Business Model Innovation
Brief Recap
https://youtu.be/B4ZSGQW0UMI
Innovation Strategies
First Movers Versus Followers:
A first-mover advantage is the gain that a firm attains when it is first to market a new
product or enter a new market.
Emergent industries are newly created or newly recreated industries formed by product,
customer, or context changes
Mature industries have slow revenue growth, high stability, and intense competitiveness.
Growing industries exhibit moderate revenue growth and have moderate stability and
uncertainty.
The follower firm can learn from the pioneer’s mistakes and exploit the market potential
created by the pioneer. Some firms successfully exploit a follower strategy.
 Many new ventures set a fast pace as they and their competitors enter a
window of opportunity.
 Many start-ups exhibit a torrid pace due to a high sense of urgency, as
illustrated by the causal diagram in Figure 5.2.
Creativity and Invention
 Creativity is the ability to use the imagination to develop new ideas, new things, or
new solutions.
 Creative ideas flow to invention, and invention flows to innovation
 Creative thinking is a core competency of most new ventures, and entrepreneurs strive
to have creative people on their team.
 Creative ideas often arise when creative people look at established solutions,
practices, or products and think of something new or different.
 The creative enterprise is based on six resources, as shown in Table 5.3
[Sternberg et al., 1997],
 To create something new, one needs knowledge of the field and of the
domain of knowledge required.
 Domains are areas such as science, engineering, or marketing. Fields within
a domain might be circuit design or market research.
 Wise, knowledgeable, creative people avoid being blinded or limited by
their knowledge.
 The intuitive person suspends critical and conventional thinking long
enough to consider the possibility of new solutions.
 One method of creative discovery includes the following steps:
 (1) slow down to explore different ideas,
 (2) read about the field, but not too much,
 (3) look at the available raw data, and
 (4) cultivate smart friends who have good intellectual skills [Paydarfar and
Schwartz, 2001].
 Creativity involves the ability to synthesize, working through information to
come up with combing tions that are new and useful [Florida, 2002].
 Incubation of the issues and time to reflect are important steps to creativity.
One process of creative' thinking is shown in Figure 5.3.
Types and Sources of Innovation
 Innovation is based on teamwork and creativity, and is d e fin e d as
invention that has produced economic value in the marketplace.
 Innovation is based on the commercialization of new technology.
 An innovation can include new products, new processes, new services,
and new ways of doing business.
 There are several different types of innovation, as illustrated in Figure.
 Incremental innovation is characterized by faster, better, and/or cheaper
versions of existing products. Thus, they take an existing idea and creatively
expand on it.
 Architectural innovation changes the way io which components of a product
are linked together.
 Thus, the components remain unchanged, but the architecture of module
connection is the innovation. (The overall architecture of the product describes
how the components will work together.)
 The essence of an architectural innovation is the reconfiguration of an
established system to link together existing components in a new way.
 Finally, radical innovation or disruptive innovation uses new modules and new
architecture to create new products. The Internet is an example of a network
system with new modules and new architecture - a radical or disruptive
innovation.
 Disruptive innovation transforms the relationship between customer and
supplier, restructures markets, displaces current products, and often creates
new product categories [Leifer et al., 2000],
 Sources of innovation for new ventures include research laboratories, indJ
pendent inventors, and universities [Branscomb et al., 1999]. In many areas if
science and technology, universities can be an especially important source I f
innovation. Professors and other university researchers are responsible for much
cutting-edge research.
Technology and Innovation Strategy
 An innovation strategy rests on the competencies and knowledge of the
new firm. Continual product and process innovation can enable the firm to
maintain a strategic advantage. Figure. illustrates the innovation and
competition cycle between firms.
 Three dimensions of technological inventions impact the probability that
they will be commercialized through a new firm formation:
 importance,
 radicalness,
 patent scope
 Importance reflects the magnitude of the economic value of an invention.
 The importance of an invention should increase the likelihood that a new
firm will be founded to commercialize it because more important inventions
have higher economic value and thus payoff to the entrepreneurs.
 Radicalness measures the degree to which an invention, regardless of
economic value, differs from previous inventions in the field.
 Radical technologies destroy the capabilities of existing firms because they
depend on new capabilities and resources;
 Finally, patent scope describes the breadth of intellectual property
protection for the invention. These three dimensions of likelihood of
commercilization are listed, in Table 5.4
 We can portray the new business formation process for an invention as
shown in Figure in next Slide.
 Using this process to review the potential of the Segway Human Transporter,
one can obtain different conclusions for the various proposed uses: postal
service, warehouse workers, or urban dwellers.
 Perhaps the best application for this device is not yet named.
 Often the disruptive technology will not immediately serve a mainstream
market, as shown in figure .
 It will initially serve a niche market but will eventually enter the low end of
the range of the mainstream market, as shown in figure .
New Technology Ventures
 The new technology usually becomes available due to scientific
discoveries or a new invention.
 Entrepreneurs find that this new technology may offer myriad opportunities
for new ventures.
 The elements of an attractive innovation strategy are provided in Table 5.5
One way of describing the potential applications is to use the model shown in
Table 5.6
 Examples of new
technologies that eventually
found attractive economic
applications include
semiconductors, genomics,
stents, and wireless telephone.
 All these technologies
eventually traversed the four
steps necessary for a
favorable technology
innovation, as shown in Figure .
 The innovation model
shown in Figure can be
used to illustrate new
technology applications
introduced today.
Risk and Uncertainty
 Introducing a novel product into a new market has an uncertain outcome.
An outcome resulting from an action is said to be certain in that it will
definitely happen. Something certain is reliable or guarantee!
 An outcome resulting from an action is said to be uncertain in that the
outcome is not known or is likely to be variable.
 Risk is the chance or possibility of loss. This loss could be financial, physical,
or reputational.
 Risk is a measure of the potential variability of outcomes that will be
experienced in the future.
 Furthermore, risk is the chance or possibility of loss.
 The entrepreneur-investor assumes the risk of the venture and should be
willing to take on sizable risks with the knowledge that he or she can
manage or mitigate them.
 The best method for most entrepreneurs is to use a form of
experimentation— trial and error.
 Identify possible new ventures and take a few steps toward a business and
then evaluate the early feedback
 Henry Ford said: “Failure is the opportunity to begin again, more
intelligently,"
 Entrepreneur-investors should consider the concept of regret, which we define as the
amount of loss a person can tolerate.
 People treat regret of loss differently than the potential of possible gain
 The amount of risk entrepreneurs will endure varies, but most retain some personal financial
reserve so that failure will not equate to homelessness or starvation.
 It is easier to be a risk taker if one has some reserves to fall back on. The risk-adjusted value
of a venture, V, is
 V=U-λR
(6.1)
 where U = upside, λ = risk-adjusted constant, usually greater than 1, and R = downside or
regret. The larger the value of λ, the more risk-averse is the entrepreneur.
 We are neutral at λ = 1 but risk-averse at λ = 2 (Dembo and Freeman, 1998). If your regret is R
= $110,000 and λ = 2, to proceed requires V > 0, or
 U > λR
(6.2)
 Therefore, the required upside, U, is U > $220,000. Entrepreneurs can use scenarios and
economic analysis to estimate the potential upside, U, of a venture.
 The strategic response to uncertainty is to build a venture in stages, reserving the right to
adjust your core competencies and strategies, and play again at the next stage.
 Thus, reconsidering the case of the entrepreneur who is riskaverse with λ = 2 , he or she can
choose to proceed for six months with the venture so that R = $55,000, and the minimum
upside required is then only $110,000.
 After the six months, the entrepreneur adjusts the business strategy to improve the business
performance and based on a new calculation of the upside, U, proceeds to a second
stage of activity or decides to terminate the venture.
 Risk reflects the degree o f uncertainty and the potential loss associated with the
outcomes, which m ay follow from an action or set o f actions.

Risk consists o f two elements: the significance o f the potential losses and die uncertainty
of those losses.
 In most new ventures, it is the significance or size of the potential losses, hazard, and the
uncertainty that are estimated by new venture entrepreneurs and their investors.
 We propose a measure of risk as:
Risk = hazard X uncertainty
 The hazard, H, is the size of the potential losses as perceived by the entrepreneurial team.
 Hazard is an entrepreneur’s income forgone (opportunity cost, OC) plus the financial
investment, I, which he or she will need to make. Therefore,
Risk = (I + OC) X UC (6.4)
 The uncertainty, UC, is measured by the variability in anticipated outcomes, which may be
described by their estimate of the probability of loss (failure).
Based on factors discussed , the entrepreneurial team may make a selection of a
new venture (or to proceed or not), as shown in Figure 6.1.
 Technology ventures usually have
four types of risk: technology,
market, financial, and team.
 Every effort should be made to
test the assumptions about these
four sources of risk.
 Strategic risk management
involves setting up strategies that
anticipate the. downside of risk.
 The key to surviving risks is
assessment and response
[Slywotzky and Drzik, 2005]
 A process for managing risk and
uncertainty is shown in Figure 6.2.
 One way to calculate an estimate of a new venture’s potential risk and
reward is to answer the four questions posed in Table 6.3.
 In general, the entrepreneur seeks a venture where the return is expected
to significantly exceed the potential losses.
S c a le and S co p e:
 The scale of a firm is the extent of the activity of a firm as described by its
size.
 The scale of a firmr’s activity can be described by its revenues, units sold, or
some other measure of size.
 Economies of scale are expected based on the concept that larger
quantities of units sold will result in reduced per-unit costs.
 Economies of scale are generally achieved by distributing fixed costs such
as rent, general and administrative expenses, and other overhead over a
larger quantity, q, of units sold.
 This effect is portrayed in Figure 6.3.
 The cost per unit decreases, reaching a minimum at qm.
 Often, the cost per unit will increase for q > qm, since the complexity of
coordination may increase costs per unit for a high number of units
 Scalability refers to how big a firm can grow in various dimensions to provide more
service. There are several measures of scalability. They include volume or quantity
sold per year, revenues, and number of customers.
 These dimensions are not independent, as scaling up the size of a firm in one
dimension can affect the other dimensions.
 Capacity is the ability to act or do something. Any firm has process assets,
inventory, cash, and other factors that must be expanded as the company grows
its sales volume.
 A firm that can easily grow its capacity is said to be readily scalable.
 The total cost, TC, of the production of units is described as:
 TC = FC + V C
 where FC is the fixed costs that do not vary with the quantity of production.
 The variable costs, VC, do vary with the quantity produced where VC - if X q, c
being the cost/unit and the quantity being q.
 This relationship is shown in Figure 6.4.
 Table 6.4 describes the scalability and economies of scale for four types of
businesses.
 The scope of a firm is the range of products offered or distribution channels
utilized Cot both).
 The sharing of resources such as manufacturing facilities, distribution
channels, and other factors by multiple products or business units gives rise
to economies of scope
 The economies of scale, and scope both reduce the cost per unit. For a
factory, its throughput—the amount processed within a given time—needs
to be consistently high.
Network Effects and Increasing Returns
 Network economies arise in industries where a network of complementary
products is a determinant of demand (also called network effects)
 The overall tendency is toward “bigger is better.” As Figure 6.6 indicates,
over time, a winner emerges (company A) and the competitors decline
 Increasing returns mean that the marginal benefits of a good or of an
activity are growing with the total quantity of the good or the activity
consumed or produced [Van den Ende and Wijaberg, 2003].
 Increasing returns is the tendency for a company that is ahead, firm A in
Figure 6.6, to get farther ahead.
 The theory is that the firm that has a successful product that is increasingly
becoming the standard for the industry will experience increasing returns as
increasing quantities are sold.
 . In the PC industry, Wintel captured the largest market share, with Apple
holding about 10 percent of the market.
 In general, network effects exhibit reinforcing characteristics, as shown in
Figure 6.7.