1. Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Chapter 7 Business Strategy: Innovation and Entrepreneurship

2. 7-2

3. 7-3 Chapter Outline 7.1 Competition Driven by Innovation The Innovation Process 7.2 Strategic and Social Entrepreneurship 7.3 Innovation and the Industry Life Cycle 7.4 Types of Innovation Incremental vs. Radical Innovation Architectural vs. Disruptive Innovation The Internet as Disruptive Force: The Long Tail Open Innovation 7.5 Implications for the Strategist 7.1 Competition Driven by Innovation The Innovation Process 7.2 Strategic and Social Entrepreneurship 7.3 Innovation and the Industry Life Cycle 7.4 Types of Innovation Incremental vs. Radical Innovation Architectural vs. Disruptive Innovation The Internet as Disruptive Force: The Long Tail Open Innovation 7.5 Implications for the Strategist

4. 7-4 Strategy Smart Videos Ideas Come From Everywhere Marissa Mayer (CEO Yahoo, former VP Google) http://ecorner.stanford.edu/authorMaterialInfo.html?mi d=1524 3:08 Minutes Topic: Innovation

5. 7-5 Strategy Smart Videos Give Ideas Credit, Not Credit for Ideas Marissa Mayer (CEO Yahoo, former VP Google) http://ecorner.stanford.edu/authorMaterialInfo.html?mi d=1525 2:35 Minutes Topic: Innovation

6. 7-6 Strategy Smart Videos Learning From Mistakes Marissa Mayer (CEO Yahoo, former VP Google) http://ecorner.stanford.edu/authorMaterialInfo.html?mi d=1528 4:03 Minutes Topic: Innovation

7. 7-7 Strategy Smart Videos Don't Kill Projects; Morph Them Marissa Mayer (CEO Yahoo, former VP Google) http://ecorner.stanford.edu/author/marissa_mayer http://ecorner.stanford.edu/authorMaterialInfo.html?mi d=1532 2:00 Minutes Topic: Innovation

8. 7-8 Strategy Smart Videos Steve Jobs' 2005 Stanford Commencement Address Steve Jobs Classic http://www.youtube.com/watch?v=UF8uR6Z6KLc 15:05 Minutes Topic: Innovation

9. 7-9 Strategy Smart Videos Tom Peters: Innovation is Actually Easy! http://www.youtube.com/watch?v=8AGTpu_i8sc 2:52 Minutes Topic: Innovation

10. 7-10 ChapterCase 7 Wikipedia: The Free Encyclopedia For 250 years, Encyclopedia Britannica was the leader. In the early 1990s, annual encyclopedia sales were $1.2 billion. Encyclopedia Britannica was the market leader with over 50% of sales. Enter innovation and the Internet: Microsoft launched its electronic encyclopedia Encarta in 1993 for $99. Within only three years, the market for printed encyclopedias had shrunk by half, along with Britannica’s revenues, while Microsoft sold over $100 million worth of Encarta CDs. Wikipedia: The Free Encyclopedia For 250 years, Encyclopedia Britannica was the leader. In the early 1990s, annual encyclopedia sales were $1.2 billion. Encyclopedia Britannica was the market leader with over 50% of sales. Enter innovation and the Internet: Microsoft launched its electronic encyclopedia Encarta in 1993 for $99. Within only three years, the market for printed encyclopedias had shrunk by half, along with Britannica’s revenues, while Microsoft sold over $100 million worth of Encarta CDs. The Wikipedia logo is a registered trademark of the Wikimedia Foundation. Photo of Jimmy Wales by Lane Hart-well/Licensed under CC BY-SA 3.0/ http://commons.wikimedia.org/wiki/File:Jimmy_Wales_July_2010.jpghttp://commons.wikimedia.org/wiki/File:Jimmy_Wales_July_2010.jpg

11. 7-11 ChapterCase 7 2001: Internet entrepreneur Jimmy Wales launched Wikipedia.  Free encyclopedia relies on the wisdom of the crowds,  “the many” often know more than “the expert”  Criticisms include: Unreliable content Systematic bias  But a study by Nature found that the errors in Wikipedia and Britannica were about the same. 2001: Internet entrepreneur Jimmy Wales launched Wikipedia.  Free encyclopedia relies on the wisdom of the crowds,  “the many” often know more than “the expert”  Criticisms include: Unreliable content Systematic bias  But a study by Nature found that the errors in Wikipedia and Britannica were about the same.

12. 7-12  Innovation is a big driver in the competitive process.  “Gale of Creative destruction” – Joseph Schumpeter Typewriters to computers Wang Labs, a computer company, helped to kill the typewriter industry. IBM & Compaq defeated Wang Labs for the computer market. Lenovo bought the remains of the IBM personal computer market. HP bought Compaq and is under threat from mobile devices itself. TV viewing options “Big 3” networks struggling against cable & satellite providers Customized online content (Hulu, Netflix, etc.) now rising 7.1 Competition Driven by Innovation

13. 7-13 Exhibit 7.1 Accelerating Speed of Technological Change

14. 7-14  Discovery and development of new knowledge captured by the 4 I’s: Idea – may be presented in terms of abstract concepts or as findings derived from basic research Invention – transformation of an idea into a new product, process, or the modification and recombination of existing ones Innovation – concerns the commercialization of an invention by entrepreneurs Imitation – copying a successful innovation The Innovation Process

15. 7-15 Exhibit 7.2 The 4 I’s: Idea, Invention, Innovation, and Imitation

16. 7-16 Exhibit 7.3 Innovation: A Novel and Useful Idea that Is Successfully Implemented

17. 7-17  Entrepreneurs are the change agents for creative destruction. Create new opportunities & exploit them Jeff Bezos – Amazon  Saw growth of Internet in 1994  Now the world’s largest online retailer Oprah Winfrey – Harpo Productions  Rose from abuse & poverty to over $2 billion net worth  Ended talk show to devote time to OWN TV channel Elon Musk – Tesla Motors, Solar City, SpaceX, PayPal  An engineer and serial entrepreneur  Deep passion to solve environmental, social, and economic challenges How to combine entrepreneurial with strategic actions? Example: Samsung’s innovations in mobile devices 7.2 Strategic and Social Entrepreneurship

18. 7-18  The five different stages: introduction, growth, shakeout, maturity, and decline  Innovations create new industries. Express delivery Internet retailing and advertising Nanotechnology growing in medical and aircraft industries  Competitors The number and size of competitors change with each stage.  Consumers Different types of consumers enter the market at each stage. Both the supply and demand sides of the market change as the industry ages. 7.3 Innovation and the Industry Life Cycle

19. 7-19 Exhibit 7.4 Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies

20. 7-20 Strategy Highlight 7.1 Apple Leverages Network Effects to Propel Growth  Apple launched iPhone in summer ’07. Launched App store a year later Small programs but BIG business!  50 billion Apple app downloads by spring ‘13 Apps increase value of the iPhone (& iPad too!) More devices sold; incentivizes software developers  The availability of apps, in turn, leads to network effects that increase the value of the iPhone for its users. Apple Leverages Network Effects to Propel Growth  Apple launched iPhone in summer ’07. Launched App store a year later Small programs but BIG business!  50 billion Apple app downloads by spring ‘13 Apps increase value of the iPhone (& iPad too!) More devices sold; incentivizes software developers  The availability of apps, in turn, leads to network effects that increase the value of the iPhone for its users.

21. 7-21 Exhibit 7.5 Leveraging Network Effects to Drive Demand: Apple’s iPhone

22. 7-22 Exhibit 7.6 Product and Process Innovation and the Emergence of an Industry Standard Throughout an Industry Life Cycle

23. 7-23  Life cycle for products/services that need different customer behaviors. (Geoffrey Moore’s book)  Many innovators fail to get from early adopters to majority. (15% to 50% of market).  The early adopters are excited by the possibilities of the product rather than the “cool technology” of technology enthusiasts.  The critical early majority base purchasing decisions on practicality. This group can generate a herding effect. Crossing the Chasm

24. 7-24 Exhibit 7.7 The Crossing-the- Chasm Framework

25. 7-25 Exhibit 7.8 Crossing the Chasm: The Smartphone Industry

26. 7-26 Exhibit 7.9 Features and Strategic Implications of the Industry Life Cycle

27. 7-27 7.4 Types of Innovation  Incremental Steady improvement of a product or service Examples: Gillette now 6-bladed razors Intel 386 to 486 processors Often from incumbent firms Often from incumbent firms Economic incentives Higher entry barriers Organizational inertia Innovation ecosystem  Radical Novel methods or materials serving new markets Examples: Mass production − Ford Genetic engineering Often from new firms Airplanes’ predictable pattern of innovation De Havilland 1 st commercial jet  Boeing, Airbus leaders  CRJ, Embraer rising up

28. 7-28 Exhibit 7.10 Types of Innovation: Combining Markets and Technologies

29. 7-29 TYPES OF INNOVATION (cont’d)  Architectural Reconfigure known components to create new markets. Example: Canon user-friendly copiers GPS to handheld consumer devices  Disruptive Novel technologies serving existing markets from bottom up Examples: Japanese autos Digital photography Data storage media “Stealth” attack Captures current customers typically with initially lower cost & performance Protection against it…. “Disrupt yourself”

30. 7-30 Exhibit 7.11 Disruptive Innovation: Riding the Technology Trajectory to Invade Different Market Segments from the Bottom Up

31. 7-31 Strategy Highlight 7.2 GE’s New Innovation Mantra: Disrupt Yourself!  Ultrasound (US) machine for research hospitals − $250,000 No major 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 for under $10,000 Vscan – “21 st -century stethoscope” GE’s New Innovation Mantra: Disrupt Yourself!  Ultrasound (US) machine for research hospitals − $250,000 No major 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 for under $10,000 Vscan – “21 st -century stethoscope”

32. 7-32  Long tail in a digital world Examples: books, movies, but also TurboTax 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 from selling a small # of nearly unlimited choices.  Short head is the “blockbuster.” Available at brick & mortar stores Significant inventory costs The Internet as Disruptive Force: The Long Tail

33. 7-33 Exhibit 7.12 The Short Head and the Long Tail

34. 7-34  20 th century mostly …closed innovation – internal  Mobility of skilled workers  Exponential growth of venture capital  Wider “marketplace of ideas” options  Better capabilities in external suppliers  Open innovation – leverages both internal ideas and inventions, and external ones; 2-way sharing Open Innovation SHIFT FROM CLOSED TO OPEN INNOVATION

35. 7-35 Exhibit 7.13 Closed Innovation vs. Open Innovation

36. 7-36 Exhibit 7.14 Contrasting Principles of Closed and Open Innovation

37. 7-37 7.5 Implications for the Strategist  The most innovative companies in 2013: Nike, Amazon, Square, Uber, Pinterest, and Target All these firms use continuous innovations.  Life cycle and chasm frameworks − major implications  Many successful firms are moving to open innovation  Internal and external innovation must be managed.  Externally, innovation is managed through cooperative strategies such as licensing, strategic alliances, joint ventures, and acquisitions.

38. 7-38 ChapterCase 7 Consider This… WIKIPEDIA leverages technological innovation Combined with crowdsourcing For content development and maintenance Keys to success: Attract legions of contributors – over 32 million registered Utilize these interested individuals – over 300,000 users edit content each month Proper servers, interfaces, and bandwidth Perceived “neutral point of view” for continued growth Consider This… WIKIPEDIA leverages technological innovation Combined with crowdsourcing For content development and maintenance Keys to success: Attract legions of contributors – over 32 million registered Utilize these interested individuals – over 300,000 users edit content each month Proper servers, interfaces, and bandwidth Perceived “neutral point of view” for continued growth The Wikipedia logo is a registered trademark of the Wikimedia Foundation. Photo of Jimmy Wales by Lane Hart-well/Licensed under CC BY-SA 3.0/ http://commons.wikimedia.org/wiki/File:Jimmy_Wales_July_2010.jpghttp://commons.wikimedia.org/wiki/File:Jimmy_Wales_July_2010.jpg

39. 7-39 Take-Away Concepts  Innovation describes the discovery and development of new knowledge in a four-step process captured in the 4 I’s: idea, invention, innovation,and imitation.  The innovation process begins with an idea.  An invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones.  Innovation concerns the commercialization of an invention by entrepreneurs (within existing companies or new ventures).  If an innovation is successful in the marketplace, competitors will attempt to imitate it. LO 7-1 Outline the four-step innovation process from idea to imitation.

40. 7-40 Take-Away Concepts  Entrepreneurship describes the process by which change agents undertake economic risk to innovate—to create new products, processes, and sometimes new organizations.  Strategic entrepreneurship describes the pursuit of innovation using tools and concepts from strategic management.  Social entrepreneurship describes the pursuit of social goals by using entrepreneurship. Social entrepreneurs use a triple-bottom-line approach to assess performance. LO 7-2 Apply strategic management concepts to entrepreneur- ship and innovation.

41. 7-41 Take-Away Concepts  Innovations frequently lead to the birth of new industries.  Industries generally follow a predictable industry life cycle, with five distinct stages: introduction, growth, shakeout, maturity, and decline.  Exhibit 7.9 details features and strategic implications of the industry life cycle. LO 7-3 Describe the competitive implications of different stages in the industry life cycle.

42. 7-42 Take-Away Concepts  The core argument of the crossing-the-chasm framework is that each stage of the industry life cycle is dominated by a different customer group, which responds differently to a new technological innovation.  There exists a significant difference between the customer groups that enter early during the introductory stage of the industry life cycle versus customers that enter later during the growth stage.  This distinct difference between customer groups leads to a big chasm in which companies and their innovations frequently fall into.  To overcome the chasm, managers need to formulate a business strategy guided by the “who-what-why-and-how” questions of competition. LO 7-4 Derive strategic implications of the crossing-the- chasm framework.

43. 7-43 Take-Away Concepts  Four types of innovation emerge when applying existing versus new dimensions of technology and markets.  An incremental innovation builds on an established knowledge base, and steadily improves an existing product or service.  A radical innovation draws on novel methods or materials, and is derived from either an entirely different knowledge base.  An architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured to attack new markets.  A disruptive innovation leverages new technologies to attack existing markets from the bottom up. LO 7-5 Categorize different types of innovations in the markets-and- technology framework.

44. 7-44 Take-Away Concepts  An architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets (new market / existing technology).  A disruptive innovation is an innovation that leverages new technologies to attack existing markets from the bottom up (existing market / new technology). LO 7-6 Explain the long-tail concept and derive its strategic implications.

45. 7-45 Take-Away Concepts LO 7-7 Compare and contrast closed and open innovation.

46. 7-46