Managing Innovation

(Read the Theory in Action on page 59. Write a 7 page paper in APA format.)

The research paper should include the following sections.

Cover page

Introduction – (Thesis statement and Purpose of paper)

Background – Background and History on the concept

Discussion – Discuss current issues, innovation, and future use. Support the topic with any necessary sources. Be sure to include in-text citations.

Conclusion – Summary of main points

References – Formatted using APA

Theory in Action “Segment Zero”—A Serious Threat to Microsoft? (Schillings, 2016.pages 59-61)

From 1980 to 2012, Microsoft was entrenched as the dominant personal computer operating system, giving it enormous influence over many aspects of the computer hardware and software industries. Though competing operating systems had been introduced during that time (e.g., Unix, Geoworks, NeXTSTEP, Linux, and the Mac OS), Microsoft’s share of the personal computer operating system market held stable at roughly 85 percent throughout most of that period. In 2013, however, Microsoft’s dominance in computer operating systems was under greater threat than it had ever been. A high-stakes race for dominance over the next generation of computing was well underway, and Microsoft was not even in the front pack.

“SEGMENT ZERO”

As Andy Grove, former CEO of Intel, noted in 1998, in many industries—including microprocessors, software, motorcycles, and electric vehicles—technologies improve faster than customer demands of those technologies increase. Firms often add features (speed, power, etc.) to products faster than customers' capacity to absorb them. Why would firms provide higher performance than that required by the bulk of their customers? The answer appears to lie in the market segmentation and pricing objectives of a technology’s providers. As competition in an industry drives prices and margins lower, firms often try to shift sales into progressively higher tiers of the market. In these tiers, high performance and feature-rich products can command higher margins. Though customers may also expect to have better-performing products over time, their ability to fully utilize such performance improvements is slowed by the need to learn how to use new features and adapt their work and lifestyles. Thus, while both the trajectory of technology improvement and the trajectory of customer demands are upward sloping, the trajectory for technology improvement is steeper (for simplicity, the technology trajectories are drawn in Figure 3.8 as straight lines and plotted against time in order to compare them against customer requirements). In Figure 3.8, the technology trajectory begins at a point where it provides performance close to that demanded by the mass market, but over time it increases faster than the expectations of the mass market as the firm targets the high-end market. As the price of the technology rises, the mass market may feel it is overpaying for technological features it does not value. In Figure 3.9, the low-end market is not being served; it either pays far more for technology that it does not need, or it goes without. It is this market that Andy Grove, former CEO of Intel, refers to as segment zero. For Intel, segment zero was the market for low-end personal computers (those less than $1,000). While segment zero may seem unattractive in terms of margins, if it is neglected, it can become the breeding ground for companies that provide lower-end versions of the technology. As Grove notes, “The overlooked, underserved, and seemingly unprofitable end of the market can provide fertile ground for massive competitive change”.

FIGURE 3.8 Trajectories of Technology Improvement and Customer Requirements

FIGURE 3.9Low-End Technology’s Trajectory Intersects Mass Market Trajectory

As the firms serving low-end markets with simpler technologies ride up their own trajectories (which are also steeper than the slope of the trajectories of customer expectations), they can eventually reach a performance level that meets the demands of the mass market, while offering a much lower price than the premium technology (see Figure 3.9). At this point, the firms offering the premium technology may suddenly find they are losing the bulk of their sales revenue to industry contenders that do not look so low end anymore. For example, by 1998, the combination of rising microprocessor power and decreasing prices enabled personal computers priced under $1,000 to capture 20 percent of the market.

THE THREAT TO MICROSOFT

So where was the “segment zero “that could threaten Microsoft? Look in your pocket. In 2015, Apple’s iPhone operating system (iOS) and Google’s Android collectively controlled over 90 percent of the worldwide market for smartphone, followed by Research in Motion’s Blackberry Gartner estimates put Microsoft’s share at 3 percent. The iOS and Android interfaces offered a double whammy of beautiful aesthetics and remarkable ease of use. The applications business model used for the phones was also extremely attractive to both developers and customers, and quickly resulted in enormous libraries of applications that ranged from the ridiculous to the indispensible.

From a traditional economics perspective, the phone operating system market should not be that attractive to Microsoft—people do not spend as much on the applications, and the carriers have too much bargaining power, among other reasons. However, those smartphone operating systems soon became tablet operating systems, and tablets were rapidly becoming fully functional computers. Suddenly, all of that mindshare that Apple and Google had achieved in smartphone operating systems was transforming into mindshare in personal computer operating systems. Despite years of masterminding the computing industry, Microsoft’s dominant position was at risk of evaporating. The outcome was still uncertain–in 2015 Microsoft had an impressive arsenal of capital, talent, and relationships in its armory—but for the first time, it was fighting the battle from a disadvantaged position.

a A. S. Grove, "Managing Segment Zero," Leader to Leader, 1999, p. 11.

b Dignan, L. 2013. Android, Apple iOS flip consumer, corporate market share. Between the Lines, February 13th.

Reference:

Schilling, M (2015). Strategic Management of Technological Innovation 5th Edition: McGraw Hill