Professional Documents
Culture Documents
Faculty discussion
Antonio Schuh
Objectives of this presentation
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A note about me
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Presentation guide
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Innovation is more than invention
Innovation means
effective introduction
of new ideas in the
marketplace
Musical flamethrower
Need to understand
Gas-filled umbrella
Technology and its
evolution
Innovation
requirement Appropri-
for Technology Market Execution
ability
viability
Source: Chandy & Tellis (2000), “The Incumbents Curse? Incumbency, size and radical product innovation”
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However, there plenty of examples of incumbents who lost
the train of technology change
Innovative new entrant Incumbent
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Extreme example: sole inventors (absolute new entrants)
were instrumental for a large number of innovations in major
industries
Catalytic Personal
Xerography, cracking of computers:
Chester petroleum: Insulin: Jobs &
Carlson Eugene Houdry Frederick Wozniak
Banting
FM radio:
Edwin
Armstrong
E-commerce business
Zipper: Whitcomb architecture: Jeff Jet Engine:
.ludson Bezos Frank Whittle
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Analysis of a 150-year cross-section of innovations in further
validates the “incumbents’ curse”
Source: Chandy & Tellis (2000), “The Incumbents Curse? Incumbency, size and radical product innovation”
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According to Christensen, disruptive technologies are a
challenge to incumbents
Nature of Technological Change
1 t o gies
•A new disruptive technology is launched e
s du nolo
s
•It underperforms the dominant one gre tech
along the dimensions valued by Proning
mainstream customers sta i Performance
su demanded at the
•Incumbents most profitable customers high end of the
do not want products based on market
Product Performance
disruptive technologies.
Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro
e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance
Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro
2 Disruptive technology offer new
features – typically (a) cheaper, (b)
simpler, (c) smaller, or (d) more
convenient than those based on the
dominant technology. Time
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Recap: Dynamics of disruptive technologies
e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance
3
Disruptive technologies Performance
enter emerging/ e demanded at the
ptiv low end of the
insignificant markets that u
d isr market
value new features
e to gies
s du nolo
g res tech
Pro
Time
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Recap: Dynamics of disruptive technologies
e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
market
Product Performance
4
The new disruptive technology Performance
e steadily improves in demanded at the
v
u pti performance until it meets the low end of the
d isr standards of performance
market
to gie s
e
u olo demanded by the mainstream
d
ess chn
g r te
market.
Pr o
Time
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Recap: Dynamics of disruptive technologies
5
The incumbent continues to
e to gies improve its current
s du nolo technology, leading to
g res tech performance oversupply
(overserving customers in
Proning their needs) Performance
sta i
su demanded at the
high end of the
market
Product Performance
Performance
e demanded at the
ptiv low end of the
u
d isr market
e to gies
s du nolo
g res tech
Pro
Time
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Recap: Dynamics of disruptive technologies
e to gies
s du nolo
g res tech
Proning
sta i Performance
su demanded at the
high end of the
6 market
At that point, the
Product Performance
new (disruptive)
technology
displaces the
Performance
dominant one and
demanded at the
e
ptiv (b) thelow
newend of the
entrant
u
d isr market
displaces the
e to gies dominant
s du nolo incumbent(s) in the
g res tech mainstream market.
Pro
Time
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Why incumbents do not deal well with disruptive
technologies
the very management practices that have • Resources, processes & values
allowed them to become industry
— Companies depend on customers
leaders also make it extremely
and investors
difficult for them to develop the
disruptive technologies that — An organization’s capabilities
ultimately steal away their markets: define its disabilities
• Listening to customers — Technology supply may not
equal market demand
• Investing aggressively in
technologies that give those • Incentives and resource allocation
customers what they say they
want — Smaller markets don’t solve the
growth needs of larger
• Seeking higher margins companies
• Targeting larger markets rather — Markets that don’t exist can’t be
than smaller ones. analyzed
Source: Christensen (1997)
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Incumbents are better prepared to assess and implement
sustaining technologies, not disruptive ones
Sustaining innovation Disruptive innovation
• Positioned on a job that •Focuses on a job that people
Market competitors aren’t serving well are trying to get done
focus
•Margin improvement
Reach of • Isn’t over-shooting •Competes against non-
customer consumption and
needs overconsumption
•Existing •Disruptive relative to
Business competitors’ business model
•Readily leveraged into
model
derivative projects
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Evolution curves
Sustaining & Non-disruptive radical Disruptive innovation
technologies
Magneto-resistive heads
1000
Disruptive innovation:
Ferrite-oxide heads
Thin-film heads
10
Sustaining innovation:
improvements on existing
performance attributes
1975 1980 1985 1990 1995 Year
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Main managerial implications of Christensen’s disruptive
innovation theory
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Christensen’s theory has been extremely successful
New books
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And yet there are several recent criticisms directed at the
theory
Source of criticism Issues
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Music industry value chain
Recording companies
Source: Bruno Cassiman and Pablo F. Salvador, “Digital Technologies and the Internet: Their Impact on the Music Industry” IESE-PwC eBusiness
Center research note, 2005
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Recording companies overview
Players Practices
Market share, %
0% 10% 20% 30% • Focuses on mass appeal artists
• 7-year contracts
Universal 25,5% • Advance to artist against future royalties
• Were vertically integrated, now outsourcing
• KSFs:
SonyBMG
Majors 21,5%
•A&R
•“Hit making” (Marketing)
EMI 13,40% •Catalog exploitation
Warner 11,30%
• Hundreds of • Segment-specific
specialist labels • Single/2-album contracts
0% 5% 10% 15% 20% 25% 30% • Outsourcing
Indies • Frequently, horizontal integration with concert
Indies
º 28,3%
management
• KSFs:
•Find/develop/ sell to major
•Artist development
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Is there disruptive innovation in the music industry?
Source: Christensen & Innosight Team (2004). Strategy & Innovation Innovator’s Insights, January 2004.
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Description of main likely sources of disruptive technologies
in the music industry
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Main events of potential sources of disruptive innovation in
the music industry
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
•iTunes
LEGAL MP3.com SonyConn •Music
ect subscription
DISTRI-
service
BUTION •Rio Player
Fraunhof •eMusic OD2
er IUMA (Internet wholesale
platform PressPlay MusicNet
Gesellsch Underground
aft MPEG- Music Archive)
1 layer 3
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Napster KaAaA
P2P 1.0
Napster BitTorrent
Gnutella closes legal
version
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Both new technologies fit Christensen’s criteria of disruption
Emerge occasionally
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Disruptive innovation with legal music distribution
Initially: high-end
Market focus
Over time:, broader base
iPod/iTunes
iTunes Music Store was first successful
player business model
Valued by niche: integrating is based in part
ripped CD and purchased files;
Features convenience, pay per song; on cross-
& value exclusives(selection of
previously un-digitized singles subsidization
proposition and remixes) between device
Unfit for mainstream market: and content
expensive
Lock-in via proprietary DRM
MP3 devices penetration: 3% -12% of
population in Western Europe(1)
Size
iPod market share: ~40%
Itunes market share: ~60%
Source: (1) Screendigest. “Online Music in Europe: Market assessment and forecast” (August 2006)
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Disruptive innovation with P2P
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Response of the recording companies to disruptive innovation
Main response
Direct response Other
Support traditional
Majors: 3 stages product (CD)
1. Ignore/fight it (circa 2000): • Technical
concerns of cannibalization improvements:
2. Own sites (2001-02): SACD; DVD-Audio
LEGAL – 2 “blocks” • Added value
DISTRI- – No cross-licensing – Artwork
BUTION
– Pricing
– Booklets
3. Validation and support: post-iTunes
– DVD
But: divergent – Business model experimentation
position between
– Promotion of competitive intensity
• Pricing flexibility
majors & indies
in distribution
Focus on “safe” artist:
Legal measures Mariah Carrey
example
P2P
Discussion of alternative pricing Move towards “all
schemes: “broadband tax” rights”
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Current situation: incumbents hurt
P2P Stable position
downloads Files available for downloading in 2002: 900 MM
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Current situation: more complex value chain
Jukebox
Recording software
companies Hosting
DRM
•New players
Metadata
•More difficult control
Encoding over value chain
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But…
Digital
margins high
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Digital margins are higher than CDs’
Breakdown of revenues, %
100% 100%
9% Manufacturing
Recording company
60% Recording company
32%
Artist+publisher
Artist+publisher 16% 16%
iTunes Traditional CD
Source: Billboard, NARIP (National Association of Record Industry Source:AMM Music Group based on sales of 250 th units.
Professionals)
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Online music market is still relatively small and majors’
actions in mobile music show tight control of its development
Mobile
5% Mobile full- Majors’ actions
Online track: grew
Online 5% 230% Inventory control
(06/05)
revenues are
small and Standard, non-
negotiable terms
mobile
grows faster Physical
90%
Minimum pricing
levels
Revenue split
High iPods
46 Clauses on
potential: commercial
sales of exploitation
music-
enabled Marketing efforts
phones Nokia+ 130 paid by mobile
Sony operators
dwarf iPod’s
Ericsson
0 20 40 60 80 100 120 140
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Presentation guide
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Answering questions with music industry case
Anomaly
— High exit barriers and high entry barriers in the majors strategic group
— Control over catalogs allows for a relevant degree of influence over distributors,
online or else
– Learning can also arise from illegal sources: P2P as inspiration to SpiralFrog ad-based
rental
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Not the first time that the music industry deals with
significant changes in delivery format
Source: Blomqvist, Eriksson, Findahl, Selg, Wallis, 2005. “Trends in downloading and filesharing of music”
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Answering questions part 2
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Capstone: objectives and takeaways
Objectives Take-aways
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Extras and back-up slides
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Selected bibliography
(when not referenced directly in the main presentation)
Adner , Ron (2002). “When are technologies disruptive? a demand-based view of the emergence of
competition”. Strategic Management Journal, Volume 23, Issue 8 , Pages 667 – 688.
Chandy, Rajesh & Tellis, Gerard J. (2000). “The Incumbents Curse? Incumbency, size and radical
product innovation”. Journal of Marketing, Vol. 64 (July 2000), 1-17
Danneels, Erwin (2004), "Disruptive Technology Reconsidered: A Critique and Research Agenda,"
Journal of Product Innovation Management 21 (4): 246-58.
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Long list: small new entrants were instrumental for a large
number of innovations
Electronics Pharma Mechanical devices
Xerography, Chester DDT: J. R. Geigy & Co. Cotton Picker: John &
Carlson Mack Rust
Insulin: Frederick
Vacuum Tube: Lee De Banting Zipper: Whitcomb
Forest .ludson/Gideon Sundbeck
Streptomycin: Selman
Frequency Modulation Waksman Automatic Transmissions:
Radio: Edwin H. F. Hobbs
Armstrong Penicillin: Alexander
Fleming Gyrocompass: A.
Kaempfe/E. A. Sperry ,IS. G.
Chemicals & Brown
Basic research
Dacron Polyester Fiber: Jet Engine: Frank
Rockets: Robert J. R. WhinfieldlJ. T. Whittle/Hans Von Ohain
Goddard Dickson
Self-Winding Wristwatch:
Titanium: W. J. Kroll Catalytic Cracking of John Harwood
Petroleum: Eugene
Cyclotron: Ernest O. Houdry Helicopter: Juan De La
Lawrence Cierva/Heinrich Focke/Igor
Cellophane: Jacques Sikorsky
Brandenberger
Ball-Point Pen: Ladislao &
Georg Biro
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Innovation requires going beyond technical issue into market,
strategic and execution issues
Launc
h inno
vation
Execu
nabletio-
Appro ?
able?pri-
Like • Is there possible access
adoplyt to be to distribution
consu ed by channels?
Techn mers?
• Are complementary • Is there a marketing
feasibically assets required? value proposition
le?
• Is control over around the
• Are there adoption barriers? complementary assets innovation?
• Does the innovation possible? • Does the firm has the
provides… • Are there innovations resources to withstand
• Does the core technology • Relative advantage with increasing returns early losses?
works? (economic or social)
• Compatibility to be displaced?
• Are there production
• Complexity • Learning curve
processes in place?
• Observability • Externalities
• Is it reliable?
• Is there an evolution path • Trialibility
• Is there a relevant core
for the technology?
group of early adopters?
• Can it reach a tipping point?
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Majors’ reaction centered in legal action against users…
Indiscriminate approach
— College students
— Families
— A 12-year old girl
— Durwood Pickle, 71
Heavy-handed in acquiring
information: threat to ISPs
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Value creation in the music recording sector
— Recoupable 16.000
10.000
— Non-recoupable
8.000
– Marketing: US$ 510
6.000
– G&A: US$ 30 k
4.000
Variable costs:
2.000
— Manufacturing: US$ 1,20/unit 0
0
0
0
10
50
00
50
00
10
20
30
45
60
1.
1.
3.
— Royalties: 10% to composer; 10% minus
recoupable to performer
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P2P growth indicates willingness of a large chunk of the
market to get music under an advertising-based model
P2P simultaneous users
worldwide
P2P offers users… P2P advertising
Million revenues are hard to
40 — Convenience estimate since it is a
37 grey zone for
35
— All-you-can-eat advertisers and
30 companies lack
25
— Variety of content transparency. E.g.,
KaZaa
20
But requires — Incorporated in
15
10 Vanuatu
10 — Incurring some of the
5 2
infrastructure costs — HQ in Sidney,
0 — Patience. 10% of files Australia
2002 2004 2006 are wrongly labeled — Servers in
•Between 17%-33% of online — Accepting heavy Danmark
users are downloading with exposure to — Software
P2P(1) advertising (on development in
•Total users worlwide ~280 MM occasion, very Estonia
intrusive)
Sources: NPD Group 2006;
OECD 2004; CacheLogic 2006.
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Christensen’s Principles of Disruptive Technology
• Technology supply may not Develop new markets that value the attributes of the
equal market demand disruptive products
Do not wait for disruptive product to evolve and become
a sustaining technology in mainstream markets
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Current situation from the vantage point of a musician
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Music industry sales
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