4490 7 - Business Strategy: Innovation and Entrepreneurship
First-Mover Advantages -examples of first-mover advantages (4)
"competitive benefits that accrue to the successful innovator" 1. economies of scale 2. experience & learning curve effects 3. some network effects 4. benefit from switching costs
P&G Innovation Model
"razor-razorblade" model: customer purchases the handle at low price but must pay premium for replacement refills
Must-Have characteristics to be a "disruptive innovation"
(1) It begins as a low-cost solution to an existing problem. (2) Initially, its performance is inferior to the existing technology, but its rate of technological improvement over time is faster than the rate of performance increases required by different market segments. "Technology Trajectory" (curved line): used by a disruptive innovator to invade market segments from the BOTTOM up!
who makes up the lion's share of market potential
- early adopters AND early majority
First-mover disadvantages
- must find distribution channels and complementary assets - must educate potential customers about product's intended benefits - must continue to perfect the product
EXAM!! (3) Reasons Incumbent firms tend to be a source of incremental innovation - incumbent firms like INCREMENTAL innovations (rather than radical)
1. Economic Incentives 2. Organizational Inertia 3. Innovation Ecosystem
Innovation Process
1. Idea 2. Invention 3. Innovation 4. Imitation
factors that led to a shift in the knowledge landscape from closed innovation to open innovation (4)
1. The increasing supply and mobility of skilled workers. 2. The exponential growth of venture capital. 3. The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. 4. The increasing capability of external suppliers globally
invention must be (3) things to be patented by US Patent and Trademark Office
1. Useful 2. Novel 3. Non-obvious
(4) Strategic Options for Managers
1. exit 2. harvest 3. maintain 4. consolidate.
Patent - what is it? - often allows for "___________" - but... can be a double-edged sword because...
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. - often allows for "temporary monopoly position" until the patent expires - but...can be a "double-edged sword" because must disclose the invention completely in order to get it patented
3) Shakeout Stage - competition? - what do firms do? - focus?
1. Competitive intensity increases and weaker firms are forced out 2. Firms begin to cut prices and offer more services 3. Consolidations and acquisitions occur, weaker firms exit through bankruptcy 4. Winners often stake out a strong position as cost leaders 5. Few may implement a blue ocean strategy, combining differentiation and low cost - focus: manufacturing - process innovation increasing - shift from non-price competition to price competition - differentiation or blue ocean CUSTOMER: early majority
How to Respond to Disruptive Innovation
1. Continue to innovate in order to stay ahead of the competition. 2. Guard against disruptive innovation by protecting the low end of the market. 3. Disrupt yourself, rather than wait for others to disrupt you (e.g., reverse innovation).
2) Growth Stage - competitive rivalry: - ___________ emerges - process innovation:
1. Demand increases after introduction 2. Competitive rivalry muted 3. "Standard" emerges 4. Product/ process innovations made - process innovation increasing - many competitors - non-price competition - differentiation CUSTOMER: early adopters ** After a standard is established in an industry, the basis of competition tends to move away from product innovations toward PROCESS innovations
(2) reasons why innovations has succeeded
1. initial innovations provided the infrastructure for newer innovations to diffuse more rapidly 2. new business models make innovations more accessible
Early Majority
Customers coming into the market during the SHAKEOUT stage, about 34 percent. Purpose: practicality...what can the technology do for THEM? 1/3rd of entire market.
Early Adopters
Customers entering the market in the GROWTH STAGE, roughly 13.5 percent of the market potential. Purpose: imagination and creativity
Late Majority
Customers entering the market in the MATURITY STAGE, making up approximately 34 percent of the total - NOT confident in their ability to master a technology...would rather wait until standards are established to adopt - care about purchasing from companies with good brand image
Harvest
Firm reduces investments in product support and allocates only a minimum of human and other resources (e.g., IBM offering typewriters-- they don't invest in future innovation, but are just maximizing cash flow from their existing typewriter line)
The innovation process ends with...
IMITATION
4. Imitation - example
If an innovation is successful in the marketplace, competitors will attempt to imitate it. Although Netflix has some 50 million U.S. subscribers, imitators are set to compete its advantage away. Amazon offers its Instant Video service to its estimated 50 million Prime subscribers ($99 a year or $8.25 a month), with selected titles free.
Technology Enthusiasts
Introductory phase of the industry life cycle (2.5%)
Markets and Technology Framework
A conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions.
Absorptive Capacity
A firm's ability to understand EXTERNAL technology developments, evaluate them, and integrate them into current products or create new ones
Open Innovation
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 insourced while others are spun out.
Architectural Innovation
A new product in which existing technologies are used in a novel way to create new markets
Intrapreneurs
Agents who innovate within existing companies - they pursue "corporate entrepreneurship" - EXAMPLE: A.G. Lafley at Procter & Gamble (P&G), who implemented an "open-innovation model"
Standard
An agreed-upon solution about a common set of engineering features and design choices.
Disruptive Innovation
An innovation that leverages new technologies to attack existing markets from the bottom up!
Reverse Innovation
An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes called frugal innovation. (ex: Developing products for emerging markets such as China and India and then introduce the products into developed markets such as the United States)
1. Idea - idea is often ____________
The innovation process begins with an idea. - The idea is often presented in terms of ABSTRACT concepts or as findings derived from basic research.
what 2 groups actually drive industry growth and firm profitability?
early majority AND late majority
iPhone & customer segments
iPhone enticed BOTH the early majority and Late majority
In the third step of the innovation process, a(n)
invention is commercialized by entrepreneurs.
Consolidate
Buying rivals—may approach monopoly power (albeit in declining industry)
(5) Industry Life Cycle - when can innovations emerge?
As an industry evolves over time, there are FIVE distinct stages: 1. introduction 2. growth 3. shakeout 4. maturity 5. decline ** tends to be a PREDICTABLE industry life-cycle - The # and size of competitors CHANGE as the industry life cycle unfolds - different types of consumers enter the market at each stage - both the supply and demand sides of the market CHANGE as the industry ages. - Each stage of the industry life cycle requires different competencies for the firm to perform well and to satisfy that stage's unique customer group. NOTE: industries do not always evolve through the exact stages...innovations can emerge at ANY stage in the life cycle
Incremental Innovation vs. Radical Innovation
Incremental Innovation: An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service. - ex: gillette Radical Innovation: An innovation that draws on new methods or materials, is derived from an entirely different knowledge base or from a recombination of existing knowledge bases with a new stream of knowledge.
Winner-take-all markets - where does this often occur?
Markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created. - occurs in markets where network effects are important
Markets and Technology Model
Markets: New Architectural, Radial Existing Incremental, Disruptive Tech: Existing, New FOUR types of innovations emerge: 1. incremental 2. radical 3. architectural 4. disruptive innovations. ** PAIRS: - incremental vs. radical innovation - architectural vs. disruptive innovation. *see slide 39*
Product Innovation
New or recombined knowledge embedded in new products
Process Innovation
New ways to produce existing products or deliver existing services. -- in other words, new ways to do things.
Exit
Some firms are forced to exit the industry by bankruptcy or liquidation (ex: US textile industry firms exiting due to low-cost foreign competition)
3. Innovation
The COMMERCIALIZATION of any new product or process, or the modification and recombination of existing ones (or in other words, an invention)
How are the early majority and late majority different in their attitudes toward technology?
The early majority is confident in their ability to master the new technology; the late majority is not.
Network Effects - Apple's positive iPhone example
The positive effect (externality) that one user of a product or service has on the value of that product for OTHER users. - leveraging network effects drives demand - EXAMPLE: Apple's use of Apps leads to network effects Apple's positive iphone cycle: 1. iPhone installed base 2. iPhone Apps 3. Value of iPhone 4. Demand for iPhone
2. Invention
The transformation of an idea into a new product or process, or the modification and recombination of existing ones.
Maintain
Continue to support marketing efforts despite demand (e.g., Marlboro cigarettes)
CAUTION: Industry Life Cyle
Useful framework to guide strategic choice, industries DO NOT necessarily "evolve" through these stages - innovations can emerge at ANY stage of the industry life cycle, which in turn can initiate a new cycle - Industries can also be rejuvenated, often in the declining stage. EXAMPLE: Although the motorcycle industry in the United States had been declining for a long time, Harley-Davidson was able to rejuvenate the industry with new designs and an extended lineup of bikes, greater reliability, and a more efficient and professional dealer network
Trade Secrets - what are they? - patents vs. trade secrets
Valuable proprietary information that is NOT in the public domain and where the firm makes every effort to maintain its secrecy - alternative to a patent because you do NOT disclose the details of the invention (avoids public disclosure) - both Netflix & google use trade secrets so they DON'T disclose their algorithms **Most famous: Coca-Cola recipe
While the industry for tablet computers is in the growth stage, the laptop industry is in its shakeout stage. What does this imply?
While the market demand for tablets will be high, the demand for laptops will be limited.
Competition
a process driven by the "perennial gale of creative destruction," - Joseph Schumpeter
Insightful way to categorize innovations - "technology" refers to... - an invention turns into an innovation only when...
measure their degree of newness in terms of TECHNOLOGY & MARKETS. - "technology" refers to the methods and materials used to achieve a commercial objective. example: Amazon integrates different types of technologies (hardware, software, microprocessors, the Internet, logistics, and so on) to provide the largest selection of retail goods online AND an array of services and mobile devices (e.g., cloud computing, Kindle tablets, Prime, and so on). - We also want to understand the market for an innovation—e.g., whether an innovation is introduced into a new or an existing market—because... ** an invention turns into an innovation only when it is successfully commercialized**
Social Entrepreneurship - what is it? - what's different about social entrepreneurs evaluation of performance? - example
pursuit of SOCIAL goals while creating profitable businesses. - Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution (profits, planet, and people). **They use a "triple-bottom-line" approach to assess performance EXAMPLE: Jimmy Wales, Wikipedia - one of the first to grasp the power of an open-source method to provide knowledge on a very large scale - differentiated because of his IDEALISM: Wikipedia is free for the end user and supports itself solely by donations and not, for example, by online advertising. - ** this is a form of social entrepreneurship ... His vision is to make the entire repository of human knowledge available to anyone anywhere for free
Entrepreneurship
the process by which change agents (entrepreneurs) undertake economic risk to innovate—to create new products, processes, and sometimes new organizations. Notes: - Entrepreneurs innovate by commercializing ideas and inventions. - They seek out or create NEW business opportunities and then assemble the resources necessary to exploit them. - If successful, entrepreneurship not only drives the competitive process, but it also creates value for the individual entrepreneurs and society at large
Strategic Entrepreneurship - example
the pursuit of innovation using tools and concepts from strategic management. EXAMPLE: - Apple's continued innovation in mobile devices - use strategic analysis, formulation, and implementation when deciding which new type of mobile device to research and develop, when to launch it, and how to implement the necessary organizational changes to support the new product launch. - ** Each new Apple release is an INNOVATION; each is therefore an act of entrepreneurship—planned and executed using strategic management concepts. In 2015, for example, Apple entered the market for computer wearables by introducing the Apple Watch.
GE's Innovation Mantra: Disrupt Yourself (Reverse Innovation Example)
Typical high end ultrasound machine: $250,000 GE first developed a $30,000 device GE then developed a $5,000 device the Vscan It's a cross between an iPod and a flip phone Doctors can hang it around their neck
Why do incumbent firms focus on incremental innovation instead of radical? - 3 reasons - define each reason
Economic Incentives: - Established companies are focused on defending their position Organizational Inertia: - Established companies rely on formalized business processes and structures. Resistant to changes in status quo. Innovation Ecosystem: - Established companies are part of an ecosystem: suppliers, buyers, complementary Note: incremental innovations tend to keep everyone happy (compared to radical)
Laggards
Entering during the DECLINING phase (about 16%) - adopt a new product only if it is absolutely necessary i.e. a cell phone
competition focuses more on PRICE as you go through the life cycle
TRUE
Features and Strategic implications of the Industry Life Cycle
see slide 36
Crossing the Chasm Framework
*review this separately* read textbook CORE ARGUMENT: each stage of the industry life cycle is dominated by a different customer group - documented that many innovators were unable to successfully transition from one stage of the industry life cycle to the next (between early adopters and early majority) - breaks down the 100 percent market potential into different CUSTOMER SEGMENTS, highlighting the incremental contribution each specific segment can bring into the market. - This results in the familiar "bell curve". - NOTE** the big chasm, separates the "early adopters" from the "early and late majority" ** Each stage customer segment, is also separated by smaller chasms. Both the large competitive chasm and the smaller ones have strategic implications ** Must formulate a business strategy for each segment guided by the who, what, why, and how questions of competition (Who to serve? What needs to satisfy? Why and how to satisfy them?), introduced in Chapter 6, the firm will find that the core competencies to satisfy each of the different customer segments are quite different. EXAMPLE: only Facebook was successful with late majority and laggards (compared to Friendster and MySpace) - BlackBerry AKA "RIM" was able to cross the Chasm!! Problem, Apple introduced iPhone and early and late majority LOVED it because of online capability *** to overcome the chasm you should formulate a business strategy using the "WHO, WHAT, WHY, HOW" framework
Product and Process Innovation throughout an industry life cycle
*see slide 27* graph shows level of innovation over time - process innovation looks similar to industry life cycle (market size vs. time) - product innovation is kind-of the inverse, except they both end at zero
Netflix
- Gained competitive advantage through INNOVATION - user builds a queue of movies they want to watch next - "personalized recommendation engine"
Open Innovation - ideas and innovation can originate from...
- Ideas and innovation can originate from external sources: Customers Suppliers Universities Start-ups Competitors An example of open innovation is Procter & Gamble's Connect+Develop, or C+D *see 54 and 56*
Disruptive Innovation Examples:
- Japanese carmakers successfully followed a strategy of disruptive innovation by first introducing small fuel-efficient cars and then leveraging their low-cost and high-quality advantages into high-end luxury segments, captured by brands such as Lexus, Infiniti, and Acura. More recently, the South Korean carmakers Kia and Hyundai have followed a similar strategy. - Digital photography improved enough over time to provide higher-definition pictures. As a result, it has been able to replace film photography, even in most professional applications. Laptop computers disrupted desktop computers; now tablets and larger-screen smartphones are disrupting laptops. Educational organizations such as - Coursera and Udacity are disrupting traditional universities by offering massive open online courses (MOOCs), using the web to provide large-scale, interactive online courses with open access.
Closed Innovation
- New products discovered, developed, and commercialized INTERNALLY - popular in the 20th century - costly but allowed firms to fully capture the returns of their innovation - ALL R&D is done IN-house - uses traditional "funnel" approach - does NOT accept outside ideas and does not give out their own ideas * can fall victim to the "not-invented-here syndrome": belief that r&d leading to a discovery OUTSIDE the firm is simply "not good"
Life Cycle Model
- The development of most industries follows an "S-curve" Horizontal Axis: TIME Vertical Axis: MARKET SIZE
4) Maturity Stage - industry structure...
1. After the shakeout is completed and a few firms remain 2. Industry structure morphs into an oligopoly with only a few large firms 3. Process innovation reaches its maximum as firms attempt to lower cost 4. Level of product innovation sinks to its minimum 5. Remaining firms tend to enjoy economies of scale - product innovation at a minimum - cost leadership or blue ocean** - maintain "strategic position" CUSTOMER: late majority
5) Decline Stage - main cause - what occurs?
1. Changes in the external environment often take industries from maturity to decline. 2. The size of the market contracts further as demand falls, often rapidly. 3. Innovation efforts along both product and process dimensions cease. 4. Managers have four strategic options: exit, harvest, maintain, or consolidate CUSTOMER: laggards
1) Introduction Stage - core competency: - barriers to entry: - innovators may also encounter... - strategic objective - what is it? how is it accomplished? - focus on...
1. Characterized by the innovator's core competency in R&D 2. Barriers to entry tend to be HIGH 3. Innovators may also encounter first-mover-disadvantages - product innovation at maximum, process innovation at minimum - differentiation - non-price competition CUSTOMER: technology enthusiasts ** Strategic objective: achieve market acceptance and seed future growth - accomplished by "network effects" - focus on unique product features and performance rather than price
Innovation - what is it? - what can it do? - examples? - the pace of adoption rate of recent innovations continues to ___________
the successful introduction of a new product, process, or business model—is a powerful driver in the competitive process . - Innovations in technology and business models can make existing competitors obsolete, and how they allowed Netflix to gain a competitive advantage - a powerful strategic weapon to gain and sustain competitive advantage EXAMPLES: 1. Traditional networks vs. cable providers 2. Cable providers vs. streaming content 3. Typewriters to PC's to mobile devices - it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. - 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players - The pace of the adoption rate of recent innovations continues to ACCELERATE