by AI.

This is still the early phase. Going forward, what it means to have AI is that it will augment human decision-making. Now your staff members no longer need to make the mundane decisions about logistics, supply, coordination, email and all the scheduling. Then you could task them to do something much more creative — things that involve human empathy, human judgment, relationship building, networking, coaching, things that machines are still not very good at but humans have a commanding advantage. Those should be the areas where managers should really focus. Automate as much as possible the mundane tasks, then redeploy your human resources to take your innovation and your customer relationship to the next level.

Knowledge at Wharton: How do you take this philosophy into the world of social media? You have so many entities out there trying to do the same thing.

Yu: One of the key discoveries for me right now is that on the older consumer space, such as Google and Facebook and Twitter, you always have just one company dominating that sector. But what we’ve seen comes from the example of Uber. They were forced to exit from China and from Southeast Asia [due to competition] by Grab, and in the Middle East by Careem. As the internet continues to evolve, it’s no longer just a provision of digital information and digital entertainment. A lot of the new business models emerging right now are really the blending between digital content and the physical delivery.

Here’s the good news: Whenever a new business model requires some sort of physical delivery, the understanding of the local market from culture to regulation to infrastructure becomes more important. You can no longer just be an app from Silicon Valley and roll out across the globe. In fact, local players or the historic industry incumbent would have an exceeding amount of competitor advantage, because you know how your customer behaves in your local market. If you can blend in some Silicon Valley agility, then you become unstoppable.

“Executives really need to accept the fact that the organizational structure is no longer static.”

Knowledge at Wharton: You also talk about WeChat, which is China’s dominant social media. Here in the United States, we don’t necessarily think about WeChat a lot.

Yu: You are quite right. This is the biggest paradox because Tencent, the parent company that owns WeChat, is the fifth most valuable company on the face of the planet. We simply don’t pay enough attention. You know, in China the internet is pretty closed off. There’s the Great Firewall, so there’s no Google, Facebook or YouTube. But in this space, you have this copycat in the beginning. WeChat really started off as a copycat of WhatsApp. But fairly rapidly, it evolved into a monster app that you couldn’t really survive in China without.

You could spend a day in Shenzhen, in the southern part of China, without a credit card, without cash, just with your mobile phone because you can call your Uber, which is called Didi China, through WeChat. You can check your banking account through WeChat. You can order your instant noodles from the mom-and-pop store next door and pay using WeChat.

I was walking in Shanghai, and in People’s Park there were homeless people asking for money and so on. Instead of asking for cash, they were holding up a VR code and asked me to scan a QR code to pay digitally. It is in this quirky space that we see WeChat is able to pioneer an alternative business model [to one based] on advertisement that we are so familiar with in Facebook and Instagram and so on. What they do is provide real services and charge a fee much more akin to a subscription model or transaction model, which builds consumer trust.

Knowledge at Wharton: Do company structures need to change in order to adapt to these seismic shifts you alluded to?

Yu: Yes, I think executives really need to accept the fact that the organizational structure is no longer static. It’s going to be much, much more fluid. That deployment of human resources is going to be much more task force-driven so that whenever there’s a need or a real complex problem arises, you pull together, solve that problem and then disband again.

“Try to avoid getting trapped in a golden cage.”

I was in Hangzhou, the home of Alibaba. Under Alibaba, there’s the finance subsidiary Ant Financial, which is worth more than Goldman Sachs today. The executive told me with this runaway success of Ant Financial, with revenue doubling every five years, they do not need to hire any additional personnel simply because they constantly automate what they know and redeploy their staff to new roles. This is a startup set-up. It’s an eye-opener to me that employees and employers alike need to treat jobs no longer as a destination but simply a temporary task, that people would congeal together and solve an issue and then move on to the next phase. It’s almost like a modular organization, if you will.

Knowledge at Wharton: You focus on big business, but do the principles in the book apply for the entrepreneur and smaller business owner as well?

Yu: Absolutely, because in the area from AI to ubiquitous connectivity, a small company can really leverage on this seismic shift as long as you pay attention to what’s going on. We talked a little bit about WeChat and so on. One of the major services that they provide for small and medium-sized companies is to [facilitate] their own digital strategy. Imagine you’re a bakery that makes Chinese mooncakes, and you have no experience in doing programming. What WeChat has done is to enable the small-time entrepreneur to build a digital app without knowing programming. Overnight, you can launch your own app within WeChat.

Now, some people are early adopters. Some companies stay with their family tradition. Depending on how active you are in paying attention to the changing schemes, you can leverage these technologies to gain a competitive advantage. I think a lot of these principles, as much as they are applicable to large firms in terms of transformation, for small and medium-sized companies they are even more important. You can tap into a huge market.