BA449 - Chap007 - Fall 2020

Chapter 7: Business Strategy:
Innovation, Entrepreneurship
and Platforms
2
Chapter 7: Case Highlight:

Netflix: Disrupting the TV Industry
• Streaming video is re-shaping the television industry.

– Netflix accounts for 1/3 of downstream internet traffic
• The rise of Netflix
– Netflix started after Reed Hastings was
annoyed by a $40 late fee at Blockbuster
– Monthly DVD subscriptions through the mail began
• Got off to a slow start
– Approached Blockbuster to purchase 49% of the
company, which they declined
• Blockbuster lost 75% of value from ‘2003-’05
Copyright © 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution
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• Netflix began streaming content online.

– Adjusted quickly to consumer preferences
– Streaming available on many types of devices
– Broadcast networks began to take notice
• Netflix began creating their own content.

– Achieved huge success
• Emmys and Golden Globe awards
4

• Netflix re-shaped the TV Industry:

– Delivery: online streaming
– Access: episodes can be viewed on-demand
– Programming developed based on algorithms
• Challenges:
– How to ensure viewing is uninterrupted (buffering)
– Available titles + broadband limitations hinder growth
5

• In 2019, Netflix had 150 million subscribers worldwide,

with 61 million in the United States. The revenues for the
media services provider were $16 billion, and its market
cap was more than $150 billion.
• Over the past decade, Netflix’s stock appreciated by some
2,600 percent, while the tech-heavy NASDAQ-100 index
grew by “only” 310 percent in the same period. By
continuing to innovate on many dimensions, Netflix was
able to not only disrupt the TV industry, but also to gain
and sustain a competitive advantage.
6
Dominant Positions Can Quickly Change

Due to Innovation
• Traditional networks vs. cable providers
• Cable providers vs. streaming content
• Typewriters to PC’s to mobile devices
• Innovation can be a powerful strategic force to

gain and sustain competitive advantage.
Accelerating Speed of Technological Change
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.
© McGraw Hill
8
Causes of Rapid Technological Diffusion and Adoption
• Initial innovations are foundational for other rapid

innovation.
• New business models make innovation
possible.
– Example: 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
9
Idea, Invention, Innovation, and Imitation
• Idea
– Abstract concepts or research findings
• Invention
– Transformation of an idea into product or process
– The modification and recombination of existing ones
• Innovation
– Commercialization of an Exhibit 7.2
invention by entrepreneurs
• Imitation
– Copying a successful innovation
Innovation: A Novel and Useful Idea
That Is Successfully Implemented
Exhibit 7.3
© McGraw Hill
Innovation Funnel
7–11
The
The Development
Development of
of Technology:
Technology: From
From
Knowledge
Knowledge Generation
Generation to
to Diffusion
Diffusion
IMITATION
Supply side
Basic
Invention Innovation Diffusion
Knowledge
Demand side
ADOPTION
7–12
The
TheDevelopment
Developmentof
ofTechnology:
Technology:Lags
LagsBetween
Between
Knowledge
KnowledgeGeneration
Generation and
andCommercialization
Commercialization
BASIC FIRST PRODUCT IMITATION

KNOWLEDGE PATENTS LAUNCH
Xerography late 19th and 1940 1958 1974
early 20th
centuries
Jet Engines 17th-- early 1930 1957 1959
20th centuries
Fuzzy logic 1960’s 1981 1987 1988
controllers
Appropriation
Appropriation ofof Value:-
Value:- How
How are
are the
the
Benefits
Benefits from
from Innovation
Innovation Distributed?
Distributed?
Customers
Suppliers
Innovator
Imitators and
other
“followers”
7–14
The
The Profitability
Profitability of
of Innovation
Innovation
Value of the
• Legal protection
innovation
Profits
• Complementary
from
Innovation Innovator’s resources
ability to • Imitability of the
appropriate the technology
value of the
innovation •Lead time
7–15
Legal
Legal Protection
Protection of
of Intellectual
Intellectual Property
Property
• Patents —exclusive rights to a new product,

process, substance or design.
• Copyrights —exclusive rights to artistic, dramatic,
and musical works.
• Trademarks — exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
• Trade Secrets — protection of chemical formulae,
recipes, and industrial processes.
Also, private contracts between firms and between a firm and its
iemployees can restrict the transfer of technology and know how.
7–16
U.S.
U.S. Managers’
Managers’ Perceptions
Perceptions of
of the
the Effectiveness
Effectiveness of
of
Different
Different Mechanisms
Mechanisms for
for Protecting
Protecting Innovation
Innovation
Processes Products
Patents to prevent duplication 3.52 4.33
Patents to secure royalty income 3.31 3.75
Secrecy 4.31 3.57
Lead time 5.11 5.41
Moving quickly down the learning 5.02 5.09
curve
Sales or service efforts 4.55 5.59
1 = not at all effective 7 = very effective
Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.
Alternative
AlternativeStrategies
Strategiesfor
forExploiting
ExploitingInnovation
Innovation
Outsourcing Strategic Joint Internal

Licensing certain Alliance Venture Commercialization
functions
Limits Benefits of Shares Biggest risks &

Small risk, but
investment, but flexibility; investment & benefits.
Risk & limited returns
dependence on risks of risk. Risk of Allows complete
Return also (unless
suppliers & informal partner control
patent position
very strong partners structure conflict &
culture clash
Few Allows outside Permits pooling of the

resources & resources/capabilities of Substantial
Competing
capabilities more than one firm resource
Resources
To be accessed requirements
Konica Pixar’s movies (e.g. Apple and Microsoft TI’s

Examples licensing its “Toy Story”) Sharp build and NBC development of
digital marketed & the formed Digital Signal
camera to distributed by “Newton” MSNBC Processing
HP Disney. PDA Chips
7–18
The
TheComparative
ComparativeSuccess
Successof
ofLeaders
Leadersand
and
Followers
Followers
PRODUCT INNOVATOR FOLLOWER WINNER

Jet Airliners De Havilland (Comet) Boeing (707) Follower
Float glass Pilkington Corning Leader
X-Ray Scanner EMI General Electric Follower
Office P.C. Xerox IBM Follower
VCRs Ampex/Sony Matsushita Follower
Diet Cola R.C. Cola Coca Cola Follower
Instant Cameras Polaroid Kodak Leader
Pocket Calculator Bowmar Texas Instruments Follower
Microwave Oven Raytheon Samsung Follower
Plain Paper Copiers Xerox Canon Not clear
Fiber Optic Cable Corning many companies Leader
Video Games Players Atari Nintendo/Sega/Sony Followers
Disposable Diapers Proctor & Gamble Kimberly-Clark Leader
Web browser Netscape Microsoft Follower
PDA Psion, Apple Palm Follower
MP3 music players Diamond Multimedia Sony (&others) Followers
7–19
Uncertainty
Uncertainty&&Risk
RiskManagement
Managementin
inTech-based
Tech-basedIndustries
Industries
Selection process for standards and

Technological dominant designs emerge is complex
uncertainty and diifficult to predict, e.g. future of 3G
Sources of
uncertainty Market Customer acceptance and adoption rates
uncertainty of innovations notoriously difficult to
predict, e.g. PC, Xerox copier, Walkman
Cooperating with lead users

early identification of customer requirements
–assistance in new product development
Strategies for Limiting risk exposure

managing risk —avoid major capital commitments
(e.g. lease don’t buy)
—outsource
—alliances to access other firms’
Flexibilility resources & capabilities
—keep options open —keep debt low
—use speed of response to adapt
quickly to new information
—learn from mistakes 7–20
Sources
Sources of
of Network
Network Externalities
Externalities
• User linkages, e.g.

– Telephone systems—only value of telephone is connection to
other users
– Video game consoles—same platform allows users to
exchange games and play interactively
– On-line auction—value of auction depends on number of
buyers and sellers participating
Also, social identification—listening to same music, watching
same TV shows, wearing same clothes in order to conform
• Availability of complementary products, e.g.
– Most PC applications software written for Windows, not Mac.
– In economy autos, easier to get parts and repair for a Ford
Focus than for a Maruti or Proton
• Economizing on switching costs, e.g.
– In suites of office software, users of Microsoft Office more
likely to avoid switching costs that users of Lotus SmartSuite
when they move jobs
7–21
Competing
Competing for
for Standards:
Standards:
Value
Value Appropriation
Appropriation vs.
vs. Market
Market Acceptance
Acceptance
Maximize VHS Betamax Maximize

market value
acceptance appropriation
LOOSE TIGHT
IBM-PC Mac
23
Strategic Entrepreneurship
• Undertake economic risk to innovate

– Results in new products, processes, and organizations
• Agents who introduce change, such as:
– Reed Hastings: Netflix
– Jeff Bezos: Amazon
– Oprah Winfrey: Harpo Productions
– Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal
24
The Five Phases of an Industry Lifecycle
• Introduction
• Growth
• Shakeout
Exhibit 7.4
• Maturity
• Decline
• Supply and demand changes as industries age

• Each stage requires different competencies
25
Introduction Stage: Network Effects
• The positive effect that one user has on the

value of a product for other users
• Example: Apple’s iPhone
Exhibit 7.5
Some Standards Die Hard:
QWERTY vs. DSK
• QWERTY introduced in 1870s
 Slowed down typing to avoid jamming keys
• Dvorak introduced in 1930s

 Minimized finger reach to speed up typing
7–26
Strategy Highlight 7.1
Which Automotive Technology Will Win?
Nissan Chairman believes electric motors are the next technology
paradigm. Currently offering the 2020 “Leading, Environmentally-
friendly, Affordable, Family” (LEAF) car (shown below)
Current limitations of electric vehicle adoption:

•Lack of recharging infrastructure.
•200-250 mile “range anxiety.”
What will be the next paradigm?

•Electric?
•Hybrids?
•Hydrogen fuel cells?
•Solar?
© McGraw Hill
28
Growth Stage
• Demand increases rapidly.

– First-time buyers rush to purchase.
– Proof of concept completed
• Competitive rivalry: muted (due to growth)
• Product /service standards emerge
– A common set of features and design choices
• Basis of competition: process innovation Exhibit 7.7
• Core competencies:
– Manufacturing
– Marketing
29
Shakeout Stage
• Firms begin to compete more intensely.
– The rate of growth declines

– Weaker firms forced out
– The industry consolidates
– Only the strongest competitors survive.
• Low price is an important competitive weapon
30
Maturity Stage
• Few large firms remain.

– They enjoy economies of scale.
• Additional market demand is limited.
• Market has reached maximum size.
• Competitive intensity: increases
31
Decline Stage
• Demand falls, often rapidly.

• Strong pressure on prices
• Four strategic options to pursue:
– Exit: bankruptcy / liquidation
– Harvest: reduce further investments
– Maintain: support at a given level
– Consolidate: buy rivals, near monopoly
(e.g., IBM mainframes)
32
Crossing the Chasm:

Applied to the Mobile Phone Industry
Exhibit 7.9
Types of Innovation:
Combining Markets and Technologies
Exhibit 7.11
© McGraw Hill
34
Incremental vs. Radical Innovation
• Incremental Innovation:
– Builds on established knowledge base
– Results from steady improvement
– Targets existing markets with existing technology
– Example: Gillette blades: from one to six!
• Radical Innovation:
– Draws on novel methods and materials
– Forms from an entirely new knowledge base
– Forms from a recombination of
existing knowledge
– Example: X-ray technology
35
Architectural vs. Disruptive Innovation
• Architectural Innovation:
– Leverages existing technology into new markets
– Alters the architecture of a product
– A new product, with known components, used in a novel
way (e.g., commercializing xerography invention)
• Disruptive Innovation:
– Leverages new technologies in existing markets (e.g.,
mini-mills in the steel industry; also laptop computers)
– New product / process meets existing customer needs
Disruptive Innovation Invading Different
Market Segments from the Bottom Up
Exhibit 7.12
7–36
37
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
– Rather than wait for others to disrupt you
– Called reverse innovation
• An innovation that was developed for emerging economies
before being introduced in developed economies.
GE’s Innovation Mantra:
Disrupt Yourself!
• GE Healthcare – global leader in diagnostics
 Ultrasound machine for research hospitals – $250,000
 Limited 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 – about $10,000
 Vscan - large cell phone – shaped device
 It’s a cross between an iPod and a flip phone
Doctors can hang it around their neck

1–38
7–38

39

Wikipedia: Disrupting the Encyclopedia Industry
Encyclopedia Britannica used to be the standard source of information.

•Written by scholars and Nobel laureates.
•Price of $2,000 for a set and holding 50%
market share, with $650 million in revenues.
Waves of disruption:
•1993-2009: Microsoft launches its electronic encyclopedia,
Encarta sales soared to $100 million.
•2001: Wikipedia launched.
•Result: Encyclopedia Britannica is
no longer in print.
40

Wikipedia: Disrupting the Encyclopedia Industry
• The pursuit of social goals AND

• Creation of a profitable business
• Example: Jimmy Wales
– Founder of Wikipedia in 2001
• 500 million users per month
– One of the first to grasp the power of an open source
method
– Goal: provide knowledge on very large-scale
– Wikipedia supports are via donations not advertising
• Typifies a sense of idealism
– https://www.youtube.com/watch?v=oVFPW0r4jWk
41
Closed vs. Open Innovation
• Closed Innovation
– New products discovered, developed, and commercialized
internally
• Open Innovation
– Ideas and innovation can originate from external sources
• Customers
• Suppliers
• Universities
• Start-ups
• Competitors
42
Contrasting Principles:
Closed vs. Open Innovation
The Internet as Disruptive Force: The Long Tail
• Long tail in a digital world
 Both opportunity and threat
 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 of revenue from selling a
small number of nearly unlimited choices
• Short head is the mainstream

 Available at brick & mortar stores
 Significant inventory costs
The Long-Tail Consequences: Selling Less of More
25% to 45% of sales for online retailers is from products

NOT available in traditional retail stores. 7–44
45
Absorptive Capacity
• A firm’s ability to:
– Understand external technology developments
– Evaluate these external developments
– Integrate them into current products

or create new ones
Absorptive Capacity and a
Firm’s Technical Knowledge
Internal R&D
Absorptive capacity Technical

knowledge
Spillovers of competitors’ knowledge,

Extra-industry knowledge
Adapted from: Cohen and Levinthal, 1990

The Players in a Platform Ecosystem
Exhibit 7.13
© McGraw Hill
Advantages of the Platform Business Model
Platform models, such as Alibaba, Facebook, and Uber

scale more efficiently by eliminating gatekeepers.
They enable value-creating interactions between external

producers and consumers, and they set governance conditions.
They benefit from community feedback.
© McGraw Hill
Netflix Business Model: Leveraging Network
Effects to Drive Demand
Exhibit 7.14
© McGraw Hill
Uber’s Business Model: Leveraging Network
Effects to Increase Demand
Exhibit 7.15
© McGraw Hill
Uber’s Network Effects with Feedback Loop
Exhibit 7.16
© McGraw Hill

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Chapter 7: Business Strategy:

Chapter 7: Case Highlight:

• Streaming video is re-shaping the television industry.

• Netflix began streaming content online.

• Netflix began creating their own content.

Chapter 7: Case Highlight:

• Netflix re-shaped the TV Industry:

Chapter 7: Case Highlight:

• In 2019, Netflix had 150 million subscribers worldwide,

Dominant Positions Can Quickly Change

• Traditional networks vs. cable providers

• Cable providers vs. streaming content

• Typewriters to PC’s to mobile devices

• Innovation can be a powerful strategic force to

Causes of Rapid Technological Diffusion and Adoption

• Initial innovations are foundational for other rapid

Idea, Invention, Innovation, and Imitation

BASIC FIRST PRODUCT IMITATION

• Patents —exclusive rights to a new product,

1 = not at all effective 7 = very effective

Outsourcing Strategic Joint Internal

Limits Benefits of Shares Biggest risks &

Few Allows outside Permits pooling of the

Konica Pixar’s movies (e.g. Apple and Microsoft TI’s

PRODUCT INNOVATOR FOLLOWER WINNER

Selection process for standards and

Cooperating with lead users

Strategies for Limiting risk exposure

• User linkages, e.g.

Maximize VHS Betamax Maximize

• Undertake economic risk to innovate

The Five Phases of an Industry Lifecycle

• Supply and demand changes as industries age

Introduction Stage: Network Effects

• The positive effect that one user has on the

• Dvorak introduced in 1930s

Current limitations of electric vehicle adoption:

What will be the next paradigm?

• Demand increases rapidly.

• Firms begin to compete more intensely.

– The rate of growth declines

• Low price is an important competitive weapon

• Few large firms remain.

• Additional market demand is limited.

• Market has reached maximum size.

• Competitive intensity: increases

• Demand falls, often rapidly.

Crossing the Chasm:

Incremental vs. Radical Innovation

Architectural vs. Disruptive Innovation

How to Respond to Disruptive Innovation

• Guard against disruptive innovation

 Limited 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 – about $10,000

 Vscan - large cell phone – shaped device

 It’s a cross between an iPod and a flip phone