MGMT 352 Chapter 7

how to respond to disruptive innovaiton

1. Continue to innovate in order to stay ahead of the competition. a. Moving target is much harder to hit than a still one 2. Guard against disruptive innovation by protecting the low end of the market by introducing low-cost innovations to preempt stealth competitors. 3. Disrupt yourself, rather than wait for others to disrupt you. a. Reverse innovation: innovation that was developed for emerging economies before being introduced in developed economies (i.e. frugal innovation)

early majority

1. Customer coming into the market at the shakeout stage 2. Main consideration in deciding whether or not to adopt a new technology is a strong sense of practicality 3. Pragmatists and concerned with the question of what the technology can do for them 4. They weight the benefits and costs carefully 5. They like to observe how early adopters are using the product and rely on endorsements by others 6. Because the early majority makes up 1/3 of the entire market potential, winning them over is critical to the commercial success of the innovation 7. Once the early majority decides to enter the market, they enter in large numbers (herding effect) 8. The significant differences in the attitudes toward technology of the early majority as compared to early adopters signify the wide gulf (the chasm) between the two segments

technology enthusiasts

1. Customers entering the market in the introductory stage 2. Smallest market segment that makes up 2.5% of total 3. Often have an engineering mindset and pursue new technology proactively 4. Frequently seek out products before the products have been introduced to the market 5. Will pay the premium price to have the latest gadget

laggards

1. Last consumer section to enter during the decline stage 2. Customers who adopt the product only if absolutely necessary 3. Generally, don't want new technology, either for personal or economic reasons 4. Make up 16% of total market potential 5. Demand is too small to compensate for reduced demand from the early and late majority

late majority

1. Next wave of growth comes from buyers entering in the maturity stage 2. Large customer segment (34% of market potential) 3. Demand from early majority and late majority drives most industry growth and firm profitability 4. Late majority shares all the concerns of the early majority 5. Late majority is NOT confident in their ability to master the new technology, and prefer to wait until the standards have emerged and are entrenched 6. Prefers to buy from well-established firms with a strong brand image

idea

1. Often presented in terms of abstract concepts or findings derived from basic research 2. Basic research is often transformed into applied research with commercial applications

early adopters

1. The customers entering the market during the growth stage 2. 13.5% of total market potential 3. Eager to buy early into a new technology or product concept, but their demand is driven by imagination and creativity rather than technology 4. They recognize and appreciate the possibilities the new technology can afford them in their lives 5. Demand is fueled more by intuition and vision rather than technology concerns

imitation

If an innovation is successful in the marketplace, competitors will attempt to imitate it

innovation ecosystem

a firm's embeddedness in a complex network of suppliers, buyers, and complementors, which requires interdependent strategic decision making i. Firms must consider the ramifications on other parties in their innovation ecosystem ii. Continuous incremental innovations reinforce this network and keep all its members happy, while radical innovations disrupt it

intrapreneurs

change agents innovating within companies pursuing corporate entrepreneurship

first-mover advantages

competitive benefits that accrue to the successful innovator

crossing the chasm

conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group i. Many innovators can be unsuccessful in transitioning smoothly from one stage of the industry life cycle to the next

markets and technology framework

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

innovation

concerns the commercialization of an invention Successful commercialization allows a firm to extract temporary monopoly profits A firm MUST continuously innovate to sustain competitive advantage Successful innovators can benefit from first-mover advantages, including economies of scale as well as experience and learning curve effects

invention

describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones If an invention is useful, novel, and non-obvious as assessed by the US Patent and Trademark office, then it can be patented

radical innovation

draws on novel 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 1. Targets new markets using new technologies 2. Firms use radical innovation to create a temporary competitive advantage 3. They then follow up with a string of incremental innovations to sustain that initial lead 4. In some instances, the innovator is outcompeted by second movers that quickly introduce a similar incremental innovation to continuously improve their own offering 5. Once firms have achieved a breakthrough innovation, they tend to follow up with incremental innovations, and eventually become incumbents. Future radical innovations are generally introduced by new entrepreneurial ventures. WHY? (economic incentives, organizational inertia, innovation ecosystem)

patent

form of intellectual property (IP) 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 Time period in US = 20 years

growth stage

i. Demand increases rapidly as first-time buyers rush to enter the market, convinced by the proof of concept demonstrated in the introductory stage ii. A standard signals the market's agreement on a common set of engineering features and design choices 1. Can emerge bottom-up through competition in the marketplace or top-down from government or other standard-setting agencies 2. An agreed-upon standard ensures that all components of the system work well together, regardless of who developed them 3. Helps legitimize the new technology 4. Tends to capture larger market share and can persist for a long time iii. Since demand is strong, both efficient and inefficient firms thrive, and prices begin to fall as standard business processes are put into place iv. Distribution channels and expand and complementary assets in the form of products/services are widely available v. After a standard is set into an industry, the basis of competition tends to move away from product innovations and towards process innovations KEY OBJECTIVE: stake out a strong position not easily imitated by rivals

maturity stage

i. Industry structure morphs into an oligopoly with only a few large firms ii. Demand now consists of replacement or repeat purchases iii. Market has reached its maximum size iv. Industry growth is likely to be zero or even negative going forward v. Decrease in market demand increases competitive intensity vi. Process innovation reaches its maximum vii. Firms that survive the shakeout stage tend to be larger and enjoy economies of scale, as the industry is consolidated

introduction stage

i. Innovator's core competency is R&D, which is necessary to creating a new product category that will attract customers ii. Capital-intensive process iii. Initial high price of the product, initial market size is small, and growth is slow iv. When barriers to entry are high, generally only a few firms are active in the market, and in their competitive struggle for market share, they emphasize unique product features and performance rather than price first-mover disadvantages STRATEGIC OBJECTIVE: achieve market acceptance and seed future growth

economic incentives

i. Once an innovator has become established as an incumbent firm, it has strong incentives to defend its strategic position and market power ii. High entry barriers iii. 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 1. Firm uses incremental innovations to extend the time is can extract profits based on a favorable industry structure iv. New entrants focus on radical innovations, and incumbents push forward with incremental innovations

shakeout stage

i. Rate of growth declines and firms begin to compete directly against one another for market share ii. Weaker firms are forced out of the industry iii. Only the strongest competitors survive increasing rivalry as firms begin to cut prices and offer more services, all in attempt to gain more of a market that grows slowly, if at all iv. Erodes profitability of all but the most efficient firms in the industry v. Weakest competitors are either acquired by stronger firms or exit through bankruptcy vi. Winners in this competitive environment are often firms that stake out a strong position as cost leaders

decline stage

i. Size of the market contracts further as demand falls ii. Innovation efforts along both product and process dimensions cease iii. Managers have four strategic options: 1. Exit: some firms are forced to exit by bankruptcy or liquidation 2. Harvest: firm reduces investments in product support and allocates only a minimum of human and other resources 3. Maintain: continuing to support efforts despite the declining market 4. Consolidate: buying rivals to consolidating the industry and stake out a strong position

four I's

idea, invention, innovation, imitation

disruptive innovation

leverages new technologies to attack existing markets from the bottom up 1. To be a disruptive force, a new technology must have: a. Begins as a low-cost solution to an existing problem b. Initially has inferior performance 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. 2. Invades the market from the bottom-up, by first capturing the low end a. Incumbent firms generally fail to defend the low end of the market

product innovations

new or recombined knowledge embodied in new products

architectual innovation

new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets

process innovations

new ways to produce existing products or deliver existing services

network effects

positive effect (externality) that one user of a product/service has on the value of that product for other users a. Can occur when the value of a product/service increases, often exponentially, with the number of users b. If successful, network effects propel industry to the next stage of the industry life cycle, growth

Entrepreneurship

process by which change agent (entrepreneurs) undertake economic risk to innovate --> to create new products, processes, and sometimes new organizations

strategic entrepreneurship

pursuit of innovation using tools and concepts from strategic management Leverage innovation for competitive advantage by applying a strategic management lens to entrepreneurship How do we combine entrepreneurial actions, creating new opportunities or exploiting existing ones with strategic actions taken in the pursuit of competitive advantage?

social entrepreneurship

pursuit of social goals while creating profitable businesses Social entrepreneurs evaluate the performance of their ventures not only by financial metrics by also by ecological and social contribution Use a triple-bottom line approach to assess performance Ex: TOMS shoes, Teach for America

organizational inertia

resistance to changes in the status quo i. Firms as they become more established rely more on formalized business structures and processes ii. Incumbent firms tend to favor incremental innovations that reinforce the existing organizational structure and power distribution while avoiding radical innovation that can disturb the existing power distribution

incremental innovation

squarely builds on an established knowledge base and steadily improves an existing product/service 1. Targets existing markets using existing technologies

entrepreneurs

the agents who introduce change into the competitive system Figure out how to use inventions, but also by introduction new products/services, new production processes, and new forms of organization

industry life cycle

the five different stages: introduction, growth, shakeout, maturity, and decline that occur in the evolution of an industry over time Number and size of competitors change as the industry life cycle unfolds, and different types of consumers enter the market at each stage Both the supply and demand sides of the market change as the industry ages

trade secrets

valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain secrecy Ex: Coca Cola and Nutella recipes