MGT 499 Exam 2- Book Notes

innovation ecosystem

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

ECONOMIC INCENTIVES

An emphasis on incremental innovations strengthens the incumbent firm's position and thus maintains high entry barriers. A focus on incremental innovation is particularly attractive once an industry standard has emerged and technological uncertainty is reduced.

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.

incremental innovation

An innovation that squarely builds on an established knowledge base and steadily improves an existing product or service.

strategic entrepreneurship

The pursuit of innovation using tools and concepts from strategic management.

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.

DIFFERENCES IN LEARNING CURVES.

The steeper the learning curve, the more learning has occurred.

invention

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

COMPLEMENTS

add value page 192to a product or service when they are consumed in tandem Ex: Smartphones and Cellular Services

A cost leader can achieve a competitive advantage:

as long as its economic value created (V − C) is greater than that of its competitors.

generic business strategies

differentiation and cost leadership

LAGGARDS

entering in the declining stage of the industry life cycle. These are customers who adopt a new product only if it is absolutely necessary These customers generally don't want new technology, either for personal or economic reasons. Given their reluctance to adopt new technology, they are generally not considered worth pursuing. Laggards make up no more than 16 percent of the total market potential

At this final stage (DECLINE STAFE) of the industry life cycle, managers generally have four strategic options:

exit, harvest, maintain, or consolidate

A strong value curve has:

focus and divergence, and it can even provide a kind of tagline as to what strategy is being undertaken or should be undertaken.

LEARNING CURVE

if we consider our productivity, learning curves go down, as it takes less and less time to produce the same output as we learn how to be more efficient—learning by doing drives down cost. EX: Tesla Model S production

INTRODUCTION STAGE

the innovator's core competency is R&D, which is necessary to creating a product category that will attract customers. This is a capital-intensive process, in which 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 price when the product is launched. The initial market size is small, and growth is slow. barriers to entry tend to be high, generally only a few firms are active in the market. emphasize unique product features and performance rather than price.

These two business strategies are called generic strategies because:

they can be used by any organization—manufacturing or service, large or small, for-profit or nonprofit, public or private, domestic or foreign—in the quest for competitive advantage, independent of industry context.

To sustain a competitive advantage, however, a firm must

continuously innovate—that is, it must produce a string of successful new products or services over time

A blue ocean strategy is only successful, in contrast, if:

the firm can implement some type of value innovation that reconciles the inherent trade-off between value creation and underlying costs.

Harvest

the firm reduces investments in product support and allocates only a minimum of human and other resources.

Key Takeaways: Define business-level strategy and describe how it determines a firm's strategic position:

Business-level strategy determines a firm's strategic position in its quest for competitive advantage when competing in a single industry or product market. Strategic positioning requires that managers address strategic trade-offs that arise between value and cost, because higher value tends to go along with higher cost. Differentiation and cost leadership are distinct strategic positions. Besides selecting an appropriate strategic position, managers must also define the scope of competition—whether to pursue a specific market niche or go after the broader market.

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 along both product and process dimensions cease

strategic trade-offs

Choices between a cost or value position. Such choices are necessary because higher value creation tends to generate higher cost.

first-mover advantages

Competitive benefits that accrue to the successful innovator.

crossing-the-chasm framework

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

cost drivers that managers can manipulate to keep their costs low are:

Cost of input factors. Economies of scale. Learning-curve effects. Experience-curve effects.

diseconomies of scal

Increases in cost per unit when output increases.

SPREADING FIXED COSTS OVER LARGER OUTPUT.

Larger output allows firms to spread their fixed costs over more units. That is why gains in market share are often critical to drive down per-unit cost.

EMPLOYING SPECIALIZED SYSTEMS AND EQUIPMENT.

Larger output also allows firms to invest in more specialized systems and equipment, such as enterprise resource planning (ERP) software or manufacturing robots.

CUSTOMER SERVICE

Managers can increase the perceived value of their firms' product or service offerings by focusing on customer service EX: Zappos offering free shipping both ways, encouraged to build relationships with the customers not read from a script

focused differentiation strategy

Same as the differentiation strategy except with a narrow focus on a niche market.

Blue oceans represent

untapped market space, the creation of additional demand, and the resulting opportunities for highly profitable growth.

economies of scope

Savings that come from producing two (or more) outputs at less cost than producing each output individually, despite using the same resources and technology.

Exit

Some firms are forced to exit the industry by bankruptcy or liquidation.

These value drivers are related to:

a firm's expertise in, and organization of, different internal value chain activities.

Maintain.

continuing to support marketing efforts at a given level

imitation

copying a successful innovation

cost-leadership strategy

Generic business strategy that seeks to create the same or similar value for customers at a lower cost.

GROWTH STAGE

After the initial innovation has gained some market acceptance, demand increases rapidly as first-time buyers rush to enter the market, convinced by the proof of concept demonstrated in the introductory stage. 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 expanded, and complementary assets in the form of products and services become widely available.

ECONOMIES OF SCALE

Firms with greater market share might be in a position to reap economies of scale, decreases in cost per unit as output increases.

differentiation strategy

Generic business strategy that seeks to create higher value for customers than the value that competitors create, while containing costs.

value curve

Horizontal connection of the points of each value on the strategy canvas that helps strategic leaders diagnose and determine courses of action.

differentiation strategy example

Mont Blanc focused, offering exquisite pens—what it calls "writing instruments"—frequently priced at several hundred dollars.

product innovation

New or recombined knowledge embodied in new products.

process innovation

New ways to produce existing products or deliver existing services.

COST OF INPUT FACTORS

One of the most basic advantages a firm can have over its rivals is access to lower-cost input factors such as raw materials, capital, labor, and IT services.

minimum efficient scale (MES)

Output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale.

value drivers:

Product features Customer service Complements

focused cost-leadership strategy

Same as the cost-leadership strategy except with a narrow focus on a niche market.

innovation

The commercialization of any new product or process, or the modification and recombination of existing ones.

industry life cycle

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

"How should we compete?"

Who—which customer segments will we serve? What customer needs, wishes, and desires will we satisfy? Why do we want to satisfy them? How will we satisfy our customers' needs?

blue ocean strategy

a business-level strategy that successfully combines differentiation and cost-leadership activities using value innovation to reconcile the inherent trade-offs in those two distinct strategic positions. They use the metaphor of an ocean to denote market spaces

A business strategy is more likely to lead to a competitive advantage if:

a firm has a clear strategic profile, either as differentiator or a low-cost leader.

competitive advantage is determined jointly by:

industry and firm effects

A business strategy, therefore, is more likely to lead to a competitive advantage if:

it allows firms to either perform similar activities differently or perform different activities than their rivals that result in creating more value or offering similar products or services at lower cost.

Key success factors at the Shakeout Stage are

manufacturing and process engineering capabilities that can be used to drive costs down

The goal of a cost-leadership strategy is to:

reduce the firm's cost below that of its competitors while offering adequate value.

ORGANIZATIONAL INERTIA.

resistance to changes in the status quo

Successful value innovation requires:

that a firm's strategic moves lower its costs and also increase the perceived value for buyers

value drivers contribute to competitive advantage only if:

their increase in value creation (ΔV) exceeds the increase in costs (ΔC).

At the firm level, performance is determined by:

value and cost positions relative to competitors.

EXPERIENCE CURVE

we now change the underlying technology while holding cumulative output constant.

Key Takeaways: Assess the risks of a blue ocean strategy, and explain why it is difficult to succeed at value innovation.

A successful blue ocean strategy requires that trade-offs between differentiation and low cost be reconciled. A blue ocean strategy often is difficult because the two distinct strategic positions require internal value chain activities that are fundamentally different from one another. When firms fail to resolve strategic trade-offs between differentiation and cost, they end up being "stuck in the middle." They then succeed at neither business strategy, leading to a competitive disadvantage.

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—possibly approaching monopolistic market power, albeit in a declining industry.

Key Takeaways: Evaluate value and cost drivers that may allow a firm to pursue a blue ocean strategy.

To address the trade-offs between differentiation and cost leadership at the business level, managers must employ value innovation, a process that will lead them to align the proposed business strategy with total perceived consumer benefits, price, and cost. Lowering a firm's costs is primarily achieved by eliminating and reducing the taken-for-granted factors on which the firm's industry rivals compete. Increasing perceived buyer value is primarily achieved by raising existing key success factors and by creating new elements that the industry has not yet offered. Strategic leaders track their opportunities and risks for lowering a firm's costs and increasing perceived value vis-à-vis their competitors by use of a strategy canvas, which plots industry factors among competitors (see Exhibit 6.11).

To initiate a strategic move that allows a firm to open a new and uncontested market space through value innovation, managers must answer the *four key questions* below when formulating a blue ocean business strategy:

*Value Innovation—Lower Costs* 1. Eliminate. Which of the factors that the industry takes for granted should be eliminated? 2. Reduce. Which of the factors should be reduced well below the industry's standard? *Value Innovation—Increase Perceived Consumer Benefits* 3. Raise. Which of the factors should be raised well above the industry's standard? 4. Create. Which factors should be created that the industry has never offered?

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 by introducing low-cost innovations to preempt stealth competitors. 3. Disrupt yourself, rather than wait for others to disrupt you.

architectural innovation

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

disruptive innovation

An innovation that leverages new technologies to attack existing markets from the bottom up.

REDUCE

Because of its do-it-yourself business model regarding furniture selection, delivery, and assembly, IKEA drastically reduced the need for staff in its mega-stores. IKEA also reduced several other taken-for-granted competitive elements: 25-year warranties on high-end custom furniture, high degree of customization in selection of options such as different fabrics and patterns, and use of expensive materials such as leather or hardwoods, among other elements.

CREATE

IKEA created a new way for people to shop for furniture. Customers stroll along a predetermined path winding through the fully furnished showrooms. They can compare, test, and touch all the things in the showroom.

SHAKEOUT STAGE

Firms begin to compete directly against one another for market share, rather than trying page 234to capture a share of an increasing pie. As competitive intensity increases, the weaker firms are forced out of the industry. This is the reason this phase of the industry life cycle is called the shakeout stage: Only the strongest competitors survive increasing rivalry as 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. As a consequence, the industry often consolidates, as the weakest competitors either are acquired by stronger firms or exit through bankruptcy. Assuming an acceptable value proposition, price becomes a more important competitive weapon in the shakeout stage, because product features and performance requirements tend to be well-established.

A successfully implemented blue ocean strategy allows firms two pricing options:

First, the firm can charge a higher price than the cost leader, reflecting its higher value creation and thus generating greater profit margins. Second, the firm can lower its price below that of the differentiator because of its lower-cost structure. If the firm offers lower prices than the differentiator, it can gain market share and make up the loss in margin through increased sales.

Example of Radical innovation

Gillette Razors changing from 1 blade to 6

strategy canvas

Graphical depiction of a company's relative performance vis-à-vis its competitors across the industry's key success factors.

Example of Cosy of Input Factors

Greatest competitive threat facing U.S. legacy carriers—American, Delta, and United—comes from three fast-growing airlines located in the Persian Gulf states—Emirates, Etihad, and Qatar. These airlines achieve a competitive advantage over their U.S. counterparts thanks to lower-cost inputs—raw materials (access to cheaper fuel), capital (interest-free government loans), labor—and fewer regulations (for example, regarding nighttime takeoffs and landings, or in adding new runways and building luxury airports with swimming pools, among other amenities).

ELIMINATE

IKEA eliminated several taken-for-granted competitive elements: salespeople, expensive but small retail outlets in prime urban locations and shopping malls, long wait after ordering furniture, after-sales service, and other factors.

RAISE

IKEA raised several competitive elements: It offers tens of thousands of home furnishing items in each of its big-box stores (some 300,000 square feet, roughly five football fields), versus a few hundred at best in traditional furniture stores; it also offers more than furniture, including a range of accessories such as place mats, laptop stands, and much more; each store has hundreds of rooms fully decorated with all sorts of IKEA items, each with a detailed tag explaining the item.

The Four I's

Idea, Invention, Innovation, and Imitation

PRODUCT FEATURES

One of the obvious but most important levers that strategic leaders can adjust, thereby increasing the perceived value of the product or service offering. Adding unique product attributes allows firms to turn commodity products into differentiated products commanding a premium price Strong R&D capabilities are often needed to create superior product features. EX: Trader Joes

TAKING ADVANTAGE OF CERTAIN PHYSICAL PROPERTIES.

One such property is known as the cube-square rule: The volume of a body such as a pipe or a tank increases disproportionately more than its surface. This same principle makes big-box retail stores such as Walmart or The Home Depot cheaper to build and run. They can also stock much more merchandise and handle inventory more efficiently.

What causes per-unit cost to drop as output increases (up to point Q1)? Economies of scale allow firms to:

Spread their fixed costs over a larger output. Employ specialized systems and equipment. Take advantage of certain physical properties.

TECHNOLOGY ENTHUSIASTS.

The customer segment in the introductory stage of the industry life cycle is called technology enthusiasts. The smallest market segment, it makes up some 2.5 percent of total market potential. Technology enthusiasts often have an engineering mind-set and pursue new technology proactively. They frequently seek out new products before the products are officially introduced into the market. Technology enthusiasts enjoy using beta versions of products, tinkering with the product's imperfections and providing (free) feedback and suggestions to companies.

EARLY MAJORITY.

The customers coming into the market in the shakeout stage are called early majority. Their main consideration in deciding whether or not to adopt a new technological innovation is a strong sense of practicality. They are pragmatists and are most concerned with the question of what the new technology can do for them. Before adopting a new product or service, they weigh the benefits and costs carefully. Customers in the early majority are aware that many hyped product introductions will fade away, so they prefer to wait and see how things shake out. They like to observe how early adopters are using the product. Early majority customers rely on endorsements by others. They seek out reputable references such as reviews in prominent trade journals or in magazines such as Consumer Reports.

EARLY ADOPTERS

The customers entering the market in the growth stage are early adopters. They make up roughly 13.5 percent of the total market potential. Early adopters, as the name suggests, are eager to buy early into a new technology or product concept. Unlike technology enthusiasts, however, their demand is driven by their imagination and creativity rather than by the technology per se. They recognize and appreciate the possibilities the new technology can afford them in their professional and personal lives. Early adopters' demand is fueled more by intuition and vision rather than technology concerns.

Key Takeaways: Assess the benefits and risks of differentiation and cost-leadership strategies using the five forces that shape competition.

The five forces model helps managers use generic business strategies to protect themselves against the industry forces that drive down profitability. Differentiation and cost-leadership strategies allow firms to carve out strong strategic positions, not only to protect themselves against the five forces, but also to benefit from them in their quest for competitive advantage.

Key Takeaways: Examine the relationship between cost drivers and cost-leadership strategy:

The goal of a cost-leadership strategy is to reduce the firm's cost below that of its competitors. In a cost-leadership strategy, the focus of competition is achieving the lowest possible cost position, which allows the firm to offer a lower price than competitors while maintaining acceptable value. Some of the unique cost drivers that managers can manipulate are the cost of input factors, economies of scale, and learning- and experience-curve effects. No matter how low the price, if there is no acceptable value proposition, the product or service will not sell.

Key Takeaways: Examine the relationship between value drivers and differentiation strategy:

The goal of a differentiation strategy is to increase the perceived value of goods and services so that customers will pay a higher price for additional features. In a differentiation strategy, the focus of competition is on value-enhancing attributes and features, while controlling costs. Some of the unique value drivers managers can manipulate are product features, customer service, customization, and complements. Value drivers contribute to competitive advantage only if their increase in value creation (ΔV) exceeds the increase in costs, that is: (ΔV) > (ΔC).

business-level strategy

The goal-directed actions managers take in their quest for competitive advantage when competing in a single product market.

LATE MAJORITY

The next wave of growth comes from buyers in the late majority entering the market in the maturity stage. Like the early majority, they are a large customer segment, making up approximately 34 percent of the total market potential. They prefer to wait until standards have emerged and are firmly entrenched, so that uncertainty is much reduced. The late majority also prefers to buy from well-established firms with a strong brand image rather than from unknown new ventures.

network effects

The positive effect (externality) that one user of a product or service has on the value of that product for other users.

entrepreneurship

The process by which people undertake economic risk to innovate—to create new products, processes, and sometimes new organizations. EX: Reed Hastings - Netflix

social entrepreneurship

The pursuit of social goals while creating a profitable business. EX: Jimmy Wales founder of Wikipedia

scope of competition

The size—narrow or broad—of the market in which a firm chooses to compete.

The innovation process begins with:

an idea

cost leader

focuses its attention and resources on reducing the cost to manufacture a product or on lowering the operating cost to deliver a service in order to offer lower prices to its customers.

By choosing the differentiation strategy as the strategic position for a product:

managers focus their attention on adding value to the product through its unique features that respond to customer preferences, customer service during and after the sale, or effective marketing that communicates the value of the product's features. Although this positioning involves increased costs (for example, higher-quality inputs or innovative research and development activities), customers will be willing to pay a premium price for the product or service that satisfies their needs and preferences. In the next section, we will discuss how managers formulate a cost-leadership strategy.

focused cost-leadership strategy example:

manufacturing company BIC, designing and producing disposable pens and cigarette lighters at a low cost

The key objective for firms during the growth phase is

to stake out a strong strategic position not easily imitated by rivals.

MATURITY STAGE

the industry structure morphs into an oligopoly with only a few large firms. Most of the demand was largely satisfied in the shakeout stage. Any additional market demand in the maturity stage is limited. 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. This decrease in market demand increases competitive intensity within the industry. 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

red oceans represent

the known market space of existing industries. the rivalry among existing firms is cut-throat because the market space is crowded and competition is a zero-sum game. Products become commodities, and competition is focused mainly on price. Any market share gain comes at the expense of other competitors in the same industry, turning the oceans bloody red.

The strategic objective during the introductory stage is

to achieve market acceptance and seed future growth

The goal of a differentiation strategy is:

to add unique features that will increase the perceived value of goods and services in the minds of consumers so they are willing to pay a higher price