Innovation (Chapter 7)

Shakeout Stage

Growth declines. Firms begin to compete directly against one another for market share, rather than trying to capture a share of an increasing pie. As competitive intensity increases, the weaker firms are forced out of the industry The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders - since price becomes a more important competitive weapon in the shakeout stage because product features and performance requirements tend to be well established - successful firms are able to continue process innovation

One insightful way to categorize innovations is to measure their degree of newness in terms of technology and markets

Split into a 2x2 Tech: Existing or New Markets: Existing or New

In the Growth stage, after a standard is established in an industry, the basis of competition tends to move...

away from product innovations toward process innovations Product innovations: are new or recombined knowledge embodied in new products Process innovations: are new ways to produce existing products or to deliver existing services After the market accepts a new product, and a standard for the new technology has emerged, process innovation rapidly becomes more important than product innovation (product innovation more important in the introductory stage)

Innovation Process

idea, invention, innovation, imitation

"Radical" Innovation Spectrum/markets-and-technology framework breaks innovations into 4 kinds:

incremental, radical, architectural, and disruptive.

Idea

typically presented in terms of abstract concepts or as findings derived from basic research

Platform's purpose

The platform's overarching purpose is to consummate matches among users and facilitate the exchange of goods, services, or social currency, thereby enabling value creation for all participants

invention

The transformation of an idea into a new product or process, or the modification and recombination of existing ones

disruptive innovation

An innovation that leverages new technologies to attack existing markets from the bottom up 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 (it surpasses the existing tech eventually) New competitor has advantage since incumbents move slow

first-mover advantages

Competitive benefits that accrue to the successful innovator - benefits the first firm in an industry gets - EX: economies of scale, experience and learning-curve effects, network effects

Early Majority

Customers coming into the market in the shakeout stage of the industry life cycle. Pragmatists that are mainly concerned with whether adopting a new technological innovation serves a practical purpose or not Pragmatists, focused mostly on the question of what the new technology can do for them Influenced by reputable endorsements from reputable sources like Consumer Reports

Platforms and Tech

Effective use of technology allows platform firms to drastically reduce the barriers of time and space: Information is available in real time across the globe, and market exchanges can take place effectively across vast distances (i.e., China to the United States) or even in small geographic spaces (EX: Tinder)

innovation ecosystem

Established companies are part of an ecosystem: suppliers, buyers, complementors -They have to consider the ramifications on other parties in their innovation ecosystem when they make a decision Continuous incremental innovations reinforce this network and keep all its members happy

economic incentives

Once an innovator has become an established incumbent firm (such as Alphabet's Google has today), it has strong incentives to defend its strategic position and market power. An emphasis on incremental innovations strengthens the incumbent firm's position and thus maintains high entry barriers This lead is especially important in winner-takes-all markets Incremental innovations extend the time lead firms can extract profits

Advantages of the platform

Platforms scale more efficiently than pipelines by eliminating gatekeepers (Platforms unbundle professional services by making available precisely defined individual services while eliminating the need to purchase a bundle of services, required by gatekeepers in old-line pipelines. Platforms unlock new sources of value creation and supply (EX: AirBNB doesn't need a ton of tangible real estate to house people) Platforms benefit from community feedback (feedback loops from consumers back to the producers allow platforms to fine-tune their offerings and to benefit from AI)

The development of most industries follows an...

S-Curve... Initial demand for a new product or service is often slow to take off, then accelerates, before decelerating, and eventually turn-ing to zero, and even becoming negative as a market contracts

Difference between tech enthusiasts and early adopters

T.E. - focused solely on getting the newest stuff E.A. - focused on their own vision and how applying new tech can help them achieve this vision

What's the chasm in Moore's chasm?

The chasm illustrates that differences between customer groups lead to a big gulf or chasm into which companies and their innovations frequently fall. - This chasm exists since different customer groups in different stages are concerned with conflicting needs (tech, performance, cost insensitive, high-value vs solutions, convenience, cost-sensitivity, adequate-value) - Firms have to find a way to offset the tradeoffs that come with pursuing the needs of opposing customer groups to avoid falling into the chasm

innovation (as described in the innovation process)

The commercialization of any new product or process, or the modification and recombination of existing ones To sustain a competitive advantage a firm must continuously innovate—that is, it must produce a string of successful new products or services over time

Entrepreneurship

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

strategic entrepreneurship

The pursuit of innovation using tools and concepts from strategic management leverages innovation for competitive advantage by applying a strategic management lens to entrepreneurship

social entrepreneurship

The pursuit of social goals while creating a profitable business - Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution (triple-bottom-line: profits, planet, and people)

Innovation

The successful introduction of a new product, process, or business model Allows firms to redefine the marketplace in their favor and achieve a competitive advantage. Continued innovation enables a firm to sustain a competitive advantage over time

Introduction Stage

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 creating a product category that will attract customers The innovator is investing in designing a unique product, trying new ideas to attract customers, and producing small quantities—all of which contribute to a high cost for the innovator, and frequently resulting in a high price... growth is slow strategic objective during the introductory stage is to achieve market acceptance and seed future growth - one way to achieve this is through network effects

Speed of Innovation

rate of technological change has accelerated dramatically over the past hundred years. Changing technologies spawn new industries, while others die Also, the pace of the adoption rate of recent innovations continues to accelerate Tech changes and adoption changes have become faster most likely because of the internet The accelerating speed of technological changes has significant impli-cations for the competitive process and firm strategy

Organizational inertia

resistance to changes in the status quo Incumbent firms 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

Firms must be able to innovate while also...

Fending off competitors' imitation attempts Many firms have dominated an early wave of innovation only to be challenged and often destroyed by the next wave (competition does not stand still)

The crossing-the-chasm framework identifies 5 customer groups:

1) Tech Enthusiasts 2) Early Adopters CHASM 3) Early Majority 4) Late Majority 5) Laggards

During the decline stage... manager have 4 options:

1) exit: firms are forced to exit the industry by bankruptcy or liquidation 2) harvest: firm reduces investments in product support and allocates only a minimum of human and other resources 3) maintain: essentially staying the course until the very end 4) consolidate: Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals. This allows the consolidating firm to stake out a strong position

Long tail

A 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 EX: Netflix

Tech Enthusiasts

A customer segment in the introductory stage of the industry life cycle. Often have an engineering mindset and pursue new technology proactively, frequently seeking out new products before they are officially introduced to the market - Focused on having the most cutting-edge, newest tech regardless of price

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. - provide temporary monopoly position

architectural innovation

A new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets Existing Tech, New Markets

Relationship between Radical and Incremental Innovation

A predictable pattern of innovation is that firms (often new ventures) use radical innovation to create a temporary competitive advantage. They then follow up with a string of incremental innovations to sustain that initial lead In some instances, the innovator is outcompeted by second movers that quickly introduce a similar incremental innovation to continuously improve their own offerings

Platform Business Model

An enterprise that creates value by matching external producers and consumers in a way that creates value for all participants Transactions depend on the infrastructure or platform that the enterprise manages Ese technology to connect organizations, resources, information, and people in an interactive ecosystem where value-generating trans-actions

Radical Innovation

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 New Tech, New Market

Incremental Innovation

An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service Existing Tech, Existing Market

Industries tend to follow a predictable industry life cycle

As an industry evolves over time, we can identify five distinct stages: introduction, growth, shakeout, maturity, and decline

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. If there is any remaining excess industry capacity in the decline stage, this puts strong pressure on prices and can further increase competitive intensity If a technological or business model breakthrough emerges that opens up a new industry or resets the industry life cycle, however, then this dynamic interplay between product and process innovation starts anew (this can happen at any stage)

crossing-the-chasm framework

Conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group

To counter disruptive innovations, incumbents can:

Continue to innovate in order to stay ahead of the competition Guard against disruptive innovation by protecting the low end of the market Disrupt yourself, rather than wait for others to disrupt you through reverse innovation (allows firm to disrupt itself) - A firm develops products specifically for emerging markets and then introduces these innovations into developed markets

Laggards

Customers entering the market in the declining stage of the industry life cycle. Will adopt a new product only if absolutely necessary, generally don't want new technology, and are generally not a customer segment worth pursuing Focused on maintaining s tech-free lifestyle, only purchase tech when it's deemed necessary

Early adopters

Customers entering the market in the growth stage of the industry life cycle that are eager to buy early into a new technology or product concept. Their demand is driven by recognizing and appreciating the possibilities the new technology can afford them in their professional and personal lives - Unlike technology enthusiasts, E.A. demand is driven by their imagination and creativity rather than solely by the new technology per se. They ask themselves the question, what can this new product do for me or my business? - When it comes to E.A., firms need to communicate their product's potential applications in a more direct way when compared to T.E. (who just care about metrics and newness)

Late Majority

Customers entering the market in the maturity stage of the industry life cycle that are less confident about their ability to master new technology. Will wait until standards have emerged and become firmly entrenched so as to ensure reduction in uncertainty. Tend to buy from well-established firms with strong brand image Focused on ease of usage and eliminating any unknown info about a product - Unlike early majority, they aren't confident in their abilities to master new tech so they wait for it to become standardized

Growth Stage

Market growth accelerates in the growth stage of the industry life cycle. After the initial innovation has gained some market acceptance, demand increases rapidly as first-time buyers rush to enter the market As the size of the market expands, a standard signals the market's agreement on a common set of engineer-ing features and design choices (emerge from bottom in comp in the market or the top from the gov) Since demand is strong during the growth phase, both efficient and inefficient firms thrive; the rising tide lifts all boats. Also, costs start to decrease as process standards are established that reap economies of scale and learning curves The key objective for firms during the growth phase is to stake out a strong strategic position not easily imitated by rivals

To avoid Moore's chasm, companies must...

Recognize the differences between customer groups and to apply the appropriate competencies at each stage of the industry life cycle to have a chance at transitioning successfully from stage to stage Companies must fine-tune their business strategies to match different customer groups as it moves along the industry life cycle

Strategic variety in the growth stage

Some competitors will continue to follow a differentiation strategy like in the intro stage, emphasizing unique features, product functionality, and reliability. Other firms employ a cost-leadership strategy in order to offer an acceptable level of value but lower prices to consumers

Entrepreneur

The agents that 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 can also be found in firms (intrapreneurs)

Maturity Stage

The industry structure morphs into an oligopoly with only a few large firms 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 The level of process innovation reaches its maximum as firms attempt to lower cost as much as possible, while the level of incremental product innovation sinks to its minimum

imitation

The innovation process ends with imitation. If an innovation is successful in the marketplace, competitors will attempt to imitate it. Success attracts attention and with it competition

Changing from one stage of the life cycle to the next

The number and size of competitors change as the industry life cycle unfolds, and different types of consumers enter the market at each stage. That is, 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

Pipeline Business Model

The value chain represents a linear view of a firm's business activities. As such, this traditional system of horizontal business organization has been described as a pipeline, because it captures a lin-ear transformation with producers at one end and consumers at the other

trade secret

Valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy - public never knows about them (in theory) as opposed to a patent (which eventually is made public)

Once firms have achieved market acceptance of a breakthrough innovation, they tend to follow up with incremental rather than radical innovations because of....

economic incentives, organizational inertia, and the firm's embeddedness in an innovation ecosystem

For platforms to succeed, they need...

positive network effects Need to build big user bases, and create avenues for feedback loops (AI related for EX) that can initiate virtuous growth cycles leading to platform leadership

The core competencies for competitive advantage in the growth stage tend to shift toward...

manufacturing and marketing capabilities and away from R&D

Innovation doesn't need to be high-tech, it just has to be...

novel, useful, and successfully implemented to help firms gain and sustain a competitive advantage