Executive Master in International Postal
Management
Patrick Foley
April, 2010
Executive Master in International Postal
Management
Innovation
Managing in Complex and Uncertain Times:
Red and Blue Oceans
Tuesday 13th April, 2010
Patrick Foley
Innovation has a range of meanings
and applications
Definitions of innovation

A successfully commercialised invention

A learning process where knowledge is enhanced and applied

The solution of problems through discovery and creation

The successful production, assimilation and exploitation of novelty

A new or different solution to a new or existing problem

Device + Marketing

Systematic entrepreneurship

The process of turning an idea into income - commercialising invention

The search for, discovery experimentation, development, imitation and adoption
of new products, new processes and new organisational set-ups

The effort to create purposeful, focused change in an enterprise’s economic or
social potential
Innovation
Innovation = Invention + Commercial Exploitation
Is inventing the light bulb enough?
No : it must pass the five tests of a new
innovation
1. Function Test (does it perform the function?)
2. Mass Production Test (can it be mass
produced?)
3. Market test (will it sell/ is there a solid
market channel?)
4. Financial test (Can we do all the above at a
profit?)
5. Permission Test (can it be legally used in the
context intended)
Innovation and Value
Creation
The Marketing and Sales
departments must
understand the customer
and translate this
knowledge into product
design parameters.
CUSTOMER
NEEDS
Delivery, installation,
commissioning and after
sales service and
support must all meet or
exceed the customers
expectations.
Also, advances in product
design can occur ahead of
needs.
PRODUCT
DESIGNS &
SERVICES
The production process
must be capable of
meeting the design
specifications.
Also, the design should
facilitate ease of
production and take
advantage of production
systems, technologies
etc.
PRODUCTION
Sources of innovation fall into two
distinct categories
Four sources of opportunity exist
within a company or industry

Unexpected occurrences

Incongruities

Process needs

Industry & market changes
Three exist outside a company’s
social & intellectual environment

Demographic changes

Changes in perception

New knowledge
Source: Professor Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles; Harvard Business Review: Innovation, 1991
7
In all cases, the outcome is the creation
of something new and transformational
External
opportunities
Internal
opportunities
Examples of innovative inventions

The unexpected
Du Pont’s Nylon, G.D. Searle’s NutraSweet,
Alexander Fleming’s penicillin

The incongruity
Alcon Industries’ cataract enzyme, Ro-Ro container ships

Process needs
AT&T’s automatic switchboard, Mergenthaler’s Linotype,
Ochs, Pulitzer and Randolph Hearst’s modern advertising

Changes in industry
or market structure
Nokia’s mobile phones, investment banking, the car

Demographics
BUPA’s healthcare insurance, Japan’s robotics industry,
Club Mediterranee’s travel & resort business

Changes in perception
Pfizer’s Viagra, organic food

New knowledge
J.P.Morgan’s commercial banking, Douglas & Boeing’s
commercial aircraft, the computer
What type of competitive advantage
does/could the innovation contribute to?
What is the driver of Innovations Cost Advantage?
How does the innovation help
to differentiate?
Red Ocean versus Blue Ocean Strategy
The imperative for red ocean and blue ocean strategies are
starkly different
Red Ocean Strategy





Compete in existing market space
Beat the competition
Exploit existing demand
Make the value/cost trade off
Align the whole system/activities with
either differentiation or low cost
Blue Ocean Strategy





Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value/cost trade off
Align the whole system/activities in
pursuit of differentiation and low cost
Porter’s Five Forces Model
POTENTIAL
ENTRANTS
Threat of
new entrants
Bargaining power
of suppliers
INDUSTRY
COMPETITORS
SUPPLIERS
Bargaining power
of buyers
(customers)
BUYERS
Rivalry among
existing firms
Threat of substitute
products or services
SUBSTITUTES
Source: M.E. Porter, Competitive Advantage (1985)
(Competitive forces) determine
the profit potential of the industry
and therefore, its attractiveness
Forces Determining
Industry Attractiveness
1. Intensity of Direct Competition
–
–
–
–
–
Excess production capacity
Standardised products
Large number of competitors
Low market growth
Commitment to industry
Forces Determining
Industry Attractiveness
2.
Buyer Power
– Price sensitivity of buyers
• A function of buyer profitability/perceived benefits
• Proportion of product’s cost in their total expenditures
– Negotiating power
• Few buyers
• Many manufacturers
• Little differentiation
• Low switching costs
• Opportunities for backward integration (for industrial
buyers)
Forces Determining
Industry Attractiveness
3.
Threat of new entry
– Weak barriers to entry (and demonstrated profitability)
encourage new firms to enter industries
• Patents & the diffusion of proprietary knowledge (e.g.,
pharmaceuticals)
• Legislation (e.g., airlines)
• Economies of scale (i.e., minimum efficient scale)
• Capital requirements (e.g., telecoms)
• Strength & importance of brands
• Threat of retaliation
• Access to distribution channels
Forces Determining
Industry Attractiveness
4.
Threat of substitutes
– Indirect competitors that can undermine demand and prices
• Alternative products (e.g., cotton / wool)
• New products (e.g., telex -> fax -> e-mail)
• Elimination of need (e.g., choice fuels eliminating fuel
additives)
• Generic substitution (e.g., broad categories of ‘leisure’
products competing for discretionary spending)
• Abstinence
Forces Determining
Industry Attractiveness
5.
Power of suppliers
– Suppliers limit industry attractiveness and profitability if
they can increase input costs faster than they can be passed
on
• Few suppliers available
• Suppliers have unique products
• Switching costs are high
• Threat of forward integration
• Large number of small customers
Porter’s Five Forces Model
 The model systematically captures the business logic that
all managers are intuitively familiar with:
–
–
–
–
An industry that has weak suppliers and buyers…
High barriers to entry…
No substitutes…
POTENTIAL
ENTRANTS
and is a monopoly...
High
Will be very profitable!
Weak
INDUSTRY
COMPETITORS
SUPPLIERS
Weak
BUYERS
Rivalry among
existing firms
No rivalry
(monopoly)
None
SUBSTITUTES
Generic Strategies
Source of Advantage
Broad Scope
(Industry wide)
Narrow Scope
(Market Segment)
Differentiation
Cost Leadership
Focus
Porter (1980)
Porter’s Competitive Advantage
 Remember that a companies overall business strategy
will drive all other strategies.
 Porter defined these competitive advantages to
represent various business strategies found in the
marketplace.
 Cost leadership strategy firms include Walmart,
Suzuki, Overstock.com, etc.
 Differentiation strategy firms include Coca Cola,
Progressive Insurance, Publix, etc.
 Focus strategy firms include the Ritz Carlton,
Marriott, etc.
STEP Framework
STEP Analysis Factors
Socio-cultural
– Demographics
– Social Trends
Technological
– Available infrastructure
– Product / Process technology
– E-commerce / routes to market
Economic
– Economic cycles
– Unemployment / inflation
– Tariffs
Political-Legal
– Stability of government
– Regulations (e.g., employment law)
Potential Impact
Type of
Impact
H – high
M – Medium
+ Positive
L – Low
U - Undetermined - Negative
? Unknown
Time Frame
0-6 Months
6-12 Months
12-24 Months
24+ Months
∆ Impact
> Increasing
=
Unchanging
<
Decreasing
Differentiation Strategy Variants
 Shareholder value model: create advantage through
the use of knowledge and timing (Fruhan)
 Unlimited resources model: companies with a large
resource can sustain losses more easily than ones with
fewer resources (Chain Store vs Mom & Pop).
 The problem with Porter and these variants are that
the rate of change is no longer easily managed and
sustained.
Understanding
Competitors
Understanding Competitors
1. Size, Growth, and Profitability Position
–
–
Indicates level of resources (e.g., to defend or
advance a market position)
Commitment to segment or industry (e.g.,
pursuing growth at the expense of profitability)
Understanding Competitors
2.
Strategic objectives of competitors
– Differentiation via:
• Product line breadth
• Product quality
• Service support
• Distribution channel
• Brand
– Cost leadership via:
• Scale
• Experience
• Sourcing
Understanding Competitors
3.
Competitors’ branding objectives
– Intended brand positioning indicates likely strategic
initiatives
• ‘Innovative’ -> high R&D investment
• ‘User friendly’ -> investment in service & support
• ‘Value’ -> investment in efficient systems &
manufacturing
–
Identifies unmet positions
• Opportunities for building market share
• Increasing profitability
Hypercompetition
Often a characteristic of new markets and industries,
hypercompetition occurs when technologies or offerings
are so new that standards and rules are in flux, resulting
in competitive advantages that cannot be sustained. In
response, companies must constantly compete in price or
quality, or innovate in , supply chain management ,new
value creation, or have enough financial capital to outlast
other competitors.
 Assumptions of D’Avenis Hypercompetition
and the New 7 Ss Framework model:
– Every advantage is eroded.
– Sustaining an advantage can be a deadly
distraction.
– Goal of advantage should be disruption, not
sustainability
– Initiatives are achieved through series of small
steps.
D’Aveni’s new 7 Ss


The 7 Ss are useful for determining different aspects of a business strategy and
aligning them to make the organization competitive in the hypercompetitive
arena.
The 7 Ss are:
1. Superior stakeholder satisfaction: maximize customer satisfaction by
adding value strategically
2. Strategic soothsaying: use new knowledge to predict new windows of
opportunity
3. Positioning for speed: prepare the org. to react as fast as possible
4. Positioning for surprise: surprise competitors
5. Shifting the rules of competition: serve customers in novel ways
6. Signaling strategic intent: communicate intensions in order to stall
competitors
7. Simultaneous and sequential strategic thrusts: take steps to stun and
confuse competitors in order to disrupt or block their efforts
Vision for Disruption
Identifying and creating
opportunities for temporary
advantage via understanding
•Stakeholder satisfaction
• Strategic soothsaying
to ID new ways to serve current
customers better or serve
those not being served
Capability for Disruption
Sustaining the momentum by
developing abilities for:
• Speed
• Surprise
that can be applied across
many actions to build
a series of temporary
advantages
Market
Disruption
Tactics for Disruption
Seizing the initiative to
gain advantage by
• Shifting the rules
• Signaling
• Strategic thrusts
with actions that shape,
mould or influence
the direction or nature of
competitors’ responses
Limitations of Traditional View


A key limitation of all the above strategies is that it ignores
the dynamics of competition in the marketplace.
While the issue of foremost importance for the company is
the customer, D’Aveni notes that competitive interaction
among firms typically goes through six stages
Hypercompetition
 D’Aveni developed a model that stated that
sustainable competitive advantage could NOT
be sustained.
 Called the “Hypercompetition and the New 7
Ss Framework”.
 Competitive advantage is rapidly erased by
competition and the market.
Strategic Competitive Advantage
Exploitation
Profits from a
sustained
competitive
advantage
Launch
Counterattack
Traditional View
Time
Firm has already moved to advantage 2
Exploitation
Profits from a
series of
actions
Counterattack
Hypercompetition
Launch
Time
Hypercompetition
Four arenas of competition
• Cost & Quality (C-Q)
• Timing and know-how (T-K)
• Strongholds (S)
• Deep pockets (D)
Coke vs. Pepsi
Price / Ounce

Coke: 1886; Pepsi: 1893
1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz.
bottle to 5c, making it a better value
Ad jingle “twice as much for a nickel” better known in the US than the Star
Spangled Banner
Pepsi
Coke
Perceived Quality
Price / Ounce


Coke
Pepsi
Perceived Quality
Coke vs. Pepsi,
Contd..


Pepsi
Coke
Youth & Middle
Class Segments
Perceived Quality
Price / Ounce

Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers
20% less for its concentrate
With rising ingredient costs, Pepsi could no longer offer twice as much for the
same price. So it raised price to Coke’s level giving it a war chest to fuel an
aggressive ad campaign
Battle shifted from Price to Quality, with Pepsi targeting the youth
What followed was the Pepsi Challenge & “Real Thing” Coke ads
Price / Ounce

First move:
Pepsi
Challenge
2nd move:
Coke’s Ad war
Perceived Quality
Coke vs. Pepsi,
Contd..


Generics
RC Cola
Coke &
Pepsi
Price
Spiral
Perceived Quality
Price / Ounce

Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price
war in selective markets where Pepsi was weak in the 70s. Pepsi responded with
its discounts and by the end of the 80s, 50% of food store sales were on discount
Other companies moved into the lower left quadrant of the market. But the two
major players forced price down to “ultimate value.”
To break price spiral, Coke launched New Coke to keep Coke loyals and induce
switching among Pepsi buyers. Rejected by market.
Attempts to move to next arena via niches in caffeine and sugar substitutes
Price / Ounce

NewCoke Classic Coke
& Pepsi
Actual
NewCoke
Intended
Perceived Quality
The Cycle of Price-Quality Competition - Moving
Up the Escalation Ladder
Move to the next Arena
Return to Price Wars
Commodity like Market
Attempt to redefine Quality
Move to Ultimate Value
Niching & Outflanking
Full line Producers
Price-Quality Maneuvers
Price War
Firm builds a Tech. Resource
Base to create advantage
Escalating costs &
risks each cycle
Then moves into a new market
first: Pioneer
Followers imitate products & overcome switching costs
and brand loyalties
Pioneer throws up impediments to imitation
Followers overcome impediments
and replicate pioneer’s resource base
First mover uses a Transformation
Strategy & abandons product design/
technology based approach
Builds resources to match followers
manufacturing skills
Price War
First mover moves
downstream into
higher value added
products
First mover uses a Leapfrog
Strategy to a new resource base
Cycle of Timing / Know-How
Competition
Build entry barrier around market A
to exclude competition
Build entry barrier around market B
to exclude competition
Circumvent barriers and attack
niche in market B
Short Run: Withdraw from niche
or fail to respond
Entrant breaches barriers
or triggers price war in B
Cycle
restarts with
entry into a
new market
Incumbent’s stronghold in B weakens as it grows more competitive
Entrant responds in market A or in
market B
One firm
builds new
stronghold
Other firm
divests
Delayed Response: Barriers to
contain entrant to a segment of B
Standoff until one party gains the
upper hand in market A or B
If one firm dominates
Long Run:Incumbent attacks
entrant’s market A to punish
Both strongholds erode
or merge into one
market
Price War
STRONGHOLDS
ARENA
Deep pocket develops
Antitrust laws
invoked - work
occasionally
Small firms forced
to outmaneuver
deep pocket
Cycle of Deep
Pockets
Competition
Buyers or
suppliers develop a
countervailing
force
Hostile takeover
of large firm
Small firm escalates
own resource base
Cooperative
strategy develops
Avoidance strategy
niching, etc.
Large scale
alliances form
with equally
deep pockets
Deep pocket advantage is eliminated or neutralized
Launches attack to
drive out small firms
New attempt to escalate resources
Framework
Key Idea
Application to Information Systems
Porter’s
generic
strategies
framework
Firms achieve
competitive
advantage through
cost leadership,
differentiation, or
focus.
Understanding which strategy is chosen by a
firm is critical
D’Aveni’s
hypercompetition
model
Speed and
aggressive moves
and countermoves
by a firm create
competitive
advantage
The 7 Ss give the manager suggestions on what
moves and countermoves to make.
.
Ansoff’s Growth Vector Matrix
PRODUCTS / SERVICES
Present
New
Market penetration
Product / Service
development
New
MARKET
Present
Market
development
Diversification
Source: D.T. Brownlie & C.K. Bart, Products and Strategies, MCB University Press, Vol.11, No.1, 1985, p.29
Using the Ansoff Matrix in the
Objective-setting Process
PRODUCTS / SERVICES
Established
New
MARKET
Established
Market penetration (1)
New
Product / Service
development (2)
High Risk
Market
development (3)
Diversification (4)
The Myth of the Linear Model of
Innovation
Basic Research
Applied
Research
Development
Commercialization
Myth: Innovation is a Linear Process
 Reality: Innovation is a Complex Process
– Major overlap between Basic and Applied Research, as well
as between Development and Commercialization
– Principal Investigators and/or Patents and Processes are
Mobile, i.e., not firm-dependent
– Many Unexpected Outcomes
– Technological breakthroughs may precede, as well as stem
from, basic research
Non-Linear Model of Innovation
Basic
Research
Quest for Basic Understanding
•New Knowledge
•Fundamental Ideas
Potential Use
•Application of Knowledge to
a Specific Subject
•“Prototypicalization”
Feedback:
• Basic Research
needed for discovery
•Search for new
ideas and solutions to
solve longer-term Feedback:
Applied Research
issues
needed to design
new product
characteristics
Applied
Research
Development
Feedback: Market Signals/
Technical Challenge
• Desired Product Alterations
or New Characteristics
•Cost/design trade-off
New
Unanticipated
Applications
Development of Products
•Goods and Services
Commercialization
Principles of successful
innovation
 Analyse the sources of all new opportunities
– These will have different importance at different times depending on the context –
new knowledge may be of little relevance to someone innovating a social
instrument to satisfy a need that changing demographics or tax laws have created.
Think laterally and with vision.
 Be aware of everything and everyone around you
– Innovation is both conceptual and perceptual – go out and look, ask and listen.
Successful innovators use both the right and left sides of the brain. They look at
figures and people. They work out analytically what the innovation has to be to
satisfy an opportunity. They look at potential users to study their expectations, their
values and their needs.
Principles of successful
innovation



Focus on simple and specific areas
– To be effective, an innovation has to be simple and focused. It should do only one thing
otherwise it confuses people. Even the innovation that creates new users and new markets
should be directed toward a specific clear and carefully designed application. Effective
innovations start small. They try to do one specific thing and are based around a simple
notion. They are not grandiose. By contrast, grandiose ideas for things that will
‘revolutionise an industry’ are unlikely to work.
Aim for transformational innovations
– The successful innovation aims from the beginning to become the standard setter, to
determine the direction of a new technology or a new industry, to create the business that is –
and remains – ahead of the pack. If an innovation does not aim at leadership from the
beginning, it is unlikely to be innovative enough.
Be systematic and persistent
– Innovation is work rather than genius. It requires knowledge. It often requires ingenuity. And
it requires focus. Innovators rarely work in more than one area – an innovator in financial
areas is unlikely to embark on innovations in health care. Most of all, innovation requires
hard, focused, purposeful work - if diligence, persistence and commitment are lacking, talent,
ingenuity and knowledge are to no avail.
Continuum of Innovations
Incremental
Radical
Extension of existing product or
process
New technology creates new
market
Product characteristics welldefined
R&D invention in the lab
Competitive advantage on low
cost production
Superior functional performance
over "old" technology
Often developed in response to
specific market need
Specific market opportunity or
need of only secondary concern
"Demand-side" market/customer pull
"Supply-side" market/technology
push
Dimensions of innovative space
high
Perceived
extent of
change
low
Product
Service
Process
What is changed
Business
Model
A range of options:
innovativeness as it applies to products and services
New to the world products/services
New to the market products/services
New product/service line in a country
Additions to product service lines
Product improvements/revisions
New applications for existing products/services
Repositioning of existing products/services
Cost reductions for existing products/services
The Strategy Focused Organization
Treacy and Wiersema propose that a
business should follow four rules for
success:
1. Become best at one of the three value
disciplines.
2. Achieve an adequate performance level
in the other two disciplines.
3. Keep improving one’s superior position in the
chosen discipline so as not to lose out to a
competitor.
4. Keep becoming more adequate in the other
two disciplines, because competitors keep
raising customers’ expectations.
Operational Excellence
• Companies that pursue this are
not primarily product or
service innovators, nor do they
cultivate deep, one-to-one
relationships with customers.
• Operationally excellent
companies provide middle-ofthe-market products at the best
price with the least
inconvenience.
Product Leadership
• Its practitioners
concentrate on offering
products that push
performance boundaries.
• Their proposition to
customers is an offer of the
best product, period.
Customer Intimacy
• Firms following this
value discipline focus
on delivering not what
the market wants but
what specific
customers want.
• Customer-intimate
companies do not
pursue one-time
transactions; they
cultivate relationships.
Pursuing Value Innovation:
The Six Paths Framework
1. Across
substitute
industries
Reduce
What factors should be
reduced well below the
industry standard?
6. Across
time/trends
Eliminate
What factors
should be that
eliminated the
industry has
taken for
granted?
5. Across functional
or emotional appeal
Create
New Value
Curve
Raise
What factors should be
raised well beyond the
industry standard?
4. Across
complementary
offerings
2. Across
strategic groups
What factors
should be
created that
the industry
has never
offered?
3. Across the
chain of buyers
Challenges in New-Product
Development
– Incremental innovation
– Disruptive technologies
 Why do new products fail?
– A high-level executive pushes a favorite idea
through in spite of negative research findings.
– The idea is good, but the market size is
overestimated.
– The product is not well designed.
Challenges in New-Product
Development
– The product is incorrectly positioned in
the market, not advertised effectively, or
overpriced.
– The product fails to gain sufficient
distribution coverage or support.
– Development costs are higher than
expected.
– Competitors fight back harder than
expected.
Market Definition, Size, Growth and
Profitability
 What is the market? How can it be defined?
 How big is it/what’s the size of the
opportunity?
 What will affect its future growth?
 What will affect its future profitability?
 How much can you expect to capture?
 How long will it be before others solutions
erode your market share?
Factors affecting Growth and
Profitability of Markets
 All our assumptions so far have not considered
factors that could impact on the growth and
profitability of our selected markets
 A number of models exist to systematically work
through key factors to identify the most important
ones
– Environmental Audit
– Industry Analysis
“Value innovation is about making the competition
irrelevant by creating uncontested marketspace.
We argue that beating the competition within the
confines of the existing industry is not the way to
create profitable growth.”
—Chan Kim & René Mauborgne from Blue Ocean
Strategy
Value Innovation v.
Conventional Strategic Thinking
Dimension
Industry
Strategy
focus
Customer
focus
Capabilities,
assets
Products,
services
Conventional
Strategic Thinking
Conditions are given
Build competitive
advantage to
beat competition
Existing customers
Segment, customise
Leverage existing
ones
Determined by
industry boundaries
Value Innovation Logic
Conditions can be changed
Competition is not benchmark
Pursue quantum leap in value
Mass markets
Key commonalities
What would we be doing if we
started anew?
What is the total solution for
the customer?
The Value Innovation Concept
What factors should
be eliminated that our
industry takes for
granted?
What factors should
be reduced well below
the industry
standard?
Costs
Value
Innovation
What factors should
be raised well above
the industry
standard?
What factors should
be created that the
industry has never
offered?
Buyer value
Cost savings from
eliminating &
reducing
Cost advantages
from high volume
Superior value by
raising & creating
Factors of Competition
Value Curve of Formule 1 in the
French Low Budget Hotel Industry
using“Value Curves” to plot relative strategic positioning
F1
Results of Formula 1’s Strategy
From Formula 1’s perspective:
Cost per room
Cost of staff
Profit Margins
Occupancy rates
100,000 FF  270,000 FF
20-23% of sales vs. 23-25%
> 2x industry average
> 3x industry average
From customers’ perspective:
Hygiene
Bed quality
Silence
Price
> average 2* hotel
> average 2* hotel
> average 2* hotel
100 FF  200 FF of industry