Ch 7
Strategic initiatives to counter 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.
Factors that favor Disruptive Innovation
1. It relies on stealth attacks by invading the market from the bottom up, by first capturing the low end (which, many times, incumbent firms fail to defend because of low-margin business). 2. Incumbent firms often are slow to change because they tend to listen closely to their current customers and respond by continuing to invest in the existing technology and in incremental changes to the existing products; when newer technology matures and proves to be a better solution, those same customers will switch over.
Absorptive capacity
A firm's ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones
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
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 in-sourced while others are spun-out These firms realize that great ideas can come from both inside and outside the company Focus is on building a more effective business model to commercialize (internal and external) R&D, rather than focusing on being the first to market One key assumption is that combining the best of internal and external R&D will more likely lead to a competitive advantage (requires absorptive capacity)
Types of Innovation
INCREMENTAL - Existing market, Existing technology RADICAL - New market, New technology ARCHITECTURAL - New market, Existing technology DISRUPTIVE - Existing market, New technology
Incremental VS Radical Innovation
INCREMENTAL - an innovation that squarely builds on an established knowledge base, and steadily improves an existing product or service offering; targets existing markets by using existing technology RADICAL - an innovation that draws on novel 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, or targets new markets by using new technologies
Closed innovation
R&D approach used dominantly during the 20th century in which most leading industrial corporations tended to discover, develop, and commercialize new products internally Allowed firms to fully capture the returns to their own innovations Firms are extremely protective of their intellectual property (IP) Focus is on being the first to market
Pareto principle
Roughly 80% of effects come from 20% of the causes
Categories of Innovation
TECHNOLOGY - the methods and materials used to achieve a commercial objective MARKETS - whether an innovation is introduced into a new or an existing market
Industry life cycle
The five different stages and their objectives for a firm: 1) INTRODUCTION - to achieve market acceptance and seed future growth 2) GROWTH - to stake out a strong strategic position not easily imitated by rivals 3) SHAKEOUT - to survive the increasing rivalry between competitors as the rate of growth declines 4) MATURITY - to continue to survive as competition keeps increasing 5) DECLINE - as demand falls, must choose one of four strategic options: exit, harvest, maintain, or consolidate Supply and demand sides of the market change as the industry ages; each stage requires different competencies for the firm to perform well and to satisfy that stage's unique customer group
Factors that led to a shift from closed innovation to open innovation
- The increasing supply and mobility of skilled workers - The exponential growth of venture capital - The increasing availability of external options to commercialize ideas that were previously shelved or in-sourced promising ideas and inventions - The increasing capability of external suppliers
Thin markets
A situation in which transactions are likely not to take place because there are only a few buyers and sellers who have difficulty finding each other
Architectural VS Disruptive Innovation
ARCHITECTURAL - a 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 DISRUPTIVE - an innovation that leverages new technologies to attack existing markets from the bottom up
Standard
An agreed-upon solution about a common set of engineering features and design choices Can emerge bottom-up through competition in the marketplace, or be imposed top-down by government or other standard-seeing agencies Ensures that all components of the system work well together, regardless of who developed them; also helps legitimize the new technology by reducing uncertainty and confusion
Chasm framework
Breaks down the 100% market potential into different customer segments, highlighting the incremental contribution each specific segment can bring into the market
Long tail
Business model in which companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices; allows online retailers to overcome the problem of thin markets
First-mover advantages
Competitive benefits that accrue to the successful innovator May also benefit from network effects May hold important intellectual property such as critical patents
Reasons why radical innovations are generally introduced by new entrepreneurial ventures:
ECONOMIC INCENTIVES - incumbent firms have strong incentives to defend their strategic position and market power; differences in incentives leads incumbent firms to push incremental innovations while new entrepreneurs focus on radical innovations ORGANIZATIONAL INERTIA - a firm's resistance to changes in the status quo; incumbent firm's favor incremental innovations that reinforce the existing organizational structure and power distribution; new entrants do not have formal organizational structures and processes, giving them more freedom to launch an initial breakthrough INNOVATION ECOSYSTEM - a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making; incumbents must consider the ramifications on other parties in their innovation ecosystem when making decisions; new entrants don't have to worry about preexisting innovation ecosystems, since they will be building theirs around the radical innovation they are bringing to a new market
Four strategic options during the Decline Stage
EXIT - firms are forced to exit due to bankruptcy or liquidation HARVEST - firm reduces investments in product support and allocates only a minimum of human and other resources MAINTAIN - firm continues to support marketing efforts at a given level CONSOLIDATE - firms buyout rivals (those who choose to exit)
The Internet as Disruptive Force: The Long Tail
Everything that can go digital will--creating some losers and some winners Online digitization is both a threat and an opportunity Disruptive force of the Internet provides an opportunity to online retaliers to benefit from marketing the long tail (80% of the offerings) Leading online retailers carry an inventory 50-100 times larger than those of their largest brick-and-mortar competitors
Product innovations
New or recombined knowledge embodied in new products; at a maximum in the Introductory stage
Process innovations
New ways to produce existing products or deliver existing services
Customer segments of the Chasm framework (Life Cycle stage)
TECHNOLOGY ENTHUSIASTS (Introduction) - smallest market segment (2.5%); have an engineering mindset and pursue new technology proactively; often willing to pay a premium price to have the latest gadget EARLY ADOPTERS (Growth) - 13.5% of market potential; eager to buy into a new technology or product concept; demand is driven by their imagination and creativity; demand is fueled more by intuition and vision rather than technology concerns; firm needs to communicate the product's potential applications in a more direct way for this segment "The Chasm" is between these two segments - the widest competitive gulf EARLY MAJORITY (Shakeout) - 34% of market potential; main consideration is a strong sense of practicality; weight the benefits and costs carefully; prefer to wait and see how things shake out; rely on endorsements by others; winning this segment is critical to the commercial success of the innovation; "herding effect" LATE MAJORITY (Maturity) - 34% of market potential; similar to early majority in the attitudes toward new technology; difference is that late majority prefer to wait for standards to emerge and be firmly entrenched, so that uncertainty is much reduced; prefers to buy from well-established firms with a strong brand image LAGGARDS (Decline) - 16% of market potential; adopt a new product only if it is necessary; don't want new technology, either for personal or economic reasons
Four-step process of innovation
The 4-I's: 1) IDEA - presented in terms of abstract concepts or as findings derived from basic research 2) INVENTION - the transformation of an idea into a new product or process, or the modification and recombination of existing ones 3) INNOVATION - the commercialization of an invention by entrepreneurs 4) IMITATION - if an innovation is successful in the marketplace, competitors will attempt to imitate it
Entrepreneurs
The agents that introduce change into the competitive system; they do this not only be figuring out how to use inventions, but also by introducing new products or services, new production processes, and new forms of organization
Innovation
The commercialization of any new product or process, of the modification and recombination of existing ones; to drive growth, it also needs to be useful and successfully implemented Needs to be novel, useful, and successfully implemented in order to help firms gain and sustain a competitive advantage
How to be a disruptive force regarding innovation
The new product or technology has to have additional characteristics: 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.
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 If successful, these propel the industry to the next stage of the life cycle
Entrepreneurship
The process by which people undertake economic risk to innovate--to create new products, processes, and sometimes new organizations Innovate by commercializing ideas and inventions
Strategic entrepreneurship
The pursuit of innovation using tools and concepts from strategic management
Social entrepreneurship
The pursuit of social goals by using entrepreneurship; uses a triple-bottom-line approach to assess performance
Invention
The transformation of idea into a new product or process, or the modification and recombination of existing ones