Ch.7 MGMT 495: Business Strategy (Innovation and Entrepreneurship)
(Just understand) To overcome the chasm, You must: 1. Formulate a business strategy guided by: The WHO, WHAT, WHY, AND HOW questions of competition 2. Meet customer needs -Needs are different at for each industry life cycle stage 3. Bring competencies and capabilities to the table -Needs are different for each life cycle stage
(Just understand) To overcome the chasm, You must: 1. Formulate a business strategy guided by: The WHO, WHAT, WHY, AND HOW questions of competition 2. Meet customer needs -Needs are different at for each industry life cycle stage 3. Bring competencies and capabilities to the table -Needs are different for each life cycle stage
(Understand) Closed innovation firms are more likely to fall victim to "Not invented here syndrome" -If R&D led to discovery not conducted in-house, it can't be good
(Understand) Closed innovation firms are more likely to fall victim to "Not invented here syndrome" -If R&D led to discovery not conducted in-house, it can't be good
(Understand) Competition is a process driven by creative destruction -Innovation is a competitive weapon: It can simultaneously create and destroy value -Firms must be able to innovate while also fending off competitions' innovation attempts (Successful strategy has both an EFFECTIVE OFFENSE and DEFENSE)
(Understand) Competition is a process driven by creative destruction -Innovation is a competitive weapon: It can simultaneously create and destroy value -Firms must be able to innovate while also fending off competitions' innovation attempts (Successful strategy has both an EFFECTIVE OFFENSE and DEFENSE)
(Understand) First 2 groups of the crossing-the-chasm framework work together= Early market -The chasm comes from pragmatists who want proof that the product is good before adopting it -To get them to cross the chasm, must cause them duress= Make them feel like they need to adopt (Then turns into a tornado where everyone starts growing)
(Understand) First 2 groups of the crossing-the-chasm framework work together= Early market -The chasm comes from pragmatists who want proof that the product is good before adopting it -To get them to cross the chasm, must cause them duress= Make them feel like they need to adopt (Then turns into a tornado where everyone starts growing)
(Understand) Initial innovations are foundation for other rapid innovation -New business models make innovation possible ex.) Dell's direct to consumer model
(Understand) Initial innovations are foundation for other rapid innovation -New business models make innovation possible ex.) Dell's direct to consumer model
(Understand) Innovation is a powerful competitive weapon -Competition is a process driven by continuous innovation
(Understand) Innovation is a powerful competitive weapon -Competition is a process driven by continuous innovation
(Understand) Innovations frequently lead to the birth of new industries -Industries generally follow a predictable industry life cycle, with 5 distinct stages: Introduction, Growth, Shakeout, Maturity, Decline
(Understand) Innovations frequently lead to the birth of new industries -Industries generally follow a predictable industry life cycle, with 5 distinct stages: Introduction, Growth, Shakeout, Maturity, Decline
(Understand) Introduction stage can benefit from network effects= Positive effect that one user has on the value of a product for other users
(Understand) Introduction stage can benefit from network effects= Positive effect that one user has on the value of a product for other users
(Understand) We are experiencing a rapid acceleration of the speed of technological change -No reason to believe it will decelerate
(Understand) We are experiencing a rapid acceleration of the speed of technological change -No reason to believe it will decelerate
What are the 2 characteristics required for a force to be disruptive?
1. Begins as a low cost solution to existing problem (Attacks from bottom of market) 2. The rate of technological improvement increases (Increases faster than other markets)
What are the 3 ways to respond to a disruptive innovation?
1. CONTINUE TO INNOVATE -Stay ahead of competition (Moving target is harder to hit than one standing still) 2. GUARD AGAINST DISRUPTIVE INNOVATION -Protect the low-end of market (Introduce low-cost innovations to preempt stealth competitors) 3. DISRUPT YOURSELF -Reverse innovation
What are the 4 strategic options of managers at the decline stage of the industry life cycle?
1. EXIT - Some firms forced out of industry through bankruptcy or liquidation 2. HARVEST -Reduce further investment -Don't invest more, just try to maximize profit in existing things 3. MAINTAIN -support at a given level -ex.) continuing to support marketing efforts even as growth declines 4. CONSOLIDATE -buy rivals -Can stake out a strong position, possibly achieving a near monopoly
What are the 4-steps of innovation? (Four I's of innovation)
1. Idea= Abstract concepts or finding from basic research 2. Invention= Transformation of idea into a new product or process, or the modification and recombination of existing ones 3. Innovation= Commercialization of an invention 4. Imitation= If an innovation is successful in marketplace, competition will try to imitate
(May not need to know) What 4 things caused the shift from closed to open innovation?
1. Increasing supply and mobility of skilled workers 2. Exponential growth of venture capital 3. Availability of options to commercialize ideas 4. Increasing capabilities of suppliers gloabally
What are the 4 types of innovations from the Market-technology framework?
1. Incremental -existing market/ existing technology 2. Radical (new market/new technology) 3. Architectural (new market/existing technology) 4. Disruptive innovation (existing market/new technology)
What are the 5 phases of an industry life cycle? (TEST Q.)
1. Introduction 2. Growth 3. Shakeout 4. Maturity 5. Decline (Supply and demand changes as industries age) (Each stage requires different core competencies)
What are the 3 characteristics of the Late Majority they causes them to enter the market later than the Early Majority?
1. Not as confident in their ability to master the technology 2. Prefer to wait until STANDARDS EMERGE 3. Prefer to buy from WELL-ESTABLISHED firms
How are patents double-edged swords? (Just understand)
1. Provide a temporary monopoly for a specified period of time -May form basis for competitive advantage 2. Make you fully disclose information -Others can use it freely when patent ends (This is why Netflix doesn't patent its algorithm)
What are the 5 customer groups of the crossing-the-chasm framework?
1. Technology enthusiasts 2. Early adopters 3. Early majority 4. Late majority 5. Laggards
Architectural Innovation
Architectural Innovation= Leverages existing technology into new markets -Alters the architecture of the product -A new product, with known components, used in a novel way
BE FAMILIAR WITH INDUSTRY LIFE CYCLE ON TEST!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
BE FAMILIAR WITH INDUSTRY LIFE CYCLE ON TEST!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
What is the competitive weapon of firms in the shakeout stage?
Biggest competitive weapon= LOW PRICE -Can price competition out of market (Everyone's profit is hurt, so choose to consolidate)
Decline Stage (industry life cycle)
Decline Stage: Demand falls rapidly, further contracting size of market -Innovation of product and process cease -Strong pressure on prices (If technological or business model breakthrough emerges that opens a new market= PROCESS RESTARTS)
What is demand driven by for early adopters?
Demand driven by: a.) Imagination and creativity b.) Intuition and imagination ("What can this new product do for me and my business?")
Disruptive innovation
Disruptive Innovation= Leverages new technologies into existing markets -New product/ process meets existing customer needs -Invades market from bottom-up= Stays off of the radar of opponents
Early Adopters
Early Adopters: Growth Stage (13.5% market) -Demand driven by: a.) Imagination and creativity b.) Intuition and imagination ("What can this new product do for me and my business?") -Firms need to communicate the product's potential in more direct ways
What is the total market share that is represented by Early adopters? What stage do they enter in?
Early adopters: 13.5% Growth Stage
What is the total market share that is represented by Early Majority? What stage do they enter in?
Early majority: 34% total market potential -Shakeout Stage
Entrepreneurs
Entrepreneurs= The agents who introduce change -Do this by: figuring out how to use inventions, and introducing new products or services, new production processes, and new forms of organization (Just understand)
Entrepreneurship
Entrepreneurship= Process by which change agents undertake economic risk to innovate -To create new products, processes, and sometimes new organizations -Innovate by commercializing ideas and inventions (If successful, not only drives competitive process, but also creates value for the individual entrepreneurs and society at large)
First mover disadvantages (Just understand)
First mover disadvantages= Part of introduction stage -Must educate potential customers about product's intended benefits, find distribution channels and complementary assets, and continue to prefect product (Marketing core competency is helpful in introduction stage)
First-Mover Advantages
First-Mover Advantages= Competitive benefits that accrue to the most successful innovator ex.) Economies of scale, learning-curve effects, and network effects
Industry life cycle
Industry life cycle= As an industry evolves over time, we can identify 5 distinct stages: Introduction, growth, shakeout, maturity, decline -# and size of competitors change as the industry life cycle unfolds, and different types of consumers enter at each stage (Both supply and demand side of industry change as it ages) -Each stage requires different competencies a firm needs to satisfy consumer needs
Innovation Ecosystem (Just understand)
Innovation Ecosystem= Established companies are part of an ecosystem -Have to satisfy suppliers, buyers, and complements -Causes them to not be able to make independent decisions without referring to ecoystems (Makes them focus on incremental innovation rather than radical innovation)
Innovation (Four I's of innovation)
Innovation= The commercialization of an invention (Turns invention into something people buy) -A NOVEL, USEFUL idea that is successfully IMPLEMENTED
Innovation
Innovation= The discovery and development of new knowledge in a four-step process.. -Four I's of innovation: 1. Idea 2. Invention 3. Innovation 4. Imitation
Introduction stage (industry life cycle)
Introduction stage: -Basis of competition= New product development and experimentation -Core Competency= R&D -Strategic objective= Market acceptance and future growth -Emphasis= Uniqueness and performance -Capital-intensive= Trying new ideas and producing small quantities -Growth= Slow -Barriers to entry= High
In the introduction stage what is the main kind of innovation? How does this change in the growth stage?
Introduction stage= Product innovation -Growth Stage= Product innovation decreases, while process innovation increases (Standards begin to emerge so process innovation increases)
Invention (Four I's of innovation)
Invention= Transformation of an idea into a new product or process, or the modification and recombination of existing ones
What is the total market share that is represented by Laggards? What stage do they enter in?
Laggards: 16% of total market share -Decline Stage
What is the Laggards view on adopting new technology?
Laggards: Only adopt new technology if absolutely necessary -Generally don't want new technology -Typically not pursued as future customers= Demand small (not worth it)
What is the total market share that is represented by Late Majority? What stage do they enter in?
Late Majority: 34% of total market potential -Maturity Stage
What is the key consideration of the Early Majority when deciding to buy an innovation?
Main consideration: "IS this PRACTICAL?" -Weigh benefits and costs carefully -Observe early adopters using the product= Rely on endorsements (This group is key to catching the growth wave)
Market-technology framework
Market-technology framework= Model to categorize innovation along: 1. MARKETS (existing/new) 2. TECHNOLOGY (existing/new) -Horizontal axis= Asks whether innovation builds on existing technology or new ones -Vertical axis= Asks whether innovation targets new or existing markets
Maturity stage (industry life cycle)
Maturity stage: Few large firms remain (OLIGOPOLY) (Existing firms enjoy economies of scale) 1. Additional market demand limited= Demand only comes from replacement or repeat purchases 2. Market growth maximized= 0 or negative going forward -RIVALRY INTENSE!!!!! 3. Process innovation maximized
Open innovation
Open innovation= Framework for R&D that proposes PERMEABLE FIRM BOUNDARIES -allow firms to benefit from not only internal ideas and inventions, but also from external sources -Sharing goes both ways= Some external R&D is absorbed by the firm while may spin off some R&D to external firms that doesn't fit strategy
Patents
Patents= Form of intellectual property, and gives inventor the exclusive rights to benefit from commercializing a technology for a specific period of time. -In exchange for public disclosure of the underlying idea -Gives temporary monopoly position (In U.S. 20 years)
Process innovation
Process innovation= New ways to produce existing products or deliver existing services -Possible through things like internet, lean manufacturing, etc. (Switches from product innovation to process in growth stage)
Product innovation
Product innovation= New or recombined knowledge embodied in new products ex.) electric vehicle, smartphones, etc (Concentrated on in introduction stage)
Radical Innovation
Radical Innovation= new market/new technology -Draws from novel methods and materials -Forms from an entirely new knowledge base, or from a recombination of existing knowledge ex.) iPhone, X-ray, airplane, genetic engineering, etc
Reverse innovation
Reverse innovation= An innovation that was developed for emerging economies before being introduced into developed economies -Allows companies to disrupt themselves -Have to be willing to sacrifice business at the high-end
Shakeout Stage (industry life cycle)
Shakeout Stage: RATE OF GROWTH DECLINES 1. WEAKER FIRMS FORCED OUT -Industry CONSOLIDATES -Only strongest competitors survive 2. Biggest competitive weapon= LOW PRICE -Can price competition out of market
Societal Entrepreneurship
Societal Entrepreneurship= The pursuit of social goals WHILE creating a profitable business -Evaluate the performance of their ventures not only by financial metrics, but also by ecological and social contribution (profits, people, planet) -Use TRIPLE-BOTTOM LINE to assess performance
What is the objective for firms in the growth stage?
Stake out a strong position not easily imitated by rivals
Standard (Understand)
Standard= Market agreement on a common set of engineering and design choices. -Can emerge bottom-up through competition or top-down through government -Agreed upon standards ensure that all components of the system work well together, regardless of who developed them (Set in Growth Stage!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!)
Strategic Entrepreneurship
Strategic Entrepreneurship= The pursuit of innovation using tools and concepts from strategic management -Can leverage innovation for competitive advantage by applying strategic management lens to entrepreneurship
Trade secret
Trade secret= Valuable proprietary information that is not in the public domain.. -And the firm makes every effort to maintain its secrecy ex.) Coke recipe
(Just understand) Cautions of Industry life cycle: 1. Industries don't necessarily evolve through these stages 2. Innovations can emerge at any stage of industry life cycle= Initiate an new cycle at any time 3. Industries can be rejuvenated, especially in decline stage
(Just understand) Cautions of Industry life cycle: 1. Industries don't necessarily evolve through these stages 2. Innovations can emerge at any stage of industry life cycle= Initiate an new cycle at any time 3. Industries can be rejuvenated, especially in decline stage
(Just understand) Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle -Each responds differently to technological innovation
(Just understand) Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle -Each responds differently to technological innovation
(Just understand) Early majority and Late majority make up the lion's share of market potential (Each 34% of market)
(Just understand) Early majority and Late majority make up the lion's share of market potential (Each 34% of market)
(Just understand) Innovation drives competition: -Innovation helps drive strategy -Innovation results in temporary monopoly -Entrepreneurs are agents that introduce change
(Just understand) Innovation drives competition: -Innovation helps drive strategy -Innovation results in temporary monopoly -Entrepreneurs are agents that introduce change
(Just understand) One way to categorize innovations is to measure their degree of newness in terms of technology and markets: -Technology= Methods and materials used to achieve a common objective -Market= Whether innovation introduced in a new or existing segment
(Just understand) One way to categorize innovations is to measure their degree of newness in terms of technology and markets: -Technology= Methods and materials used to achieve a common objective -Market= Whether innovation introduced in a new or existing segment
What are the 3 reasons why incumbent firms are focused on incremental innovation rather than radical innovation?
1.) Economic incentives= Established companies are focused on DEFENDING THEIR POSITION -Help build barriers to entry and network effects -Markets with network effects turn into "winner-takes-all" markets 2.) ORGANIZATIONAL INTERTIA= Established companies rely on formalized business processes and structures -Resistance to the status quo= Risk averse mindset 3.) Innovation Ecosystem= Established companies are part of an ecosystem -Have to satisfy suppliers, buyers, and complements -Causes them to not be able to make independent decisions without referring to ecoystems
Absorptive Capacity
Absorptive capacity= A firm's ability to: -Understand external technology developments -Evaluate them -And integrate them into currents products or create new ones (Key to open innovation process and to see disruptive technology)
What is the strategic objective in the introduction stage? (Understand well)
Achieve full market acceptance and seed future growth -One way to accomplish= leverage network effects
Closed innovation
Closed innovation= Firm conducts all of its R&D in house using funnel approach -BOUNDARIES OF FIRM ARE IMPENETRABLE= R&D can neither enter or exit firm -Allows firms to benefit fully from R&D while not letting competitors benefit
What is the main argument between the Crossing-the Chasm Framework?
Crossing-the Chasm Framework= Each stage of the industry life cycle is dominated by a different consumer group, which responds differently to TECHNOLOGICAL INNOVATION -There is a significant difference between the customer groups that enter early during the introductory stage of the life cycle and those that enter during the growth stage -The significant differences make it difficult to transition to each stage of life cycle (CREATES A CHASM)
Crossing-the Chasm Framework
Crossing-the Chasm Framework= the chasm is the distance between early adoptors, and the early majority and late majority, that make up the mass market -Breaks down 100% market potential into different customers who's demand is different -Many innovators DON'T SUCCESSFULLY TRANSITION from one stage of the industry life cycle to the next
Growth Stage (industry life cycle)
Growth Stage: MARKET GROWTH ACCELERATES 1.) Demand increases rapidly: -First-time buyers rush to buy -PROOF OF CONCEPT complete= Demonstrated by introduction stage 2. Competitive rivalry= Low (large market growth) -Lots of good and bad firms entering market 3. Product/ service standards emerge: -a common set of features and design features 4. Core competencies= Manufacturing, marketing, R&D
What is the fundamental question of Strategic Entrepreneurship?
How to combine entrepreneurial actions... How to create new opportunities.. How to exploit existing opportunities... ...in the pursuit of competitive advantage
Idea (Four I's of innovation)
Idea= Presented in terms abstract concepts or findings from basic research -First step of Innovation process
Imitation (Four I's of innovation)
Imitation= If an innovation is successful, competitors will attempt to imitate it
(Understand) Once firms have achieved market of acceptance of a breakthrough innovation, do they tend to follow up with incremental or radical innovation?
Incremental innovation -Over time, these companies morph into industry incumbents -Future radical innovations are introduced by new entrepreneurial ventures
Incremental innovation
Incremental innovation= existing market/ existing technology -BUILDS ON EXISTING KNOWLEDGE BASE -Results from steady improvement of existing product ex.) Gillete blades from 1 to 6
Network effects (Just understand)
Network effects= The positive effects that one user of a product has on the value of that product for other users -Value of product increases with number of users
What is the total market share that is represented by technology enthusiasts? What stage do they enter in?
Technology Enthusiasts: 2.5% Introduction stage 2.5% of total market potential= Smallest group
Technology Enthusiasts
Technology Enthusiasts: Introduction stage (2.5% of total market) -Have an engineering mind -Pursue new technology proactively -Enjoy using Beta versions -Tinker with product's imperfections= Often give free feedback and suggestions (Really enthusiastic about new technology= drives demand)
Winner-takes-all
Winner-takes-all= Markets where market leader captures almost all of the market share and is able to extract a significant amount of the value created -Become near-monopolies -Accomplished through Network effects