1 Strategy and Innovation Jonny Holmström

2 Today’s Main Issues  Key trends in today’s society  Disruptive innovations in the network economy  Some possible strategic responses to disruptive innovations: from product and services to solutions and experiences

3 The big trends in the 21st Century?  Smart Phones

The big trends in the 21st Century? 4  Tablets

5  Social Web The big trends in the 21st Century?

Result: Disruption 6

Disruptive innovation  A disruptive innovation is an innovation that helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology. (Wikipedia) innovation marketvalue network 7

8 According to Clayton Christensen, professor at HBS, high- performing firms can do everything right and still loose their market leaderhip

9 The fast track of innovation Because of increased competition in a globalized world innovation is speeding up. But while new products are launched in an increasing pace, consumers are having a hard time catching up…

10 The comfort zone of society Society does not change as fast as technological innovations are. People much rather stay within their ‘comfort zone’ and keep living their lives they way they are used to living them.

11 Technological possibilities and the pace of innovation is way ahead of people’s needs. We must remind ourselves that the real meaning of innovation is in the use. The real meaning is in the use

12 Disruptive Innovations  Clayton Christensen – Innovators Dilemma and Innovator’s Solution  Sustaining Innovation – make better products that can be sold for more money to attractive customers – incumbents prevail  Disruptive Innovations – commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customers – new entrants beat incumbents

13 Sustaining vs Disruptive Innovations  Sustaining innovation targets demanding customers with ‘better performance’ than what was previously available  Disruptive innovations do not attempt to bring better products to established customers in existing markets – rather they introduce products/services that are (maybe) not as good as those currently available but they are simpler and less expensive and appeal to customers  Disruption occurs as the rate of technological improvements are higher than customers can utilize  The disruptive products and services may eventually become acceptable to high-end customers

14 The customer is not always right: Why high performing companies fail ‘The highest performing companies... have well developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies – lower margin opportunities their customers don’t want – until [those same customers decided that they] want them. And by then it is too late.’  - This is the Innovator’s Dilemma

15 Two Types of Disruptions  New Market Disruptions – compete with non-consumption as they are so cheap and simple they attract new customers previously don’t use the products and services  Low End Disruptions – simple low cost business models to pick off the least attractive of the established firms’ markets and progress upwards

Disruptive vs. Sustaining Technologies 16

17 How to initiate an innovation

18 Examples  Low cost airlines – British Airways and KLM under attack from Ryanair - full service, hub- and-spoke strategy versus low cost, point to point, no-frills strategies  Barnes & Noble vs Amazon.com  The attackers utilize strategies that are both different from and in conflict with the strategies of the incumbent firms – Disruptive strategic innovations  Incumbent firms struggle in competing because of conflict with mainstream strategy and established way of working

19 Possible responses to disruptive innovations  Focus on and invest in the traditional business – the disruptive innovation will not grow indefinitely (10-20%) and won’t capture 100% of the market  Ignore the innovation – it is not your business – different customers, value propositions and require different skills and competences  Attack back – disrupt the disruptive innovation – create an even newer game  Playing both games simultaneously – via a separate unit Charitou, C & C Markides (2003) Responses to Disruptive Strategic Innovations. Sloan Management Review Winter 2003: 55-63

20 Strategic Re-Orientations: From Products and Services to Solutions and Experiences  Two strategic re-orientations in recent years: In a world of standardized products, companies are turning to service offering for growth - often in the name of business solutions ‘What the customer buys and considers value is never a product. It is always utility – that is, what a product does for him’ – Peter Drucker

21 Example: GM  General Motors – Automotive services - sales, repairs, financing, parts and accessories; roadside assistance; insurance OnStar – travel, emergencies, satellite radio services; vehicle monitoring services; car phone and data services, personal concierge services … Home services (GMAC) – home sales, mortgage, relocation, monitoring, insurance, satellite TV etc  Underpinned by strong brand, an ICTs platform and a community of users and suppliers

22 Example: MacGregor Cranes  MacGregor Cranes Manufacturer of shipboard cranes Core – Manufacturing of cranes based on engineering skills Threat from low-wage countries From product to services – from cranes to “the service of lifting stuff…” Give the crane for free, charge the customer for using it Role of sensor technologies

Summing up  Disruptive innovation is a key force in today’s society  Innovation strategies must be in place both for incumbent firms and start-ups  “The customer is always right” is not correct anymore 23