Victorious Secret present:

Week 5 Workshop Questions

- Innovation as Evolution -

1. Evolutionary theory and innovation  What are the key features of Schumpeter’s approach to innovation? What are the main sources of discontinuities in his model? What is the role of new combinations of knowledge? What do you understand by path dependency? What are the main characteristics of disruptive technologies? Why might disruptive technologies creep up on established

companies? What is the relationship between Schumpeter’s discontinuities and

Christensen’s theory of disruptive technologies?2. Disruptive Innovation

What are disruptive innovations?  Why are disruptive innovations usually developed outside

established companies and outside established sectors?  Identify some examples of disruptive innovations. Why were they ignored by established players?  In what sense can Sony be identified as a market disruptor?  How do you account for the slowing down of performance of

Japanese companies in the last 20 years?  How is the development of small new companies important to the

economic prosperity of nations? 

1.1 What are the key features of Schumpeter’s approach to innovation?

Figure 1: Schumpeter’s Mark 1 model of InnovationAs illustrated in Dodgson (2000)

The model of Joseph Schumpeter is widely acknowledged as the first linear model of entrepreneurship and thus innovation.

Early innovation models such as this one involved: R & D / science push OR Technology pull

Roberts (1988) notes: Invention Exploitation

Innovation

Innovation can be seen as “creative destruction” waves that restructure the whole market in favor of those who grasp discontinuities faster.

In his own words “the problem that is usually visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them” (Schumpeter, 1934)

“the opening up of new markets, foreign or domestic, and the organizational development [...] illustrate the same process of industrial mutation, that incessantly revolutionizes the

economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter, 1934).

He called this process “creative destruction”.

Cantillon first introduced the term “entrepreneur” = “the agent who buys means of production at certain prices in order to combine them into a product that he is going to sell at certain prices that are uncertain at the moment at which he commits himself to his costs”

Entrepreneurship is “an activity that involves the discovery, evaluation, and exploitation of opportunities to introduce new goods and services, ways of organizing, markets, process, and raw materials through organizing efforts that previously had not existed” (Venkataraman, 1997).

In Schumpeter’s own words, “economic life is essentially passive ... so that the theory of a stationary process constitutes really the whole of theoretical economics ... I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained” (Schumpeter, 1937).

It was this ‘source of energy’, innovation, that he wanted to explain.He focused in particular on the interaction between innovative

individuals, who he called ‘entrepreneurs’, and their inert social surroundings.

1.2 What are the main sources of discontinuities in his model?

Vague relationship between new combinations and macro performance

The existence of overlaps between the Mark 1 stages

Innovation is evolutionary by nature, but Schumpeter disregards this by focusing mainly on discontinuity

In his later work, he changed his view, stating that larger corporations could have an advantage to develop innovations because they have better resources and more market power than smaller businesses. This shift, however, lacks the support of proper evidence

Lone innovator

Innovation is deeply rooted in our social and cultural environment, Schumpeter mostly disregards these influences

Falsely assumes that the most advanced innovation is adopted

1.3 What is the role of new combinations of knowledge?

Schumpeter added a definition of innovation (“development”) as “new combinations” of new or existing knowledge, resources, equipment and so on (Schumpeter, 1934). He also stressed the difference between innovation and invention.

Thus, for Schumpeter, innovations are novel combinations of knowledge, resources etc. which people/firms/organizations then

attempt to commercialize or carry out in practice.

• a specific social activity (function) carried out within the economic sphere and with a commercial purpose

Innovation•can be carried out everywhere and without any intent of commercialisationInvention

IDEAS NEVER STAND ALONE

Computer

Keyboard

Typewriter

Electricity

Plastics

Written language

Operating systems

Circuits

USB connector

s

Binary Data

In his book, The myths of innovation, Scott Berkun (2007) discusses how innovations are simply a recombination of existing elements ( “puzzle pieces”) with an “epiphany” as the last piece that connects everything and helps produce the ‘magic’ of something seemingly so new.

The accompanying image shows various scattered pieces (with the darker one being the “epiphany”) and how, stage-wise, they connect perfectly when the last piece is introduced and produces a new image / innovation.

1.4 What do you understand by path dependency?

Path Dependence is similar to the inertia of physics, it might generate dependence to the path which entering, either good or bad. Established direction of a certain path will obtain self-reinforcing in the future development. It determines the selection about current or future choice by the decision people used to make. Good path produce the role of positive feedback to enterprises, and resulting in a flywheel effect (The continuation of oscillations in an oscillator circuit after the control stimulus has been removed.) through inertia and momentum, so that the development of business enter a virtuous circle. On the other hand, bad path play a negative feedback role in enterprises, such as a doom loop, the business become stagnation, because it locked in some kind of inefficient state. That is to say, business operates without meaning; they can’t catch the direction or set up a target. As a result, once the choices go into a situation of lock, it may be hard to get out of the state. In my opinion, making path dependence should have certain advantages, such as develop earlier or the large number of use, and so on. For example, the modern railway spacing is 4 feet 8.5 inches width derived from the Roman chariot as same as two horses ass width on a chariot. By the way, the worker who made trams had made carriage previously, so the standard of tram followed by the normal of carriage’s tread. Furthermore, the early railway is designed by the people who built tram Tread standard, while four feet and 8.5 inches is the tram. Nowadays, the most advanced design of transportation system is determined by two horses’ ass width in two thousand years ago. It could use path dependence to explain all of theory about the custom of people. Based on this, people must find a right direction in the beginning, thus the negative effect of path dependence won’t occur. Everyone has their own basic patterns of thinking which lay as early as childhood, this model will decide people’s channel in their life largely. The power of inertia make the decisions are self-reinforcing continuously. It means people already build their own life after making the first decision, even if they are unsatisfied. It is difficult to change it, so we should be careful on choose at the start.

1.5 What are the main characteristics of disruptive technologies?

The concept of disruptive technology is coined by Professor Clayton M. Christensen (Harvard Business School), in his book, "The Innovator's Dilemma," to describe an innovative technology that unexpectedly displaces an existing technology or introduce an entirely novel concept to society ( Rouse, 2011). Christensen considered that there are two kinds of innovative technology: sustaining and disruptive (Christensen, 1997). Sustaining technology depends on incremental innovation, which improves established technology. Oppositely, disruptive technology tend to focus on a “different value proposition than had been available previously” (Christensen, 1997,p11). However, disruptive technologies lack of the foundation of existing technique or knowledge and limitedly appeal to customers. Therefore, it difficultly competes with established products and services in its leading market. But in the long term it also has its own advantages:

Based on the characters of cheaper and simper, disruptive products generally maintain lower margin rather than purchasing a rich profit (Christensen, 1997). Because of this, disruptive technologies are able to entrance to emerging or insignificant markets, which can avoid an intensive competition with large or dominant firms(Christensen, 1997). The main reason is why the leading firms’ most significant consumers fail to show interest with the products based on disruptive technologies(Christensen, 1997). Generally speaking, a disruptive technology mostly focuses on “the least profitable customers” in a market. Hence, Christensen (1997) points out those large corporations excel at judging their markets, maintaining good relationship with their customers, and having practiced principles to update existing technology. Conversely, they have trouble on seeking the potential efficiencies, cost-savings, or new marketing opportunities created by low-margin disruptive technologies Rouse, 2011).

“Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more

convenient to use.” (Christensen, 1997)

1.6 Why might disruptive technologies creep up on established companies?

According to ‘Clayton M. Christensen ‘, the term of disruptive technology is that a kind of technology can create an original venture into the market and it will dominate and disrupt the market to be the mainstream in years to come. However, this kind of technology might just some innovative or fit in the market rather than an extremely novel innovation or evolution.

It has some attractive function such as cheaper than original product or more improver than previous one so that is it easier to instead of earlier technology. Disruptive technologies also have to experience long time to become dominate technology and have a deep influence on customer. Moreover, it is easy to be ignored by leading companies because it is not an incremental or radical innovation technology even has no competitive advantage. When companies recognize the importance of it, it already invades to the market. As a result, companies need to be award of the power of the disruptive technologies and develop an accurate insight toward disruptive technologies. There is an analysis of iPad, which demonstrates the impact disruptive technology for business companies of as below.

At the beginning iPad doesn’t have huge market share due to the issue of function. The first issue is costs. Compared with netbook computer, it is not economical. Secondly, not as powerful as notebook. It also can’t perform as well as notebook. It

doesn’t have the connection equipment such as mouse, keyboard and other connective slot to cooperate with other devices.

Third, In terms of function of portable, it doesn’t have competitive advantage to match with smart phone.

However, as we can see the amount of sales in different kind of computer, the sales of apple iPad has grown up considerably from 2010, which can’t be imagine by other competitors. Moreover, it is be widely accepted by the public, even in the business propose. We can see the usage of iPad in the various sectors in another figure to prove that iPod is successful infiltrated and embed into the market of computer and tablet.

1.7 What is the relationship between Schumpeter’s discontinuities and Christensen’s theory of disruptive technologies?

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the Competition Irrelevant, by W. C. Kim and R. Mauborgne is a great combination between Schumpeter’s discontinuities and Christensen’s theory of disruptive technologies (Poul Houman & Jesper, 2008).

The book is based on the Schumpeterian view that market boundaries and industry structure are not given but can be reconstructed by the actions and beliefs of industry players (Poul Houman & Jesper, 2008).

While Hamel sets the scene for industry revolution, the designers of blue ocean strategies provide the industry revolutionaries with weapons and analytical tools that allow them to break out of the red ocean of bloody competition and, instead, explore the blue ocean that makes competition irrelevant (Poul Houman & Jesper, 2008).

2.1 What are disruptive innovations? 

Disruptive technology is a term coined by Harvard Business School professor Clayton M. Christensen to describe a new technology that unexpectedly displaces an established technology.

Christensen separates new technology into two categories: sustaining and disruptive. Sustaining technology relies on incremental improvements (E.g. the supersonic industries focus on the Concorde) to an already established

technology. Disruptive technology is radical innovation and often lacks refinement, often has performance problems because it is new, appeals to a limited audience, and may not yet have a proven practical application (E.g. the private

jet which would eventually displace the concord).

Recommended Video:

http://www.youtube.com/watch?v=9L66OH-

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2.2 Why are disruptive innovations usually developed outside established companies and outside established sectors? 

In his book, Christensen argues that large corporations innately function to work with sustaining technologies. They are brilliant at knowing their market, staying close to their customers, and having a mechanism in place to develop existing

technology.

However, they often have trouble capitalizing on the potential efficiencies, cost-savings, or new marketing opportunities created by low-margin disruptive

technologies (Chaniot, 2007). As such disruptive innovations are not initially perceived as disruptive . Instead they sneak up unnoticed on established

businesses.

It’s interesting that in Gary Hamel’s (2001) book “Leading the Revolution” he asks most of the fortune 500 companies what they are afraid of? The

overwhelming answer was “New start-ups which break the rules”. Using real-world examples to illustrate his point, Christensen shows how it is not unusual for

a big corporation to overlook the value of a disruptive technology because it does not reinforce current company goals, or it only caters to a certain niche,

only to be surprised as the technology matures, gains a larger marketshare and threatens to rock the boat of the industry.  

2.3 Identify some examples of disruptive innovations.2.4 Why were they ignored by established players? 

Innovation Disrupted Market How?

The Private Jet Supersonic Transport The Concorde aircraft was the only supersonic airliner in extensive commercial traffic. However, its target market was a small customer segment, which could later afford small private sub-sonic jets. The loss of speed was compensated by flexibility and a more direct routing. The current providers missed out as they were too focused on improving their current procedures.

The Steamboat Sailing Ships The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets

Digital Calculator Mechanical Calculator Facit AB used to monopolise the European market for calculators, but did not adapt digital technology, and as such failed to compete with digital competitors

Innovation Disrupted Market How?

GPS Navigation Navigational Map The old navigational system using maps, needed pre-existent knowledge

of how to read maps as well as possession of a sextant. A clear sky

was paramount for the calculating of an exact position. GPS can show the exact position, either on a projected map or in degrees N/S/E/W (low end

models), in any weather.

Digital Synthesizer Electric organ / piano

Synthesizers were designed to be low-cost, low-weight alternatives to

electronic organs and acoustic pianos.

However today's synthesizers feature many automated functions and taken the majority market share for home

and hobby users, mostly due to refusing to adapt new technology.

2.5 In what sense can Sony be identified as a market disruptor? 

In 1955, Sony Introduced the world’s first battery – powered pocket transistor radio – Low power consumption and compactness Sony thrived in this product because it chose to compete against non-consumption in new value network. Sony targeted the teenagers who could afford big vacuum tube radio. Then in 1959, Sony introduced 12-inch black-and-white portable TV with the same strategy. Its costumer reference point was has no TV or radio at all. In 1979, Sony released the first portable music player called Walkman, which was a player which plays cassette that replaced bulky music player known as the “boom box” (Sony 2011) this term “ but five years later in 1984, the first portable CD player was introduced by SONY and was dominated for long time (Sony 2011).

Period Disruptive Technology

Disrupted Technology

Note

1970s Sony WalkmanCassette Player

Boom Box (Ghetto Blaster)

In the late 1970s, the boom box was quite popular among the younger generation. Companies were competing on who could produce the loudest product or the biggest product. In 1979, Sony introduced the first portable cassette player and it became very popular in a short time and disrupted boom box players

Late 1980s and 1990s

The Discman and Portable CD Players

Sony WalkmanCassette Player

In 1984, Sony introduced the world’s first portable CD player. This invention accelerated the spread of the CD usage. Following this invention other large companies started producing portable CD players which in time disrupted the cassette player market

1990s and onwards

iPod and Other Digital Players

Portable CD Player

In the late 1990s, many companies started introducing flash memory based digital audio players. However, most players were bulky in size, had low storage capacity and low battery life. In 2001, Apple introduced their first iPod model and in 2003 they introduced their online music store iTunes. In a short time, iPod became very popular as Apple was the first company who offered customers a legal whole package product. The new way of online music purchase and the quality of iPods disrupted portable CD players and became the leader of the digital audio player market

Trend of Disruption – the case of portable music player

(Source: Disruptive Product Innovation Strategy: The Case of Portable Digital Music Player)

2.6 How do you account for the slowing down of performance of Japanese companies in the last 20 years? 

The mainstream explanation for Japanese economic decline in 1990’s is a combination of a negative demand shock, an excessive financial multiplier due to bad feed of loan into broader economy through connected lending and regulatory forbearance, and severe fiscal and monetary policy missteps turning its debt-deflation The Question always raised that Japan, world’s leading manufacturing corporations choose to feature an Innovative product, which has never brought successfully to market nor become any sort of technological standard, as the emblem of its tradition of industry and technology? Neither the efforts of corporate public relation nor Japanese culture, are known for their sense of deliberate irony. Looking back to 2001, after 10 years of slow and negative growth in Japan, there is reason to wonder whether Japanese technical powers evaporated for some reason, whether national innovation system can be appropriate somehow to capitalize on particular technology development and not others, or whether perhaps technological innovation alone is insufficient to guarantee good economic growth.

It was examined that there was relationship between Japanese technological innovation and the sustained declice in Japan’s growth rate in 1990’s. The three aspects of the innovation and growth were:1. Radical change in macroeconomic performance without any accompanying change in the inputs to the

innovative process.2. The maintenance of a sustained high level of technological innovation can possibly continue even as

economy surrounded by innovation is suffering3. Advancement of free flow of information in productivity can remain in a limited number of sectors

without diffusing across the economy.

“Until recently, Japanese enterprises achieved and maintained competitiveness by introducing basic industrial technologies from Western nations to achieve ‘process

innovation’ ” (NITSDC, 1999)

2.7 How is the development of small new companies important to the economic prosperity of nations? 

After the global downturn of 2008-09, Small new companies and businesses are refered to the backbone of the global economy. The contribution of Small companies is significant not only in static but also in dynamic term.Majority of global business are very small (di Giovanni et al.2012). Statistically around 85%-99.9% of businesses are small or medium out of which 50% of private sector value added and 77% of private sector employment.

It is definite that the contribution on Small businesses to economic fundamentals varies substantially across countries; Rich countries have larger SMEs than poor countries. The Legal tradition and history plays important role. (Ayyaagari et al 2003)The small businesses are often said to exist in a Schumpeterian world of continuous creative destruction as the least sustainable business model weeds out or least successful managers.

In 2002, the Global Entrepreneurship Monitor (GEM) report suggested that 460m adults might be engaged in entrepreneurial activity – this might lead to creation of around 100m new business (Reynolds et al 2002) which a lot for an economy of nation.

As per the statistic and dynamic of Small businesses on the economy. It is evident that the Small businesses contributes maximum towards the national economy and It is very important for the development of nation to encourage the Small new companies to grow and contribute to the nations wealth.

The following image portrays the 5 models of dramatic change, as well as, give examples for each;

References

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