C HAPTER 10 Innovative Strategies and Business Models

CHAPTER 10

Innovative Strategies and Business Models

• Why innovate?• Problem with strategy: Developed for

existing conditions, not necessarily future oriented

• Conditions change – “creative destruction” of markets noted by Joseph Schumpeeer

• Hypercompetition (p. 209) – fast paced change

• Transient advantage replaces competitive advantage

• Innovation offers transient advantage

Nov

el

Definition of Innovation

Useful

Implemented

Implemented

DEFINITION OF INNOVATION

TYPES OF INNOVATION

Incremental Innovations1

Radical (Disruptive) Innovations2

Incremental InnovationsINCREMENTAL INNOVATIONS

• Builds on existing knowledge base

• Better offerings that generate better profits from current customers

• New features

• Important for success but they don’t create growth because they are replacements of existing products

LED TVs 3D TVs

INCREMENTAL INNOVATIONS

TYPES OF INNOVATION

Incremental Innovations1

Radical (Disruptive) Innovations2

CATEGORIES OF INNOVATIVE STRATEGIES BASED ON RADICAL INNOVATIONS

• Reconfigure the Value/Supply Chain to Eliminate Activities

• Low End Disruptive Innovations• High End Disruptive Innovations• Reconfigure the Value/Supply Chain to Allow

for Mass Customization• Blue Ocean Strategy—Creating New Markets

by Targeting Non-Consumers• Free Business Models

BUSINESS MODEL CANVASKey Partners

Key Activities

Value Propositions

CustomerRelationships

CustomerSegments

Key Resources

Channels

Cost Structure Revenue Streams

9

CATEGORIES OF DISRUPTIVE INNOVATION

• Reconfigure the Value/Supply Chain to Eliminate Activities– Amazon vs. Barnes & Noble; Netflix vs. Blockbuster,

1800 Mattress, Charles Schwab (eliminate stores, labor, and inventory).

– Southwest vs. Hub & Spoke carriers (eliminate meals, seat reservations, baggage transfer, etc.)

Process innovations that typically create an efficient new business model; allow companies to create, deliver, sell, or service a product more efficiently.

RECONFIGURE VALUE/SUPPLY CHAIN ACTIVITIES

RECONFIGURE VALUE/SUPPLY CHAIN ACTIVITIES

Barnes & Noble

v.

Amazon.com

DIFFERENT VALUE/SUPPLY CHAINS

Authors Publishers

Distributor

Store Customer

Warehouse

Authors Publishers Warehouse Store Customer

Barnes & Noble

Amazon.com

Film Studios

Film Distributors

Blockbuster’ Warehouses

Blockbuster

StoresCustomer

Film Studios

Film Distributors Netflix

Customer

COMPARING VALUE/SUPPLY CHAINS


Low End Disruption: Low cost business model based on new technology that improves

– Nucor vs. U.S. Steel– Skype vs. AT&T – Honda vs. Harley Davidson or Mercedes Benz

LOW-END DISRUPTIVE INNOVATIONS

• Target customers whose needs are over-served in the mainstream market– Price is far more important than features.

• Product performance is “good enough” on basic features to attract low-end customers of the mainstream market

• Entrant– uses a new low cost business model– performs different activities which allows

the firm to earn profits even at deeply discounted prices

DISRUPTIVE TECHNOLOGIES ARE A DRIVER OF LEADERSHIP FAILURE AND THE SOURCE OF

NEW GROWTH OPPORTUNITIES

Why?• Leader overlooks the disruptive threat

• Leader dismisses new technology

• Leader committed to existed technology

Per

form

ance

Time

Performance that customers

can utilize or absorb

Pace of

Technological

Progress

Sustaining innovations

Disruptive technologies

Incumbents nearly always win

Entrants nearly always win

LEADERS FAIL AND NEW GROWTH

7% margins

4%

Quality of m

inimill-produced steel

12% margins

8%

18% margins

22%

% of tons

Ste

el

Qu

alit

y

19801975 1985 1990

Rebar

Angle iron; bars & rods

Structural Beams

Sheet steel 25–30% margins

55%

NUCOR MOVES UP-MARKET TO BEAT COMPETITORS

PERSONAL COMPUTERS DISRUPT MINI-COMPUTERS

(ENTIRE PRODUCT CATEGORIES CAN BE DISRUPTED)

Per

form

ance

Time

Disruptive technology: personal computers

60% margins on$500,000 computer

45% margins on $250,000 computer

20% margins on $2,000 computer

Sustaining innovations

to minicomputers

MFG. COMPANIES CAN BE DISRUPTED

(E.G., IN SPECIFIC PRODUCTS LIKE MICROWAVES.)

Per

form

ance

Time

General Electric

Panasonic

Samsung LG

Galanz Group

Performance that customers

can utilize or absorb


High End Disruption: Leapfrog technology with premium price comes from top-down.

– Apple iPod vs. Sony Discman– Flash drives vs. floppy disks– PCs vs. typewriters– Cell phones vs. landlines

HIGH END DISRUPTION EXAMPLES

IndustryProblem New Solution Disruptor Disrupted Type of

Innovation

Coffee/ Donut shops

How to get quality morning coffee conveniently?

Source premium coffee; ubiquitous availability; drive-up service

Starbucks Dunkin’ DonutsMa and Pa Coffee shops

Radical (Architectural)

Music distribution

How to make music portable?

High capacity, small-size storage device; MP3 file structure and software

Apple (iPod) SonyPanasonic


Package shipping

How to get packages to their destination more quickly and at a reasonable cost?

Create transportation infrastructure; guarantee overnight delivery

Fedex US Postal Service


Telephony How to make phone calls from any location?

Use towers and satellites to send signals directly to mobile device using radio spectrum.

Phones:Apple,Samsung, etc.Service: AT&T, Sprint

AT&T landline; Baby Bells

Radical (Technological)

Time

Sustaining

Innovations

Low-end Disruptive

Innovations

High-end Disruptive

InnovationsDiscontinuity in demand market

following emergence of high-end disruption

Per

form

ance

*Adapted from Christensen and Raynor, The Innovator’s Solution, pg. 33

Range of performance that customers demand

THE HIGH END DISRUPTIVE INNOVATION MODEL*

WHY HIGH END DISRUPTIONS ARE DIFFICULT FOR

INCUMBENTS TO IMITATERadical (Architectural) Innovation• A product’s architecture

• Reflects the way in which a set of components are integrated into a “system” (product).

• Change the architecture of a product (the way they are linked together or adding new components) without fundamentally changing the technology underlying its components (e.g., iPod, Starbucks, FedEx).

Radical (Technological) Innovation• Based on a different set of engineering and scientific principles and

technologies• Compared to established products, a radical technological innovation

• establishes a new dominant design for the product and• a new set of core technologies and design concepts embodied in

components that are linked together in a new product architecture (e.g., Mobile phones, PCs, Electronic Fuel Injection).


Reconfigure the Value/Supply Chain to allow for “Mass Customization”—the mass production of customized goods.

• Build-A-Bear (mass produce components of stuffed animals and customize them at stores)

• Dell Direct (customized computers) • Timbuk2 (customize/design your own handbag)• Nike ID (customize/design your own shoe.• My Twinn (customize your own doll, etc.)

CONFLICTS IN MASS CUSTOMIZATION

Conflicts in Name:Mass – Aggregation

Customization – one-of-a-kind

Conflicts in Operability:Customers’ demands are diverse and irregular which calls for leads to high component variety, large numbers of suppliers, and high administrative complexity

MassProduction

CraftProduction

MassCustomization

Economies of Scale Hand-crafted

Small, on demand factories

Optimized set-up,

manufacturing lines

APPLICATION OF MASS CUSTOMIZATION

• Nike ID• Dell• My Twinn


Blue Ocean Strategy: create new demand in an uncontested market space.

– Cirque de Soleil (combination of circus, acrobatic troupe, music, Broadway).

– Federal express (met uncontested demand for secure overnight delivery).

– ChotuKool ($49 refrigerator that runs on a battery and uses solid state thermoelectric cooling)

80% of Indian households have no refrigerator

Refrigerators• Expensive• Large• Requires

electricity• Difficult to

service

ChotuKool• Affordable• Small• Requires no

electricity• Easy to

service

CHOTUKOOL: TARGETING A BLUE OCEAN


Free Business Models– Free Upsell (Freemium): Zynga; Skype

– Free Cross Sell: Mint.com; Ryanair,

– Free 3rd Party Pay: Google, Craigslist

– Free Bundled free: Cell phone service; printers, financial services (e.g. trades), etc.

COMPETING WITH FREE1. Free Up-Sell Strategy (“Freemium”):

Offer a free version to gain attention and widespread use; then offer a premium product with advanced features for customers willing to pay.

Skype, Flickr, Zynga

Requirements: A free product that appeals to a very large user base so that even

a low conversion rate of free users to paying customers will generate substantial revenues

OR

A high percentage of users willing to pay for the premium version

COMPETING WITH FREE

2. Free Cross-Sell Strategy: Offer a free version to gain attention and widespread use; then offer other products for which customers are willing to pay.

Ryanair, Galderma, mint

Requirements: A broad product line (preferably products that complement

the free product)

OR The ability through partnerships to sell a broad line of

products to users of the free product

COMPETING WITH FREE3. Free Third Party Pay (Advertising) Strategy:

Make the product/service free to generate a community (network externality) for which you get paid by a third party company who desires access to that community.

Google, Hulu, Craigslist, Blyk, Ryanair

Requirements: A free offering that attracts either many users who can be

segmented for advertisers or a targeted group that comprises a customer segment

AND Third parties willing to pay to reach these customers

Google Yahoo Facebook Zynga Pandora Skype

15.96

11.18

3.5 3.09

1.8 1.6 Re

ve

nu

es

Pe

r U

niq

ue

Us

er

Pe

r Y

ea

r

Note: Data on Google and Yahoo are from 2005; other data are from 2010.

CONVERTING PRODUCT USERS INTO REVENUES

COMPETING WITH FREE4. Free Bundling Strategy (Direct cross

subsidy): Bundle the free product with non-free products and derive revenues from non-free products; can’t get the one without the other.

Requirements: Products or services that can be bundled with the free

offering

OR A free product that needs regular maintenance or

complementary products (e.g., free printer but costly ink).

Business ModelThreat (change business model)

DelayedThreat(co-exist or delay launch of free product)

ImmediateThreat (launch free product immediately)

Minor Threat (monitor situation)

Growth Rate(of number of users of the free offering)

Defection Rate (of paying customers to the free offering)

High(5% per year or

more)

Low (less than

5% per year)

Low(less than 40% per year)

High (more than 40% per year)

HOW BIG A THREAT IS FREE COMPETITION?

ORIGINS OF INNOVATIONS (P. 207)

Intersection of Diverse Disciplines

Questioning

Observing

Networking

Experimenting

Documents

C HAPTER 10 Innovative Strategies and Business Models