week 10: Strategic Management - Innovation and Platform Strategies Notes

Strategies in Action: Competition Driven by Innovation and Platform Business Strategies

Course Information

• Instructor: DR. A. MERVE URFA YILMAZ
• Contact:
  • Email: aysemerveurfa@gmail.com, murfa@yildiz.edu.tr
  • Social Media: isletme_ytu, yildizisletme
  • Website: https://isl.yildiz.edu.tr

Outline

1. Netflix Case Study
2. Competition Driven by Innovation
3. The Innovation Process
4. Innovation and the Industry Lifecycle - Crossing the Chasm
5. Types of Innovation
6. Platform Businesses and Strategies

Competition Driven by Innovation

• Schumpeter's view: "Competition is a process driven by the perennial gale of creative destruction."
• TV Industry Disruption Waves:
  • Wave 1 (1980s–1990s): Cable disrupts Broadcast TV
  • Wave 2 (2000s–Now): Streaming disrupts Cable
  • Question: What will be the third wave in the TV industry?

Netflix's Continued Innovation

• New business model.
• Utilized data and algorithms for video rental and streaming improvements.
• Employed AI to refine recommendations over time.
• First-mover advantage.
• Long tail business model: Achieving significant revenue by selling small quantities of numerous niche products.

The Innovation Process

• Step 1 - Idea: Innovation begins with an idea, often from basic research.
• Step 2 - Invention: Transforming an idea into a new product/process or modifying existing ones.
  • Patent: Exclusive rights to commercialize a technology for a set period in exchange for public disclosure.
• Step 3 - Innovation: Commercializing a new or modified product/process.
  • Requires novelty, usefulness, and successful implementation for competitive advantage.
• Step 4 - Imitation: Competitors copying successful innovations.
  • Increases competition and reduces profits for the original innovator.

Innovation and the Industry Lifecycle

• Industry life cycle: Stages of industry evolution (introduction, growth, shakeout, maturity, and decline).

Introduction Stage

• Focus: R&D, creating a new product category, testing, and small-scale production which results in high costs.
• Market: Small with slow growth; high barriers to entry.
• Disadvantage: First mover disadvantage.
• Goal: Market acceptance and preparation for growth.
• Helpful Strategy: Creating network effects.
• Example: App ecosystem for iPhones:
  • More apps $\rightarrow$ better user experience $\rightarrow$ more iPhone users $\rightarrow$ more developers $\rightarrow$ more apps, etc.

Growth Stage

• Market expansion accelerates.
• Demand increases rapidly after initial market acceptance.
• Common standard usually forms.
• Even weaker companies can grow due to high demand.
• Costs decrease.
• Complementary products & services emerge.
• Types of Innovation:
  • Product innovation: New or recombined knowledge in new products.
  • Process innovation: New methods to produce or deliver existing products/services.

Shakeout Stage

• Growth slows; market expansion plateaus.
• Companies compete for market share instead of pursuing new customers.
• Increased competition forces weaker firms to exit or be acquired.
• Process innovation gains importance (cost reduction).
• Product innovation declines in importance.

Maturity Stage

• Market evolves into an oligopoly (few large players).
• Most customers already possess the product.
• Demand arises mainly from replacements or repeat purchases.
• Market growth is minimal or negative.
• Process innovation is paramount (cost-cutting).
• Product innovation is minimal (minor improvements).
• Strong competitive intensity within a stagnant market.

Decline Stage

• External factors (politics, economy, technology) can trigger decline.
• Market demand declines rapidly.
• Both product and process innovation cease.
• Shrinking market leads to low profits or losses.
• Excess capacity + fewer customers = lower prices.
• High exit barriers intensify competition.
• Strategic options: exit, harvest, maintain, or consolidate.

Crossing the Chasm

• Crossing-the-chasm framework: Conceptual model illustrating the customer groups dominating each stage of the industry life cycle.

Customer Groups

• Technology Enthusiasts: Introductory stage; engineering mindset, proactive in seeking new tech.
• Early Adopters: Growth stage; eager to adopt new technology for professional and personal benefits.
• Early Majority: Shakeout stage; pragmatists focused on the practical utility of new technology.
• Late Majority: Maturity stage; less confident, wait for established standards and reduced uncertainty.
• Laggards: Declining stage; adopt only when necessary, generally uninterested in new technology.

Failed Innovations’ Second Wind

• Life cycle (introduction $\rightarrow$ growth $\rightarrow$ shakeout $\rightarrow$ maturity $\rightarrow$ decline) is a general guide.
• Industries may not strictly adhere to it.
• Innovation can occur at any stage, potentially restarting the cycle.
• Initial failures can find later success with better timing or applications.

Types of Innovation

• Combining Markets and Technologies:
  • Incremental Innovation: Existing Markets, Existing Technologies
  • Radical Innovation: New Markets, New Technologies
  • Architectural Innovation: New Markets, Existing Technologies
  • Disruptive Innovation: Existing Markets, New Technologies

Incremental vs Radical Innovation

• Successful companies typically start with radical innovation, then extend their lead with incremental improvements.
• Big Firms: Focus on Incremental Innovation.
  • Fits existing systems, maintains power balance, avoids disruption.
  • Tied to existing operations, so they play it safe.
• Startups: Focus on Radical Innovation.
  • Move fast, experiment, launch radical innovations easily.
  • Start fresh and change the game.

Architectural vs Disruptive Innovation

Strategic Responses to Disruptive Innovation

1. Keep Innovating (Stay a Moving Target): Continuous innovation makes it harder for competitors to catch up.
2. Protect the Low-End Market: Don't ignore low-margin products; startups thrive there.
3. Disrupt Yourself (Reverse Innovation): Develop low-cost products for emerging markets and then introduce them to developed markets.

Pipeline vs. Platform Businesses

• Pipeline businesses create and sell their own products.
• Platform businesses connect users and don't own core assets.

The Platform Ecosystem

• Players:
  • Platform Owner: Controls IP and participation.
  • Producers: Create platform offerings.
  • Consumers: Use platform offerings.
  • Providers: Interfaces for the platform
• Value and data exchange between players.

Platform Ecosystem Features

Network Effects in Platform Ecosystems

• Value increases with more users.
• More users = more value for everyone on the platform.
• Netflix example:
  • More users $\rightarrow$ more content $\rightarrow$ better service $\rightarrow$ more new users.
  • Virtuous cycle: More users $\rightarrow$ More content $\rightarrow$ More value $\rightarrow$ Even more users.

References

• Rothaermel, F. T. (2024). Strategic management. McGraw-Hill.
• David, F. R. (2023). Strategic management concepts and cases. Prentice hall.
• Peng, M. W. (2022). Global strategy. Cengage learning.
• Ülgen, H., Mirze, K. (2016). İşletmelerde Stratejik Yönetim. İstanbul: Beta.