Building Breakthrough
Competences (Chapter 6)
•
•
•
Disruptive Innovation Continued Ch. 5 & 6
SMaL Case Study
The Idea Box (Fritz Zwicky's Morphological box)
Instructor:
J. Christopher Westland, Professor, ISMT
Time:
Tue & Thu 1:30pm-2:50pmVenue: Rm. 4333Duration: 5 Sep – 7 Dec
Text.
McGrath & MacMillan, The Entrepreneurial Mindset, HBS Press 2000
Contact:
Office: 852 2358 7643
Email: westland@ust.hk
Fax: 852 2358 2421
URL: http://teaching.ust.hk/~ismt302/
Week
Readings
Industry Profile
What is Innovation?
Lecture Notes 1
Chapter 1
How Successful Companies
Get Innovative
Mad Catz, Inc.
Great Innovations (videos)
12-Sep-06
Business Needs: Framing the
Challenge
Lecture Notes 2
Chapter
2
Why Business Models
Matter
False Faces (perceptual reversals)
19-Sep-06
Building Blockbuster
Innovations
Lecture Notes 3
Chapter
3
3M and Norton
Slice and Dice (Attribute Maps pp.
24-35)
The Role of the Practicum
26-Sep-06
Redifferentiating Products: New
Technology or New Uses
Lecture Notes 4
Chapter 4
Recognizing the Potential
of an Innovation
Think Bubbles (Quizzing to
understand the customers’
experiential context pp. 5056)
Disruptive Innovation
Lecture Notes 5
Chapter 5
The Disk Drive Industry
Industrial Design Competition
Building Breakthrough
Competences
Chapter 6
Dell Computer (It’s not
about the
computing)
The Idea Box (Dr. Fritz Zwicky’s
morphological box)
5-Sep-06
3-Oct-06
10-Oct-06
Topic
17-Oct-06
Practicum
Mid-term Exam
Venue: Rm4333
Time: 1:30pm - 2:50pm
19-Oct-06
Selecting Your Competitive
Terrain
Chapter 7
The Excavator Industry
Hall of Fame (forced connection)
24-Oct-06
Assembling Your Opportunity
Portfolio
Chapter 8
Motorola’s Iridium Satellite
System
Cherry Split (fractionation)
31-Oct-06
Executing Your Entrance
Strategy
Chapter 9
PETCO
Tug-of-War (force-field analysis)
7-Nov-06
Putting Discovery-Driven
Planning to Work
Chapter
10
14-Nov-06
Managing Under Uncertainty
Chapter
11
21-Nov-06
Entrepreneurial Leadership
Chapter
12
Clever Trevor (talk to a stranger)
28-Nov-06
Strategy as Discovery
Chapter
13
Circle of Opportunity (forced
connection)
Ideatoons (pattern language)
Innovation the Microsoft
Way
Future Fruit (rationalizing future
uncertainty)
Innovation = Invention + Commercialization
Innovation
ons
Inventi
Commercial Opportunities
Ideas
Core Competences:
Assessment & Investment
Opportunity
Register
Adaptive
Execution
Market Entrance &
Competitive Strategy
Sources of Innovations
What
kinds of sources exist?
Where do you find innovations?
Where will you find your own innovation
for the final presentation?
Two Sources of Innovation
(Eric von Hippel)

Functional (functional relationship through which firms and
individuals derive benefits from innovation, e.g., customer
or manufacturer)




Where do the innovations come from?
Do they come from within the firm or from someplace
else?
Where exactly within the firm?
Circumstantial (under what circumstances will they
benefit)

Under what circumstances can one expect innovation?

When can one expect innovation?
Functional Sources of Innovation
Handset Makers
1.
2.
3.
4.
5.
Internal to Value Map (bubbles)
External Value Map (boxes)
Competitors & related industries
University, government & private labs
Other nations / regions


3rd party
Applications
Developers
cost: 70 million
pounds annual; 703
employees
Co
st
of
pr
ov
id
in
g
These costs
tend to be relatively
fixed, recurring
annual costs
Captive relationships tend to
be contractual (compare to
Palm O/S)
The entire market
(HW, SW, Telecom Networks)
is driven by "killer" applications
fu
Ca
pti
ve
nc
tio
ns
es
enu
Rev
sing
n
e
Lic
Symbian O/S
Ca
ptiv
e
Programming / Sales
operations
Mobile Network
Operators (600,
though 10
control 50%
subscribers
These revenues
tend to grow by the square
of the MNOs subscriber base
‘Complementarity of several sources may amplify and
accelerate innovation
The last two sources are strongly influenced by
society and governments
Social characteristics that promote innovation and
success at a commercial level?

Prior experience tells us that societies which:







operate, manage and build instruments of production
create, adapt and master new technologies
impart expertise and knowledge to the young
choose people for jobs by competence and relative merit
promote and demote on basis of performance
encourage initiative, competition and emulation
let people to enjoy and employ the fruits of their labor, enterprise and
creativity

(adapted from David Landes (1998) The Wealth and Poverty of Nations, New
York: Norton, chapters 27-29)
Government has a role to play

Where innovation has flourished in the past, the government does the following:









encourage saving and investment
enforce rights of contract
secure rights of personal liberty against tyranny and crime
provide stable government,
though not necessarily democratic
provide responsive government
provide no rents or favors for government position
have governments that are moderate, efficient and ungreedy
Direct government involvement in innovation tends to favor the creation and
maintenance of powerful, conservative, expensive scientific bureaucracies which rob
would-be innovators of scarce talent


.e.g., Sematech, MITI, Malaysian projects, US Aerospace and NASA, European Space
Agency.
(adapted from Landes’ The Wealth and Poverty of Nations )
Circumstantial Sources of
Innovation



Planned firm activities
Serendipity (fortunate accidents)
Change (creative destruction)
For Example:
Consider the Electric Lighting Innovation
Thomas Alva Edison didn’t invent
the lightbulb


Humphry Davy, an English chemist, invented the first electric
light in 1809

Joseph Wilson Swan, an English physicist, was the first
person to invent a practical and longer-lasting electric
lightbulb in 1878
But new technology



Offered new customers
Substituting for gas and arc lighting
… and a new competitor
Edison’s System

“all parts of the system must be constructed with
reference to all other parts,, since in one sense, all
the s form one machine part

1878 - Thomas Alva Edison, referring to an electrical grid in his article
on the phonograph in the North American Review

Edison and his team of engineers in Menlo Park,
N.J., spent years building the entire electric system,
from light sockets and safety fuses to generating
facilities and the wiring network.

Edison beat all his predecessors at one crucial task:
managing the whole process of innovation, from
light-bulb moment to final product
Edison’s Strategy

Develop the working DC system


When George Westinghouse introduced a
superior AC system


Protect it with patents
He attacked with a smear campaign
He eventually switched to AC systems when
customers demanded
Microsoft’s O/S Innovation
The most profitable innovation in history

Linking & Leveraging
Strategy




Get the business
Create the standard
Leverage the business
Crush the competition

An Early Competitor
Case Study in MS-DOS

MS purchased Seattle Computer Products' QDOS

for Quick and Dirty Operating System (written by Tim Paterson)

Written as a version of CP/M, with 4000 lines of assembler.

IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300 bugs, and
decided to rewrite the program


This is why PC-DOS is copyrighted by both IBM and Microsoft.
Gates locked up the IBM deal with the help of his father’s law
firm

est. value of services $250,000
Case Study in DOS

You could order one of three operating systems for
your original IBM PC:

Digital Research's CP/M-86 for $495

UCSD p-System for several hundred dollars


this was a souped-up BASIC operating systems like that
used by the Commodore 64

but portable like Java
DOS 1.0 for $39.95
Case Study in DOS


Microsoft’s OEM brochure touted future
enhancements to DOS:

Unix-compatible pipes, process forks, and multitasking, as
well as graphics and cursor positioning, kanji support,
multi-user and hard disk support, and networking

None of these was ever added
Innovation = Invention + Commercialization!
Innovation Transfer

Across functional boundaries


Absorptive and Transmission Capacities



bounded rationality on the receiving side
Cultural differences


the stovepipes
Culture = shared ‘values’ (what’s important) + shared ‘beliefs’
(what works or what’s true)
Nature of the innovation
Timing
Science & Technology
What are they? How are they related?
Influence / feedback
Verbally
Encoded
Information
Verbally
Encoded
Information
Science
Technology
Influence / feedback
Verbally Encoded
Information
*publications
*patents
Physically & Verbally Encoded
Information
*products & services
*documentatiom
*publications
*patents
Making SMaL Big
SMaL:
What, who, …?

What is the Problem?


Who is responsible for solving the problem and making a
decision?


Sodini of course; but are there other interested players?
Where is the money?


SMaL has experienced initial success by targeting a market where
competition was sparse. But now competitors like Casio are arising.
What is SMaL’s main competitive challenge circa 2003
What markets that SMaL can conceivably compete in will generate an
adequate ROI?
Why does ‘disruptive innovation’ matter?
The Challenge
Innovation on the Demand Side

It is important to get the differentiation large
enough to make the investment in the
technology worthwhile, yet small enough so
it doesn’t take six years to develop a market


Charles Sodini, Chairman of SMaL
Q: How do you develop successful new
technology or innovations?
Three potential market segments

Digital Still Cameras

Security-surveillance

Automotive (cruise control, etc.)


Currently 10%-15% of US cars have this technology
How do you “Sell” the product?


Hardware (CCD, CMOS, X3)?
Software (applications)?
Autobrite®
How you manipulate demand with Software


Images on the left, the inability of conventional cameras to adapt to
varying lighting conditions creates a significant safety risk.
Images on the right demonstrate how accurately SMaL's ACM100
with proprietary Autobrite technology capture what the eye sees.
Camera Imaging Technologies



CCD (Sony, Kodak;
industry standard)
CMOS (Kodak, Canon,
SMaL; used in phones,
Canon in some EOS)
X3 (Foveon; used in
Sigma SD10)
Focus

Having a screen between you and the
consumer at this size company is important



(you don’t want a large company at this stage)
Manufacturing is a high fixed cost, low
margin game
Product definition is the key technological
component that allows us to capture value

Sodini
SMaL:
Competitive Environment
Which strategy is best?

Which of the following six strategies – in your
judgment– is best for SMaL over the next seven
years given what you know of their technology,
operations and potential markets


(think five forces)
How will disruptive technology (basically the
threat of substitutes or new entrants)
influence SMaL’s choice.
Strategies
(Be Prepared to discuss these at the start of next
class)






S#1: Move on up
S#2: Focus on Security and Surveillance
S#3: Focus on Automotive
S#4: Focus on Phone Cameras
S#5: Search for new markets that fit SMaL
technology’s strengths (Making a left turn)
S#X: Mix and match any two or three of the
above five
Your Analysis Toolkit

(1) Framing the Challenge

The Challenge & objectives, the Business Model, the Strategy Drivers
Establish what your business needs to do to make innovation
worthwhile

If I were to do something in the next 3-5 years




(2) Opportunity ‘Register’


That my customers would regard as a major (disruptive) innovation
How would I change their lives?
Concept: Always keep an inventory of possible opportunities so that
you are unlikely to run out of ideas for making the next competitive
move or capturing the next prospect for growth
(3) Reverse your Assumptions to escape from Looking at
Problems in the Traditional Way
Forced Market Reconfiguration:
Digital Cameras
Forced Market Reconfiguration: Digital
Cameras
… never forget

The Purpose of a Business is to Create a
Customer - Peter Drucker

Even if you create marvelous inventions



Your customers won’t care
Unless that is exactly what they need
Business customers are especially impatient

With any product that doesn’t help them gain competitive
advantage
Your Analysis Toolkit
The Attribute Map
Basic
Discriminator
Energizer
Positive
Nonnegotiable
Differentiator
Exciter
Negative
Tolerable
Dissatisfier
Enrager
Neutral
So What?
Parallel


Slicing and Dicing will help you identify and improve the
Attributes of your product
Attribute Maps are used in Consumption Chain Analysis,
Resegmenting, and Redifferentiating
Your Analysis Toolkit

Redifferentiate

Goal: Lay your biases on the
table


There is no market that is so
mature that you cannot further
differentiate your offerings
(a) Quizzing

Search
Through a series of questions
Think Bubbles with help you
Quiz
Order and
purchase
Awareness
of need
Delivery
Looks at the customers
“stream of consciousness”


Selection
Repairs and
Returns
Payment
Final disposal
Service
Financing
Use

(b) Consumption Chain
Analysis
Receipt
Storage and Installation
trasport and Assembly
Practicum:
The Idea Box
Fritz Zwicky’s morphological box
Combining the parameters of a
challenge into new ideas
Generating parameters ; listing
variations for each parameter.
Competences:
Building Breakthrough Competences
Selecting a Competitive Terrain
Chapter 6
Building Breakthrough
Competences
Dell Computer (It’s not about the computing)
What to do with your Opportunity
Register

Assuming you’ve been religiously adding to
your Opportunity Register


Then the question becomes:


You should by this time have a lot of different ideas for
new and marketable products
Which projects should you take on; emphasize;
continue?
The answer depends on your competences
Two Realities

Competitors simply cannot allow you to go
unchallenged



and must try to erode your position
Understanding where to create a competitive
position that cannot easily overcome is thus
essential
You are not only competing with other organizations
in customer markets

You are also competing with them in the capital
markets for critical funds that you need to build future
competitive position
Competences



You best
(perhaps your only)
opportunities to
compete are


Your
Competences
Where Product Market
Needs
Cross with
Competences
Competitor A's
Competences
Product Market
Opportunities
Competitor B's
Competences
Competitor C's
Competences
You Convince Competitors and
Financiers By …

Proving that your ideas can perform on Key Metrics (e.g., Profit)


This raises the question:

“What are the important Metrics?”


Measure the Past
Competitors and Financiers are interested in your future!


The answer is complex … and is not necessarily “Profit”
Accounting metrics like Profit


Show me the money!
Future Profits, Revenues, etc. are Unknown
Thus Other Measures both needed and More Important than
Profit!
Delivering on 7-10 critical ‘Key
Ratios’

This is what Investors and Venture
Capitalists will look for



The particular accounting statement measures
That indicate whether your strategy is
succeeding or not
The exact set of measures depends on


your business model and
your strategy
Some Key Ratios


























Valuation
Price to Sales
Price to Book Value
Enterprise Value to Sales
EV / EVITDA
PEG Factor (price/earnings to growth)
Price to Research
Reinvested Return on Equity
IS
Sales, Earnings and Equity per Share
Staff Costs to Sales
Directors Remuneration to Net Income
Sales and Profit per Employee
Margins
Cash Flow
Op Cash Flow / Op Profit
Price to Free Cash Flow
Discounted Cash Flow
BS
Current Ratio & Acid Test
Debtors Days and Creditor Days
Stock Days and Stockturn
Equity
Gearing (OE to borrowed funds)
Return on Capital Employed
Z-score (output from a credit-strength test that gauges the likelihood of
bankruptcy )
Magic Numbers: The 33 Key Ratios That Every
Investor Should Know by Peter Temple Each of the
ratios contained in this part looks at the ways in which
share prices can be combined with measurements from
the various...
Dell’s War on Inventory
A Case Study in Technology
Acceleration and Organizational
Scaling
Dell’s War on Inventory



In less than 20 years, Michael Dell moved
from cluttered dorm-room operations
to a $25 billion a year company,
outperforming giants such as IBM, HewlettPackard and Compaq in the process.
Hyper-efficient supply chain



Dell is relentless in negotiating the best
prices from suppliers, and
driving those savings through the supplychain.
To do that, Dell replaces inventory with
information.
Materials costs account for about
74% of Dell’s revenues

about $21 billion in 2000


Where other competitors carry one to three months
of inventory,


Lowering materials costs by 0.1% can have a
bigger impact than improving manufacturing
productivity by 10%.
Dell carries 5 days.
Since materials costs in the computer industry fall
by around 1% per weeks,

carrying 5 days versus one month of inventory is
around 6% of materials cost.
Safety stocks are very expensive




But they are very difficult to reduce.

Reduction requires complete and accurate information and
forecasts about production and procurement.
Dell has standardized worldwide on i2 Technologies’ software,

with hourly updates of all information from customers to
suppliers.
five hours’ worth of inventory on hand, including work in progress.

This increases cycle time at Dell’s factories and reduces
warehouse space.
The warehouse space is replaced with more manufacturing lines in
a virtuous cycle

Dell has traded property for information.
Customers

Dell’s online customer procurement Website puts
Dell in contact with more than 10,000 customers
daily


– giving them more than 10,000 opportunities to forecast
demand and balance supply.
For example, Dell can alter supply constraints through
promotions and substitutions.


If inventory is low on Sony 17-inch monitors, Dell can offer a
19-inch model at the 17-inch price. This moves a lot of
demand in real-time.
Competitors selling through retail channels
cannot do this!
The bottom-line


Dell writes off less than 0.1% of total
material costs in excess and obsolete
inventory
Their competitors write off 2% to 3%.
Core Competences

Identify the business of the firm

Identify the key activities on the value chain,
and differentiate them from supporting activities

Identify the critical success measures
generated for each activity (supporting and
key).
Tracking the Dynamics of the
Core Competences
consequences of industrial change on
the capabilities demanded of a
competitive firm

‘Core-ness’ and imitability of the firm’s
capabilities determine the profitability of
innovations dependent on those capabilities.
Coreness
Noncore
No Profits
Core
Short-term Profits
High
Imitability
No Profits
Long-term Profits
Low
Why Incumbents Perform






The Abernathy-Clark model provides one explanation of why incumbents may
outperform new entrants in the face of ‘radical’ innovations.
The model suggests that there are actually two kinds of knowledge that underpin a
innovation: technological and market.
An innovation is incremental (regular) if it conserves the manufacturers/s existing
technological and market capabilities;
niche if it conserves technological capabilities but obsoletes market capabilities;
radical (revolutionary) if it obsoletes technological capabilities, but enhances market
capabilities; and
architectural if both technological and market capabilities become obsolete. The point
to note is that market knowledge is just as important as technological knowledge.
Technical Capabilities
Preserved
Incremental
Destroyed
Radical
Preserved
Market Capabilities
Niche
Architectural
Destroyed
Difficulties Competing



Henderson and Clark were curious why some incumbents had such difficulty with apparently
incremental innovations which involved seemingly small changes that could easily be handled by their
capabilities.
For example, Xerox, the pioneer of the copier industry (albeit through their acquisition of Chester
Carlson’s technology) stumbled for years before developing a small plain-paper copier to challenge
Japanese products.
They suggested that innovations are invariably built up of components, and thus building them
requires two kinds of technical knowledge






technology underlying individual components, and
architectural knowledge about how to link components together.
If the innovation enhances both component and architectural knowledge, it is incremental;
if it destroys both, it is radical;
if only architectural is destroyed, then the innovation is architectural;
where only component knowledge is destroyed (for one or more components) the innovation is
Architectural Knowledge
modular.
Preserved
Incremental
Destroyed
Architectural
Preserved
Component Knowldge
Modular
Radical
Destroyed
Trajectories






Industries evolve along four distinct trajectories
radical, progressive, creative, and intermediating.
Where a firm's strategy (its plan for achieving a return on investments in
capabilities) failed to align with the industry's change trajectory, profitability
suffered commensurately.
Failure resulted from obsolescence of the firm’s products or services
arising from two directions:
(1) a threat to the industry's core competences; and
(2) a threat to the industry's core assets—the resources, knowledge, and
brand capital that have historically made differentiated the firm.
Competences
Preserved
Creative
Obsolete
Radical
Obsolete
Assets
Progressive
Intermediating
Preserved
Trajectories in Practice
Creative, 6%
Radical, 19%
Progressive,
43%
Intermediating,
32%
Cisco




Cisco Systems has a reputation for expanding its
capabilities through acquisitions.
Shortly after going public in 1990
went on a buying spree, acquiring 73 firms from
1993 to 2000.
By late March 2000, at the height of the dot-com
boom,

Cisco was the most valuable company in the world, with a
market capitalization of more than $US 500 billion.
Early years




This had not always been the case.
During its first decade after it was founded in 1984 the company acquired
no businesses at all,
sticking to selling routers and only routers.
Cisco went public in 1990.



Cisco engineers scrambled to produce their own switch, but realized that
they could not acquire the capabilities to produce one anytime soon.
In 1993 of Crescendo Communications for $95 million which got them into
switches – fast.



three years later, a faster and cheaper piece of hardware – the switch –
threatened its business.
Cisco's engineers grumbled that they could have produced their own switch in
time.
Most of Crescendo's executives stayed with the company, and switches
became a core Cisco business.
The switching unit today generates nearly $10 billion in annual revenues.
Acquisitions

Since then, using acquisitions



where they are unable to develop internal capabilities
quickly enough to be competitive,
Acquisitions and partnering with other companies
have enabled Cisco to retain its market dominance.
Cisco has made inroads into many network
equipment markets outside of routing, including
Ethernet switching, remote access, branch office
routers, ATM networking, security, IP telephony and
others.
Acquisitions



What began as a one-off response in an emergency soon
evolved into a long-term strategy, an essential part of the
Cisco culture.
While most big tech companies rely heavily on R&D to create
products and business lines,
Cisco, after Crescendo, decided to strategically use
acquisition to expand its capabilities:




In 1995, Cisco acquired its way into firewalls and cache engines.
In 1998, Internet telephony.
In 2003, with the acquisition of Linksys, a home-networking
company,
In 2006 by acquiring Scientific Atlanta, a set-top-box
manufacturer.
People




The vast majority of Cisco’s acquisitions have been targeted
technology buys:
small start-ups with 50 or less engineers whose products link back
to Cisco’s core competencies, routers and
Cisco has come to realize that the acquisition of technology really
isn't just about technology.
"The people are the most strategic asset.“
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If, after the acquisition, Cisco loses the technologists and product
managers who created, say, the Linksys router,
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Ned Hooper, vice president of business development, whose former
company LightSpeed was acquired by Cisco in 1998.
then it has lost the second and third generations of the product that
existed only in those employees' heads.
That, is where the billion-dollar markets lie. And that is where
Cisco's acquisitions are aimed. "We need the expertise,"