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Case study notes

This case has been updated to include the Apple iPad.

Principally this is case explores the issue of licensing and how successful firms can become unsuccessful. It
is not a case about Apple and why it has become successful.
This case study explores the rise of the Apple Corporation. The Apple iPod is one of the most successful new
product launches in recent years, transforming the way the public listens to music, with huge ramifications
for major record labels. More than 50 million MP3 players are expected to be sold in 2005; over a third more
than last year. Mobile phones have long been regarded as the most credible challengers to MP3 players and
iPods. The launch of digital download services via mobile phones illustrates the dramatic speed of
convergence between the telecom and media industries, which many observers expect to usher in a new era
of growth for mobile phones. Users are willing to pay more for additional services and many analysts predict
that mobile phone handsets will eventually emerge as the dominant technology of the age, combining
personal organisers, digital music players and games consoles in a single device. Indeed, Microsoft founder
Bill Gates has predicted that mobile phones will supersede the iPod as the favoured way of listening to
digital music.
The launch of the Apple ipad in 2010 makes this case even more topical.
This should form the basis of supplementary questions at the end of the case: How will the iPhone succeed?
What about Android and the rise of HTC and Samsung?
The mobile phone market is very competitive.
The iPhone does not use the latest technology. Indeed it offers no new technology, but it may be, as was the
iPod, the simplest technology to use! And this may help it win.
Case study questions
1. Explain how the iPod is helping Apple achieve increased sales of its range of Mac
personal computers.
Apple was established in the 1970s and became a pioneer in the 1980s; many iPod owners may not
realise Apple was at one time the leading PC manufacturer. This position was lost in the late 1980s
and 1990s to HP, Compaq, Dell and generic PC clone manufacturers. Hence, the iPod offers Apple
an opportunity to promote its PCs to the iPod generation.
2. What are the potential benefits and limitations of licensing the iPod software to other
MP3 manufacturers?
This is the key issue about the case and involves the licensing issue. In the 1980s, Apple refused to
licence its operating system software to Microsoft. At that time, Microsoft was a small company
compared to Apple. We know what happened. Apple's lead in the PC market was slowly eroded as
Microsoft developed competing technology (i.e. Windows) and licenced it to all PC manufacturers.
Apple's market share fell to 5% of the PC market. It became a small player. History could repeat
itself if Apple again refuses to licence its iTunes software to other MP3 players. On the other hand it
may be that this is a different product and the similarities cannot be drawn with PCs?
Apple wants full control over the hardware and software of its MP3 player, the iPod. But already it is
possible to get an MP3 player with similar specification to that of an iPod at a fraction of the cost.
Can Apple really compete?
Apple has decided to licence its iTunes software to Motorola and one can purchase a Motorola
mobile phone with iTunes software. So there may be evidence that Apple is considering the
licensing question.
This is a complex issue, one in which students have to consider longer-term strategy and deal with
many unknowns such as market changes, competition, the technological frontier where the
technology is changing so rapidly. This reflects, quite nicely, difficult business decisions.
3. With sales of the ipod falling and Apple facing fierce competition from all quarters such
as Sony, Dell and other electronics firms as well as mobile phone makers who are
incorporating MP3 players into their devices, can the ipod survive?
Indeed, when you can get an MP3 player for 15, why pay 99 for an iPod. How much are you
prepared to pay for styling when the product specifications are the same?
Sony, which has brought out the Sony Walkman MP3 player, is a big brand competing with Apple.
Also many other manufacturers are bringing out their own MP3 players.
However, Apple can perform the following:
Improve features
Develop new products (e.g. Nano)
Reduce price
Improve distribution.
4. If Open Innovation has been so successful for Procter & Gamble and others, why is
Apple not adopting this model of innovation?
This case briefly touches upon the unusual level of secrecy that Apple seems to impose on its
suppliers. It is true Apple does seem to operate a much closed model of innovation- it always has.
What works for Apple may not necessarily work for others, but it would seem that Apple does not
need Open innovation at present. Even if others wish to pursue this approach.
5. Can Apple continue to be successful in the long term by adopting a BMW strategy
(BMW strategy is to target high-premium segments) for its iPod, iPhone and iPad?
This refers to a premium price segment to which BMW successfully provides products. Can we
compare an iPod to a car? Will people willingly pay a premium for a product that does exactly the
same thing as another? Experience from the PC market shows us that people were not prepared to
pay a premium. The car market, on the other hand, shows that people are prepared to pay a
premium. So where does that leave MP3 players?
You can ask students to list products for which they are prepared to pay a premium and those they
are not. But in many categories the evidence suggests price is the key: VCRs, televisions,
camcorders, etc. The evidence shows Sony is struggling to compete with the low cost Koreans in
many of its electronics product categories.
6. What are the advantages and disadvantages of the Apple approach to launching a new
product at Apple users first and then the larger Microsoft Windows users second?
The advantages of launching iTunes to the smaller but loyal Apple users segment is that they may
be more likely to gain acceptance among loyal devoted users. It may be regarded as a less risky
approach. However, by doing this Apple runs the risk of competitors seeing what is happening and
responding quickly by offering a similar product to the much larger Microsoft Windows users. The
difference in the size of the market is significant here: 90% Windows users versus 10% Apple users.
7. Discuss whether Apples demands for secrecy from its suppliers may have gone too far.
This builds on Question 4. This darker side of Apple Inc. often goes unnoticed. Some students
seem so brand loyal that they tune out negative publicity. This darker side is worth exploring. It is
briefly mentioned in the case but there are other stories including a desire to keep from the public
the true profit margins involved with the products. 500% + margins may start to erode public
goodwill if they knew how much profits were involved.

Case study notes
This case study explores a very unique organisation: W.L. Gore Associates. It explores the role of
organisational management and culture within a very innovative firm, which is responsible for some very
well-known products such as the famous Gore-Tex fabric, and yet few people know much about this
remarkable organisation. It is operated in a way similar to that of a cooperative such as The John Lewis
Partnership in the UK, where the employees are also owners. In addition, the organisation seeks to minimise
management with the emphasis on action and creativity.
Case study questions
1. Explain what happened to the Gore-Tex brand after the patent expired. What activity can
firms use to try to maintain any advantage developed during the patent protection phase?
Competitor products emerged (generic versions if you like).
To compete, it was necessary to develop the brand. This is something that has not happened.
What else could it do?
2. List some of the wide range of products that the Gore-Tex fabric has been applied?
All sorts of clothing, shoes, coats, etc. Also, windsurf sales and kite surf sales.
What else could it be applied to?
3. It seems that Gore Associates is heavily orientated towards technology. What are some
of the dangers of being too heavily focused on technology?
Myopic views such as not listening to customer views, too focused on technology.
Missing opportunities that may exist, which involve minor changes.
Also, marketing mix considerations need to be considered: price, distribution, promotion, etc.
4. Cooperatives and share-ownership schemes provide many attractions and benefits, but
there are also limitations; discuss these.
Can lead to cumbersome slow decision-making.
Can lead to feathering ones own nest rather than on meeting customer needs.
Difficult and unpopular decisions are avoided, which may lead to more serious problems.
5. What has been the Gore strategy to achieving success in its markets? How is this
strategy now being challenged?
This has been based on developing technology for niche markets and becoming the dominant
supplier, often the only supplier of that technology to an industry. This usually leads to growth
through further applications of the technology to other industries and other markets. It is a
well-trodden path of a technology-push strategy. The strategy is now being challenged by
competitors who are entering the markets and offering competing products often inferior but
competitively priced. Gore will need to decide whether to try to compete on the price or to develop a
brand for which consumers are willing to pay a premium.
6. Using CIM (Figure 1.9) illustrate the innovation process within W.L. Gore.
CIM has four processes around the outside and the entrepreneur in the middle.
We can try to use this to identify key activities within the innovation process:
Natural sciences cycle
Many innovations are applications of existing technology; in such cases, this part of the framework
may not be used. In the Gore-Tex case, the new science is the creation of PTFE, but this was back
in the 1960s.
Integrated engineering cycle
As with so many innovations, this is where most of the technical effort takes place. Gore has spent
the past 50 years applying PTFE to many different applications and they keep finding new uses for
the technology. The stretching of PTFE to create lots of tiny holes in it led to the breathable
membrane maybe other firms would have seen this as a fault and thrown the technology away. It
is the curiosity in the R&D scientists which often leads to new product ideas.
Differentiated services cycle
During this phase, the technology is adapted to meet specific needs of customers. In this case,
Gore simply provides the fabric in square metres to different manufacturers to incorporate into their
products. There is little adaptation of the technology. What is important is the negotiations on
licencing and using the Gore-Tex brand. Clearly, Nike, Berghaus and the others would want to use
the patented membrane, but once the twenty years of the patent expires they no longer have to buy
from Gore and indeed some firms do not. It is interesting that some big brands like Berghaus have
their own breathable membrane, which they use in some of their products and they also continue to
use Gore-Tex in other products. Clearly, buying the licence is a crucial part of the business model
for all concerned.
Social sciences cycle
As Gore is selling business to business, this part of the innovation cycle is limited for Gore, but there
would have to be educational effort to explain the product to the end customer. Gore would probably
work with its partners, Nike, Berghaus etc., to develop such literature and merchandise.
Sometimes this can be a single individual; in this case, it was the firm W.L. Gore. There may have been a
project team involved and there may have been an individual project champion.

Case study notes
This case study explores the world of publishing and examines how a new product in this industry reaches
the customer. While many publishers spend enormous sums of money promoting their bestsellers
(Bloomsbury and Harry Potter is an obvious example), sometimes little money, if any, is spent on investing
in the new publishing products and talents of tomorrow, that is, new authors. In effect, some publishers are
simply printing books without the necessary promotion. This case study illustrates that in this relatively
straightforward new product there are many factors, some very surprising, that influence the success or not
of a new book. The roles of the publisher, the agent, the retailer, the buyer and the critic all influence success
in this industry. While all publishers would like to have the next Harry Potter, this case study illustrates that
this is unlikely to happen if they do not invest in new product development today.
What is of concern is that, increasingly, publishers are selecting fewer books to promote, and without
promotion a book is only being printed. Promotion is an integral part of publishing. Indeed, most dictionaries
define publishing as to make widely known. Printing a book and leaving it piled high in a warehouse is not
making it widely known.
The future of publishing depends on new authors. To be innovative, publishers need to nurture and find new
talent. This is effectively the research and development of publishing. Without this activity, publishers will
soon find they have no new products to sell. Supporting a bestselling author is fine and necessary, but so is
uncovering tomorrows J.K. Rowling. The case highlights that the market is increasingly dominated by the big
retailers, who, understandably, adopt a short-term market pull approach. This leads to fewer titles being
promoted and made available (despite increasing titles being printed) and stifles innovation. Consumers are
not always able to communicate their needs; frequently, consumers do not know whether they are going to
enjoy a story about a child and his wizard-like powers until they have read it.
Case study questions
1. Explain why you think the Harry Potter series of books have been so successful.
At one level, this is simply getting students to contribute. At another level, it is asking them to think
about how books appeal and what makes some more successful than others. It should also get
them to think about what makes a book successful. The content is part of it but there are others
things to consider. This may surprise some.
Clearly, the books appeal beyond their target market of children.
2. Explain how a new book has three aspects of a product (concept, package and process).
This refers to the need to view a product in slightly wider terms. The concept refers to the
manuscript and the ideas of the author. The package refers to the cover and the merchandising of
the book in store/supporting websites on the Internet. The process refers to the development and
production process involving author, agent, publisher, retailer, buyer, etc.
3. How can publishers exploit writers?
This is an allegation that many writers and authors groups make. They believe that publishers are
willing to support the bestsellers but not new authors. They argue that publishers do not invest in
new talent and are very conservative. They also believe that new authors are treated very poorly
and receive very little help or support until of course they are successful when resources are
thrown at them.
5. Using the CIM (Figure 1.9) identify the key actors and processes in the publishing
Natural sciences cycle
In this industry, there is no new science. Even e-books are applications of known technology to
create a simple hand-held screen for viewing text.
Integrated engineering cycle
As with so many innovations, this is where most of the technical effort takes place. In the publishing
industry, there has been little change in book production for many years. Word processing and
desktop publishing have helped lower costs. And this is the same for authors who can now write
and make changes simply and easily.
Differentiated services cycle
In-store merchandising is part of the promotion of a book and, as with advertising, there are many
options available. Developing the film rights for a book involves work by the agent who will need to
contact film studios. Clearly, film studios also approach agents of authors for film rights to
successful novels
Social sciences cycle
In publishing, the main activity is in distribution and promotion. Printing books is a small part of
publishing; the more difficult part is marketing and promotion. The case illustrates some innovative
techniques used by some publishers.
Clearly, the development of a book rests largely with the author. There are, however, other key
individuals involved. The agent working on behalf of the author can be extremely influential as was
seen in this case with J.K. Rowling. The publisher can play an influential role, too.
6. What influence have supermarkets had on book publishing and retailing?
Supermarkets rely on high-volume sales with relatively low margins. They have moved into the
book market by relying on selling high volumes of a few book titles (bestsellers only). This is very
different from the traditional bookshop, which has to carry a large stock. Hence, there has been an
increase in sales of bestsellers and a decrease in the number of bookshops.
7. How can small independent publishers compete with the large internationals?
By being different, they can offer an improved service to authors and/or publish works that others
refused. They need to be creative and identify small segments that they can target. It is possible to
make comparisons between football teams investing in youth teams and so on to try to improve and
move up the league tables.
8. What has been the rationale of publishing in hardback one year prior to paperback?
Some critics argue that to be taken seriously a book needs to be published in hardback. This may
sound slightly snobbish, but in some sections this view is taken seriously and it is certainly taken
seriously by authors, all of whom it seems want to be seen in hardback. Few consumers may be
aware of this but as a way of illustration almost all books being considered for the prestigious
Booker Prize are published in hardback first. The other key reason was profits. Bestselling books
are often published in hardback a few months before the paperback so that they can generate more
profits as the margins are bigger on hardbacks.
9. Explain the modern publishing dilemma.
The future of publishing depends on new authors. To be innovative, publishers need to nurture and find new
talent. This is effectively the research and development (R&D) of publishing. Publishers are reluctant to
publish books that no one wants, but consumers do not always know whether they are going to enjoy a story
until they have read it.

Case study notes
It is the unique structure of the industry and the patent system that is at the crux of the problem. Europe, the
United States and Japan account for virtually all the profits of the pharmaceutical companies. In most other
markets, profits are driven down by the power and price sensitivity of customers, but in pharmaceuticals,
neither the patient who consumes the drugs nor the doctor who prescribes them is price sensitive. Customers
for medicines are not price sensitive because they do not pay for them. In Europe, it is the taxpayer who
foots the bill.
Competition is another key force that drives down prices in most industries. In electronics an industry even
more innovative than pharmaceuticals excess profits from a new product soon disappear as competitors
bring out copies. However, in the pharmaceutical business, it is the patent system that ensures high profits
continue for an average of 10 years.
The industrys justification for its high prices and patent monopolies is that it encourages innovation, but to
what extent is this true? In most other industries, it is intense competition and a fight to survive and win
market share that drives forward innovation. Without new and better products, companies such as Hewlett
Packard and Canon know they cannot maintain growth and market share. As we have seen in Chapters 1, 2
and 3, innovation is dependent on a collection of factors and the patent system alone cannot stimulate
innovation. It is necessary but not sufficient.
Case study questions
1. Explain how the pricing of drugs contributes to the acquisition of supra-normal profits in
the pharmaceutical industry.
Profits resulting in a mean return of 35 per cent on investment are impressive indeed, and some
extremely well-run companies in other industries have never been able to achieve this sort of return.
It is suggested this is because of a lack of competition caused by the use of patents and the
monopoly effect this creates and because of the way most drugs are purchased, that is via
government departments of health; in other words, there is a lack of price sensitivity.
2. It is because drugs are absolutely essential to life that the pharmaceutical industry is
able to justify large profits. Discuss the merits of this argument. Consider also that bread
and milk companies do not make huge profits.
The pharmaceutical industry is an extremely powerful industry and is able to influence politicians
around the world. Almost every state would want a thriving pharmaceutical industry (it is a growing
modern industry). Hence, this industry is able to influence decision-makers. Indeed, it has done so in
the case of patenting life forms and gene technology and on the issue of patent extensions. The key
point here is the lack of competition caused by the patent system. In other industries, firms are able
to eventually get round patents or use a slightly different technique. In the pharmaceutical industry,
a chemical formula is very objective with no grey areas.
3. Explain why drugs are not price-sensitive.
Partly due to patents and partly due to the way they are purchased by Government Health
Departments. These have set budgets for certain treatments; this information is known to the
pharmaceutical industry and it influences the price set.
4. Explain why the patent system may not be working as it was originally intended.
This is because it prevents competition. In many other industries, while patents provide protection to
firms for a limited period, eventually firms are able to develop alternative systems (i.e. get around
the patent). In the pharmaceutical industry, due to the nature of the science and the way the patents
are written, alternative competitive products do not emerge.
5. Use CIM (Figure 1.9) to illustrate the innovation process in this case.
Natural sciences cycle
Many innovations are applications of existing technology, in such cases this part of the framework
may not be used. In the pharmaceutical industry there clearly are examples of new science. And
every year there are Nobel prizes awarded for significant knowledge contributions.
Integrated engineering cycle
As with so many innovations this is where most of the technical effort takes place. The pharma
industry spends much effort trying to find out the properties of drugs and their impact on humans.
This is the first stage of the product development process.
Differentiated services cycle
During this phase, the technology is adapted to meet specific needs of customers. A good example
of where the pharma industry has been successful in this area is the drug Asprin. It has been
applied to many different areas and is claimed to offer benefits to many different conditions.
Manufacturers have thus targeted and promoted the drug at these opportunities.
Social sciences cycle
Significant efforts are made in this part to try to get customers, regulators, etc. to support the
concept. In the pharma industry regulators play a big role here. The industry is heavily regulated to
try to protect consumers.
Sometimes this is an individual, sometimes a project team.
In the pharma industry like many large industrialised industries. There will be project leaders who
are responsible for developing products/projects and their skills help push ideas through
development to completion.
6. Nobel Prize winning economist Joseph Stiglitz argues that prizes rather than patents
could stimulate scientific competition. Explain how this might work.
The fundamental problem with the patent system is simple: it is based on restricting the use of
knowledge. Because there is no extra cost associated with an additional individual enjoying the
benefits of any piece of knowledge, restricting knowledge is inefficient. But the patent system not
only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes
medications unaffordable for people who dont have insurance. There is an alternative way of
financing and incentivising research that, at least in some instances, could do a far better job than
patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as
widely as possible: a medical prize fund that would reward those who discover cures and vaccines.
Since governments already pay the cost of much drug research directly or indirectly, through
prescription benefits, they could finance the prize fund, which would award the biggest prizes for
developers of treatments or preventions for costly diseases affecting hundreds of millions of people.

Case study notes
This case study explores the use of cork as a way of sealing wine in a bottle, which is referred to as a closure
in the wine industry. This 400-year-old industry with all its associated working practices has continued
largely unaffected by technology changes in almost all other industries until, that is, the 1990s when
synthetic plastic closures were used by some wine producers instead of natural cork. With a requirement of
over 17 billion wine bottle closures a year, the cork industry could arguably afford a little competition, but it
seems the cork industry had not recognised the significant changes taking place in the wine industry to which
it acts as a supplier (Cole, 2006). The wine industry was experiencing a revolution where new producers
from Australia, California and Chile had new and different requirements. In a matter of a few years, the
industry had changed completely.
Finally, while the battle over closures rages, the so-called traditionalists argue that the wine industry is
merely exploiting profits in the short-term by producing large-volume homogenised wine and that this may
harm the wine industry in the long-term because consumers will grow bored with the uniformity of style.
Case study questions
1. To what extent is the cork industry guilty of complacency and a lack of innovation?
To a large extent it is guilty. This is because of the following reasons: First, it did little to consider
potential threats from replacement products. Second, it did little, if any, R&D. Third, it also allowed
its quality of production to deteriorate and this helped to contribute to the call for a better product.
2. If consumers love corks why are the producers not providing what their customers
This is a key question and should make students realise that sometimes the consumers do not get
what they want and sometimes the industry decides what it wants. In this case, the big buyers
supermarkets have influenced the decision as they demand a better-quality closure. In addition,
the new worldwide wine brands are also demanding a better-quality product and these two factors
have changed the industry.
3. Is it wine quality or costs that have driven producers to synthetic?
Initially, synthetic was more expensive but economies of scale have brought the cost down. But the
initial driver was quality and an inferior product from the cork industry.
4. How could technology forecasting have helped the cork industry?
Technology forecasting is undertaken in industries that operate at the forefront of technology.
However, the cork industry should have been able to recognise that a potential threat might be
forthcoming from the synthetic cork producers. Also, competitor analysis might have been able to
provide an early warning signal of a competitor threat.
5. What level of R&D investment would be required to help the industry diversify and
develop new opportunities for its materials?
This is a very difficult question to answer, but students should start considering what other similar
industries spend. This may provide an indication on level of expenditure. Clearly, at present, very
little investment is made in R&D, but that is part of the problem. A starting point would generally be
agriculture industries. Also, the trade bodies of these industries often invest on behalf of the
industry. For example, the UK cereal and grain industry spends money on R&D on behalf of its
members who are grain and cereal farmers.
6. What portfolio of R&D projects would you establish for the cork industry?
Here, students need to think about how R&D can help a business (see Chapter 8). R&D should
help the existing businesses compete, develop new businesses and finally provide access to new
technologies of the future. Diversification would be one possibility. The questions that arise are:
Where else could cork be applied? What are the properties of cork that could be exploited by other
products/markets? Another area could be improving the quality of the existing products. Finally, the
analysis includes what opportunities exist for the product within other products and what strategic
alliances can be developed.
Some lobby groups have been arguing that the synthetics have been causing the destruction of the
cork forests. But the issue is slightly more complicated as the forests that were planted for harvest
were not natural in the first place. Secondly, one may argue that the forests could remain it does
not necessarily mean that they will disappear. Also, cork could be used for other applications.
7. What role have the wine buyers (end-users and others in the supply chain) played in
contributing to the fall in demand for cork as a closure?
It is the wine buyers supermarkets that have played a crucial role in the demise of corks.
Supermarkets did not want customers bringing back faulty bottles of wine. Their margins were so
small that they could not profit from large numbers of returns. Professional buyers/tasters also
preferred screw caps because if you are opening a large number of bottles a day it is simply easier
to open a screw cap.
8. Use CIM (Figure 1.9) to illustrate the innovation process in this case.
Natural sciences cycle
Many innovations are applications of existing technology, in such cases this part of the framework
may not be used. In the Gore-Tex case, the new science is the creation of PTFE but this was back
in the 1960s.
Integrated engineering cycle
As with so many innovations this is where most of the technical effort takes place. Gore has spent
the past 50 years applying PTFE to many different applications and they keep finding new uses for
the technology. The stretching of PTFE to create lots of tiny holes in it led to the breathable
membrane- maybe other firms would have seen this as a fault and thrown the technology away. It is
the curiosity in the R&D scientists which often leads to new product ideas.
Differentiated services cycle
During this phase, the technology is adapted to meet specific needs of customers. In this case Gore
simply provides the fabric in square meters to different manufacturers to incorporate into their
products. There is little adaptation of the technology. What is important are the negotiations on
licencing and using the Gore-Tex brand. Clearly, Nike, Berghaus and the others would want to use
the patented membrane, but once the twenty years of the patent expires they no longer have to buy
from Gore and indeed some firms do not. It is interesting that some big brands like Berghaus have
their own breathable membrane which they use in some of their products and they also continue to
use Gore-Tex in other products. Clearly, buying the licence is a crucial part of the business model
for all concerned.
Social sciences cycle
As Gore is selling business to business this part of the innovation cycle is limited for Gore but there
would have to be educational effort to explain the product to the end customer. Gore would probably
work with its partners, Nike, Berghaus, etc., to develop such literature and merchandise.
Sometimes this can be a single individual; in this case it was the firm W L Gore. There may have
been a project team involved and there may have been an individual project champion.
9. In terms of closures, what are the disadvantages that the cork industry needs to address
and what are the advantages that it could promote?
This is the challenge for the industry. Consumers clearly still enjoy cork and the theatre of using the
corkscrew, the pop, etc. However, the synthetic still provides this. Some wines seem to survive
longer with cork as a closure, so this is something that the industry can develop. It also needs to
improve the production quality. This is largely a marketing challenge, but it is one that calls for
creativity and innovation.
10. Will the cork industry have to concede defeat to the Zork?
At first glimpse, it would seem the Zork offers all the benefits of the cork and the screw cap. It
provides the theatre and can be resealed. This would seem to be a major challenge, but it is

Case study notes
This case study explores the development of high definition video and the format war between Sonys
Blu-ray and Toshibas HD-DVD. A format war describes competition between mutually incompatible
proprietary formats that compete for the same market, typically for data storage devices and recording
formats for electronic media. A useful historical example of one of the first format wars was between railway
width gauges on railway lines in the UK during the industrial revolution of the early 1800s. Isambard
Kingdom Brunel developed a 2.1 m width gauge for his Great Western Railway because it offered greater
stability and capacity at high speed. While George Stephenson developed a 1.44 m width gauge for the first
main-line railway, the Liverpool to Manchester Railway; the de facto standard for the colliery railways
where Stephenson had worked. Needless to say the narrower 1.44 m gauge won simply because more of this
track had been laid, but trains today could be travelling much faster if the wider gauge had been adopted.
Case study questions
1. What does this case tell us about whether or not it is the best technology and or being
first in the market that determines the winner of these product format battles?
Clearly, having the best technology does not guarantee success, but having poor technology can
guarantee failure, so the technology has to be good. But there are many other factors that need to
be considered such as distribution and supply. As well as licencing and getting other manufacturers
on board to produce your system.
2. Illustrate some other business sectors where different formats coexist and some where a
single format is preferred.
Computing operating systems: Windows/Apple/Linux;
Mobile phones?
MP3 players different file formats
3. What were the relative advantages and disadvantages of the Blu-ray format (versus
Table 7.5: 'DVD performance details
Blu-ray HD-DVD
ROM single layer:
ROM dual layer:
RW single layer:
RW dual layer:
Highest test:
Theoretical limit:
Single layer:
Dual layer:
Highest test:
Theoretical limit:
Table 7.6: Studios supporting HD-DVD and Blu-ray
Studios (movie and game) listed as supporting members
Blu-ray HD-DVD
Century Fox
Buena Vista Home Entertainment
Electronic Arts
MGM Studios
Paramount Pictures
Sony Pictures Entertainment
The Walt Disney Company
Vivendi Universal Games
Warner Bros.
Buena Vista Home Entertainment
New Line Cinema
Paramount Pictures
The Walt Disney Company
Universal Studios
Warner Bros.
4. Why was the PlayStation the first Bluray player and subsequently when Blu-ray players
were launched, why did the PlayStation remain cheaper? Consider possible reasons for
The first Blu-ray player launched by Sony (the primary developer of the Blu-ray format) was actually
the PlayStation 3, which featured the ability to play Blu-ray disks. This gave Sony something of an
upper hand for some time, because its PlayStation 3 games console has a built-in Blu-ray player.
Sony had therefore sold more than 10 m Blu-ray units while only about 1 m HD-DVD players have
been sold, mostly in Japan.
The PlayStation 3 was originally launched at a price of around 500, the first pure Blu-ray player
was launched later and at a price of around 800. Obviously, in comparison to the PlayStation this
player lacked a number of features, particularly the ability to play games. Interestingly, one of the
earliest machines to play HD-DVD was also a games console, the Xbox 360, which was Microsofts
primary competitor against the PlayStation (and priced around 200 cheaper). Interestingly, both of
these consoles were notably more expensive than Nintendos Wii, which was attracting much
attention around this time. Despite the high technological performance of both the PlayStation and
Xbox, Nintendo has been able to gain a majority share in the market (and this is also despite the
PlayStations ability to play Blu-ray disks).
5. What additional factors helped Blu-ray win the battle? What role did licencing and
networks play in the relative success of each format?
It is also worth noting that in the years prior to the launch of these formats, and immediately
afterwards, Sony acquired a number of film studios. Sony was also rumoured to be paying some
studios large sums to take on and stick with its format.
A much more difficult factor to unravel is the list of networks (formal and informal) that each group of
firms developed. In some cases it was clear with firms listing associate members of each board.
Once again Blu-ray had a longer list of members and interesting parties. It seemed Sony had learnt
from its mistakes with VCR and it was not going to make the same mistake again (see Table 7.7).
Table 7.7: Interlinkages and networks between firms
Companies listed as Members of the Board or Managing Members
Blu-ray HD-DVD
Apple Computer Corp.
Dell, Inc.
Hewlett Packard Company
Hitachi, Ltd.
LG Electronics Inc.
Mitsubishi Electric Corporation
Panasonic (Matsushita Electric)
Pioneer Corporation
Royal Philips Electronics
Samsung Electronics Co., Ltd.
Sharp Corporation
Sony Corporation
TDK Corporation
Twentieth Century Fox
Walt Disney Pictures and Television
Memory-Tech Corporation
NEC Corporation
Sanyo Electric Co.
6. What related industries contributed to the format war and how did they influence its
Few may be willing to admit it, but sex sells, and there is certainly a case that more convenient
nudity (and the pornographers preferred choice between HD-DVD and Blu-ray) will play some role
in determining which of the two formats are, ultimately, successful.
7. With the increasing popularity and use of downloading films what influence will the DVD
format winner play in this related battle.
Music downloading destroyed the CD industry; the same may happen in DVD. Why would people
go out to the shops to buy disks when they can buy high-definition movies straight away online?
What does this suggestion say for the future of Blu-ray?
Interestingly, despite Apple giving its backing to the Blu-ray format; it has yet to produce a single
computer with a Blu-ray drive. Instead, Apple seems to be concentrating on movies delivered
across the internet, through iTunes and the new Apple TV, rather than on physical discs. So
although Blu-ray has won this battle, it may not have won the war. As home internet speeds
become faster and consumers get used to video on-demand services, the movie market could
undergo a similar change to the music sector, with films downloaded rather than physically bought.
Enter a new format war of online video . . .
8. What are the implications for innovation strategy, R&D expenditure and marketing for
firms engaged in or likely to be engaged in a format war?
That there has to be joined up thinking between all three. Marketing has a role to play early on
especially in terms of Public Relations etc. Clearly, technology alone will not ensure victory,
relationships with a wide variety of partners is required.
9. List the key factors that seem to determine the eventual winner in industry format wars.
Divide these into primary and secondary factors.
This can be constructed on the board using two columns.
The list can be long and may include:
Technology superiority;
Industry support within;
Industry support outside;
Support from the supply chain;
Effective licensing strategy;
Effective marketing strategy; etc.

Case study notes
There are many stories that have emerged over the years concerning Pfizers product Viagra. Some of these
are true, but many are simply fictional stories developed to try and reinforce a particular argument. One of
the most common stories is that Viagra was the result of luck. This case study explores the long 13-year
journey from laboratory to the marketplace and explores some of the key challenges faced by Pfizer: most
notably, project evaluation considerations, when the available market research evidence suggests a small
market for the product; and, product launch considerations, when impotence is such an unpopular topic that
it is almost impossible for advertisers to refer to it without alienating the very consumer base they are trying
to reach.
Case study questions
1. Was Viagra the result of serendipity or is this journalistic licence to help sell a story,
where the real story is a complex one of difficult decisions full of risks?
It is true that the general press has consistently presented Viagra as an innovation that was the
result of luck and an accident. This is a good illustration of the problem of the public perception of
science (discussed in Chapter 1). It is true there is an element of good fortune (as with all research)
and it originated from another research project, but fundamentally this research can be traced back
to novel prize winning science. This is not good luck and fortune; it is hard work and dedication.
Moreover, the case illustrates that at every turn the Pfizer team was faced with very difficult
decisions and it was very effective management that eventually delivered a successful project; good
management at the R&D level and at the marketing level.
2. Explain why it was so necessary to ensure marketing was involved in the early stages of
this new product development project.
As the case illustrates, although there were technical challenges, one of the most difficult decisions
was whether to proceed with a new product development project for a product where there was no
established market. It was marketings input that helped convince the team that it may be possible
to educate the market and build a brand around a drug for impotence.
3. Explain how despite the enormous resources of Pfizer a lack of available information
made the evaluation of the new product proposal so very difficult.
This refers to market data and market knowledge. Put simply, because up to the mid 1990s
impotence was considered a psychological condition and certainly not treatable with a drug, there
was no market data available and there was no market for impotence drugs. This complete
transformation of viewing the condition as treatable with a pill revolutionised not only this sector of
medicine but many others as well.
4. Explain how the Viagra case needs to be viewed as a successful example of excellent
applied science but also an excellent example of good marketing.
The applied science part is worth highlighting as it illustrates how attention to detail can reveal
opportunities. In this case, it was the clinical trial scientist who noted and explored further the
strange side effects of the angina drug. This was not simply dismissed but explored further, leading
to a research project, etc. On the marketing side, it played an equally important role by not only
exploring the possibility of uncovering a market but also by educating it and developing a brand.
This is a highly sensitive area. In the US, sex is something that is not discussed openly and in many
ways the US is very conservative, especially by European standards. The idea that a company
could launch television ads or billboard ads openly discussing impotence was almost unbelievable
at that time. But the marketing team succeeded in a very difficult task by handling it carefully and
very sensitively.
5. How can Pfizer manage the threat posed to Viagra by new entrants to the market?
This will require students to draw on their marketing knowledge. Branding and advertising will help,
but as the competition is also improving its products, Viagra will also need to improve its quality and
performance or it will lose its market share. It seems the competitors have already improved their
products and in some tests achieved better results than Viagra. More R&D may help, but price
cutting may also help. In addition, the firm is considering loyalty schemes and other promotional
campaigns such as buy one get one free, and so on.
6. How has Pfizer helped create a market for Viagra and thereby contributed to disease
This is clearly a serious allegation. The evidence from Australia would seem to suggest that Pfizer is guilty,
but that is for others to decide. What this case reveals is the whole aspect of disease mongering and the scale
and size of this issue. On one hand, we have health supplements such as vitamin pills where the producers
claim benefits that the medical professional is doubtful of. And on the other hand, we have more serious
drugs with genuine side effects that once again are being promoted as delivering benefits and the producers
make wild claims that may or may not be true. There is a fine line between sales and education. On the other
hand, one may argue the pharmaceutical industry is simply applying the marketing concepts from FMCG
markets to drugs.

Case study notes
CSI and genetic fingerprinting: A case study
The US drama CSI: Crime Scene Investigation (CSI) has been one of televisions greatest success stories
of all time. It is a huge hit all over the world. The show's popularity owes a great deal to the writers and
actors who bring the stories to life. But another intriguing element is the cutting-edge technology used by the
crime lab trying to solve crimes. Collecting and analysing DNA evidence tops the list of the lab's forensic
toolkit, and its ubiquity in shows like CSI and the UKs Silent Witness and Waking the Dead has
increased public awareness to the point that many jurors in real-world courtrooms expect to see DNA
evidence presented whether a case calls for it or not. Indeed, such television programmes as CSI have come
in for fierce criticism from police chiefs and prosecutors who argue that they portray an inaccurate image of
how police solve crimes. There have, however, been some positive outcomes of the so-called CSI effect and
that is the bringing of science to a mass audience and encouraging interest in science amongst children.
The extraordinary growth in the business of DNA fingerprinting has been matched only by the mass appeal
of the CSI television shows. In just a few years the industry has grown into a 20 billion dollar technology
intensive colossus. But where and when did this all begin? This case study shows how a UK scientist Alec
Jeffreys, driven by curiosity, uncovered a technique for DNA fingerprinting. First, we need to look at the
background to this development.
CSI and genetic fingerprint
Case study questions
1. What are the benefits of undirected research (curiosity-driven research)?
2. Should firms undertake undirected or curiosity-driven research or should all research be
linked to products and businesses?
3. Show how this case illustrates the power and influence of radical innovation and
incremental innovation.
4. Given the contribution to society that DNA fingerprinting has made, why is Alex Jeffreys
not a household name?
5. Explain why the adoption of technology in this case seems to have happened very
6. Discuss how this case illustrates benefits and limitations of the public understanding of
7. Discuss the impact of the CSI phenomenon
8. Explain the prosecutors fallacy and why it is a problem.

Case study notes
The case study has been updated to include developments in smart phones.
This case study provides an excellent example of why firms engage in technology transfer. It also provides
practical evidence to illustrate the benefits of technology transfer.
In April 2001, Ericsson, the Swedish telecommunications equipment group, and Sony of Japan established a
joint venture in mobile phones. The venture, based in London, brought together the loss-making handset
businesses of the two companies. The news was generally accepted as good for both companies. It would
combine Sonys consumer products expertise with Ericssons extensive knowledge of mobile phone
networks. Ericsson is the worlds leading maker of wireless networks. It would give Ericsson access to
Sonys multimedia technology, branding expertise and knowledge acquired from Japans early start in third
generation mobile phone technology. Sony would gain access to Ericssons telecommunications technology
and its distribution. The two companies hoped to create a market leader to threaten the dominance of Nokia
of Finland within five years. In 2000, the two companies together shipped 50 million or $7.2 billion worth of
mobile phones, giving them a 12 per cent market share and third position after Nokia of Finland and
Motorola of the United States.
Case study questions
1. Ericsson is the world leader in mobile phone networks and has many years of experience
of handsets. Explain how Sonys technology portfolio has helped the joint venture.
The move into a new business area such as mobile phones is welcomed by investors who argue
that Sony has been too slow to move away from its traditional businesses such as music stereos,
televisions, VCRs, DVDs and camera recorders. The mobile phone market is viewed, possibly
incorrectly, as a new vibrant highly profitable market.
Moreover, the problem for Sony is that competition is fierce in many of its existing markets; indeed
prices have been falling, leading to a squeeze on margins for Sony. Certain products, such as
low-end stereos made by Aiwa, Sony's 61 per cent-owned subsidiary, are being increasingly
dominated by low-cost Chinese and South Korean manufacturers. In addition, the games division,
which accounted for 44 per cent of operating profits in 1998, has been mired in losses. Increasing
competition from Nintendos GameCube and Microsofts Xbox will put further pressure on Sonys
Sonys technology portfolio will be useful in the mobile phone handset product.
Sonys technology portfolio includes the following:
HDTVs, Flat-panel Plasma and LCD WEGA

TVs, FD Trinitron


CRT TVs, CRT rear

projection TVs, and Grand WEGA

LCD rear projection TVs;

Hi-Fi components (AV receivers), shelf systems and speakers;

personal stereos, MiniDisc Walkman

players/recorders and personal digital music


and Mavica

digital still cameras;

Memory Stick

flash media;

desktop and notebook computers;

Video-conferencing products;
Visual-imaging products;
Professional digital photography systems;
E-communication and digital signage;
Semiconductor devices.
Students need to discuss how the technologies may be helpful.
2. Use the CIM (Figure 1.9) to illustrate the innovation process in this case.
Natural sciences cycle
Many innovations are applications of existing technology, in such cases this part of the framework
may not be used. In this case, the technology can be traced back to Business radio communication
devices such as those as used by Taxi firms and Emergency Services. These allow one party to talk
at a time. Few people realise that a mobile phone is much more like a radio than a conventional
wired telephone. Indeed, mobile phone technology is a development of radio technology rather than
wired telecommunications technology. That is it picks up signals from transmitters. It seems that the
technology existed for many years and was extremely slow to develop.
Integrated engineering cycle
As with so many innovations this is where most of the technical effort takes place. If one considers,
that one-way business radio has been around for 50 years. It seems funding to develop the
technology was not forthcoming because people didnt perceive how popular cellular radio would
become nor how cheap the service would eventually be.
Unquestionably since the early 1990s, when mobile phones began to emerge the technology
development has been rapid and diverse. Initially the emphasis was on reducing the size of the
brick like products. This happened within three/four years. Simultaneously, network coverage
increased and improved. Then battery life improved considerably. Next it was screen improvements
then keyboard and cameras etc.
Differentiated services cycle
During this phase, the technology is adapted to meet specific needs of customers. This is where
there have been huge developments. The range of services developed for the mobile phone is
increasing almost daily. It may soon be the device we use to pay for other products and services.
Social sciences cycle
This cycle overlaps with the one above. In this case, there was a significant amount of educating
and informing to be undertaken. But, also the development of networks had to be undertaken in
cooperation with local governments and national governments so that mobile phone masts could be
built all over the country.
Sometimes this can be a single individual. In this case it was the firm; Motorola is often credited with
being one of the first firms to develop the mobile phone but there were others as well including:
Siemens, Nokia, Ericsson. The role of national governments cannot be overlooked here because
they also encouraged the development and building of national infrastructures of networks.
3. Explain why Sony and Ericsson were finding it increasingly difficult to sustain R&D over
all of their businesses.
The increasing technological content of mobile phones, as illustrated above, has forced many firms
in the industry to search for technology partners who can provide the additional technology required
such as multimedia, digital camera, games, and so on. For these firms, to try to develop expertise in
these areas would be too expensive and too slow because of the rapid technological changes that
are occurring in the mobile phone market. Indeed, the mobile phone market is an excellent example
of the increasing complexity of technology and the increasing range of technology found within
products. This has led to a shortening of product life cycles within the mobile phone market. Many
users now change their handset after 18 months to 2 years. Companies are also finding it
increasingly difficult to sustain R&D capability over all areas of their business as the complexity of
these areas increases. Internal R&D is increasingly focused on core competencies, while R&D in all
other business activities is progressively covered by collaborations, partnerships and strategic
4. Explain why Ericsson is maintaining a large R&D division focusing on handsets when its
joint venture with Sony is also conducting R&D and product development of handsets.
Notwithstanding the joint venture with Sony, Ericsson intends to retain a large research and
development division focusing on handsets, which is vital to ensure its network business stays in
touch with consumer demands.
This is an interesting strategic issue. One could argue that it suggests a lack of confidence in the JV
and that Ericsson intends to eventually go it alone. However, it is not unreasonable for a firm that
provides the infrastructure for a product to also need to be informed about the product that is
handsets themselves.
5. Discuss why the mobile phone handset market seems to be more like the fashion
The rapid pace of technology change and the intensity of competition in the mobile phone handset
market have created a remarkably dynamic market. In addition, handset manufacturers are acutely
aware that once a person has bought a mobile phone handset they may be unwilling to buy another,
hence the industry has responded by ensuring there is a steady stream of updates and new
features which ensures the handset market behaves in a way similar to the fashion clothing
industry. Without this product obsolescence manufacturers would risk huge falls in revenue.
6. Many firms are outsourcing more and more of their activities and focusing on core
activities. What are the advantages for Sony Ericsson in bringing manufacturing back
under its control?
The main advantages are increased control of activities.
Sony Ericsson is planning to bring more of its mobile phone manufacturing plants under its own
control to smooth out supply-chain problems and help improve its market share. It is in talks to raise
its stake in Beijing Ericsson Putian Mobile Communication, a manufacturing facility outside Beijing,
and could consider other similar deals in the future. The company is keen to avoid a repeat of 2002,
when it failed to take full advantage of booming pre-Christmas demand for phones because of
component shortages, resulting in loss of market share. However, the decision to bring more
factories under direct control is a reversal of parent company Ericsson's earlier policy followed in
2001 just before setting up the joint venture of outsourcing all its handset manufacturing to
companies such as Flextronics. About 30 per cent of Sony Ericsson phones are produced in
factories controlled by the company while 70 per cent of production is outsourced. Sony-Ericsson is
aiming for 50 per cent production in factories being controlled by the company.
7. What are the advantages and disadvantages of outsourcing?
The disadvantages of outsourcing are as follows:

Main negative outcomes
of outsourcing
Main references
1 Dependence on the
Alexander and Young (1996); Aubert et al. (1998)
2 Hidden costs Earl (1996); Alexander and Young (1996); Aubert et
al. (1998); Lacity and Hirschheim (1993); Barthelemy
3 Loss of competencies Bettis et al. (1992); Martisons (1993); Quinn and
Hilmer (1994); Khosrowpour et al (1995); Alexander
and Young (1996); Aubert et al. (1998); Doig et al.
4 Service providers lack of
necessary capabilities
Earl (1996); Aubert et al. (1998); Kaplan (2002)
5 Social risk Lacity and Hirschheim (1993); Barthelemy and
Geyer (2000)
6 Inefficient management Wang and Regan (2003); Lynch (2002)
Adapted from Qulin and Duhamel (2003).
8. This is a fierce industry in which to try to compete. Should Sony Ericsson quit?
Many students may think that a firm with a successful product should stay in the game, but as Nokia
have decided some markets may not be financially profitable for the firm. Even with a good product.
Also, these firms may decide they could put their money somewhere else and get a better return!
While the decision to quit is probably not realistic at this time it is nonetheless something students
could consider. And what would they do if it was their money?
9. What is the market share/profitability of the Apple iPhone in this market?
The rapid ascent of Android, which now powers devices from the Verizon Droid to Samsungs new
Galaxy S, shows the power of software. The momentum, particularly at the expensive end of the
market, is with iPhones and Android phones. The global market share of the Symbian platform
backed by Nokia fell in 2009 while the iPhone OS rose to 15 per cent from 11 per cent in 2009.
Android grew rapidly, supported by mobile operators without the iPhone, rising from 2 per cent to 10
per cent.
Finally, the network operators that subsidise and sell handsets have a vested interest in diversity. The
iPhone has been a sales success for those operators who dealt with Apple, but Apple has been able to drive a
hard bargain with network operators on subsidies and other terms. For that reason, network operators have
been supporting Android to regain bargaining power with Apple.

Case study notes
Nestled alongside the Olympic Park in the heart of Munichs industrial district, to the north of the city, sits
Munich Gases: a German industrial gas company with a long history of supplying gases and liquids to firms
across Europe. Its product range is dominated by liquid oxygen which it supplies to health care markets and
carbon dioxide which it supplies to the drinks and beverages industry. With a market capitalisation of 10
billion Munich Gases is one of the industry leaders. It also has a proud history of successful R&D which has
helped to maintain its dominant position over the past 80 years. This case study tells the story of how
Munich Gases uncovered a multi-billion dollar market opportunity for whitening teeth, and explored how
best to exploit it.
Case study questions
1. Should the Munich Gases invest 10 million in this new product project?
Students simply need to consider all the facts supporting investment and then all the unknowns.
Clearly, there is no right answer and much would depend on the current portfolio of products that
the company holds.
2. What other factors may yet decide the fate of this project?
The wider economic issues may influence the decision to invest. Also, safety reports that determine
the product is unsafe to use. Consumer testing of the concept may suggest consumers would not
3. Which market should Munich Gases select? The consumer product market or
professional/business market?
This is the key decision. Both options are possible. One is less risky but the consumer market
carries the potential for greater rewards. The professional market may be easier to enter. Of course
it may be possible to enter both in the long-term.
4. Sketch out five different possible business models. Of these determine which is the most
profitable and which is most likely to succeed?
Creativity is required here. The business model should contain:
i. A graphical representation (usually in the form of a flow chart);
ii. A list of activities, on the part of both the business owner and potential customers;
iii. A likely sequence for those activities (which may later be altered in the light of customer
iv. A set of indicators or metrics for measuring the linkage between the activities.
There is a key question that needs to be addressed:
How will this business make money?
To answer this question it is necessary to address a series of additional questions such as:
Who is the target customer?
What customer problem or challenge does the business solve?
What value does it deliver?
How does it reach, acquire and keep customers?
How does it define and differentiate its offering?
How does it generate revenue?
What is the cost structure?
What is the profit margin?
5. How will the powerful toothpaste brand owners react?
If, a consumer market product is developed one of the big brands would surely want to be
associated with the product. If not they could fight the product with propaganda etc. Care is required
here, and it would be better to have one of the big FMCG brand management companies on your
side rather than try to fight them all.
6. Should Munich Gases secure an entry into the market with one of Europes leading
multiples (e.g. Lidl, Tesco, Carefour, Aldi)?
This could be an alternative way to enter the market. The retailers will provide direct access to
consumers. The product will be on the shelf and should generate sales.
7. Should Munich Gases secure the endorsement of one of Europes leading toothpaste
brands (e.g. Aquafresh; Signal; Macleans) before entering the market?
The answer is surely yes. A good business deal could be developed here that means all parties win.
8. How can the firm reassure uneasy consumers about the safety of plasma in their
Probably through education and reassurance. It may be possible to get endorsement from a
professional group or even possibly a well-known male/female model.

Case study notes
Since launching their business in 1999 innocent has not only witnessed the rise of its own business but also
the rise of the smoothie market and the rise of competitors. While being the market leader, the recent
purchase of the number two smoothie brand, PJ Smoothies, by the multinational PepsiCo firm means that
innocent can expect fierce competition as it attempts to be the dominant smoothie brand in Europe. This
case study tells the story of how innocent developed a business idea into a product and launched it into the
UK market with very limited funds. At that time, the smoothie market was in its infancy, although innocent
was not the first into the market and could not benefit from any early entrant advantages. Nonetheless, the
launch of the product coincided with the rapid growth of the market, especially in the form of own-label
smoothies from Sainsbury, Tesco and M&S.
Case study questions
1. innocent are very clear about the image it wishes to project to the public. This is one
based around being different, fun-loving and having a carefree approach to life. This
hippie style image has helped the brand become acceptable to the young urban
professionals at whom it is aimed. But beneath the surface of this image there is
evidence of a very different business that could be characterised as ruthless,
single-minded, profit driven and very business orientated. Where is the evidence of the
There are clear benefits in trying to portray a devil-may-care approach to life, the so-called hippie
style; this appeals to the target audience. However, the evidence available suggests something
different. The background of the three is one of privilege (one of the three founders attended
Winchester college). This may not be the rags to riches story they like to imply. Furthermore, while
the founders like to portray themselves as alternative and outrageous they all benefited from
conventional excellent university education at Cambridge University. This was followed by
successful careers in banking and management consultancy in the City of London. Finally, the
decision to take a few months unpaid leave from their employment while trying to establish the
business suggests a risk-averse style that differs considerably from the one they like to portray.
2. The success of the business is partly based on extremely good communications with
retailers. How is this achieved?
innocent place emphasis on communication with retailers rather than consumers. It is their view
that it is retailers who buy their products and who will display and stock them. innocent try to keep
retailers happy; they give lots of promotional materials to retailers and invite them all for
entertainment days.
You could discuss the role of suppliers and their relationship with retailers/consumers.
3. What type of financing did innocent secure? Does it matter?
Viewers of the BBC series Dragons Den will recognise this issue. For all start-up businesses
leveraging in finance to pay for manufacturing, distribution or promotion costs a lot of money. Very
often, entrepreneurs have to sell a significant stake of the business 2060 per cent to get 100,000
of investment. This is usually because the business idea has yet to be fully tested and a large
injection of cash is a risk that may result in all that money being lost.
In the case of innocent, Maurice Pinto, a wealthy American businessman invested 2,50,000 and
became the fourth shareholder in the group, retaining a 20 per cent stake. The money provided
salaries for the three entrepreneurs, office space, cash to buy production capacity at bottling plants,
promotional material and labelling for the bottles.
4. Would you sell out to Coca-Cola for 400 million? As one of the three shareholders you
could pocket 100 million. If not, why not?
Students will like discussing this. Getting their hands on a lot of money is usually too tempting. But
even bigger riches are available if you look at Bill Gates or Dyson. Despite receiving many offers,
both these entrepreneurs did not sell out during the growth stages of their businesses. Both are now
billionaires (50 and 1, respectively).
5. innocent benefited from a key advantage: what was this, and explain how it helped in
the product development process.
The entrepreneurs were all members of the target market. They were young, wealthy and worked in
a large city. The target market was 20/30 somethings who wanted to try something different,
something healthy. It was an expensive beverage at 2. A can of coke is 60p!
The product development process involved trying out and testing ideas, packaging, flavours,
pricing, etc. Sometimes, firms get the marketing of a product or service wrong. In this case, the
decision-makers were part of the target market, hence they were able to draw on their own
experience when making the decision regarding the bundling of the offer.
6. How is innocent virtual and how is this different from traditional food and drink
manufacturers? What advantages and disadvantages does this provide?
innocent do not own any manufacturing or packaging resources. Hence, all production, bottling
and packaging of the beverage are undertaken by contract bottling plants. This is a weakness in
terms of level of control but offers advantages in terms of flexibility, capital investment, etc.
Other considerations:
delivery, reliability, quality, leakage of intellectual property from contractors to other manufacturers,
control of the brand and its value is less secure if there is too much reliance on others.
7. Use CIM (Figure 1.9) to illustrate the innovation process.
Natural sciences cycle
Many innovations are applications of existing technology; in such cases, this part of the framework
may not be used. In this case, there is no new science. This is such a case. Indeed, there is limited
technical innovation in this case.
Integrated engineering cycle
As with so many innovations, this is where most of the technical effort takes place. In this case,
there was little new technology. There was a certain amount of new manufacturing techniques
required because of the high fruit content and improving the shelf life without adding additional
chemicals. But mostly this case was about branding and launching a new product.
Differentiated services cycle
During this phase, the technology is adapted to meet the specific needs of customers. In this case,
emphasis was placed on the creation of a brand image is crucial here, and especially so for
products in FMCG markets. For all new entrants into an existing market, the aim is to try to get
existing users to change to your brand of fruit smoothie and to try to attract new buyers who
currently purchase bottled water or Coca-Cola, for example. The brand image developed and
carefully nurtured by innocent is one based on fun, and an almost hippie approach to life. This is
reflected in the packaging, promotion and logo used for the product.
Design has played a big role in the products success, from the logo and shape of the bottles to the
delivery vans. Careful consideration of design and packaging has contributed to the success of the
business. The brand was totally unknown, so innocent had to rely on people being intrigued
enough to try the product. It is not a cheap drink, so it had to appeal to the consumer and it had to
stand out and look like something you would want to pick up. Finally, like all beverage producers,
innocent relied on the taste to be sufficiently good to ensure a repeat purchase.
Social sciences cycle
This cycle can often involve negotiations with regulators or governments.
Innocent has not spent large sums of money on television, press or radio promotion. Emphasis is
placed on packaging design and retailers who stock and shelf the product. Advertising copy tends
to be witty and straightforward, as does other communications material. The relationship with
retailers has been built up through regular communication, including a newsletter, which combines
product information and fun stories.
Sometimes this can be a single individual; in this case, it was the three friends the owners of the
business. They have grown the business from small beginnings in London and created an
international brand. The firm owns little equipment such as manufacturing sites. Its business model
is similar to that of Coca-Cola, whereby it sells the licence to produce around the world.
In the early days of the business, raising money to finance the business development was crucial
and this was a key part of the business success.
Large sums of money are now required to position the brand in the minds of the consumer. This is
something brands like Coca-Cola have spent over 100 years doing.
Case study notes
This case study explores how Halfords investigated a poor-performing product category, namely, motor oil,
and, largely through packaging design, developed a hugely successful business. The packaging-design
changes introduced were later copied by the brand leaders in the industry, namely, Castrol and Mobil.
Case study questions
1. Discuss how Halfords used packaging as a strategic tool.
The firm commissioned the international design group Pentagram with a brief to redevelop its brand
of motor oil. This would probably involve redesigning the container, relabelling it and repositioning it
in the market. Pentagram decided to look closely at the possibility of considerably improving the
dispensing of oil from the container into the engine. Further studies revealed that the problem
seemed to centre on the inability to accurately direct the flow of oil. In addition, the handle for the
container is in line with the spout, helping to direct flow of oil. The issue of labelling was solved
simply by offering three types of motor oil. A premium-grade oil for most 16-valve petrol engines, a
diesel-grade for diesel engines and one for standard-grade. The three different oils were offered in
three different colours, making them different and distinguishable on the shelf. The final container
also incorporated a viewer for oil level.
2. Should Halfords have explored the possibility of developing a new brand of motor oil?
Though this was a possibility, the cost would have been much higher and there is limited evidence
of success of retailers developing brands other than their own store brands. Moreover, the Halfords
brand was acceptable and could be used to develop a successful product.
3. Use the attributes in Table 13.2 to explore whether more radical packaging could be
developed for this product category.
1. Dispensing handle and directing pouring;
2. Storage time limit device on storage;
3. Stability discolouring warning if product is unstable;
4. Handling ease of carrying;
5. Opening/resealing screwcap;
6. After use to be used as a useful storage container; and
7. Disposal improve ease of disposal, e.g. ability to screw into a ball
4. Arguably this was a product whose sales were declining and could have been dumped.
Can you think of any other mature products that could benefit from an investment in
packaging design?
Virtually all mature products can benefit from an investment in packaging and branding investment.
Indeed, there are some famous FMC food products that have been reinvigorated through new
packaging such as Branston Pickle, now offered in a single squeeze sachet; Heinz Tomato
Ketchup, now offered in a plastic squeeze bottle; and many more.
5. Use CIM (Figure 1.9) to illustrate the innovation process.
Natural sciences cycle
Many innovations are applications of existing technology; in such cases, this part of the framework
may not be used. In this case, there is no new science. This is such a case. Indeed, there is limited
technical innovation in this case. There is new design only.
Integrated engineering cycle
As with so many innovations, this is where most of the technical effort takes place. In this case,
there was little new technology. There is new design only.
Differentiated services cycle
During this phase, the technology is adapted to meet specific needs of customers. In this case, it is
the design of a new package that forms the centre part of the innovation process. This part of the
innovation process is the most significant in this case.
The external design agency: Pentagram set up a series of consumer focus groups to try to explore
the issues that influence purchase and to explore how consumers use the oil. Pentagram decided to
look closely at the possibility of improving considerably the dispensing of oil from the container into
the engine. The final container also incorporated a viewer for oil level. All these packaging attributes
propelled the Halfords brand up the sales league, and many of the leading manufacturer brands
have been forced to incorporate them into their own brand.
Social sciences cycle
This cycle can often involve negotiations with regulators or governments.
This case clearly illustrates the value of packaging and labelling in product development. The motor
oil itself remained unchanged, but the packaging and labelling of the oil were considerably altered,
enabling Halfords to reposition its oil as a slightly more upmarket store-brand oil.
Sometimes this can be a single individual; in this case, it was a combination of the Halfords product
development team and the external design agency.

Case study notes
The case study has been updated.
This case study explores the remarkable success of eBay and illustrates how continuous development of its
new services has enabled it to remain the worlds leading auction site and deliver extraordinary financial
results for investors.
Ms Whitman, CEO has transformed eBay from a purely domestic group that held auctions in 300 categories
into a global enterprise, operating in 18 countries and offering 16,000 categories. She has expanded the range
of goods sold from mainly collectibles Beanie Babies dolls accounted for 8 per cent of items sold at the
time of the IPO to include used cars, motorcycles, computers, time-share holiday homes and even golf
tee-off times. A Gulfstream corporate jet has been sold on eBay for $4.9 million. However, eBay risks
alienating its customers and the whole eBay community by introducing fixed-price sales. IBM is now its
biggest customer. This move away from auction and onto mainstream sales goes against the principles on
which eBay was established.
The purchase of Skype raises many opportunities. Will eBay block potential in the adult market an area
where a great many developers see potential? Especially when history teaches us that from the VCR industry
to the Internet, the adult industry has been at the forefront of developing technologies and markets.
Case study questions
1. eBay is one of the only major Internet-based firms to consistently make a profit from its
inception. What is eBays business model? Why has it been so successful?
eBays business model is in some ways a traditional intermediary. It takes a small cut of the money
from every trade from the seller and the buyer (now with Paypal). The amounts of money are very
small and it is simply because the business is online that this enables eBay to make the transaction
cost so low. This in turn means that while it may only make a few pennies from every trade, millions
of pennies soon add up to millions of dollars.
2. Other major websites, like Amazon.com and Yahoo, have entered the auction
marketplace with far less success than eBay. How has eBay been able to maintain its
dominant position?
It is true that eBay was not first in the market. It was one of the first and it bought up other online
auction houses around the world. There are many reasons that lie behind eBays success, but the
community of users cannot be overstated. It has worked hard to try to maintain the spirit of the
traditional community of traders. It has used this to develop new services and it is the community of
traders that has driven the new service development. eBay does not need to spend large sums of
money trying to understand what the customers want because the customers constantly request
and suggest changes.
The purchase of Paypal was a significant investment and successful move. eBays own online
payment system was not liked. The purchase of Skype has yet to deliver. However, many
opportunities exist.
3. Why did eBay ban the leaving of negative feedback on buyers? What has been the impact
of this change?
eBay felt it had to act because buyers (the people parting with their cash) were receiving negative
comments partly in retaliation from sellers who did not like any form of criticism. Even when the
criticism may have been justified such as slow delivery or the item was not as described. Ultimately,
buyers have power and eBay has returned some of the power back to them. If buyers began to walk
away, the whole business model could have collapsed.
The impact of the change has been marginal. This is partly because of the continued growth albeit
at a slower pace.
4. eBay makes every effort to conceptualise its users as a community (as opposed to, say
customers or clients). What is the purpose of this conceptual difference and does
eBay gain something by doing it?
It is the eBay community which has designed the business model. eBay supports the desire to
respond to the user community by employing approximately 5,000 people, about half of whom are
involved in customer support and about 20 per cent of whom are in technology. eBay does not need
to spend large sums of money trying to understand what their customers want because their
customers constantly request and suggest changes. In 2003, for example, over 1,00,000
messages, in which tips were shared and system glitches highlighted, were posted by users each
week. The technology systems that eBay has introduced over time enable the company to trace
every move of every potential customer, yielding rich information that can be acted upon. In
addition, category managers for eBay play a crucial role in the companys development. Unlike
others, say product managers in large firms, their roles involve listening, adapting and enabling. It is
their responsibility to develop tools that help users buy and sell more effectively.
5. eBay has long been a marketplace for used goods and collectibles. Today, it is
increasingly a place where major businesses come to auction their wares. Why would a
brand-name vendor set up shop on eBay?
In 2004, eBay began offering commercial sellers the concept of a shop on the site, where they could
direct consumers to view more of their merchandise. This has proved extremely popular for the
large sellers.
The move in 2004 to sell an increasing number of goods at fixed prices, rather than through auction,
was seen as controversial among some suppliers. So too has the strategy of attracting large
corporate sellers such as IBM, now the biggest supplier which has raised fears among smaller,
traditional clients. Such moves risk antagonising the power sellers, the army of entrepreneurs that
have formed the bedrock of eBays sellers and make their living by trading on the site. They provide
the liquidity that makes eBay the dominant online auctioneer. Many sellers welcome the changes
because of the new buyers they attract to the site. Others, however, believe corporations will get
special treatment from eBay and this will destroy its culture.
6. Many analysts have argued that by moving to fixed-price sales eBay is risking alienating
its traditional community of garage/car boot traders. How can eBay stop becoming just
another site for selling?
The answer surely lies in placing emphasis on its community of traders. This eBay community
includes more than a hundred million registered members from around the world. It is this
community that can make eBay different. It made eBay different, but recent strategic moves may be
moving eBay away from its community of users to a more corporate business model. Ensuring the
eBay community remains in control and has the power to change and influence trading will help.
7. Given the growth opportunities available to eBay, which ones and in which order should
it develop?
VOIP, the online payment system (Paypal) and the eBay community should create new
experiences and encourage new developer solutions at the intersection of the three businesses.
How open the enlarged business is to the innovation in the developer community could well
determine its success. There is a shared opportunity for the company and independent developers.
eBay will undoubtedly find ways to achieve a return on the huge investment it has made in Skype,
but the rewards could be all the richer if it opens the platform to outside influences. It is worthy of
note that what was a weakness for eBay its technology has now become a strength.

Case study notes
This case study illustrates many of the obstacles and difficulties of launching a new product. The product in
question used new technology that was initially rejected by existing manufacturers; it was priced at more
than double that of existing products, but eventually captured more than 50 per cent of the UK vacuum
cleaner market in less than four years.
Conventional wisdom would surely suggest that Dyson Appliances Ltd would fail within a few months.
After all, it appeared to be a small company with an eccentric manager at its helm, trying to sell an
overpriced product of limited appeal in a very competitive market with less expensive, conventional,
mass-market products made by respected manufacturers whose names were, quite literally, household words.
The result was very different.
Dyson invests heavily in R&D and believes that this is the key to success. Not all firms support this view.
The level of investment in R&D varies considerably. The high value he places on creativity sets Dyson apart
from other firms and helps explain his insistence on maintaining what, in Britain, are considered insanely
large annual investments in research and development. Nearly 17 per cent of revenue regularly goes to
supporting the company's R&D efforts, a figure some 10 times greater than the average in the UK. Because
of these ongoing research expenditures, a company that started with just one product now offers more than a
dozen all either upright or canister vacuum cleaners, each a more refined and technologically advanced
model than its predecessors.
Case study questions
1. Explore the key problems Dyson had to overcome?
This is a long list: design problems; a lack of money; lack of support from the UK government; lack
of interest from existing manufacturers; lack of interest from retailers, etc.
2. Characterise the type of innovation and new product development in the mature vacuum
cleaner market prior to Dyson. Are there other industries in this situation?
The emphasis was on motor power and suction. Increasing the size of the motor was deemed
necessary to convince customers that the product was better. Prior to Dyson the vacuum cleaner
was virtually a commodity product. Some retailed for as little as 40. Even the best-selling brand
was 100. Dyson transformed the industry. NPD in the industry was on process innovation and
cutting costs.
3. Manufacturing the product has turned out to be hugely profitable, yet this was not the
original plan; why not?
Originally, Dyson was after a quick return on his money through royalties. He did not want to be a
manufacturer. But being forced into manufacturing has turned out to be extremely profitable. This is
similar to the Victorian entrepreneurs from Stephenson, Carnegie, Watt, etc.
4. Explain the rationale behind Electrolux and Hoovers decision not to purchase the
licence from Dyson. Given Hoovers recent development of the Triple Vortex vacuum
cleaner, how do you assess this decision? What level of royalty would have been
reasonable for both parties, that is, Dyson and Hoover?
They clearly did not believe in the technology and/or thought the licence deal was too expensive.
They also believed that their own technologists could deliver something similar. There are two
strategies available here, both of which have benefits and risks.
5. Why is negotiating a licence for a new product so difficult?
This is because of the large number of unknowns, usually, unknown and untested technology it
could be wonderful or turn out to be a white elephant.
Examine the Dyson example; was his request greedy?
Many would say yes, given the unproven product.
Often, there is so much uncertainty about whether the product will work or whether there is a
Linked to this is the question of what is fair and reasonable.
6. How can businesses try to ensure that their senior managers (both buyers and new
business development managers) do not dismiss exciting technology and with it
potentially profitable business?
This refers to the rejection by domestic appliance manufacturers of Dysons product. There is no
simple answer it is a collection of things that need to be done. Marketing and business development
managers need to be technically aware and not technically illiterate. Good communication between
technical and marketing departments can help here. New product proposals need to be viewed by a
cross-functional team so that a multiple-perspective is achieved.
7. What is the role of patents? To what extent is it an effective system for protecting
intellectual property?
The role is to provide a monopoly for the inventor. The objective is to act as an incentive to the
inventor or entrepreneur. Creativity can lead to commercial rewards. Many people argue it is a
system for large multinational firms only.
8. Not all firms invest in R&D. What should be the level of expenditure on R&D for a firm?
See Chapters 8 and 9 for industry comparisons of R&D expenditure. Some industries spend very
little; what could happen if R&D expenditure is substantially increased?
9. Explain the very different market entry strategy used for the US?
The entry strategy for the US was based on an established brand developed at home. Extensive
and unique advertising was used in the US to launch the product. It was a very successful launch.
One of the key problems faced was securing distribution agreements with the big US retailers
(department stores, JC Penny). The retailers wanted reassurance that Dyson could deliver the
products to the stores on time. This meant Dyson had to fill warehouses across the US with
products. The penalty for failing to deliver was severe.
Dyson chose not to defend his patents in the US because he did not want to spend lots of money on
lawyers fees.

Case study notes
The case study has been updated.
It would be difficult to examine the subject of innovation and new product development without reference to
3M. The company has become synonymous with product innovation. Year after year, 3M appears in the
Fortune 500 rankings as the most innovative company. This case study explores why this is so.
Virtually all students will have used a 3M product, but very few will have extensive knowledge of the
company or the vast range of products that it manufactures. Part of the rationale for including this 3M case
study is to ensure that all students become more familiar with one of the most innovative companies in the
The case summarises some of the key successful techniques that the company uses. Many of these are not
exclusively used by 3M. Indeed, one of the most important messages to get across to students is that the key
to successful product innovation is good management. Moreover, it is the unique combination of activities
that is, by definition, difficult to replicate that makes 3M successful.
The company has established an effective culture that nurtures innovation and it has developed a range of
management techniques and strategies that together have delivered long-term success.
After four and a half years at 3M, McNerney left to take the CEO position at Boeing. Now his successor,
George Buckley, seems to recognise the negative impact the process-focused program had on the companys
creativity. Many of the workers say they feel reinvigorated now that the corporate emphasis has shifted back
to growth and innovation from McNerneys focus on process and short-term profits (see Chapter 3 for more
on the innovation dilemma).
This case study has highlighted some of the key activities and principles that contribute to 3Ms
performance. Many of these are not new and are indeed used by other companies. In 3Ms case, they may be
summarised as an effective company culture that nurtures innovation and a range of management techniques
and strategies that together have delivered long-term success. Many companies pay lip service to the
management principles and practice set out in this case study. There is evidence that 3M supports these fine
words with actions.
The struggle between efficiency and creativity is one many public companies face. The market values of
company stocks are impacted more by short-term results rather than long-term prospects; and executives
have an incentive to drive those results.
There are no easy answers and the best solution most likely lies somewhere between the two extremes of
either process control or open-ended innovation.
Case study questions
1. There are many examples of successful companies. To what extent is 3M justifiably
highlighted as the innovating machine?
During the 1980s and 1990s, 3M delivered consistently good results and continued to deliver many
new products across a wide range of industries. It was rightly classified as a highly successful and
innovative firm. Indeed, it won the Fortune 500 most innovative company award for several years
during this time. At about the same time, the business world analysts and business schools started
taking an ever closer look at the influence of innovation on firm performance and hence, at the time,
3M was highly regarded and the label has remained.
It is true there are many other very successful and innovative firms such as Nokia, Sony, Apple,
Microsoft, etc. Furthermore, arguably 3Ms performance has not been as strong as it was in the
past. Some analysts have argued that it has not delivered in terms of return on its investment in
2. In the 3M case study, what is meant by the statement: the message is more important
than the figures?
This refers to ensuring that employees realise that the 3M reward innovation even if there are times
when the guidelines, for whatever reason, may be ignored. While a business may not deliver 25 per
cent of sales from new products, so long as it delivers 15, 16, 17 per cent, that will probably be
acceptable. Hence, it is about ensuring that the culture of innovation is enforced.
3. Discuss the merits and problems with the so-called 15 per cent rule. Consider cost
implications and a busy environment with deadlines to meet. To what extent is this
realistic or mere rhetoric?
The idea that scientists can spend almost one day a week on projects that they find interesting
seems a wonderful luxury some may say an unrealistic paradise. What happens when there are
turbulent times, unexpected events that cause disruption to the firm, surely then, critics would
suggest employees would be required to drop what they are doing and help out. The firms
response may well be that the 15 per cent is flexible and while they may be times when it is not
feasible, over a long time frame, scientists are afforded approximately 15 per cent of their time.
Moreover, they will be some who choose not to use this time. Once again, this is a flexible guideline
that is about trying to ensure there is slack in the R&D environment for creativity.
4. Encouraging product and brand managers to achieve 25 per cent of sales from recently
introduced products would be welcomed by shareholders, but what happens if a
successful business delivers profits without 25 per cent of sales from recently
introduced products?
Take the Post-It notes business for instance for many years in the early period of its development,
it could barely keep up with demand for existing products; so the idea that it had to deliver new
products was almost humorous and certainly difficult to achieve. Moreover, any firm would probably
have said keep doing what you are doing, the profits are great. The point here is once again the
emphasis on delivering innovation and new products, in particular, forced the firm to at least think of
the future and start considering new products. Arguably, this helped the firm deliver a whole range
of different versions of the original yellow Post-It note. So we had different sizes, different colours
and later, different types in the form of book marks and other forms of labels.
5. Some people may argue that 3Ms success is largely due to the significance given to
science and technology and this is the main lesson for other firms. Discuss the merits of
such a view and the extent to which this is the case.
It is unquestionably the case that the firm has an impressive record when it comes to investing in
science and technology over a 70-year period. But science and technology alone is not enough as
many once-successful firms will testify. Indeed, in the late 1990s, 3M came under severe pressure
from investors to show some return from its investment in R&D; this was because profits were
sluggish and the new product pipeline was looking empty. Good science alone is not enough;
Alexander Flemming was credited with discovering penicillin, but it was 30 years later that a US
pharmaceutical firm profited from antibiotics.
6. Explain how the innovation dilemma affected 3M.
The Six Sigma programme is a series of management techniques designed to increase efficiency.
For the most part, the implementation of the Six Sigma programme was successful as it focused on
the operations (manufacturing/logistics) side of the business. However, when 3Ms R&D personnel
were asked to adopt Six Sigma processes, the results were less favourable. While established
operational processes like manufacturing require strict monitoring, measuring, and a regimented set
of procedures, the innovation process requires a different approach.
3M felt stifled by the new structure and pressured to produce more new products faster. The result
was a greater number of incremental product-line extensions than true new product innovations.
Traditionally, 3M drew at least one-third of sales from products released in the past five years, but in
2006 that fraction has fallen to one-quarter of sales. In 2004, 3M was ranked No. 1 on the Business
Week/BCG list of Most Innovative Companies. In 2007, the company dropped to number seven.