SESSION 22
EXAM 2 REVIEW
I N N O VAT I O N P R O C E S S
THE 4 I’S
• Idea: Abstract concepts or
research findings
• Invention: Transformation
of an idea into a product or
the modification and
recombination of products
• Innovation:
Commercialization of an
invention
• Imitation: Copying a
successful innovation
T Y P E S O F I N N O VAT I O N
I N C R E M E N TA L V S . R A D I C A L I N N O VAT I O N
Incremental Innovation:
Radical Innovation:
• Builds on established
knowledge
• Novel methods &
materials
• Results from steady
improvement
• Entirely new knowledge
base or recombination of
existing knowledge
• Targets new markets and
technology
A R C H I T E C T U R A L V S . D I S R U P T I V E I N N O VAT I O N
Architectural Innovation:
Disruptive Innovation:
• Existing technology leveraged
into a new market
• Leverages new technologies in
existing markets
• Known components, existing
technology, used in a novel
way
• New product / process meets
existing customer needs
I N D U S T RY L I F E C Y C L E
I N D U S T R Y L I F E C Y C L E : S TA G E S
PRODUCT
AND
PROCESS
I N N O VAT I O N
THROUGHOUT
AN INDUSTRY
LIFE CYCLE
I N T R O D U C T I O N S TA G E
•Core competency: research and development
• Create product category that will attract customers
• Can be very capital-intensive (high costs)
•Barriers to entry are high
•Strategic objective: market acceptance & future
growth
G R O W T H S TA G E
•Demand increases rapidly
• First-time buyers rush to purchase
• Proof of concept has been demonstrated
•Product / service standards emerge
• Common set of features and design choices
• Emerges from competition, government, or agencies
•Product innovation:
• New / recombined aspects of a product
•Process innovation:
• New ways to produce a product
Core competencies:
manufacturing and
marketing
S H A K E O U T S TA G E
•Rate of growth declines
•Firms begin to intensely compete
• Weaker firms forced out
• Industry consolidation
• Only the strongest competitors survive
•Price is an important competitive weapon
• Firms with strong cost positions do well
• Process innovation is more important than ever
M AT U R I T Y S TA G E
Only a few large firms remain
• Enjoy economies of scale
• Process innovation has reached maximum
Demand: replacement or repeat purchases
• Market has reached maximum size
• Industry growth is zero or negative
D E C L I N E S TA G E
• Demand falls rapidly
• Innovation efforts cease
• If breakthrough emerges,
leads to a new industry or
resets the life cycle
• Strong pressure on prices
Four strategic options to
pursue:
• Exit: bankruptcy / liquidation
• Harvest: reduce further
investments
• Maintain: support at a given
level
• Consolidate: buy rivals
CROSSING THE CHASM
Laggards
Late majority
Early majority
Early adopters
Tech enthusiasts
I N D U S T R Y L I F E C Y C L E : S TA G E S
P L AT F O R M S
P L AT F O R M V S . P I P E L I N E B U S I N E S S E S
Pipeline Business:
Platform Business:
• Linear transformation through
the value chain
• Enables interaction between
producers and consumers
• Research and development,
then design, then manufacture,
then sell
• Purpose is to enable matches
among users
• Provides infrastructure and
sets governance conditions
NETWORK EFFECTS
NETWORK
EFFECTS
Better
recommendations +
Value of offering
increases with
user base
V E R T I C A L I N T E G R AT I O N
V E R T I C A L I N T E G R AT I O N
• Ownership of inputs or distribution channels
• Backward Vertical Integration:
• Owning inputs of the value chain
• Forward Vertical Integration:
• Owning activities closer to the customer
VERTICAL
I N T E G R AT I O N
AND THE
VA L U E C H A I N
B E N E F I T S O F V E R T I C A L I N T E G R AT I O N
• Lowering costs
• Improving quality
• Facilitating scheduling and planning
• Securing critical supplies and distribution channels
• Facilitating investments in specialized assets
B C G M AT R I X
RESTRUCTURING
T H E C O R P O R AT E
PORTFOLIO:
BCG GROWTH–
S H A R E M AT R I X
Helpful
restructuring tool:
• Guides portfolio
planning
• Each category
warrants a
different strategy
D I V E R S I F I C AT I O N
FOUR MAIN
TYPES OF
D I V E R S I F I C AT I O N
H O W D I V E R S I F I C AT I O N C A N
ENHANCE FIRM PERFORMANCE
•Provides economies of scale
•Exploits economies of scope
•Reduces costs and increase
value.
ALLIANCES
Expected benefits must exceed the
costs
•Five reasons for alliance formation:
1. Strengthen competitive position
2. Enter new markets
3. Hedge against uncertainty
4. Access critical complementary
resources
5. Learn new capabilities
R
SELECTI
ON AND
ALLIAN
CE
F O R M AT
Partners
ION
must be
compatible
and
committed
MERGERS & ACQUISITIONS
WHY DO FIRMS ACQUIRE
OTHER FIRMS?
•••••••••••••••••••••••••••••••••
1. To access new
markets &
distribution
channels
2. Access to a new
capability or
competency
3. To preempt rivals
B U I L D , B O R R O W, B U Y
BUILD-BORROW-BUY
FRAMEWORK CONCEPTS
•••••••••••••••••••••••••••••••••
Relevancy:
• How relevant are the firm’s existing internal resources to solving the
resource gap?
Tradability:
• How tradable are the targeted resources that may be available
externally?
Closeness:
• How close do you need to be to your external resource partner?
Integration:
• How well can you integrate the targeted firm should you determine to
acquire?
C O R P O RAT E S T R ATE G Y:
B
U
I
L
D
,
B
O
R
R
O
W,
O
R
B
U
Y
?
•••••••••••••••••••••••••••••••••
CAGE FRAMEWORK
THE CAGE DISTANCE
FRAMEWORK
•••••••••••••••••••••••••••••••••
• Distance is the main cost and risk of expansion
• CAGE is an acronym for different types of distance:
•Cultural
•Administrative and political
•Geographic
•Economic
• Guides multinational enterprise decisions on which
countries to enter
C U LT U R A L D I S TA N C E
• Disparity between a
firm’s home and host
country, in social norms
and morals, beliefs, and
values
• Lack of connective ethnic
or social networks
• Lack of trust or mutual
respect
• Hofstede’s culture
measure:
• Power distance
• Individualism
• Masculinity–femininity
• Uncertainty avoidance
• Long-term orientation
• Indulgence
CULTURAL DISTANCE
•••••••••••••••••••••••••••••••••
Most affects industries and products:
• High linguistic content (media)
• Related to national and/or religious identity
(foods)
• Carrying country-specific quality associations
(wines)
ADMINISTRATIVE AND
POLITICAL DISTANCE
•••••••••••••••••••••••••••••••••
Captured in factors such as:
• Shared monetary or political associations
• Political hostilities
• Weak or strong legal and financial institutions
Political and administrative barriers include:
• Tariffs, quotas and restrictions
ADMINISTRATIVE AND
POLITICAL DISTANCE
•••••••••••••••••••••••••••••••••
Most affects industries and products:
• Staples (electricity)
• Building national reputations (aerospace)
• National security (Telecom)
GEOGRAPHIC
DISTANCE
•••••••••••••••••••••••••••••••••
• More than just physical distance.
• Measured by:
• Physical size (Canada versus Singapore)
• Within-country distances to its borders
• Topography
• Time zones
• Whether the countries are contiguous
• Access to waterways and the ocean
• Infrastructure.
• Roads, power, and telecommunications
GEOGRAPHIC
DISTANCE
•••••••••••••••••••••••••••••••••
Most affects industries and products:
• Low value-to-weight ratio (cement)
• Fragile (glass)
• Perishable (meat)
• Where communication is vital (finance)
ECONOMIC DISTANCE
•••••••••••••••••••••••••••••••••
Wealth and per capita income of consumers
• Wealthy countries engage in more cross-border trade
• Wealthy countries trade with wealthy countries
Economies of experience, scale, scope, and
standardization
• Similar infrastructure and resources
Wealthy countries trade with poor countries
• Access to low-cost input factors (economic arbitrage)
ECONOMIC DISTANCE
•••••••••••••••••••••••••••••••••
Most affects industries and products:
• Demand depends on income (cars)
• Labor costs matter (textiles)
G L O B A L S T R AT E G Y
COST REDUCTIONS VS.
LOCAL RESPONSIVENESS
Two opposing forces in global
competition:
• Cost reductions: key
competitive weapon
• Local responsiveness: tailoring
to specific preferences
I N T E R N AT I O N A L S T R AT E G Y
Sell the same products or
services in domestic and
foreign markets
Often used successfully by
multinational enterprises
with:
• Low cost reductions / low
local responsiveness:
• Large domestic markets
• Leverages home-based core
competencies
• Strong reputations and
brand names
M U LT I D O M E S T I C S T R AT E G Y
Low-cost reductions / high-local responsiveness:
• Local consumers ideally perceive products as local
Can be costly and inefficient:
• Duplication of business functions across countries
Common in:
• Consumer products industry
• Food industry
G L O B A L - S TA N D A R D I Z AT I O N
S T R AT E G Y
High-cost reductions / low-local responsiveness:
• Economies of scale and location economies
• Achieved through global division of labor
• Based on wherever capabilities have lowest cost
Price, the main competitive weapon:
• Minimal local adaptation
T R A N S N AT I O N A L S T R AT E G Y
High-cost reductions / high-local responsiveness:
• “Think globally, act locally.”
• Best practices, ideas, and innovations used everywhere.
Used by multinational enterprises that pursue a blue
ocean strategy
• Difficult to implement:
• Duplication of efforts
• Organizational complexity
O R G A N I Z AT I O N B U I L D I N G
BLOCKS
S P E C I A L I Z AT I O N
Degree to which a task is divided into separate jobs
•Larger firms: high degree of specialization
•Smaller ventures: low degree of specialization
•Requires tradeoff between depth and breadth of
knowledge
F O R M A L I Z AT I O N
Extent to which employee behavior is guided by rules
and procedures
Pros:
Cons:
• Ensures consistent
and predictable
results
• Safety and reliability
• Slower decision making
• Reduced innovation
• Hindered customer
service
C E N T R A L I Z AT I O N
Degree to which decision making is concentrated at
the top of the organization
• Correlates to slow response time and reduced
customer satisfaction
Affects strategic planning:
• Top-down strategic planning takes place in highly
centralized organizations
• Planned emergence is found in more decentralized
organizations
HIERARCHY
Formal, position-based reporting lines
• i.e. Who reports to whom
Span of control:
• Number of employees who directly report to a
manager
O R G A N I Z AT I O N
STRUCTURES
SIMPLE STRUCTURE
Used by small firms with low organizational complexity
• The founders usually:
• Make all the strategic decisions
• Run day-to-day operations
• Professional managers and sophisticated systems
are rare
• Low degree of formalization and specialization
FUNCTIONAL STRUCTURE
• Employees grouped into functional areas:
• Based on domain expertise.
• Often correspond to value chain stages
• Leaders of functional areas report to CEO
• CEO coordinates and integrates the work of each function
M U LT I D I V I S I O N A L ( M - F O R M ) S T R U C T U R E
Used as a firm diversifies products and geography
•Each strategic business unit (SBU):
• Has profit-and-loss (P&L) responsibility
• Operated independently
• Led by a unique CEO who is responsible for SBU strategy and
operations
•Widely adopted organizational structure
M AT R I X S T R U C T U R E
Leverages SBU (M-form)
benefits:
Also leverages functional
benefits:
• Domain expertise
• Responsiveness
• Economies of scale
• Decentralized focus
• Efficient processing of
information
VA L U E C H A I N S
GENERIC
VA L U E
CHAIN
VERTICAL
I N T E G R AT I O N
AND THE
VA L U E C H A I N
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