Session 6 - Innovation and Entrepreneurship

Competition Driven by Innovation

• Invention: discovery of new ideas/products

  • wright bothers-airplane flight

• Innovation: the commercialization of invention

  • Boeing and Airbus - selling the airplanes

• Schumpeter’s “gale of creative destruction”

  • Batman and Joker

  • in order for something new to come about, we have to destroy the old

Strategy Entrepreneurship

• entrepreneurship is the process by which change agents undertake economic risk to innovate- to create new products, processes, and sometimes new organizations

  • the act of taking economic risks to innovate, leading to new products, processes, or organizations

  • agents who introduce change

• Strategic Entrepreneurship uses strategic mngt principles to innovate for the purpose of achieving competitive advantage, while social entrepreneurship focuses on social goals, assessing performance thru a triple-bottom line approach

  • competitive advantage

• innovation involves discovering and developing new knowledge thru a 4 step process:

• 1. Idea

• 2. Invention

• 3. Commercialization (Innovation)

• 4. Imitation

• It starts with a creative idea, which leads to an invention- the transformation of the idea into a new product or process

• commercialization is the process of bringing the invention to market, and if it is successful, it will eventually be imitated by competitors

The Innovation Process- Innovation

• first mover advantage: setting the stage in the marketplace

• competitive benefits that accrue to the successful innovator

  • experience and learning curve effects

  • locking in key suppliers

  • building switching costs

Innovations can lead to New Industries

• IT and Logistics:

  • created overnight express deliveries (Fed Ex)

  • Created big-box retailing (Walmart)

• The Internet:

  • Online Retailing (Amazon and eBay)

  • Revolutionized advertising (Google, Facebook)

• Nanotechnology:

  • Medical diagnostics and surgery

  • Lighter and stronger airline components

Product/Industry Life Cycle Stages (Strategic View)

• Introduction: Early Adopters

• Growth: Early Majority

• Shakeout (not a fully developed phase)

• Maturity: Late Majority

• Decline: Laggards

supply and demand changes as industries age

each stage req different set of core competencies

Product/Industry Life Cycle Stages: Introduction Stage

• Early adopters will pay a premium

• only a few innovators in the market- differentiated and high barriers

• Strategy objective- market acceptance and seeds for growth

  • network effects (very helpful

    • positive effects one user has for others users

• What are you selling?

• Awareness is crucial for adoption. companies may use price skimming pricing if competition is limited or penetration pricing in a competitive market. Initial sales are low, and slotting fees to retailers are common

• At the start of the intro stage, people (other than those that work in the industry) are likely to be completely unaware that a product even exists; building awareness is a key to adoption of the product

• companies invest in ads to make consumers aware of their offerings and the benefits of becoming a customer

• for many product, the early adopters are ppl who value newness and innovation

• if a comp faces only limited competition, it might use a skimming approach to pricing bc people who want to be among the first to have the product will generally be willing to pay a higher price (recall that “skimming” means that the company will set initial prices high, and only those consumers who feel especially excited about the product will buy it).

  • The company will then lower prices to appeal to the next layer of consumers – those who wanted the product but were unwilling to pay the high introductory price. The company will continue to gradually lower prices, in effect taking off layer after layer of potential customers until the product is priced low enough to be afforded by the mass market.

• If the company has or expects a lot of competition, though, it may decide to use penetration pricing and capture a lot of market share, which may discourage some potential competitors from entering the market at all. The higher the price levels in a market, the more likely it is that new competitors will want to enter.

• During the intro stage, the industry as whole will sell only a relatively small quantity of the product, so competitors will distribute the product through just a few channels.

  • Most retailers charge what is called a slotting fee – a payment the manufacturer makes to persuade the retailer to stock the item. If the product fails, they do not offer refunds on these charges, so producers will want to be confident that a product will draw enough customers before they pay these fees and so may limit its initial distribution. Because sales at this stage are low while advertising and other costs are high, all competitors tend to lose money during this stage.

• As the competitors in an industry focus on building sales, successful products will enter a stage of rapid customer adoption (Growth stage)

  • Depending on how innovative and attractive a product is, the industry might reach the growth stage relatively quickly – or it could take many months or even longer for that point to arrive, if it happens at all.

  • In order for industry sales to increase rapidly, advertising costs will generally be very high during the growth stage.

  • If competition appears, companies may respond by lowering prices to retain their market shares. Competitors will also be looking for channels in which to distribute their products. Where possible, they will try to establish exclusive arrangements with distributors, at least for a period of time, so that their product may be the only one available in a product category at a particular retail outlet. The buyers in this stage are known as the "Early Adopters."

Product/Industry Life Cycle Stages: Growth Stage

• Early maj buyers inc growth rapidly; dominant design is set

• core competencies move from manufacturing and marketing

• characterized by rapid customer adoption and high advertising costs

• Product and Process Innovation and the Emergence of an Industry Standard

  • Product innovation: a new recombined knowledge in new products; a new way of solving a problem a high number of consumers have

  • Process Innovation: new ways to produce existing products or deliver existing services

    • ai, internet, six sigma…

    • after an industry standard is established, process innovations become more important (look at video for graphic)

• companies may lower prices in response to competition and seek exclusive distribution arrangements

• During the growth stage, it is also important for companies to invest in making improvements to their products so as to maintain any advantage they may have established over their competitors.

• Since sales are rising rapidly during the growth stage, many products begin to turn a profit here, even though they are still investing heavily in advertising, establishing distribution, and refining the product itself.

• The buyers in this stage are known as the "Early Majority."

Shakeout Phase

• weaker firms are forced out

• firms begin to compete more intensely

• the industry consolidates

• only the strongest survive

• greatest competitive weapon: price; cost leadership position

Product/Industry Life Cycle Stages: Maturity Stage

• Late majority buyers and more limited market growth

• few large firms remain, increased competitive rivalry

• cost leadership firms tend to drive industry; weaker firms will exit or be acquired

• OLIGOPOLY is dominant industry structure in this stage

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• Sales growth sloes and eventually plateaus

• strategies focus on cost leadership or differentiation

• industry consolidation occurs, with larger companies acquiring smaller ones

• If a product survives the growth stage, it will probably remain in the maturity stage for a long time.

• Sales still grow in the initial part of this stage, though at a decreasing rate. Later in the maturity stage, sales will plateau and eventually begin to move in a slightly downward direction.

• By this stage, if not sooner, competitors will have settled on a strategy intended to deliver them a sustainable competitive advantage – either by being the cost leader of a product, or by successfully differentiating their product from the competition. S

• ince at least one competitor will generally move towards a low-cost strategy, after initially peaking, price levels begin to decline during the maturity stage. Price wars may even occur, but profits still tend to be strong because sales volume remains high.

• As the product becomes outdated, the company may make changes in keeping with changing consumer preferences, but usually not as rapidly as in the earlier stages of the life of a product.

• Branding becomes a key aspect of success in the maturity stage, particularly for those companies seeking to differentiate their products as their source of competitive advantage.

• industry consolidation is high; in other words, larger competitors will buy up smaller competitors in order to find synergies and build share and scale economies. Some models of the product life cycle reflect a stage called “shakeout”, which occurs towards the end of the growth and the beginning of the maturity stages. The term shakeout reflects this trend towards industry consolidation. Some competitors survive and others get “shaken out,” either by going out of business or by being acquired by a stronger competitor. 

• The buyers in this stage are known as the "Late Majority."

Product/Industry Life Cycle Stages: Decline Stage

• laggards are buyers and market size shrinks

• 4 Strategic Options

  • 1. Exit- get out of the industry;

  • 2. Harvest- stay with limited investments

  • 3. Maintain- stay and continue marketing

  • 4. Consolidate- buy rivals, near monopoly

• Sales significantly drop due to various factors

• prices may increase due to reduced competition

• companies may innovate to restart growth or limit advertising dollars

• At some point, virtually every product will reach the decline stage, the point at which sales drop significantly. New innovations, changes in consumer tastes, regulations, and other forces from the macro-level business environment can change the outlook for a product almost overnight.

• Products with a very short life cycle are known as “fads”. They may move through the entire product life cycle in a matter of months. Many products, particularly those which have experienced a long period in maturity may stay in the decline phase for years.

  
  

• Ironically, price levels during the decline stage may actually increase, which occurs because the number of competitors is few – in fact, there may be only one remaining, giving that company great pricing power over the few consumers who still want or need the product.

• New product development is usually very limited, unless a company believes that innovation can restart growth in the category.

• advertising is typically limited or non-existent – those who need the product are likely to know about it already. So while it may seem counter-intuitive, many companies make a lot of money while they are riding the downward shape of the product life cycle curve during the decline stage.

• As a strategist, you really have four strategic options to choose from if you find yourself in this industry lifecycle stage

• The buyers in this stage are known as the "Laggards."

Types of Innovations

• Architectural Innovation: Reconfigures known components in novel ways to create new products for new markets.

• Radical Innovation: Replaces existing ideas, products, services, or processes, potentially creating new markets and leading to industry changes.

• Incremental Innovation: Small improvements to existing technology that can have significant market impacts, like the evolution of smartphones.

• Disruptive Innovation: Uses new technologies to challenge existing markets from the bottom up, such as digital photography disrupting film photography.

Types of Innovations: Innovation Matrix (Market vs. Technology)

• Architectural Quadrant (Market: New | Technology: Existing)

• Radical Quadrant (Market: New | Technology: New)

• Incremental Quadrant (Market: Existing | Technology: Existing)

• Disruptive Quadrant (Market: Existing | Technology: New)

Radical and Incremental Innovation

• Radical innovation tends to replace existing ideas, products, services, or processes.

  • Novel methods or materials serving new markets; Targets new markets using new tech

  • first start her then move to incremental

  • They are innovations that are very different or even revolutionary and they replace existing ideas, products, services, or processes and perhaps lead to markets that were previously nonexistent.

  • can lead to massive changes in an industry and to what is referred to as creative destruction in the marketplace.

  • draws on novel methods or materials and, is derived either from an entirely different knowledge base or from the recombination of the existing knowledge base with a new stream of knowledge (new market / new technology).
    
    

• Incremental innovations involve smaller improvements in ideas, products, services, and processes.

  • Steady improvement of a p/s; Target’s existing market using existing tech

  • They are like adding unique features to a product or service.

  • But even incremental improvements can have a radical effect on the marketplace.

    • For example, consider the incremental improvements in wireless phones that eventually lead to the development of Apple’s iPhone and to the numerous smartphone offerings (existing market / existing technology). 

Why do some firms focus on incremental innovation?

• Economic Incentives: Established comp are focused on defending their position

• Organization Inertia: established comps rely on formalized business processes and structures

• Innovation Ecosystem: Established comps are part of an ecosystem: suppliers, buyers, complementors

Architectural and Disruptive Innovation

• Architectural innovation is an embodied new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets (new market / existing technology).

  • Leverages existing tech into new markets

  • alters the architecture of a product

  • a new product, with known components, used in a novel way

•  A disruptive innovation is an innovation that leverages new technologies to attack existing markets from the bottom up (existing market / new technology)

  • Leverages a new tech in existing markets

  • new product/process meets existing customer needs