Chapter 7
Business Strategy:
Innovation and Entrepreneurship
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Chapter Outline
7.1 Competition Driven by Innovation
• The Innovation Process
7.2 Strategic and Social Entrepreneurship
7.3 Innovation and the Industry Life Cycle
7.4 Types of Innovation
•
•
•
•
Incremental vs. Radical Innovation
Architectural vs. Disruptive Innovation
The Internet as Disruptive Force: The Long Tail
Open Innovation
7.5 Implications for the Strategist
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7.1 Competition Driven by Innovation
 Innovation is a big driver in the competitive process.
 “Gale of Creative destruction” – Joseph Schumpeter
• Typewriters to computers
 Wang Labs, a computer company, helped to kill the typewriter
industry.
 IBM & Compaq defeated Wang Labs for the computer market.
 Lenovo bought the remains of the IBM personal computer market.
 HP bought Compaq and is under threat from mobile devices itself.
• TV viewing options
 “Big 3” networks struggling against cable & satellite providers
 Customized online content (Hulu, Netflix, etc.) now rising
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Exhibit 7.1 Accelerating Speed of
Technological Change
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The Innovation Process
 Discovery and development of new knowledge
captured by the 4 I’s:
• Idea – may be presented in terms of abstract concepts or
as findings derived from basic research
• Invention – transformation of an idea into a new product,
process, or the modification and recombination of existing
ones
• Innovation – concerns the commercialization of an
invention by entrepreneurs
• Imitation – copying a successful innovation
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Exhibit 7.2 The 4 I’s: Idea,
Invention, Innovation, and Imitation
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Exhibit 7.3 Innovation: A Novel and
Useful Idea that Is Successfully Implemented
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7.2 Strategic and Social
Entrepreneurship
 Entrepreneurs are the change agents for creative
destruction.
• Create new opportunities & exploit them
 Jeff Bezos – Amazon
 Saw growth of Internet in 1994
 Now the world’s largest online retailer
 Oprah Winfrey – Harpo Productions
 Rose from abuse & poverty to over $2 billion net worth
 Ended talk show to devote time to OWN TV channel
 Elon Musk – Tesla Motors, Solar City, SpaceX, PayPal
 An engineer and serial entrepreneur
 Deep passion to solve environmental, social, and economic challenges
• How to combine entrepreneurial with strategic actions?
 Example: Samsung’s innovations in mobile devices
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7.3 Innovation and the Industry
Life Cycle
 The five different stages:
introduction, growth, shakeout, maturity, and decline
 Innovations create new industries.
• Express delivery
• Internet retailing and advertising
• Nanotechnology growing in medical and aircraft industries
 Competitors
• The number and size of competitors change with each stage.
 Consumers
• Different types of consumers enter the market at each stage.
Both the supply and demand sides of the market change as the
industry ages.
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Exhibit 7.4 Industry Life Cycle: The Smartphone
Industry in Emerging and Developed Economies
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Strategy Highlight 7.1
Apple Leverages Network Effects to Propel Growth
 Apple launched iPhone in summer ’07.
• Launched App store a year later
• Small programs but BIG business!
 50 billion Apple app downloads by spring ‘13
• Apps increase value of the iPhone (& iPad too!)
• More devices sold; incentivizes software developers
 The availability of apps, in turn, leads to network
effects that increase the value of the iPhone for its
users.
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Exhibit 7.5 Leveraging Network
Effects to Drive Demand: Apple’s iPhone
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Exhibit 7.6 Product and Process
Innovation and the Emergence of an Industry
Standard Throughout an Industry Life Cycle
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Crossing the Chasm
 Life cycle for products/services that need different
customer behaviors. (Geoffrey Moore’s book)
 Many innovators fail to get from early adopters to
majority. (15% to 50% of market).
 The early adopters are excited by the possibilities of
the product rather than the “cool technology” of
technology enthusiasts.
 The critical early majority base purchasing decisions
on practicality.
• This group can generate a herding effect.
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Exhibit 7.7 The Crossing-theChasm Framework
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Exhibit 7.8 Crossing the Chasm:
The Smartphone Industry
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Exhibit 7.9 Features and Strategic
Implications of the Industry Life Cycle
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7.4 Types of Innovation
 Incremental
 Radical
• Steady improvement of a
product or service
• Examples:
 Gillette now 6-bladed razors
 Intel 386 to 486 processors
• Often from incumbent firms
 Economic incentives
• Higher entry barriers
 Organizational inertia
 Innovation ecosystem
• Novel methods or
materials serving new
markets
• Examples:
 Mass production − Ford
 Genetic engineering
• Often from new firms
• Airplanes’ predictable
pattern of innovation
 De Havilland 1st
commercial jet
 Boeing, Airbus leaders
 CRJ, Embraer rising up
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Exhibit 7.10 Types of Innovation:
Combining Markets and Technologies
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TYPES OF INNOVATION (cont’d)
 Architectural
• Reconfigure known
components to create
new markets.
• Example:
 Canon user-friendly
copiers
 GPS to handheld
consumer devices
 Disruptive
• Novel technologies serving
existing markets from bottom up
• Examples:
 Japanese autos
 Digital photography
 Data storage media
• “Stealth” attack
 Captures current customers
typically with initially lower cost
& performance
 Protection against it…. “Disrupt
yourself”
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Exhibit 7.11 Disruptive Innovation:
Riding the Technology Trajectory to Invade
Different Market Segments from the Bottom Up
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Strategy Highlight 7.2
GE’s New Innovation Mantra: Disrupt Yourself!
 Ultrasound (US) machine for research hospitals −
$250,000
• No major market for these in developing countries
 2002 local team at GE China developed portable US
• Laptop based technology- Under $30,000 for U.S. rollout
 2009 introduced a handheld US for under $10,000
• Vscan – “21st-century stethoscope”
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The Internet as Disruptive Force:
The Long Tail
 Long tail in a digital world
• Examples: books, movies, but also TurboTax
• 80% sales in a given category are NOT “hits.”
 Pareto Principle
• Technology enables easier access to the “tail.”
 Selling “less of more”
 Online firms can gain a large share from selling a small # of nearly
unlimited choices.
 Short head is the “blockbuster.”
• Available at brick & mortar stores
 Significant inventory costs
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Exhibit 7.12 The Short Head and
the Long Tail
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Open Innovation
 20th century mostly …closed innovation – internal
SHIFT FROM CLOSED TO OPEN INNOVATION





Mobility of skilled workers
Exponential growth of venture capital
Wider “marketplace of ideas” options
Better capabilities in external suppliers
Open innovation – leverages both internal ideas and
inventions, and external ones; 2-way sharing
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Exhibit 7.13 Closed Innovation vs.
Open Innovation
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Exhibit 7.14 Contrasting Principles
of Closed and Open Innovation
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7.5 Implications for the Strategist
 The most innovative companies in 2013:
• Nike, Amazon, Square, Uber, Pinterest, and Target
• All these firms use continuous innovations.




Life cycle and chasm frameworks − major implications
Many successful firms are moving to open innovation
Internal and external innovation must be managed.
Externally, innovation is managed through cooperative
strategies such as licensing, strategic alliances, joint
ventures, and acquisitions.
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Take-Away Concepts
 Innovation describes the discovery and
LO 7-1
development of new knowledge in a four-step
Outline the
process captured in the 4 I’s: idea, invention,
innovation,and imitation.
four-step
innovation  The innovation process begins with an idea.
process from  An invention describes the transformation of an
idea to
idea into a new product or process, or the
imitation.
modification and recombination of existing ones.
 Innovation concerns the commercialization of an
invention by entrepreneurs (within existing
companies or new ventures).
 If an innovation is successful in the marketplace,
competitors will attempt to imitate it.
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Take-Away Concepts
 Entrepreneurship describes the process by which
LO 7-2
change agents undertake economic risk to
Apply
innovate—to create new products, processes, and
strategic
sometimes new organizations.
management
 Strategic entrepreneurship describes the pursuit of
concepts to
innovation using tools and concepts from strategic
entrepreneurmanagement.
ship and
 Social entrepreneurship describes the pursuit of
innovation.
social goals by using entrepreneurship. Social
entrepreneurs use a triple-bottom-line approach to
assess performance.
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Take-Away Concepts
LO 7-3
 Innovations frequently lead to the birth of
Describe the
new industries.
competitive
 Industries generally follow a predictable
implications
industry life cycle, with five distinct
of different
stages:
introduction,
growth,
shakeout,
stages in the
maturity, and decline.
industry life
 Exhibit 7.9 details features and strategic
cycle.
implications of the industry life cycle.
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Take-Away Concepts
LO 7-4
Derive
strategic
implications
of the
crossing-thechasm
framework.
 The core argument of the crossing-the-chasm framework is
that each stage of the industry life cycle is dominated by a
different customer group, which responds differently to a
new technological innovation.
 There exists a significant difference between the customer
groups that enter early during the introductory stage of the
industry life cycle versus customers that enter later during
the growth stage.
 This distinct difference between customer groups leads to a
big chasm in which companies and their innovations
frequently fall into.
 To overcome the chasm, managers need to formulate a
business strategy guided by the “who-what-why-and-how”
questions of competition.
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Take-Away Concepts
LO 7-5
Categorize
different types
of innovations
in the
markets-andtechnology
framework.
 Four types of innovation emerge when applying existing
versus new dimensions of technology and markets.
 An incremental innovation builds on an established
knowledge base, and steadily improves an existing
product or service.
 A radical innovation draws on novel methods or
materials, and is derived from either an entirely different
knowledge base.
 An architectural innovation is an embodied new product
in which known components, based on existing
technologies, are reconfigured to attack new markets.
 A disruptive innovation leverages new technologies to
attack existing markets from the bottom up.
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Take-Away Concepts
LO 7-6
Explain the
long-tail
concept and
derive its
strategic
implications.
 An architectural innovation is an embodied new
product in which known components, based on
existing technologies, are reconfigured in a
novel way to attack new markets (new market /
existing technology).
 A disruptive innovation is an innovation that
leverages new technologies to attack existing
markets from the bottom up (existing market /
new technology).
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Take-Away Concepts
LO 7-7
Compare
and
contrast
closed and
open
innovation.
CLOSED
INNOVATION
OPEN
INNOVATION
• A framework for
R&D that proposes
impenetrable firm
boundaries.
• Key to success in
the closed
innovation model is
that the firm
discovers,
develops, and
commercializes
new products
internally.
• A framework for
R&D that proposes
permeable firm
boundaries to allow
a firm to benefit not
only from internal
ideas and
inventions, but also
from external ones.
• The sharing goes
both ways. Some
external ideas and
inventions are insourced while
others are spun out.
EXHIBIT 7.14
• Compares and
contrasts principles
of closed and open
innovation.
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