The Strategic Five Any strategy adds value only as far as it sharpens or enhances the answers to five existential questions that every company should be asking itself every day: 1. What business or businesses should we be in? 2. How do we add value to our businesses? 3. Who are the target customers for our businesses? 4. What are our value propositions to those target customers? 5. What capabilities do we need in order to add value to our businesses and differentiate our value propositions? COMPETITIVE ADVANTAGE “The ability of a firm to provide value to customers that exceeds what competitors can provide”. The five elements to a competitive advantage. V – Value - provides superior value. The goods and services provided must give better value to customers than those of it’s competitors. (known also as a comparative advantage or distinctive competence). R - Rare. The company must be the only one capable of producing products or services of this quality that competitors will try to copy your ability. I – Imitable - difficult to imitate. The comparative advantage is difficult to imitate; firms may attempt to create both tangible and intangible barriers to imitation. S – Substitutable. Your offer involves satisfying a customer’s needs in an alternate manner. O – Outstanding returns for the organization. When the source of a competitive advantage is managed correctly, it enables a company to make higher than industry average profits, usually by better than average price/cost margins COMPETITIVE ADVANTAGE Superior value Ability of a firm to win Rarity Difficult to imitate Nonsubstitutability consistently over the long term in a competitive situation Created through the achievement of four criteria COMPETITIVE ADVANTAGE CRITERIA Superior Value Types of superior value Comparative advantage Firm provides products and services that produce value that is superior to competitors HP printers - meets all four ◦ Compared to others, the value is superior Distinctive competence ◦ Superior product is result of a unique competence COMPETITIVE ADVANTAGE CRITERIA Rarity No other firm has the capabilities needed to provide the quality/ quantity of products and services. Do other firms have similar capabilities? Apple - new releases None = we have rarity If your capabilities produce superior value for the customers >1 = do not have rarity ◦ Superior product is result of a unique competence Capabilities that provide superior value for customers and that are rare will produce only a temporary advantage. COMPETITIVE ADVANTAGE CRITERIA Difficult to imitate Firm must try to avoid competitor imitation of its capabilities that create superior value to the customers Disney-friendly (hire/ train) • Must create barriers difficult for others to imitate firm’s capabilities Tangible barriers ◦ Size, location Intangible barriers ◦ Company’s culture ◦ Corporate reputation COMPETITIVE ADVANTAGE CRITERIA Nonsubstitutability Inability for another firm to fulfill a customer’s need by alternative means Godiva- taste/ smoothness • To sustain competitive advantage, customers must find it difficult to find a substitute that equally satisfies their desire for a product/ service TURNING COMPETITIVE ADVANTAGE INTO PROFITS Above-average returns = profits greater than the average for a comparable set of firms— compared by industry and size— function of cost-price Turning Competitive Advantage margins. into Profits Firms must manage resources to capture profits from their competitive advantage iRobot: Creativity and Innovation • Created 20 years ago by MIT students and a professor, iRobot is a company aiming to create robots that make a difference in the world. • Created and built over six million robots that help to accomplish anything from common household chores to supporting military missions. • iRobot conducts studies to determine (1) what new products customers want to see; (2) how customers feel the company’s current products are performing. • Research is also conducted to see how technology, developed in other fields, can be incorporated into iRobot products. • The company strives to create more innovative products that bring robots into mainstream use in the home. Is the iRobot company a symbol of product creativity and innovation? Why? http://media.pearsoncmg.com/ph/streaming/bp/2013/MGMT/POM/POM2013_iR obot_Creativity.html • Prior to the creation of iRobot, no company really focused on introducing the use of robots into the home to help tackle common household chores. • The basic idea for the products this company produces was entirely new, making each product it created extremely innovative. • There was nothing on which iRobot could base its product designs. So the company had to be very creative to bring to life their unique ideas. How does iRobot’s product creation process assure the quality and practicality of their products? • iRobot’s process is to build a product and then to test the product. • They then make changes to the design and test the product again. • This product creation process that assures that the product does what it is intended to do and that customers will get the results they expect from an iRobot product. How does research play a role in the process of product creation at iRobot? • Research is a fundamental part of this organization. • Research determines what are customer needs could be met through the use of robotics. • Research is also conducted in other fields to determine how modern technologies can be incorporated into iRobot products. • Research is conducted to determine how pleased customers are with the iRobot products that have already been produced. This enables improvements to be made as needed. This is important because the products are so innovative that constant analysis is necessary to find areas in which improvements can be made, allowing the products to be enhanced. Which of the following phrases best describes the future goals of iRobot? a. extreme innovation b. perfection of current products c. increased profit margins d. expansion of facilities • The future of iRobot will focus on the creation of even more innovative technologies. • The company wants to continue to develop new and creative ways that robots can be used in mainstream households and to make a difference in the world. Which of the following could be considered a strength of the iRobot company? a. vision b. production speed c. profit margin d. none of the above • The iRobot company’s major strength is its vision. The products are highly innovative, offering creative solutions to make the completion of everyday tasks easier. • The products the company offers are unique in their use of robotics to complete household chores. The ideas behind these creative products require vision and resourcefulness. WHAT IS INNOVATION? Innovation involves the conversion of new knowledge into a new product, process, or service and the putting of this new product, process, or service into use, either via the marketplace or by other processes of delivery. INNOVATOR DILEMMAS • • • • • • • • • • • Identify and respond to key innovation dilemmas: What relative emphases to place on: technologies (push) or markets (pull), product or process innovations, how much to rely on ‘open innovation’, the broad business model: focus on technological innovation or business model innovation. Anticipate key issues facing entrepreneurs as they go through the stages of growth - from start-up to exit. Anticipate and, to some extent, influence the diffusion or spread of innovations. Decide when being a ‘first-mover’ or ‘follower’ is most appropriate in innovation. How the organization should respond to innovative challengers? Evaluate opportunities and choices facing social entrepreneurs as they create new ventures to address social problems. INNOVATOR DILEMMAS (1) Technology push or market pull: • Technology push is the view that it is the new knowledge created by technologists or scientists that pushes the innovation process. • Market pull is the view that it is the pull of users in the market that is responsible for innovation. ‘Lead users’ are of particular importance. INNOVATOR DILEMMAS (2) Product or process innovation: • Product innovation relates to the final product (or service) to be sold, especially with regard to its features. • Process innovation relates to the way in which a product is produced and distributed, especially with regard to improvements in cost or reliability. PRODUCT AND PROCESS INNOVATION Product and process innovation Source: Adapted from J. Abernathy and W. Utterback, ‘A dynamic model of process and product innovation’, Omega, vol. 3, no. 6 (1975), pp. 142–60 IMPLICATIONS OF PRODUCT/ PROCESS INNOVATION MODEL • New developing industries favor product innovation • Maturing industries favor process innovation • Small new entrants have greatest opportunities in early stages of an industry • Large incumbent firms have advantage in later stages INNOVATOR DILEMMAS (3) Open or closed innovation: • ‘Closed’ innovation - traditional approach relying on the organisation’s own internal resources: it’s own laboratories and marketing departments. Innovation is secretive, anxious to protect intellectual property (patents), avoid competitors’ free-riding on ideas. • ‘Open’ innovation - a deliberate import and export of knowledge by an organisation to accelerate and enhance innovation. Exchanging ideas openly is likely to produce better products more quickly. INNOVATOR DILEMMAS The balance between “open” and “closed” innovation depends on: • Competitive rivalry – if it is intense, closed innovation is better. • ‘One-shot’ <vs> continuous innovation - open innovation is best where innovation is continuous. • Tight-linked innovation – closed innovation is best in order to avoid inconsistent elements. INNOVATION DILEMMAS (4) Technological or business-model innovation: • A business model describes how an organisation manages incomes and costs through structural arrangement of activities. • Business model innovation involves re-organising all elements of a business into new combinations. This can involve innovation in: The product. It may redefine what the product or service is and how it is produced. The selling. It may change the way in which the organisation generates its revenues – it’s selling and distribution activities. WHAT IS A BUSINESS MODEL? A business model describes the structure of product, service, and information flows and the role of participating parties. WHAT IS A FIRST-MOVER ADVANTAGE? A first-mover advantage exists where an organization is better off than it’s competitors as a result of being ‘first to market’ with a new product, process or service. • Managers must choose between being first into the marketplace or entering later. • Innovators can capture first-mover advantages. • “Fast second’ strategies however, are often more attractive. FIRST-MOVER ADVANTAGES Experience curve benefits Scale benefits Reputation Pre-emption of scarce resources Buyer switching costs LATE-MOVER ADVANTAGES Free-riding – imitating pioneer’s strategies but more cheaply Learning – from the mistakes made by pioneers FIRST OR SECOND? Three contextual factors to consider in choosing between innovating and imitating: Capacity for profit capture Complementary assets Fast-moving arenas STAGES OF ENTREPRENEURIAL GROWTH KEY DEBATE: ARE LARGE FIRMS BETTER INNOVATORS THAN SMALL FIRMS? • What kinds of managerial action might you consider if you were trying to increase the innovativeness of a large firm in a hightechnology manufacturing industry? PLATFORM LEADERSHIP Platform leadership refers to how large firms consciously nurture independent companies through successive waves of innovation around their basic technological ‘platform’. Intel as a platform leader, transformed the company from merely `supplying silicon embedded microprocessors` to become `the architect of the PC industry.' INNOVATION DIFFUSION Diffusion is the process by which innovations spread amongst users. This can vary with respect to both speed and extent. INTRODUCTION TO DISRUPTIVE INNOVATION Because companies tend to innovate faster than their customers' lives change, most organizations eventually end up producing products or services that are too good, too expensive, and too inconvenient for many customers. By pursuing only "sustaining innovations" that perpetuate what has historically helped them succeed, companies unwittingly open the door to disruptive innovations. WHAT IS A DISRUPTIVE INNOVATION? A disruptive innovation helps create a new market and value network, and eventually disrupts an existing market and value network (over a few years or decades), displacing an earlier technology. Disruptive innovation creates substantial growth by offering a new performance trajectory – “a game changer” - that, even if initially inferior to the performance of existing technologies, has the potential to become markedly superior. Blockbuster vs Netflix, Xerox vs Canon, Apple iPhone vs Nokia, Southwest Airlines, Given Imaging, Skype, Spotify, MOOCs). DISRUPTIVE INNOVATION Disruptive innovation Source: Reprinted by permission of Harvard Business School Press. From The Innovator’s Solution by C. Christensen and M.E. Raynor. Boston, MA 2003. Copyright © 2003 by the Harvard Business School Publishing Corporation. All rights reserved Sustaining innovations are typically innovations in technology, whereas disruptive innovations change entire markets. For example, the automobile was a revolutionary technological innovation, but it was not a disruptive innovation, because early automobiles were expensive luxury items that did not disrupt the market for horse-drawn vehicles. The market for transportation essentially remained unchanged until the debut of the lower priced Ford Model T in 1908. The mass-produced automobile was a disruptive innovation, because it changed the transportation market. The automobile, by itself, was not. DISRUPTIVE INNOVATION Incumbents can follow two policies to help keep them responsive to potentially disruptive innovations: Develop a portfolio of real options (limited investments that keep opportunities open for the future); Develop new venture units – small, innovative businesses with relative autonomy. Entrepreneurial relationships Entrepreneurship often involves managing relationships with other companies: Corporate venturing – investing externally in new ventures thereby protecting early-stage ventures from internal bureaucracy and by spreading risk. Spin-offs (or spin-outs) – the generation of small innovative units from larger organisations. Ecosystems – fostering communities of connected suppliers, agents, distributors, franchisees, technology entrepreneurs and makers of complementary products. Case Example: Skype • Skype’s software allows people to use the Internet to make free calls to other Skype users • Skype’s costs are very low. Customers use their own computers and marketing is accomplished via word of mouth • It earns revenues on ancillary services • eBay purchased Skype • There are similarities in the business models • eBay plans to leave Skype to manage its own business Social entrepreneurship Social entrepreneurs are individuals and groups who create independent organisations to mobilise ideas and resources to address social problems, typically earning revenues but on a not-for-profit basis. Social entrepreneurship decisions Social mission Organisational form Business model SUMMARY • Strategists face four fundamental dilemmas in innovation: the relative emphasis to put on technology push or market pull; whether to focus on product or process innovation; how much to rely on ‘open innovation’ and finally, how far to concentrate on technological innovation as opposed to broader business-model innovation. • Innovations often diffuse into the marketplace according to an S-curve model in which slow start-up is followed by accelerating growth (the tipping point) and finally a flattening of demand. Managers should watch out for ‘tripping points’. • Managers must choose between being first into the marketplace and entering later. Innovators can capture first-mover advantages. However, ‘fast second’ strategies are often more attractive. • Established incumbents’ businesses should beware of disruptive innovations. Incumbents can reduce inertia by developing portfolios of real options and by organizing autonomous new venture units. • Entrepreneurs face characteristic dilemmas as their businesses go through the entrepreneurial life cycle of start-up, growth, maturity and exit. Entrepreneurs have to choose how they relate to large firms as they may become involved in ecosystems or strategies for open innovation. • Social entrepreneurship offers a flexible way of addressing social problems, but raises issues about appropriate missions, organizational forms and business models. INNOVATION - RESEARCH & DEVELOPMENT Are there universal principles that may be applied to improve success rates? R&D is a “black box” - where large sums of money go in, but only sometimes do products and services come out. There are no statistically significant relationships between R&D spending and successful company performance. Studies show that R&D does not impact sales growth, gross profit, enterprise profit, market capitalization, or shareholder return. “When Apple came out with the Mac, IBM were spending 100 times more on R&D. It’s not about money, but the people, the leaders and how much you get it” (Steve Jobs, 1998). THE TOP R&D SPENDERS R&D SPENDING BY INDUSTRY 2014 CHANGE IN R&D SPENDING BY REGION 2013-14 SUCCESSFUL INNOVATORS Studies over 10 years show that companies improve innovation by focus on 2 areas: business capabilities, and organization and processes. • Aligning the innovation portfolio with customer needs; • Developing and retaining the right people with technical knowledge; • Ensuring that technical and business leaders are aligned; • Understanding new product and service-related trends and technologies; • Pursuing lean product development. The top 25% of companies, as measured by sustained performance, concentrate on a shorter, coherent list of capabilities (‘doing less, instead of being good at everything’). Companies with more tightly linked innovation and business strategies, had a 40% higher operating income growth over a 3-year period. THE CUSTOMER CONNECTION When R&D efforts were driven by a thorough understanding of what their customers need and want, companies had: • 3 times the growth in operating income, • twice the return on assets compared to those who captured customer insights indirectly, • 65% higher total shareholder returns. THREE TYPES OF INNOVATING COMPANIES The 2007 Global Innovation study identified 3 ways in which different companies managed their R&D processes. Need Seekers: • Use superior insights gained by direct engagement with clients to generate new ideas, and by big data analysis. • New products are developed based on this end-user understanding. • The goal is to find the unstated needs of the future and be the first to address them (Apple, P&G, Tesla). Market Readers: • Focus on creating value by incremental innovations to products already proven in the market. • They closely monitor markets, customers and competitors. • More a “follower” and “second mover” type. • Prioritize capabilities for managing resource requirements and engaging suppliers and partners (Samsung, Caterpillar, Visteon). Technology Drivers: • Spend heavily on internal technological capabilities to develop new products and services. • Leverage their R&D to drive breakthrough innovation and incremental change. • By discoveries, will meet known and unknown needs. • Strive to develop products of superior technological value. • Their cultures respect talent and technical knowledge (Google, Bosch, Siemens). CAPABILITIES OF TOP PERFROMERS THE MOST INNOVATIVE COMPANIES THE TOP 10 INNOVATORS vs THE TOP 10 SPENDERS THE KEY AREA OF INNOVATION FOCUS - 2014 ANTICIPATED FUTURE R&D INVESTMENT THE KEY IMPERATIVES TO INNOVATION SUCCESS • Define the innovation strategy, communicate it throughout the organization, and identify a short list of capabilities that will enable it. • Align the innovation and business strategies. • Ensure that innovation culture is aligned with and supportive of the innovation strategy. • Focus on developing deep customer insight by directly engaging and observing end-users of your products. • Ensure the technical community participates in defining the corporate agenda. • Systematically manage the R&D portfolio, scrapping low-potential projects, beefing-up high-potential ones, and ensure good risk management capabilities support the ‘big bets’.