MGT 4195 Chapter 7

The process by which change agents undertake economic risks to innovate

Entrepreneurship

A. invention is imitated by competitors. B. new idea is presented in terms of abstract concepts. C. new idea is expressed as findings derived from basic research. *D. invention is commercialized by entrepreneurs.* (The innovation process begins with an idea. In the next step, invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones. This is followed by commercialization. Innovation concerns the commercialization of an invention by entrepreneurs.)

In the third step of the innovation process, a(n):

Innovation initiates and drives an industry life cycle

Industry Life Cycle

Innovation is invention +commercialization -Technology without a market is a lost cause -Complementary assets, platforms, complements matter Different types of innovation prevails in different industry life cycles A "killer" technology can kill an existing market -Uber and the demise of taxi industry Watch out for disruptive forces -Pay attention to what's coming from the lower end market (e.g. cell phone camera)

Key Take-Aways

• Innovation describes the discovery and development of new knowledge in a four-step process captured in the 4-I's: idea, invention, innovation, and imitation. • The innovation process begins with an idea. • An invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones. • Innovation concerns the commercialization of an invention by entrepreneurs (within existing companies or new ventures). • If an innovation is successful in the marketplace, competitors will attempt to imitate it.

LO 7-1 / Outline the four-step innovation process from idea to imitation.

• Innovations frequently lead to the birth of new industries. • Industries generally follow a predictable industry life cycle, with five distinct stages: introduction, growth, shakeout, maturity, and decline. • Exhibit 7.9 details features and strategic implications of the industry life cycle

LO 7-3 / Describe the competitive implications of different stages in the industry life cycle.

• Firms digitize their offerings to leverage the Internet as a disruptive force. • The long tail describes a business model in which companies can obtain a significant part of their revenues by selling a small number of units from among almost unlimited choices.

LO 7-6 / Explain the long-tail concept and derive its strategic implications.

A. Razor-razor-blade business model *B. Long tail business model* C. Pay-as-you-go business model D. Subscription-based business model (The long tail business model is one in which companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices.)

Most of ElectraWork.com's revenues are generated from a few popular electronic devices like notebook computers and MP3 players. Yet, the company offers a wide product portfolio that includes kitchen appliances, televisions, and watches. Low-cost virtual shelf space and nominal inventory investments allow the online retailer to increase perceived customer value by offering them unlimited choices under the same platform. This, in turn, allows the company to increase its revenues by selling smaller quantities of more products. Which of the following business models does this scenario best illustrate?

*Radical Innovation* -New Technology + New Market *Architectural Innovation* -Existing Technology for a New Market -components -platform/architecture -hard to imitate but production less efficient *Incremental Innovation* -Better Technology for the Existing Market -price/performance tradeoff *Disruptive Innovation* -New Technology (often from a lower end) Attacking Existing Market *Key Difficulties in Innovation:* Entrants It's often hard for entrants to overcome the chasm -Often a technology-push without market-pull -Costly to educate and create the market -High uncertainties about technologies/demand -Lack of complementary assets -"First Mover Disadvantage" -It's hard for incumbentsto be disruptive -Cannibalization -Entrenched in existing organizational routines -Netflix vs. Blockbuster

Types of Innovation Tesla Example

An innovation that draws on novel methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge, or targets new markets by using new technologies.

Radical innovation

Strategyis a set of goal-directed actions a firm takes to gain and sustain superior performance relativeto competitor ExternalandInternaldrivers of performance -5 Forces, VRIO Framework, SWOT Analysis Business-level Strategy: How to compete (position) in a product market -Cost Position vs. Value Position How can we increase value and/or keep cost down? -Innovation

Strategy

*PDA Example - in the chasm* -Not enough value for early majority (in 1993, Newton was priced at $700-900) -Failure to create a "bandwagon" effect -Lack of "ecosystem" -no complements, no network effect *Table Example - crossing the chasm*

Crossing-the-Chasm Framework

An innovation that squarely builds on an established knowledge base, and steadily improves an existing product or service offering; targets existing markets by using existing technology.

Incremental innovation

*Introduction Stage* -Uncertainty in technological standards -Most efforts focused on Product R&D *Growth Stage* -Emergence of technological standards -Start of large-scale manufacturing, process innovation and marketing -Fragmented market, but fast growth -Differentiation matters *Shakeout, Maturity and Decline* -Standards are fixed; no more major product innovation -Process innovation prevails -Shifting from non-price to price competition

Industry Life Cycle

The five different stages—introduction, growth, shakeout, maturity, and decline—that occur in the evolution of an industry over time.

Industry life cycle

Invention + Commercialization Not just product, but also process and business model

Innovation

• Entrepreneurship describes the process by which change agents undertake economic risk to innovate—to create new products, processes, and sometimes new organizations. • Strategic entrepreneurship describes the pursuit of innovation using tools and concepts from strategic management. • Social entrepreneurship describes the pursuit of social goals by using entrepreneurship. Social entrepreneurs use a triple-bottom-line approach to assess performance.

LO 7-2 / Apply strategic management concepts to entrepreneurship and innovation.

• Closed innovation is a framework for R&D that proposes impenetrable firm boundaries. Key to success in the closed innovation model is that the firm discovers, develops, and commercializes new products internally. • Open innovation is a framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones. The sharing goes both ways: some external ideas and inventions are in-sourced while others are spun-out. • Exhibit 7.14 compares and contrasts principles of closed and open innovation.

LO 7-7 / Compare and contrast closed and open innovation.

A. Technology enthusiasts *B. Early adopters* C. Late majority D. Laggards (Jacob belongs to the category of early adopters. The customers entering the market in the growth stage are early adopters. They recognize and appreciate the possibilities the new technology can afford them in their professional and personal lives.)

Jacob bought his laptop and smartphone when these products had just entered their respective growth stages. More than the technological sophistication of these products, it was the idea that these products would allow him to multitask and work when traveling that drove him to make his purchase decision. Which of the following customer segments does Jacob best represent?

A. A category captain *B. An intrapreneur* C. A venture capitalist D. A franchised dealer (Arnold is an intrapreneur. When innovating within existing companies, change agents are often called intrapreneurs: those pursuing corporate entrepreneurship.)

Arnold is a marketing and sales employee at Vibgyor Foods Inc. He has invented a new way to process and pack the company's food products that would avoid the usage of chemical preservatives. Which of the following terms best describes Arnold?

An innovation that leverages new technologies to attack existing markets from the bottom up.

Disruptive innovation

A situation in which transactions are likely not to take place because there are only a few buyers and sellers who have difficulty finding each other.

Thin markets

A. the number and size of competitors change throughout the industry life cycle. B. the firm tends to follow a predictable industry life cycle C. there are frequent changes in the supply and demand sides of the market throughout the industry life cycle. *D. there is a big gulf separating the early adopters from customer segments that make up the mass market.* (Significant differences between the customer groups that enter early during the introductory stage of the industry life cycle versus customers that enter later during the growth stage make a firm's smooth transition between the different parts of the industry life cycle difficult. These distinct differences between customer groups lead to a big gulf or chasm into which companies and their innovations frequently fall.)

According to the crossing-the-chasm framework, a firm's transition between the different parts of the industry life cycle is difficult because:

*A. disruptive innovation.* B. incremental innovation. C. radical innovation. D. progressive innovation. (In 2002, a GE team in China, through a bottom-up strategic initiative, developed an inexpensive, portable ultrasound device, combining laptop technology with a probe and sophisticated imaging software. Realizing that the likelihood of disruptive innovation increases over time, GE decided to disrupt itself.)

General Electric (GE) Healthcare introduced a portable ultrasound device at a price of less than $30,000 in developing countries against the $250,000 high-end ultrasound machine used in developed economies. This initiative best illustrates a(n):

The positive effect (externality) that one user of a product or service has on the value of that product for other users.

Network effects

Roughly 80 percent of effects come from 20 percent of the causes.

Pareto principle

A. The tablet industry is ahead of the laptop industry in the industry life cycle. *B. While the market demand for tablets will be high, the demand for laptops will be limited.* C. The number of competitors entering the laptop industry will be more than those entering the tablet computers industry. D. While competition for the tablet industry is primarily based on price, it is not so for the tablet industry. (Given the large market size achieved from the growth stage, any additional market demand in the next stage is limited. Demand now consists of replacement or repeat purchases only. This limited market demand in turn increases competitive intensity within the industry.)

While the industry for tablet computers is in the growth stage, the laptop industry is in its shakeout stage. What does this imply?

*A. Invention* B. Direct imitation C. Bootstrapping D. Lean manufacturing (Invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones.)

_____ is best described as the process of transformation of an idea into a new product or process, or the modification and recombination of existing ones.

• The core argument of the crossing-the-chasm framework is that each stage of the industry life cycle is dominated by a different customer group, which responds differently to a new technological innovation. • There exists a significant difference between the customer groups that enter early during the introductory stage of the industry life cycle and customers that enter later during the growth stage. • This distinct difference between customer groups leads to a big gulf or chasm which companies and their innovations frequently fall into. • To overcome the chasm, managers need to formulate a business strategy guided by the "who-what-why-and-how" questions of competition.

LO 7-4 / Derive strategic implications of the crossing-the-chasm framework.

• Four types of innovation emerge when applying the existing versus new dimensions of technology and markets: incremental, radical, architectural, and disruptive innovations (see Exhibit 7.10). • An incremental innovation squarely builds on an established knowledge base, and steadily improves an existing product or service offering (existing market / existing technology). • A radical innovation draws on novel methods or materials, is derived either from an entirely different knowledge base or from the recombination of the existing knowledge base with a new stream of knowledge (new market / new technology). • An architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets (new market / existing technology). • A disruptive innovation is an innovation that leverages new technologies to attack existing markets from the bottom up (existing market / new technology).

LO 7-5 / Categorize different types of innovations in the markets-and-technology framework.

Business model in which companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices.

Long tail

A. They will have no access to intellectual properties such as critical patents. B. They cannot benefit much from network effects. C. They cannot benefit from learning and experience curve effects like the late entrants. *D. They will have to find distribution channels and complementary assets.* (First movers must educate potential customers about the product's intended benefits, find distribution channels and complementary assets, and continue to perfect the fledgling product.)

Which of the following is a disadvantage faced by first movers in an industry?

*A. A patent over a product translates into a permanent monopoly position.* B. A patent can be enforced in court. C. A patent is a form of intellectual property. D. A patent can be obtained when an invention is useful, novel, and non-obvious. (In the U.S., the time period for the right to exclude others from the use of the technology is 20 years from the filing date of a patent application. Exclusive rights often translate into a temporary monopoly position until the patent expires.)

Which of the following statements about patents is *NOT* true?