Strategy, Value Innovation,and the Knowledge Economy

Garrett Vogenbeck

Mariah Van Winkle

Amanda Morneault

Matt Smith

Cody Mack

Value Innovation

Strategy and Competitive Advantage

• “ For the past twenty years, competition has occupied the center of strategic thinking”

• Focus on building advantages over the competition

Imitation vs. Innovation

• “When asked to build competitive advantage, managers typically assess what competitors do and strive to do it better”

• Many firms regress towards the competition by only achieving incremental improvement.

Unintended Consequences of Strategy Driven by Competition

• Companies take imitative approaches rather than innovating.

• Companies act reactively. This causes energy and resources to be expended on daily competition rather than creating growth.

• Emerging mass markets and shifts in demand become unclear to the company.

Example: Compaq vs. IBM

• In the early 1980’s, Compaq came out with the first IBM-compatible PC, and won the mass of PC buyers

VS.

Compaq Portable, 1983 IBM PC 5150, 1981

Putting the Blinders On

• Both Compaq and IBM ended up suffering with the emergence of the low-end PC market.

• Low price and user-friendliness were the true keys to success.

At $669, the IBM PC Jr. was so overpriced that it wasn’t competitive in the market.

IBM’s focus on feature enhancement caused themselves to lose focus on changing customer demands.

The Roots of Profitable Growth

• Research has shown a pattern of strategies that separate the less successful companies from the highly successful ones.

• Rather than continuously building an advantage over competitors, the highly successful companies do not make the competition the reference point for their strategies.

Value Innovation

• The highly successful companies strived to make competition irrelevant by providing buyers with a quantum leap in value.

• This type of strategy is called value innovation.

More on Value Innovators

• Whereas others focus on restraints of the external environment, value innovators find opportunities despite poor industry conditions.

• The emphasis on value places the buyer, and not the competition at the center of strategic thinking.

A Recent Study of New Businesses

• 86% of new businesses were ‘me too’ or value improvement ventures, while 14% were value innovators.

• The value innovators generated 61% of the total profits, the 39% by the others.

• Value innovation fuels growth and profits for a company.

Shifting the Basis of Strategy

A Neoclassical Economic View of Competition• Firms and Innovations are seen as

‘black boxes’. • The actions of a firm are

determined by market conditions.• In this situation, innovation is not

endogenous.• Cost and product performance are

seen as trade-offs.

A Neoclassical Economic View of Competition

A Neoclassical Economic View of Competition

MARKET

A Neoclassical Economic View of Competition

MARKET

• In many industries, supply exceeds demand.

• Competition-based strategy in such a situation isn’t very powerful.

• Let’s look at two very different strategies: ‘second-best’ and ‘first-best’ strategies.

• A ‘second-best’ strategy consists of competing for a share of contracting markets• Zero-sum, marginal strategy• Cutthroat• Does not create wealth

• A ‘first-best’ strategy stimulates the demand side of the economy.• Non zero-sum strategy• Expands existing markets• Creates new markets• Generates new wealth

Make the Competition Irrelevant!

• The strategic focus of value innovators wasn’t to outcompete their competitors…

• It was to make the competition irrelevant through the creation of new and superior value

Value AND Innovation

Value AND Innovation

• Value without innovation– Focused on improving buyer’s net

benefit on an incremental scale

• Innovation without value– Can be too strategic, wild, tech-

driven, and/or futuristic

Value AND Innovation

• In order to value innovate, companies should ask two questions:1. “Are we offering the customers radically superior

value?”2. “Is our price level accessible to the mass of

buyers in our target market?”

Value AND Innovation• Companies tend to focus on a

solution to a problem• Value Innovation “focuses on

redefining the problem” in an industry– Shifts criteria to what matters to the

customer– Creates new market space

• Callaway Golf

Value AND Innovation• Companies tend to focus on a solution

to a problem• Value Innovation “focuses on

redefining the problem” in an industry– Shifts criteria to what matters to the

customer– Creates new market space

• Callaway Golf– Hitting the ball farther vs. hitting the ball more

easily

Value AND Innovation• Consistent with “creative

destruction”

Value AND Innovation• Consistent with “creative

destruction”– Creating new and superior value

makes existing things and ways of doing things irrelevant

IKEA – Furniture

Starbucks – Coffee

Wal-mart – Discount Retail

Borders and Barnes & Noble – Bookstores

Enron – Gas & Utilities

Fortune named:• “America’s Most Innovation Company”

http://money.cnn.com/magazines/fortune/fortune_archive/1997/06/23/228066/index.htm

Value Innovations• Created first national spot market for gas

Reduced risk and volatility related to gas prices• Transitioned from production to knowledge

economy Employed traders, analysts and scientists

In addition to the needed pipeline personnel

Potential for Increasing Returns• Large Initial Cost

Microsoft – Windows 95 OS Enron – Risk management tools Wal-Mart – Logistical Software and

System• But then low marginal costs are

achieved Potential for Free Riding

• Rival vs. Non-Rival Good• Excludability

• Rival Good– Any resource that when employed by one

company, cannot be used by another• Non-Rival Good

– A resource that can be implemented by multiple companies• Virgin Atlantic Airways – “Upper Class” concept

– Competitive Imitation– Reverse Engineering

» Hybrids

Can a company prevent others from imitating or using their resource, product or idea?• Limiting access to the resource

Intel – manufacturing facilities Starbucks – coffee beans

• Patent and Legal Protection Use if available or applicable

Neither can truly protect intangible real value

Strategic Pricing for demand creation• High Volume• Brand Reputation

Target costing for profit creation• Increases profit margins• Increases barriers to

entry of potential competitors

Consumer Surplus at P1 Q1

Profit Center at P1 Q1

Q1 Q2

Profit Center at P2 Q2

Consumer Surplus at P2 Q2

Q1 Q2

Shifting Strategy Focus

Shifting Strategy Focus

• The underlying foundation of business is changing due to:

– New knowledge– Idea creation– Global diffusion

Shifting Strategy Focus

Shifting Strategy Focus

Conventional Focus: Focus on the Competition- striving to match

and/or beat the competitionReactive, incremental, and imitative movesWhile competition makes innovation indispensable it also makes innovation difficult to attain

Leverage and Extend Current CapabilitiesLimits opportunity horizonsResistance to change even if market is evolving away from your company

Retain and Extend Existing CustomersHesitant to resist status quo in fear of losing or dissatisfying existing customers

Shifting Strategy Focus

Value Innovation Focus:Strategies must shift to thrive in a rapidly

changing knowledge economy Think beyond company boundaries Goal is to create radically new and

superior value Focus on capturing the mass of buyers Continue to monitor existing customers

but also follow noncustomers closely- they provide insights into trends and changes

Form networks with partners

Making Value Innovation Happen

Making Value Innovation Happen• Three Key Changes

• Communication

• Organizational Change - Structure

• Organizational Change - Culture

Communication ChangeCEO Top management

Top Down Strategy – Initially

Emphasize Importance of Value Innovation

Refocus current strategy Eliminate competition based thinking

Strategic Retreats & Corporate Communication

5 Key Questions Reframe Strategic thinking

Challenge Current Industry ConditionsOffering an Advance in Buyer ValueConsider Starting NewSearch for Value CommoditiesTotal Customer Solution

Organizational Change - StructureSmall Autonomous Teams

Focus on business / product vs. function, region, or channel type

Importance of Freedom Creativity, Ownership, Experience

Teams with Diverse BackgroundsCreativity

Structure yields potential Culture yields actual innovation

Organizational Change - CultureCompulsory Cooperation

Unwilling In accordance with rules of organization

Within your duties as an employeeImplemented through forceNot supportive of Value Innovation

Voluntary CooperationTrust necessarySupportive of Value InnovationEncouraged by Fair Process

Fair Process

Strengthens desire for fair process

Strengthens ability to value innovate

Figure 9.4 The Positively Reinforcing Cycle of Fair Process

VALUE INNOVATIONAS STRATEGY

Value Innovation as Strategy In Knowledge Economy

• Strategy creates pattern of Punctuated Equilibrium– Bursts of value innovation

• Must be supported by Proper Tactics– Business line extensions– Continuous improvements

Competitive Strategies

• Cost-leaders and Differentiators can survive– Cost-leaders on low end– Differentiators on high end

• Value innovators dominate market core• Expand their markets by creating new demand

Market Share

Questions?

• How does using a “first-best” strategy benefit a company over another that uses a “second-best” strategy?

• Explain the difference between the conventional strategy focus and the value innovation strategy focus.

• How can a company prevent others from imitating or using their resource, product, or idea?

Essay Question

Thank you and have a nice day.

• Cusumano, Michael, and Constantinos Markides. Strategic Thining for the Next Economy. 1st ed. San Fransisco: Jossey-Bass, 2001.

• Powerpoint templates from TemplatesWise.Com

http://www.templateswise.com/

References