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Assessing and Managing Capabilities
Disruptive Innovation SMaL Case StudyPaxil Case StudyForced Splits (Innovation Workout)
Innovation = Invention + Commercialization
O p p o r tu n ityR eg is ter
In ven tio n s
Ide a
s
Com
mercial O
pportunities
Inno va tio n
C o re C o m p etences :A ssessm ent & Investm ent
M ark et E ntra nce &C o m p etitive S tra teg y
A d ap tiveE x ecutio n
From Chapter 5 capabilities (assets + competences) constrain the space in which we can
effectively compete
radical, progressive, creative, and intermediating industry innovation trajectories
acquiring capabilities can expand your opportunities for innovation, but are limited by the money and people at your disposal
successful innovation requires the collaboration of Idea generators, boundary spanners , evangelists, coaches and project managers
two sources of innovation: functional and circumstantial
innovations are often are procured from a combination of competitors’ laboratories, universities, and government laboratories.
Competences: Your Source of Innovations
What kinds of sources exist?Where do you find innovations?What technological and competence based forces will influence an innovation
Core Competences
These are the things that the firm does That they do better than other firms That are the source of their competitive advantage
Firms establish their core competences by: Investing in people Investing in assets, plant and land Identifying and focusing their mission
The Firm’s core competences are often those of its CEO and management
Competences
You best (perhaps your only) opportunities to
compete are Where Product Market
Needs Cross with
Competences
Y o u rC o m p eten ces
P ro d u ct M a rk etO p p o r tu n ities
C o m pe ti to r A'sC o m pe te nc e s
C o m pe ti to r B 'sC o m pe te nc e s
C o m pe ti to r C 'sC o m pe te nc e s
Yo u r C o m p eten c e
We Look for Competences in Functions and Circumstances
Functional (functional relationship through which firms
and individuals derive benefits from innovation) Internal; Competitors & related industries;
University, government & private labs
Circumstantial (under what circumstances will they benefit)
Planned firm activities Serendipity (fortunate accidents) Change (creative destruction)
Redifferentiating Gives us New Life from Old Competences
Innovation involves a dialectic: On the one-side are arguments about what the
customer wants (demand-side) Remember that the customer doesn’t care about us or
our products We have to make them care
On the other-side are arguments about what we can do (supply-side) These are determined by our core competences Which are to some extent determined by Mission and
Vision statements, and our Business Models
Resegmenting and Reconfiguring
Resegmenting Focusing on and better serving existing market
segment
Reconfiguring Completely changing the existing basis for
segmentations By reconfiguring existing value maps Or introducing entirely new kinds of solutions
Reconfiguring your Market
Reconfiguration is about Breaking down the Barriers (technological,
regulatory or organizational) That set limits on the Attributes you can
offer Or on the way that Consumption Chains
can be configured It builds on your insights from the Consumption
Chain Analysis and Attribute Map Looking to remove the Limitations imposed by
your existing Core Competences
How to Resegment
Resegmentation addresses the Dynamics of Customer Usage of a Product It builds on your insights from the Consumption
Chain Analysis and Attribute Map Looking for new Segments to market to
Observe behavior To Uncover existing Customer’s Needs To find new Customer Groups within your existing
customers Keep them from moving to competitors’ products
Resource-based view (RBV) of firmsDominant approach to business strategy today Basis for Core Competences
The resource-based view suggests that a firm's unique resources and capabilities provide the basis for a strategy.
The strategy chosen should allow the firm to best exploit its core competencies relative to opportunities in the external environment.
E n v ir o n m en t 'sR es o u r c e S u p p ly C u r v e
& C o n s tr a in ts
O w n er o fS tr a teg y
( R - P - V S o u r c eo f C o m p etit iv e
Ad v an tag e )
E n v ir o n m en t 's D em an dC u r v e & C o n s tr a in ts
Valu eF lo w
{ v alu e t , v o lu m e t}
Valu eF lo w
{ v alu e t , v o lu m e t}
Valu e Ad d ed b y S tr a teg y( d if f e r en c e b e tw een tw o v a lu e f lo w s )
Science & TechnologyWhat are they? How are they related?
S c ien c e
T ec h n o lo g y
I n f lu en c e / f eed b ac k
I n f lu en c e / f eed b ac k
Ver b allyE n c o d edI n f o r m atio n
Ver b allyE n c o d edI n f o r m atio n
Ver b ally E n c o d edI n f o r m atio n * p u b lic a tio n s * p a ten ts
P h y s ic a lly & Ver b ally E n c o d edI n f o r m atio n * p r o d u c ts & s er v ic es * d o c u m en ta tio m * p u b lic a tio n s * p a ten ts
Case Studies: Competences and Management Perspectives on Two Innovations
Electric Lighting
MS-DOS Operating System
For Example:For Example:Consider the Electric Lighting InnovationConsider the Electric Lighting Innovation
“Systems” provide Functional BenefitsThe lightbulb “system”
Thomas Edison, Humphrey Davy, and Joseph Swan all helped invent a practical and longer-lasting electric lightbulb in the 19th century
This was Science
Edison’s System “all parts of the system must be constructed with reference to all other
parts,, since in one sense, all the s form one machine part 1878 - Thomas Alva Edison, referring to an electrical grid in his article on the phonograph in the North
American Review
Edison and his team of engineers in Menlo Park, N.J., spent years building the entire electric system, from light sockets and safety fuses to generating facilities and the wiring network.
This was Technology
Edison beat all his predecessors at one crucial task: managing the whole process of innovation, from light-bulb moment to final product
Systems Warfare
Edison’s Strategy Develop the working DC system
Protect it with patents When George Westinghouse introduced a superior AC system
He attacked with a smear campaign
Westinghouse / Tesla won with superior technology 133 Hz (Westinghouse) to 60 Hz (Tesla) at 240 VAC Edison eventually switched to AC at 110VAC / 60Hz
Microsoft’s O/S InnovationThe most profitable innovation in history
Linking & Leveraging Strategy Get the business Create the standard Leverage the business Crush the competition
An Early Competitor
Case Study in MS-DOS
MS purchased Seattle Computer Products' QDOS for Quick and Dirty Operating System (written by Tim Paterson)
Written as a version of CP/M, with 4000 lines of assembler.
IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300 bugs, and decided to rewrite the program
This is why PC-DOS is copyrighted by both IBM and Microsoft.
Gates locked up the IBM deal with the help of his father’s law firm
est. value of services $250,000
Case Study in DOS
You could order one of three operating systems for your original IBM PC:
Digital Research's CP/M-86 for $495$495
UCSD p-System for several hundred dollarsseveral hundred dollars
this was a souped-up BASIC operating systems like that used by the Commodore 64
but portable like Java
DOS 1.0 for $39.95$39.95
Case Study in DOS
Microsoft’s OEM brochure touted future enhancements to DOS:
Unix-compatible pipes, process forks, and multitasking, as well as graphics and cursor positioning, kanji support, multi-user and hard disk support, and networking
None of these was ever added
This was neither Science nor Technology
(Innovation = Invention + Commercialization)
Capabilities
What to do with your Opportunity Register
Assuming you’ve been religiously adding to your Opportunity Register
You should by this time have a lot of different ideas for new and marketable products
Then the question becomes: Which projects should you take on; emphasize;
continue? The answer depends on your competences
Two Realities
Competitors simply cannot allow you to go unchallenged
and must try to erode your position
Understanding where to create a competitive position that cannot easily overcome is thus essential
You are not only competing with other organizations in customer markets You are also competing with them in the capital
markets for critical funds that you need to build future competitive position
Competences
You best (perhaps your only) opportunities to
compete are Where Product Market
Needs Cross with
Competences
Y o u rC o m p eten ces
P ro d u ct M a rk etO p p o r tu n ities
C o m pe ti to r A'sC o m pe te nc e s
C o m pe ti to r B 'sC o m pe te nc e s
C o m pe ti to r C 'sC o m pe te nc e s
Yo u r C o m p eten c e
Creative Tension
Innovation = Invention + Commercialization Can be
Technological, or Market related
Capabilities = assets + competences What you can do
Y o u rC o m p eten ces
P ro d u ct M a rk etO p p o r tu n ities
C o m pe ti to r A 'sC o m pe te nc e s
C o m pe ti to r B 'sC o m pe te nc e s
C o m pe ti to r C 'sC o m pe te nc e s
Yo u r C o m p eten c e
Dell’s War on InventoryFedEx’s Inverts the Post Office Business Model
Dell’s War on Inventory
In less than 20 years, Michael Dell moved from cluttered dorm-room operations
to a $25 billion a year company, outperforming giants such as IBM,
Hewlett-Packard and Compaq in the process.
Hyper-efficient supply chain
Dell is relentless in negotiating the best prices from suppliers, and
driving those savings through the supply-chain.
To do that, Dell replaces inventory with information.
Materials costs account for about 74% of Dell’s revenues
about $21 billion in 2000 Lowering materials costs by 0.1% can have a bigger
impact than improving manufacturing productivity by 10%.
Where other competitors carry one to three months of inventory, Dell carries 5 days.
Since materials costs in the computer industry fall by around 1% per weeks, carrying 5 days versus one month of inventory is
around 6% of materials cost.
Safety stocks are very expensive But they are very difficult to reduce.
Reduction requires complete and accurate information and forecasts about production and procurement.
Dell has standardized worldwide on i2 Technologies’ software, with hourly updates of all information from customers to
suppliers. five hours’ worth of inventory on hand, including work in progress.
This increases cycle time at Dell’s factories and reduces warehouse space.
The warehouse space is replaced with more manufacturing lines in a virtuous cycle Dell has traded inventory for information.
Customers
Dell’s online customer procurement Website puts Dell in contact with more than 10,000 customers daily – giving them more than 10,000 opportunities to forecast
demand and balance supply. For example, Dell can alter supply constraints through
promotions and substitutions. If inventory is low on Sony 17-inch monitors, Dell can offer a
19-inch model at the 17-inch price. This moves a lot of demand in real-time.
Competitors selling through retail channels cannot do this!
The bottom-line
Dell writes off less than 0.1% of total material costs in excess and obsolete inventory
Their competitors write off 2% to 3%.
FedEx
"The concept is interesting and well-formed, but in order to earn better than a 'C,' the idea must be feasible."
A Yale University management professor in response to Fred Smith's paper proposing reliable overnight delivery service. (before Smith went on to found Federal Express Corp.)
Fred’s Idea Compete for customers
Using new technologies
i.e., the increasing size and speed of jets
That restructure the geography of space time money
Overnight Delivery
Smith realized that he could turn Post Office economics upside-down
Post Office delivery optimized distance traveled
time was not a critical value,
package handling was cheap.
Smith saw that new air technology could let him ignore distance traveled
… and instead, optimize speed and handling to create new market value
Lock-in is not forever
In flat letter overnight delivery, Smith used: first mover advantage active management of the business ecology linking and leveraging (network externalities) “locked-in” customers
But Group III fax quickly substituted for overnight flat delivery
Tracking the Dynamics of the Core Competences
consequences of industrial change on the capabilities demanded of a competitive firm
‘Coreness’ and imitability of the firm’s capabilities determine the profitability of innovations dependent on those capabilities.
L o n g - term P ro f itsN o P ro f its
S h o rt- term P ro f itsN o P ro f its Hig h
L o w
N o n c o r e C o r e
C o re n e s s
I m ita bility
Why Incumbents Perform
An innovation is incremental (regular) if it conserves the manufacturers/s existing technological and market capabilities;
niche if it conserves technological capabilities but obsoletes market capabilities;
radical (revolutionary) if it obsoletes technological capabilities, but enhances market capabilities; and
architectural if both technological and market capabilities become obsolete. The point to note is that market knowledge is just as important as technological knowledge.
A rch itectu ra lN iche
R ad ica lIncrem en ta l P r es er v ed
D es tr o y ed
P r es er v ed D es tr o y ed
Te ch n ica l C a pa bilit ie s
M a rk e t C a pa bilit ie s
Difficulties Competing
Innovations are invariably built up of components, and thus building them requires two kinds of technical knowledge technology underlying individual components, and architectural knowledge about how to link components together.
If the innovation enhances both component and architectural knowledge, it is incremental;
if it destroys both, it is radical; if only architectural is destroyed, then the innovation is architectural; where only component knowledge is destroyed (for one or more
components) the innovation is modular.
R a d ica lM o d u lar
A rch itectu ra lIncrem en ta l P r es er v ed
D es tr o y ed
P r es er v ed D es tr o y ed
A rch it e ctu ra l K n o wle dg e
C o m po n e n t K n o wldg e
Trajectories
Industries evolve along four distinct trajectories radical, progressive, creative, and intermediating. Failure results from obsolescence of the firm’s products
or services arising from two directions: (1) a threat to the industry's core competences; and (2) a threat to the industry's core assets—the
resources, knowledge, and brand capital that have historically made differentiated the firm.
In term ed ia tin gP ro g ressiv e
R a d ica lC rea tiv e
P r es er v ed
O b s o le te
P r es er v ed O b s o le te
C o m pe te n ce s
A s s e t s
Trajectories in Practice
Creative, 6%
Radical, 19%
Progressive, 43% Intermediating,
32%
Markets and CompetencesCompetences are knowledge assets
By its very definition, you are very likely to know when you stumble across an innovation – the fact that what you have found is new to you, your customer or your employer makes it an 'innovation.' But because of its newness, you
are just as unlikely to know its value.
Innovations, to be successful, must align with the competences and assets of the firm
Y o u rC o m p eten ces
P ro d u ct M a rk etO p p o r tu n ities
C o m pe ti to r A 'sC o m pe te nc e s
C o m pe ti to r B 'sC o m pe te nc e s
C o m pe ti to r C 'sC o m pe te nc e s
Yo u r C o m p eten c e
Understanding InnovationTypes of Knowledge
Four kinds of knowledge underpin an innovation; two are Technological Market Component Architectural
Incumbents Fail when they Fail to “Get” one or the other type of Knowledge
Science generates commercial technologies in three phases
The first 'fluid' phase marks the prototyping of laboratory technologies
The second 'transitional' phase begins standardizing components, and defining consumer-producer relationships
Successful innovation demands the firm be sensitive to ‘Windows of Opportunity’
The early part of the S-curve is a period of idiosyncratic development, before standards or deep understanding of the technology exist Many competing theories and trajectories
exist, promoted by strong and volatile egos, making any investments highly risky.
As understanding evolves, standards are established, and technology advances incrementally, generally through sober research, investment
and hard work.
Physical limits of the S-curve
The physical limits of the S-curve are constrained by the limits of scientific knowledge; often technology alone cannot push it back.
Understanding InnovationLife cycle
Fluid phase Mainly lab based or custom applications of technology
Transitional phase Standardization of components, and consumer-producer interaction lead to dominant design
Specific phase Products built around the dominant design proliferate; innovation is incremental
N ear C erta in tyN on techn ica l f acto rs
m ay be igno red
L ittle U n certa in tyL o w in f luence o f
non techn ica l f acto rs
M ed ium U ncerta in tyH ig h in f luence o f
non techn ica l f acto rs
H ig h U ncerta in tyH ig h in f luence o f
non techn ica l f acto rs
Hig h
L o w
E r a o f F er m en t E r a o f I n c r em en ta l C h an g e
S ta te o f Ev o lu t io n o f Te ch
C o m ple x ity
What is an Innovation Worth?
Value ‘Happens’ in the Future
Your ‘Vision’ of the Innovation Firm is the best source of information about this future value From the ‘Vision’ you derive your ‘Business Plan’ From your ‘Business Plan’ you derive your ‘Strategies’ ‘Strategies’ comprise ‘Real Options’ which are conditional particular
‘Events’ occurring in the future The feasibility of each ‘Event’ is ultimately ‘Discovered’ at some point in the
future
Finance and accounting are geared towards measuring the past Strategy is designed to plan and control the future
To select the correct innovations from our opportunity register We need to assess how good our strategy will be
This is why Strategy Drivers The basis of our key ratios Are the basis of value as well
Easy and Difficult Industries
Deciding on investments in core competences for the future is easy as you move to the left on the line below
It is nearly impossible as you move to the right
W h e r e to u s e F in a n c ia l D y n a m ic s(a n d w ha t k in d s of corp ora te a ssets or serv i ces g en era te v a lu e)
P roperty,M ortgages,M in in g & E x tractiveIn du stries
U tilities &V oice T eleph on y
In su ran ce,E lectron ic M arkets& R isk M an agem en t
S of tw are,V ideogam es,C in em a , M u sic,N ew s
D ata T eleph on y,G loba l N etw orkS ervices (e.g . , sh ipp in g )
C om m odityM an u factu rin g(e.g . , paper)
C om plexM an u factu rin g(e.g . , ca rs, ch ip s)
L oca l S ervices(e.g . , L ega l,G overn m en t)
R eta ilin g ,E du ca tion &P u re R & D
B ran ded-L u xu ryM erch an d ise
M a in ly Ta n g ible A s s e t s M a in ly K n o wle dg e - I n ta n g ible A s s e t s
D C F & Tra dit io n a lV a lu a t io n M e th o ds a re A ccu ra te
Fin a n cia l D y n a m ics is Ne ce s s a ryfo r A ccu ra te V a lu a t io n
Business Models:Tying Narrative to Numbers What activities, operations and
products are within the ‘scope’ of the valuation analysis? (Bubbles: depends on audience)
What are the significant environmental influences? (Boxes: major competitive forces outside management control)
How does value flow through the relevant scope of the analysis? (Arrows: value metric)
R & D
C u s to m erR elat io n s h ipM an ag em en t
L ab o r C u s to m er s
F act o ry
W o r k
Production
Market Entry Strategy Model What are the major
competitive forces molding managerial strategy which add to, or take away from ‘Value’?
What ‘levers’ (strategy drivers) can management pull to influence value added?
What is the functional relationship between value and the strategy drivers? (Define the ‘Strategy Model’)
Technology Choice
Technology is shared across all competitors. It offers: Efficiency (improved performance at the same cost) Quality Novelty Substitutes
What are the major technologies relevant to managerial strategy which add to, or take away from ‘Value’?
What ‘levers’ (strategy drivers) can management pull to incorporate technology or react to the threat of technology?
What is the functional relationship over time of technological trends on value? (Define the ‘Technology Choice Model’)
Technology Choice Models will be implemented in the same manner as strategy models.
Cisco’s Innovation Strategy
Cisco
Cisco Systems has a reputation for expanding its capabilities through acquisitions.
Shortly after going public in 1990 went on a buying spree, acquiring 73 firms from
1993 to 2000. By late March 2000, at the height of the dot-com
boom, Cisco was the most valuable company in the world, with a
market capitalization of more than $US 500 billion.
Early years
This had not always been the case. During its first decade after it was founded in 1984 the
company acquired no businesses at all, sticking to selling routers and only routers. Cisco went public in 1990.
three years later, a faster and cheaper piece of hardware – the switch – threatened its business.
Cisco engineers scrambled to produce their own switch, but realized that they could not acquire the capabilities to produce one anytime soon.
Buying the ‘Switch’
In 1993 of Crescendo Communications for $95 million which got them into switches – fast. Cisco's engineers grumbled that they could have
produced their own switch in time. Most of Crescendo's executives stayed with
the company, and switches became a core Cisco business.
The switching unit today generates nearly $10 billion in annual revenues.
Acquisitions
Since then, using acquisitions where they are unable to develop internal capabilities
quickly enough to be competitive,
Acquisitions and partnering with other companies have enabled Cisco to retain its market dominance.
Cisco has made inroads into many network equipment markets outside of routing, including Ethernet switching, remote access, branch office routers, ATM networking, security, IP telephony and others.
Acquisitions
What began as a one-off response in an emergency soon evolved into a long-term strategy, an essential part of the Cisco culture.
While most big tech companies rely heavily on R&D to create products and business lines,
Cisco, after Crescendo, decided to strategically use acquisition to expand its capabilities: In 1995, Cisco acquired its way into firewalls and cache engines. In 1998, Internet telephony. In 2003, with the acquisition of Linksys, a home-networking
company, In 2006 by acquiring Scientific Atlanta, a set-top-box
manufacturer.
People The vast majority of Cisco’s acquisitions have
been targeted technology buys: small start-ups with 50 or less engineers whose
products link back to Cisco’s core competencies, routers and
Cisco has come to realize that the acquisition of technology really isn't just about technology.
Cisco’s People
"The people are the most strategic asset.“ Ned Hooper, vice president of business development, whose former
company LightSpeed was acquired by Cisco in 1998.
If, after the acquisition, Cisco loses the technologists and product managers who created, say, the Linksys router, then it has lost the second and third generations of the product
that existed only in those employees' heads.
That, is where the billion-dollar markets lie. And that is where Cisco's acquisitions are aimed. "We need the expertise,"
Five sorts of People (Manpower Assets)Are needed for Innovation
Idea Generators Can sift through large quantities of technological and market data
to identify ‘innovations’ Gatekeepers & Boundary Spanners
Conduits for knowledge from other firms and labs Champions (Entrepreneurs, Evangelists)
Sell the innovation to the firm Sponsors (Coach, Mentor)
Senior level manager who provides behind the scenes support, access to resources, and protection from political foes
Project Managers Planners with discipline; one-stop decision making shop
Case Study in Disruptive Innovation: SMal Camera
SMaL’s Challenge in 2003
SMaL has experienced initial success by targeting a market where competition was sparse.
But now competitors like Casio are arising. What is SMaL’s main competitive challenge circa 2003
SMaL is suffering from ‘disruptive innovation’
Sometimes the best strategy can’t save you from progress and new technology
The Challenge
Innovation on the Demand Side
It is important to get the differentiation large enough to make the investment in the technology worthwhile, yet small enough so it doesn’t take six years to develop a market
Charles Sodini, Chairman of SMaL
Q: How do you develop successful new technology or innovations?
Forced Market Reconfiguration:
Digital Cameras
Forced Market Reconfiguration: Digital Cameras
Three potential market segments
Digital Still Cameras
Security-surveillance
Automotive (cruise control, etc.) Currently 10%-15% of US cars have this technology
How do you “Sell” the product? Hardware (CCD, CMOS, X3)? Software (applications)?
Autobrite® How you manipulate demand with Software
Images on the left, the inability of conventional cameras to adapt to varying lighting conditions creates a significant safety risk.
Images on the right demonstrate how accurately SMaL's ACM100 with proprietary Autobrite technology capture what the eye sees.
Camera Imaging Technologies
CCD (Sony, Kodak; industry standard)
CMOS (Kodak, Canon, SMaL; used in phones, Canon in some EOS)
X3 (Foveon; used in Sigma SD10)
Focus
Having a screen between you and the consumer at this size company is important
(you don’t want a large company at this stage)
Manufacturing is a high fixed cost, low margin game
Product definition is the key technological component that allows us to capture value
Sodini
Six Strategies for SMaL
S#1: Move on up S#2: Focus on Security and Surveillance S#3: Focus on Automotive S#4: Focus on Phone Cameras S#5: Search for new markets that fit SMaL
technology’s strengths (Making a left turn) S#X: Mix and match any two or three of the
above five
Case Study: Paxil