Digital Media & Innovation:
Three Strategic Approaches
to Business Transformation
Columbia University, November 11, 2010
Richard A. Gershon, Ph.D.
Western Michigan University
Disruptive Technology
 The lessons of business history have taught us
that there is no such thing as a static market.
Advancements in digital media and global competition
have engendered a new competitive spirit that cuts
across countries and companies alike.
 In 1942, Joseph Schumpeter introduced the principle
of “creative destruction” as a way to describe the
disruptive process that accompanies the work of the
entrepreneur and the consequences of innovation.
 In time, companies that once revolutionized and
dominated select markets give way to rivals who are
able to introduce improved product designs, offer
substitute products and services and/or lower
manufacturing costs
 Today, we use words like “disruptive technology”
(Christensen, 1997) to describe the same principle.
Table 1.
Disruptive Communication and Information Technology
Incumbent technology :
Challenged by:
Solution:
Newspapers
Radio, late 1930’s and 1940’s
Become more interpretative in
news approach; emphasize pictures
Radio
Broadcast Television, 1950s
Deemphasized radio drama and
comedies and focused on music
(top 40, sports broadcasting etc.)
Broadcast Television
Cable Television, late 1970s
and 1980s
Broadcast TV companies slowly
bought into cable programmers
or created their own cable brands
ABC acquired ESPN
NBC launches CNBC
Cable Television
Direct Broadcast Satellite,
1990s, early 21st century
Cable has emphasized high-speed
Internet access and cable telephony
Vinyl Records
Compact Disk (CD), 1980s
All music production companies
eventually transitioned to CD format
Compact Disks
(traditional music retail)
iPod, MP3 music file sharing,
early 21st century
music is steadily transitioning
to E-Commerce model, iTunes
Newspapers / Television
The Internet, 21st century
Source: R. Gershon, 2009
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 Today’s media and telecommunication companies are
faced with the same basic question; what are the best
methods for staying competitive over time? In a word,
innovation.
 This presentation will examine the importance
of innovation (and innovative thinking) to the long
term success of today’s media business enterprise.
 Specifically, it will identify three strategic approaches
to business transformation.
Three Strategic Approaches
to Business Transformation
 Successful media innovation occurs when it meets one
or more of the following strategies:
 1) The innovation is based on a novel principle that
challenges management orthodoxy.
 2) The innovation is systemic; that is, it involves a
range of processes and methods.
 3) The innovation is part of an on-going commitment
to develop new and enhanced products and services.
Gary Hamel, Harvard Business Review
Business Transformation 1.
 The innovation is based on a novel principle that
challenges management orthodoxy. The innovation
is transformative. It redefines the playing field by
introducing an altogether new value proposition.

Sony:
 “Walkman” portable stereo
 the Compact Disk (Sony & Philips)
 “Playstation” videogame system
 The aforementioned products are all major
contributors to our present day digital lifestyle.
Sony Playstation
 The Sony Playstation was the brainchild of an
engineer named Ken Kutaragi, who was fascinated
with designing an entertainment device that could
combine the power of a computer workstation with
high resolution graphics. For two years, Kutaragi
operated without a sponsor until a friend and senior
executive at Sony, interceded on his behalf.
 Sony President Norio Ohga was sufficiently impressed
that he authorized Kutaragi to begin building a working
prototype of his videogame console.
 In the beginning, the management at Sony was not
enamored with the idea of videogame technology.
They did not view themselves as a company that built
toys. Worse still, companies like Nintendo and Sega
were the established leaders in videogame technology
and software.
Ken Kutaragi
Playstation
 One of Sony's major challenges was to convince the larger
software developers to create innovative games to support
the new platform system. Sony's future success in videogame
technology would depend on high quality software games.
 Playstation I.
 On December 3, 1994, the Sony Playstation was launched
in Japan with 8 game titles. Sony sold some 300,000 units
in the first month alone, more than three times what company
strategists had expected. A year later, Playstation debuted in
the U.S. and achieved immediate success.
 By 1998, Playstation had sold 33 million units worldwide and
had become the international leader in videogame consoles.
Playstation was responsible for 10% of Sony's worldwide
revenues in its first year alone.
Business Transformation 2.
 The innovation is systemic; that is, it involves a range of
processes and methods. Related to this idea is the importance
of business process innovation.
 A highly successful business process creates internal and
external efficiencies that provides added value to the company
and organization.

Dell Computer:


Home Box Office:


Direct to home sales, just-in-time manufacturing
Cable networking (satellite-to-cable interface)
Netflix:

On-line subscription movie rental service, proprietary
recommendation software
 Successful business process innovation sets into motion a scale
of imitation by other competitors in the same industry.
Netflix
 Netflix is an on-line subscription based DVD rental




service founded by Reed Hastings in 1997.
At the time, the home video market was populated
by a number of mom and pop retail outlets as well
as the video rental giants: Blockbuster and
Hollywood Video.
In the beginning, Netflix launched the service as
a pay-per-rental – similar to existing video rental
outlets.
The one distinguishing factor - the consumer could
order movies on line via the Internet. But the cost
structure was the same made worse by the fact that
home delivery times were inconsistent.
In September 1999, Netflix changed its business
model to an unlimited DVD subscription service
(i.e., HBO) with no late fees.
Netflix Innovation Strategies
 1) Netflix adopted a prepaid subscription




service that offers its customers a great value
proposition (i.e., unlimited DVDs…)
2) Convenience. No late fees; hold on to the
videos as long as the customer wants.
3) Rather than adopt a bricks and mortar
approach (i.e., Blockbuster), Netflix partnered
with the U.S. Postal service to engage in direct
delivery of DVDs directly to its customers.
4) Netflx fully utilizes the power of the
Internet to promote a proprietary software
recommendation system. This has the added
benefit of stimulating demand for lesser known
movies and taking the pressure off recently
released feature films (i.e., long tail principle).
5) Netflix has developed a sophisticated
supply-chain management system that enables
the company to offer subscribers good
selection as well as fast turn around time.
Business Transformation 3.
 The innovation is part of an on-going commitment to
develop new and enhanced products and services.
 There is a discernible pattern in product development
(both planned and unplanned).
 This commitment helps to establish brand identity as
well as creating lasting advantage.





Apple – Digital media
Google – Internet search products and services
Amazon – Electronic commerce
Sony
– Consumer electronics
Nokia – Wireless communication
Apple iPod and iTunes
 Steve Jobs, senior technical designer,
Jonathan Ive, (and the team from Apple) are
responsible for the development of the iPod;
portable music device and the iTunes music
store. The iPod was built around earlier
R&D work by a company called Portal Player.
 The combination of the Apple iPod and
iTunes media store created the first sustainable
music down-loading business model of its kind.
This came at a time when music piracy
threatened to tear the music industry apart.
 Together, the Apple iPod and iTunes redefined
the way music product software is sold and
distributed to the consumer.
Value Innovation
and Boundary Spanning
 Apple’s success rests on its ability to look across complementary
products and to create new opportunities and added value features.

Ex. Using ITunes as the principle information server for the iPad
 There are different terms to describe this process.
Kim & Mauborgne (2005) use the term “value innovation” as a
way to describe this. I call it the principle of “boundary spanning.”
The net effect is the same.
 Forward looking companies find ways to expand and add value to
their current line of product and service offerings.


Apple
iPod
iTunes
iPhone
iPad
Innovation and Risk
Even the best managed companies are susceptible
to innovation failure.
There is always the element of risk when attempting
to develop a new product or service. The solution,
therefore, is to develop a culture of innovation where
risk and experimentation are supported.