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Innovation and Entrepreneurship

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1 Innovation and Entrepreneurship
Be sure to see experienced and newer versions of the Instructor’s Manual at http://www.mhhe.com/ftrStrategy2e.com Chapter 7 Business Strategy: Innovation and Entrepreneurship

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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

4 7.1 Competition Driven by Innovation
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 Instructors: Other examples of creative destruction abound in today’s marketplace. Below is one example from several in the IM. One that will resonate with students is the way that phones have killed the market for point-and-shoot cameras. (see “Smart Phones Expose Camera Maker to Trouble” Wall Street Journal 8/13/13) ?KEYWORDS=aaron+back&mg=reno64-wsj

5 Exhibit 7.1 Accelerating Speed of Technological Change
Instructors: The life experience of the Gen-Y population reflects the accelerated pace of technology diffusion shown in Exhibit 7.1. New technologies are a natural part of their lives. The Gen-Y cohort came of age during the boom of the Internet; its members are accustomed to constant connectivity and to rapid technological change. By the time they graduate from college, the average Gen-Y student has spent over 10,000 hours playing video games and over 20,000 hours watching TV. The Gen-Y cohort is sometimes called digital natives—people who grew up with the Internet and other advanced technologies and who need no help to adapt to new technologies. Those who did not grow up with the Internet and other advanced technologies, and so have taken longer to adapt to them, are called digital immigrants.

6 The Innovation Process
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

7 Exhibit 7.2 The 4 I’s: Idea, Invention, Innovation, and Imitation
Instructors: From the IM The discussion of the innovation process shown in Exhibit 7.2 is worth spending a few moments on in class. Many students will come into the classroom confused over the difference between inventions and innovations. It is important to set the framework here at the start of the chapter for a better understanding of the concepts to follow.

8 Exhibit 7.3 Innovation: A Novel and Useful Idea that Is Successfully Implemented

9 7.2 Strategic and Social Entrepreneurship
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 Instructors: The digital companion to this book McGraw-Hill Connect has a short video case exercise on this section of the textbook. It builds student confidence on entrepreneurship by using a portion of a talk given by Elon Musk (LO 7-2). The textbook describes a few serial entrepreneurs, but the flip side of that is that as firms mature they often need different skill sets in their CEO than the entrepreneurial expertise of the founder. A good example of this is Twitter; as they approach their public offering, none of the four founders are leading the firm. According to “Success after Founders’ Exit” (Wall Street Journal 10/3/13) fewer than half of the firms that go public still have a founder as CEO. A suggested exercise from the IM: For an exercise in critical reasoning skills, ask the students to watch an episode of Shark Tank (http://abc.go.com/shows/shark-tank), then choose one of these assignments to prepare for class discussion: • For one of the start-ups that received funding, what traits of that business made it attractive to the investor? Why? • For one of the start-ups that received funding, what traits or experiences of the entrepreneur made the business attractive to investor? Why? • For one of the businesses, what resources or capabilities were they looking for in the sharks, in addition to money? Why? • For one of the businesses that did not receive funding, what was the fatal flaw that discouraged investors? Why? • Look at the abc website to learn something about one of the sharks, what experience does he/she have as an entrepreneur?

10 7.3 Innovation and the Industry Life Cycle
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. Instructors: The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on innovation and the industry life cycle (LO 7-3). One small group exercise that might be fun and insightful for the class is in the IM and included below for convenience. Ask student teams to draw a projected industry life cycle for self-driving cars. When they have had a few minutes to discuss this, guide a group discussion on what uncertainties auto makers are experiencing in this area. This discussion should lead to an identification of PESTEL factors (Chapter3) , such as technology developments, societal attitudes, legal barriers, and consumer behaviors that are highly uncertain. How might the firms reduce their risk? Students may suggest alliances or staged investments. (see “Auto Makers Accelerate Efforts to Develop Self-Driving Cars” Wall Street Journal 9/10/13).

11 Exhibit 7.4 Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies
Instructors: Discussion of Exhibit 7.4 can be enhanced with this video, “Google’s Android Seizes Smart Phone Market” Wall Street Journal 8/12/13, that describes the growth of Android in the emerging markets and compares developed markets for smartphones with emerging markets. Video link is here: market/04EE95E0-97C AB9- 1F9FF3F0BD03.html?KEYWORDS=android%23!04EE95E0-97C AB9-1F9FF3F0BD03#!04EE95E0-97C AB9-1F9FF3F0BD03 One point we like to make when discussing the declining stage of the industry life cycle is that there is still an opportunity for businesses in this phase. Indeed the “harvest” strategic option can prove to be very profitable for firms. It is a close parallel to a “cash cow” from the Boston Consulting Group (BCG) portfolio matrix (discussed in Chapter 8 of the text).

12 Apple Leverages Network Effects to Propel Growth
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. Instructors: Some thoughts on this strategy highlight from the IM. Most students will immediately recognize that they do indeed often value the apps more than the actual phone features (or would if they actually had a smartphone). Yet so often they have not thought through the implications of this. Link back to Porter’s five forces and recall the idea of switching costs. The access to unique apps not only can drive consumer value and therefore volumes, but it also increases the “stickiness” of customers. If a customer is comfortable with the Apple app store products and the interface with iTunes to purchase and organize their apps, they are far less likely to explore Android (from Google) or Windows 8 (from Microsoft) even if these latter firms introduce a really attractive hardware/software phone package or features.

13 Exhibit 7.5 Leveraging Network Effects to Drive Demand: Apple’s iPhone

14 Exhibit 7.6 Product and Process Innovation and the Emergence of an Industry Standard Throughout an Industry Life Cycle Instructors: Standards are extremely important because they represent a common set of engineering features and design choices. Standards reduce industry uncertainty and confusion and ensure product quality, performance, and safety. As standards become dominant, the competitive nature of an industry intensifies. Firms begin to reap economies of scale and learning, prices begin to fall, and distribution channels are expanded. As shown in Exhibit 7.6, the basis of competition transitions more toward process innovation (lean manufacturing, Six Sigma, and others) instead of product innovation. As an example, the QWERTY keyboard, named for the sequence of the first six letters on the upper-left row, was introduced in the 1870s as a way to slow typists in order to avoid jamming the type bars in mechanical typewriters. While generally considered an inefficient arrangement of the most frequently used letters, the QWERTY keyboard remains the standard today, but not for lack of alternatives. In the 1930s, August Dvorak, a designed and patented an alternative keyboard (DSK) intended to speed up typing by locating the most frequently used letters in the center row. But given the sunk cost people had invested in learning the QWERTY keyboard, the DSK did not catch on. Today, however, every personal computer comes with an optional DSK setting that requires only a minor software modification. Even though most people have never heard about it, the DSK has a passionate core of devotees. They were quite surprised to learn that when smartphones with virtual keyboards, like the iPhone and the BlackBerry Storm, and the media tablet iPad were introduced, they came only with the traditional QWERTY keyboard layout. A software developer created an iPhone app to allow users to add the Dvorak layout.

15 Crossing the Chasm 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. Instructors: In early 2014 Mr. Moore published a third edition of his classic book Crossing the Chasm. The book has many updated examples compared to his original work. For example Moore discusses Facebook, 3-D printing and Yammer.

16 Exhibit 7.7 The Crossing-the-Chasm Framework
Instructors: “Crossing the Chasm in Consumer Markets: A Visual Example by Geoffrey Moore” is an engaging and humorous 4 minute video to illustrate the concept of the industry life cycle and crossing the chasm. The video link is here: https://www.youtube.com/watch?v=izP5n1SBEaI

17 Exhibit 7.8 Crossing the Chasm: The Smartphone Industry
Instructors: The text has a quite detailed example of the smartphone industry as illustrated here. Other examples could be the Tesla/Fisker example briefly noted on page 216 where Fisker declared bankruptcy in November 2013 and their assets were purchased by a Chinese firm in February of Link to article here: idUSBREA1E04B Tesla on the other hand, seems to be moving into early majority as has declared their first profitable quarter and has a positive outlook for Link to article is here: idUSBREA1I23D Another example students will likely be familiar with is social network sites which have followed a pattern similar to that illustrated in Exhibit Friendster was unable to cross the chasm. MySpace was successful with the early majority, but only Facebook went on to succeed with the late majority and laggards.

18 Exhibit 7.9 Features and Strategic Implications of the Industry Life Cycle

19 7.4 Types of Innovation Incremental Radical
Steady improvement of a product or service Examples: Gillette now 6-bladed razors Intel 386 to 486 processors 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 1st commercial jet Boeing, Airbus leaders CRJ, Embraer rising up Instructors: The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on the types of innovation (LO 7-5).

20 Exhibit 7.10 Types of Innovation: Combining Markets and Technologies

21 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” Instructors: Another example of Architectural innovation would be GPS to handheld consumer devices. The global positioning system (GPS) technology and satellite infrastructure was originally developed for military applications. After several years in operation there, the government opened up the satellite feeds for commercial uses. Today, running on those existing technologies, we have a variety of new and inexpensive consumer products incorporating GPS technology (including almost all smartphones!).

22 Exhibit Disruptive Innovation: Riding the Technology Trajectory to Invade Different Market Segments from the Bottom Up Instructors: The text is replete with example of disruptive innovations from cars to photography to education. The IM also has some additional examples. Below is one: Currently, in the car industry, different technologies are being put forth as potential alternatives to gasoline, including electric, hybrid (a cross between gasoline and electric), hydrogen, biofuels, solar, steam, and even exotic alternatives like algae. In this case, we have a swarm of disruptive technologies developing. One technology may eventually emerge as the new paradigm or different technologies may dominate in different regions (hydrogen fuel cells in Germany and battery hybrids in the U.S., for example), but during the discontinuity, the winner is far from clear (see MiniCase 12).

23 GE’s New Innovation Mantra: Disrupt Yourself!
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 – “21st-century stethoscope” Instructors: GE Healthcare is a leader in diagnostic devices. We have found students relate best to seeing it used rather than viewing just a photo of it. A two-minute video produced by GE shows the Vscan handheld device in use. A link is here: https://www.youtube.com/watch?v=Ry3w6fbT7rY The IM has several exercises related to innovation and the GE Vscan in particular that may be worth your review if you want a class or group activity on this example.

24 The Internet as Disruptive Force: The Long Tail
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 Instructors: Chris Anderson, author and editor of “Wired” explains the “long Tail” theory (illustrated in Exhibit 7.12) with examples from the music and film industries in a 9 minute video. Link here: https://www.youtube.com/watch?v=0Yku0GTrcuw&feature=player_embedded An exercise at the end of chapter will encourage students to think more deeply about this subject: EOC Small Group Exercise 1 (suggested answers from the IM). What are the key issues you must grapple with to improve the position of Warner Music Group? Students will have a variety of answers to this question. It is difficult to prevent the piracy of music, especially in this digital age. Thus, WMG should determine a strategy which capitalizes upon this growing digital trend. WMG can partner (or buy out) with several netlabels and online music stores (iTunes) to claim some of the lost revenue from piracy. Additionally, to further improve their position, WMG should look to draft deals with artists that give the Label additional control and potential for revenue from tours, merchandising, and endorsements. In what phase of the life cycle is the record-label industry? The record-label industry is in the decline stage. The increase in file sharing and drop in music sales have required record labels to reconsider their strategies. How does this life-cycle phase affect the types of innovation that should be considered to help WMG be successful? The decline stage of the life cycle suggests four strategic options: exit, harvest, maintain, or consolidate. None of these strategies recommend a firm should invest heavily in future innovation. However, to extend the long tail the record-label industry could identify a disruptive innovation which will aid in the collection of revenue from legitimate and illegitimate music sales.

25 Exhibit 7.12 The Short Head and the Long Tail
Instructors: McKinsey Quarterly has published a video interview with inventor, futurist, and author Ray Kurzweil. The video is in four sections but if you choose to play all, it runs 13 minutes. Mr. Kurzweil proposes that the growth of technologies is transforming industries and creating challenges for society. Video link is here: change_a_conversation_with_ray_Kurzweil

26 SHIFT FROM CLOSED TO OPEN INNOVATION
20th 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 SHIFT FROM CLOSED TO OPEN INNOVATION Instructors: The text presents a detailed example of Merck and also P&G. Microsoft’s innovation processes are very different from those of Google or Apple. Incremental innovations predominate at Microsoft (see “Next CEO’s Biggest Job: Fixing Microsoft’s Culture” Wall Street Journal 8/25/13). In early February 2014 Microsoft announced the promotion of Satya Nadella to the position of CEO. How might the new CEO of Microsoft use open innovation processes to engage users in innovation of new and existing products? What other ideas might work? One example is the CEO of Extended Stay America hotel chain gives out “Get Out Of Jail Free” cards to his employees to use when they take a risk on behalf of the company (see “Memo to Staff: Take More Risks” Wall Street Journal 3/20/13).

27 Exhibit 7.13 Closed Innovation vs. Open Innovation

28 Exhibit 7.14 Contrasting Principles of Closed and Open Innovation

29 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. Instructors: A suggested wrap up discussion of this chapter is in the IM. The video game industry offers the opportunity for a discussion of the practical implications of several of the concepts in this chapter. The freemium business model games have been a disruptive force rapidly depleting the market for game consoles. The long tail facilitated by internet distribution has facilitated this decline. One destructive wave was driven by social games that reached customers through Facebook, such as Zynga. Recently those games have been negatively impacted by games originally designed for mobile device use and distributed through Apple and Google app stores. It is also a market in which Asian and Western markets have required different criteria for success. It is also an industry in which strategic entrepreneur’s have risen to success almost overnight. Students will be very familiar with this industry and the pace of evolution has been so rapid that they can probably recall several generations of disruptive innovation. Consider the case of Supercell (see “Zero to $3 Billion in 3 Years” Wall Street Journal 10/16/13) as a basis for identifying the opportunity that the app stores offer to enable firms to rise from nothing to multi-billion dollar valuations. The contrast with Zynga provides an example of the low durability of competitive advantage in industries that are so easy to enter. Microsoft’s and Sony’s recent moves to build alliances with freemium business model games illustrates one method that firms in the disrupted industry can use to survive and learn from the disruption (see “A Truce in the Video Game War” Wall Street Journal 10/15/13).

30 Outline the four-step innovation process from idea to imitation.
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.

31 Take-Away Concepts LO 7-2
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.

32 Take-Away Concepts LO 7-3 Describe the competitive implications of different stages in the industry life cycle. 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.

33 Take-Away Concepts LO 7-4 Derive strategic implications of the
crossing-the-chasm framework. 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.

34 Take-Away Concepts LO 7-5
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.

35 Take-Away Concepts LO 7-6 Explain the long-tail concept and derive its strategic implications. 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).

36 LO 7-7 Compare and contrast closed and open innovation.
Take-Away Concepts CLOSED INNOVATION A framework for R&D that proposes impenetrable firm boundaries. Key to success in the closed innovation model is that the firm discovers, develops, and commercializes new products internally. 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 in-sourced while others are spun out. EXHIBIT 7.14 Compares and contrasts principles of closed and open innovation. LO 7-7 Compare and contrast closed and open innovation.

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