executive master in international postal management patrick foley april, 2010
TRANSCRIPT
Executive Master in International Postal Management
Innovation
Managing in Complex and Uncertain Times:
Red and Blue Oceans
Tuesday 13th April, 2010
Patrick Foley
Innovation has a range of meanings and applications
Definitions of innovation A successfully commercialised invention
A learning process where knowledge is enhanced and applied
The solution of problems through discovery and creation
The successful production, assimilation and exploitation of novelty
A new or different solution to a new or existing problem
Device + Marketing
Systematic entrepreneurship
The process of turning an idea into income - commercialising invention
The search for, discovery experimentation, development, imitation and adoption of new products, new processes and new organisational set-ups
The effort to create purposeful, focused change in an enterprise’s economic or social potential
Innovation
Innovation = Invention + Commercial Exploitation
Is inventing the light bulb enough?Is inventing the light bulb enough?No : it must pass the five tests of a new No : it must pass the five tests of a new
innovationinnovation
1. Function Test (does it perform the function?)2. Mass Production Test (can it be mass
produced?)3. Market test (will it sell/ is there a solid
market channel?)4. Financial test (Can we do all the above at a
profit?)5. Permission Test (can it be legally used in
the context intended)
Innovation and Value Creation
The production process must be capable of meeting the design
specifications.
Also, the design should facilitate ease of
production and take advantage of production systems, technologies
etc.
Delivery, installation, commissioning and after
sales service and support must all meet or exceed the customers
expectations.
PRODUCTION
CUSTOMER
NEEDS
PRODUCT DESIGNS & SERVICES
The Marketing and Sales departments must understand the customer and translate this knowledge into product design parameters.
Also, advances in product design can occur ahead of needs.
Sources of innovation fall into two distinct categories
Source: Professor Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles; Harvard Business Review: Innovation, 1991
Unexpected occurrences
Incongruities
Process needs
Industry & market changes
Demographic changesDemographic changes
Changes in perceptionChanges in perception
New knowledge
Demographic changesDemographic changes
Changes in perceptionChanges in perception
New knowledge
Four sources of opportunity exist within a company or industry
Three exist outside a company’s social & intellectual environment
In all cases, the outcome is the creation of something new and transformational
The unexpected
Examples of innovative inventions
Du Pont’s Nylon, G.D. Searle’s NutraSweet, Alexander Fleming’s penicillin
The incongruity
Process needs
Changes in industry or market structure
Demographics
Changes in perception
New knowledge
Alcon Industries’ cataract enzyme, Ro-Ro container ships
AT&T’s automatic switchboard, Mergenthaler’s Linotype, Ochs, Pulitzer and Randolph Hearst’s modern advertising
Nokia’s mobile phones, investment banking, the car
BUPA’s healthcare insurance, Japan’s robotics industry, Club Mediterranee’s travel & resort business
Pfizer’s Viagra, organic food
J.P.Morgan’s commercial banking, Douglas & Boeing’s commercial aircraft, the computer
Inte
rnal
opp
ortu
nitie
sE
xter
nal
opp
ortu
nitie
s
Red Ocean versus Blue Ocean Strategy
The imperative for red ocean and blue ocean strategies are starkly different
Red Ocean StrategyRed Ocean Strategy
Compete in existing market space
Beat the competition
Exploit existing demand
Make the value/cost trade off
Align the whole system/activities with either differentiation or low cost
Compete in existing market space
Beat the competition
Exploit existing demand
Make the value/cost trade off
Align the whole system/activities with either differentiation or low cost
Blue Ocean StrategyBlue Ocean Strategy
Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value/cost trade off
Align the whole system/activities in pursuit of differentiation and low cost
Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value/cost trade off
Align the whole system/activities in pursuit of differentiation and low cost
Porter’s Five Forces ModelPOTENTIALENTRANTS
SUPPLIERS
SUBSTITUTES
BUYERS
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Threat ofnew entrants
Bargaining power of buyers
(customers)
Threat of substitute products or services
Bargaining power of suppliers
Source: M.E. Porter, Competitive Advantage (1985)
(Competitive forces) determine the profit potential of the industry and therefore, its attractiveness
(Competitive forces) determine the profit potential of the industry and therefore, its attractiveness
Forces DeterminingIndustry Attractiveness
1. Intensity of Direct Competition– Excess production capacity– Standardised products– Large number of competitors– Low market growth– Commitment to industry
Forces DeterminingIndustry Attractiveness
2. Buyer Power
– Price sensitivity of buyers
• A function of buyer profitability/perceived benefits
• Proportion of product’s cost in their total expenditures
– Negotiating power
• Few buyers
• Many manufacturers
• Little differentiation
• Low switching costs
• Opportunities for backward integration (for industrial buyers)
Forces DeterminingIndustry Attractiveness
3. Threat of new entry
– Weak barriers to entry (and demonstrated profitability) encourage new firms to enter industries
• Patents & the diffusion of proprietary knowledge (e.g., pharmaceuticals)
• Legislation (e.g., airlines)
• Economies of scale (i.e., minimum efficient scale)
• Capital requirements (e.g., telecoms)
• Strength & importance of brands
• Threat of retaliation
• Access to distribution channels
Forces DeterminingIndustry Attractiveness
4. Threat of substitutes
– Indirect competitors that can undermine demand and prices
• Alternative products (e.g., cotton / wool)
• New products (e.g., telex -> fax -> e-mail)
• Elimination of need (e.g., choice fuels eliminating fuel additives)
• Generic substitution (e.g., broad categories of ‘leisure’ products competing for discretionary spending)
• Abstinence
Forces DeterminingIndustry Attractiveness
5. Power of suppliers
– Suppliers limit industry attractiveness and profitability if they can increase input costs faster than they can be passed on
• Few suppliers available
• Suppliers have unique products
• Switching costs are high
• Threat of forward integration
• Large number of small customers
Porter’s Five Forces Model The model systematically captures the business logic that
all managers are intuitively familiar with: – An industry that has weak suppliers and buyers…
– High barriers to entry…
– No substitutes…
– and is a monopoly...POTENTIALENTRANTS
SUPPLIERS
SUBSTITUTES
BUYERS
INDUSTRYCOMPETITORS
Rivalry amongexisting firms
Weak Weak
High
NoneNo rivalry
(monopoly)
Will be very profitable!
Generic Strategies
DifferentiationDifferentiation Cost LeadershipCost Leadership
FocusFocus
Broad Scope(Industry wide)
Narrow Scope(Market Segment)
S o u r c e o f A d v a n t a g e
Porter (1980)
Porter’s Competitive Advantage
Remember that a companies overall business strategy will drive all other strategies.
Porter defined these competitive advantages to represent various business strategies found in the marketplace.
Cost leadership strategy firms include Walmart, Suzuki, Overstock.com, etc.
Differentiation strategy firms include Coca Cola, Progressive Insurance, Publix, etc.
Focus strategy firms include the Ritz Carlton, Marriott, etc.
STEP Framework
STEP Analysis Factors
Potential Impact
H – high
M – Medium
L – Low
U - Undetermined
Type of Impact
+ Positive
- Negative
? Unknown
Time Frame
0-6 Months
6-12 Months
12-24 Months
24+ Months
∆ Impact
> Increasing
= Unchanging
< Decreasing
Socio-cultural– Demographics– Social Trends
Technological– Available infrastructure– Product / Process technology– E-commerce / routes to market
Economic– Economic cycles– Unemployment / inflation– Tariffs
Political-Legal– Stability of government– Regulations (e.g., employment law)
Differentiation Strategy Variants Shareholder value model: create advantage through
the use of knowledge and timing (Fruhan) Unlimited resources model: companies with a large
resource can sustain losses more easily than ones with fewer resources (Chain Store vs Mom & Pop).
The problem with Porter and these variants are that the rate of change is no longer easily managed and sustained.
Understanding Competitors
1. Size, Growth, and Profitability Position– Indicates level of resources (e.g., to defend or
advance a market position)– Commitment to segment or industry (e.g.,
pursuing growth at the expense of profitability)
Understanding Competitors
2. Strategic objectives of competitors
– Differentiation via:
• Product line breadth
• Product quality
• Service support
• Distribution channel
• Brand
– Cost leadership via:
• Scale
• Experience
• Sourcing
Product Innovation
Customer Intimacy
Operating Excellence
Understanding Competitors
3. Competitors’ branding objectives
– Intended brand positioning indicates likely strategic initiatives
• ‘Innovative’ -> high R&D investment
• ‘User friendly’ -> investment in service & support
• ‘Value’ -> investment in efficient systems & manufacturing
– Identifies unmet positions
• Opportunities for building market share
• Increasing profitability
Hypercompetition
Often a characteristic of new markets and industries, hypercompetition occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages that cannot be sustained. In response, companies must constantly compete in price or quality, or innovate in , supply chain management ,new value creation, or have enough financial capital to outlast
other competitors.
Assumptions of D’Avenis Hypercompetition and the New 7 Ss Framework model:– Every advantage is eroded.– Sustaining an advantage can be a deadly
distraction.– Goal of advantage should be disruption, not
sustainability– Initiatives are achieved through series of small
steps.
D’Aveni’s new 7 Ss The 7 Ss are useful for determining different aspects of a business strategy and
aligning them to make the organization competitive in the hypercompetitive arena.
The 7 Ss are:1. Superior stakeholder satisfaction: maximize customer satisfaction by
adding value strategically2. Strategic soothsaying: use new knowledge to predict new windows of
opportunity3. Positioning for speed: prepare the org. to react as fast as possible4. Positioning for surprise: surprise competitors5. Shifting the rules of competition: serve customers in novel ways6. Signaling strategic intent: communicate intensions in order to stall
competitors7. Simultaneous and sequential strategic thrusts: take steps to stun and
confuse competitors in order to disrupt or block their efforts
Vision for DisruptionIdentifying and creating
opportunities for temporaryadvantage via understanding•Stakeholder satisfaction• Strategic soothsaying
to ID new ways to serve current customers better or serve
those not being served
Capability for DisruptionSustaining the momentum by
developing abilities for:• Speed
• Surprisethat can be applied across
many actions to builda series of temporary
advantages
Tactics for DisruptionSeizing the initiative to
gain advantage by• Shifting the rules
• Signaling• Strategic thrusts
with actions that shape,mould or influence
the direction or nature ofcompetitors’ responses
MarketDisruption
Limitations of Traditional View
A key limitation of all the above strategies is that it ignores the dynamics of competition in the marketplace.
While the issue of foremost importance for the company is the customer, D’Aveni notes that competitive interaction among firms typically goes through six stages
Hypercompetition
D’Aveni developed a model that stated that sustainable competitive advantage could NOT be sustained.
Called the “Hypercompetition and the New 7 Ss Framework”.
Competitive advantage is rapidly erased by competition and the market.
Strategic Competitive Advantage
Profits from asustained
competitiveadvantage
Time
LaunchExploitation
Counterattack
Profits from aseries of actions
Time
Exploitation
Launch
Counterattack
Firm has already moved to advantage 2
Traditional View
Hypercompetition
Hypercompetition
Four arenas of competition
• Cost & Quality (C-Q)• Timing and know-how (T-K)• Strongholds (S)• Deep pockets (D)
Coke vs. Pepsi
Coke: 1886; Pepsi: 1893
1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better value
Ad jingle “twice as much for a nickel” better known in the US than the Star Spangled Banner
Pepsi Coke
Pri
ce /
Oun
ce
Pri
ce /
Oun
ce
Pepsi
Coke
Perceived Quality Perceived Quality
Coke vs. Pepsi, Contd..
Pepsi Coke
Pri
ce /
Oun
ce
Pri
ce /
Oun
ce
First move:PepsiChallenge
Perceived Quality Perceived Quality
Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate
With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Coke’s level giving it a war chest to fuel an aggressive ad campaign
Battle shifted from Price to Quality, with Pepsi targeting the youth What followed was the Pepsi Challenge & “Real Thing” Coke ads
Youth & MiddleClass Segments 2nd move:
Coke’s Ad war
Pri
ce /
Oun
ce
Pri
ce /
Oun
ce
Perceived Quality Perceived Quality
Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. Pepsi responded with its discounts and by the end of the 80s, 50% of food store sales were on discount
Other companies moved into the lower left quadrant of the market. But the two major players forced price down to “ultimate value.”
To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market.
Attempts to move to next arena via niches in caffeine and sugar substitutes
GenericsRC Cola
Coke &PepsiPriceSpiral NewCoke
ActualClassic Coke& Pepsi
NewCokeIntended
Coke vs. Pepsi, Contd..
Price-Quality Maneuvers
Price War
Full line Producers
Niching & Outflanking
Move to Ultimate Value
Attempt to redefine Quality
Commodity like Market
Return to Price Wars
Move to the next Arena
The Cycle of Price-Quality Competition - MovingUp the Escalation Ladder
Firm builds a Tech. ResourceBase to create advantage
Then moves into a new marketfirst: Pioneer
Followers imitate products & overcome switching costsand brand loyalties
Pioneer throws up impediments to imitation
Followers overcome impedimentsand replicate pioneer’s resource base
First mover uses a TransformationStrategy & abandons product design/
technology based approach
Builds resources to match followersmanufacturing skills
Price War
First mover uses a LeapfrogStrategy to a new resource base
First mover movesdownstream into
higher value addedproducts
Escalating costs &risks each cycle
Cycle of Timing / Know-HowCompetition
Build entry barrier around market Ato exclude competition
Build entry barrier around market Bto exclude competition
Circumvent barriers and attackniche in market B
Short Run: Withdraw from niche or fail to respond
Delayed Response: Barriers to contain entrant to a segment of B
Entrant breaches barriersor triggers price war in B
Incumbent’s stronghold in B weak-ens as it grows more competitive
Long Run:Incumbent attacks entrant’s market A to punish
Entrant responds in market A or inmarket B
Standoff until one party gains theupper hand in market A or B
Both strongholds erodeor merge into one
market
Price WarOther firmdivests
One firm builds newstronghold
Cyclerestarts withentry into anew market
If one firm dominates
STRONG-HOLDSARENA
Deep pocket develops
Launches attack todrive out small firms
Antitrust laws invoked - work
occasionally
Small firms forcedto outmaneuver
deep pocket
Hostile takeoverof large firm
Small firm escalatesown resource base
Cooperative strategy develops
Avoidance strategyniching, etc.
Large scalealliances form with equally deep pockets
Deep pocket advantage is elim
inated or neutralized
Buyers or suppliers develop a
countervailingforce
New attempt to escalate resources
Cycle of DeepPockets Competition
Framework Key Idea Application to Information Systems
Porter’s generic strategies framework
Firms achieve competitive advantage through cost leadership, differentiation, or focus.
Understanding which strategy is chosen by a firm is critical
D’Aveni’s hyper-competition model
Speed and aggressive moves and countermoves by a firm create competitive advantage
The 7 Ss give the manager suggestions on what moves and countermoves to make.
.
Ansoff’s Growth Vector Matrix
Market penetration
Market development
Diversification
Product / Service development
Pre
sen
tN
ew
Present New
MA
RK
ET
PRODUCTS / SERVICES
Source: D.T. Brownlie & C.K. Bart, Products and Strategies, MCB University Press, Vol.11, No.1, 1985, p.29
Using the Ansoff Matrix in the Objective-setting Process
Market penetration (1)
Market development (3) Diversification (4)
Product / Service development (2)
Esta
blish
ed
New
Established
New
MA
RK
ET
PRODUCTS / SERVICES
High Risk
Reality: Innovation is a Complex Process– Major overlap between Basic and Applied Research, as well
as between Development and Commercialization – Principal Investigators and/or Patents and Processes are
Mobile, i.e., not firm-dependent – Many Unexpected Outcomes– Technological breakthroughs may precede, as well as stem
from, basic research
The Myth of the Linear Model of Innovation
Basic ResearchApplied Research
Development Commercialization
Myth: Innovation is a Linear Process
Basic Research
AppliedResearch
Development
Commercial-ization
Quest for Basic Understanding•New Knowledge•Fundamental Ideas Potential Use
•Application of Knowledge to a Specific Subject•“Prototypicalization”
Development of Products•Goods and Services
Feedback: Market Signals/Technical Challenge• Desired Product Alterations or New Characteristics•Cost/design trade-off
Feedback:Applied Researchneeded to designnew product characteristics
Feedback:• Basic Research needed for discovery •Search for new ideas and solutions to solve longer-term issues
NewUnanticipatedApplications
Non-Linear Model of Innovation
Principles of successful innovation
Analyse the sources of all new opportunities– These will have different importance at different times depending on the context –
new knowledge may be of little relevance to someone innovating a social instrument to satisfy a need that changing demographics or tax laws have created. Think laterally and with vision.
Be aware of everything and everyone around you– Innovation is both conceptual and perceptual – go out and look, ask and listen.
Successful innovators use both the right and left sides of the brain. They look at figures and people. They work out analytically what the innovation has to be to satisfy an opportunity. They look at potential users to study their expectations, their values and their needs.
Principles of successful innovation
Focus on simple and specific areas– To be effective, an innovation has to be simple and focused. It should do only one thing
otherwise it confuses people. Even the innovation that creates new users and new markets should be directed toward a specific clear and carefully designed application. Effective innovations start small. They try to do one specific thing and are based around a simple notion. They are not grandiose. By contrast, grandiose ideas for things that will ‘revolutionise an industry’ are unlikely to work.
Aim for transformational innovations– The successful innovation aims from the beginning to become the standard setter, to determine
the direction of a new technology or a new industry, to create the business that is – and remains – ahead of the pack. If an innovation does not aim at leadership from the beginning, it is unlikely to be innovative enough.
Be systematic and persistent– Innovation is work rather than genius. It requires knowledge. It often requires ingenuity. And it
requires focus. Innovators rarely work in more than one area – an innovator in financial areas is unlikely to embark on innovations in health care. Most of all, innovation requires hard, focused, purposeful work - if diligence, persistence and commitment are lacking, talent, ingenuity and knowledge are to no avail.
Continuum of Innovations
Incremental Radical
Extension of existing product or process Product characteristics well- defined Competitive advantage on low cost production Often developed in response to specific market need "Demand-side" market/customer pull
New technology creates new market R&D invention in the lab Superior functional performance over "old" technology Specific market opportunity or need of only secondary concern "Supply-side" market/technology push
Dimensions of innovative space
Product Service Process BusinessModel
What is changed
Perceived extent of change
low
high
New to the world products/services
New to the market products/services
New product/service line in a country
Additions to product service lines
Product improvements/revisions
New applications for existing products/services
Repositioning of existing products/services
Cost reductions for existing products/services
A range of options: innovativeness as it applies to products and services
Treacy and Wiersema propose that a business should follow four rules for success:
1. Become best at one of the three value disciplines.
2. Achieve an adequate performance level in the other two disciplines.
3. Keep improving one’s superior position in the chosen discipline so as not to lose out to a competitor.
4. Keep becoming more adequate in the other two disciplines, because competitors keep raising customers’ expectations.
The Strategy Focused Organization
Operational Excellence
• Companies that pursue this are not primarily product or service innovators, nor do they cultivate deep, one-to-one relationships with customers.
• Operationally excellent companies provide middle-of-the-market products at the best price with the least inconvenience.
Product Leadership
• Its practitioners concentrate on offering products that push performance boundaries.
• Their proposition to customers is an offer of the best product, period.
Customer Intimacy
• Firms following this value discipline focus on delivering not what the market wants but what specific customers want.
• Customer-intimate companies do not pursue one-time transactions; they cultivate relationships.
Pursuing Value Innovation: Pursuing Value Innovation: The Six Paths FrameworkThe Six Paths Framework
1. Across substitute industries
2. Across strategic groups
3. Across the chain of buyers
4. Across complementary
offerings
5. Across functional or emotional appeal
6. Across time/trends Eliminate
What factors should be that eliminated the industry has
taken for granted?
Raise
What factors should be raised well beyond the
industry standard?
Create
What factors should be
created that the industry has never offered?
New Value Curve
Reduce
What factors should be reduced well below the
industry standard?
Challenges in New-Product Development
– Incremental innovation– Disruptive technologies
Why do new products fail?– A high-level executive pushes a favorite idea
through in spite of negative research findings.– The idea is good, but the market size is
overestimated.– The product is not well designed.
Challenges in New-Product Development
– The product is incorrectly positioned in the market, not advertised effectively, or overpriced.
– The product fails to gain sufficient distribution coverage or support.
– Development costs are higher than expected.
– Competitors fight back harder than expected.
Market Definition, Size, Growth and Profitability
What is the market? How can it be defined? How big is it/what’s the size of the
opportunity? What will affect its future growth? What will affect its future profitability? How much can you expect to capture? How long will it be before others solutions
erode your market share?
Factors affecting Growth and Profitability of Markets
All our assumptions so far have not considered factors that could impact on the growth and profitability of our selected markets
A number of models exist to systematically work through key factors to identify the most important ones – Environmental Audit– Industry Analysis
“Value innovation is about making the competition irrelevant by creating uncontested marketspace. We argue that beating the competition within the confines of the existing industry is not the way to create profitable growth.”
—Chan Kim & René Mauborgne from Blue Ocean Strategy
Value Innovation v. Conventional Strategic Thinking
Dimension Conventional Value Innovation LogicStrategic Thinking
Industry Conditions are given Conditions can be changedStrategy Build competitive Competition is not benchmarkfocus advantage to Pursue quantum leap in value
beat competitionCustomer Existing customers Mass marketsfocus Segment, customise Key commonalities Capabilities, Leverage existing What would we be doing if weassets ones started anew?Products, Determined by What is the total solution for services industry boundaries the customer?
The Value Innovation Concept
What factors should be eliminated that our industry takes for granted?
What factors should be reduced well below the industry standard?
Costs
ValueInnovation
Buyer value
What factors should be raised well above the industry standard?
What factors should be created that the industry has never offered?
Cost advantages from high volume
Cost savings from eliminating & reducing
Superior value by raising & creating
Value Curve of Formule 1 in the French Low Budget Hotel Industry
High
Low
Relative Level
Key elements of product, service, and delivery
Eatin
gFa
cilit
ies
2 Star
Arc
hite
ctur
al
Aes
thet
ics
Lou
nge
App
eal
Roo
m si
ze
24-H
our
Rec
eptio
nist
Roo
mFu
rnitu
re/
Am
eniti
es BedQ
ualit
y
Hyg
iene
Sile
nce
Pric
e
1 Star
F 1
using“Value Curves” to plot relative strategic positioning
Results of Formula 1’s Strategy
Cost per room 100,000 FF 270,000 FFCost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry averageOccupancy rates > 3x industry average
From customers’ perspective:
Hygiene > average 2* hotelBed quality > average 2* hotelSilence > average 2* hotelPrice 100 FF 200 FF of industry
From Formula 1’s perspective: