Lectures 2 and 3
- Discontinuity happens due to change in downstream demands. Therefore this leads to
change innovation by the upper stream
- Innovator's dilemma: to disrupt or be disrupted (whether to change or innovate the
business model or not)
e.g;
Nokia:
They failed because they joined the innovations very late regarding the software;
they couldn’t keep up with competitors even though they had the patents that would
give them the edge to introduce the first software mobile because nokia is a
communication company, not a software company , however apple was quick
enough to introduce the IOS and disrupt the market → this example shows that as
Nokia did not face the disruption of apple they failed big time
Xerox:
For office printers, “big ones”. They faced competition by Canon by introducing
printers for home uses and much cheaper (sustaining vs disruptive innovation), They
did not join the disruptive of canon but sustained what they do, they worked on their
competencies and their were demand, opposite to nokia’s case → this example shows
that Xerox did not have to face the disruption as the office printer still had its market
- Sustaining vs. Disruptive technologies
1) Sustaining technologies:
- is improving the performance of established products, along the
dimensions of performance that mainstream customers in major markets
have historically valued.
- It could be discontinuous or radical in character which depend on new
type of knowledge or competencies (e.g. biotechnology : CRISPR-Cas9 is
being been used to genetically modify mosquitoes so that they could not
carry malaria, and to restore the efficacy of front-line chemotherapies for
lung cancer.) (Apple watch for apple)
- incremental in nature which depend on the existing knowledge or
competencies and the innovator gets to build on them (e.g. razor blades)
- Same example of Nokia, mention that they were incremental sustaining
therefore IOS won the competition ( E.g;TETRA PACK improved its
package to be more convenient to use and to be anti-spill. Rather than
using scissors to open, or to have sticky paper that may ruin the quality of
the pack after being opened, TETRA PACK developed highly resilient
packages that are easily opened and closed. ) (Iphone 11&12)
2) Disruptive technology:
- introduced by new market entrants a.k.a start ups/ challengers
- Disruptive technologies underperform established products in mainstream
markets, but customers value the resulting products that are cheaper,
simpler, smaller, and convenient to use. They usually replace existing
products.
- Disruptive innovation has to serve unserved market by the incumbents or
low end market a.k.a people who look for cheaper stuff for lower prices
- Disruptive innovations should have quality improvement over time.
- disruptive innovation is not a fixed point in time, but rather an ongoing
evolution of a product. It involves a smaller company with fewer resources
successfully challenging established incumbent businesses by initially
targeting low-end or unserved customers and then migrating to the
mainstream market.When mainstream customers start adopting the
disrupters' offerings in volume, disruption has occurred.
Netflix: they started disruption by sending video tapes through
mail. Then, when technology emerged, they started online stream
- disruption doesn't guarantee success
It's important to recognize that some disruptive innovations succeed while
others do not.
- business model of disrupter and incumbent are not similar
Disrupters often build business models that differ significantly from those
of incumbents.
- E.g;
1) Netflix disrupted the entertainment market: Netflix was able to
disrupt the market as blockbusters was only offering film renting
through a physical store and customers had to travel to the store to
browse and search for DVDs, also blockbusters was mainly about
new popular movies, However, netflix disrupted the market by
offering DVD rentals sent by mail, also they offered older movies
and different niche categories, Netflix was smart enough not to
introduce the online streaming as they were unknown at first and
only introduced it after some time so that blockbusters do not
compete them in the online streaming area.
2) Airbnb disrupted the hospitality market: Introduced a wider range
of accommodation options, including apartments, houses, unique
properties, and homestays. This catered to diverse traveler
preferences and budgets. On the other hand hotels offer
standardized rooms and limited variety in terms of location and
experience. Also they have very different business model from
pricing, booking, economic business view
3) Fawry disrupted the financial market: Fawry, a brainchild of
Egyptian tech expert Ashraf Sabry, lets users pay and receive
money through QR codes on their phones. It uses blockchain
technology and offers a secure platform for merchants to accept
payments and manage finances. By linking a credit card to the
Fawry app, users can send and receive money from others with
similar setups, even through social media.
4) Breadfast
5) Tesla (electric cars)
- Why do good companies fail?
1) Overshooting technology compared to market demand (e.g.IBM was used in
decoding German codes in WW2. They not only missed the storage market but
also they missed the personal computer market, as complementary goods. They
failed to acquire one of the computer companies they were trying to compete in
but it was too late because Japanese companies already gained market share. They
thought Japanese can't be strong especially after ww2 )
2) Not being attentive to real demands and hence the radical innovations of others
(e.g. Nokia).
3) Incumbents – established firms - move to disruptive technologies and leaving
sustaining technologies; or
4) Incumbents oversee/neglect disruptive technologies (IBM disks)
5) Companies structure can make a company fail ( companies should give
employees space to be innovative “ 20% of their time” not only R&D such as
Google)
6) Companies culture can make a company fail
7) Lack of capabilities
- Companies capabilities
1) Competence destroying discontinuities :
- are initiated by new firms and are associated with increased environmental
turbulence.
- create new products or substitute new ones, or create fundamentally new
processes. These products and processes are so fundamentally different
from previously dominant technologies that the skills and knowledge base
required to operate the core technology shift. Such major changes in skills,
distinctive competence, and production processes are associated with
major changes in the distribution of power and control within firms and
industries.
- E.g;
Product: Kindle and digital books replacing printed books. , from film
cameras to digital cameras
Process: the ascendance of automatically controlled machine tooling
increased the power of industrial engineers within the machine-tool
industry, while the diffusion of high-volume production processes led to
the rise of professional managers within more formally structured
organizations.
2) Competence enhancing discontinuities:
- initiated by existing firms and are associated with decreased
environmental turbulence.
- magnitude Competence-enhancing discontinuities are order-of-magnitude
improvements in price/performance that build on existing know-how
within a product class, or improvement in processes through enhancing
production capacity. Such innovations substitute for older technologies,
yet do not render obsolete skills required to master the old technologies.
Competence-enhancing product discontinuities represent an order-of-
improvement over prior products yet build on existing know-how.
- E.g;
Product: IPhone 11 & 12 series.
Process: recycling materials.
- Technological change is a bit-by-bit, cumulative process until it is punctuated by a major
advance. Such discontinuities offer sharp price-performance improvements over existing
technologies. Major technological innovations represent technical advances so significant
that no increase in scale, efficiency, or design can make older technologies competitive
with the new technology.
E.g; Apple do competence enhancing for few years to remain and sell it for scrap prices
and keep their sales (iPhone) and to keep their market share, Till they introduce their
competence destroying product/process (apple vision) to gain more profit
they start to reduce battery health and stop software updates to push you to keep buying
from their portfolio till they introduce their competence destroying
- Value networks as explanation for failure
1) Every company develops its network structures (value chains) according to the
products produced. As firms gain experience within a given network, they are
likely to develop capabilities, organizational structures, and cultures, tailored to
their value network’s distinctive requirements.
2) When customers’ needs change, these value networks are disrupted.
3) This requires capabilities to form new value networks + incur substantial costs
(new cost structure). E.g. selling directly to customers is different from selling
through retail
(Kodak )-> they started joining the disrupting market of digital cameras and it did
well in the beginning by opening a new business unit for digital cameras and
sustaining the old film based cameras, both of them failed because of the
organizational structures & culture. They didn't put digital cameras into the
structure of the organization· they used the same employees who were doing film
based cameras to make digital Cameras
-Exploiting S curves as explanation of failure
- Sustaining technology that transcends and/or matches disruptive technologies (first
tech, second tech, and third tech) needs a great deal of agility.
- E.g; Disruptive innovation → heart monitoring watch
Incremental innovation → apple watch that had the same feature + many more ( it was
incremental as apple continued or enhanced the technology they have to make the apple
watch)
- Customers search for :
1) Cost
2) Fidelity
3) Selection
4) Portability
5) Customizability
6) Synchronization
Lecture 4
What to do when faced with disruptive technology?
- If firm does not own resources and depend on other (customers and investors) to provide
resources this is called resource dependence
- If you depend on your customers, you will have to respond to their needs.
- But what if some customers’ needs are radically different from what you are currently
specialized in?
Then the company has to respond by opening another venture! E.g; BMW, they only used
to do cars that depend only on solar/gas, now they do electric cars too
The concept of Corporate New Ventures (CNV)
- At first big companies used to downsize and cut costs as a way of success, but
they realized, that they can’t shrink their way to success, therefore they new that,
Because of maturing technologies and aging product portfolios, a new imperative
is clear: Companies must create, develop, and sustain innovative new businesses.
They must do that by looking in two directions at once, with one face focused on
the old and the other seeking out the new. They can’t change their current
offering in order not to lose their current customers, also they can’t overlook the
new market therefore they do CNV
But there are many problems here… (problems of CNV)
1) The two cultures' problems: new businesses are quite different, with cultures on
their own. Their financial and operating models are seldom the same as those of
existing businesses. In fact, most new business models aren’t fully defined in the
beginning; they become clearer as executives try new strategies, develop new
applications, and pursue new customers.
“The 2 companies may have very different cultures regarding the strategy,
financial plan, operating model, therefore each business has its own culture”
2) Skepticism: new businesses require innovation, innovation requires fresh ideas,
and fresh ideas require mavericks. We’ve heard too many stories of leaders
trapped by conventional thinking: Microsoft’s wariness of open- source software,
Polaroid’s grudging move into digital cameras, and GM’s and Ford’s reluctance
to embrace hybrid cars.
“New business requires new ideas, innovation, investment, There is doubt
regarding failing to disrupt, compete, or inability to reach customers”
3) Misfit: new businesses are difficult to finance for long periods, and in times of
austerity, they are the first to face funding cuts. In a similar spirit, companies
design HR systems to develop executives whose operational skills match the
needs of mature businesses— not the strategic, conceptual, and entrepreneurial
skills that start-ups require.
“Misfit in strategy and culture which increase costs”
E.g. vodafone, w bay2olak
- Types of CNV
1) Internal corporate ventures/ intrapreneurship: business units doing
another new business unit inside the company (eg google search and gmail
and google maps)
- Intrapreneurship is the process by which corporations put systems to
encourage employees to think entrepreneurially (20% of their time), and to
create new ideas that can be commercialized.
- These processes include HR policies as well as funding and governance
structures to integrate into the business.
- Resulting innovations can be established as a business unit or a spin-off
enterprise.
- E.g. Google, P&G, HP ink-jet business unit (to meet disruptive innovation
against its laser printers).
2) External corporate ventures: companies may not have the competencies
required or cannot meet market demands, but there are startups who are
very disruptive who can do this, therefore they invest in this startups
- Companies create Corporate Venture funds to invest in other companies
(mainly startups) to boost innovation and R&D spending outside the
boundaries of the organization.
- This has an advantage that integration is of lee intensity if compared to
internal ventures, and divestment is easier.
- E.g. Lilly BioVenture Funds, Vodafone Venture Funds (Sarmadi &
By2olak), Sanofi & acquisition of Genzyme.
How to implement CNV: Structural Ambidexterity ( when someone is ambidextrous,
this means that he can use both hands at the same time doing different things)
- are defined as those able to compete by both exploiting their current capabilities
and exploring new ones. Ambidexterity has been considered particularly relevant
in conditions of environmental volatility and uncertainty as it helps firms
maintain their strategic agility by being both aligned to the existing environment
and adaptive to possible turbulence. This balance of exploration and exploitation
has been associated with organizational adaptation and superior organizational
performance over the long term, especially in knowledge intensive industries.
- March (1991) described exploration and exploitation as two fundamentally
different activities, with exploitation associated with “refinement, efficiency,
selection and implementation” and exploration with “search, variation,
experimentation and innovation”. The two processes are regarded as
incompatible, requiring different capabilities, and entailing organizational
tensions as they compete for scarce resources. Yet, March (1991) highlighted the
need for a balance between the two for superior organizational performance.
- Key pathway to manage these tensions is known in the literature as structural or
architectural ambidexterity, where organizations can simultaneously manage
short-term efficiency and long-term growth through the structural separation of
exploration and exploitation activities in different business units; each with their
own alignments and capabilities (Tushman and O'Reilly, 1996).
- Ambidexterity here is seen as the ability to “simultaneously pursue both
incremental and discontinuous innovation … from hosting multiple contradictory
structures, processes, and cultures within the same firm” (Tushman and O'Reilly,
1996: 24).
- It is assumed that holding two distinct alignments, each with their own
management team, processes, cultures, and incentive systems, can enable
organizations to maintain the necessary competencies for addressing both existing
and emerging business opportunities.
- Structural separation allows units focusing on innovation to operate away from th
- Competency trap :
1) When a company rely only on their competency and don’t have openness to
explore and exploit new opportunities eg Nokia
2) is solved by cv, and ambidexterity
3) The same capabilities that made the company successful can become
dysfunctional when the environment changes, or when new product development
is pursued.
The potentially inertial nature or dynamic capabilities becomes clearer when we
consider that such capabilities can be seen as types of routines that involve
learned behavior, tacit knowledge and repetition over time.
2 ways to respond to change in the market → either ambidexterity or Dynamic
capabilities “DC” (they are similar)
- Dynamic capability : Sensing( to notice changes in external environment ), seizing ( you
use your resources and capabilities), reconfiguring or transforming ( implementing by
changing your strategies to be able to respond to the discounted changes in the market)
- Ambidexterity : exploring, exploitation your resources and the 3 modes of adaptation:
1) structural separation → one business unit for exploration and another for
exploitation, (e.g For example, Nestlé SA created separate units for exploring new
markets and leveraging their existing products. This allows each unit to focus on its
specific task while adapting to discontinuous changes.)
2) behavioral integration → one business unit for both ( e.g GlaxoSmithKline (GSK)
designed a context that encourages employees in different units to work together to sense
and seize opportunities simultaneously.)
3)sequential alteration → alternate between them over a period of time ( exploring,
exploiting) (like the BMW Group, adopting this mode shift their focus between seizing
immediate opportunities and sensing new ones in the future. By deliberately alternating
between these activities, firms can adapt to discontinuous changes effectively.)
- Exploring = sensing, seizing=exploitation, reconfiguration = 3 modes of
adaptation
Lectures 5,6
Value creation:
- Value should be created for all stakeholders/ networks eg customers, suppliers,
governments, etc.. in the business
- Stakeholders looking for value are : Customers + partners
- Value Creation: Total value created can be thought of as a “value pie”. The greater the
total value created, the larger the proverbial value pie.
- Value Appropriation: The amount of value that is captured by individual stakeholders. In
other words, value appropriation can be thought of as the proportionate size of individual
slices of the value pie.
- E.g amazon AI, in amazon they created an AI where people can use to try clothes on by
standing in front of the camera, this helped customers to know the right fit of clothes, it
helped sellers with returns of]f purchases
Business model/ activity system
- BMs emphasize a system-level, holistic approach to explaining how firms do business.
- Designing value for each one of the partners
- Activity system and it is shared activity between the partners
- Business models (BMs) center on the logic of how value is created for all stakeholders,
not just how it is captured by one firm.
- Activities performed by the focal firm play an important role, but so too do the activities
performed by partners, suppliers, and even customers. The BM is a system of
interdependent activities that are performed by a focal firm and by its partners and the
mechanisms that link these activities to each other.
- An activity in a focal firm’s business model can be viewed as the engagement of human,
physical, and capital resources of any parts of the business model (the focal firm, end
customers, vendors…etc.) to serve specific purpose toward fulfilling the overall
objectives.
- An activity system is a set of interdependent and interconnected activities that are
centered on a focal firm. It encompasses activities that are conducted either by the focal
firm or by partners, customers, or vendors. A BM is an activity system.
- E.g. IKEA and the activity system of the firm, retailers, and customers.
Characteristics of BMs
1) Circular value innovation rather than linear: Amazon AI algorithms and feedback
loops (Amazon customer Amazon).
2) Spanning firm and industry boundaries: Breadfast platform.
3) Allowing for a non-linear sequencing of interdependent activities: e-bay auction
platform (customer browsing, interaction, and price setting interdependently).
The business model framework
- The business model framework is to:
1) Create Value
(3 building blocks – key resources; key activities; key partners)
2) Deliver Value
(3 building blocks – customer segments; channels; relationships)
3) Capture Value
(2 building blocks - Revenue streams and Cost Structure)
The case of IKEA
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