Chapter 7 Business Strategy Innovation Entrepreneurship and Platforms

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 Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 7: Case Highlight: Netflix: Disrupting the TV Industry • 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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Chapter 7: Case Highlight: Netflix: Disrupting the TV Industry • 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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 4

Chapter 7: Case Highlight: Netflix: Disrupting the TV Industry • 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. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 5

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. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 6

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. © Mc. Graw 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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 invention by entrepreneurs • Imitation – Copying a successful innovation Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 7. 2

Innovation: A Novel and Useful Idea That Is Successfully Implemented Exhibit 7. 3 © Mc. Graw Hill

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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, Space. X, Pay. Pal Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

24 The Five Phases of an Industry Lifecycle • • • Introduction Growth Shakeout Maturity Decline Exhibit 7. 4 • Supply and demand changes as industries age • Each stage requires different competencies Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

25 Introduction Stage: Network Effects • The positive effect that one user has on the value of a product for other users • Example: Apple’s i. Phone Exhibit 7. 5 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Some Standards Die Hard: QWERTY vs. DSK • QWERTY introduced in 1870 s Ø Slowed down typing to avoid jamming keys • Dvorak introduced in 1930 s Ø 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, Environmentallyfriendly, 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? © Mc. Graw 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 • Core competencies: – Manufacturing – Marketing Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. Exhibit 7. 7

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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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) Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Crossing the Chasm: Applied to the Mobile Phone Industry Exhibit 7. 9 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 32

Types of Innovation: Combining Markets and Technologies Exhibit 7. 11 © Mc. Graw 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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

GE’s Innovation Mantra: Disrupt Yourself! • GE Healthcare – global leader in diagnostics Ø Ultrasound machine for research hospitals – $250, 000 v Limited market for these in developing countries Ø 2002 local team at GE China – developed portable US v Laptop-based technology – Under $30, 000 for U. S. rollout Ø 2009 introduced a handheld US – about $10, 000 v Vscan - large cell phone – shaped device v It’s a cross between an i. Pod and a flip phone v Doctors can hang it around their neck 1– 38 7– 38

39 Strategy Highlight 7. 2 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. Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

40 Strategy Highlight 7. 2 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=o. VFPW 0 r 4 j. Wk Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Contrasting Principles: Closed vs. Open Innovation Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 42

The Internet as Disruptive Force: The Long Tail • Long tail in a digital world Ø Both opportunity and threat Ø 80% sales in a given category are NOT “hits” v Pareto principle Ø Technology enables easier access to the ‘tail’ Selling “less of more” v Online firms can gain a large share of revenue from selling a small number of nearly unlimited choices v • Short head is the mainstream Ø Available at brick & mortar stores v 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 Copyright © 2017 by Mc. Graw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Players in a Platform Ecosystem Exhibit 7. 13 © Mc. Graw 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. © Mc. Graw Hill