Strategy Formulation - Key External Factors
Readings
Christiansen, Clay, and Michael Raynor. Innovator's Solution. Chapters 2 and 8
Click link for notes
Henderson, Rebecca. "Architectural Innovation."
Notes:
Traditional categorization of innovation as either incremental or radical is incomplete
Minor innovations can have great competitive consequenses
Architectural innovations destroy the base knowledge of established firms
- difficult for those firms to recognize and correct
- changes to how the components are linked together, leaving core design concepts unchanged
product as a whole
- system
product in parts
- components
- physically distinct part of a product that embodies a core design concept
- performs a well designed function
- physical implementation of the design concept
successful product development requires
- component knowledge
- know each of the core design concepts and how they are implemented
- architectual knowledge
- how the components are linked together as a coherent whole
change the architecture of a product without changing its components
- change the way they are integrated into a system
technical innovation
- improving a design or introducing a new concept significant from the past product
incremental innovation
- refines and extends and established design
- introduces minor changes into the existing components architecture
- underlying core design concepts and the links between them remain the same
- exploits the potential of established designs
- reinforces established firms
- over time has significant economic consequences
radical innovation
- new dominant design
- different set of engineering and scientific principles
- opens new markets and potential applications
- creates great difficulty for established firms, destroys
- successful basis for entry of new firms or redefinition of an industry
organizational capabilities are difficult to create and costly to adjust
modular Innovation
- Innovation that changes only the core design concepts
- without changing the technology's architecture
Dominant design
- core design concepts that correspond to the major functions performed by the product embodied in the components defines how components are integrated
- basic choices about a design that are not reexamined in each subsequent design
- improvements are within the components within the framework of a stable architecture
- before dominant design emergence companies need to be knowledgeable about alternative components and knowledge about how they can be implemented
- after firms focus on refinements of components
- emerges in response to achieve economies of scale or take advantage of externalities
- product technologies do not emerge fully developed at their outset
- experimentation followed by acceptance of prominent design
- organizations build knowledge and capability around the recurrent tasks they perform
A firms architectural knowledge is determined
- by communication channels between component divisions, critical to effective design
- by information filters, to determine what is most crucial in the information stream
Architectural innovation often creates problems for established firms
-information that an innovation may be architectural may be screened out by filters and communication channels
-difficult to build and apply new knowledge effectively
-has to change from refinement of a stable architecture to active search for new solutions in a constantly changing context
-it's difficult to identify which filters, channels, and problem-solving strategies that need to be modified in the attempt to build the new product with the old
New entrants are not handicapped by the legacy of embedded and partially irrelevant knowledge
A reliance on architectural knowledge based on the previous generation blinds incumbent firms to the critical aspects of new technology.
Lecture Notes
Technology-based Business Transformation
Irving Wladawsky-Berger
Cite as: Irving Wladawsky-Berger, course materials for ESD.57
Technology-based Business Transformation, Fall 2007.
MIT OpenCourseWare (http://ocw.mit.edu/)
Massachusetts Institute of Technology.
Complex Systems -Technical Skills
Complex Markets - Business Skills
Complex Organizations - People Skills
Skills needed to be an effective transformational leader
- a leader that is comfortable dealing with disruptive innovations and complex systems, markets and organizations?
Problem-solving
Analysis
Creativity
Design
Development
Holistic thinking
Technology-based innovation and business survival
Formulating a market strategy around a new, disruptive, complex technology
Executing a multi-faceted strategy in the marketplace
Organizational and Cultural Issues
Class project presentation and discussion
IBM at the top in 1984
The Fall – Reversal of Fortune 1984 1992
Cover of Fortune Magazine;
“America’s Most Admired Corporations.”
Cover of Fortune Magazine;
“Dinosaurs? The decline of these three giants is the biggest what-went-wrong story in U.S. business history.”
The Re-Birth: New Technology-based Market Initiatives
Internet, Web, and e-business plus
Supercomputing
Linux and Open Source
Social Networks/Web 2.0 and Virtual Worlds
On Demand, Business Architecture
Services and Services Sciences
The Re-Birth: The Internet, Web, and e-business...
Technology-based innovation and business survival
Formulating a market strategy around a new, disruptive, complex technology
Executing a multi-faceted strategy in the marketplace
Organizational and Cultural Issues
Formulating a Disruptive, Technology-based Strategy
Sustained vs disruptive innovations
Different kinds of disruptive innovations
Strategy formulation for disruptive innovations
The Internet as a major disruptive innovation
Two Major Kinds of Innovation
Sustained
Better products that can be sold for more money to demanding customers
Performance improvements in attributes most valued by most demanding customers
Incremental or breakthrough improvements
Incumbents almost always prevail
Disruptive
Simpler, more convenient, less expensive “good enough” products that appeal to new or less-demanding customers
Once disruptive products or services gain a market foothold, the sustained, improvement cycle begins
Disruptive products and services typically crush the incumbents over time and replace them as leaders
Disruptive Innovation
What must a business do in order to not just survive but thrive when facing a disruptive innovation?
Become the Disruptor rather than the Disruptee, of current business and technology status quo. To do so successfully, one must tailor each decision and process in the business to fit the disruptive circumstances.
Different kinds of disruptive innovations
Low-end disruption – Are there customers at the low end of the market who would be happy to purchase a “good enough” product with less performance at a lower price?
– Can you create a business model to earn attractive profits at the discounts required to win the business of the low-end customers?
New market disruption
– Is there a large population of people who have not had the money, equipment or skill to use the existing products?
– Do customers need to go to an inconvenient, centralized location or deal with an unresponsive central group to use the product or service?
Disruption to incumbents
– Is the innovation disruptive to all or the major incumbents in the industry, or can it be?
– Could innovation be sustaining to one or more significant major incumbents?
Another view of disruptive innovations Products/Components vs Systems/Architecture
Components
Continuous improvements to existing components and their underlying technologies – increased performance, higher quality, lower costs, . . .
New components, usually based on new technologies – e,g, analog to digital
Architecture and Design
Stable, dominant architecture or design
New architectures and design, based on new ways of framing the product or system and different ways of linking the various components
Another view of disruptive innovations Products/Components vs Systems/Architecture
Incremental – Sustained, favors incumbents
Existing components and technologies
Existing architecture and designs
Modular – Sustained, favors incumbents
New components and technologies
Existing architecture and designs
Architectural – Disruptive, favors new entrants
Existing components and technologies
New architectures and designs
Radical - Disruptive, favors new entrants
New components and technologies
New architectures and designs
Strategy Formulation – Management and Processes
Deliberate
“Top Down”, hierarchic management style
“Inside out”, mostly developed within a business, self-contained, proprietary
Rigorous analysis of markets, customers, competitors, technologies, . . .
Problems to be solved and approaches are taken are well understood
Emergent
“Bottom Up”, “organic”, self-organizing management style
“Outside In”, mostly developed in the marketplace, with partners, open
Future is hard to read, not clear how things will develop
Usually applicable in early phases of new disruptive innovation
Strategy Formulation – Major Risk Factors
Do not:
Apply “deliberate strategy” management style, funding and organization to an “emergent strategy”
“Too Early”
Overly aggressive business model - too much money spent too quickly
Unrealistic expectations will result in disappointment and loss of patience
Management style too rigid based on how little is known
Continue to apply “emergent” management style, funding and organization even when strategy becomes clear
“Too Late”
Inadequate funding for switching from “research” to “production” mode
“Research” or “early “stage” oriented management team not suitable to next stages involving scale-up, market presence, and customer support
Will likely be out-marketed by more aggressive competitors
How do you decide that it is now time to begin formulating a disruptive, technology-based strategy
Key Market Factors
How advanced is the technology?
What is the marketplace saying about it?
What are competitors doing?
How are your clients reacting?
How do you decide that it is now time to begin formulating a disruptive, technology-based strategy
The Internet - mid '90's
Networking:
TCP/IP
Information:
World Wide Web
Communications:
How advanced is the technology?
The Internet and Web were breaking out of the research community into the “early adopter” general marketplace
What is the marketplace saying about it?
The marketplace started paying more and more attention, especially after the Netscape IPO in August 1995
What are competitors doing?
Major competition was arising, both existing companies – e.g., Sun, later Microsoft, and new companies – e.g., Netscape and many new “dot-coms”
How are your clients reacting?
Clients were beginning to experiment with the Web – both putting up websites, front end to their existing systems, and developing brand new applications,