BCOR 2304 Chapter 7

markets and technology framework

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

Innovation Ecosystem

A firm's embeddedness in a complex network of suppliers, buyers and complementors which requires interdependent strategic decision making Another reason why incumbent firms tend to be a source of incremental rather than radical innovators

Patent

A form of intellectual property that 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

Decline Stage

Changes in the external environment often take industries from maturity to decline. The size of the market contracts further as demand falls, often rapidly. Innovation efforts cease in both products and processes Managers have four strategic options: exit, harvest, maintain, consolidate

first-mover advantages

Competitive benefits that accrue to the successful innovatorEx: economies of scale, experience curve, learning curve, network effects, lock in key suppliers, lock in customers through increasing switching costs

Crossing the Chasm

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle The significant difference between the early customer groups - who enter during the introduction stage - and later customers - who enter during the growth stage - can make for a difficult transition between the different parts of the industry life cycle.

The predictable pattern of innovation

Firms use radical innovation to create a temporary competitive advantage, and then follow up with a string of incremental innovations to sustain that initial lead.

four I's of innovation:

Idea Invention Innovation Imitation

Introduction stage

In this stage, the innovator's core competency is R&D Emphasis on unique product features and performance rather than price Strategic objective is to achieve market acceptance and seed future growth, which can be done by initiating and leveraging network effects Product innovation at its maximum Process innovation at its minimum

Maturity Stage

Industry structure morphs into an oligopoly with only a few large firms. Demand now consists of replacement or repeat purchases. level of process innovation reaches its maximum as firms attempt to lower costs as much as possible, while the level of incremental product innovation sinks to its minimum

Radical innovation

Targets new markets by using new technologies An innovation that draws on new methods or materials, is derived either from an entirely different knowledge base or from a recombination of the existing knowledge bases with a new stream of knowledge Ex: mass produced automobile, x-ray, airplane, decoding human genome

first mover disadvantages

They must educate potential customers about the product's intended benefits, find distribution channels and complementary assets, and continue to perfect the fledging product.

Trade secret

Valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy Coca-coal formula

Maintain (decline stage)

continuing efforts ex: Marlboro continues to support marketing efforts despite the fact that U.S cigarette consumption has been declining

winner take all markets

markets where the market leader captures almost all of the market share and is able to extract a significant amount of the value created

Product innovations

new or recombined knowledge embodied in new products

Process innovation

new ways to produce existing products or deliver existing services

Economic incentives

once an innovator has become an established incumbent firm it has strong incentives to defend its strategic position and market power The incentive for entrepreneurial ventures is the opposite. successfully commercializing a radical innovation is frequently the only option to enter an industry protected by high entry barriers

The key objective for firms during the growth stage

stake out a strong strategic position not easily imitated by rivals

Innovation

the discovery, development and transformation of new knowledge in a four step process Concerns the commercialization of an invention

In disruptive innovation, for the new technology to be a disruptive force is must

-Begins as a low-cost solution to an existing problem -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; Netflix

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 (low cost innovations) 3. Disrupt yourself, rather than wait for others to disrupt you (reverse innovation)

Architectural innovation

A way to innovate by leveraging existing technologies into new markets A new product in which known components, based on existing technologies are reconfigured in a new way to attack new markets Cannon building copiers for small and medium businesses where Xerox had only been focusing on providing them for large companies

Consolidate (decline stage)

Although market size shrinks during the decline stage, some firms may choose to buy rivals, which allows consolidating firms to stake out a strong position - possibly approaching monopolistic market power in a declining industry

standard

An agreed-upon solution about a common set of engineering features and design choices Can emerge from the bottom up through competition in the marketplace or be imposed from the top down by government or other standard-setting agencies.

Disruptive innovation

An innovation that leverages new technologies to attack existing markets from the bottom up The dynamic process begins when a firm, frequently a startup, introduces a new product or process based on a new technology to meet existing customer needs. ex: Japanese carmakers by first introducing small fuel-efficient cards and then leveraging their low cost and high quality advantages into luxury segments; Laptop computers disrupted desktops, now tablets and large screen smartphones are disrupting laptops

reverse innovation

An innovation that was developed for emerging economies before being introduced in developed economies. aka frugal innovation

Early Majority

Customers coming into the market in the shakeout stage Main consideration in deciding to adopt a new technological innovation is a strong sense of practicality. Concerned about what they new technology can do for them. Weigh benefits and costs carefully Prefer to sit and wait and see how hyped up products shake out Seek out reputable references Because they make up 1/3 of market winning them over is critical to success.

Which two customer groups make up the majority of market potential?

Early majority Late Majority

Late Majority

Enter the market in the maturity stage Large customer segment making up 35% of market Not confident in their ability to master the new technology, and prefer to wait until standards have emerged and are firmly entrenched. Prefers to buy from well-established firms with a strong brand image

Incremental innovation

Existing markets using existing technologies An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service Vast majority of innovations

Exit (decline stage)

Exit the industry by bankruptcy or liquidation

Growth Stage

Market growth accelerates Both efficient and inefficient firms thrive Prices begin to fall, often rapidly as standard business processes are put in place and firms begin to reap economies of scale and learning Distribution channels are expanding and complementary assets in the form of products and services become widely available Standards emerge Process innovation rapidly become more important than product innovation Core competencies for competitive advantage tend to shift toward manufacturing and marketing capabilities. More strategic variety Key objective for firms is to stake out a strong strategic position not easily imitated by rivals

Herding effect

Once the early majority decide to enter the market, they enter in large numbers

Shakeout Stage

Rate of growth decline Firms begin to compete directly against one another for market share, rather than trying capture a share of an increasing pie Firms begin to cut prices and offer more services, all in an attempt to gain more of a market that grows slowly if at all Cutthroat competition erodes profitability of all but the most efficient firms Industry often consolidates Winners are often firms that stake out a strong position as cost leaders. Key success factors are the manufacturing and process engineering capabilities that drive down costs The importance of process innovation further increases, while product innovation further declines

Factors favoring the success of disruptive innovation

Relies on stealth attack, by attacking from market up where incumbent firms fail to defend Incumbent firms are slow to change

organizational inertia

Resistance to changes in the status quo. Incumbent firms therefore tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that could disturb the existing power distribution From an organizational perspective, as firms become established and grow, they rely more heavily on formalized business processes and structures.

Technology enthusiasts

The customer segment in the introduction stage of the industry life cycle The smallest market segment - 2.5% of market Will pay premium price to have the latest gadget. Enjoy using beta versions providing feedback to companies

Early Adopters

The customers entering the market in the growth stage Make up 13.5 % of market Demand is driven by imagination and creativity, and fueled more by intuition and vision rather than technology concerns. Need to communicate the products potential

Harvest (decline stage)

The firm reduces investments in product support and allocates only a minimum of human and other resources. Ex: while IBM still offer typewriters, they don't invest much in future innovation, instead they are maximizing cash flow from their existing typewriter product line

Industry life cycle

The five different stages - introduction, growth, shakeout, maturity, and decline that occur in the evolution of an industry over time

Laggards

The last customer segment to come into the market, entering during the decline stage. Only adopt a new product if it is absolutely necessary, such as first-time cell phone adopters Generally don't want new technology for personal or economic reasons Generally not worth pursuing. Make up 16% of market

network effects

The positive effect (externality) that one user of a product or service has on the value of that product for other users Occur when the value of a product or service increases, often exponentially, with the number of users Propel the industry to the growth stage of the industry life cycle.

Entrepreneurship

The process by which people undertake economic risk to innovate - to create new products, processes and sometimes new organizations