COMPETITION DRIVEN BY INNOVATION

Invention is discovery of new ideas/products

Wright brothers airplane flight
Innovation is the commercialization of invention
Boeing & Airbus selling the airplanes



Encyclopedias to Wikipedia

Typewriters to PCs

7-1
APPLE
72
APPLE

I think [Nokia] is a
reminder to
everyone in
business that you
have to keep
innovating and that
to not innovate is to
die. - Tim Cook
73
INNOVATION AND THE INDUSTRY LIFE CYCLE
Four stages of industry development

1. Introduction
Early adopters will pay a premium
Strategy here market acceptance & seeds for growth
Network effects helpful
Positive effects ONE user has for other users

2. Growth Stage
Early majority buyers increase growth rapidly
Standard (Dominant design) is set

7-4
EXHIBIT 7.3
Leveraging Network Economics: Apples iPhone
Virtuous Cycle for iPhone (& iPad)

7-5
INNOVATION AND THE INDUSTRY LIFE CYCLE
Four stages of industry development (cont'd)
3. Maturity
Late majority buyers
-Increased competitive rivalry
-Weaker firms will exit

4. Decline
Laggards
Four strategic options:
1. Exit
2.Harvest
3. Maintain
4. Consolidate
7-6
EXHIBIT 7.5 Features of the Industry Life Cycle
7-7
Strategic Entrepreneurship
Entrepreneurs are the change agents for creative
destruction.
Create new opportunities & exploit them
Jeff Bezos Amazon.com
Saw growth of Internet in 1994
Chose books as the first product for online sales
Oprah Winfrey Harpo Productions
Rose from abuse & poverty to over $2 billion net worth
Ended talk show to devote time to OWN TV channel
Jeff Hawkins Palm Computing (founded in 1992)
PalmPilot and Treo products
How to combine entrepreneurial with strategic actions?
Example: P&G continued innovations in detergent

7-8
TYPES OF INNOVATION
Incremental
Steady improvement of a
product or service
Examples:
Gillette razors
Intel 386 to 486 processors
Often from incumbent firms
Stronger position for
incumbents
Higher entry barriers
Organizational inertia
Reinforce supplier/buyer
networks


Radical
Novel methods or
materials serving new
markets
Examples:
Mass production Ford
MRI radiology
Often from new firms
Airplanes
De Havilland 1
st

commercial jet
Boeing took idea to
industry dominance
7-9
110
STRATEGY HIGHLIGHT 7.3
From King Gillette to King
of Incremental Innovation
Gillette invented the safety razor in 1903
A radical innovation at the start
Innovative business model
Make money from the blades NOT the razors
Incremental innovation
Moved from 1 to six blades (so far)
Top selling blades today! Over $1 billion in sales
Prices steady to higher for the blades!
7-10
TYPES OF INNOVATION (contd)
Architectural
Reconfigure known
components to create
new markets

Example:
Canon user-friendly
copiers
GPS to handheld
consumer devices


Disruptive
Novel technologies serving
existing markets
Examples:
Japanese autos
Digital photography
Data storage media
Stealth attack
Captures current customers
typically with initially lower
cost & performance
Protection against it.
Disrupt yourself
Intel Celeron chip
7-11
2013 by The McGraw-Hill Companies, Inc. All rights reserved. 712
http://www.youtube.com/watch?v=oSWEd4o-BdE
Nike and Innovation
EXHIBIT 7.7
Disruptive Innovation Invading Different
Market Segments from the Bottom Up
Googles Chrome OS could be a disruptor of traditional Microsoft
operating systems for computers
7-13
114
STRATEGY HIGHLIGHT 7.4
GEs Reverse Innovation:
Disrupt Yourself!
GE Healthcare global leader in diagnostics
Ultrasound machine for research hospitals $230,000
Limited 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 about $10,000
Vscan - large cell phone shaped device
GE Vscan Video
7-14
The Internet as Disruptive Force: The Long Tail
Long tail in a digital world
Both opportunity & threat
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 of revenue from selling a
small number of nearly unlimited choices
Short head is the mainstream
Available at brick & mortar stores
Significant inventory costs

Ray Kurzwiel Video
7-15
EXHIBIT 7.8 The Short Head and the Long Tail
The Internet and inventory management software drive down costs to
match customer demand, increasing the tail to the black dotted line.
7-16
DISCONTINUITIES: PERIODS OF PARADIGM CHANGE
Periods when underlying standard changes
Paradigm shift
New technology revolutionizes existing industries
New standard is established
Technology S-curve
Physical limits nearing or reached
Incumbents need absorptive capacity
Existing firms must place good bets on new technologies
Examples of Discontinuities
Airplanes: propellers to jets
Cameras: film to digital
TV screens: vacuum tube to flat panel
Music storage: vinyl to CDs to MP3 storage
Steven Chu
Plant Energy Video
7-17
Discontinuities:Periods of Paradigm Change
VOIP





Automotive Firms
Absorptive Capacity
Gas Hybrid Electric

718


2013 by The McGraw-Hill Companies, Inc. All rights reserved.
HYPERCOMPETITION
No single strategy sustains competitive
advantage
Must be a series of short-term advantages
Radical innovation shifts to incremental
Each subsequent innovation has a short timespan
Example:
Intel 286 through Dual Cores
Michael Porter NOT inevitable
Caused by imitation rather than differentiation


7-19
EXHIBIT 7.11
Hypercompetition Driven by
Continuous Innovation
Subsequent innovations sustain competitive advantage for a shorter time frame.
7-20
ChapterCase 7
From Encyclopedia Britannica to
Encarta to Wikipedia
18
th
century Scottish Enlightenment creates
Encyclopedia Britannica (E.B.)
65,000 topics by 4,000 scholars
In 1991, E. B. sales $650M (market was $1.2 billion annually)
Price ~$2,000 per set of books
Microsoft launches Encarta in 1993 for $99 ea.
By 1996 Encarta U.S. sales over $100M & E.B. ~$300M

Mr. Wales launches Wikipedia in 2001 for $0 ea.
3.6 million articles in English ( 40X E.B. !)
18 million total in 281 languages
In 09 Microsoft shut down Encarta
Peer-reviewed study of 42 topics found 4 errors in Wiki3 in E.B.

7-21
From Encyclopedia Britannica to
Encarta to Wikipedia
The innovation of CD-based encyclopedia
Destroyed more than the revenue of encyclopedias
Technology allowed Wikipedia to increase value
AND decrease costs

The innovative business model:
"Crowd wisdom" for big value
But NO revenue
Wikipedia is funded by donations of time and money
ChapterCase 7
7-22
CHAPTERCASE 7/Consider This
Wikipedia..
Over 300,000 users contribute edits at least once a MONTH
Volunteer time of this crowd is vital to success of Wikipedia

Has benefited from the "long tail" of the Internet

1. How can Wikipedia maintain and grow its ability to harness the
crowdsourcing of its Wikipedians to maintain high-quality (and
quickly updated) content?

2. How has the long tail affected both Wikipedia and Borders
Group?

3. What type of innovations should each of these two companies use
to gain or sustain a competitive advantage?

7-23
Wiki Case Answers
1.) Wikipedia is able to quickly update its content due to
being the most popular online Encyclopedia source and
by having over 14 million registered users who regularly
update its content. In other words, brand loyalty.

2.) The long tail effect has Put Borders out of business
and made Wikipedia popular due to the large amount of
content available to users for free

3.) Wikipedia should focus on attracting scholarly editors
to its list of registered users for maintaining the accuracy
of its Encyclopedia content. For Borders it is too late in
the game to gain or sustain a competitive advantage
currently as it has already filed for bankruptcy.
724
Reference Page

Malik, O. (2006, August 15) Who Will Really Make Money in
VoIP?. GIGAOM. Retrieved , from
http://gigaom.com/2006/08/15/who-will-really-make-money-in-voip/

Fedewa, J. (2013, September 19). Apple CEO Tim Cook slams
Nokia and Microsoft for failing to innovate. WinSource. Retrieved ,
from http://winsource.com/2013/09/19/apple-ceo-tim-cook-slams-
nokia-and-microsoft-for-failing-to-innovate/

Noe, R. (2012, April 6). CEO of Nike Inc. on Innovation and
Design. . Retrieved , from
http://www.core77.com/blog/exclusive/exclusive_ceo_of_nike_inc_m
ark_parker_on_innovation_and_design_22231.asp

725
Absorptive capacity
Architectural innovation
Discontinuities
Disruptive innovation
Entrepreneurship
Hypercompetition
Incremental innovation
Innovation
Industry life cycle
Long tail
Network effects
Paradigm shift
Process innovations
Product innovations
Radical innovation
Standard
Strategic
entrepreneurship
Thin markets

7-26