Exam 2

Radical vs. Incremental Innovation: What is an innovation ecosystem?

- A firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making

How are EVC and competitive advantage related?

- A higher EVC compared to rivals creates a competitive advantage - Referring to the formula, this means you have higher WTP (value), lower costs (C), or both

EVC: Why would firms lower their price? (what are the advantages/disadvantages of having lower price than rivals)

- Advantages: creates economies of scale and network effects - Disadvantages: reduces profit compared to those with higher price (PS = P - C)

What is a platform business?

- An enterprise that creates value by matching external producers and consumers in a way that creates value for all participants, and that depends on the infrastructure or platform that the enterprise manages.

4 categories of innovation: What is radical innovation?

- An innovation that draws on novel methods or materials, is derived either from (1) an entirely different knowledge base or from (2) a recombination of the existing knowledge bases with a new stream of knowledge - New market, new tech

4 categories of innovation: What is disruptive innovation?

- An innovation that leverages new technologies to attack existing markets from the bottom up - New tech, existing market

4 categories of innovation: What is incremental innovation?

- An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service - Existing market, existing tech

What is reverse innovation? Example?

- An innovation that was developed for emerging economies/markets before being introduced in developed economies/markets - Develop a product for an emerging market, like China, before introducing it to a developed market, like the U.S.

Platform ecosystem roles: What is the role of the consumers?

- Buy/use the platform's offerings

EVC Formula: What do consumer surplus and producer surplus mean?

- CS (V - P): the value we create; after taking out price paid, what's left is the additional perceived value of customers - PS (P - C): firm's profit

Platform ecosystem roles: What is the role of the producers?

- Create the platforms offerings (product/service)

Generally speaking, where do the value curves of differentiation and low-cost strategy firms fall on the strategy canvas?

- Differentiation: curve near the top of canvas (high price, many features) - Low-cost: curve near bottom of canvas (low price, few features)

5/6 forces model: For the other 6th force, what happens to profits when the opportunity is high? low?

- High complements = high profits - Low complements = low profits

Barriers to entry: What are switching costs in terms of threat of new entry? Describe. Example?

- If there are low/no switching costs, customers can easily switch from an incumbent firm to one of the new entrants - Ex: Switching from Lagunitas craft beer to a new, innovative entrant

Learning curve vs. Experience curve

- Learning: assume underlying processes remain constant while cumulative outputs increase - Experience: assume cumulative output stays constant while underlying processes change (process innovation)

Radical vs. Incremental Innovation: What is a "winner-take-all" market? What is the cause/effects of these?

- Markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created - Cause: when network effects are very strong - Effect: winner takes all market share, losers left with nothing

5/6 forces model - threat of substitutes: What are substitutes? Examples?

- Multiple products from different industries that serve the same purpose for customers - Ex: Substitutes for beer include wine, spirits, hard seltzers, etc.

Platform ecosystem: What is "side-switching"? Example?

- Players in the ecosystem switching from one role to another - Ex: Uber users become uber drivers

What is critical to the success of a platform model? Explain.

- Positive network effects: as # users increase, so does the value of the business/product

What is a strategy canvas? What is a value curve?

- Strategy canvas: a graoh that shows a company's performance, relative to its competitors, across its industry's factors of competition - Value curve: a component of the canvas that connects each point of value and helps leaders diagnose and determine courses of action

5/6 forces model: For all 5 traditional forces, what happens to profits when the force is strong? Weak?

- Strong = decrease in profits - Weak = increase in profits

What are economies of scope?

- The decline in the cost of production due to the sharing of resources across products and services - the savings that come from producing 2+ outputs at less cost than producing each individually

What are economies of scale?

- The decline in the fixed cost of production per unit as the volume grows

What is a platform ecosystem? Who are the 4 players?

- The market environment in which all players participate relative to the platform - 4 players: 1. Producers: create the platform's offerings 2. Consumers: buy/use the offerings 3. Owner: controls the IP address, who participants, and in what ways they participate 4. Providers: offer interfaces for the platform, enabling its accessibility online

What is value innovation?

- The simultaneous pursuit of differentiation and low cost in a way that creates a leap in value for both the firm and the consumers - Considered a cornerstone of *blue ocean strategy* - instead of attempting to out-compete rivals by offering better features or lower costs, successful value innovation makes competition irrelevant by providing a leap in value creation - aligning innovation with total perceived consumer benefits, price, and cost; opens new and uncontested market spaces

What is at the center of a platform ecosystem?

- Value and data exchange and feedback

What is a blue ocean?

- an industry uncontested by competitors, where unmet demand can be found - a successful Blue Ocean Strategy typically requires creating new demand with a value proposition that no other company has yet delivered—or even identified as an opportunity. - the first player in a blue ocean captures all market share and can enjoy economies of scale and low-cost CVP, resulting in sustainable competitive advantage

What is the consequence of a blue ocean strategy gone bad?

- being "stuck in the middle" - the firm has neither a clear differentiation nor a clear low-cost profile - this leads to inferior performance and a competitive disadvantage

Platform ecosystem roles: What is the role of the owner?

- controls the IP address - controls who participates and in what ways

Barriers to entry: List examples of advantages independent of size

- incumbents possess things such as brand loyalty, favorable location, experience/learning, and preferential access to resources - all these things may be gained regardless of the firm's size, but they take a long time to develop (like loyalty and experience) or are hard to get (like resources and location)

What is a red ocean?

- industry overcrowded with competitors - the ocean is red because "products turn into commodities and increasing competition turns the water bloody" - firms are in a never-ending fight to outperform rivals for the existing market - growth and profitability are constrained and eventually eroded by competition

Why/how is a blue ocean strategy difficult to implement?

- it requires the reconciliation of fundamentally different strategic positions - differentiation and low cost - which in turn require distinct internal activities so the firm can increase value and lower cost at the same time

4 categories of innovation: What is architectural innovation?

- new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets. - alter the overall *architecture* of a product - existing tech, new market

Barriers to entry: What are network effects? Give an example

- occurs when the value of a product increases as the number of users of that product increases - ex: as more people used Apple iPhones, it became more valuable and popular. trying to get a share in that market would be difficult

Platform ecosystem roles: What is the role of the provider?

- offers the interfaces for the platform, enabling its online accessibility

Radical vs. Incremental Innovation: Economic incentives - describe the economic incentives behind new firms using radical innovation

- successfully commercializing a radical innovation is usually the only option to enter an industry that has high entry barriers

Rivalry: What are exit barriers? How do they effect rivalry?

- the obstacles that determine how easily a firm can leave an industry - if exit barriers are high, people are less likely to leave because they don't want to go through the trouble (less attractive, increases competitive pressure) - if exit barriers are low, firms can leave an industry more easily, reducing the competition (more attractive, reduces competitive pressure)

What is the pipeline model? What does it represent? Example?

- the typical value chain; captures the internal activities a firm engages in - represents a horizontal, linear view of of a firm's activities from producer to consumer - Ex: Raw materials -> WIP -> FG -> retail -> post-sale support

EVC for low-cost firms: In terms of CS, PS, and EVC, what are the effects of (1) keeping same price as rivals and (2) lowering price as well?

1. CS stays the same, PS increases, EVC increases 2. CS increases, PS increases (but not as much as #1), EVC increases

5/6 forces model - Rivalry: What 8 things intensify rivalry in an industry?

1. Competitive industry structure: more firms = more rivalry 2. Industry growth: slow growth = more rivalry 3. Strategic commitments: high FC, low MC 4. High exit barriers 5. Incumbent firms are highly committed 6. Incumbent firms can't understand eachother's strategies 7. Products in the industry are direct substitutes (commodity product) 8. The product/service is perishable

4 categories of innovation - Disruptive: What are the 3 best ways for incumbent firms to respond to disruptive innovation?

1. Continue to innovate and stay ahead of the competition 2. Guard against disruptive innovation by protecting the low-end of the market 3. Reverse innovation: disrupt yourself instead of waiting for others to disrupt you

Business models (customer value proposition): What are the 2 main types of value propositions? (describe each)

1. Cost-Leadership (low cost): attracts customers by offering lower prices—or better value at a low price—than its competitors 2. Differentiation: offers a product perceived to be better in some way than alternatives, increasing customer's willingness to pay

The EVC framework shows that strategy is about 2 things:

1. Creating value (V - C) 2. Capturing as much of that value as possible; split between... a) Consumer value captured: CS = V-P b) Producer value captured: PS = P-C

3 limitations of the EVC framework:

1. Determining value in the eyes of a customer is not simple 2. The value of a good in the eyes of consumers changes based on income, preferences, time, and other factors 3. To measure firm-level competitive advantage, we must estimate the EVC for all products/services offered by a firm (sometimes that is alot)

Rivalry: What are the 2 types of factors that create exit barriers? Give examples of each

1. Economic factors: fixed costs that must be paid regardless of leaving, contractual obligations to suppliers, employee severence/retirement 2. Social factors: emotional connection to geographic location, relationships with suppliers

Radical vs. Incremental Innovation: What are the 3 reasons why new firms use radical and incumbents use incremental?

1. Economic incentives 2. Organizational inertia 3. Innovation ecosystems

5/6 forces model - power of buyers: What causes this force to be high? 4 things

1. Few buyers, each purchasing large quantities 2. Industry's products are standardized 3. Low/no switching costs for the buyer (can easily switch to a substitute product without consequence) 4. Buyers can threaten to backwards-integrate into industry

Low-Cost: What are the risks involved with this strategy?

1. If a new entrant with relevant expertise enters the market, low-cost leader's margins may decrease due to losing market share while trying to learn new capabilities 2. Substitutes may emerge through innovation 3. Rivals may imitate the strategy and lower their costs more effectively 4. Focus of competition may shift from price to non-orice attributes

Markets-and-Technology Framework: What are the 4 categories of innovation? List with a brief description of new/existing markets/tech.

1. Incremental: existing markets, existing tech 2. Radical: new markets, new tech 3. Architectural: new markets, existing tech 4. Disruptive: existing markets, new tech

4 categories of innovation - Disruptive: 2 factors that aid in the success of disruptive innovation (what incumbents do that helps out the disrupter)

1. Incumbents ignore the low-end, allowing disruptor to invate there 2. Incumbent firms are often slow to change (they focus on incremental innovation). Eventually, customers switch to the disrupter and it's too late to catch up

What are the 4 primary cost drivers used to keep a low-cost strategy?

1. Low-cost inputs 2. Economies of scale 3. Learning curve effects 4. Experience curve effects

5/6 forces model - threat of substitutes: What causes this threat to be high? 2 things

1. Low/no switching costs - consumers can easily switch to a substitute without consequence 2. Substitute has good price-performance trade-off (ex: renting a car instead of buying one)

What 2 things are required for successful value innovation? Describe how it is accomplished.

1. Lowering costs: *eliminating and reducing* the taken-for-granted factors that industry rivals compete on 2. Increasing perceived value: *raising* existing key success factors by *creating* new elements that the industry has not offered previously

What are the 2 types of target market? Describe with examples.

1. Mass Market: broad in scope (ex: Walmart) 2. Focused/Niche: narrow in scope (ex: Laganitas; Cirque de Soliel)

5/6 forces model - Rivalry: What are the 4 main competitive industry structures, in order of lowest to highest profit potential? Briefly describe each in terms of... a) Fragmented or consolidated industry? b) What is pricing power like? c) What are products like? d) High or low barriers to entry?

1. Perfect competition: fragmented (many small firms), price takers, commodity product, low entry barriers 2. Monopolistic competition: fragmented, some pricing power, differentiated product, medium entry barriers 3. Oligopoly: consolidated (few large firms), some pricing power, differentiated product, high entry barriers 4. Monopoly: consolidated (one firm), considerable pricing power, unique product, very high entry barriers

3 Advantages of a platform model (why they outperform pipelines)

1. Platforms scale more efficiency (grow faster) than pipelines by eliminating gatekeepers 2. Platforms unlock new sources of value creation and supply 3. Platforms benefit from community feedback

What are the 3 biggest "value drivers" used by strategic leaders? Briefly describe each

1. Product features: inc. perceived value and WTP by differentiating product 2. Customer service: build relationships with consumers 3. Complements: find a complement to increase value (ex: apple makes a bundle with AT&T)

Low-Cost: How can each of the 5 forces be reduced with a successful low-cost strategy? Explain.

1. Rivalry: by obtaining the lowest cost position in the industry, they're protected from competitors 2. Threat of entry: since obtaining economies of scale is critical to reaching a low-cost position, the low-cost leader will have a large market share, reducing this threat 3. BP of suppliers: firm is more able to absorb input price increases by accepting lower profit margins 4. BP of buyers: buyers demand lower prices, and these firms can give it to them 5. Substitutes: low-cost firm can continue lowering prices to reinstall relative value compared to the substitute

Differentiation: How can each of the 5 forces be reduced with a successful differentiation strategy? Explain.

1. Rivalry: in order to gain market share, rivals need to focus on creating special, unique features instead of focusing on cutting costs/taking from others 2. Threat of new entry: potential competitors find the intangible advantages time-consuming, costly, or impossible to imitate 3. BP of Suppliers: if a firm is able to create significant value and comp. adv., it won't be so threatened by increases in input prices from suppliers 4. BP of buyers: by creating perceived value, brand loyalty grows 5. Substitutes: unique features have been created to appeal to customer preferences

5/6 forces model - Threat of new entry: What are the 7 barriers to entry?

1. Switching Costs 2. Network Effects 3. Economies of Scale 4. Capital Requirements 5. Advantages independent of size 6. Government policy 7. Threat of retaliation

What are the 2 ways in which learning effects differ from economies of scale? Describe

1. Timing: learning is over time as output accumulates, economies of scale captured at one point in time when output increases 2. Complexity: in some production processes, effects from EOS are significant while learning effects are minimal (ex: manufacturing steel rods) and vice versa (ex: brain surgery)

Differentiation: What are the risks involved with this strategy?

1. When competition shifts from value-creating features to price (happens when differentiated products become commoditized) 2. Adding product features that raise costs but not perceived consumer value 3. When costs of providing uniqueness rise above a customer's WTP

5/6 forces model - power of suppliers: What causes this force to be high? 5 things

1. few suppliers, many buyers in the industry 2. the particular industry is not the supplier's main revenue source 3. switching costs exist (costly to change suppliers) 4. supplier has differentiated products; low/few substitutes 5. suppliers can threaten to forward-integrate into industry

Radical vs. Incremental Innovation: Economic incentives - describe the 3 economic incentives behind incumbent firms using incremental innovation

1. these innovations strengthen the firm's position, thus maintaining high entry barriers (keeping threat of entry low, less competition, higher profit) 2. once industry standard has emerged and tech uncertainty has been reduced, incremental innovations are helpful to differentiate 3. these innovations extend the time needed for the firm to extract profits based on a favorable industry structure (one it becomes monopoly, or winner-take-all, the opportunity is gone)

4 categories of innovation - Disruptive: What is the main idea behind this type? (2 steps)

1st: Enter the low-end market segment by providing a low-cost solution (start on the fringe) 2nd: Over time, fast rate of tech improvements help the firm to capture more and more of the market, eventually the high-end

Radical vs. Incremental Innovation: What is the typical pattern of business innovation? (2 steps)

1st: Use radical innovation to gain market share and create temporary competitive advantage 2nd: Follow-up with a string of incremental innovations to maintain market share and make that advantage sustainable

5/6 forces model: List the 5 traditional forces and the other 6th force

5 traditional: 1. Threat of new entry 2. Bargaining power of suppliers 3. Bargaining power of buyers 4. Rivalry 5. Threat of substitutes ~~~~~~~~~~~~~~~~~ 6th force: Opportunity of complements

5/6 forces model - complements: What are complements?

A company in one industry that provides products or services that increase the value of the products or services of a company in another industry

What is the markets-and-technology framework?

A conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions

What is the value innovation model?

A. Lower costs: 1. Eliminate: Which factors that the industry takes for granted should be eliminated? 2. Reduce: Which factors should be reduced below industry standard? -------------------------- B. Increase perceived consumer value: 1. Raise: Which factors should be raised well above the industry standard? 2. Create: Which factors whould be created that the industry has never offered?

Economic Value Created (EVC): What is the EVC formula? Break down

EVC = Value - Cost OR EVC = (Value - Price) + (Price - Cost) which means... EVC = Consumer Surplus + Producer Surplus

5/6 forces model - Threat of new entry: What causes this threat to be high?

Lack of entry barriers

EVC Formula: Describe value, price, and cost components

Value = consumer's max WTP; determined by the perceived benefits a good/service provides to the buyer Price = price paid by consumer/charged by seller (aka reservation price) Cost = total costs to produce the good/service relative to rivals

5/6 forces model - power of suppliers: a) If this force is high, what happens and why? b) If this force is low, what happens and why?

a) Costs increase (suppliers may set higher prices for their services/materials, increasing the price firms pay to obtain them) b) Costs decrease (if there are many suppliers to choose from, they won't increase prices or buyers can switch)

Radical vs. Incremental Innovation: Innovation ecosystem - describe the effect this has on (a) incumbent firms using incremental and (b) new firms using radical

a) Incumbent: they are embedded in an ecosystem where they have to consider other parties. radical innovations could mess up the ecosystem. incremental reinforces the network and keeps members happy b) New: don't have an ecosystem yet, so free to be radical

Radical vs. Incremental Innovation: Organizational inertia - describe the effect this has on (a) incumbent firms using incremental and (B) new firms using radical

a) Incumbents: incremental innovations reinforce the existing organizational structure and power distribution. radical messes it up b) New firms: don't have a formal structure yet, so they have freedom to launch an initial breakthrough

Platform model: Describe the effects of (a) positive network effects vs. (b) negative network effects

a) Positive: critical to value creation (as value rises with # of users) and allows platform to gain and sustain competitive advantage (ex: Facebook) b) Negative: occurs when more users exit the platform and the value for each remaining user declines; leads to failure of a company (ex: MySpace)

5/6 forces model - Rivalry: a) If this force is high, what happens and why? b) If this force is low, what happens and why?

a) WTP and price decreases, costs increases (price wars - rivals drop prices to gain customers and increase costs by trying to differentiate their product) b) WTP and price increase; costs decrease (not alot of rivalry - firms can raise prices)

5/6 forces model - Threat of new entry: a) If this threat increases, what happens and why? b) If this threat decreases, what happens?

a) WTP dec, price dec, & costs inc. (why: if threat of new firms is high, incumbents may drop prices to make the industry look less attractive and increase costs to maintain loyalty from existing customers) b) WTP inc, price inc. & costs dec.

5/6 forces model - power of buyers: a) If this force is high, what happens and why? b) If this force is low, what happens and why?

a) WTP decrease, prices decrease (buyers may demand lower prices) b) WTP increase, prices increase

5/6 forces model - threat of substitutes: a) If this threat is high, what happens and why? b) If this threat is low, what happens and why?

a) WTP decreases, prices decrease (industry may drop prices so buyers don't switch to substitute) b) WTP increases, prices increase (if there are no substitutes, consumers are more willing to pay and firms can raise prices)

5/6 forces model - complements: a) When the opportunity of complements is high, what happens? b) When the opportunity of complements is low, what happens?

a) WTP inc, prices inc, so profits inc (when complements exist, more ppl want the original product) b) WTP dec, prices dec, so profits dec (no additional value is added)

Platform business: a) What it enables... b) What is it's purpose... c) What it provides...

a) enables value-creating interactions between external producers and consumers b) purpose: consummate matches among users and facilitate exchanges, which enables value creation for all participants c) provides an infrastructure for the interactions and sets governance for them

Rivalry - competitive industry structure: a) What is a fragmented industry? b) What is a consolidated industry?

a) many small firms, often have low profit potential b) few large firms, often have high profit potential

Radical vs. Incremental Innovation: What is organizational inertia?

resistance to changes in status quo