MANAGEMENT STRATEGY

Topic 5
Business Strategy Ⅱ
M E N G J I N G AO
Learning Objectives
 Describe the competitive implications of different stages in the industry life cycle.

 Derive strategic implications of the crossing-the-chasm framework.

 Outline the four-step innovation process from idea to imitation.

 Apply strategic management concepts to entrepreneurship and innovation.

 Categorize different types of innovations in the markets-and-technology framework.

 Explain why and how platform businesses can outperform pipeline businesses.
Sources: Wikipedia
Netflix is Reshaping the TV Industry
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.
• Netflix offered a sale to Blockbuster, they declined.
Netflix began streaming content online on many types of devices: Innovation wave 1
• Adjusted quickly to consumer preferences.
• Netflix began creating their own award-winning content. Innovation wave 2
Reshaped the TV industry via online streaming:
• Access viewed on-demand.
• Programming developed based on algorithms.
Netflix in 2022:
• Spend $18 billion on content, more than any Hollywood studios Innovation continues
• But it started to lose subscribers rapidly
• Offer a lower-tier, ad-supported service.
 Innovation Is a Competitive Weapon
Innovation can create and destroy value.
Innovation often comes in waves:
• Many firms dominated an early wave of innovation, and are challenged by
the next wave.
~

• Traditional networks vs. cable providers.

(
'

innovatkon
examples • Cable providers vs. streaming content.
• Typewriters to PC’s to mobile devices.
Initial innovations are foundational for other rapid innovations.
Innovation and the Birth of New Industry
Innovation allows firms to
• Redefine the marketplace in their favor.
• Achieve a competitive advantage.
~

Innovation frequently leads to the birth of new industries. (e.g., Overnight

~

Express Delivery)
Industry life cycle over time:
• The number and size of competitors change.
• Different types of consumers enter the market.
• The supply and demand sides of the market change.
• Different competencies are needed for the firm to perform well.
Industry Life Cycle
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Introduction Stage
• A new industry emerge when successful innovation launched
• Strategic objective: achievinga
…
market acceptance
…

• Core competency: R&D, some marketing(Capital intensive)

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• Market size: small

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• Market growth: slow

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• First-mover Disadvantage:
• educate customers
• find distribution channels and complementary assets
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• continue to perfect the product

…
Growth Stage
• Industry standard emerges, demand is strong, any firms may thrive (e.g., pigs fly!)
~

• Maintain differentiation (Some may reach economies of scale, learning/experience

~

curve effect, able to drive down the cost)

• Strategic objective: Staking out a strong strategic position
~
~

• Core competency: R&D, some 나

…

ㅡ
manufacturing and marketing
ㅡ

• Market size: Moderate

• Market growth: high
• Price: falling (iPad at 2010-over $800, iPad at 2013-$300)
• Competitors: many
~

a
• Product innovation decreases, process innovation increases
“Even pigs can fly when placed
against the wind.”
Product innovation VS process innovation
Product innovation:
• New / recombined aspects of a
~

product.
~

Process innovation:
• New ways to produce a product.
)~~
Want to lower cost ×

Product innovafion

decreases over fime

Shakeout Stage
• After standards emergence
• Differentiation or Blue Ocean Strategy
r
ㅡ

• Strategic objective: Surviving

• Core competency: manufacturing and1ㄱ
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ㅡ

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process engineering (to reduce cost)
Market size: large
ㅡ

• Market growth: moderate and slowing down

• Price: Moderate
• Competitors:ㅇ
fewer
• Firms compete against one another, rather than increasing the size of the pie.
Maturity Stage
• Strategic objective: Maintain strong strategic position
…
~

• Core competency: manufacturing and process engineering, marketing

…
ㅡ
ㅡ ㅡ

• Market size: largest

• Market growth: none to moderate
• Price: low
• Competitors: moderate, but large ones
• Industry structure-> oligopoly (a few large firms).
ㅡ
…

• Demands: replacement or repeat purchases

Decline Stage
• Strategic objective: Exit, harvest, maintain, consolidate
-
…

• Core competency: manufacturing and process engineering, marketing, service

~
…

• Market size: small to moderate

• Market growth: negative
• Price: low to high
• Competitors: few, if any
• Changes in external environment (PESTEL) can take industries from maturity to
m ~ ~ …

decline
~
 Crossing the Chasm,
g ( ?

• Each stage of the industry life cycle is dominated by a

different customer group.
• Early customer groups and later customer groups can
make for a difficult transition between the different
parts of the industry life cycle.
• Such differences between customer groups lead to a
big gulf or chasm, where companies and their
innovations frequently fall.
• Companies that recognize these differences and are
able to apply the appropriate competencies at each
stage of the industry life cycle will have a chance to
transition successfully from stage to stage.
High Failure Rates of New Ventures:
The Crossing-the-chasm Framework
Source: Adapted from G.A. Moore (1991), Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (New
York: HarperCollins), 17.

browth Q Shakeout
Technology Enthusiasts
Enter the market during the introductory stage.
ㅇ
…

◦ Smallest market segment, 2.5% of the total market potential.

Have an engineering mind.

Proactively pursue new technology.

Enjoy using beta versions.

Tinker with product imperfections.

Provide free feedback and suggestions.

https://uxdesign.cc/can-apples-vision-pro-succeed-
where-google-glass-failed-b186898989cf
Early Adopters
Thousands of dollars in deposits for
Enter the market during the growth stage.
~
…
the car with only seeing it on the

Q
internet.
• 13.5% of the total market potential.
~
Demand is driven byㅇ imagination and ㅇcreativity.
• Ask themselves, “What can this new product
do for me or my business?”
To capture these customers:
ㅇ
• Directly communicate the product’s potential.
Early Majority
Enter the market during the shakeout stage.
~

•ㅇ34% of the total market potential.

• Decision criteria, a strong sense of practicality.
0

• Observe how early adopters respond.

• Rely on endorsements of others, such as reviews
8

• Weigh the benefits and costs carefully.

~

This group is key to catching the growth wave.

…

Winning in this stage is critical!

Late Majority
Enter the market during the maturity stage.
ㅡ

•ㅇ34% of the total market potential.

Not as confident in their ability to master the technology:
• Do not like uncertainty.
…

Represent the majority of the market.

Buy from well-established firms with a strong brand.
ㅡ ~
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Enter the market during the decline stage.
w
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•ㅇ 16% of total market potential.
Adopt a new product only if necessary (reluctant).
~

Generally don’t want new technology.

…

Typically not pursued as future customers.

• Demand is small.
• Early and late majority are at this time moving on to different products and
services.
 The Smartphone Industry (several examples)

Iridium Treo BlackBerry

어 1998. $5000 per phone.$14 per min for call. <failed at technology
• Motorola-Iridium,
enthusiasts -> early adopters>
~

•ㅇTreo, 2002. full functioned smartphone. Use exclusive wireless service and lack of
apps. <failed at early adopters -> early majority>
~

ㅇ
• Blackberry, 2000. full functioned smartphone. <failed at early majority -> late
…

majority>
…
Source: Wikipedia
Crossing the Chasm: The Mobile Phone Industry
A Second Chance of Technology
1) What is the stage of the online streaming industry in Korea now/or in your
home country?
2) What stage of customers Netflix is facing in Korea/ or in your home country?
Did you purchase a membership, and what types of customers do you think
you are?
 Ida
Ʃnventon

Jnnovation
smitation
The Innovation Process
The discovery, development, and transformation of new knowledge.
A four-step process:
◦ Idea: 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 rec
~ e e r

ombination of existing ones

~
D
◦ Innovation: concerns the m
~
commercialization of an invention by entrepreneurs (Novel, useful,
and successfully implemented)
◦ Imitation: copying a successful innovation
~

Idea Invention Innovation Imitation

Entrepreneurs
The process by which change agents Examples:
undertake economic risk to innovate.
• Reed Hastings: Netflix.
•aCreate new products, processes,
• Elon Musk: Tesla Motors, Solar City,
…
ㅡ

and organizations.
~

SpaceX, PayPal.
• Create value for society.
ㅡ

• Commercialize ideas and

…

inventions.
~
Different Entrepreneurship
STRATEGIC ENTREPRENEURSHIP: SOCIAL ENTREPRENEURSHIP:

• Pursuit of innovation using strategic

ㅡ …
• The pursuit of social goals while
…ㅁ

tools and concepts.

…
creating profitable businesses.
~

• Combining entrepreneurial actions. • Evaluate performance by financial,

ㅡ

• Creating new opportunities. ecological and social contribution

ㅡ ㅡ

~
metrics.
• Exploiting existing opportunities.
…

CORPORATE ENTREPRENEURSHIP:

• Or intrapreneurs. ㄴ)
ㅡ

• Innovating within existing companies.

ㅡ ~
:
Do You Want to be an Entrepreneur?
There’s a public debate about whether entrepreneurs are better off skipping college.
• Some famous entrepreneurs have neglected higher education.
• However, most entrepreneurs are more likely to be better educated.
• College often results in debt, but also higher paying jobs.
Questions to consider:
• Thinking about today’s business climate, would you say that now is a good time to start a
business? Why or why not?
• Do you see higher education as a benefit or detriment to becoming a successful
entrepreneur? Why?
Innovation is good
“If a man has good corn or wood, or
boards, or pigs, to sell, or can make better
chairs or knives, crucibles or church
organs, than anybody else, you will find a
broad hard-beaten road to his house,
though it be in the woods.”

“Build a better mousetrap, and the

Ralph Waldo Emerson
world will beat a path to your door.” (1803-1882)

Sources: Wikipedia
but not always profitable

There are over 4,400 patents of mousetraps issued by the US Patent and
Trademark Office.

But less than 25 creators have earned any profit.

Why???

Sources: Wikipedia
 Profitability of Innovation
It depends on value created by the innovation and the share of that value
~ ~

that the innovator is able to capture.

ㅡ

Grant， P245
Profitability of Innovation (cont.)
the scope in which Knowledge and innovations cam be Pro 아ecfed from imifators

ㄱ
~
Regime of appropriability: the conditions that influence the distribution of the
value created by innovation.
The innovator’s ability to profit from innovation depends on 3 components of the
~~~
regime of appropriability :
Z
-Ability to protect1 property rights (patents, copy right, trade marks, trade secrets)

[ 나
~
→
-Tacitness and complexity of the technology
-Lead time: time for followers to catch up (lock in s/c, network effects,
~

learning/experience curve)
When the appropriability regime is 자
strong, innovators capture most of the value,
?
when it’s weak, others capture most of the value.
~
Complementary Resources and Value Capture

Grant
 The Teece Framework

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Source: Ceccagnoli, M. and Rothaermel, F.T., 2008. Appropriating the returns from innovation.
 EMI CT Scanner
EMI Technology
Innovator

Product Development

Manufacturing

GE
Manufacturing & Marketing
Distribution Capabilities

Distribution
,
How to get profit then? Commercialization The ProceSs smth Principally for financcal gain
Strategy
Of managing
or
ruaning

Competition in the product market

◦ Internal commercialization
◦ Biggest investments yet benefits of control
Cooperation with incumbents
◦ “Market for Ideas”: Contracting out ideas
Licensing:
ㅡ

e.g. Microsoft non-exclusive licensing to IBM with its MS-DOS operating system
Outsourcing certain functions
…

e.g. Apple outsourcing manufacturing to Foxconn and Pegatron

Strategic Alliance
~

e.g. Nike+Apple
Joint Venture
~

e.g. Panasonic+Tesla
 To Lead or to Follow?
Product Innovator Follower The winner
Jet airliner De Havilland (Comet) Boeing (707) Follower
Float glass Pilkington Corning Leader
X-ray scanner EMI General Electric Follower
Office PC Xerox IBM Follower
VCRs Ampex/Sony Matsushita Follower
Instant camera Polaroid Kodak Leader
Microwave oven Raytheon Samsung Follower
Video games player Atari Nintendo/Sony Followers
Disposable diaper Procter & Gamble Kimberley-Clark Leader
Compact disk (CD) Sony/Philips Matsushita, Pioneer Leader
Web browser Netscape Microsoft Follower
Web search engine Lycos Google Follower
MP3 music players Diamond Multimedia Apple (iPod) Follower
Operating systems for mobile devices Symbian, Palm OS Apple, Google Followers
Cryptocurrencies Bitcoin Etherium, Ripple Leader
Flash memory Toshiba Samsung, Intel Followers
E-book reader Sony (Digital Reader) Amazon (Kindle) Follower
Social networking SixDegrees.com Facebook Follower
Some Key Considerations to answer to lead or to
follow
Can the innovation be If so, advantages in
protected by intellectual leadership
property rights or lead-time
advantages?
•If so, follower maybe better
•Followers can avoid
ㅡ

How important are investing in

complementary resources?
~

~
complementary resources
by using better-established
…

~
industry infrastructure
Is there potential to establish
If so, advantages in
an industry standard ?
leadership
Types of Innovation

New Architectural innovation Radical innovation

Market

Existing Incremental innovation Disruptive innovation

Market

Existing New
Technical Capabilities Technical Capabilities
 New markets tech
EXiSf Market , fech

Incremental vs. Radical Innovation

INCREMENTAL INNOVATION: RADICAL INNOVATION:

• Mostly observed.
…
• Novel methods & materials.
*

• Builds on established knowledge. • Entirely new knowledge base or

…

recombination of existing knowledge.

…

• Results from steady improvement. …

• Targets new markets and technology.

…

• E.g., the iPhone, the Ford Model T, the x-ray

machine, the airplane, genetic engineering,
and decoding of the human genome
 - Businessesalreadyestablished
f marketorindustry
「

in each
…

Why Incumbent Firms Tend to Focus 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.
~ ~
 Ne W market Marke와
Ehisting
EXisfing tech New tech

Architectural vs. Disruptive Innovation

ARCHITECTURAL INNOVATION: DISRUPTIVE INNOVATION:

• Existing technology leveraged into a

…
• Leverages new technologies in
ㅡ

new market.
…
existing markets.
ㅡ

• Known components, existing • New product / process meets existing

technology, used in a novel way.
ㅡ
customer needs.
• E.g., Xerox-Canon
 D
419
쉽

Disruptive Innovation

Clay Christensen (1952-2020), who developed the theory of disruptive innovation,

if in a market,
1. There is a large population who historically had no money, equipment, or skill to
use the product; or use the product in an inconvenient, centralized location.
2. There are customers at the low end of the market who would be happy to
purchase a product with fewer features at a lower price

Source： Clayton M. Christensen, Michael Raynor, and Rory Mcdonald. “What is disruptive innovation?”, 2015
Disruptive Innovation: Riding the Technology
Trajectory to Invade Different Market Segments
from the Bottom Up
Characteristics of technology in DI:
1. It begins as a low-cost solution to an
…
ㅡ

existing problem
2. Initially, its performance is inferior to
the existing technology, but its rate of
ㅡ

technological improvement over time

…

…
is faster than the rate of performance
increases required by different
~

market segments.
ㅡ

e.g., Jap. carmakers

Disruptive Innovation (cont.)
다
What drives successful disruptive innovation (as disruptors)?
1. Incumbents do not care: disruptive innovation invades the market from the bottom up,
incumbents don’t care about the low-end as its often a low-margin business
2. Incumbents are slow to change: incumbent firms tend to close to current customers and
continually invest in the existing technology; when new tech proves to be a better one,
customers switch. But the incumbent firm is too late.
E.g., Netflix vs cable TV
How to respond to disruptive innovation (as incumbents)?
1. Continue to innovate to stay ahead of the competition
2. Protecting the low-end market
ㅡ

3. Disrupt yourself.

Picture source: wikipedia

GE: Vscan
Business Models
Business model describes a firm’s competitive tactics and initiatives
ㅡ ㅡ

– how a firm intends to make money

~

- how the firm conducts its business with its buyers, suppliers, and partners in order to get profit
~
ㄱ

It is the logic of the company - how it creates, delivers, and captures value for stakeholders

54% of senior executives: Business model innovation is more important than process or product
innovation.
- often more costly
- higher risk
- a longer time to come up with and implement

Business model innovation complements to product innovation, and raises the barriers to
ㅡ

imitation.
ㅡ
 The Why, What, Who, and How of Business
Models Framework

The process of formulating and

implementing a business model by asking
the important questions of the why, what,
who, and how.

Source: Adapted from R. Amit and C. Zott (2012, Spring), “Creating value through business model innovation,” MIT Sloan Management Review: 41–49.
Popular Business Models
• Razor-razor-blades : pay for replacements
• Subscription: pay for access
• Pay-as-you-go: pay for what you consume
• Freemium: pay for extra features/add-ons
• Wholesale: products sold at a discount
• Bundling: more than one product sold at a discount.
• Agency: producer relies on an agent or retailer to sell the product, at a predetermined perce
ntage commission
• …
Dynamic Nature of Business Models

Business Models:
• Can be combined. E.g., razor-razor-blade + subscription
…

• Can evolve. E.g., freemium comes from razor-razor-blade

~

• Can be disrupted. E.g., Amazon $9.99 Kindle e-books

ㅡ
 Platform Business Model ex) uner airbub
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Image source: https://insuranceblog.accenture.com/carriers-looking-to-deliver-living-services-must-drop-outdated-business-practices
Platform vs. Pipeline Businesses
PLATFORM BUSINESS: PIPELINE BUSINESS:

• Enables interaction between producers and

ㅡ ㅡ
• Linear transformation through the value
~
m

consumers.
~
:
chain.
ㅡ

• Its overarching purpose is to enable matches • Research and development, then design,
ㅡ ㅡ ~

among users. then manufacture, then sell.

ㅡ
ㅡ
ㅡ

• Provides infrastructure and sets governance

~

conditions.
ㅡ

~
 The Players in a Platform Ecosystem
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Car manufacturers and thruthe plafform
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through the
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Source: Adapted from M. Van Alstyne, G. G. Parker, and S. P. Choudary (2016, April) “
Pipelines, platforms, and the new rules of strategy,” Harvard Business Review.
Advantages of the Platform Business Model

• They scale more efficiently by eliminating gatekeepers.

ㅡ

• E.g., remove middle-person

•They unlock new sources of value creation and supply.
…

• E.g., Hotel VS Airbnb

•They benefit from community feedback.
~

• E.g., reviews
 How to Success A Platform?-Network Effect
+
More
Demand
+ +
Less Fee
Charged

Faster Pickup More Drivers

Less Driver
Down Time
+ +
More
Geographic
+ Coverage

Image source: This Photo by Unknown Author is licensed under CC BY

 Section 1: The Industry Life Cycle
◦ Introduction stage
◦ Growth stage
◦ Shakeout stage
◦ Maturity stage
Summary ◦
◦
Decline stage
Crossing the Chasm

Section 2: Innovation
◦ The innovation process
◦ Entrepreneurship
◦ Capturing value from innovation
◦ Timing innovation: to lead or to follow
◦ Types of innovation: Incremental VS radical VS architectural VS
disruptive innovation

Section 3: Business models, platforms