BADM-590 Strategic Innovation

Innovation is about executing ideas to create unique value.

Creativity is about ideas and Innovation is about executing on those ideas.

 

A framework to analyze Innovation Problems
Companies create value for customers through unique offerings and capture value by appropriate pricing, customer loyalty, word of mouth, potential referrals, and long-term equity. Companies can reach customers directly or through network intermediaries like retailers and wholesalers. Companies are customers to their suppliers as well. Suppliers create value by supplying supplies and components and capture value through revenues. Suppliers can reach companies directly or through a network of intermediaries like distributors. Suppliers, wholesalers, retailers, distributors collectively are called collaborators because they collaborate with the company to create value for the customers.

Co-innovation Risk: Multiple components from suppliers have to be put together by the company to create value for the customers. If one component fails, the entire innovation fails. The co-innovation risk has to be low for the innovation to be developed and commercialized by the company.

Execution Risk: Consumers need to be aware of the product, act on the product, show interest in the product by buying it. Sometime collaborators like retailers and wholesalers might not see the value in the product so they don’t help in the adoption of the product. When values aren’t aligned, the product might never get commercialized.

Both direct and indirect competitors need to considered when analyzing competitive environment.

Companies, collaborators, customers, and competitors exist in PESTLE environment.
PESTLEC = Political, Economic, Social, Technological, Legal, Cultural, Environmental.

All of that combined is known as Business Ecosystem.

Prospect Theory

a psychological account of how people make choices under conditions of risk and uncertainty.

The Reference Point: It’s always about deviation from the reference point that is critical.
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2. Diminishing Sensitivity:

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3. Losses loom larger than Gains:

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The frame of reference and context matter a lot. They determine your loses or gains. If I say glass is half full, I’m gain framing. If I say glass is half empty, I’m loss framing.

Endowment Effect: Consumers compare an innovative product with their existing product so the innovative product is seen as a loss by the consumers. Consumers value things that they own 3 times more. Company’s’ baseline is the innovative product that they developed. Companies over value their product 3 times. This endowment effect leads to resistance by consumers to adopt new products. The Product that minimizes the loses by satisfying the needs of the consumer, actually wins out in the long run.

 

Marketing Myopia: When companies are too focused on the product and not on customer needs. Regularly ask this question to avoid Marketing Myopia: What business are we in? Be needs focused and not wants focused. Define your business with eye towards the future. Markets consistently evolve and consumers change.

Manifest Needs: That can be articulated

Latent Needs: Intangible needs

Value is contextual.

 

Value Proposition

Value is the quality obtained by the consumer relative to the price paid. Value = Quality obtained / Price paid
Value is psychological, perceived by the consumer. A company need to effectively create and capture value.

 

Customer Value Proposition (CVP)

  • What value does the offering deliver?
    • Bundle of benefits
    • What are the pain points?
    • What are the points of difference?
  • Who is the target segment?
  • How are we reaching the segments?
    • What are the channels?

 

Generic Competitive Strategies
Goal is to become excellent in one and match the industry standard in other two.

  • Operational Excellence
    • Cost leadership by focusing on Volume and Standardization
    • Walmart, Southwest, Ryanair
  • Customer Intimacy
    • Segment and target markets precisely and tailor the offerings
    • Focus is on obtaining detailed knowledge about the customers, combined with operational flexibility
    • Acquiring customers, retaining customers, maintaining customer relationships is very critical
    • P&G, Netflix
  • Product Development
    • Offer leading edge products and services
    • Focus is on developing premium products that get you premium prices
    • Nurture and foster talent that help build premium products
    • Intel, Apple

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Alignment with the eco-system is also very critical when building innovative products.

 

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Sales Take-Off point: The tippint point on a Product Life Cycle, which is basically modeling industry sales overtime, is known as Sales Take-Off point. It signifies a major milestone in the life cycle of an industry as it signifies transition from a niche segment to mass market.

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Firm Take-Off point: Number of firms entering the industry over time. The firm take-off point signifies that the industry is transitioning from technological uncertainty to a viable industry and we start to see building of marketing infrastructure.

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Small jumps are incremental innovation and big jumps are radical innovation.

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Dominant industry attribute is also the basis of competition.

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Crossing over from niche market to mass market:

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Customer Journey Map

A customer journey map documents customer experiences; helps companies best understand the emotions and touch points as customers experience a product. They are good for configuring a specific new product or service and for prioritizing features in an existing product within a specific price band. Vital for giving organizations the “moments of truth”. It is a living document.

1. Nail down your Personas

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2. Journey Map – Sequence of consumption activities

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3. Journey Map – Emotions Involved

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Developing Winning Products

  1. Your innovation should do the ―core function‖ to the segment really, really well!
  2. Develop mechanisms to elicit feedback from the appropriate market; Voice of the customers.
  3. Do not fall into the Swiss Army Knife syndrome.

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Three categories of features in your product:

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Four Action Framework:

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BALANCE SUPPLY-SIDE AND DEMAND-SIDE FACTORS

Company-side
What are our capabilities?
What do competitors do well? What are they missing?
Are there things that we can borrow from other categories that can do the job better?
What about the suppliers? Ecosystem?

Customer-side
What is it customers like/love about the product?
What is it customers do not like/hate about the product?
What is in their wish list?

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The beachhead segment is the niche segment for which the product is a perfect fit.

 

 

 

An innovator comes in with different set of attributes that are not attractive to mass market, focuses on least profitable customers, who are happy with good enough product, not a perfect product, not willing to pay premium and that is how disruption gets hold, overtime disruption gets better, and as the disruptor improve quality, it squeezes incumbent to smaller market, and finally meets the demand of mass market. Its not just about the original starting point, but how the product performance trajectory improves overtime. In the beginning it looks like it’s a very different idea from the mainstream company, overtime improvement on the performance trajectory reduces the gap between incumbent and the disruptor, the disruptor meets the customer expectation trajectory of the mainstream consumers and replaces the incumbent.

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DISRUPTION

Lesson 1: Disruption is a process from the niches to the mainstream, and not a one-off event.

Lesson 2: Learn from analog industries. Beware of short-term agency pressures. Start with a clean slate. Do not let your current product dictate your innovative thinking.

Lesson 3: Cognitive biases to protect the status quo are real. Willingness to cannibalize is actually a virtue when it comes to disruptions. Companies tend to force-fit disruption into existing business models to make money immediately.

Lesson 4: Companies depend on existing (profitable) customers for resources. Disruptions take root in insignificant markets that promise lower margins. So investing aggressively in disruptive technologies is often difficult for incumbent firms.

Lesson 5: The capability to simultaneously exploit (concrete) and explore (uncertain) is an essential skill for leaders. Learn to question mental models.

 

Framework to look at Innovation Problems holistically:

Leadership and Vision
Resources
Processes
Structure
Culture

 

Components of a successful Disruptive Innovation:

Technology
Business Model
Ecosystem

Underserved and unserved segments locked out of consumption due to skills, access, or time-based constraints.

 

Strategy vs Business Model vs Tactics 

Strategy is a broad plan to differentiate the enterprise either through low-cost leadership or value differentiation and thereby derive a competitive advantage. The object of strategy is a busines model.

A business model is not the same as strategy. It is a self-conatined system that does not involve competition.

Business Model dictates Tactics (Execution).

 

Components of a Business Model

1. Customer Value Proposition (CVP)

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2. Resources

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3. Processes

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4. Revenues and Costs

 

Business Model Canvas

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WHAT ARE THE ACTIVITIES?

The things that a company should do!

 

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EXAMPLE: Metro Newspaper

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Designing Innovative Business Models

  1. Assess
    1. Outline the current business models in the industry.
    2. What are the assumptions on creating value?
    3. Evaluate the context.
    4. What are the key trends that may impact the business in the future?
  2. Question
    1. Question the assumptions.
    2. Question conventional wisdom.
    3. Engage in thought experiments to break the mold.
    4. Look outside for inspiration.
  3. Reframe
    1. Reframe based on your analyses.
    2. What are the opportunities?
    3. Within the company, better leverage of resources, and/or delighting its customers?
  4. Design
    1. Design the new innovative model.
    2. Check.
    3. Pilot test.
    4. Iterate.
    5. Learn.
    6. Scale.

 

Demand-side disruption

This is caused by innovations that disrupt the customer demand patterns. For instance, a new entrant or a startup develops an innovative product that is initially attractive only to a small segment of customers, mostly the low-end customers.

The current big players typically neglect the low-end customers and focus more on the high-end ones, thus creating a gap between the demand and (subpar) supply. The new player – ‘the disruptor’ may have a limited budget and resources, which means that their product or service underperforms as compared to other mainstream products. Customers may reject the innovation from the startup, but as it improves rapidly with features and performance dimensions that users care about, slowly (or sometimes even rapidly) customers begin to embrace the innovation and the new entrant becomes a real threat to leading businesses.

Supply-side disruption
Supply-side disruption happens when a new innovation or technology offers a better way of providing consumer value than the existing technology does. The entire evolution of computers from Mainframes to PCs to tablets and mobiles have followed this paradigm. Every year newer technologies have come up and the computing landscape has been disrupted a bit. When Flip digital camera was bought by Cisco at close to $600 m, they were the trendsetters. But, in a span of two years it changed. The digital camera technology evolved and iPhone put a ‘free’ digital camera inside a phone. Flip went down faster than the Titanic. Garmin and TomTom were once worth $40 bn together and then smartphones started bundling GPS for free.

For a company it is usually difficult to guard itself against supply-side disruption.

 

The Innovator’s Dilemma

The Innovator’s Dilemma is the decision that businesses must make between catering to their customers’ current needs, or adopting new innovations and technologies which will answer their future needs. This is a constant problem for companies and has already claimed a long list of victims.

Businesses that listen too closely to customer feedback can easily fall into the trap of stagnation, even though they reacted directly to what their consumers wanted – or at least what they thought they wanted. Although market research is a very valuable tool, it can only tell innovators so much because consumers aren’t necessarily the best judges of what they want. American businessman Henry Ford summed this up perfectly when he purportedly said, “If I had asked people what they wanted, they would have said faster horses.” Although it’s uncertain whether or not he actually said this, it emphasises the point that when it comes to new ventures, the customer isn’t always right.

Lesson #1: Disruption is a process from the niches to the mainstream and not a one-off event.

Established markets may grow as disruptions continue on their merry way. Small markets from disruptive innovations do not interest established firms. Complete substitution may take years, if at all.

Lesson #2: Learn from “analog” industries. Beware of short-term agency pressures.

Start with a clean slate. Do not let current products dictate your innovative thinking.

Cross-pollination of ideas without the contamination from existing industries is key to success. Otherwise a disruptive technology will turn into a sustaining innovation.

Lesson #3: Cognitive biases to protect the status quo are real. Willingness to cannibalize is actually a virtue when it comes to disruptions.

Assuming that cannibalization is something to be avoided is a disastrous strategy in disruptions as it might cause managers to persist in inappropriate courses of action.

Companies tend to force-fit disruption into existing business models to make money immediately.

Lesson #4: Companies depend on existing (profitable) customers for resources.

Disruptions take root in insignificant markets that promise lower margins. So investing aggressively in disruptive technologies is often difficult for incumbent firms.

Lesson #5: The capability to simultaneously exploit (concrete) and explore (uncertain) is an essential skill for leaders. Learn to question mental models.