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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’.

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