CHAPTER 10
Innovative Strategies and
Business Models
Definition of Innovation
DEFINITION OF INNOVATION
Implemented
TYPES OF INNOVATION
1
Incremental Innovations
2
Radical (Disruptive) Innovations
IIncremental
NCREMENTAL IInnovations
NNOVATIONS
• Better offerings that generate better profits
from current customers
• New features
• Important for success but they don’t create
growth because they are replacements of
existing products
INCREMENTAL INNOVATIONS
LED TVs
3D TVs
CATEGORIES OF INNOVATIVE STRATEGIES
BASED ON RADICAL INNOVATIONS
• Reconfigure the Value/Supply Chain to Eliminate
Activities
• Low End Disruptive Innovations
• High End Disruptive Innovations
• Reconfigure the Value/Supply Chain to Allow for
Mass Customization
• Blue Ocean Strategy—Creating New Markets by
Targeting Non-Consumers
• Free Business Models
CATEGORIES OF DISRUPTIVE INNOVATION
• Reconfigure the Value/Supply Chain to
Eliminate Activities
– Amazon vs. Barnes & Noble; Netflix vs. Blockbuster,
1800 Mattress, Charles Schwab (eliminate stores,
labor, and inventory).
– Southwest vs. Hub & Spoke carriers (eliminate
meals, seat reservations, baggage transfer, etc.)
TYPES OF INNOVATION
1
Incremental Innovations
2
Radical (Disruptive) Innovations
RECONFIGURE VALUE/SUPPLY CHAIN
ACTIVITIES
Process innovations that typically
create an efficient new business
model; allow companies to create,
deliver, sell, or service a product more
efficiently.
RECONFIGURE VALUE/SUPPLY CHAIN
ACTIVITIES
Barnes & Noble
v.
Amazon.com
DIFFERENT VALUE/SUPPLY CHAINS
Barnes & Noble
Amazon.com
Authors
Publishers
Warehouse
Store
Customer
COMPARING VALUE/SUPPLY CHAINS
Film Studios
Film
Distributors
Film
Studios
Film
Distributors
Blockbuster’
Warehouses
Blockbuster
Stores
Netflix
Customer
Customer
CATEGORIES OF DISRUPTIVE INNOVATION
Low End Disruption: Low cost business
model based on new technology that
improves
– Nucor vs. U.S. Steel
– Skype vs. AT&T
– Honda vs. Harley Davidson or Mercedes Benz
LOW-END DISRUPTIVE INNOVATIONS
• Target customers whose needs are
over-served in the mainstream market
– Price is far more important than features.
• Product performance is “good enough”
on basic features to attract low-end
customers of the mainstream market
• Entrant uses a new low cost business
model; performs different activities
which allows the firm to earn profits
even at deeply discounted prices
DISRUPTIVE TECHNOLOGIES ARE A
DRIVER OF LEADERSHIP FAILURE AND
THE SOURCE OF NEW GROWTH
OPPORTUNITIES
LEADERS FAIL AND NEW GROWTH
Performance
Incumbents nearly always win
Disruptive
technologies
Entrants nearly always win
Time
NUCOR MOVES UP-MARKET TO BEAT
COMPETITORS
Steel Quality
% of tons
55%
25–30%
margins
22%
18%
margins
8%
12%
margins
4%
7%
margins
1975
1980
1985
1990
PERSONAL COMPUTERS DISRUPT MINI-COMPUTERS
(ENTIRE PRODUCT CATEGORIES CAN BE DISRUPTED)
Performance
60% margins on
$500,000
computer
45%
margins on
$250,000
computer
Disruptive
technology:
personal
computers
20% margins
on $2,000 computer
Time
MFG. COMPANIES CAN BE DISRUPTED
Performance
(E.G., IN SPECIFIC PRODUCTS LIKE
MICROWAVES.)
Panasonic
Samsung
LG
Galanz
Group
Time
CATEGORIES OF DISRUPTIVE INNOVATION
High End Disruption: Leapfrog
technology with premium price comes
from top-down.
–
–
–
–
Apple iPod vs. Sony Discman
Flash drives vs. floppy disks
PCs vs. typewriters
Cell phones vs. landlines
HIGH END DISRUPTION EXAMPLES
Problem
New Solution
Disruptor
Disrupted
Type of
Innovation
Industry
Coffee/
Donut
shops
How to get quality
morning coffee
conveniently?
Source premium
coffee; ubiquitous
availability; drive-up
service
Starbucks
Dunkin’
Donuts
Ma and Pa
Coffee shops
Radical
(Architectural)
Music
distribution
How to make
music portable?
High capacity, smallsize storage device;
MP3 file structure and
software
Apple (iPod)
Sony
Panasonic
Radical
(Architectural)
Package
shipping
How to get
packages to their
destination more
quickly and at a
reasonable cost?
Create transportation
infrastructure;
guarantee overnight
delivery
Fedex
US Postal
Service
Radical
(Architectural)
Telephony
How to make
phone calls from
any location?
Use towers and
satellites to send
signals directly to
mobile device using
radio spectrum.
Phones:Appl
e,Samsung,
etc.
Service:
AT&T, Sprint
AT&T landline;
Baby Bells
Radical
(Technological)
Performance
THE HIGH END DISRUPTIVE
INNOVATION MODEL*
Discontinuity in
demand market
following emergence
of high-end disruption
Range of
performance
that customers
demand
Time
*Adapted from Christensen and Raynor, The Innovator’s Solution, pg. 33
WHY HIGH END DISRUPTIONS ARE
DIFFICULT FOR INCUMBENTS TO IMITATE
Radical (Architectural) Innovation
• A product’s architecture reflects the way in which a set of
components are integrated into a “system” (product). Architectural
innovations change the architecture of a product (the way they are
linked together or adding new components) without fundamentally
introducing changing the technology underlying its components
(e.g., iPod, Starbucks, FedEx).
Radical (Technological) Innovation
• Innovations based on a different set of engineering and scientific
principles and technologies. Compared to established products, a
radical technological innovation establishes a new dominant
design for the product and a new set of core technologies and
design concepts embodied in components that are linked together
in a new product architecture (e.g., Mobile phones, PCs, Electronic
Fuel Injection).
CATEGORIES OF DISRUPTIVE INNOVATION
Reconfigure the Value/Supply Chain to
allow for “Mass Customization”—the
mass production of customized goods.
• Build-A-Bear (mass produce components of
stuffed animals and customize them at stores)
• Dell Direct (customized computers)
• Timbuk2 (customize/design your own handbag)
• Nike ID (customize/design your own shoe.
• My Twinn (customize your own doll, etc.)
CONFLICTS IN MASS CUSTOMIZATION
Conflicts in Name:
Mass – Aggregation
Customization – one-of-akind
Economies of Scale
Mass
Production
Hand-crafted
Craft
Production
Conflicts in Operability:
Customers’ demands are
diverse and irregular which
calls for leads to high
component variety, large
numbers of suppliers, and
high administrative
complexity
Optimized
set-up,
manufacturi
ng lines
Small, on
demand
factories
Mass
Customization
APPLICATION OF MASS
CUSTOMIZATION
• Nike ID
• Dell
• My Twinn
CATEGORIES OF DISRUPTIVE INNOVATION
Blue Ocean Strategy: create new demand
in an uncontested market space.
– Cirque de Soleil (combination of circus,
acrobatic troupe, music, Broadway).
– Federal express (met uncontested demand for
secure overnight delivery).
– ChotuKool ($49 refrigerator that runs on a
battery and uses solid state thermoelectric
cooling)
CHOTUKOOL: TARGETING A BLUE
OCEAN
80% of Indian households have no refrigerator
Refrigerators
ChotuKool
• Expensive
• Large
• Requires
electricity
• Difficult to
service
• Affordable
• Small
• Requires no
electricity
• Easy to
service
CATEGORIES OF DISRUPTIVE INNOVATION
Free Business Models
– Free Upsell (Freemium): Zynga; Skype
– Free Cross Sell: Mint.com; Ryanair,
– Free 3rd Party Pay: Google, Craigslist
– Free Bundled free: Cell phone service; printers,
financial services (e.g. trades), etc.
COMPETING WITH FREE
1. Free Up-Sell Strategy (“Freemium”):
Offer a free version to gain attention and widespread use; then offer
a premium product with advanced features for customers willing to
pay.
Skype, Flickr, Zynga
Requirements:
 A free product that appeals to a very large user base so
that even a low conversion rate of free users to paying
customers will generate substantial revenues
OR
 A high percentage of users willing to pay for the
premium version
COMPETING WITH FREE
2. Free Cross-Sell Strategy:
Offer a free version to gain attention and widespread
use; then offer other products for which customers are
willing to pay.
Ryanair, Galderma, mint
Requirements:
 A broad product line (preferably products that complement
the free product)
OR
 The ability through partnerships to sell a broad line of
products to users of the free product
COMPETING WITH FREE
3. Free Third Party Pay (Advertising) Strategy:
• Make the product/service free to generate a
community (network externality) for which you get
paid by a third party company who desires access to
that community.
Google, Hulu, Craigslist, Blyk, Ryanair
Requirements:
 A free offering that attracts either many users who can be
segmented for advertisers or a targeted group that comprises a
customer segment
AND
 Third parties willing to pay to reach these customers
Revenues Per Unique User Per Year
CONVERTING PRODUCT USERS INTO
REVENUES
15.96
11.18
3.5
GOOGLE
YAHOO
FACEBOOK
3.09
ZYNGA
1.8
1.6
PANDORA
SKYPE
Note: Data on Google and Yahoo are from 2005; other data are from 2010.
COMPETING WITH FREE
4. Free Bundling Strategy (Direct cross subsidy):
• Bundle the free product with non-free products
and derive revenues from non-free products; can’t
get the one without the other.
Requirements:
 Products or services that can be bundled with the free
offering
OR
 A free product that needs regular maintenance or
complementary products (e.g., free printer but costly ink).
HOW BIG A THREAT IS FREE
COMPETITION?
Defection
Rate
(of paying
customers to the
free offering)
High
(5% per year or
more)
Low
(less than
5% per year)
Immediate
Threat (launch
free product
immediately)
Business Model
Threat
(change business
model)
Minor Threat
(monitor
situation)
Delayed
Threat
(co-exist or delay
launch of free
product)
Low
(less than 40% per
year)
High
(more than 40% per
year)
Growth Rate
(of number of users of the
free offering)