Lecture Three Flashcards
(23 cards)
what are the degrees of innovation?
innovations can be dramatic, but they can also reflect minor changes. innovation is a spectrum but generally three degrees:
- incremental innovation
- breakthrough innovation
- radical (or discontinuous) innovation
what is incremental innovation?
improvements to existing products, services and processes, such as line extentsions.
optimising existing products for existing customers.
new products or service that address the same existing markets.
easy to develop based on customer needs
growth only possible through taking market share
what is breakthrough innovation?
new products or services with unique features that provide real benefits to customers.
difficult to develop, as they require deep customer insights
generate growth through opening new, adjacent markets
may take time to generate sales
what is radical innovation?
develops products, services for markets that do not yet exist.
new business models that transform markets.
rare and difficult to develop
cannot be tracked back to a previous version, e.g. the MP3 player technology cannot be tracked back to the tape cassette player technology.
radical innovations tend to lead to a creative destruction.
need to consider collateral changes: when the innovation is so new that the organisation in its present form cannot manage it.
what is innovation ambition?
when wrestling with these questions, managers need to decide what the role of innovations is in their firms. this is known as innovation ambition.
-increasing the degree of innovation
- increasing the breadth of markets addressed.
key message: firms need to decide their innovation strategy.
- what do we want to achieve from innovation?
- how should we spread our innovation budget across categories (incremental, breakthrough, radical)?
what is the golden ratio of investment (%)
incremental (70%)
breakthrough (20%)
radical (10%)
discuss the golden ratio of investment
a company with an ambition to grow through new market development might divide its ambition budget acorss each strategic bucket using 70:20:10
a company with an ambition to grow through conservative strategies might employ a 90:5:5 ratio.
what are the strengths and cautions of the golden ratio?
strength: concept of ratio is useful as it forces firms to evaluate current strategy, its appropriateness, and their innovation ambitions.
caution: using a ratio can be misleading. no single ‘golden ratio’ can guarantee growth and success.
what is discontinuous innovation?
Some innovations disrupt industry equilibrium and cause major upheaval.
Transform relationships between customers and suppliers.
Restructure marketplaces and economies.
Displace existing products and create new product categories.
Often referred to as discontinuous innovations
(Noke et al., 2008).
what are sources of discontinuity?
- new technology emerges
- new market emerges
- political regime
- running out of road
-sea change in social attitudes/behaviour - regulatory regime changes
- new business models
- unpredictable events
what is the S curve in technolical improvement?
Many technologies exhibit an S-curve in their performance improvement over their lifetime
When performance of a technology is plotted against the amount of effort and money invested, it typically shows:
1. Slow initial improvement – because fundamentals are still poorly
understood
2. Then accelerated improvement – as scientists or firms gain a deeper
understanding of the tech.
3. Then diminishing improvement – as the technology begins to reach
its inherent limits
Pattern has been documented in various
technologies; e.g. disk drives, semi-
conductors, automobiles, sailing ships, etc.
Schilling & Esmundo (2009)
apply the S curve to discontinuous technology
existing technologies can be rendered obsolete by new ‘dicontinuous’ technologies.
a new innovation is ‘discontinuos’ when it fulfils a similar market need, but does so by building on a new knowledge base (starts a new s curve)
discontinous technologies may intially have lower performance than incumbent technology, making incumbent firms reluctant to switch over.
each technlogical discontinuity inaugurates a period of turbulnece and uncertainty. there is considerable design competition as firms experiment with different forms of the technology before a dominant design emerges.
What is the discontinuous innovation lifecycle?
The fluid phase:
- high uncertainty about target and technical knowledge
-highly turbulent
-experimentation, rapid rates of change
-emphasis on product/service innovation
-dominant design is developed, but has not emerged
The transtitional phase:
-convergence around dominant design
- rules of the game start to emerge
-emphasis on process innovation, on perfecting and refining offering
the specific phase:
- low uncertainty
- incremental changes
- emphasis on cost reduction, sales economies, process innovation
- scope of innovation decreases, stage is set for new discontinuous innovation to start the process again, to sustain competetive advantage
example??
what is disruptive innovation?
disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product ot service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.
what are features of disruptive innovation?
aims for simplicty, conveinience, accessibility, and affordability where complication and high cost are the status quo.
target market intially unattractive or inconsequential to industry incumbents.
eventually the new product or idea completely redefines the industry.
distruptive innovations are not breakthrough technologies that makes good products better; they are innovations that make products and services more accessible and affordable, thereby making them available to a much larger population.
how does disruptive innovation happen?
due to increasing pressures to innovate, most firms end up developing products or services that are too sophisticated, too expensive and too complicated for most of their customers.
firms pursue this ‘sustaining innovation’ strategy at the higher tiers of their markets - charging the highest prices to their most demanding and sophisticated customers at the top of the market, resulting in higher profitbality.
by doing so, companies unwittingly open the door to ‘disruptive innovations’ at the bottom of the market.
what are characteristics of disruptive businesses?
- lower gross margins
- smaller target markets
- simpler products and services that may not appear as attractive as existing solutions.
because these lower tiers of the market odder lower gross margins, they are unattratcive to other firms moving upward in the market, creating space at the bottom of the market for new disruptive competitors to emerge.
example of distruptive innovation
how should firms resond to the disruptive threat?
incumbent firms facing the threat of disruptive innovation should be vigilant!
-do they invest resources in technologies that may never be commercialised?
- or do they stand back and risk being threatened by the introduction of disruptive innovation?
in most cases, incumbents will still have some advantages over late entrants (knowledge of market, equipment, supply chains)
what are the 3 options in responding to a disruptive threat?
firms facing a disruptive threat have three options:
- find an immediate application
if the disruptive technology is not suitable for the existing market, the incumbent can set up a new division that is kept separate from the rest of the company, so that it can develop its own business model (e.g. HP with inkjet printers)
- focus on existing business
if the disruptive technology does not precisely replace the exisitng one, the incumbent firm may respons aggresively by emphasising and enhancing the features of the exisisting business, and how they are better than the new one (e.g. cinemas vs streaming services)
-attack back
disrupt the disruption. incumbents can emphasise and enhance the intrinsic advantages of their existing offering against the disrupting technology, and also add features that change the basis of competition (e.g. swiss watch industry vs new, accurate and cheaper watches).
what are challenges to discontinous and disruptive innovation
both discontinous and disruptive innovation offers threats and opportunities for both new and established players.
changing the rules of the game puts a premium on entrepeneurial behaviour i.e. being able to spot an emerging opportunity and exploit it.
entrpeneurs typically face the challenge of managing growth of business from:
- a good but risky opportunity
- resource poverty
what is competence destroying vs competence enhancing?
not all technological shifts upset the established players.
if the significance of new developments is recognised early enough this can strengthen their position.
major technological shifts could be:
competence destroying - new entrants dominate the industry enabled by radical technology
competence enhancing - strengthens the hand of existing players
