7CHAPTER
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Business Strategy:Innovation and Strategic
Entrepreneurship
LO 7-1LO 7-1 Define innovation and describe its role in the competitive process.
LO 7-2LO 7-2 Describe the competitive implications of different stages in the industry life cycle.
LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-4 Evaluate different types of innovation and derive their strategic implications.
LO 7-5 Describe the long-tail concept and derive strategic implications.
LO 7-6 Evaluate discontinuities and describe the dynamics of paradigm changes.
LO 7-7 Identify the process leading to hypercompetition, and explain why competitive advantage can often be sustained through continuous innovation.
7–3
The Development of Technology: From Knowledge Generation to Diffusion
The Development of Technology: From Knowledge Generation to Diffusion
Basic Knowledge
Invention Innovation Diffusion
IMITATION
ADOPTION
Supply side
Demand side
7–5
The Development of Technology: Lags Between Knowledge Generation and Commercialization
The Development of Technology: Lags Between Knowledge Generation and Commercialization
BASIC FIRST PRODUCT IMITATIONKNOWLEDGE PATENTS LAUNCH
Xerography late 19th and 1940 1958 1974
early 20th centuries
Jet Engines 17th-- early 1930 1957 1959
20th centuries
Fuzzy logic 1960’s 1981 1987 1988
controllers
Appropriation of Value:- How are the Benefits from Innovation Distributed?
Appropriation of Value:- How are the Benefits from Innovation Distributed?
Customers
Suppliers
Imitators and other
“followers”
Innovator
7–7
The Profitability of InnovationThe Profitability of Innovation
• Legal protection
• Complementary resources
• Imitability of the technology
•Lead time
Profits from
Innovation
Value of the innovation
Innovator’s ability to
appropriate the value of the innovation
7–8
Legal Protection of Intellectual PropertyLegal Protection of Intellectual Property
• Patents —exclusive rights to a new product, process, substance or design.
• Copyrights —exclusive rights to artistic, dramatic, and musical works.
• Trademarks — exclusive rights to words, symbols or other marks to distinguish goods and services; trademarks areregistered with the Patent Office.
• Trade Secrets — protection of chemical formulae,
recipes, and industrial processes.
Also, private contracts between firms and between a firm and itsiemployees can restrict the transfer of technology and know how.
7–9
U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation
U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation
Processes Products
Patents to prevent duplication 3.52 4.33
Patents to secure royalty income 3.31 3.75
Secrecy 4.31 3.57Lead time 5.11 5.41
Moving quickly down the learning 5.02 5.09curve
Sales or service efforts 4.55 5.59
1 = not at all effective 7 = very effective
Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.
The Technology Transfer Process
Research Disclosure IP Decision
IP Protection
Commercialization Strategy Licensing
$29.5
billion
6,375 patent
applications
13,039
disclosures
4,362 licenses
454 new companies3,764 issued
patents
Source: AUTM
Licensing Survey:
FY 20007-11
Risk & Return
CompetingResources
Examples
LicensingOutsourcing
certain functions
Strategic Alliance
Joint Venture
Internal Commercialization
Small risk, but limited returns also (unless patent position very strong
Limits investment, but dependence on suppliers & partners
Benefits of flexibility; risks of informal structure
Shares investment & risk. Risk of partner conflict & culture clash
Biggest risks & benefits. Allows complete control
Few Allows outside resources & capabilitiesTo be accessed
Permits pooling of the resources/capabilities of more than one firm
Substantial resource requirements
Konica licensing its digital camera to HP
Pixar’s movies (e.g. “Toy Story”) marketed & distributed by Disney.
Apple and Sharp build the “Newton” PDA
Microsoft and NBC formed MSNBC
TI’sdevelopment of Digital Signal Processing Chips
Alternative Strategies for Exploiting InnovationAlternative Strategies for Exploiting Innovation
7–12
The Comparative Success of Leaders and Followers
The Comparative Success of Leaders and Followers
PRODUCT INNOVATOR FOLLOWER WINNER
Jet Airliners De Havilland (Comet) Boeing (707) Follower
Float glass Pilkington Corning Leader
X-Ray Scanner EMI General Electric Follower
Office P.C. Xerox IBM Follower
VCRs Ampex/Sony Matsushita Follower
Diet Cola R.C. Cola Coca Cola Follower
Instant Cameras Polaroid Kodak Leader
Pocket Calculator Bowmar Texas Instruments Follower
Microwave Oven Raytheon Samsung Follower
Plain Paper Copiers Xerox Canon Not clear
Fiber Optic Cable Corning many companies Leader
Video Games Players Atari Nintendo/Sega/Sony Followers
Disposable Diapers Proctor & Gamble Kimberly-Clark Leader
Web browser Netscape Microsoft Follower
PDA Psion, Apple Palm Follower
MP3 music players Diamond Multimedia Sony (&others) Followers
7–13
Uncertainty & Risk Management in Tech-based IndustriesUncertainty & Risk Management in Tech-based Industries
Sources ofuncertainty
Technologicaluncertainty
Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G
Customer acceptance and adoption ratesof innovations notoriously difficult topredict, e.g. PC, Xerox copier, Walkman
Marketuncertainty
Strategies formanaging risk
Cooperating with lead usersearly identification of customer requirements
–assistance in new product development
Flexibilility—keep options open—use speed of response to adapt
quickly to new information—learn from mistakes
Limiting risk exposure—avoid major capital commitments
(e.g. lease don’t buy)—outsource—alliances to access other firms’
resources & capabilities—keep debt low
7–14
Sources of Network ExternalitiesSources of Network Externalities
• User linkages, e.g. – Telephone systems—only value of telephone is connection to
other users– Video game consoles—same platform allows users to
exchange games and play interactively– On-line auction—value of auction depends on number of
buyers and sellers participatingAlso, social identification—listening to same music, watching
same TV shows, wearing same clothes in order to conform
• Availability of complementary products, e.g. – Most PC applications software written for Windows, not Mac.– In economy autos, easier to get parts and repair for a Ford
Focus than for a Maruti or Proton
• Economizing on switching costs, e.g.– In suites of office software, users of Microsoft Office more
likely to avoid switching costs that users of Lotus SmartSuitewhen they move jobs
7–15
Competing for Standards:Value Appropriation vs. Market Acceptance
Competing for Standards:Value Appropriation vs. Market Acceptance
Maximize value
appropriation
Maximize market
acceptance
LOOSE TIGHT
VHS
IBM-PC Mac
Betamax
The Conditions for Creativity:“Operating” and “Innovating” Organizations
The Conditions for Creativity:“Operating” and “Innovating” Organizations
Operating Organization Innovating Organization
Structure Bureaucratic. Specialization and division of labor. Hierarchical control
Flat organization without hierarchical control. Task-oriented project teams.
Processes Operating units controlled and coordinated by top management which undertakes strategic planning, capital allocation and operational planning.
Processes directed toward generation, selection, funding and development of ideas. Strategic planning flexible, financial and operating controls loose.
Reward
Systems
Financial compensation, promotion up the hierarchy, power and status symbols.
Autonomy, recognition, equity participation in new ventures
People Recruitment and selection based upon the needs of the organization structure for specific skills: functional and staff specialists, general managers, and operatives.
Key need is for idea generators which combine required technical knowledge with creative personality traits. Managers must act as sponsors and orchestrators.
7–17
Strategy Implementation: Invention to Innovation
Strategy Implementation: Invention to Innovation
• While invention depends upon creativity, successful innovation requires integrating new knowledge with multiple business functions.
• Need to link R&D departments with other functions (the problem of Xerox’s PARC)
• The role of cross-functional new product development teams as vehicles for integration
• The role of product champions--in achieving integration and counteracting organizational inertia.
Chapter Case 7 Chapter Case 7 From Encyclopedia Britannica to
Encarta to Wikipedia
• 18th century Scottish Enlightenment creates Encyclopedia Britannica (E.B.) 65,000 topics by 4,000 scholars In 1991, E. B. sales $650M (market was $1.2 billion annually)
Price ~$2,000 per set of books
• Microsoft launches Encarta in 1993 for $99 ea. By 1996 Encarta U.S. sales over $100M & E.B. ~$300M
• Mr. Wales launches Wikipedia in 2001 for $0 ea. 3.6 million articles in English ( 40X E.B. !)
18 million total in 281 languages
In ‘09 Microsoft shut down Encarta Peer-reviewed study of 42 topics found 4 errors in Wiki…3 in
E.B. 7–19
From Encyclopedia Britannica to Encarta to Wikipedia
• The innovation of CD-based encyclopedia
Destroyed more than ½ the revenue of encyclopedias
• Technology allowed Wikipedia to increase value and decrease costs
• The innovative business model:
"Crowd wisdom" for big value
But NO revenue
Wikipedia is funded by donations of time and money
Chapter Case 7 Chapter Case 7
7–20
Competition Driven by Innovation
• Invention is discovery of new ideas/products Wright brothers – airplane flight
• Innovation is the commercialization of invention Boeing & Airbus – selling the airplanes
• Schumpeter’s “gale of creative destruction”
Encyclopedias to Wikipedia…
Typewriters to PCs to ???
Pharmaceuticals to custom treatments
(individualized medicine)
7–21
EXHIBIT 7.1 Innovation: A Novel and Useful Idea that is Successfully Implemented
Innovation is an invention that is implemented in the marketplace7–22
Innovation and the Industry Life Cycle
• Innovations create new industries Big box retailing Express delivery Nanotechnology still evolving
• Four stages of industry development
1. Introduction
Early adopters will pay a premium Only a few innovators in the market – differentiated Strategy here — market acceptance & seeds for growth
– Network effects helpful • Positive effects ONE user has for other users
7–23
1–25
STRATEGY HIGHLIGHT 7.1STRATEGY HIGHLIGHT 7.1 Apple Leverages NetworkEffects to Propel Growth
• Apple launched iPhone in summer ‘07
Launched app store a year later
Small programs but BIG business!
- Over $4 billion in 2012
Virtuous cycle of 10 billion Apple apps downloaded by 2011
Apps increase value of the iPhone (& iPad too!)
More devices sold, incentivizes software developers
Recent iBook store likely to grow the network effects still more
7–25
Innovation and the Industry Life Cycle
• Four stages of industry development (cont'd)2. Growth Stage
Early majority buyers increase growth rapidly Dominant design is set
– IBM PC: Wintel– Government influence – GSM standard for mobile phones– QWERTY keyboards
Core competencies move to manufacturing & marketing
An example of growth stage Women’s shapeware industry
– Spanx started in 1998• Sold over 5M units & over $750 million in sales by 2008
– Maidenform, Body Wrap, & Miraclesuit are competitors
7–27
EXHIBIT 7.4 Product and Process Innovation and the Emergence of an Industry Standard
After an industry standard is established, process innovations become more important.
7–28
STRATEGY HIGHLIGHT 7.2STRATEGY HIGHLIGHT 7.2 Some Standards Die Hard:QWERTY vs. DSK
• QWERTY introduced in 1870s
Slowed down typing to avoid jamming keys
• Dvorak introduced in 1930s
Minimized finger reach to speed up typing
7–29
Innovation and the Industry Life-Cycle
• Four stages of industry development (cont'd)3. Maturity
Late majority buyers & more limited market growth– Increased competitive rivalry
Cost leadership firms tend to drive industry– Weaker firms will exit
Oligopoly is dominant industry structure in this stage
4. Decline Laggards are buyers and market size shrinks Four strategic options:
– Exit – get out of the industry– Harvest – stay with limited investments (Olivetti)– Maintain – stay & continue marketing (Marlboro)– Consolidate – buy rivals, near monopoly (IBM mainframes)
7–30
EXHIBIT 7.5 Features of the Industry Life Cycle
Not all industries emerge through these stages and some can rejuvenate such as the steel industry with mini-mills.
7–31
LO 7-1 Define innovation and describe its role in the competitive process.
LO 7-2 Describe the competitive implications of different stages in the industry life cycle.
LO 7-3LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-4LO 7-4 Evaluate different types of innovation and derive their strategic implications.
LO 7-5 Describe the long-tail concept and derive strategic implications.
LO 7-6 Evaluate discontinuities and describe the dynamics of paradigm changes.
LO 7-7 Identify the process leading to hypercompetition, and explain why competitive advantage can often be sustained through continuous innovation.
7–32
Strategic Entrepreneurship
• Entrepreneurs are the change agents for creative destruction. Create new opportunities and exploit them
Jeff Bezos – Amazon.com– Saw growth of Internet in 1994– Chose books as the first product for online sales
Oprah Winfrey – Harpo Productions– Rose from abuse & poverty to over $2 billion net worth– Ended talk show to devote time to OWN TV channel
Jeff Hawkins – Palm Computing (founded in 1992)– PalmPilot and Treo products
How to combine entrepreneurial with strategic actions? Example: P&G continued innovations in detergent
7–33
EXHIBIT 7.6 Types of Innovation: Combining Markets and Technologies
Categorizing according to technology and markets yields 4 quadrants
Intel 386 to 486 processors
MRI radiologyGPS to handheld consumer devices
Digital photography
7–34
1–35
STRATEGY HIGHLIGHT 7.3STRATEGY HIGHLIGHT 7.3 From King Gillette to Kingof Incremental Innovation
1930s 2011
7–35
1–36
STRATEGY HIGHLIGHT 7.3STRATEGY HIGHLIGHT 7.3 From King Gillette to Kingof Incremental Innovation
• Gillette invented the safety razor in 1903
A radical innovation at the start
Innovative business model
Make money from the blades NOT the razors
Incremental innovation
Moved from 1 to six blades (so far…)
Top selling blades today! Over $1 billion in sales
Prices steady to higher for the blades!
7–36
EXHIBIT 7.7Disruptive Innovation Invading DifferentMarket Segments from the Bottom Up
Google’s Chrome OS could be a disruptor of traditional Microsoft operating systems for computers…
7–37
1–38
STRATEGY HIGHLIGHT 7.4STRATEGY HIGHLIGHT 7.4 GE’s Reverse Innovation:Disrupt Yourself!
• GE Healthcare – global leader in diagnostics
Ultrasound machine for research hospitals – $230,000
Limited market for these in developing countries
2002 local team at GE China – developed portable US
Laptop-based technology – Under $30,000 for U.S. rollout
2009 introduced a handheld US – about $10,000
Vscan - large cell phone – shaped device
GE Vscan Video7–38
LO 7-1 Define innovation and describe its role in the competitive process.
LO 7-2 Describe the competitive implications of different stages in the industry life cycle.
LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-4 Evaluate different types of innovation and derive their strategic implications.
LO 7-5LO 7-5 Describe the long-tail concept and derive strategic implications.
LO 7-6 Evaluate discontinuities and describe the dynamics of paradigm changes.
LO 7-7 Identify the process leading to hypercompetition, and explain why competitive advantage can often be sustained through continuous innovation.
7–39
The Internet as Disruptive Force: The Long Tail
• Long tail in a digital world
Both opportunity and threat
80% sales in a given category are NOT “hits” Pareto principle
Technology enables easier access to the ‘tail’ Selling “less of more” Online firms can gain a large share of revenue from
selling a small number of nearly unlimited choices
• Short head is the mainstream Available at brick & mortar stores
Significant inventory costs
Ray Kurzwiel Video7–40
EXHIBIT 7.8 The Short Head and the Long Tail
The Internet and inventory management software drive down costs to match customer demand, increasing the tail to the black dotted line.
7–41
EXHIBIT 7.9 The Long-Tail Consequences: Selling Less of More
25% to 45% of sales for online retailers is from products NOT available in traditional retail stores. 7–42
LO 7-1 Define innovation and describe its role in the competitive process.
LO 7-2 Describe the competitive implications of different stages in the industry life cycle.
LO 7-3 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-4 Evaluate different types of innovation and derive their strategic implications.
LO 7-5 Describe the long-tail concept and derive strategic implications.
LO 7-6 Evaluate discontinuities and describe the dynamics of paradigm changes.
LO 7-7 Identify the process leading to hypercompetition, and explain why competitive advantage can often be sustained through continuous innovation.
7–43
Discontinuities: Periods of Paradigm Change
• Periods when underlying standard changes
Paradigm shift New technology revolutionizes existing industries
– New standard is established Technology “S-curve”
– Physical limits nearing or reached
Incumbents need absorptive capacity Existing firms must place “good bets” on new technologies
Examples of Discontinuities Airplanes: propellers to jets Cameras: film to digital TV screens: vacuum tube to flat panel Music storage: vinyl to CDs to MP3 storage
Steven ChuPlant Energy Video
Absorptive Capacity and a Firm’s Technical Knowledge
Absorptive capacity Technical knowledge
Spillovers of competitors’ knowledge,Extra-industry knowledge
Internal R&D
Adapted from: Cohen and Levinthal, 1990
EXHIBIT 7.10Likelihood of Discontinuity Increases as Technology Approaches Physical Limit
The Internet and inventory management software drive down costs to match customer demand, increasing the tail to the black dotted line.
7–46
Ex: Hybrid as Intermediate Step for Autos
Hybrid
Combustion
Ra
te o
f T
ec
hn
olo
gic
alP
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res
s(r
ed
uc
tio
nin
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iss
ion
s)
Time
Electric
Hybrid
Combustion
Ra
te o
f T
ec
hn
olo
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res
s(r
ed
uc
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Time
Electric
Combustion has been automobile standard for over 100 years… Is it time for a new standard? This is one scenario from the “swarm”
(for more discussion, see MiniCase 7). 7–47
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