assessing and managing capabilities disruptive innovation smal case study paxil case study forced...

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



C o m pe ti to r A'sC o m pe te nc e s




Creative Tension

Innovation = Invention + Commercialization Can be

Technological, or Market related

Capabilities = assets + competences What you can do



C o m pe ti to r A 'sC o m pe te nc e s




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



C o m pe ti to r A 'sC o m pe te nc e s




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


H ig h U ncerta in tyH ig h in f luence o f


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

assessing and managing capabilities disruptive innovation smal case study paxil case study forced...

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