On Innovation Models

Ziya G. Boyacigiller

This presentation was created and given by Ziya Boyacigiller who was leading Angel Investor and a loved mentor to many young entrepreneurs in Turkey. We have shared it on the web for everyone’s benefit. It is free to use but please cite Ziya Boyacigiller as the source when you use any part of this presentation. For more about Ziya Boyacigiller’s contributions to the start-up Ecosystem of Turkey, please go to www.ziyaboyacigiller.com

On Innovation Models…

Ziya G. Boyacigiller

How to Know in Advanceif you have a Chance?

Ziya G. BoyacıgillerSabanci UniversitesiYonetim Bilimleri Fakultesi

Ziya G. Boyacigiller (c) 2005 EMBA 4

Which approach is better?You are going to start a new business:

a) You will develop products that have improved performance and functionality than existing products, and sell them for higher prices.

b) You will develop products that are simpler and better than existing products, and sell them for lower prices.

Ziya G. Boyacigiller (c) 2005 EMBA 5

Sun Tzu says…

“Now an army may be likened to water, for just as flowing water avoids the heights and hastens to the lowlands, so an army avoids strengths and strikes weakness.”

How do you identify your competitor’s strengths and weaknesses?

Ziya G. Boyacigiller (c) 2005 EMBA 6

Ziya G. Boyacigiller (c) 2005 EMBA 7

Theory 1:Resources, Process, Values (RPV) Theory

Resources, Process, and Values a firm has, define its strengths and weaknesses.

Firms successfully tackle opportunities

when they have the Resources to succeed, when their Processes facilitate what needs to get done, and when their Values allow them to give priority to that

opportunity - compared to other opportunities and demands that compete for the firm’s resources.

Q: What does RPV imply for competing with incumbent firms?

Ziya G. Boyacigiller (c) 2005 EMBA 8

RESOURCES PROCESSES VALUESThings or assets that firms can buy or sell, build or destroy.

Established ways firms turn resources into products or services.

The criteria by which prioritization decisions are made.

KnowledgeTechnologyProductsEquipmentBrandCashChannelsPeople …

Resource allocationHiringTrainingProduct definitionProduct developmentManufacturingPlanning/BudgetingMarket research…

Profit marginCost structureIncome statementCustomer demandsSize of opportunityEthics…

Ziya G. Boyacigiller (c) 2005 EMBA 9

Theory 2:Prof. Clayton Christensen’s Disruptive Innovation Models

1

2

3

Ziya G. Boyacigiller (c) 2005 EMBA 10

…asymmetric motivation…

Industry leaders are always motivated to go up-market, and almost never motivated to defend the new- or low-end markets that the disruptors (entrepreneurs) find attractive.

This asymmetric motivation is at the core of innovator’s dilemma and its solution.

Ziya G. Boyacigiller (c) 2005 EMBA 11

Resource Allocation Decisions Result in Allowing Disruption Company upper-management allocate their

resources first to support their most important customers.

Also, middle managers minimize career risk by developing products for existing and important customers (as opposed to nonconsuming or unattractive customers).

Therefore, companies develop better (next generation, improved) products for these important customers – allocate their resources to these projects.

Ziya G. Boyacigiller (c) 2005 EMBA 12

What Good is Disruptive Innovation?Few technologies or business ideas are

intrinsically sustaining or disruptive in character.

Their disruptive impact must be molded into strategy as entrepreneurs shape the idea into a plan and then implement them.

Point: Learn disruption and use it !

Ziya G. Boyacigiller (c) 2005 EMBA 13

How Incumbent Companies T h i n k…

(e.g. PC, desk top copiers, cell phones)

flee..

not attractive..

what our customers want…

(e.g. Southwest Airlines, Japanese cars)

Why?

Ziya G. Boyacigiller (c) 2005 EMBA 14

Cell-Phones vs Home-Phones

1987 – Cell Phones are bulky, work in cars only, quality of voice not good, coverage is spotty.

2010 – Almost everyone has a cell-phone, many people are choosing not to get a home-phone. Even at home, many use cell-phones although its “air-time” costs more than home-phones.

Ziya G. Boyacigiller (c) 2005 EMBA 15

Litmus Tests for Disruptive Ideas

1. Can the idea become a new-market disruption?

• Is there a large population of people who historically have not had the money, equipment, or skill to do this thing for themselves, and as a result have gone without it altogether or have needed to pay someone with more expertise to do it for them?

• To use the product or service, do customers need to go to an inconvenient, centralized location?

Example: Personal Computer / Cell Phones

Ziya G. Boyacigiller (c) 2005 EMBA 16

Litmus Tests for Disruptive Ideas2. Is there low-end disruption potential?

• Are there customers at the low end of the market who would be happy to purchase a product with less (but good enough) performance if they could get it at a lower price?

• Can we create a business model that enables us to earn attractive profits at the discount prices required to win the business of these over-served customers at the low end?

Example: Internet telephones (Skype) / Honda

Ziya G. Boyacigiller (c) 2005 EMBA 17

Litmus Tests for Disruptive Ideas

3. Is the innovation disruptive to all of the significant incumbent firms in the industry?

If it appears to be a sustaining innovation to one or more significant players in the industry, then the odds will be stacked in that firm’s favor and the entrant is unlikely to win.

Example: Internet Banks vs Incumbent Banks, Internet grocery shopping

Ziya G. Boyacigiller (c) 2005 EMBA 18

Sustaining Innovations

Targeted performance of the product or service

Performance improvement most valued by industry’s most demanding existing customers. These may be incremental or breakthrough.

Targeted customers or market application

Most attractive (profitable) customers in the mainstream markets willing to pay for improved performance.

Impact of the required business model (processes and cost structure)

Improves or maintains profit margins by exploiting current processes and cost structures and making better use of current competitive advantages.

Ziya G. Boyacigiller (c) 2005 EMBA 19

Sustaining Innovation Targets to Identify Bigger/More Value

Ziya G. Boyacigiller (c) 2005 EMBA 20

What is good about sustaining innovation?Entrepreneurs can:

1. Generate quick cash flow by replacing existing products in an established market.

2. Develop infrastructure and capabilities to “catch-up”.

3. Develop key customer relationships by offering them an alternative supply source.

But, don’t wait! Start to create non-sustaining type disruptive innovations as soon as you can!

Ziya G. Boyacigiller (c) 2005 EMBA 21

Low-End DisruptionsTargeted performance of the product or service

Performance that is good enough along the traditional metrics of performance at the low end of the mainstream market.

Targeted customers or market application

Over-served customer in the low end of the mainstream market.

Impact of the required business model (processes and cost structure)

Uses a new operating or financial approach or both – a different combination of lower GM and higher asset utilization to win business at lower prices required to win business at the low end of market.

Ziya G. Boyacigiller (c) 2005 EMBA 22

New-Market Disruptions

Targeted performance of the product or service

Lower performance in “traditional attributes, but improved performance in new attributes – typically simplicity and convenience.

Targeted customers or market application

Non-consumption – customers who historically lacked the money or skill to buy and use the product, or no product alternative existed.

Impact of the required business model (processes and cost structure)

Business model must make money at lower price per unit sold, and at unit production volumes that initially will be small. Gross margin dollars per unit sold will be significantly lower.

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Disruptive Companies in History

Hybrid

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Lessons Learned: Not all innovative ideas can be shaped into

disruptive strategies, because the necessary preconditions do not exist.

In such situations, the opportunity is best licensed or left to the firms already established in the market.

Disruption does not guarantee success: It just helps with an important element in the total formula for success…