Chapter Outline
7.1 Competition Driven by Innovation
The Innovation Process
7.2 Strategic and Social Entrepreneurship
7.3 Innovation and the Industry Life Cycle
Introduction Stage
Growth Stage
Shakeout Stage
Maturity Stage
Decline Stage
Crossing the Chasm
7.4 Types of Innovation
Incremental vs. Radical Innovation
Architectural vs. Disruptive Innovation
The Internet as Disruptive Force: The Long Tail
Open Innovation
7.5 Implications for the Strategist
Learning Objectives
After studying this chapter, you will be able to:
LO 7-1 Outline the four-step innovation process from idea to imitation.
LO 7-2 Apply strategic management concepts to entrepreneurship and innovation.
LO 7-3 Describe the competitive implications of different stages in the industry life cycle.
LO 7-4 Derive strategic implications of the crossingthe- chasm framework.
LO 7-5 Categorize different types of innovations in the markets-and-technology framework.
LO 7-6 Explain the long-tail concept and derive its strategic implications.
LO 7-7 Compare and contrast closed and open innovation.The beautiful leather-bound, multivolume set of books made a nice decorative item in many homes.
In the early 1990s, when total sales for encyclopedias were over $1.2 billion annually, Encyclopedia
Britannica was the undisputed market leader, holding more than 50 percent market share and earning some $650 million in revenues. Not surprisingly, its superior differentiated appeal was highly correlated with cost, reflected in its steep sticker price of up to $2,000.
Innovation changed all that. Banking on the widespread diffusion of the personal computer, Microsoft launched its electronic encyclopedia Encarta in 1993 at a price of $99. Although some viewed it as merely a CD-version of the lower-cost and lower-quality Funk
& Wagnall’s Encyclopedia sold in supermarkets,
Encarta still took a big bite out of Britannica’s market.
Within only three years, the market for printed encyclopedias had shrunk by half, along with Britannica’s revenues, while Microsoft sold over $100 million worth of Encarta CDs.
In 2001, Internet entrepreneur Jimmy Wales launched Wikipedia, the free online multilanguage encyclopedia. In Hawaiian, wiki means quick, referring to the instant do-it-yourself editing capabilities of the site. Wikipedia is a nonprofit venture supported by the Wikimedia Foundation, which obtains its funding from donations. Wikipedia now has
26 million articles in 285 languages, including over
4.2 million items in English.
Wikipedia’s slogan is “ the Free Encyclopedia that anyone can edit. ” Since it is open source, any person, expert or novice, can contribute content and edit pages using the handy “edit this page” button.
It also draws on tens of thousands of volunteer editors, who monitor and validate content by consensus.
Although Wikipedia’s volume of English entries is almost 65 times greater than that of Britannica, the site is not as error-prone as you might think. The free online encyclopedia relies on the wisdom of the crowds, which assumes “the many” often know more than “the expert.” Moreover, user-generated content needs to be verifiable by reliable sources such as links to reputable websites. A peer-reviewed study by Nature of selected science topics found that the error rate of Wikipedia and Britannica was roughly the same. Yet, Wikipedia’s crowdsourcing approach to display user-generated content is not without criticism.
The most serious are that the content may be unreliable and unauthoritative, that it could exhibit systematic bias, and that group dynamics might prevent objective and factual reporting. 1
After reading the chapter, you will find more about thisuser-generated content and available to anyone on the Internet. In doing so, it destroyed
Encarta’s business, which Microsoft shut down in 2009. At the same time, Wikipedia created substantial benefits for users by shifting to the open-source model for content.
Because Wikipedia was able to create value for consumers by driving the price for the end user to zero and making the information instantly accessible on the Internet, there is no future for printed or CD-based encyclopedias. Sales of the beautiful leather-bound
Encyclopedia Britannica volumes declined from a peak of 120,000 sets in 1990 to a mere 12,000 sets in 2010. As a consequence, Encyclopedia Britannica announced in
2012 that it no longer would print its namesake books. Its content is now accessible via a paid subscription through its website and apps for mobile devices.
Innovation allows firms to redefine the marketplace in their favor and achieve a competitive advantage. 2 As a powerful competitive weapon for business strategy formulation, innovation and the related topic of entrepreneurship are the focus of this chapter.
We begin this chapter by detailing how competition is a process driven by continuous innovation. Next we discuss strategic and social entrepreneurship. We then take a deep dive into the industry life cycle. This helps us to formulate a more dynamic business strategy as the industry changes over time. We also introduce the crossing-the-chasm framework, highlighting the difficulties in transitioning different stages of the industry life cycle. We then move into a detailed discussion of different types of innovation and derive their strategic implications. We also present different ways to organize for innovation.
As with every chapter, we conclude with practice-oriented Implications for the
Strategist.
7.1 Competition Driven by Innovation
Competition is a process driven by the “perennial gale of creative destruction,” in the words of famed economist Joseph Schumpeter. 3 The continuous waves of market leadership changes in the encyclopedia business, detailed in the Chapter Case, demonstrate the potency of innovation as a competitive weapon: It can simultaneously create and destroy value. Firms must be able to innovate while also fending off competitors’ imitation attempts. A successful strategy requires both an effective offense and a hard-to-crack defense. Many firms have dominated an early wave of innovation only to be destroyed by the next wave. Examples include:
■ The move from typewriters to computers: Wang Laboratories, a gravitate toward customized content online. To exploit such opportunities, Google acquired YouTube, while Comcast, the largest cable operator in the U.S., purchased
NBC Universal from GE. 4 Comcast’s acquisition helps it integrate delivery services and content, with the goal of establishing itself as a new player in the media industry.
In turn, both traditional TV and cable networks are currently under threat from content providers that stream via the Internet, such as Netflix, YouTube, Vimeo, Hulu, and
Amazon Instant Video.
As the adage goes, change is the only constant—and the rate of technological change has accelerated dramatically over the last hundred years. Changing technologies spawn new industries, while others die out. This makes innovation a powerful strategic weapon in order to gain and sustain competitive advantage. Exhibit 7.1 shows how many years it took for different technological innovations to reach 50 percent of the U.S. population
(either through ownership or usage). As an example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the
Years
Car