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Disruptive strategic innovations and strategic re-orientations
Professor Feng LiThe Business SchoolUniversity of Newcastle upon TyneE-Mail: [email protected]
© Feng Li, 2006
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Main Issues
Disruptive innovations in the network economy
Some possible strategic responses to disruptive innovations
Strategic re-orientations: from product and services to solutions and experiences
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Disruptive Innovations
Clayton Christensen – Innovators Dilemma and Innovator’s Solution
Sustaining Innovation – make better products that can be sold for more money to attractive customers – incumbents prevail
Disruptive Innovations – commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customers – new entrants beat incumbents
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Sustaining vs Disruptive Innovations
Sustaining innovation targets demanding high end customers with better performance than what was previously available
Disruptive innovations don’t attempt to bring better products to established customers in existing markets – rather they introduce products and services that are not as good as currently available products but they are simpler, more convenient and less expensive and appeal to new or less demanding customers
Disruption occurs as the rate of technological improvements are higher than customers can utilise or absorb
The disruptive products and services eventually become acceptable to high-end customers
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The Customer isn’t always right:Why high performing companies fail
‘The highest performing companies .. Have well developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies – lower margin opportunities their customers don’t want – until [those same customers decided that they] want them. And by then it is too late.’
- Innovator’s Dilemma
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Two Types of Disruptions
New Market Disruptions – compete with non-consumption as they are so cheap and simple they attract new customers previously don’t use the products and services
Low End Disruptions –simple low cost business models to pick off the least attractive of the established firms’ markets and progress upwards
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The Impact of Sustaining and
Disruptive Technological Change
Pro
duct
Per
form
ance
Time
Performance demanded at the high
end of the market
Performance demanded at the low
end of the market
Performance Oversupply
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The Process of New Market Disruption
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Examples
Low cost airlines – British Airways and KLM under attack from easyjet and Ryanair - full service, hub-and-spoke strategy versus low cost, point to point, no-frills strategies
Financial services – Merrill Lynch versus Charles Schwab, E*Trade and Ameritrade
Unilever and P&G versus low priced distributor owned private labels
Barnes & Noble versus Amazon.com The attackers utilised strategies that were both
different from and in conflict with the strategies of the top dogs – Disruptive strategic innovations
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Disruptive innovations
Emphasis on different product or service attributes
Start out as small and low margin business – unattractive until they grow big
They grow to capture a large share of the established market – good enough in old attributes and superior in new attributes than established firms
Established firm’s can’t compete because of conflict with mainstream strategy and established way of working
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Responses to disruptive innovations
Focus on and invest in the traditional business – the disruptive innovation will not grow indefinitely (10-20%) and won’t capture 100% of the market
Ignore the innovation – it is not your business – different customers, value propositions and require different skills and competences
Attach back – disrupt the disruptive innovation – create an even newer game
Playing both games simultaneously – via a separate unit
Embrace the innovation completely and scale it up Charitou, C & C Markides (2003) Responses to
Disruptive Strategic Innovations. Sloan Management Review Winter 2003: 55-63
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Responses to disruptive innovations
In almost all cases of disruptive innovations, the net effect is total market growth
In new market disruptions – major growth opportunities for both incumbents and upstarts
Gilbert, Clark (2003) The Disruption Opportunity. Sloan Management Review Summer 2003: 27-32
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A Third Type - Top Down Disruptions
Low end and new market disruptions - under-performs established products in mainstream markets and sold for less money to least profitable customers
Top down disruptions outperform existing products, selling at a premium price, initially purchased by the most demanding and least price-sensitive customers
Federal Express and Wang Labs’ word processing system - started at top end and rapidly moved downwards to disrupt established markets.
Apple iPod and Satellite Radios.
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Top Down Disruptions … continued
Gives incumbents a better chance of surviving Potential danger of premium brands moved
downwards - long term viability. Damage the brand and disfranchise their most
profitable customers at top end in long term. Marks & Spencer in the UK and BMW of
Germany? Need to be assessed over different time scales Carr, Nicholas (2005) Top-Down Disruption.
Strategy + Business, Issue 39, Summer 2005. http://www.strategy-business.com/magazine
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The Internet & Disruptive Strategic Innovations
The Internet enables new ways of working and new business models superior than established firms
Basis for disruption in different industries Long list of examples in Innovator’s
Solution pp56-65 Amazon.com; Charles Schwab; Cisco;
Dell; e-Bay; ….. Useful Framework for analysing,
explaining and addressing strategic challenges and opportunities in various industries
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The Internet & Disruptive Strategic Innovations (2)
One of the most influential theories since the late 1990s
Insights to battles between industry leaders and unknown new entrants
Not specific to network economy But Internet provided numerous
opportunities for new entrants Low cost models to compete with industry
leaders in ways impossible in the past.
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Strategic Re-Orientations: From Products and Services to Solutions and Experiences
Two strategic re-orientations in recent years
In a world of commoditized products, companies are turning to service offering for growth - often in the name of business solutions
‘What the customer buys and considers value is never a product. It is always utility – that is, what a product does for him’ – Peter Drucker
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Examples
General Motors – Automotive services - sales, repairs, financing, parts
and accessories; roadside assistance; insurance OnStar – travel, emergencies, satellite radio services;
vehicle monitoring services; car phone and data services, personal concierge services …
Home services (GMAC) – home sales, mortgage, relocation, monitoring, insurance, satellite TV etc
Underpinned by strong brand, an ICTs platform and a community of users and suppliers
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Examples 2
UPS Logistics service business Core – pick-up, drop-off, shipping,
supplies, tracking New services – assembly and testing,
repairs, inbound and outbound logistics, warehouse management, spare parts management, customer support management …
Role of IT platform
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The Next Step – Experience Innovation
The focus of innovation will shift from products and services to experience environment
Supported by a network of companies and consumer communities
Co-create unique value for individual consumers
Features and functionality used to be embedded in products
Now distinctive identities of products, services, channels, industries and companies are rapidly disappearing
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Examples - Cardiac pacemaker
5m adults in US alone suffer cardiac problems Pacemaker monitors and manages heart rhythm and
performance Remote monitoring – deviations altered to patient and doctor
simultaneously Doctor in consultation with the patient can jointly decide
actions When patient is travelling – other doctors need to be involved –
access to patient records Others involved – e.g. the patient’s spouse Information and skills network Value – not in products, communications, and all the agents
involved (hospitals, families, doctors etc) Value from co-creation experience through interactions
between patient and others Value is determined by personal and other circumstances
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Value to patients
Value lies in the co-creation experience of a specific patient, at a specific point in time, in a specific location, in the context of a specific event
Circumstance-based New business logic: from company- and
customer-centric to network-centric How can firms compete in the experience
economy?
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Questions
Fundamental changes ? Role – or different types of roles - of
Internet and related technologies in these innovations
The relationships between individuals and institutions/ organisations
The changing business logics Implications for organisations?
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What is e-Business? How the Internet Transforms Organisations
Chapter 7. Managing Disruptive Strategic Innovations in the New Economy
Chapter 8. Strategic Re-Orientations in the Network Economy: Products, Services, Solutions and Experiences
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Further readings Christensen, Clayton M (1997) The Innovator’s Dilemma.
Harvard Business School Press, Boston Christensen, Clayton M & Michael Raynor (2003) The
Innovator’s Solution: Creating and Sustaining Successful Growth. Harvard Business School Press, Boston
Christensen, Clayton M, Eric A. Roth & Scott D. Anthony (2005) Seeing What Next: Using Theories of Innovation to Predict Industry Change, Harvard Business School Press, Boston
Charitou, Constantinos & Constantinos Markides (2003) Responses to disruptive strategic innovation. Sloan Management Review 44(2): 55-63
Gilbert, Clark (2003) The Disruption opportunities. Sloan Management Review 44(4): 27-32
Carr, Nicholas (2005) Top-Down Disruption. Strategy + Business, Issue 39, Summer 2005. http://www.strategy-business.com/magazine
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Further readings (2)
Charitou, C & C Markides (2003) Responses to Disruptive Strategic Innovations. Sloan Management Review Winter 2003: 55-63
Gilbert, Clark (2003) The Disruption Opportunity. Sloan Management Review Summer 2003: 27-32
Sawhney, M; S Balasubramanian & V Krishnan (2004) Creating Growth with Services. Sloan Management Review Winter 2004: 34-43
Prahalad, C K & V Ramaswamy (2003) The New Frontier of Experience Innovation. Sloan Management Review. Summer 2003: 12-18
Prahalad, C K & Venkat Ramaswamy (2004) The Future of Competition. Harvard Business School Press, Boston
Brynjolfsson, E & Glen Urban (2001, eds.) Strategies for E-Business Success. Jossey-Bass, San Francisco
Cusumano, Michael & C Markides (2001, eds.) Strategic Thinking for the next economy. Jossey-Bass, San Francisco
Gerbert, P & A Birch (2001) Digital Storm – Fresh business strategies from the electronic marketplace. Capstone, Oxford