Chapter 7: Business Strategy: Innovation & Entrepreneurship

Architectural Innovation

-Firms can also innovate by leveraging existing technologies into new markets. Doing so generally requires them to reconfigure the components of a technology, meaning they alter the overall architecture of the product. -Therefore, is a new product in which known components, based on existing technologies, are reconfigured in a novel way to create new markets.

Open Innovation

-Not all the smart people work for us. We need to work with smart people inside and outside our company. -External R&D can create significant value; internal R&D is needed to claim (absorb) some portion of that value. -We don't have to originate the research to profit from it; we can still be first if we successfully commercialize new research. -Building a better business model is often more important than getting to market first. -If we make the best use of internal and external ideas, we will win. -We should profit from others' use of our IP, and we should buy others' IP whenever it advances our own business model.

Closed Innovation

-The smart people in our field work for us. -To profit from R&D, we must discover it, develop it, and ship it ourselves. -If we discover it ourselves, we will get it to market first. -The company that gets an innovation to market first will win. -If we create the most and best ideas in the industry, we will win. -We should control our intellectual property (IP), so that our competitors don't profit from it.

Industry Life Cycle

As an industry evolves over time, we can identify five distinct stages: introduction, growth, shakeout, maturity, and decline. —The industry life cycle model assumes a more or less smooth transition from one stage or another. This holds true for most continuous innovations that require little or no change in consumer behavior. But not all innovations enjoy such continuity.

Shakeout

As the industry moves into the next stage of the industry life cycle, the rate of growth declines. Firms begin to compete directly against one another for market share, rather than trying to capture a share of an increasing pie. —The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines. Assuming an acceptable value proposition, price becomes a more important competitive weapon in the shakeout stage, because product features and performance requirements tend to be well-established. —A few firms may be able to implement a blue ocean strategy, combining differentiation and low cost, but given the intensity of competition, many weaker firms are forced to exit. Any firm that does not have a clear strategic position is likely to not survive this phase.

The Four I's of Innovation

Broadly viewed, innovation describes the discovery, development, and transformation of new knowledge in a four-step process captured in the four I's: idea, invention, innovation, and imitation.

Decline

Changes in the external environment often take industries from maturity to this stage. In this final stage of the industry life cycle, the size of the market contracts further as demand falls, often rapidly. —At this final phase of the industry life cycle, innovation efforts along both products and process dimensions cease. If a technological or business model breakthrough emerges that opens up a new industry, however, then this dynamic interplay between product and process innovation starts anew.

Early Adopters (13.5%)

Customers entering the market in the growth stage. They make up roughly 13.5% of the total market potential. As the name suggests, they're eager to buy early into a new technology or product concept. Unlike tech enthusiasts, however, their demand is driven by their imagination and creativity rather than by the technology per se.

Crossing the Chasm (customer groups at each stage)

Geoffrey Moore, documented that many innovators were unable to successfully transition from one stage of the industry life cycle to the next. —Based on empirical observations, Moore's core argument is that each stage of the industry life cycle is dominated by a different customer group. —Technology Enthusiasts (2.5%) —Early Adopters (13.5%) —Early Majority (33%) —Late Majority (34%) —Laggards (~16%)

Disruptive Innovation

Leverages new technologies to attack existing markets. It invades an existing market from bottom up. -IPhone in 2007

Creative Destruction

Rate of change that is bringing and destroying value at the same time.

Early Majority: (33%)

The customers coming into the market in the shakeout stage. Their main consideration in deciding whether or not to adopt a new technological innovation is a strong sense of practicality. —They are pragmatists and are most concerned with the question of what the new technology can do for them. Before adopting a new product or service, they weigh the benefits and costs carefully.

Idea

The ideas are often presented in terms of abstract concepts or findings derived from basic research. Basic research is conducted to discover new knowledge and is often published in academic journals.

Laggards: (~16%)

The last consumer segment to come into the market, entering in the declining stage of the industry life cycle. These are customers who adopt a new product only if it is absolutely necessary, such as first-time cell phone adopters in the US today. —These customers generally don't want new technology, either for personal or economic reasons. Given their reluctance to adopt new technology, they are generally not considered worth pursuing.

Late Majority: (34%)

The next wave of growth comes from buyers in the late majority entering the market in the maturity stage. Like the early majority, they are a large customer segment, making up approximately 34% of the total market potential. —They prefer to wait until standards have emerged and are firmly entrenched, so that uncertainty is much reduced. The late majority also prefers to buy from well-established firms with a strong brand image rather than from unknown new ventures.

Technology Enthusiasts (2.5%)

The smallest market segment, it makes up some 2.5% of total market potential. Often have an engineering mind-set and pursue new technology proactively. They frequently seek out new products before the products are officially introduced into the market.

Process Innovation

are new ways to produce existing products or to deliver existing services. Process innovations are made possible through advances such as the internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.

Product Innovation

as the name suggests, are new or recombined knowledge embodied in new products—the jet airplane, electric vehicle, smartphones, and wearable computers.

Innovation

concerns the commercialization of an invention. The successful commercialization of a new product or service allows a firm to extract temporary monopoly profits.

Entrepreneurship

describes the 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. They seek out or create new business opportunities and then assemble the resources necessary to exploit them. —They're agents who introduce change into the competitive system. They do this not only by figuring out how to use inventions, but also by introducing new products or services, new production processes, and new forms of organization. —Strategic: describes the pursuit of innovation using tools and concepts from strategic management lens to entrepreneurship. —Social: describes the pursuit of social goals while creating profitable businesses.

Imitation

if an innovation is successful in the marketplace, competitors will attempt to imitate it.

Growth

After an innovation has gained some market acceptance, demand increases rapidly as first-time buyers rush to enter the market, convinced by the proof of concept demonstrated in the introductory stage. —The key objective during this phase is to stake out a strong strategic position not easily imitated by rivals.

Maturity

After the shakeout is completed and few firms remain, the industry enters the maturity stage. During the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with only a few large firms. —Most of the demand was largely satisfied in the shakeout stage. Any additional market demand in the maturity stage is limited. Demand now consists of replacement or repeat purchases. The market has reached its maximum size, and industry growth is likely to be zero or even negative going forward.

Invention

Describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones. The practical application of basic knowledge in a particular area frequently results in new technology. —If an invention is useful, novel, and non-obvious as assessed by the US PTO, it can be patented. -> A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea. -> In the US, 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.

Introduction

When an individual inventor or company launches a successful innovation, a new industry may emerge. In this introductory stage, the innovator's core competency is R&D, which is necessary to create a product category that will attract customers. —The strategic objective during this stage is to achieve market acceptance and seed further growth. —> One way to accomplish these objectives is to initiate and leverage network effects: The positive effect that one user of a product or service has on the value of that product for other users.