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Disruptive strategic innovations and strategic re-orientations

Professor Feng LiThe Business SchoolUniversity of Newcastle upon TyneE-Mail: Feng.li@ncl.ac.uk

© Feng Li, 2006

© Feng Li, 2006 2

Main Issues

Disruptive innovations in the network economy

Some possible strategic responses to disruptive innovations

Strategic re-orientations: from product and services to solutions and experiences

© Feng Li, 2006 3

Disruptive Innovations

Clayton Christensen – Innovators Dilemma and Innovator’s Solution

Sustaining Innovation – make better products that can be sold for more money to attractive customers – incumbents prevail

Disruptive Innovations – commercialize a simpler, more convenient product that sells for less money and appeals to a new or unattractive customers – new entrants beat incumbents

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Sustaining vs Disruptive Innovations

Sustaining innovation targets demanding high end customers with better performance than what was previously available

Disruptive innovations don’t attempt to bring better products to established customers in existing markets – rather they introduce products and services that are not as good as currently available products but they are simpler, more convenient and less expensive and appeal to new or less demanding customers

Disruption occurs as the rate of technological improvements are higher than customers can utilise or absorb

The disruptive products and services eventually become acceptable to high-end customers

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The Customer isn’t always right:Why high performing companies fail

‘The highest performing companies .. Have well developed systems for killing ideas that their customers don’t want. As a result, these companies find it very difficult to invest adequate resources in disruptive technologies – lower margin opportunities their customers don’t want – until [those same customers decided that they] want them. And by then it is too late.’

- Innovator’s Dilemma

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Two Types of Disruptions

New Market Disruptions – compete with non-consumption as they are so cheap and simple they attract new customers previously don’t use the products and services

Low End Disruptions –simple low cost business models to pick off the least attractive of the established firms’ markets and progress upwards

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The Impact of Sustaining and

Disruptive Technological Change

Pro

duct

Per

form

ance

Time

Performance demanded at the high

end of the market

Performance demanded at the low

end of the market

Performance Oversupply

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The Process of New Market Disruption

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Examples

Low cost airlines – British Airways and KLM under attack from easyjet and Ryanair - full service, hub-and-spoke strategy versus low cost, point to point, no-frills strategies

Financial services – Merrill Lynch versus Charles Schwab, E*Trade and Ameritrade

Unilever and P&G versus low priced distributor owned private labels

Barnes & Noble versus Amazon.com The attackers utilised strategies that were both

different from and in conflict with the strategies of the top dogs – Disruptive strategic innovations

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Disruptive innovations

Emphasis on different product or service attributes

Start out as small and low margin business – unattractive until they grow big

They grow to capture a large share of the established market – good enough in old attributes and superior in new attributes than established firms

Established firm’s can’t compete because of conflict with mainstream strategy and established way of working

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Responses to disruptive innovations

Focus on and invest in the traditional business – the disruptive innovation will not grow indefinitely (10-20%) and won’t capture 100% of the market

Ignore the innovation – it is not your business – different customers, value propositions and require different skills and competences

Attach back – disrupt the disruptive innovation – create an even newer game

Playing both games simultaneously – via a separate unit

Embrace the innovation completely and scale it up Charitou, C & C Markides (2003) Responses to

Disruptive Strategic Innovations. Sloan Management Review Winter 2003: 55-63

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Responses to disruptive innovations

In almost all cases of disruptive innovations, the net effect is total market growth

In new market disruptions – major growth opportunities for both incumbents and upstarts

Gilbert, Clark (2003) The Disruption Opportunity. Sloan Management Review Summer 2003: 27-32

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A Third Type - Top Down Disruptions

Low end and new market disruptions - under-performs established products in mainstream markets and sold for less money to least profitable customers

Top down disruptions outperform existing products, selling at a premium price, initially purchased by the most demanding and least price-sensitive customers

Federal Express and Wang Labs’ word processing system - started at top end and rapidly moved downwards to disrupt established markets.

Apple iPod and Satellite Radios.

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Top Down Disruptions … continued

Gives incumbents a better chance of surviving Potential danger of premium brands moved

downwards - long term viability. Damage the brand and disfranchise their most

profitable customers at top end in long term. Marks & Spencer in the UK and BMW of

Germany? Need to be assessed over different time scales Carr, Nicholas (2005) Top-Down Disruption.

Strategy + Business, Issue 39, Summer 2005. http://www.strategy-business.com/magazine

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The Internet & Disruptive Strategic Innovations

The Internet enables new ways of working and new business models superior than established firms

Basis for disruption in different industries Long list of examples in Innovator’s

Solution pp56-65 Amazon.com; Charles Schwab; Cisco;

Dell; e-Bay; ….. Useful Framework for analysing,

explaining and addressing strategic challenges and opportunities in various industries

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The Internet & Disruptive Strategic Innovations (2)

One of the most influential theories since the late 1990s

Insights to battles between industry leaders and unknown new entrants

Not specific to network economy But Internet provided numerous

opportunities for new entrants Low cost models to compete with industry

leaders in ways impossible in the past.

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Strategic Re-Orientations: From Products and Services to Solutions and Experiences

Two strategic re-orientations in recent years

In a world of commoditized products, companies are turning to service offering for growth - often in the name of business solutions

‘What the customer buys and considers value is never a product. It is always utility – that is, what a product does for him’ – Peter Drucker

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Examples

General Motors – Automotive services - sales, repairs, financing, parts

and accessories; roadside assistance; insurance OnStar – travel, emergencies, satellite radio services;

vehicle monitoring services; car phone and data services, personal concierge services …

Home services (GMAC) – home sales, mortgage, relocation, monitoring, insurance, satellite TV etc

Underpinned by strong brand, an ICTs platform and a community of users and suppliers

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Examples 2

UPS Logistics service business Core – pick-up, drop-off, shipping,

supplies, tracking New services – assembly and testing,

repairs, inbound and outbound logistics, warehouse management, spare parts management, customer support management …

Role of IT platform

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The Next Step – Experience Innovation

The focus of innovation will shift from products and services to experience environment

Supported by a network of companies and consumer communities

Co-create unique value for individual consumers

Features and functionality used to be embedded in products

Now distinctive identities of products, services, channels, industries and companies are rapidly disappearing

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Examples - Cardiac pacemaker

5m adults in US alone suffer cardiac problems Pacemaker monitors and manages heart rhythm and

performance Remote monitoring – deviations altered to patient and doctor

simultaneously Doctor in consultation with the patient can jointly decide

actions When patient is travelling – other doctors need to be involved –

access to patient records Others involved – e.g. the patient’s spouse Information and skills network Value – not in products, communications, and all the agents

involved (hospitals, families, doctors etc) Value from co-creation experience through interactions

between patient and others Value is determined by personal and other circumstances

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Value to patients

Value lies in the co-creation experience of a specific patient, at a specific point in time, in a specific location, in the context of a specific event

Circumstance-based New business logic: from company- and

customer-centric to network-centric How can firms compete in the experience

economy?

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Questions

Fundamental changes ? Role – or different types of roles - of

Internet and related technologies in these innovations

The relationships between individuals and institutions/ organisations

The changing business logics Implications for organisations?

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What is e-Business? How the Internet Transforms Organisations

Chapter 7. Managing Disruptive Strategic Innovations in the New Economy

Chapter 8. Strategic Re-Orientations in the Network Economy: Products, Services, Solutions and Experiences

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Further readings Christensen, Clayton M (1997) The Innovator’s Dilemma.

Harvard Business School Press, Boston Christensen, Clayton M & Michael Raynor (2003) The

Innovator’s Solution: Creating and Sustaining Successful Growth. Harvard Business School Press, Boston

Christensen, Clayton M, Eric A. Roth & Scott D. Anthony (2005) Seeing What Next: Using Theories of Innovation to Predict Industry Change, Harvard Business School Press, Boston

Charitou, Constantinos & Constantinos Markides (2003) Responses to disruptive strategic innovation. Sloan Management Review 44(2): 55-63

Gilbert, Clark (2003) The Disruption opportunities. Sloan Management Review 44(4): 27-32

Carr, Nicholas (2005) Top-Down Disruption. Strategy + Business, Issue 39, Summer 2005. http://www.strategy-business.com/magazine

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Further readings (2)

Charitou, C & C Markides (2003) Responses to Disruptive Strategic Innovations. Sloan Management Review Winter 2003: 55-63

Gilbert, Clark (2003) The Disruption Opportunity. Sloan Management Review Summer 2003: 27-32

Sawhney, M; S Balasubramanian & V Krishnan (2004) Creating Growth with Services. Sloan Management Review Winter 2004: 34-43

Prahalad, C K & V Ramaswamy (2003) The New Frontier of Experience Innovation. Sloan Management Review. Summer 2003: 12-18

Prahalad, C K & Venkat Ramaswamy (2004) The Future of Competition. Harvard Business School Press, Boston

Brynjolfsson, E & Glen Urban (2001, eds.) Strategies for E-Business Success. Jossey-Bass, San Francisco

Cusumano, Michael & C Markides (2001, eds.) Strategic Thinking for the next economy. Jossey-Bass, San Francisco

Gerbert, P & A Birch (2001) Digital Storm – Fresh business strategies from the electronic marketplace. Capstone, Oxford