MBA Course 1 Module 1 - UIUC 12 27 2020 PDF

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Table of Contents
1. Preface
2. Module 1 Strategic Innovation: Building and Sustaining Innovative Organizations
1. About the Course
1. Welcome from Professor Geoff Love!
2. Welcome from Professor Raj Echambadi!
2. Module 1: Finding Your Innovation Sweet Spot: Crafting a Great Value Proposition
1. Introduction to Module 1
3. Lesson 1-1 A Concise Framework to Analyze Innovation Problems
1. Lesson 1-1.1 A Concise Framework to Analyze Innovation Problems - Part 1
2. Lesson 1-1.2 A Concise Framework to Analyze Innovation Problems - Part 2
4. Lesson 1-2 Prospect Theory
1. Lesson 1-2.1 Prospect Theory: Minimizing Losses and Maximizing Gains
5. Lesson 1-3 Marketing Myopia
1. Lesson 1-3.1 Marketing Myopia: Focus on "Needs" for Long-Term Advantage
6. Lesson 1-4 Developing a Value Proposition
1. Lesson 1-4.1 Developing a Value Proposition - Part 1
2. Lesson 1-4.2 Developing a Value Proposition - Part 2
7. Application Corner
1. The Case of DeWalt Tools
8. Module 1 Wrap Up
1. Module 1 Summary
1. Module 2 Information
1. Introduction to Module 2
2. Lesson 2-1 Innovation Adoption Lifecycle
1. Lesson 2-1.1 Innovation Adoption Lifecycle
3. Lesson 2-2 Will the "New-to-the-World" Innovation Fly? A Discussion of Sales
Takeoff and Firm Takeoff Points
1. Lesson 2-2.1 Will the "New-to-the-World" Innovation Fly? A Discussion of
Sales Takeoff and Firm Takeoff Points - Part 1
2. Lesson 2-2.2 Will the "New-to-the-World" Innovation Fly? A Discussion of
Sales Takeoff and Firm Takeoff Points - Part 2
4. Lesson 2-3 Mapping Performance and Expectations in an Innovation Context
1. Lesson 2-3.1 Mapping Performance and Expectations in an Innovation
Context - Part 1
2. Lesson 2-3.2 Mapping Performance and Expectations in an Innovation
Context - Part 2
5. Lesson 2-4 Types of Innovation
1. Lesson 2-4.1 Types of Innovation
6. Module 2 Wrap Up
1. Module 2 Summary
1. The Evolution of the P CPC Industry
1. Introduction of Module 3
2. Lesson 3-1 Crossing Over From Niche Markets to Mass-Market Dominance
1. Lesson 3-1.1 Crossing Over From Niche Markets to Mass-Market Dominance
3. Lesson 3-2 Customer Journey Maps: Identifying Moments of Truth
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1. Lesson 3-2.1 Customer Journey Maps: Identifying Moments of Truth
4. Lesson 3-3 General Philosophy About Building Great Products
1. Lesson 3-3.1 General Philosophy About Building Great Products
5. Lesson 3-4 Product Configuration Maps: How to Develop Winning Products
1. Lesson 3-4.1 Product Configuration Maps: How to Develop Winning Products
6. Module 3 Wrap Up
1. Module 3 Summary
1. The Case of Wikipedia
1. Introduction of Module 4
2. Lesson 4-1 How Do Innovative Business Model Help Companies?
1. Lesson 4-1.1 How Do Innovative Business Model Help Companies? - Part 1
2. Lesson 4-1.2 How Do Innovative Business Model Help Companies? - Part 2
3. Lesson 4-2 Elements of Business Models and Business Model Canvas
1. Lesson 4-2.1 Elements of Business Models and Business Model Canvas -
Part 1
2. Lesson 4-2.2 Elements of Business Models and Business Model Canvas -
Part 2
4. Lesson 4-3 Designing Innovative Business Models
1. Lesson 4-3.1 Designing Innovative Business Models - Part 1
2. Lesson 4-3.2 Designing Innovative Business Models - Part 2
5. Module 4 Wrap Up
1. Module 4 Summary
1. The Case of Newspaper Industry
7. Wrapping Up the Course
1. Course Summary with Professor Geoff Love
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Preface
Thank you for choosing a Gies eBook.
This Gies eBook is based on an extended video lecture transcript made from Professor Geoff
Love and Professor Raj Echambadi's Strategic Innovation: Building and Sustaining Innovative
Organizations on Coursera. The Gies eBook provides a reading experience that covers all of the
information in the MOOC videos in a fully accessible format. The Gies eBook can be used with
any standards-based e-reading software supporting the ePUB 3.0 format.
Each Gies eBook is broken down by lessons that are navigable using our e-reader’s table of
contents feature. Within each lesson the following sequence of content will always occur:
Lesson title
A link to the web-based videos for each lesson (You must be online to view.)
Within the lesson, every time there is a slide change or a switch to the next informative video
scene, you will be presented with:
Thumbnail image of the current slide or video scene

Any text present on the slide in the video is recreated below the thumbnail in a searchable,
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Any tabular data from the video is recreated and properly labeled for screen reader
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Giesbooks@illinois.edu
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Copyright © 2019 by Geoff Love & Raj Echambadi
All rights reserved.
Published by the Gies College of Business at the University of Illinois at Urbana-Champaign, and
the Board of Trustees of the University of Illinois
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Module 1 Strategic Innovation: Building and
Sustaining Innovative Organizations
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About the Course
Welcome from Professor Geoff Love!

Media Player for Video
Professor Geoff Love - Slide 1
Transcript
Hello. My name is Geoff Love. As a professor at the Giese School of Business at the University of
Illinois, I want to first say that I and we at the University of Illinois are proud to be offering this
course on the fascinating and important topic of strategic innovation. I want to extend to you a
hearty welcome to it.
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Strategic Innovation (1 of 4) - Slide 2
Finding novel ways to compete
Transcript
Now, strategic innovation has been discussed in different ways but then its core involves a firm
finding novel ways to compete. We might and probably do think first of new products or services,
and they are often at the core of strategic innovation.
Technologies
Product Possibilities
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Markets
Segments
Competitors
Transcript
But it's also important to realize that strategic innovation can involve finding new and unique ways
to satisfy customer needs or serve new customers. It can involve creating new business models
that differentiate the firm and even open the industries. All of these concepts are particularly
important to understand in today's fast-moving business environment, and they will be central
topics in this course. I also said strategic innovation is fascinating, and there's many reasons why.
Just for instance, customers react to new things very differently than they do to familiar ones.
Innovation is about the future but the future is uncertain and ambiguous.
So innovations often fail, but failure to innovate is not an option. In the end, companies have to
navigate a complex and changing matrix of technologies, and product possibilities, markets and
segments, and competitors. So, strategic innovation is not easy but there is good research and
there are powerful frameworks that can help you diagnose what's going on, and then make sound
creative decisions about strategic innovation. That is what we work to bring to you here.
"Building and Sustaining Innovative Organizations"
Transcript
Now at those points in mind, I want to mention that this course is the first in a linked pair of
courses 'sister courses' if you will about strategic innovation. This course is about the strategy
side. That it is mostly about making decisions that lead to a winning innovation strategy.
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"Managing Innovative Initiatives"
Transcript
But there's another side innovation which is about implementing strategic innovation at firms, that
is managing innovation initiatives. That is the preview of the sister course. I hope you are able to
take both, they are highly complementary.
Now, I also mentioned these two courses for another reason. In this course, you will see two
Giese school professors; myself, and Professor Raj Echambadi. Raj was one of our leading
professors at the Giese school, but he recently left. Nevertheless, you will see that the videos for
this course continue to feature Him. We are drawing on these videos because we believe they're
quite well done and because the strategic and marketing side of innovation is very much in his
wheelhouse.
Now, if you continue over to the sister course in managing innovation, you'll see that I take over
the videos there. In this course though, I'll play a role as a guide. I'll introduce the core topics in
each module giving you a bit of an orientation. Some modules cover quite a range of topics, so
it'll be helpful to have an idea what is coming, and then at the end of each module I'll give you a
high level summary, ties together the various key learnings and taking takeaways, and at times I'll
provide a perspective that is complementary to Raj.
So, next and before we get to the first module you'll see Raj's course introduction. He actually
starts with what I think isn't inspiring orientation. He talks about the rich heritage of innovation
here at the University of Illinois and highlights the critical importance of innovation to society in
general. Then he proceeds to the idea of Strategic Innovation and the core course topics. So, I'll
see you next when you're ready to start the first module.
Welcome from Professor Raj Echambadi!
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Professor Raj Echambadi - Slide 6
Transcript
Welcome to the Building and Sustaining Innovative Organization course form the University of
Illinois Urbana-Champaign. Home for 23 Nobel prizes, 19 Pulitzer prize winners, and over 80
National Academy of Science winners. I'm actually standing in the Grainger Library, which
happens to be the largest library in the world dedicated to engineering studies.
Bardeen, Shockley, and Brattain - Slide 7
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The slide contains an image of Bardeen, William Shockley, and Walter Brattain
Transcript
And, I'm actually standing north of the Bardeen quad. Bardeen is the only physicist in the world to
have won two Nobel prizes. In 1956, he won the Nobel prize for the discovery of the transistors,
along with William Shockley and Walter Brattain. And, in 1972, he won the Nobel prize for theory
of conventional superconductivity. Actually, right behind me, you can see the Beckman Institute.
Arnold Beckman was a graduate of the University of Illinois, actually helped William Shockley, the
winner of the 1956 Nobel prize, to find Shockley semi-conductors in what became known as the
first building the modern Silicon Valley. As you can see, the University of Illinois has been
extraordinarily important for the last 150 years for the progress of human civilization and we are
extraordinarily proud to offer this innovation course to all of you from the University of Illinois.
London City in late 1800 - Slide 8
This slide contains an image of a crowded area of the city of London in the late 1800s.
Transcript
In the late 1800s, London had 50,000 horses for transportation purposes. London like many other
great cities of the world at that point in time, including New York, was drowning in manure
because horses on average were dropping about 15 pounds to 35 pounds of manure per day,
leading to hygiene and sanitary problems. More gravely, the life expectancy of a horse was less
than three years and there were dead horses strewn all over London. In 1894, this problem was
so grave that the times of London had a headline that said that London would be buried in 9 feet
of manure by 1950. Of course, this dire prediction did not come to pass, necessity is the mother
of invention, cars came to the rescue and horses ceased to be a transportation option.
Moving onto another example. The life expectancy in the United States has actually improved
from 40 to 80 years in the last 200 years. In the last 100 years, in South Korea, the life
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expectancy has actually quadrupled, while the life expectancy in India has actually tripled. While
these expectancy gains are attributable to large impressive declines in child mortality, a large part
of the explanation actually goes to innovation in healthcare, including development of antibiotics.
Transcript
In his book, The Progress Paradox, Gregg Easterbrook writes that the average store today sells
better quality wines than the wines drunk by the Kings of France. Look at our own lifetimes. PCs
in the 70s, cellphones in the 80s, internet in the 1990s, social networking, digital devices,
genomic mapping in 2000, and now we have the evolution of augmented reality, machine
learning, internet of things, driverless cars. Things get better and better and better. Think about
this for a second. The smartphone that I have in my pocket is thousands of times more powerful
than the onboard computer that went aboard NASA's mission to space that carried Neil
Armstrong, Buzz Aldrin, and Michael Collins to space.
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Innovation - Slide 10
The slide contains an image of cogs. The cogs are labeled as Country, Company, and Individual.
Transcript
By every conceivable measure involving comfort and productivity, our lives today are much better
than what we were 500, 200, 100 and even 50 years ago. Innovation is the engine that has
driven human progress by providing breakthrough ideas and practical solutions. Innovation is a
message of hope. Innovation also requires continuous efforts and consistent renewal. Innovation
can be studied at various levels. Country should be innovative on the whole. In fact, innovation
policy is at the top of the agendas of many governments. For example, the OECD, the
Organization for Economic Cooperation and Development, has right now formulated an
innovation policy for inclusive growth that is actually scalable. But this course is about how
individual companies can be innovative. This is applicable for both established firms and small
startups on how companies can actually foster, cultivate and manage innovation within their walls
so as to achieve superior performance. But given the fact that companies are made of people,
individual leaders and individual employees, there are going to be a natural spillover as well and
individuals can learn how to be innovative.
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VUCA - Slide 11
Volatile
Uncertain
Complex
Ambiguous
Transcript
We are living in a VUCA world, volatile, uncertain, complex, and ambiguous world out there. John
Chambers, the executive Chairman of CISCO, has said that in ten years, 40% of Fortune 500
companies will cease to exist. Of course, I do not know about 40% as an informed statistic, but
similar statements have been made by other luminaries, including Richard Foster, who has said
that the average life span of an S&P company has dropped from 67 years in the 1920s to about
15 years today. In fact, some of the smart companies S&Phave fallen off the S&P list like Kodak,
Radio Shack, Compaq, Circuit City, Sears, Bear Stearns. And, some smart, new companies have
actually entered the S&P 500 list, Netflix, Google, Amazon, eBay. And, the broader point here is
that people expect that 75% of the current S&P 500 firms will actually be replaced by new firms
by 2027. All this leads to the fact that this transformative change that is happening in the
economy that requires firms to be vigilant and focus on their innovative skills. In other words, we
need firms to be strategically innovative
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Strategic Innovation - Slide 12
Different way of competing
Unique value creation
Superior performance outcomes
Transcript
What does strategic innovation mean? Costas Markides from London Business School defines
strategic innovation as a different way of competing, as a novel way of competing, doing things
differently and thinking about activities differently in order to create unique value for the
consumers. And, when you create unique values for the consumer, you are likely to differentiate
yourself as a company and stand out and thereby achieve superior performance outcomes.
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Transcript
The narrative and the numbers tell us that there is no dominance by birthright for any company.
This is the fundamental truth. Innovation is a meritocracy where start of David can slay
entrenched to Goliath. As long as companies remain strategically innovative, by which I mean
they learn to play the rules of the game in novel ways, they can renew themselves in the long run
and be poised for long term success. This is a fairly important truth for companies to understand.
So, what are some guidelines for being strategically innovative? Here are some topics we'll
explore in this particular module.
This Course Will Explore - Slide 14
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Customer Value Proposition
Capabilities to Focus On
Collaborator Relationships
Aligning the Ecosystem
Business Models
Transcript
What is the customer value proposition that companies need to craft for innovative products so
that they can [inaudible] unique value? What are the capabilities that they need to focus on,
either building their capabilities in house or buying the capabilities from the outside? What should
their relationship be with collaborators, i.e., suppliers, in order to reduce co-innovation risks? Or,
retails and distributors in order to mitigate execution risks so that they can deliver the final
innovative product. What should the alignment be with the ecosystem? And, last but not least,
how should one design a business model so that they can execute the unique value for their
consumers?
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Module 1: Finding Your Innovation Sweet Spot:
Crafting a Great Value Proposition
Introduction to Module 1
Module Introductions - Slide 15
Big picture
Big questions
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Transcript
So in these module introductions, as I just talked about, I'm going to give you the big picture
about the videos that you're going to watch in the modules but also I'm going to give you one or
two big questions that each video is motivated by. And what I'm asking, right, is that you think
about those questions and you write down some answers before you start learning. Now why
would this make sense? Well, if learning is about thinking in new ways, then it behooves us to be
aware of how we're thinking before we start learning these new ways. And if you do that, the
advantage is you'll be able to see more clearly what's new in these videos and how you can think
in new ways, use new theories, new models, new frameworks. So that's the idea. And I'm asking
you to give it a try. Right. Take out a pencil and pen and then as these questions come out in the
video, go ahead and write down an answer or if you're mobile, at least think them through. The
whole idea is to be thoughtful about where we're going before we go through it. So this first
module really does two things. The first couple of videos are about developing a broad
perspective on innovation.
Module 1 Questions (Questions 1 and 2) - Slide 16
1. What is innovation?
2. Where do innovators get their ideas from?
Transcript
And so what we're going to talk about here is one very basic question. What is innovation? I
mean, innovation is the topic of the course, right, so it seems simple but we need to be clear on
it. So how would you answer this question? What is innovation? And when I'm talking about
innovation, I'm talking about it as a process, as a full process not what an innovation is but what
is innovation? And the video asks another key question. Where do innovators get their ideas
from? So write down what you think about that.
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Framework to Analyze Innovation Problems - Slide 17
Transcript
Now the second video builds on this by laying out a framework to help you analyze innovation
problems. That's where the framework really comes in. And what it's about is who is involved in
the innovation and what role they play in its success or failure. So for this one, I think just
knowing that second video is about who's involved and the scope of the analysis that you then
need to do, that'll work.
Customer Choices and Values - Slide 18
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Transcript
But the next two videos, in fact the four last ones as a whole, shift gear. They're about customer
choices and value and the links between these and the third and the fourth talk about some
important pitfalls that you can fall into. So this third video is about how people choose to use an
innovation or not. Here's the question for you to consider.
Module 1 Questions (Questions 3, 4, and 5) - Slide 19
3. How do people make choices about whether to use new products or services?
4. Does the best product or innovation win out? Why?
5. How would you describe the benefits that your innovation provides?
Transcript
How do people make choices about whether to use new products or services? Maybe for this one
draw a diagram of how you see this happening. And if you're into this, answer another quick
question. Does the best product or innovation win out? Why? The fourth video moves on to have
us consider the idea of the benefits that an innovation provides. And so here's the question. How
would you describe the benefits that your innovation provides to someone? Write out a sentence
or two on this to get you into that fourth video.
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Crafting A Customer Value Proposition (CVP) - Slide
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The slide contains an image of a box labeled CVP in the middle and connected to three other
boxes labeled: What value does the offering deliver? (Bundle of benefits, What are the pain
points? and What are the points of difference?), How are we reaching the segment(s)? (What are
the channels?), and Who is the target segment?
Transcript
And then the last two videos are about the idea of crafting a value proposition. And this value
proposition -- that's a term you might have heard before.
Module 1 Questions (Question 6) - Slide 21
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6. What is a customer value proposition? How would you draw a diagram of one? What
makes a winning one?
Transcript
So the question here is what is a value proposition from your perspective? How would you draw a
diagram of one of these? And what makes for a winning value proposition? Okay. So we'll put up
the questions that I've laid out so you have them in one place and queue them up for you to
consider before you start watching the videos. Now I'm really confident that just by having these
questions queued up in your mind, you're going to learn more because you'll have that
perspective on where things are going and how you think about it now. And I'm even more
confident that if you take the time to write down your own views, that's going to accelerate your
learning. But we spent enough time on prep work. Now it's time to view Raj's videos. And I'll see
you at the end of the module.
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Lesson 1-1 A Concise Framework to Analyze
Innovation Problems
Lesson 1-1.1 A Concise Framework to Analyze

Innovation Problems - Part 1
Transcript
Innovation is thinking differently and arriving at creative solutions. The great master Proust once
said, the art of discovery lies not in seeking your landscapes, but actually in having new eyes. Let
me tell you a story. We all know that mosquitos cause malaria and a lot of people around the
world, they are coming up with innovative solutions involving mosquito creams and mosquito
coils and mosquito nets. And there is an interesting company out of the United States that has
created a startup because in their literature review, they found that mosquitos love heat and
sweat.
And, therefore, what they did is they developed a paraffin wax cone so that you can leave it
outside your house and during the day the cone actually absorbs sunlight. At the same time, they
gave sweat bands to people living in the house so that during the day as they go about doing
their work, these sweat bands accumulate the sweat from the body. And at night, the sweat
bands are actually deposited inside the cone of paraffin wax. At night, when there is no sun, the
wax starts emitting light and mosquitos that are attracted to the heat and the sweat inside the
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sweat band, they go inside the cone and they are trapped. This is an example of looking at a
problem very differently and coming up with a creative solution.
Here is a story about Embrace warmers. Twenty million infants are born around the world. They
are born either as low weight or as premature babies. And in the western world or in cities in the
developing world it's not a problem. These children can be taken to the hospitals where hospitals
have incubators that are about $20,000. But when you think about rural areas in developing
countries, these incubators are expensive, these incubators are complicated to use, more
importantly these incubators you need 24/7 electricity. And so what a group of researchers
decided to do is they went to Kathmandu Nepal and they found a majority of these infants that
are actually born in rural areas. And what was required was not a very highly expensive
incubator, but a low cost inexpensive baby warmer which is exactly what they did. And so think of
this baby warmer as a sleeping bag that is coated with a special wax.
And inside the baby warmer, they have what we call as a phase change material and the phase
change material can keep the baby safe and at the right temperature for about four hours after
which the phase change material can be taken -- that pouch can be taken, submerged in boiling
water, the temperature brought back and put it back in. But the argument thing is this baby
warmer is safe, it can be sanitized, it is inexpensive, it costs about $25. But more importantly, it
mimics the feel of a mother holding a baby to her skin. And this is what I mean by thinking about
the problem very differently and coming up with creative solutions.
What is Innovation? - Slide 23
"Sometimes these ideas are new"
Innovation is about executing ideas to create unique value.
"Sometimes they are pre-existing"
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Transcript
What is innovation? Innovation is about executing ideas to create value. Innovation is very
different from creativity. Creativity is about ideas and innovation is about executing those ideas.
Sometimes these ideas are truly novel. Think of the penicillin and the transistors. But more times,
these ideas can be adapted and reused from one context to another. For example, think of Henry
Ford who adapted the assembly line that he saw in meat packing plants at that point in time to
assembling his own cars and the result is history.
A car comes off the end of the line every 10 seconds.
Sometimes it is about recombining or reconfiguring existing technologies in novel ways in order

to create market phase innovations. This is what Andrew Hargadon calls the recombinant
innovations in this book, How Market Breakthroughs Happen.
Building-Block view of the World - Slide 24
The slide contains an image of 4 blocks of various sizes, arranged in ascending order.
Transcript
When we think about innovation, we need to think of it as assembling blocks of knowledge. There
are blocks of knowledge out there. All we need to do is to be creative and put these blocks
together in clever ways and harness value in the marketplace. This is what we call as a building-
block view of the world. Sometimes an easy way to accomplish this is to have people collaborate.
People with different skills, different functionalities, different experiences. And when they come
together, they all bring their blocks of knowledge inside their head which are all very different and
when they put it all together, magic happens.
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Recombinant Innovation - Slide 25
Creating value by combining different components into valuable innovations that matter to
consumers
Transcript
When it comes to recombinant innovation, companies can create value by combining different
components into valuable innovations that actually matters to the consumers. Think of Netflix in
the late 1990's when they came up with the DVD by mail model, where consumers could go onto
the Netflix website, order a movie online, the movie would come to their homes where they could
watch it in relative convenience within their homes. What Netflix did was it used the Nathan DVD
technology that was already developed by somebody else and combined it with mail order that
Sears had pioneered a century ago and put it together in an innovative business model. In other
words, they recombined it into a valuable innovation that delivered unique value for their
consumers.
There's been a rise in recombinant innovations in the past decade. And this rise has actually
been fueled by digitization, social networking and the emergence of new technologies. Take the
case of WhatsApp which actually combined text messaging with social networking in order to
create a $19 billion market cap. Or take the case of Waze, a very successful app today which
actually combined digital maps with location information and social networking in order to create
a very successful navigation app. Take the case of Uber, a potentially model company for the
future, which combined location information with traffic management and [inaudible] management
to create $50 billion market cap. Or Instagram which combined elements of digital photography
with photo filters and social networking in order to create a billion dollar value for themselves.
The bottom line is this. You have great technologies out there and there are incredible
opportunities for you to recombine these existing technologies into novel combinations that
actually provide value.
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Needless Blindness - Slide 26
Transcript
How can we adapt from existing context. Let me talk about Dr. Venkataswamy or Dr. V as he was
known who was facing a pressing problem. He called it needless blindness. A majority of the
patients he was examining in his native India were afflicted with cataracts which is easily
operable for $300. But given that the majority of his patients were making less than $2 a day, they
couldn't afford it. Dr. V was looking for something reliable, cheap, affordable, consistent and
scalable giving the size of his patient base. In a visit to McDonald's in the United States, Dr. V
found the solution to his problem. He found specialized labor delivering consistent quality at
affordable prices. Dr. V decided to adapt or transplant this operation excellence model to his
Aravind eye hospitals. To date, Aravind has catered to 32 million patients and has conducted
over 4 million surgeries.
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The Business Model - Slide 27
Recombinations can help in inverting price-performance paradigms, thereby bringing new sets of
customers.
Transcript
But more importantly, by adapting the McDonald's model and incorporating operation excellence,
Aravind has actually inverted the price performance pattern paradigm that has resulted in an
affordable and scalable solution that has benefited millions more. This model of operation
excellence has been adapted in other health care context now [music] hernia surgeries and heart
surgeries as well.
Lesson 1-1.2 A Concise Framework to Analyze

Innovation Problems - Part 2
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Capture Value (1 of 2) - Slide 28
The slide contains an image representing the relationship between company and customers
where companies create value for customers through unique offerings and capture value back
through appropriate pricing, customer loyalty, word of mouth, potential referrals and long-term
equity.
Transcript
Here is a useful frame to look at innovation problems. At the center of the equation is the
company/customer relationship. Companies create value for the customers through unique
offerings and capture value back through appropriate pricing and customer loyalty. They may
harness additional value through word of mouth, potential referrals and even long-term equity.
The company can reach the customers directly or through a network of intermediaries such as
wholesalers and retailers.
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Capture Value (2 of 2) - Slide 29
The slide contains an image representing the relationship between the suppliers and company
where suppliers create value through supplies & components and capture value back through
revenues.
Transcript
Companies are customers to their suppliers as well. Suppliers create value by supplying supplies
and components and capture value back from the company through revenues. Suppliers can
reach the companies directly or through a network of intermediaries such as distributors. The
suppliers, the network of intermediaries including distributors, retailers and wholesalers are what
we call as collaborators because they collaborate with the company in order to create value for
the customers.
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Co-Innovation Risk - Slide 30
The slide contains an image representing Co-Innovation Risk between the suppliers and
company.
Transcript
Between the suppliers and the company we have something known as the co-innovation risk.
Suppliers have to supply multiple components to a company in order for the company to develop
a good product and commercialize the product. In other words, multiple supplies have to come
together for a product to work. When one component fails the entire innovation fails. In other
words, the co- innovation risk has to be low for an innovation to be developed and
commercialized by the company.
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Execution Risk - Slide 31
The slide contains an image representing Execution risk between the company and the customer.
Transcript
In a similar vein between the company and the customers we have something called the
execution risk. Consumers need to be aware of the product, show interest in the product and act
upon the product by buying that particular product. But sometimes the networks including the
wholesalers and retailers may not see the value offered by the company and the innovative
product and, therefore, they might not help in the adoption. When the values are misaligned then
the innovation may never get commercialized. For example, with an innovative car company if
the retailers fail to provide credit the innovation will not diffuse through the mainstream
population. The suppliers and the companies exist in a competitive environment. Sometimes the
competitors are direct, sometimes the competitors are indirect.
Let's take the case of the electric car company that we talked about earlier. Electric cars compete
with other electric cars which is what we call as direct competition. Electric cars also compete
with internal combustion engine cars that run on gasoline or diesel, and this is what we call as
indirect competition. Let's take the case where I have to fly cross-country. I could take an airplane
to go to this destination, and let's assume there are two airline companies that I can use. I could
also use a long distance train which now happens to be in direct competition to the airline
companies. So both direct and indirect competition has to be examined when we think about the
competitive environment.
35
Business Ecosystem - Slide 32
The slide contains an image of a business ecosystem. A Business Ecosystem consists of seven
aspects, which are technological, legal, cultural, environmental, political, economic, and social as
well as their connections and interactions.
Transcript
Last but not the least all the entities we talked about, company, customers, competitors,
collaborators, all of them exist in a context, political, economic, social, technological, legal,
cultural, environmental and industrial context. This is what we call as the business ecosystem.
The business ecosystem refers to a network of organizations including the suppliers, retailers,
wholesalers, customers, competitors, government agencies, regulatory bodies and other entities
that are responsible for the delivery of the innovative product through both competitive and
collaborative means.
36
Lesson 1-2 Prospect Theory
Lesson 1-2.1 Prospect Theory: Minimizing Losses and

Maximizing Gains
Transcript
I'm going to talk about prospect theory, which is a very useful theory when it comes to tackling
innovation problems. Prospect theory was first published by Kahneman and Amos Tversky in
1979 for which Kahneman won the Nobel Prize in 2002. Unfortunately, since Amos Tversky had
passed in 1996, he was not a corecipient. If you want to read more about prospect theory, here is
a book by Daniel Kahneman called "Thinking Fast and Slow" that can serve as a useful
reference. Prospects means choices. Prospect theory is actually a cytological account of how
people make choices under conditions of risk and uncertainty.
37
Illustrating Prospect Theory (Point 1) - Slide 34
1. The Reference Point
Transcript
Let me graphically illustrate prospect theory for you.
Reference Point - Slide 35
The slide contains a graph with X/Y axis. The X axis stands for the outcome. Positive outcome is
gains and negative one is losses (pains). The Y axis stands for the value of the outcome and the
origin is called the reference point.
38
Transcript
The two axes for prospect theory are as follows. The y axis is what we call a value. The critical
thing for you to understand is it is psychological value or subjective value, not objective value.
And the second axis, the x axis, is what we call an outcome. And where the two axes meet is
what we call a reference point. Reference points are extraordinarily important. Think about it.
Let's say that I want to buy a bottle of water. I go to the vending machine, and the vending
machine says the bottle of water will cost you $1.50, and I'm fine with it because it corresponds to
my reference prices that I pay for a bottle of water. But let's say tomorrow I go to the same
vending machine, and it says the bottle of water is three dollars. I'm going to say, this is unfair
because compared to my reference price of $1.50, this price seems to be exaggerated. This is
exactly the important point that you need to understand. Anytime you encounter a stimulus, it is
always with respect to the reference point that you have inside your head. But on the other hand,
what is interesting is you can go to a five-star resort and pay five dollars for a bottle of water or
you go to an airport and pay four dollars for a bottle of water. All that is okay because reference
point is fundamentally context dependent.
If I told you that I met a person who is six feet three inches tall, you will immediately say, way, that
person is a tall person relative to all the people they encounter every day in the population. But if
I told you that I saw this person on an NBA court, National Basketball Association game court
where the average height is six four, then you immediately say, wow, this person is shorter than
the rest of the people on the court. So reference point is a fairly important point for us to
understand because it is always about deviations from the reference point that are fairly critical.
Now, we have established the importance of the reference point.
We need to understand how consumers or anybody for that matter evaluate the deviations that
they see. For instance, the deviation to the right of the reference point, individuals are going to
evaluate it as gains, and any deviation to the left of the reference point, people are going to going
to evaluate it as losses. Some books will actually call it pain. Now, to understand this, the notion
of gains and losses, let's take an example. I always buy books of physical book stores because I
love to go to the bookstore. I love the touch and feel of a book. I love to see this book with the
other books that I see on the rack so that sometimes serendipitously I might buy another book
that is related or something that is tangential to my interest at that point in time. I love coffee, so I
like the smell of coffee wafting through the store, sitting there, reading a book. So it's the whole
total experience that I love in a physical bookstore. Those are all what I'm going to evaluate as
gains when I go to a physical bookstore. On the other hand, it is possible that I am paying a little
bit more for these experience, which given the fact that I'm paying extra may be perceived by me
as losses. So, one of the most important tenets of prospect theory is that any time you buy a
product, it is a bundle of pains and gains. It's a bundle of gains and losses, and consumers make
tradeoffs.
Now, let's evaluate and let's put in another alternative. I have a choice now to go to an online
bookstore, and in an online bookstore, I have two major advantages or gains. One, the prices are
likely to be cheaper. Two, the online delivery is so convenient that I order the book, and the book
comes to my home. I don't have to drive to a physical bookstore, buy the book and get back
home, etc. So those are my gains. But the losses are, for somebody who likes the smell of coffee
or somebody who loves looking at books in an aisle, those options are not there for me in an
online bookstore. While there are recommendation algorithms that can predict what book I might
like, etc., it's not the same thing. So those are losses. Now, think about it. When I have to make a
choice to go to a physical bookstore there are certain losses and gains. When I have a choice to
go to an online bookstore, there are certain losses and gains and consumers evaluate these two
in order to make an adoption decision and adopt innovation. So that is why it is extraordinarily
important for you to understand the notion of losses and gains and the whole notion of reference
39
point in order to understand how to create an innovated product and how to break through the
adoption barriers so that consumers actually adopt your product. While I talked about the impact
of reference points for consumers, the same logic actually extends for companies as well.
There is a very interesting paper by Benner and Trypsis that talks about how digital cameras
were looked at differently by different firms. Analog cameras looked the digital cameras as
substitutes, whereas consumer electronic firms and personal computers looked at digital
cameras as substitutes. And this had remarkable impact on their forecast as well. For example,
the analog companies thought of the market demand as anywhere from 1.4 million units to about
1.8 million units between '99 and 2000. Whereas the electronic companies and the computing
firms thought that the market would anywhere be from four million units to ten million units. The
final number was close to about two million units. This goes on to tell you the importance of the
frame. So one of the things that you need to understand as a company is to ask yourself, what is
your reference point, and when you look at a new stimulus, what is this deviation from is a very
important aspect to think about when you're looking at an innovation problem.
In order to explain prospect theory and reference point, let's take three bowls of water. One bowl
of water is very hot. One bowl of water is ice cold, and the third bowl of water is at room
temperature. I take my right hand, place it in the ice cold water, left hand in the hot water, and I
wait for a minute. And then I take both my hands and place it in the room temperature water.
What I am going to feel is that my right hand is colder and the left hand is warmer relative to the
room temperature water, and this fundamentally is because of the original reference point from
where they came.
2. Diminishing Sensitivity
Transcript
Now that we have established the notion of losses and gains and reference points, the second
important aspect of prospect theory is what we call as diminishing sensitivity.
40
Diminishing Sensitivity - Slide 37
The slide contains a graph with X/Y axis. The X axis stands for the outcome. The Y axis stands
for the value of the outcome. In the first quadrant, the value is an increasing function of outcome
with decreasing marginal value. For example, an increase of outcome from $5 to $10 brings more
increase in value than an increase of outcome from $1000 to $1005 with the same magnitude.
Transcript
What does that mean in layman terms? Well, Kahneman has an amazing example in his book.
Let's say I'm reading a book, and the power goes out. And when the power goes out, I'm using a
candle in order to read the book. The candle has enough illuminating power to help me read, but
suddenly the light comes on, and the candle is no longer enough because it loses its sense of
brightness amidst the bright light. What was powerful in terms of illumination in a dark room
suddenly is completely diminished in the presence of light around it. And that's the notion of
diminishing sensitivity. So let's draw the value function for a gain curve. The value function for a
gain curve is nonlinear, and it's like this. You know, so you can see, it is nonlinear. But what does
this mean? What does diminishing sensitivity mean? Let's look at the difference between five
dollars and ten dollars on the gain curve. So, when you look at five dollars, this is five, and let's
say this is ten. And you have a particular value that you see because of this difference, and this
value is given by this number here. On the other hand, let's take the same objective difference,
but let's change it to $1000 and 1005. This is $1000, and let's do 1005. Remember, the objective
difference here is $5. It's the same as here, if you will. But now, let's look at the subjective value
difference, and when you look at the subjective value difference, you will see the subjective value
of the difference between 1005 and $1000 is much, much, much smaller than the subjective
value that you get from a difference of ten dollars and five dollars. This is the notion of
diminishing sensitivity.
From an innovation context, one of the things you have to be very careful about is as you are
developing products, be very careful about adding features. The first feature, massive impact.
Second feature, significant impact. While you keep on adding features, at some point in time you
will realize adding more features actually diminishes the psychological value for the consumers,
and this is a very important concept as you are thinking about developing innovative products.
41
From an innovation context, one of the things you have to be very careful about is as you are
developing products, be very careful about adding features. The first feature, massive impact.
Second feature, significant impact. While you keep on adding features, at some point in time you
will realize adding more features actually diminishes the psychological value for the consumers,
and this is a very important concept as you are thinking about developing innovative products.
3. Losses Loom Larger than Gains
Transcript
Now that we have established two concepts, first one that we have a reference point, and then
we have consequent gains and losses. Second one, the whole diminishing sensitivity of the value
function. The third important concept from prospect theory is what we call as losses loom larger
than gains.
42
Losses Loom Larger than Gains - Slide 39
The slide contains a graph with X/Y axis. The X axis stands for the outcome. The Y axis stands
for the value of the outcome. Positive outcome is gains and negative one is losses (pains). A
same size outcome with opposite sign (e.g. $20 gain and loss) will bring different sizes of
increase/decrease in value, where losses can lead to a bigger change (drop) in value.
Transcript
What does this mean in practical terms? Let's say I walk on the road. I have $20 in my pocket,
and for some reason I lose it, and obviously it is going to create a $20 pain intensity for me that I
can represent on my value graph, and this is a loss of $20. Okay. The next morning I wake up,
I'm like a goldfish. I've forgotten the episode from the night before, and I walk on the road, and I
see $20 on the road, and I take that, and I have happiness. Twenty dollars' worth of gain
intensity, which I can represent here, let's say. This is positive $20, and what you will realize is
that the pain intensity is much, much, much, much stronger than the gain intensity. This is what
we call as the losses loom larger than gains. Losses hurt us more. What is the practical
implication of this. In the loss domain, people tend to become risk seeking, because they want to
get back to the status quo. In the gain domain, people want to become risk adverse. The whole
notion of losses loom larger than gains actually matters in how we frame news as well from a
company point of view. Let's take this glass of water. This glass is half full, or almost half full. If I
say to you the glass is half full, I'm actually gain framing. If I say to you the glass is half empty, I'm
actually loss framing. How I frame actually matters. Let me give you a practical example. Let's go
back to the early 1990s when you had Borders, which was a dominant physical bookstore, and
you had Amazon.com, which was a nascent online bookstore.
If you are sitting inside Borders as an executive, and you tell your employees, oh, my God,
Amazon.com is going to make us obsolete in about 10 years, you are loss framing. On the other
hand, if you say Amazon.com is actually going, a physical bookstore, and online bookstores are
going to be complementary to each other, then you're actually gain framing. And whether you
frame it as a loss or whether you frame it as a gain has huge implication on where you're going to
get resources and capabilities. We'll talk about it later. But this is a fairly important point. I was
actually talking to an auto dealer about a month ago, and she said to me that she was doing her
monthly surveys, and she had been up on about ten attributes including reliability and problem
43
diagnosis. But she was down in the survey for the auto dealership in terms of customer service,
and her overall satisfaction ratings had fallen. And I said losses loom larger than gains. For these
consumers that you're talking about, customer service was a very important attribute, and all your
great performance on other attributes do not matter as much. The loss on customer service
loomed larger in the minds of these consumers.
This has huge implications from innovation context as well. For example, my mother was using a
video cassette recorder, VCR, for a long time, and I would tell her, you know, mom, why don't you
get a DVD player. And for her, she had a lot of video tapes, a lot of it incorporated family
memories, and she didn't want to change it, and the inability of DVD players to play those tapes
was a huge loss for her. And therefore she would not adopt the DVD player. And the very fact
that the loss, despite the fact that the DVD player, she understood, was technologically better, but
for her, the losses of not being able to use the videotapes constituted such a big hassle in her
mind that she was not willing to adopt. Of course, the story has a happy ending. We did finally
convince her to go to a DVD player, and we convert the videotapes that she had into a digital
format, now that she can play it.
The concept of loss aversion can also be examined from a company's perspective. Think of
Kodak. Kodak was started in 1888, and by 1976, Kodak was a dominant player in the analog
camera business with an 85 percent share and in the consumable business with a 90 percent
share. Consumables meant films, paper, and chemicals. Now, put yourself in the minds of a
Kodak executive, who has a digital camera. They, by the way had one of the first digital cameras
in 1976. They are evaluating between their analog camera business and their digital cameras. If
they embark on building capabilities for the digital cameras and appropriate resource allocations,
there are potentially losses. There is potential loss of dominance in the analog camera business,
which was providing a lot of cash for their business. But the gains in the digital camera business
were fuzzy. And as a result, when loss aversion tends to dominate, it is absolutely common
sensical to see why somebody would have a wait and watch attitude. A very importance nuance
here, if you are a technologist who worked on the digital camera though, your frame of reference
is actually the digital camera, and you are going to evaluate everything from that frame. You are
going to say, I know this technology well. This digital camera technology is going to substitute the
analog camera. We need to allocate resources. We need to go into this particular domain. And so
the whole notion of what is your frame is fairly critical for us to understand, but the larger point is
how loss aversion tends to dominate these conversations.
So, in summary, what is the frame you employ is absolutely critical because the frame you
employ is going to determine your losses and gains, and loss aversion is an absolutely important
concept for us to understand as we develop innovative strategies.
44
Transcript
Related to the notion of loss aversion is the concept of endowment effect, which is defined as the
irrational tendency to overvalue things that we own. This was demonstrated in a lab experiment
by Richard Taylor years ago, wherein he took a classroom, divided the class into two. In one-half
of the class he gave them a mug, and the other half he did not give them a mug. To the class, to
the half of the class where he gave a mug, he said to them, either you can take it home or you
can sell it to the other group. Tell me what is the price you are willing to accept. To the other half
of the class, he said, now that you don't have a mug, you're free to trade, and therefore tell me
what is the price that you're willing to pay. Trade did not happen as expected because the
willingness to accept for people who had the mug and therefore had established the ownership
was at least two times higher than the willingness to pay, which is a demonstration of endowment
effect. We see that in the real world all the time.
I remember in grad school I had a desk. I couldn't part with the desk because I thought people
were paying too little for a run-down desk, and of course, you know, that is because I was
emotionally attached to the desk. You see that in real estate all the time. Sellers balk the market
prices that buyers are willing to offer because they are emotionally attached to the house. So
when you're emotionally attached, you overvalue what you have, and that affect is about three
times the value of the object. Of course, the endowment effect intensifies the longer the
ownership.
Let's put it all together. How does this all apply to a company that intends to deliver an innovative
product? When a company delivers an innovative product to a consumer, the consumer
compares this innovative product to the product that they currently have, which happens to be
their reference point or their baseline. So giving up an existing product for this innovative product
is going to be seen as a loss by the consumers. Coupled with the endowment effect, i.e., the
rational tendency to overvalue things that you own, this effect is likely to be three times as large.
Let's compare it to the company's perspective. Their baseline is the innovative product. They
know all about their product, and therefore by virtue of endowment effect of this innovative
product, they are likely to overvalue his innovative product by as much as three times. Now, you
45
have a very interesting situation where customers overvalue their existing product by three times,
and companies overvalue the innovative product by three times, leading to a coalition of
perspectives. And this is what leads to actually resistance on the parts of consumers to actually
adopt an innovative product, and companies are usually very surprised. This leads us to the
following insight. The best product does not win out in the marketplace. The product that best
minimizes the losses and thereby satisfies the needs of the consumers actually wins out in the
long run.
46
Lesson 1-3 Marketing Myopia
Lesson 1-3.1 Marketing Myopia: Focus on "Needs" for

Long-Term Advantage
Transcript
In this lesson, I'm going to talk about marketing myopia. Every year thousands of products are
released in the marketplace and 90% of these new products fail and they fail because of
marketing myopia, which is a very nearsighted focus on products and services rather than
looking at the big picture on all consumer needs. Think of the great companies in the last 50
years. Digital Equipment Corporation, Polaroid, Barters, Blockbuster, Kodak. These companies
have all fallen off their website, they've fallen off their dominant perch if you will because they
were all too focused on the product and not on the overall picture. As the great Ted Levitt, the
Harvard business school professor used to say, consumers want a quarter-inch hole; they don't
want a quarter-inch drill. And a lot of times what happens is companies because of virtue of
developing innovative products they become too product focused and the solution to avoiding
marketing myopia is fairly simple to consistently ask yourself what is the business you are in?
And, B, needs focused and not once focused.
47
What Business Are You In? - Slide 42
WHAT BUSINESS ARE YOU IN?
Transcript
A lot of times in the real world you will find that companies are obsessed with growth
opportunities in their industry without understanding that there are potential opportunities on the
horizon, which is where consumers are likely to gravitate. Let me give you an example. If you
think of the oil and gas industry right now, obviously gasoline petroleum is doing very well and if
you are a company that is a dominant player there, why you need to exploit the petroleum, the
opportunities in the petroleum sector, you also need to start thinking about alternative fuels.
Otherwise, you're likely to fall victim to marketing myopia. One of the things I always say to
people is if you're an airline company today obviously I take a plane to go from the United States
to China, but tomorrow there is some technology that comes in and I say beam me up, Scotty,
and I'm in Beijing. Well, you know, airline companies have to figure out a way to capitalize on that
market as well. And the way to think about it is what business are you in is the key question that
you need to ask yourself.
That was a good picture of the Clock Tower that I took on my phone. About 15-20 years ago if I
had to take a picture of that, I would have used a film camera. And the way it worked is I would
take a picture, I would wait for all the exposures, go to a film studio, get the pictures developed
and see the prints. About 10 years ago if I had to do it, I would have used a digital point and
shoot. It has a storage disk, I will take the picture, the images are stored, I upload it onto a
computer for potentially printing it or even manipulating the images, et cetera. These are all
different technology generations if you will of how we have evolved in the photography business
from the analog to the digital, but the critical issue is if you are product focused as in film camera
focused, then you would not have caught the transition to the digital camera. On the other hand,
if you think through it very carefully the need for capturing memories have not changed for me in
the last 20 years, but the means by which I have done it has actually changed, which is the
reason why we advise companies to focus on customer benefits and always define their business
in terms of customer needs because that enables you to capture the transitions and move on to
the next generation without a problem.
48
I have 10 minutes to kill before I meet somebody and at this point in time I have a choice of
reading this newspaper because I have to kill time or going on my Smartphone and accessing the
various information sources. Now, while it is true that this newspaper is in the business of
providing news, at a broader level at this point in this context it is alleviating boredom. If I have 20
minutes to travel on a New York subway and I don't have access to a cell phone, I use the
[inaudible]. If I have 4 hours to kill on a flight to San Francisco and I don't have access to a cell
phone, I might use an Applet pocket, but the broader point that you have to understand when you
think about marketing myopia is value is contextual and understanding the context actually opens
up a lot of innovative opportunities. A lot of times companies get locked into a very specific
position and they become non-creative, but understanding the context can open up your world.
Port of St. Louis, MO - Slide 43
The slide contains an image of cargo ships representing heavily crowded port of St. Louis.
Transcript
Here is an illustration of marketing myopia using 2 American cities, St. Louis and Chicago. In
1850, St. Louis was the second largest port city in the United States after New York. They were
bustling with shipping activity. They cater to a lot of shipping companies. So when railroad
companies came and asked permission from St. Louis to build railroad bridges across the river
so that they can transport freight, St. Louis was not too thrilled. They didn't want to antagonize
their shipping companies, therefore, they did not accept the request of the railroad companies.
So these railroad companies turned to a nearby city, Chicago, and asked for permission to lay
tracks into downtown Chicago and, of course, Chicago agreed. By virtue of the simple decision
made in the mid-1850s Chicago today is a much more bustling metropolis compared to St. Louis.
St. Louis thought of itself as being in the shipping business when it should have considered itself
as being in the transportation business. That business definition of being in the transportation
business would have enhanced the long-term prospectives of St. Louis
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Theodore Levitt - Slide 44
"The railroads let others take their customers away from them because they assumed
themselves to be in the railroad business and not in the transportation business."
—Theodore Levitt
Transcript
Here is an interesting update about the railroads in the 1950s. Railroads that were dominant for a
century actually got into trouble because the need for trade transportation was actually filled by
others including cars, trucks and airplanes. And what was interesting as Professor Ted Levitt
writes is that railroads let others take their customers away from them because they assume
themselves to be in the railroad business rather than in the transportation business. In other
words, they fell victim to the exact marketing myopia that plagued shipping companies in the mid-
1850s. Railroad companies were product oriented instead of customer oriented. So the lesson is
very simple the lesson is do not fall victim to marketing myopia and one way to not fall victim is to
define your business with an eye towards the future because remember markets consistently
evolve and consumers change and as long as you're going to define your business in terms of
the broader consumer needs and benefits, you're going to be fine as a company in the long run.
50
Define Business in Terms of Need - Slide 45
Always define the business in terms of needs of the consumers and not wants.
Transcript
Do not define your business in terms of wants. Wants change, needs don't. My need for thirst is
always going to be there, but whether you use bottled water or a cup of coffee or a cup of tea, it
changes. And similarly we talked about cameras before, cameras are, should not be defined as
being in the film business or the digital business as much as being in the capturing memories
business. If you are in the airlines space, you are in the transportation business. Think about
IKEA for instance. When all other companies were focused on custom furniture that's very
expensive, IKEA focused on a segment whose needs were to have furniture that was stylish but
inexpensive, but more importantly this segment did not have the time to wait for custom furniture
to arrive at their homes. So in order to mitigate these problems, the segment was willing to
assemble the furniture themselves and the result is IKEA was able to design modular furniture
that was stylish and quick to assemble and went after this need for convenience and flexibility for
this particular segment.
51
Encyclopedia Britannica - Slide 46
Transcript
Need assessment is usually done by talking to the consumers. Consumers sometimes can
articulate their needs, we call it the manifest needs. Sometimes it is very hard for consumers to
articulate what their true needs are. We call it latent needs. Let's take the example of this
beautiful 9th edition of Encyclopedia Britannica. You go to a consumer and say, hey, why do you
have this Encyclopedia Britannica in your walls? A consumer will say, well, this is for knowledge.
Whenever I have an important question or a doubt to be answered I can actually check the
Encyclopedia Britannica as a reference. True, this is what we call a manifest need because the
consumer can easily articulate the value proposition, but there's also a deeper need at work.
Think about it when you have this Encyclopedia Britannica at home, this beautiful volume, it also
communicates something about your household. The fact that you care for the education of the
entire family is a symbolic need that cannot be articulated by the consumers. This is a latent
need. So companies should not only focus on the latent needs but also on the manifest needs
The manifest needs are fairly straightforward, you'll talk to the consumers, but the latent needs
that are a variety of techniques that companies can use like Z-Ment or anthropological studies
inside consumer homes, but the bottom line is when you develop a product that caters to not only
the manifest needs but also accounts for the latent needs of the consumers, you're most likely
going to develop a winning innovative product.
52
Needs Are Complex - Slide 47
The slide contains an image of a Pyramid in which 5 categories of Needs are arranged from
bottom to top in the following order: Physiological, Safety, Social, Esteem, and Self-actualization.
Transcript
As we saw, needs can be manifest, needs can be latent. One way to think about the complexity
of these needs is to have an organizing framework such as the Maslow's Hierarchy of Needs,
which actually defines needs in terms of 5 categories, physiological, safety, social, esteem and
self-actualization. Sometimes, for example, if you're a luxury automotive, you are not only
catering to the safety needs you're also catering to the esteem needs of your customer base. So
this is where the complexity comes in and once you have an organizing framework and you talk
to your customers and you ascertain the complexity of their needs then the business definition
actually becomes easy.
53
Why is the Business Definition Important? - Slide 48
Building capabilities within the company and resource allocations follow the business definition.
Transcript
Why is a business definition important? Business definition is important because building

capabilities within the company and consequent resource allocation actually follow the business
definition. Think of that famous piece that President John F. Kennedy made before the Congress
in 1961 wherein he said "I believe that this nation should commit itself to achieving the goal
before this decade is out of landing a man on the moon and returning him safely to the earth."
But in the same speech as you read, he will talk about the development of the appropriate lunar
spacecraft, he will talk about liquid and solid fuel boosters and engine development, which are all
basically building capabilities, but they also followed it up with appropriate resource allocations.
They spent about $531 million in fiscal '62 and an estimated $7 to $9 billion additional over the
next 5 years and the result was a very successful man flight to the moon and back in 1969, which
goes on to tell you the power of a moon shot and following it up with building capabilities and
resource allocation.
Gives his personal pledge that this nation will move forward with the full speed of freedom in the
exciting adventure of space.
54
References - Slide 49
IKEA. (n.d.). Living Room Furniture: Sofas, Coffee Tables & Inspiration. Retrieved February 02,
2017, from http://www.ikea.com/us/en/catalog/categories/departments/living_room/
Transcript
No instruction provided during this slide.
55
Lesson 1-4 Developing a Value Proposition
Lesson 1-4.1 Developing a Value Proposition - Part 1

The Basic Building Block of Strategic Innovation is

Value - Slide 50
The slide contains an image representing the 2-way process between How do companies create
value for customers? and How do companies capture value back from customers?
Value = Quality obtained / Price paid
Transcript
In this lesson, I want to talk about value. Value is the fundamental building block of strategic
innovation. I define value as the quality obtained by the consumer relative to the price paid. But a
critical point is that value is not objective value but is psychological value as perceived by the
consumers. Once you understand value, you can actually understand how to craft winning
customer value propositions.
The basic building block of strategic innovation is value. How do companies create value for their
consumers? How do companies capture this value back from the customers? This could be
through appropriate pricing. This could be through word-of-mouth. This could be through
customer loyalty. This could be through referrals or enhanced customer equity. But the most
important thing that you need to understand about value is, value is psychological. Value is value
56
that is perceived by the consumers. And it is usually given by the expression "quality obtained
given the price paid."
A Company Endures in the Long-Term - Slide 51
When a company endures in the long-term, it does both the value creation and value capture as
well.
How do companies execute the "creation and capture" of value over time?
Transcript
A company needs to simultaneously value created and value capture well. A company that does
the value creation part without the accompanying value appropriation is not likely to survive in the
long run. In a similar vein, a company that does the value capture well but does not create value
creation is again not likely to last in the long run. So a company has to do both well, executed the
value creation and value capture part. Because then it becomes actually a virtuous cycle that
creates genuine long-term competitive advantage.
57
Crafting a Customer Value Proposition (CVP) - Slide
52
Slide has the same information as Slide 20 Crafting a Customer Value Proposition (CVP)
Transcript
Customer Value Proposition, or a "CVP", is a statement that has three facets. What is the value
that the product offers? Who's the target segment? And how are we reaching this particular
segment? As far as the what part of the value offering is concerned, think of it as a statement.
And a statement has to have the following three things. What are the bundle of benefits that your
product is offering? And does your product actually alleviate the pain points that customers have
in case they feel some losses from a prospect theory perspective by adopting your product?
Does your product alleviate those losses? And last but not the least, it also highlights the
favorable points of difference that actually delivers unique value. These favorable points of
difference need not be explicitly mentioned, but they have to be implicit.
The second facet is fairly obvious: Who's the target segment. Remember, crafting of customer
value proposition is usually segment-specific. So the third facet is: How are we reaching the
segments? So there are two unique characteristics here. You need to talk about what are the
channels that you're going to use and what are the relationships you're going to employ. As far as
the channels are concerned, it could be direct. Or you could say, I'm going to have intermediary
such as wholesalers and retailers in order to reach the customers. And as far as the relationships
are concerned, you need to ask yourself: Is it a transactive relationship? Is it a relationship-based
business? Are we going to co-create communities for these customers? These are all the
questions. So when you put the what, who, and how together, you'll get a customer value
proposition. But more importantly, you have to understand, the primary driver in a customer value
proposition happens to be the what. And then you can see that the who and the hows will actually
follow.
The value proposition of a taxi is taking a passenger to their destination. And on a crowded
street, I can actually hail a taxi off the street. But in this particular case where my trip was actually
planned, I called the dispatcher and I asked for a cab at this point in time. And while the cab
58
came on time, there's always a source of anxiety. Is the cab going to come on time? As they're
coming to your home, where exactly are they? How long is going to take, one minute, two
minutes? But more importantly, when the cab comes in, you have to tell the destination. And
when the cab ride is done, you have to pay using either cash or credit card. But the positives
about a cab, especially a cab that is regulated by your local government and your state
government, is the fact that the physical and the psychological safety of the passenger is
guaranteed.
As I'm getting into the airport, when it comes to drafting a value proposition, the what part of the
value proposition, you need to be careful about two things. What are the pain points that you're
alleviating? And what are the points of differentiation? Once you do this, the what part of the
value proposition is usually well crafted.
I'm back from my trip. Now I need to go home. And instead of taking a yellow cab taxi back home,
I've ordered an Uber. I went to their -- I have an app of Uber on my phone. I punched in my
destination. I know who the driver is. The driver is highly rated. And I know exactly where the car
is at this point in time, and it's about a minute away. And here is the Uber.
This is a daily ritual for me. I have a need to be clean-shaven. What I do is go to the store once a
month and buy a bunch of cartridges that fit in with my razor. I've paid for this razor. I buy
cartridges. And four cartridges cost me about 15 bucks or so. So what in 2011 Dollar Shave Club
did was flip this business model. Instead of people going and buying a razor and cartridges
forever, they decided to follow a subscription model. You subscribe to a monthly plan with Dollar
Shave Club, so they send you a razor handle and they send you cartridges every month. So they
provided a cost-effective and affordable solution. You don't like your razor, don't worry, there is a
flexible razor plan. One of the pain points in a subscription model could be whether as a
consumer you are locked into a contract. This Dollar Shave Club said, no contracts, no
commitments. They day you don't like it, just say you don't want to be a part of it, etc. The result
is, today they were bought out by Unilever for $1 billion. Tells you the power of innovative
strategies and how innovation can actually create value.
Creation of Value - Slide 53
The slide contains an image representing a Bell Curve with one Standard Deviation on each side
from the center with the numbers 18,000, 81,000 and 33,000 in the left, middle and right portions
59
of the Bell Curve respectively.
Transcript
Customer needs our diverse, they are not homogeneous. For every segment, customers key in
on an attribute or a rank-ordered set of attributes that can actually be represented by a bell curve.
Take the case of the SUV market in the auto industry. People choose based on size. So when
you represent size on a bell curve, the x-axis represents the size and the y-axis represents sales.
About 130,000 non-luxury SUVs are sold in the United States each month. The middle part of the
curve, i.e. the average size SUVs, 81,000 of them were sold. About 18,000 small SUVs and
33,000 large SUVs were sold. So if you are a company focused on the mass-market, being in the
center makes sense. But when you move away from the center, which is where there are
abundant opportunities, there are opportunities as well. Choose a segment which happens to be
a sweet spot with respect to your capabilities.
Let's take the example of Trader Joe's, which is a grocery chain based in the United States.
Trader Joe's opted not to reach a mass-market but went after the periphery by providing
affordable products for health and diet conscious shoppers. Its latest sales volumes at about $11
billion. And they have about 500 stores nationwide. Trader Joe's consistently tops the rankings in
customer satisfaction. And the first store sales per square foot is one of the highest in the nation.
So by virtue of going after a niche market and by virtue of not focused on the mass-market,
Trader Joe's has had a very successful strategy. Bottom line: On any bell curve, while it makes
sense for you to go to the center, you have to understand there are innovative opportunities
available at either the underserved end or the overserved end. As a company, you need to figure
out what your sweet spot is, where you actually have the right to win, and you absolutely can win
provided you reach the right segments.
60
Transcript
Dell delivered great value by thinking and performing activities differently. Dell was
commercialized in the mid-1980s. At that point in time, IBM was a dominant player in the market.
And all major computer manufacturers sold their products through intermediaries, because
intermediaries did the activities of educating consumers, informing consumers, and persuading
them to buy computers. When IBM was involved in a value differentiation focus, Dell focused on
cost leadership. And when you think about the value chain, the source from suppliers at scale,
they manufactured the items in-house. They assembled the computers. And then they bypassed
the intermediaries completely. Given the fact that less than 5% of the US population had adopted
the computers at that point in time, this was a major risky move, and some would say a
counterintuitive move. Because Dell lost the education function. But instead Dell pursued a very
innovative strategy by saying that they were going to focus on the 5% of the consumers who had
already adopted the computers, therefore, didn't need any education and persuasion.
Therefore, by following a low-cost leadership strategy, by focusing on the operational excellence

across the value chain, and by thinking very creatively, Dell created a very innovative strategy
that made them the market-dominant leader for the next 25 years or so in the personal computer
industry.
Lesson 1-4.2 Developing a Value Proposition - Part 2

Southwest Airlines - Slide 55
61
Transcript
Southwest Airlines thought differently and performed activities differently in order to become an
innovative leader in the US airline industry. The competitors for Southwest at that point in time
were large airlines that flew all over across multiple destinations. They followed what is known as
a hub-and-spoke operations. Hubs were large airports and spokes were small airports. Given that
they flew across large and small airports, they had different sized aircrafts. The hub is the large
airport which aggregates passengers and then flies them to the various smaller destination, also
known as spokes. They also catered to business class. They had to coordinate schedules and
baggage. They were consequently able to appropriate price premiums and differentiated
themselves from the competition.
On the contrary, Southwest Airlines focused on low-cost leadership by focusing on less

congested airports. Southwest few point-to-point and did not employ a hub-and-spoke system.
And given that they were flying point-to-point between destinations, they had a standardized fleet
of 737 planes, which effectively meant that they could get the best rates from their suppliers.
More importantly, they were able to control costs with respect to spare parts, with respect to
airline service, and with respect to the inventory on the supply side. Given that they flew from
point-to-point, there was no major coordination of baggage or schedules. And they could have
fast turnaround of planes.
Southwest Airline vs Full Service Airline - Slide 56
Southwest Airline
Strategy: Low-Cost Leadership

Planes flown from less congested airports in larger cities
Point-to-Point Business Model
Standardized fleet of 737 planes
No business travel - only economy
Full Service Airline
Strategy: Value Differentiation
62
Planes flown from all airports, large and small
Hub-and-Spoke Business Model
All types of planes
Business travel available
Transcript
Given that they did not cater to business travelers and they were able to bypass agents, they
were able to employ a low-cost leadership strategy that was very different from the differentiation
strategy employed by large airlines.
Generic Competitive Strategies - Slide 57
The slide contains an image of a pie-chart divided into three equal parts representing Customer
Intimacy, Product Development, and Operational Excellence dependent on each other.
Transcript
To deliver unique value, companies need to understand what they are good at. And there are
three value disciplines: operational excellence, customer intimacy, and product development. As
far as operational excellence is concerned, companies need to focus on cost leadership by
focusing on volumes and standardize processes. Think of Walmart, Southwest, RyanAir, where
the focus is fundamentally on scale and the focus is on having great processes that enable you to
standardize. By customer intimacy, companies segment and target markets precisely and then
tailor the offerings to these segments. The focus is on obtaining detailed knowledge about the
customers and combine it with operational flexibility. So acquiring customers, retaining
customers, maintaining customer relationships are very critical.
Think Procter & Gamble. Think Netflix. Where the focus is on the economies of scope and the
shed of the wallet. Getting the customers to buy multiple products from the same company is
very critical. By product development, we mean that companies should offer leading-edge
63
products and services. The focus is on developing premium products that get you premium
prices. Think of Intel and Apple as example. The focus is fundamentally on nurturing talent and
fostering talent that can help you create these cutting-edge products. And typically these
organizations are employee-oriented. So what does this all mean to a company? What this
means is, companies need to become champions in one of these three value disciplines. An
enterprise cannot excel in all three because the structure, capabilities, and cultures required for
excellence in one may be incompatible with achieving excellence in others. So the goal should be
become excellent in one and match the industry standard in the other two. In the best-case
scenario, be excellent in two value disciplines and be industry standard in the third, and that
should make you world champions.
Mapping Company Capabilities and Customer Needs -

Slide 58
Balance what the customer wants and what the company can really produce
64
Mapping Company Capabilities and Customer Needs
Relevance to Relative Capability of Company
Segment Low High
Irrelevant. Do not spend Resource Drain. Stay away from the

Low
resources. developer's curse.
Table Stakes. Build these Differentiator. Emphasize these points of

High
features. difference.
65
Transcript
We know one of the benefits that a customer is looking for in an innovative product. And we also
know what the company can really produce, because we know the value discipline they are
focused on. So how do we really balance the customer needs and what the company can
produce? We do that by mapping company capabilities and customer needs together and doing a
typology of the relative capability of the company with the relevance to the segment. When you
map the company capabilities and customer needs, you can derive a 2 x 2 matrix. On one axis I
have relative capability of the company at different levels, low and high. The other axis has
relevance to the segment, again marked as low and high. So when you look at the high/low --
high relative capability of the company and low relevance to the segment -- you will realize that
investing in developing these features is a resource drain. This is also indicative of a developer's
curse, that you want to develop the features because your attitude as a company is one of, if we
build it, they will come. Be very careful about this because these attributes are absolutely not
relevant to the consumer.
This slide shows the same information as Slide 32 Business Ecosystem
Transcript
Last but not the least, look at the high/high cell. High relevance to the segment and high relative
capability of the company. These are the differentiating features. You have to emphasize these
points of difference. The odds are, these will become the points of difference between you and
your competition that will enable you to deliver the unique value to your consumers.
Too often companies think that creating innovative products based on customer insight is enough
to deliver value and thereby succeed in the long run. Nothing can be farther from the truth.
66
Alignment with the ecosystem is very critical. Otherwise, the best laid innovation plants may
actually go awry.
What should companies aspire for when it comes to

creation of value? - Slide 60
Ensure alignment with collaborators and environmental contexts for market success.
VHS versus Betamax
HD-DVD versus Blu-ray
Transcript
Edison developed the electric bulb in 1879, a full 40 years after the first electric bulb. But Edison's
development of electric lighting was not the story of the electric bulb superiority but the alignment
with the entrenched value chain of gas utilities. Gas utilities had been around for a long time.
They were very well entrenched with proper institutional structures. And what Edison did to
dismantle these infrastructures was just remarkable. What did he do? Well, despite the fact he
had capabilities to create a 40 watt bulb at that point in time, Edison decided to create a 13 watt
bulb, electric bulb, to be equivalent to a 12 watt gas lighting that was prevalent at that time. For
distribution, instead of taking overhead lines, Edison buried the electric lines under the ground, so
as to not upset the construction workers. More importantly, he utilized the gas industry system of
centralized production and distribution and mimicked it.
So what Edison did was incorporate the new into the old, and thereby he presented a system to
the public they were already familiar with. And hence, the consumer assistance was greatly
minimized, consumer adoption was accelerated. And in 15 years, Edison dismantled the gas
lighting industry.
67
VHS versus Betamax - Slide 61
The slide contains an image of VHS and Betamax
Transcript
Let's talk about Betamax and VHS. They were both revolutionary products. Before they came
onto the marketplace, people had to go to the movie theater to watch movies. Or, if they wanted
to watch a program, they had to watch a program live. But Betamax and VHS gave the
opportunity for people to play prerecorded movies or programs. And therefore people could
watch the programs or movies whenever they wanted it. Technically, if you asked the observers,
people would say to you that Betamax was a superior recording format, because of its better
resolution, slightly superior sound, better construction, and a more stable image.
Betamax actually lost out to VHS in the long run. And the fundamental reason is that VHS was
better aligned with the content producers. So more content producers were actually creating
cassettes for the VHS standard. And because there was more content for VHS, more users
started using VHS. And the result is a virtuous cycle that enabled VHS to actually win out over
Betamax. The same scenario played out later on, about 30 years later, with Blu-ray and HD-DVD.
While HD-DVD camp sold more DVDs, Blu-ray actually attracted more content providers. And
therefore because they had more content, more users were attracted. Again, this virtuous cycle
enabled Blu-ray to win out the technology standards in the long run.
68
References - Slide 62
Hoikka 1 (2011), Beta Max [Online Image]. Retrieved from

https://commons.wikimeida.org/wiki/Valued_image_set:_Betamax_recorders
Josch13 | Pixabay. (2104). Untitled [Online Image]. Retrieved from

https://pixabay.com/static/uploads/photo/2014/06/25/06/33/light-bulb-376926_960_720.jpg
Jrdn88 (2011), Blure-Ray and DVD Discs [Online Image]. Retrieved from
http://www.regionfreedvd.net/discs.html
Treacy, M., & Wiersema, F. (1985). The discipline of Market Leaders [Image]. New York, NY:
Perseus Books.
Urireal (2012), HD DVD-R [Inline Image]. Retrieved from

https://ru.wikipedia.org/wiki/%D0%A4%D0%B0%D0%B9%D0%BB:Hddvd-r_side_12022.jpg
Transcript
69
Application Corner
The Case of DeWalt Tools

Transcript
I'm going to talk about the story of Black & Decker, creating a really innovative strategy involving
a total product. Defined as the core product, augmented product, and the ecosystem. For that, I
have to transport you back to the early 1990s, when Black & Decker was a very dominant player
in the power tools industry. Among all the segments, we are going to focus on two segments that
Black & Decker competed in. One is the consumer segment, the hobbyist segment, the do-it-
yourself segment. Where people use power tools like this cordless screwdrivers, etc. for projects
that they could do on their own. The other segment is the professional tradespeople segment,
comprised of carpenters, roofers, electricians, plumbers, people use these tools for living at other
job sites.
Black & Decker was a dominant player in the consumer segment. Whereas they were a marginal
player in the tradespeople segment. Now, among all the competitors, I want to focus on Makita,
which was a dominant competitor in the professional tradespeople segment but a marginal player
in the consumer segment. At the same time as this was happening, Black & Decker was also
involving a change in their corporate strategy. They were moving from the garage to the house.
They were also starting to make household appliances. Now, the question that people might ask
is: How did Black & Decker that was such a dominant player in the consumer segment be a
70
marginal player in the that tradespeople segment? And the answer actually lies in revisiting the
concepts of prospect theory and marketing myopia.
Think about it from a different perspective. While Black & Decker tools were competitive quality in
majority of the categories, there were some products, some tools, that were really not leadership
quality. If you are a professional tradesperson, and you have 20 tools in your toolkit, you have to
have all these tools work flawlessly. If you have even one or two that don't work, that's a pain
point, that's a problem. Because your risks are very high as a professional tradesperson,
because your livelihood is affected. The second and the larger point is one of psychological
value.
While Black & Decker was very, very product-focused, they were not needs-focused. What do I
mean by that? Think about it from a professional tradesperson's perspective. You are a
professional tradesperson, you walk into somebody's house, your client's house, and they also
have Black & Decker. Same color, same tool. And now you're a professional, using a tool as a
hobbyist. How do you differentiate yourself? How do you say that you as a professional
tradesperson add value? This is a huge issue. This is a symbolic need for a tradesperson to
differentiate their work. And more importantly, on a trade site, when you're looking at other
tradespeople around you, you need to say, I am a professional, I'm using a regular tool. And this
was a problem. So what did Black & Decker do? They did something very, very, very innovative.
So what Black & Decker did was they bid product pruning. And what I mean by that is they
ensured that all products that they were going to launch in the tradespeople segment were of the
highest quality. They changed the brand name to DeWalt. They actually changed the color to a
slightly more rugged color as opposed to the original colors of Black & Decker. But more
importantly, it said DeWalt serviced by Black & Decker. Because service was a great attribute of
Black & Decker at that point in time. But more importantly, in order to alleviate the pain points, to
reduce the losses in the minds of the tradespeople, they gave extensive technical support. They
gave loaner tools in case the tool failed in the job site, the professional tradesperson could get a
loaner tool. They had a very generous return policy. All of these from a core product perspective
and augmented product perspective were very important for achieving their returns. But last but
not the least, they were completely aligned with the retailers. Retailers loved the brand that was
high-quality, provided service. Which effectively means this alignment of the retailer or the
ecosystem made it into a complete total product, and the result is history.
In about three years, they went from being a marginal player to a dominant player in the
tradespeople segment. Which goes on to tell you one important lesson. Once you understand
and move away from the core product track and think about augmenting your core product with
accessories and enlisting the support of the ecosystem, you're going to be fine. You're going to
go ahead and do great things.
71
Reference - Slide 64
Hetrick, R. (1992, April 5) INVOKING A 'MYSTICAL' NAME Black & Decker hopes DeWalt tools'
reputation will conjure new business. The Baltimore Sun. Retrieved from
http://articles.baltimoresun.com/1992-04-05/business/1992096094_1_dewalt-tools-power-tools-
makita-tools
Transcript
72
Module 1 Wrap Up
Module 1 Summary
Module 1 Questions (Questions 1 to 6) - Slide 65
6. What is a customer value proposition? How would you draw a diagram of one? What
makes a winning one?
Transcript
Okay, you're through the videos from module one and you can see that all of them were about
fundamentals. What the innovation is, who's involved, who the players are, how customers
decide whether to use the innovation, and the basics of creating winning value propositions for
those customers.
73
Concept 1: Innovation - Slide 66
Transcript
So to finish, I'm going to summarize the core concepts and their implications and connect up with
the questions I challenge you to think about at the start as I do that. So the first concept
innovation itself, well, what is it? Raj said it was thinking differently and arriving at creative
solutions.
Executing Ideas - Slide 67
74
Transcript
But he emphasized executing ideas, executing ideas as the heart of innovation. The implication
there is for our course. We're mostly going to take ideas as given and try to figure out how to
create value through them whether through strategic choices or good implementation.
Recombinant Innovation - Slide 68
Transcript
Now that said, Raj did talk about the concept of recombinant innovation. The innovation is about
connecting existing knowledge and technology in new ways. That's often how it happens. Now
that is a fundamental and powerful insight that can reframe how you think about where ideas
come from. So, take a moment and consider, how do these points compare with your thinking at
the start of the module.
75
Concept 2: Innovation Framework - Slide 69
Transcript
The key implication here is that you need to account for multiple players and innovation,
suppliers, competitors, customers and beyond, and you need to have a strategy to develop the
full ecosystem around the innovation.
This slide shows the same information as Slide 32 Business Ecosystem
76
Transcript
This often involves collaboration, for instance, encouraging development of complimentary

products, of technical standards and so on as much as it involves competition. That's the
implication. Without a strategic attention to the ecosystem and collaboration, you can lose just as
surely as if you failed in your own strategic implementation of the idea.
Concept 3: Prospect Theory - Slide 71
Losses loom larger than gains
Transcript
The third concept is prospect theory. This helps us answer that question that I started with, how
do people make choices about adopting innovations? Now, what prospects theory says is that
people compare an innovation with what they already have that becomes their reference point
and so innovations become bundles of losses or pains and gains and the signature insight is that
losses loom larger than gains so that there's an implication. That's the best product does not
always win, rather the winner is the one that best minimizes the losses, the pains and thereby
satisfies customer needs.
77
Concept 4: Marketing Myopia - Slide 72
Transcript
Fourth concept is marketing myopia. What this does is it offers insight about that question of how
you should think about the benefits that an innovation provides. Marketing myopia says, beware.
If the answer you gave was about feature and products and not about consumer needs, you need
to watch that you don't get stuck in the here and now, rather than getting ready for what will be.
You need to be ready for game changing innovations that can redefine how needs are fulfilled
and to do that you have to define your business in terms of needs not products. You want to be
the railroad that thinks ahead and puts itself in the transportation business, not the railroad that is
stuck myopically thinking it is in the railroad business.
Concept 5: Customer Value Proposition - Slide 73
78
Transcript
Final concept is customer value proposition. This is a bedrock principle. Innovators need a
winning customer value proposition. The question was well, what is a customer value
proposition? We saw the answer has three parts.
Customer Value Proposition (Answers) - Slide 74
1. What is the value we provide? (Needs)

2. Who are we trying to reach? (Segment)
3. How are we reaching them? (Channels)
Transcript
Final concept is customer value proposition. This is a bedrock principle. Innovators need a
winning customer value proposition. The question was well, what is a customer value
proposition? We saw the answer has three parts. These are, what is the value we provide? What
need are you fulfilling? So the what. Who are we trying to reach? The customer segment, so the
who. How are we reaching them? The channel, the how.
79
Crafting a Customer Value Proposition (CVP) - Slide
75
This slide shows the same information as Slide 20 Crafting a Customer Value Proposition (CVP)
Transcript
The implication that emerge from this idea is that to win, you need to hit that sweet spot where
the needs of the segment that you reach aligns with the value discipline where your company is
superior to your competitors whether that discipline is operational excellence, customer intimacy
or product development. Okay then, that's a wrap. I'll see you at the start of the next module.
80

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Welcome from Professor Geoff Love!

Professor Geoff Love - Slide 1

Finding novel ways to compete

Strategic Innovation (2 of 4) - Slide 3

Strategic Innovation (3 of 4) - Slide 4

"Building and Sustaining Innovative Organizations"

"Managing Innovative Initiatives"

Welcome from Professor Raj Echambadi!

Professor Raj Echambadi - Slide 6

Bardeen, Shockley, and Brattain - Slide 7

London City in late 1800 - Slide 8

Professor Raj Echambadi - Slide 9

Different way of competing

Unique value creation

Superior performance outcomes

This Course Will Explore - Slide 14

Aligning the Ecosystem

Module Introductions - Slide 15

Module 1 Questions (Questions 1 and 2) - Slide 16

Customer Choices and Values - Slide 18

Module 1 Questions (Questions 3, 4, and 5) - Slide 19

Module 1 Questions (Question 6) - Slide 21

Lesson 1-1.1 A Concise Framework to Analyze

Professor Raj Echambadi - Slide 22

What is Innovation? - Slide 23

"Sometimes these ideas are new"

Innovation is about executing ideas to create unique value.

"Sometimes they are pre-existing"

A car comes off the end of the line every 10 seconds.

Sometimes it is about recombining or reconfiguring existing technologies in novel ways in order

Building-Block view of the World - Slide 24

Lesson 1-1.2 A Concise Framework to Analyze

Lesson 1-2.1 Prospect Theory: Minimizing Losses and

Professor Raj Echambadi - Slide 33

1. The Reference Point

Let me graphically illustrate prospect theory for you.

Reference Point - Slide 35

Illustrating Prospect Theory (Point 2) - Slide 36

Illustrating Prospect Theory (Point 3) - Slide 38

3. Losses Loom Larger than Gains

Lesson 1-3.1 Marketing Myopia: Focus on "Needs" for

Professor Raj Echambadi - Slide 41

WHAT BUSINESS ARE YOU IN?

Port of St. Louis, MO - Slide 43

Why is a business definition important? Business definition is important because building

No instruction provided during this slide.

Lesson 1-4.1 Developing a Value Proposition - Part 1

The Basic Building Block of Strategic Innovation is

Value = Quality obtained / Price paid

A Company Endures in the Long-Term - Slide 51

Creation of Value - Slide 53

Professor Raj Echambadi - Slide 54

Therefore, by following a low-cost leadership strategy, by focusing on the operational excellence

Lesson 1-4.2 Developing a Value Proposition - Part 2

Southwest Airlines - Slide 55

On the contrary, Southwest Airlines focused on low-cost leadership by focusing on less

Southwest Airline vs Full Service Airline - Slide 56

Strategy: Low-Cost Leadership

Full Service Airline

Strategy: Value Differentiation