Week 9 (Industry Evolution and Strategic Change)

 Overview
a. Several dimensions are used to categorize innovations.
- These dimensions help clarify how different innovations offer different
opportunities (and pose different demands) on producers, users and regulators.

b. The path a technology follows through time is termed its technology trajectory.
- Many consistent patterns have been observed in technology trajectories, helping us
understand how technologies improve and are diffused.

 Case study: Ericson’s Gamble on 3G Wireless

- Ericsson, founded as a telegraph repair shop in 1876; by end of 2002 was the largest
supplier of mobile telecommunications systems in the world.

- First generation of cell phones had been analog. Second generation (2G) was digital.
By end of 1990s, sales of 2G phones were beginning to decline.

- Telecom leaders began to set their sights on 3G phones that would utilize
broadband channels, enabling videoconferencing and high-speed web surfing.

- In late 1990s, Ericsson began focusing on 3G systems, and put less effort on
developing and promoting its 2G systems.

- Ericsson experienced a significant erosion in profits

- In 2001, lost more than $2 billion; ROA went from 8.4% to -8.5%

- Transition to 3G turned out to be more complex than expected

- Pace of rollout slowed by lack of affordable 3G handsets and competing 3G network

standards

- Billions of euros spend on upgrading networks and purchasing licenses from

government auctions

- Companies now very deep in debt which caused loss of investor support

- Users did not value 3G features as much as hoped

-
  Types of Innovation
 Product vs Process Innovation
- Product innovation are embodied in the outputs of an organization for its goods
and services.
e.g. Ericsson’s development of 3G wireless networks and network services.

New products may enable the development of new processes.

The development of advanced workstations enabled the implementation of
computer aided manufacturing processes that increase the speed and efficiency of
production.

- Process innovations are innovations in the way an organization conducts its

business, such as in techniques of producing or marketing goods or services.
This helps:
1. Improve the effectiveness or efficiency of production
2. Reducing defect rates
3. Increasing Quantity produced in a given time

New Processes may enable the production of new products.

e.g. New metallurgical technique enabled the development of the bicycle chain
which in turn enabled the development of multiple gear bicycles.

- What is a product innovation for one organization might be a process innovation for
another?
e.g. UPS created a new distribution service (product innovation) that enables its
customers to distribute their goods more widely or more easily (Process innovation)

Product Innovation Process Innovation

Locus of Innovation
When does it usually happen
Examples
Embodied in the outputs of an
organization
Introduction to Growth Stage
Development of new
therapeutic drug; working on a
product’s new designs
Improvement of a new LED light
performance
In the way an organization
conducts its business
Mature to Decline Stage
Reducing defect rates
Developing an algorithm to
identify a target for therapeutic
intervention; organizational
structure to integrate and
manufacturing teams
 Emergence of a dominant design
- In most examples of evolving technological innovation there is a period when rival
designs are competing to outperform each other.
- Gradually what emerges is a dominant design.
- A dominant design is not necessarily the one with best performance. It is a winning
product architecture that defines the look, functionality and production method for
the product.
- Its form and function have evolved to become the accepted market standard.
e.g. QWERTY Keyboard
- The Ediswan Carbon filament lamp became a dominant design in 1884.

 The stages of a dominant design

- Dominant design marks a critical juncture in an industry’s evolution
- Once the industry agrees on a single architecture of a product, there’s a shift in the
industry to improving process technologies and capabilities.
- Increased investments in production capacity; efforts to reduce costs.

 Incremental Innovation
- Incremental innovation may involve only a minor change from (or adjustment to)
existing practices
- Incremental innovations are just a little better than the previous version of the
product or service.
- Although incremental doesn’t create new markets and often does not leverage
radically new technology, it can attract high paying customers.
e.g. TV-50’’ LED television and 75’’ OLED TV
 1. Gillette
You might not think of Gillette as one of the great innovation leaders but in
actual fact, the brand is a great example of a company that has used
incremental innovation to stay ahead of the competition.

Gillette razors started life with a single blade but their product has evolved,
adding different features and more blades as the company has sought to better
meet customer needs.

2. COCA-COLA
The brand’s line extensions such as Cherry Coke, Coke with Lime and more
recently Coca-Cola Life have enabled a 130-year-old brand to stay relevant, tap
into emerging trends and bring something new to its customers over the years.

 Radical Innovation
- The radicalness of an innovation is the degree to which it is new and different from
previously existing products and processes.
- Radicalness is also defined in terms of risk.
- 3G technology required:
Investment in new networking equipment and infrastructure
Development of new phones greater display and memory capabilities as well as a
stronger battery or better power utilization
Degree of user acceptance of the technology was unknown.
 Sustaining innovation
- This is the opposite of disruptive innovation as it exists in the current market.
- It improves and grows the existing ones by satisfying the needs of a customer
- Sustaining innovations, continue to grow the market slowly, but no longer in the
same proportion.
- At this point, the focus shifts to increasing profits.
e.g. iPhone is an example of a once disruptive innovation but is currently fully
sustaining due to its high profitability and that it is upgraded every year.

 Disruptive innovation (Clayton Christensen theory)

- This refers to a concept, product or a service that creates a new value network
either by entering an existing market or by creating a completely new market.
- In the beginning, disruptive innovations have lower performance when measured by
traditional value metrics.
- Typically, enable top line growth: Large market share growth or the creation of an
entirely new market but aren’t typically profitable for a long time.
e.g. Tesla

 Disruptive vs Sustaining
 - Disruptive innovation starts off in niche markets where there are less demanding
customers and products are in small quantities.
- Sustaining innovation occurs in mass markets as these products have had a
significantly longer product life.

 Innovation Matrix

1. Sustain: Low technological newness, High Impact on the market

2. Disrupt: High technological newness, High impact on the market
3. Incremental: Low technological newness, Low impact on the market
4. Radical: High technological newness, Low impact on the market

 Technology S-Curves
- Both the rate of a technology’s improvement and its rate of diffusion to the market
typically follow an S-Shaped curve.
- Plot technology’s performance against the amount of effort and money invested in
the technology.
- Technology improves slowly improves at first because it is poorly understood.
- Then accelerates as understanding increases.
- Then tapers off approaches’ limits.
 Organizational Adaptation and Change
 Managing Strategic Change and Dual Strategies
1. A strategy for today that exploits existing resources and capabilities and current
market positions.
2. A strategy for tomorrow that prepares the firms for the future.

 How can we manage these two at the same time?

 Organizational Ambidexterity
Firms need to:
a) Exploit existing resources and capabilities and market positions
b) Explore new opportunities for the future

1. Structural Ambidexterity
- Exploration and Exploitation allocated to different organizational units.

2. Contextual ambidexterity
- Same organizational units and people perform both exploration and exploitation.
3. Punctuated Ambidexterity

 Sources of Inertia
1. Organizational routines
- Existing patterns of coordinated activity make it difficult to develop new capabilities.

2. Social and political structures

- Change threatens existing social relationships and power structures

3. Conformity
- Imitation locks firms into common structures

4. Limited Search
- Bounded rationality encourages local search; this is reinforced by managers
contentment with satisfactory rather than optimal solutions,

5. Complementary between strategy, structure and systems

- Firms create unique configurations of close-fitting organizational features- localized
changes tend to be dysfunctional, while systematic change difficult.