4490 Chapter 7: Innovation and Entrepreneurship

Incremental Innovation

- Builds on established knowledge base and steadily improved existing product / service offering - Targets existing markets using existing technology - Incumbent firms tend to only focus on incremental innovation a. Economic Incentives: Established companies are focused on defending their position b. Organizational Inertia: Established companies rely on formalized processes and structures; Resistance to change in the status quo c. Innovation Ecosystem: Established companies are part of an ecosystem: suppliers, buyers, and complementors; No longer make independent decisions, but must consider the ramifications on other parties in their innovation ecosystem

Crossing the Chasm Framework

- Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group - Many innovators do not successfully transition from one stage of the industry life cycle to the next. - Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle - Groups: tech enthusiasts, early adopters, early majority, late majority, laggards

Decline

- Demand falls rapidly a. Innovation (Product and Process) efforts cease b. Strong pressure on prices - Four strategic options to pursue. 1. Exit: bankruptcy or liquidation. 2. Harvest: reduce further investments 3. Maintain: support at a given level 4. Consolidate: buy rivals

Growth

- Demand increases rapidly - Market growth accelerates; First-time buyers rush to purchase; Proof of concept has been demonstrated; Both efficient and inefficient firms succeed because demand is so strong - Product / service standards emerge: A common set of features and design choices - Basis of competition moves away from Product innovation and focus moves towards Process innovation: New ways to produce a product / deliver existing service - Core competencies: manufacturing and marketing. - KEY OBJECTIVE: Stake out a strong strategic position not easily imitated by rivals

Platform Business

- Enables interaction between producers and consumers - Enable matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants - Provides infrastructure and governance

Laggards

- Enter the market during the decline stage - 16% of total market potential - Adopt a new product only if necessary - Generally don't want new technology - Typically not pursued as future customers - Demand small

Early Adopters

- Enter the market during the growth stage - 13.5% of the total market potential - Demand is driven by imagination and creativity, NOT technology; Demand is fueled more by intuition and vision rather than technology concerns - To capture these customers a firm should directly communicate the product's potential

Technology Enthusiasts

- Enter the market during the introductory stage - 2.5% of the total market potential - Have an engineering mind-set - Proactively pursue new technology - Enjoy using beta versions - Tinker with product imperfections and provide feedback/suggestions

Late Majority

- Enter the market during the maturity stage - 34% of the total market potential - Not as confident in their ability to master the technology - Wait until standards have emerged (Uncertainty is reduced) - Represent the majority of the market - Buy from well-established firms with strong brand image

Early Majority

- Enter the market during the shakeout stage - 34% of the total market potential - Main consideration in deciding whether or not to adopt is a strong sense of practicality - Pragmatists: "What Can This Do For Me?" - Weigh the benefits and costs carefully - Rely on endorsements of others - This group is key to catching the growth wave - Mass market, if they decide to enter a herding effect can be observed - Without adequate demand from early majority, most innovative products wither away

Innovation

- Innovation is a competitive weapon; allows firms to redefine the marketplace in their favor and achieve a competitive advantage - Innovation can create and destroy value. - Innovation often comes in waves. - Firms must be able to innovate and fend off competitors imitation attempts -*The speed of technological change has accelerated; Initial innovations are foundational for other rapid innovation.*

Pipeline Business

- Linear transformation through the value chain - R&D, then design, then manufacture, then sell

Maturity

- Only a few large firms remain (Oligopoly) and enjoy economies of scale. - Demand now consists of replacement or repeat purchases - Market has reached maximum size; Industry growth is zero or negative - Decrease in market demand increases competitive intensity within the industry - Process innovation has reached a maximum as firms attempt to lower cost as much as possible

Shakeout

- The rate of growth declines. - Firms begin to intensely compete directly against one another for market share. a. Weaker firms forced out b. Only the strongest competitors survive. c. Industry consolidation: Weak competitors are acquired by stronger firms or exit through bankruptcy - Price is an important competitive weapon - The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders - Core Competencies: Manufacturing and process engineering capabilities that can be used to drive costs down

Advantages of the Platform Business Model

- They scale more efficiently. a. there are no gatekeepers - They unlock new sources of value creation and supply. - They benefit from community feedback - Success occurs when positive network effects are realized.

Patent

A form of intellectual property that gives the inventor exclusive rights (temporary monopoly position) to benefit from commercializing technology for a specified time period (20 Years) in exchange for public disclosure of the underlying idea once the patent has expired

Trade Secrets

A substitute for patents that do not require full disclosure; defined as valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy

Types of Innovation: Markets and Technology Framework

Categorize innovations by measuring degree of newness in terms of technology and markets - Technology - methods and materials used to achieve a commercial objective - Market - new or existing market Incremental vs. Radical Innovation Architectural vs. Disruptive Innovation

Radical Innovation

Draws on novel methods & materials, is derived from an entirely new knowledge base or from a recombination of existing knowledge - Targets new markets using new technology - Typically firms use radical innovation to create a temporary competitive advantage, then follow up with a string of incremental innovations to sustain the initial lead

Industry Life Cycle

Evolution of an industry over time progressing through Introduction, Growth, Shakeout, Maturity, and Decline Stages - Innovations frequently lead to the birth of new industries - Supply and demand changes as industries age - Each stage requires different competencies to satisfy that stage's unique customer group - *The development of most industries follows an S-Curve. Initial demand for a new product/service is often slow to take off, then accelerates, before decelerating, and eventually turning to zero, and even becoming negative as a market contracts*

Architectural Innovation

Existing technology leveraged into a new market; known components used in novel ways - Targets new markets using existing technology

Introduction

Launch of successful innovation - Core competency: R&D - necessary to create a product category that will attract customers - Strategic objective: Market acceptance & future growth - Network Effects are a big contributor - The initial market size is small, growth is slow, and barriers to entry are high. - The emphasis is on uniqueness and performance in this stage. - Possible first mover disadvantages: Must educate customers about product intended benefits, find distribution channels and complementary assets, continue to perfect the fledging product

Disruptive Innovation

Leverages new technologies to attack existing markets from the bottom up - Targets new technology in existing markets - New product / process meets existing customer needs - Begins as a low cost solution to existing problem - Initial performance is inferior to existing technology, but its rate of technological improvement increases faster than the rate of performance increases - Incumbents are slow to change, favors disruptors - How to respond to disruptors: a. Continue to innovate to stay ahead of the competition b. Guard against disruptive innovation by protecting the low end of the market c. Disrupt yourself, rather than wait for others to disrupt you

Entrepreneurship

Process by which change agents (Entrepreneurs) undertake economic risk to innovate - to create products, processes, & organizations - Seek new business opportunities and then assemble resources necessary to exploit them - Create value for society

Strategic Entrepreneurship

Pursuit of innovation using strategic tools; Addresses fundamental question of how to combine: Entrepreneurial actions, Creating new opportunities, or Exploiting existing opportunities in the pursuit of competitive advantage

The Innovation Process

The discovery, development, and transformation of new knowledge in a 4 step process - 1. Idea: Abstract concepts or research findings from basic research to discover new knowledge 2. Invention: Transformation of an idea into a new product / process, or the modification and recombination of existing ones - If an invention is useful, novel, and non-obvious as assessed by US Patent and Trademark office it can be patented 3. Innovation: Commercialization of an invention - Successful innovators can accrue *First Mover Advantages* a. Economies of Scale b. Experience and Learning-Curve Effects c. Network Effects d. Intellectual Property e. Lock in key suppliers/customers - increased switching costs 4. Imitation: Copying a successful innovation

Social Entrepreneurship

The pursuit of social goals AND a profitable business - Evaluate the performance of ventures not only by financial metrics but also ecological and social contributions - Triple Bottom Line - People, Planet, Profits