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Week 2 - Strategy Formulation - Key External Factors - Complete

Strategy Formulation - Key External Factors


Christiansen, Clay, and Michael Raynor. Innovator's Solution. Chapters 2 and 8
Click link for notes

Henderson, Rebecca. "Architectural Innovation."

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 (
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?  


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 
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


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 


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


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


“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 


“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 




World Wide Web 



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,