Ch 7- Business Strategy: Innovation and Entrepreneurship

Industry Life Cycle

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

Innovation Process

discovery, development, and transformation of new knowledge in a four-step process: idea, invention, innovation, imitation

markets-and-technology framework

A conceptual model to categorize innovations along the market (existing/new) and technology (existing/new) dimensions. Along the horizontal axis, we ask whether the innovation builds on existing technologies or creates a new one. On the vertical axis, we ask whether the innovation is targeted toward existing or new markets. Four types of innovations emerge: incremental, radical, architectural, and disruptive innovations. As indicated by the color coding, each diagonal forms a pair: incremental versus radical innovation and architectural versus disruptive innovation.

reverse innovation

An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation.

Late Majority

Maturity stage (34% of total market potential) The late majority shares all the concerns of the early majority. But there are important differences. Although members of the early majority are confident in their ability to master the new technology, the late majority is not. 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.

Entrepreneurship

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

product innovation

new or recombined knowledge embodied in new products

innovation

the commercialization of any new product or process, or the modification and recombination of existing ones allows a firm to extract temporary monopoly profits (first mover advantage). To sustain a competitive advantage, however, a firm must continuously innovate Novel, useful, and successfully implemented

invention

the transformation of an idea into a new product or process, or the modification and recombination of existing ones. Invention can be patented or kept as trade secrets

Closed innovation: not-invented-here syndrome

"If the R&D leading to a discovery and a new development project was not conducted in- house, it cannot be good."

Laggards

Declining stage (no more than 16% of total market potential) 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

exit, harvest, maintain, or consolidate

Exit- bankruptcy or liquidation Harvest- firm reduces investments in product support and allocates only a minimum of human and other resources Maintain- continuing to support marketing efforts/other things at a given level Consolidate- buying rivals. This allows the consolidating firm to stake out a strong position—possibly approaching monopolistic market power, albeit in a declining industry

Early adopters

Growth stage (13.5% of total market potential) eager to buy early into a new technology or product concept. Demand is driven by their imagination and creativity rather than by the technology per se firm needs to communicate the product's potential applications in a more direct way than when it attracted the initial technology enthusiasts. Attracting the early adopters to the new offering is critical to opening any new high-tech market segment.

Technology Enthusiasts

Introductory phase of the industry life cycle (2.5% of total market potential) will often pay a premium price to have the latest gadget. The endorsement by technology enthusiasts validates the fact that the new product does in fact work

innovation as a competitive weapon

It can simultaneously create and destroy value. Firms must be able to innovate while also fending off competitors' imitation attempts. A successful strategy requires both an effective offense and a hard-to-crack defense. change is the only constant

Disruptive innovation is successful because

Many times, incumbent firms fail to defend (and sometimes are even happy to cede) the low end of the market, because it is frequently a low-margin business and/or incumbent firms often are slow to change. it can hurt incumbents to listen too closely to their existing customers

Early Majority

Shakeout stage (1/3 of market potential) pragmatists and are most concerned with the question of what the new technology can do for them. 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 Once they decide to enter the market, a herding effect is frequently observed. Without adequate demand from the early majority, most innovative products wither away.

Introduction

When an individual inventor or company launches a successful innovation, a new industry may emerge. core competency is R&D (capital intensive) high price when the product is launched. The initial market size is small, and growth is slow barriers to entry tend to be high competitive struggle for market share, they empha- size unique product features and performance rather than price Although there are some benefits to being early in the market (as previously discussed), innovators also may encounter first-mover disadvantages. They must educate potential customers about the product's intended benefits, find distribution channels and comple- mentary assets, and continue to perfect the fledgling product product innovation is at a maximum, process innovation is at a minimum

innovation ecosystem

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

patent

a form of intellectual property that gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period (20 years from the filing date of a patent application) in exchange for public disclosure of the underlying idea Creates 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

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-setting agencies. helps legitimize the new technology by reducing uncertainty and confusion. A standard tends to capture a larger market share and can persist for a long time

disruptive innovation

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

incremental innovation

an innovation that squarely builds on an established knowledge base and steadily improves an existing product or service. It targets existing markets using existing technology

closed vs. open innovation

closed innovation approach used to be the dominant research and development (R&D) approach for most firms: They tended to discover, develop, and commercialize new products internally. Although this approach was costly and time-consuming, it allowed firms to fully capture the returns to their own innovations. the firm must come up with its own discoveries, develop them on its own, and control the distribution channels Shift to open because: - The increasing supply and mobility of skilled workers. - The exponential growth of venture capital. - The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. - The increasing capability of external suppliers globally. 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 insourced while others are spun out. a company attempts to commercialize both its own ideas and research from other firms. It also finds external alternatives such as spin-out ventures or strategic alliances to commercialize its internally developed R&D.

first-mover advantage

competitive benefits that accrue to the successful innovator economies of scale, experience and learning-curve effects, network effects, may hold important intellectual property such as critical patents, may also be able to lock in key suppliers as well as customers through increasing switching costs.

crossing the chasm framework

conceptual model that shows how each stage of the industry life cycle is dominated by a different customer group Geoffrey Moore Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle. Each customer group responds differently to a techno- logical innovation Customers: technology enthusiasts, early adopters, early majority, late majority, laggards. Chasm between early adopters and early majority but also between each segment

Incremental vs. Radical Innovation: Innovation Ecosystem

incumbent firms tend to be a source of incremental rather than radical innovations because they become embedded in an innovation ecosystem They no longer make independent decisions but must consider the ramifications on other parties in their innovation ecosystem. Continuous incremental innovations reinforce this network and keep all its members happy, while radical innovations disrupt it. 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

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

Shakeout stage

rate of growth declines. Firms begin to compete directly against one another for market share, rather than trying to capture a share of an increasing pie (cut throat). As competitive intensity increases, the weaker firms are forced out of the industry industry often consolidates, as the weakest competitors either are acquired by stronger firms or exit through bankruptcy price becomes more important

Incremental vs. Radical Innovation 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. New entrants do not have formal organizational structures and processes, giving them more freedom to launch an initial breakthrough

Maturity Stage

the industry structure morphs into an oligopoly with only a few large firms. Generally, the firms that survive the shakeout stage tend to be larger and enjoy econo- mies of scale, as the industry consolidated and most excess capacity was removed 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 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

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, network effects propel the industry to the next stage of the life cycle, the growth stage

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. It targets new markets by using new technologies

Decline stage

Changes in the external environment (such as those discussed in Chapter 3 when present- ing the PESTEL framework) often take industries from maturity to decline size of the market contracts further innovation efforts along both product and process dimensions cease If there is any remaining excess industry capacity in the decline stage, this puts strong pressure on prices and can further increase competitive intensity, especially if the industry has high exit barriers. At this final stage of the industry life cycle, managers generally have four strategic options: exit, harvest, maintain, or consolidate

Countering disruptive innovation

Continue to innovate in order to stay ahead of the competition. Guard against disruptive innovation by protecting the low end of the market by introducing low-cost innovations to preempt stealth competitors. Disrupt yourself, rather than wait for others to disrupt you (reverse innovation)

Incremental vs. Radical Innovation Economic Incentives

Once an innovator has become an established incumbent firm, 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. A focus on incremental innovation is particularly attractive once an industry standard has emerged and technological uncertainty is reduced. Moreover, many markets where network effects are important (such as online search), turn into winner- take-all markets, where the market leader captures almost all of the market share. As a near monopolist, the winner in these types of markets is able to extract a significant amount of the value created The incentives for entrepreneurial ventures, however, are just the opposite. Successfully commercializing a radical innovation is frequently the only option to enter an industry protected by high entry barriers

Architectural vs. Disruptive Innovation

architectural innovation- a new product in which known components, based on existing technologies, are reconfigured in a novel way to create new markets disruptive innovation leverages new technologies to attack existing markets. It invades an existing market from the bottom up (stealth attack). the dynamic process of disruptive innovation begins when a firm, frequently a startup, introduces a new product or process based on a new technology to meet existing customer needs. To be a disruptive force, however, this new 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.

growth stage

demand increases rapidly. market expands, a standard signals the market's agreement on a common set of engineering features and design choice. both efficient and inefficient firms thrive, prices begin to fall, Distribution channels are expanded, and complementary assets in the form of products and services become widely available basis of competition tends to move away from product innovations toward process innovations. The core competencies for competitive advantage in the growth stage tend to shift toward manufacturing and marketing capabilities. At the same time, the R& D emphasis tends to shift to process innovation for improved efficiency. Competitive rivalry is somewhat muted because the market is growing fast strategic variety

absorptive capacity

key assumption underlying the open innovation model is that combining the best of internal and external R&D will more likely lead to a competitive advantage. This requires that the company must continuously upgrade its internal R&D capabilities to enhance its absorptive capacity a firm's ability to understand external technology developments, evaluate them, and integrate them into current products or create new ones

process innovation

new ways to produce existing products or deliver existing services made possible through advances such as the Internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology

Idea

often presented in terms of abstract concepts or as findings derived from basic research. Basic research is conducted to discover new knowledge and is often published in academic journals

Entrepreneurs

the agents that introduce change into the competitive system. do this not only by figuring out how to use inventions, but also by introducing new prod- ucts or services, new production processes, and new forms of organization. Entrepreneurs can introduce change by starting new ventures, or they can be found within existing firms When innovating within existing companies, change agents are often called intrapreneurs

strategic entrepreneurship

the pursuit of innovation using tools and concepts from strategic management. Combine entrepreneurial actions, creating new opportunities or exploiting existing ones with strategic actions taken in the pursuit of competitive advantage

social entrepreneurship

the pursuit of social goals while creating a profitable business. evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution. Triple bottom line

trade secret

valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy

Incremental vs. Radical Innovation

vast majority of innovations are actually incremental ones. 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