1. Building Breakthrough Competences (Chapter 6)
Disruptive Innovation Continued Ch. 5 & 6
SMaL Case Study
The Idea Box (Fritz Zwicky's Morphological box)
Instructor: J. Christopher Westland, Professor, ISMT
Time:
Tue & Thu 1:30pm-2:50pmVenue: Rm. 4333Duration: 5 Sep – 7 Dec
Text.
McGrath & MacMillan, The Entrepreneurial Mindset, HBS Press 2000
Contact:
Office: Fax:
URL:

2. How Successful Companies Get Innovative Mad Catz, Inc.
Week
Topic
Readings
Industry Profile
Practicum
5-Sep-06
What is Innovation?
Lecture Notes 1
Chapter 1
How Successful Companies Get Innovative
Mad Catz, Inc.
Great Innovations (videos)
12-Sep-06
Business Needs: Framing the Challenge
Lecture Notes 2
Chapter 2   
Why Business Models Matter
False Faces (perceptual reversals)
19-Sep-06
Building Blockbuster Innovations
Lecture Notes 3
Chapter 3   
3M and Norton
Slice and Dice (Attribute Maps pp )
The Role of the Practicum
26-Sep-06
Redifferentiating Products: New Technology or New Uses
Lecture Notes 4
Chapter 4
Recognizing the Potential of an Innovation
Think Bubbles (Quizzing to understand the customers’ experiential context pp )
3-Oct-06
Disruptive Innovation
Lecture Notes 5
Chapter 5
The Disk Drive Industry
Industrial Design Competition
10-Oct-06
Building Breakthrough Competences
Chapter 6
Dell Computer (It’s not about the computing)
The Idea Box (Dr. Fritz Zwicky’s morphological box)
17-Oct-06
Mid-term Exam Venue: Rm4333 Time: 1:30pm - 2:50pm
19-Oct-06
Selecting Your Competitive Terrain
Chapter 7
The Excavator Industry
Hall of Fame (forced connection)
24-Oct-06
Assembling Your Opportunity Portfolio
Chapter 8
Motorola’s Iridium Satellite System 
Cherry Split (fractionation)
31-Oct-06
Executing Your Entrance Strategy
Chapter 9
PETCO
Tug-of-War (force-field analysis)
7-Nov-06
Putting Discovery-Driven Planning to Work
Chapter 10
Ideatoons (pattern language)
14-Nov-06
Managing Under Uncertainty
Chapter 11
Innovation the Microsoft Way
Future Fruit (rationalizing future uncertainty)
21-Nov-06
Entrepreneurial Leadership
Chapter 12
Clever Trevor (talk to a stranger)
28-Nov-06
Strategy as Discovery
Chapter 13
Circle of Opportunity (forced connection)
5-Dec-06
Course Wrap-up
7-Dec-06
Final Exam Venue: Rm4333 Time: 1:30pm - 2:50pm 

3. Innovation = Invention + Commercialization

4. Sources of Innovations
What kinds of sources exist?
Where do you find innovations?
Where will you find your own innovation for the final presentation?

5. Two Sources of Innovation (Eric von Hippel)
Functional (functional relationship through which firms and individuals derive benefits from innovation, e.g., customer or manufacturer)
Where do the innovations come from?
Do they come from within the firm or from someplace else?
Where exactly within the firm?
Circumstantial (under what circumstances will they benefit)
Under what circumstances can one expect innovation?
When can one expect innovation?

6. Functional Sources of Innovation
Internal to Value Map (bubbles)
External Value Map (boxes)
Competitors & related industries
University, government & private labs
Other nations / regions
‘Complementarity of several sources may amplify and accelerate innovation
The last two sources are strongly influenced by society and governments

7. Social characteristics that promote innovation and success at a commercial level?
Prior experience tells us that societies which:
operate, manage and build instruments of production
create, adapt and master new technologies
impart expertise and knowledge to the young
choose people for jobs by competence and relative merit
promote and demote on basis of performance
encourage initiative, competition and emulation
let people to enjoy and employ the fruits of their labor, enterprise and creativity
(adapted from David Landes (1998) The Wealth and Poverty of Nations, New York: Norton, chapters 27-29)

8. Government has a role to play
Where innovation has flourished in the past, the government does the following:
encourage saving and investment
enforce rights of contract
secure rights of personal liberty against tyranny and crime
provide stable government,
though not necessarily democratic
provide responsive government
provide no rents or favors for government position
have governments that are moderate, efficient and ungreedy
Direct government involvement in innovation tends to favor the creation and maintenance of powerful, conservative, expensive scientific bureaucracies which rob would-be innovators of scarce talent
.e.g., Sematech, MITI, Malaysian projects, US Aerospace and NASA, European Space Agency.
(adapted from Landes’ The Wealth and Poverty of Nations )

9. Circumstantial Sources of Innovation
Planned firm activities
Serendipity (fortunate accidents)
Change (creative destruction)

10. For Example: Consider the Electric Lighting Innovation

11. Thomas Alva Edison didn’t invent the lightbulb
Humphry Davy, an English chemist, invented the first electric light in 1809
Joseph Wilson Swan, an English physicist, was the first person to invent a practical and longer-lasting electric lightbulb in 1878
But new technology
Offered new customers
Substituting for gas and arc lighting
… and a new competitor

12. Edison’s System
“all parts of the system must be constructed with reference to all other parts,, since in one sense, all the s form one machine part
Thomas Alva Edison, referring to an electrical grid in his article on the phonograph in the North American Review
Edison and his team of engineers in Menlo Park, N.J., spent years building the entire electric system, from light sockets and safety fuses to generating facilities and the wiring network.
Edison beat all his predecessors at one crucial task: managing the whole process of innovation, from light-bulb moment to final product

13. Edison’s Strategy Develop the working DC system
Protect it with patents
When George Westinghouse introduced a superior AC system
He attacked with a smear campaign
He eventually switched to AC systems when customers demanded

14. Microsoft’s O/S Innovation The most profitable innovation in history
Linking & Leveraging Strategy
Get the business
Create the standard
Leverage the business
Crush the competition
Much like Thomas Edisons strategy 100 years ago
Find a market
Get the money (from JP Morgan)
Build the technology
An Early Competitor

15. Case Study in MS-DOS MS purchased Seattle Computer Products' QDOS
for Quick and Dirty Operating System (written by Tim Paterson)
Written as a version of CP/M, with 4000 lines of assembler.
IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300 bugs, and decided to rewrite the program
This is why PC-DOS is copyrighted by both IBM and Microsoft.
Gates locked up the IBM deal with the help of his father’s law firm
est. value of services $250,000
IBM didn't start bundling DOS until the second generation AT/339 came out.

16. Case Study in DOS
You could order one of three operating systems for your original IBM PC:
Digital Research's CP/M-86 for $495
UCSD p-System for several hundred dollars
this was a souped-up BASIC operating systems like that used by the Commodore 64
but portable like Java
DOS 1.0 for $39.95

17. Case Study in DOS
Microsoft’s OEM brochure touted future enhancements to DOS:
Unix-compatible pipes, process forks, and multitasking, as well as graphics and cursor positioning, kanji support, multi-user and hard disk support, and networking
None of these was ever added
Innovation = Invention + Commercialization!

18. Innovation Transfer Cultural differences Nature of the innovation
Across functional boundaries
the stovepipes
Absorptive and Transmission Capacities
bounded rationality on the receiving side
Cultural differences
Culture = shared ‘values’ (what’s important) + shared ‘beliefs’ (what works or what’s true)
Nature of the innovation
Timing

19. Science & Technology What are they? How are they related?

20. Making SMaL Big

21. SMaL: What, who, …? What is the Problem?
SMaL has experienced initial success by targeting a market where competition was sparse. But now competitors like Casio are arising. What is SMaL’s main competitive challenge circa 2003
Who is responsible for solving the problem and making a decision?
Sodini of course; but are there other interested players?
Where is the money?
What markets that SMaL can conceivably compete in will generate an adequate ROI?
Why does ‘disruptive innovation’ matter?

22. The Challenge

23. Innovation on the Demand Side
It is important to get the differentiation large enough to make the investment in the technology worthwhile, yet small enough so it doesn’t take six years to develop a market
Charles Sodini, Chairman of SMaL
Q: How do you develop successful new technology or innovations?

24. Three potential market segments
Digital Still Cameras
Security-surveillance
Automotive (cruise control, etc.)
Currently 10%-15% of US cars have this technology
How do you “Sell” the product?
Hardware (CCD, CMOS, X3)?
Software (applications)?

25. Autobrite® How you manipulate demand with Software
Images on the left, the inability of conventional cameras to adapt to varying lighting conditions creates a significant safety risk.
Images on the right demonstrate how accurately SMaL's ACM100 with proprietary Autobrite technology capture what the eye sees.

26. Camera Imaging Technologies
CCD (Sony, Kodak; industry standard)
CMOS (Kodak, Canon, SMaL; used in phones, Canon in some EOS)
X3 (Foveon; used in Sigma SD10)

27. Focus
Having a screen between you and the consumer at this size company is important
(you don’t want a large company at this stage)
Manufacturing is a high fixed cost, low margin game
Product definition is the key technological component that allows us to capture value
Sodini

28. SMaL: Competitive Environment

29. Which strategy is best?
Which of the following six strategies – in your judgment– is best for SMaL over the next seven years given what you know of their technology, operations and potential markets
(think five forces)
How will disruptive technology (basically the threat of substitutes or new entrants) influence SMaL’s choice.

30. Strategies (Be Prepared to discuss these at the start of next class)
S#1: Move on up
S#2: Focus on Security and Surveillance
S#3: Focus on Automotive
S#4: Focus on Phone Cameras
S#5: Search for new markets that fit SMaL technology’s strengths (Making a left turn)
S#X: Mix and match any two or three of the above five

31. Your Analysis Toolkit (1) Framing the Challenge
The Challenge & objectives, the Business Model, the Strategy Drivers
Establish what your business needs to do to make innovation worthwhile
If I were to do something in the next 3-5 years
That my customers would regard as a major (disruptive) innovation
How would I change their lives?
(2) Opportunity ‘Register’
Concept: Always keep an inventory of possible opportunities so that you are unlikely to run out of ideas for making the next competitive move or capturing the next prospect for growth
(3) Reverse your Assumptions to escape from Looking at Problems in the Traditional Way

32. Forced Market Reconfiguration: Digital Cameras

33. Forced Market Reconfiguration: Digital Cameras

34. … never forget
The Purpose of a Business is to Create a Customer - Peter Drucker
Even if you create marvelous inventions
Your customers won’t care
Unless that is exactly what they need
Business customers are especially impatient
With any product that doesn’t help them gain competitive advantage

35. Your Analysis Toolkit The Attribute Map
Slicing and Dicing will help you identify and improve the Attributes of your product
Attribute Maps are used in Consumption Chain Analysis, Resegmenting, and Redifferentiating
Basic
Discriminator
Energizer
Positive
Nonnegotiable
Differentiator
Exciter
Negative
Tolerable
Dissatisfier
Enrager
Neutral
So What?
Parallel

36. Your Analysis Toolkit Redifferentiate (a) Quizzing
Goal: Lay your biases on the table
There is no market that is so mature that you cannot further differentiate your offerings
(a) Quizzing
Looks at the customers “stream of consciousness”
Through a series of questions
Think Bubbles with help you Quiz
(b) Consumption Chain Analysis

37. Practicum: The Idea Box
Fritz Zwicky’s morphological box
Combining the parameters of a challenge into new ideas
Generating parameters ; listing variations for each parameter.

38. Competences: Building Breakthrough Competences Selecting a Competitive Terrain
Chapter 6
Building Breakthrough Competences
Dell Computer (It’s not about the computing)

39. What to do with your Opportunity Register
Assuming you’ve been religiously adding to your Opportunity Register
You should by this time have a lot of different ideas for new and marketable products
Then the question becomes:
Which projects should you take on; emphasize; continue?
The answer depends on your competences

40. Two Realities Competitors simply cannot allow you to go unchallenged
and must try to erode your position
Understanding where to create a competitive position that cannot easily overcome is thus essential
You are not only competing with other organizations in customer markets
You are also competing with them in the capital markets for critical funds that you need to build future competitive position

41. Competences You best (perhaps your only) opportunities to compete are
Where Product Market Needs
Cross with Competences

42. You Convince Competitors and Financiers By …
Proving that your ideas can perform on Key Metrics (e.g., Profit)
Show me the money!
This raises the question:
“What are the important Metrics?”
The answer is complex … and is not necessarily “Profit”
Accounting metrics like Profit
Measure the Past
Competitors and Financiers are interested in your future!
Future Profits, Revenues, etc. are Unknown
Thus Other Measures both needed and More Important than Profit!

43. Delivering on 7-10 critical ‘Key Ratios’
This is what Investors and Venture Capitalists will look for
The particular accounting statement measures
That indicate whether your strategy is succeeding or not
The exact set of measures depends on
your business model and
your strategy

44. Some Key Ratios Valuation Price to Sales Price to Book Value
Some Key Ratios
Valuation
Price to Sales
Price to Book Value
Enterprise Value to Sales
EV / EVITDA
PEG Factor (price/earnings to growth)
Price to Research
Reinvested Return on Equity IS
Sales, Earnings and Equity per Share
Staff Costs to Sales
Directors Remuneration to Net Income
Sales and Profit per Employee
Margins
Cash Flow
Op Cash Flow / Op Profit
Price to Free Cash Flow
Discounted Cash Flow BS
Current Ratio & Acid Test
Debtors Days and Creditor Days
Stock Days and Stockturn
Equity
Gearing (OE to borrowed funds)
Return on Capital Employed
Z-score (output from a credit-strength test that gauges the likelihood of bankruptcy )
Magic Numbers: The 33 Key Ratios That Every Investor Should Know by Peter Temple Each of the ratios contained in this part looks at the ways in which share prices can be combined with measurements from the various...

45. Dell’s War on Inventory
A Case Study in Technology Acceleration and Organizational Scaling

46. Dell’s War on Inventory
In less than 20 years, Michael Dell moved from cluttered dorm-room operations
to a $25 billion a year company,
outperforming giants such as IBM, Hewlett-Packard and Compaq in the process.

47. Hyper-efficient supply chain
Dell is relentless in negotiating the best prices from suppliers, and
driving those savings through the supply-chain.
To do that, Dell replaces inventory with information.

48. Materials costs account for about 74% of Dell’s revenues
about $21 billion in 2000
Lowering materials costs by 0.1% can have a bigger impact than improving manufacturing productivity by 10%.
Where other competitors carry one to three months of inventory,
Dell carries 5 days.
Since materials costs in the computer industry fall by around 1% per weeks,
carrying 5 days versus one month of inventory is around 6% of materials cost.

49. Safety stocks are very expensive
But they are very difficult to reduce.
Reduction requires complete and accurate information and forecasts about production and procurement.
Dell has standardized worldwide on i2 Technologies’ software,
with hourly updates of all information from customers to suppliers.
five hours’ worth of inventory on hand, including work in progress.
This increases cycle time at Dell’s factories and reduces warehouse space.
The warehouse space is replaced with more manufacturing lines in a virtuous cycle
Dell has traded property for information.

50. Customers
Dell’s online customer procurement Website puts Dell in contact with more than 10,000 customers daily
– giving them more than 10,000 opportunities to forecast demand and balance supply.
For example, Dell can alter supply constraints through promotions and substitutions.
If inventory is low on Sony 17-inch monitors, Dell can offer a 19-inch model at the 17-inch price. This moves a lot of demand in real-time.
Competitors selling through retail channels cannot do this!

51. The bottom-line
Dell writes off less than 0.1% of total material costs in excess and obsolete inventory
Their competitors write off 2% to 3%.

52. Core Competences Identify the business of the firm
Identify the key activities on the value chain, and differentiate them from supporting activities
Identify the critical success measures generated for each activity (supporting and key).

53. Tracking the Dynamics of the Core Competences

54. consequences of industrial change on the capabilities demanded of a competitive firm
‘Core-ness’ and imitability of the firm’s capabilities determine the profitability of innovations dependent on those capabilities.

55. Why Incumbents Perform
The Abernathy-Clark model provides one explanation of why incumbents may outperform new entrants in the face of ‘radical’ innovations.
The model suggests that there are actually two kinds of knowledge that underpin a innovation: technological and market.
An innovation is incremental (regular) if it conserves the manufacturers/s existing technological and market capabilities;
niche if it conserves technological capabilities but obsoletes market capabilities;
radical (revolutionary) if it obsoletes technological capabilities, but enhances market capabilities; and
architectural if both technological and market capabilities become obsolete. The point to note is that market knowledge is just as important as technological knowledge.

56. Difficulties Competing
Henderson and Clark were curious why some incumbents had such difficulty with apparently incremental innovations which involved seemingly small changes that could easily be handled by their capabilities.
For example, Xerox, the pioneer of the copier industry (albeit through their acquisition of Chester Carlson’s technology) stumbled for years before developing a small plain-paper copier to challenge Japanese products.
They suggested that innovations are invariably built up of components, and thus building them requires two kinds of technical knowledge
technology underlying individual components, and
architectural knowledge about how to link components together.
If the innovation enhances both component and architectural knowledge, it is incremental;
if it destroys both, it is radical;
if only architectural is destroyed, then the innovation is architectural;
where only component knowledge is destroyed (for one or more components) the innovation is modular.

57. Trajectories Industries evolve along four distinct trajectories
radical, progressive, creative, and intermediating.
Where a firm's strategy (its plan for achieving a return on investments in capabilities) failed to align with the industry's change trajectory, profitability suffered commensurately.
Failure resulted from obsolescence of the firm’s products or services arising from two directions:
(1) a threat to the industry's core competences; and
(2) a threat to the industry's core assets—the resources, knowledge, and brand capital that have historically made differentiated the firm.

58. Trajectories in Practice

59. Cisco
Cisco Systems has a reputation for expanding its capabilities through acquisitions.
Shortly after going public in 1990
went on a buying spree, acquiring 73 firms from 1993 to 2000.
By late March 2000, at the height of the dot-com boom,
Cisco was the most valuable company in the world, with a market capitalization of more than $US 500 billion.

60. Early years This had not always been the case.
During its first decade after it was founded in 1984 the company acquired no businesses at all,
sticking to selling routers and only routers.
Cisco went public in 1990.
three years later, a faster and cheaper piece of hardware – the switch – threatened its business.
Cisco engineers scrambled to produce their own switch, but realized that they could not acquire the capabilities to produce one anytime soon.
In 1993 of Crescendo Communications for $95 million which got them into switches – fast.
Cisco's engineers grumbled that they could have produced their own switch in time.
Most of Crescendo's executives stayed with the company, and switches became a core Cisco business.
The switching unit today generates nearly $10 billion in annual revenues.

61. Acquisitions Since then, using acquisitions
where they are unable to develop internal capabilities quickly enough to be competitive,
Acquisitions and partnering with other companies have enabled Cisco to retain its market dominance.
Cisco has made inroads into many network equipment markets outside of routing, including Ethernet switching, remote access, branch office routers, ATM networking, security, IP telephony and others.

62. Acquisitions
What began as a one-off response in an emergency soon evolved into a long-term strategy, an essential part of the Cisco culture.
While most big tech companies rely heavily on R&D to create products and business lines,
Cisco, after Crescendo, decided to strategically use acquisition to expand its capabilities:
In 1995, Cisco acquired its way into firewalls and cache engines.
In 1998, Internet telephony.
In 2003, with the acquisition of Linksys, a home-networking company,
In 2006 by acquiring Scientific Atlanta, a set-top-box manufacturer.

63. People
The vast majority of Cisco’s acquisitions have been targeted technology buys:
small start-ups with 50 or less engineers whose products link back to Cisco’s core competencies, routers and
Cisco has come to realize that the acquisition of technology really isn't just about technology.
"The people are the most strategic asset.“
Ned Hooper, vice president of business development, whose former company LightSpeed was acquired by Cisco in 1998.
If, after the acquisition, Cisco loses the technologists and product managers who created, say, the Linksys router,
then it has lost the second and third generations of the product that existed only in those employees' heads.
That, is where the billion-dollar markets lie. And that is where Cisco's acquisitions are aimed. "We need the expertise,"