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Roth4_SM_Lecture_PPT_C07_Final.pptxCHAPTER 7
Business Strategy: Innovation, Entrepreneurship, and Platforms
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Be sure to see the NEW Teacher’s Resource Manual located in the Connect Library under Instructor’s Resources.
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The AFI Strategy Framework
Exhibit 1.3
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Learning Objectives
LO 7-1 Outline the four-step innovation process from idea to imitation.
LO 7-2 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-3 Describe the competitive implications of different stages in the industry life cycle.
LO 7-4 Derive strategic implications of the crossing-the-chasm framework.
LO 7-5 Categorize different types of innovations in the markets-and-technology framework.
LO 7-6 Explain why and how platform businesses can outperform pipeline businesses.
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Innovation Is a Competitive Weapon
Innovation can create and destroy value.
Traditional networks vs. cable providers
Cable providers vs. streaming content
Typewriters to PC’s to mobile devices
Innovation often comes in waves.
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The Speed of Technological Change Accelerates
Exhibit 7.1
Source: Depiction of data from the U.S. Census Bureau, the Consumer Electronics Association, Forbes, and the National Cable and Telecommunications Association.
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What Causes Rapid Technological Diffusion and Adoption
Initial innovations are foundational for other rapid innovation.
New business models make innovation possible.
Ex: Dell’s direct to consumer model
Satellite and cable distribution systems
Enable mass media such as radio and TV
The emergence of the internet
Social networking
Viral messaging
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This image shows how many years it took for different technological innovations to reach 50 percent of the U.S. population (either through ownership or usage). As an example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.
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The Innovation Process
Idea
Invention
Innovation
Imitation
Exhibit 7.2
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Idea, Invention, Innovation, and Imitation
Idea
Abstract concepts or research findings
Invention
Transformation of an idea into a product
The modification and recombination of products
Innovation
Commercialization of an invention
Imitation
Copying a successful innovation
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What Is Innovation?
A novel and useful idea that is successfully implemented
Exhibit 7.3
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Entrepreneurs
Agents who introduce change
Undertake economic risk to innovate
Create new products, processes, & organizations
Create value for society
Examples:
Reed Hastings: Netflix
Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal
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Reed Hastings – Netflix
Volunteered in the Peace Corps for 2 years
Educated at Stanford where he first learned about the entrepreneurial model, net worth is now $1B
Elon Musk – Tesla Motors, Solar City, SpaceX, PayPal
An engineer and serial entrepreneur
Deep passion to solve environmental, social, and economic challenges
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Strategic and Social Entrepreneurship
Strategic Entrepreneurship
Pursuit of innovation using strategic tools
Combining entrepreneurial actions
Creating new opportunities
Exploiting existing opportunities
Social Entrepreneurship
The pursuit of social goals AND a profitable business
Example: Jimmy Wales at Wikipedia
Goal: provide knowledge on very large-scale
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Instructors:
The digital companion to this book McGraw-Hill Connect has a brief case exercise about Elon Musk on this section of the textbook. It builds student confidence on strategic entrepreneurship (LO 7-2).
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The Five Phases of an Industry Lifecycle
Introduction
Growth
Shakeout
Maturity
Decline
Supply and demand changes as industries age
Each stage requires different competencies
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Industry Life Cycle: The Smartphone Industry
Exhibit 7.4
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Introduction Stage
Core competency: R&D
Strategic objective: market acceptance & future growth
Capital-intensive
Designing a unique product
Trying new ideas to attract customers
Producing small quantities
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The emphasis is on uniqueness and performance in this stage. The initial market size is small, growth is slow, and barriers to entry are high.
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Network Effects in the Introduction Stage
The positive effect that one user has on the value of a product for other users
Example: Apple’s iPhone and the creation of apps
Exhibit 7.5
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Network effects 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.
The explosive growth of the iPhone is due to the fact that the Apple App Store offers the largest selection of apps to its users. The 1.5 million apps available were downloaded 75 billion times as of spring 2015. Apple argues that users have a better experience because the apps take advantage of the tight integration of hardware and software provided by the iPhone. The availability of apps, in turn, leads to network effects that increase the value of the iPhone for its users.
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Growth Stage
Demand increases rapidly.
First-time buyers rush to purchase.
Proof of concept has been demonstrated
Product / service standards emerge
A common set of features and design choices
Product innovation
New / recombined aspects of a product
Process innovation
New ways to produce a product
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Core competencies of focus during this stage are in manufacturing and marketing.
Process innovations are made possible through advances such as the internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.
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Product vs. Process Innovation During Growth
Exhibit 7.7
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Frequently, a standard emerges during the growth stage of the industry life cycle. At that point, most of the technological and commercial uncertainties about the new product are gone. 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. As market demand increases, economies of scale kick in: Firms establish and optimize standard business processes through applications of lean manufacturing, Six Sigma, and so on. As a consequence, product improvements become incremental, while the level of process innovation rises rapidly.
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Shakeout Stage
The rate of growth declines.
Firms begin to intensely compete.
Weaker firms forced out
Industry consolidation
Only the strongest competitors survive.
Price is an important competitive weapon.
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The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders. Key success factors at this stage are the manufacturing and process engineering capabilities that can be used to drive costs down. The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines.
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Maturity Stage
Only a few large firms remain.
They enjoy economies of scale.
Process innovation has reached a maximum
Demand: replacement or repeat purchases
Market has reached maximum size.
Industry growth is zero or negative
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The domestic airline industry has been in the maturity stage for a long time. The large number of bankruptcies as well as the wave of mega-mergers, such as those of Delta and Northwest, United and Continental, and American Airlines and US Airways, are a consequence of low or zero growth in a mature market characterized by significant excess capacity.
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Decline Stage
Demand falls rapidly.
Innovation efforts cease
Strong pressure on prices
Four strategic options to pursue.
Exit: bankruptcy / liquidation
Harvest: reduce further investments
Maintain: support at a given level
Consolidate: buy rivals
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Exit. Some firms are forced to exit the industry by bankruptcy or liquidation.
Harvest. In pursuing a harvest strategy, the firm reduces investments in product support and allocates only a minimum of human and other resources.
Maintain. Philip Morris, on the other hand, is following a maintain strategy with its Marlboro brand, continuing to support marketing efforts at a given level despite the fact that U.S. cigarette consumption has been declining.
Consolidate. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals.
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Crossing the Chasm Framework
Many innovators do not successfully transition from one stage of the industry life cycle to the next.
Exhibit 7.8
Source: Adapted from G.A. Moore, Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers, New York: HarperCollins, 1991, 17.
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Technology Enthusiasts
Enter the market during the introductory stage
2.5% of the total market potential
Have an engineering mind
Proactively pursue new technology
Enjoy using beta versions
Tinker with product imperfections
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A recent example of an innovation that appeals to technology enthusiasts is Google Glass, a mobile computer that is worn like a pair of regular glasses. Instead of a lens, however, one side displays a small, high-definition computer screen. Google Glass allows the wearer to use the Internet and smartphone-like applications via voice commands (e.g., conduct online search, stream video, and so on).
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Early Adopters
Enter the market during the growth stage
13.5% of the total market potential
Demand is driven by imagination and creativity
Not technology
To capture these customers:
Directly communicate the product’s potential
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Early adopters’ demand is fueled more by intuition and vision rather than technology concerns. These are the people that lined up at Apple Stores in the spring of 2015 when it introduced Apple Watch.
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Early Majority
Enter the market during the shakeout stage
34% of the total market potential
“What Can This Do For Me?”
Weigh the benefits and costs carefully
Rely on endorsements of others
This group is key to catching the growth wave.
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Fisker Automotive, a California-based designer and manufacturer of premium plug-in hybrid vehicles, fell into the chasm because it was unable to transition to early adopters, let alone the mass market. Between its founding in 2007 and 2012, Fisker sold some 1,800 of its Karma model, a $100K sports car, to technology enthusiasts. It was unable, however, to follow up with a lower-cost model to attract the early adopters into the market. In addition, technology and reliability issues for the Karma could not be overcome. By 2013, Fisker had crashed into a chasm, filing for bankruptcy. The assets of Fisker Automotive were purchased by Wanxiang, a Chinese auto parts maker.
In contrast, Tesla Motors, the maker of all-electric vehicles, and a fierce rival of Fisker at one time, was able to overcome some of the early chasms.
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Late Majority
Enter the market during the maturity stage
34% of the total market potential
Not as confident in their ability to master the technology
Wait until standards have emerged
Represent the majority of the market
Buy from well-established firms
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Laggards
Enter the market during the decline stage
16% of total market potential
Adopt a new product only if necessary
Generally don’t want new technology
Typically not pursued as future customers
Demand small
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Crossing the Chasm Framework: Mobile Phones
Exhibit 7.9
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In 2007, RIM’s dominance over the smartphone market began to erode quickly. The main reason was Apple’s introduction of the iPhone. Although technology enthusiasts and early adopters argue that the iPhone is an inferior product to the BlackBerry based on technological criteria, the iPhone enticed not only the early majority, but also the late majority to enter the market. For the late majority, encrypted software security was much less important than having fun with a device that allowed users to surf the web, take pictures, play games, and send and receive e-mail.
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Features and Strategic Implications of the Industry Life Cycle (1 of 2)
| Life Cycle Stages | |||||
| Introduction | Growth | Shakeout | Maturity | Decline | |
| Core competency | R&D, some marketing | R&D, some manufacturing, marketing | Manufacturing, process Engineering | Manufacturing, process engineering, marketing | Manufacturing, process engineering, marketing, service |
| Type and level of innovation | Product innovation at a maximum; process innovation at a minimum | Product innovation decreasing; process innovation increasing | After emergence of standard: product innovation decreasing rapidly; process innovation increasing rapidly | Product innovation low; process innovation high | Product innovation at a minimum; process innovation at a maximum |
| Market growth | Slow | High | Moderate and slowing down | None to moderate | Negative |
| Market size | Small | Moderate | Large | Largest | Small to moderate |
| Price | High | Falling | Moderate | Low | Low to high |
| Number of competitors | Few, if any | Many | Fewer | Moderate but large | Few if any |
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Exhibit 7.10
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Features and Strategic Implications of the Industry Life Cycle (2 of 2)
| Life Cycle Stages | |||||
| Introduction | Growth | Shakeout | Maturity | Decline | |
| Mode of competition | Non-price competition | Non-price competition | Shifting from non-price to price competition | Price | Price or non-price competition |
| Type of buyers | Technology enthusiasts | Early adopters | Early majority | Late majority | Laggards |
| Business-level Strategy | Differentiation | Differentiation | Differentiation, or integration strategy | Cost-leadership or integration strategy | Cost-leadership, differentiation, or integration strategy |
| Strategic objective | Achieving market acceptance | Staking out a strong strategic position; generating “deep pockets” | Surviving by drawing on “deep pockets” | Maintaining strong strategic position | Exit, harvest, maintain, or consolidate |
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Exhibit 7.10
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Innovation: Markets and Technologies
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This is called the Each type of innovation has different strategic implications.
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Incremental vs. Radical Innovation
Incremental Innovation:
Builds on established knowledge
Results from steady improvement
Targets existing markets and technology
Radical Innovation:
Novel methods & materials
Entirely new knowledge base
Or, recombination of existing knowledge
Targets new markets and technology
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In 1903, entrepreneur King C. Gillette invented and began selling the safety razor with a disposable blade. This radical innovation launched the Gillette Co. (now a brand of Procter & Gamble). To sustain its competitive advantage, Gillette not only made sure that its razors were inexpensive and widely available by introducing the “razor and razor blade” business model, but also continually improved its blades.
In a classic example of a string of incremental innovations, Gillette kept adding an additional blade with each new version of its razor until the number had gone from one to six! Though this innovation strategy seems predictable, it worked. Gillette’s newest razor, the Fusion ProGlide with Flexball technology, a razor handle that features a swiveling ball hinge, costs $11.49 (and $12.59 for a battery-operated one) per razor!
Examples of radical innovation: the iPhone, the Ford Model T, the x-ray machine, the airplane, genetic engineering, and decoding of the human genome.
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Why Incumbent Firms Tend to Focus Only On Incremental Innovation
Economic Incentives:
They must defend their position
Organizational Inertia:
They have formalized processes and structures
Innovation Ecosystem:
They rely on certain suppliers, buyers, complementors
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Architectural vs. Disruptive Innovation
Architectural Innovation:
Existing technology leveraged into a new market
Known components, used in a novel way
Disruptive Innovation:
Leverages new technologies in existing markets
New product / process meets existing customer needs
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Examples of Disruptive Innovation include digital photography (which has improved over time to result in higher definition pictures, and has largely replaced film photography) and laptops, (which disrupted desktops…although now tablets and large screen phones are disrupting laptops).
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Disruptive Innovation: Riding the Technology Trajectory to Invade Different Market Segments
Begins as a low cost solution to existing problem
The rate of technological improvement increases
Exhibit 7.12
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The dashed lines represent different market segments, from Segment 1 at the low end to Segment 4 at the high end. Low-end market segments are generally associated with low profit margins, while high-end market segments often have high profit margins.
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How to Respond to Disruptive Innovation
Continue to innovate
Stay ahead of the competition
Guard against disruptive innovation
Protect the low end of the market
Disrupt yourself
Don’t wait for others to disrupt you
Called “reverse innovation”
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Reverse Innovation: An innovation that was developed for emerging economies before being introduced in developed economies. Sometimes also called frugal innovation.
Strategy Highlight 7.2 describes how GE Healthcare invented and commercialized a disruptive innovation in China that is now entering the U.S. market, riding the steep technology trajectory of disruptive innovation.
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Pipeline vs. Platform Businesses
Pipeline Business
Linear transformation through the value chain
R&D, then design, then manufacture, then sell
Platform Business
Enables interaction between producers and consumers
Enable matches among users
Provides infrastructure and governance
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The five most valuable companies globally (Apple, Alphabet, Microsoft, Amazon, and Facebook) all run platform business models.
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The Platform Ecosystem
Exhibit 7.13
SOURCE: Adapted from Marshall W. Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary, “Pipelines, Platforms, and the New Rules of Strategy,” Harvard Business Review, April 2016.
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From a value chain perspective, producers produce or create a product or service that consumers consume. The owner of the platform controls the platform IP address and controls who may participate and in what ways. The providers provide the interfaces for the platform, enabling its accessibility online.
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Advantages of the Platform Business Model
They scale more efficiently.
There are no gatekeepers.
They unlock new sources of value creation and supply.
They benefit from community feedback.
Success occurs when positive network effects are realized.
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New sources of value creation and supply - To grow, traditional competitors such as Marriott or Hilton would need to add additional rooms to their existing stock. To add new hotel room inventory to their chains, they would need to find suitable real estate, develop and build a new hotel, furnish all the rooms, and hire and train staff to run the new hotel. This often takes years, not to mention the multimillion-dollar upfront investments required and the risks involved. In contrast, Airbnb faces no such constraints because it does not own any real estate, nor does it manage any hotels. Just like Marriott or Hilton, however, it uses sophisticated pricing and booking systems to allow guests to find a large variety of rooms pretty much anywhere in the world to suit their needs.
Community feedback - TripAdvisor, a travel website, derives significant value from the large amount of quality reviews (including pictures) by its users of hotels, restaurants, and so on. This enables TripAdvisor to consummate more effective matches between hotels and guests via its website, thus creating more value for all participants.
Network effects - Growing its user base is critical for Netflix to sustain its competitive advantage. Netflix has been hugely successful in attracting new users: As of 2017 it had some 95 million subscribers worldwide. Yet, while providing a large selection of high-quality streaming content is a necessity of the Netflix business model, this element can and has been easily duplicated by others such as Amazon, Hulu, and premium services on Google’s YouTube. To lock in its large installed base of users, however, Netflix has begun producing and distributing original content such as the hugely popular shows House of Cards and Orange Is the New Black. To sustain its competitive advantage going forward, Netflix needs to rely on its core competencies, including its proprietary recommendation engine, data-driven content investments, and network infrastructure management.
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Appendices Descriptions of Visual Graphics to Support Student Accessibility Needs
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Appendix 1 The AFI Strategy Framework
The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with five different circles on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The five outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4) Formulation, Corporate Strategy, and (5) Implementation.
Each of these outer five circles have a brief description beside them to explain what the circle means:
Under the first outer circle titled "Getting Started," it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic Leadership: Managing the Strategy Process (Chapter 2)."
Under the second outer circle titled "External and Internal Analysis," it says: Part 1, Strategy Analysis, "External Analysis: Industry Structure, Competitive Forces and Strategic Groups (Chapter 3)," "Internal Analysis: Resources, Capabilities and Core Competencies (Chapter 4)," and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)."
Under the third outer circle titled "Formulation: Business Strategy," it says: Part 2, Strategy Formulation, "Business Strategy: Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter 7)."
Under the fourth outer circle titled "Formulation: Corporate Strategy," it says: Part 2, Strategy Formulation, "Corporate Strategy: Vertical Integration and Diversification (Chapter 8)," "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter 9)," and "Global Strategy: Competing Around the World (Chapter 10)."
Under the fifth outer circle titled "Implementation," it says: Part 3, Strategy Implementation, "Organizational Design: Structure, Culture and Control (Chapter 11)," and "Corporate Governance and Business Ethics (Chapter 12)."
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Appendix 2 The Speed of Technological Change Accelerates
As an example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.
©McGraw-Hill Education.
Appendix 3 The Innovation Process
This image is of an upward facing arrow, at the bottom is the word idea, and then moving sequentially upward are the words invention, innovation and imitation. This image is intended to convey that broadly viewed, innovation describes the discovery, development, and transformation of new knowledge in a four-step process captured in the four I’s: idea, invention, innovation, and imitation.
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Appendix 4 What Is Innovation?
This image has three overlapping circles which each read: novel, useful, implemented. In the middle of the three circles is the word “innovation.” This image is meant to convey that innovation needs to be novel, useful, and successfully implemented to help firms gain and sustain a competitive advantage.
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Appendix 5 Industry Life Cycle: The Smartphone Industry
In a stylized industry life cycle model, the horizontal axis shows time (in years) and the vertical axis market size. This image takes a snapshot of the global smartphone industry in the year 2016. This implies that we are joining two different life cycles (one for emerging economies and one for developed economies) in the same exhibit at one point in time. In emerging economies, smartphones are in the Growth stage. In developed economies however, they are in the Maturity stage.
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Appendix 6 Network Effects in the Introduction Stage
This image demonstrates how the installed base of users for the iPhone result in more use of apps, which increase the value of the iPhone, which thus increases the demand for the iPhone.
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Appendix 7 Product vs. Process Innovation During Growth
This image shows a graph with two axes: time on the X axis, and level of innovation on the Y axis. As you move from left to right on the graph, the phases of the industry life cycle are listed: introduction, growth, shakeout, maturity and decline.
There are two main lines on the graph. The first line, titled Product Innovation, has a very high level of innovation during the introduction and growth stages, and begins a sharp decline during the shakeout phase.
The second line, titled Process Innovation, starts out very low at the beginning of the life cycle, and increases rapidly during shakeout and maturity, only to decline again during decline.
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Appendix 8 Crossing the Chasm Framework
This image shows a traditional bell curve, that is similar to the Industry Lifecycle, however, there are different phase names and there is a space between the Early Adopters and the Early Majority, titled The Chasm.
The chasm framework breaks down the 100 percent market potential into different customer segments, highlighting the incremental contribution each specific segment can bring into the market.
Technology Enthusiasts: 2.5%
Early Adopters: 13.5%
Early Majority: 34%
Late Majority: 34%
Laggards: 16%
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Appendix 9 Crossing the Chasm Framework: Mobile Phones
Blackberry, while it was accepted by the early adopters and early majority, the iPhone was also able to capture the late majority and laggards as well.
In 2007, RIM’s dominance over the smartphone market began to erode quickly. The main reason was Apple’s introduction of the iPhone. Although technology enthusiasts and early adopters argue that the iPhone is an inferior product to the BlackBerry based on technological criteria, the iPhone enticed not only the early majority, but also the late majority to enter the market. For the late majority, encrypted software security was much less important than having fun with a device that allowed users to surf the web, take pictures, play games, and send and receive e-mail.
©McGraw-Hill Education.
Appendix 10 Innovation: Markets and Technologies
This image shows a large square, imbedded within it are four other squares. The two characteristics that differentiates each square are its technology and market:
New market and new technology = radical innovation
New market and existing technology = architectural innovation
Existing market and new technology = disruptive innovation
Existing market and existing technology = incremental innovation
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Appendix 11 Disruptive Innovation: Riding the Technology Trajectory to Invade Different Market Segments
This image shows dashed lines representing different market segments, from Segment 1 at the low end to Segment 4 at the high end. Low-end market segments are generally associated with low profit margins, while high-end market segments often have high profit margins. The technology trajectory used by a disruptive innovator to invade market segments must move from the bottom up.
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Appendix 12 The Platform Ecosystem
This image depicts a platform ecosystem. In the middle of the platform is the owner – the controller of platform IP and arbiter of who may participate and in what ways. In addition, the platform also hosts providers, which provide interfaces for the platform.
Value and data is exchanged outward from the owner to both the producers (creators of the platform’s offerings) and the consumers (buyers or users of the offerings).
©McGraw-Hill Education.
