1. Chapter 7
Business Strategy:
Innovation and Entrepreneurship

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. Wikipedia: The Free Encyclopedia
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 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/

5. 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

6. Exhibit 7.1 Accelerating Speed of Technological Change

7. 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

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

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.

11. Exhibit 7.4 Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies

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.

13. 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.

14. Exhibit 7.8 Crossing the Chasm: The Smartphone Industry

15. 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

16. 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”

17. 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”

18. Exhibit 7.12 The Short Head and the Long Tail

19. 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

20. 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.

21. 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
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/