CHAPTER 7

Business Strategy:
Innovation,
Entrepreneurship,
and Platforms

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 The AFI Strategy Framework

Exhibit 1.3
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 Learning Objectives

LO 7-1 Outline the four-step innovation process from idea to imitation.

LO 7-2 Apply strategic management concepts to entrepreneurship and
innovation.
LO 7-3 Describe the competitive implications of different stages in the
industry life cycle.
LO 7-4 Derive strategic implications of the crossing-the-chasm
framework.
LO 7-5 Categorize different types of innovations in the markets-and-
technology framework.
LO 7-6 Explain why and how platform businesses can outperform
pipeline businesses.

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 Innovation Is a Competitive Weapon

Innovation can create and destroy value.

• Traditional networks vs. cable providers
• Cable providers vs. streaming content
• Typewriters to PC’s to mobile devices
Innovation often comes in waves.

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 The Speed of Technological Change Accelerates

Exhibit 7.1

Source: Depiction of data from the U.S. Census Bureau, the Consumer Electronics Association, Forbes, and the National Cable and Telecommunications Association.

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 What Causes Rapid Technological
Diffusion and Adoption

Initial innovations are foundational for other rapid

innovation.
New business models make innovation possible.
• Ex: Dell’s direct to consumer model
Satellite and cable distribution systems
• Enable mass media such as radio and TV
The emergence of the internet
• Social networking
• Viral messaging

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 Idea, Invention, Innovation, and Imitation

Idea
• Abstract concepts or research findings
Invention
• Transformation of an idea into a product
• The modification and recombination of products
Innovation
• Commercialization of an invention
Imitation
• Copying a successful innovation

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 Entrepreneurs

Agents who introduce change

Undertake economic risk to innovate
• Create new products, processes, & organizations
Create value for society

Examples:
• Reed Hastings: Netflix
• Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal

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 Strategic and Social Entrepreneurship

Strategic Entrepreneurship
• Pursuit of innovation using strategic tools
• Combining entrepreneurial actions
• Creating new opportunities
• Exploiting existing opportunities
Social Entrepreneurship
• The pursuit of social goals AND a profitable business
• Example: Jimmy Wales at Wikipedia
• Goal: provide knowledge on very large-scale

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 The Five Phases of an Industry Lifecycle

1. Introduction
2. Growth
3. Shakeout
4. Maturity
5. Decline

Supply and demand changes as industries age

Each stage requires different competencies

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 Industry Life Cycle: The Smartphone Industry

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Exhibit 7.4
 Introduction Stage

Core competency: R&D

Strategic objective: market acceptance & future growth
Capital-intensive
• Designing a unique product
• Trying new ideas to attract customers
• Producing small quantities

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 Network Effects in the Introduction Stage

The positive effect that one user has on the value of a product for
other users
Example: Apple’s iPhone and the creation of apps

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Exhibit 7.5
 Growth Stage

Demand increases rapidly.

• First-time buyers rush to purchase.
• Proof of concept has been demonstrated
Product / service standards emerge
• A common set of features and design choices
Product innovation
• New / recombined aspects of a product
Process innovation
• New ways to produce a product

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 Product vs. Process Innovation During Growth

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Exhibit 7.7
 Shakeout Stage

The rate of growth declines.

Firms begin to intensely compete.
• Weaker firms forced out
• Industry consolidation
• Only the strongest competitors survive.
Price is an important competitive weapon.

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 Maturity Stage

Only a few large firms remain.

• They enjoy economies of scale.
• Process innovation has reached a maximum
Demand: replacement or repeat purchases
Market has reached maximum size.
• Industry growth is zero or negative

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 Decline Stage

Demand falls rapidly.

• Innovation efforts cease
• Strong pressure on prices
Four strategic options to pursue.
1. Exit: bankruptcy / liquidation
2. Harvest: reduce further investments
3. Maintain: support at a given level
4. Consolidate: buy rivals

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 Crossing the Chasm Framework

Many innovators do not successfully transition from one stage of

the industry life cycle to the next.

Source: Adapted from G.A. Moore, Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers, New York: HarperCollins, 1991, 17.

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Exhibit 7.8
 Technology Enthusiasts

Enter the market during the introductory stage

• 2.5% of the total market potential
Have an engineering mind
Proactively pursue new technology
Enjoy using beta versions
Tinker with product imperfections

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 Early Adopters

Enter the market during the growth stage

• 13.5% of the total market potential
Demand is driven by imagination and creativity
• Not technology
To capture these customers:
• Directly communicate the product’s potential

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 Early Majority

Enter the market during the shakeout stage

• 34% of the total market potential
“What Can This Do For Me?”
• Weigh the benefits and costs carefully
• Rely on endorsements of others
This group is key to catching the growth wave.

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 Late Majority

Enter the market during the maturity stage

• 34% of the total market potential
Not as confident in their ability to master the technology
• Wait until standards have emerged
Represent the majority of the market
Buy from well-established firms

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 Laggards

Enter the market during the decline stage

• 16% of total market potential
Adopt a new product only if necessary
Generally don’t want new technology
Typically not pursued as future customers
• Demand small

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 Crossing the Chasm Framework: Mobile Phones

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Exhibit 7.9
 Features and Strategic Implications
of the Industry Life Cycle (1 of 2)

Life Cycle
Stages
Introduction Growth Shakeout Maturity Decline

Core competency R&D, some R&D, some Manufacturing, Manufacturing, Manufacturing,

marketing manufacturing, process process process
marketing Engineering engineering, engineering,
marketing marketing, service
Type and level of Product Product After emergence Product Product
innovation innovation at innovation of standard: innovation innovation
a maximum; decreasing; product innovation low; process at a minimum;
process process decreasing innovation high process
innovation at a innovation rapidly; innovation
minimum increasing process at a maximum
innovation
increasing rapidly

Market growth Slow High Moderate and None to moderate Negative

slowing down
Market size Small Moderate Large Largest Small to moderate

Price High Falling Moderate Low Low to high

Number of Few, if any Many Fewer Moderate but Few if any
competitors large
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 Features and Strategic Implications
of the Industry Life Cycle (2 of 2)

Life Cycle
Stages
Introduction Growth Shakeout Maturity Decline

Mode of Non-price Non-price Shifting from Price Price or non-price

competition competition competition non-price to price competition
competition

Type of buyers Technology Early adopters Early majority Late majority Laggards
enthusiasts

Business-level Differentiation Differentiation Differentiation, or Cost-leadership Cost-leadership,

Strategy integration or integration differentiation,
strategy strategy or integration
strategy
Strategic Achieving Staking out a Surviving by Maintaining Exit, harvest,
objective market strong strategic drawing on “deep strong strategic maintain, or
acceptance position; pockets” position consolidate
generating “deep
pockets”

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 Innovation: Markets and Technologies

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 Incremental vs. Radical Innovation

Incremental Innovation:
• Builds on established knowledge
• Results from steady improvement
• Targets existing markets and technology

Radical Innovation:
• Novel methods & materials
• Entirely new knowledge base
• Or, recombination of existing knowledge
• Targets new markets and technology

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 Why Incumbent Firms Tend to
Focus Only On Incremental Innovation

Economic Incentives:
• They must defend their position
Organizational Inertia:
• They have formalized processes and structures
Innovation Ecosystem:
• They rely on certain suppliers, buyers, complementors

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 Architectural vs. Disruptive Innovation

Architectural Innovation:
• Existing technology leveraged into a new market
• Known components, used in a novel way
Disruptive Innovation:
• Leverages new technologies in existing markets
• New product / process meets existing customer needs

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 How to Respond to Disruptive Innovation

Continue to innovate
• Stay ahead of the competition
Guard against disruptive innovation
• Protect the low end of the market
Disrupt yourself
• Don’t wait for others to disrupt you
• Called “reverse innovation”

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 Pipeline vs. Platform Businesses

Pipeline Business
• Linear transformation through the value chain
• R&D, then design, then manufacture, then sell
Platform Business
• Enables interaction between producers and consumers
• Enable matches among users
• Provides infrastructure and governance

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 The Platform Ecosystem

SOURCE: Adapted from Marshall W. Van Alstyne, Geoffrey G. Parker, and Sangeet Paul Choudary, “Pipelines, Platforms, and the New Rules of Strategy,” Harvard Business Review, April 2016.

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Exhibit 7.13
 Advantages of the Platform Business Model

They scale more efficiently.

• There are no gatekeepers.
They unlock new sources of value creation and supply.
They benefit from community feedback.
Success occurs when positive network effects are
realized.

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