Technological change, disruptive innovation & the impact on the business operating environment

Session 2 of BMAN 71942: Technology, Innovation Management & Business Strategy

Dr Andrew James
Andrew.James@mbs.ac.uk Tel: +44 161 275 5860

Factors in strategic choice at the business level

TECHNOLOGICAL CHANGE & The influence of: DISRUPTIVE INNOVATION Environmental forces Globalisation of research & Accessible resources & capabilities technology Expectations Open innovation & crowd sourcing

Bases of competitive advantage: Price-based strategies Differentiation strategies Focus strategies

Sustaining competitive advantage: Sustaining low-price advantage Managing the innovation process Sustaining differentiation advantage Managing the globalisation of Lock-in research & technology Competition & collaboration
Intellectual property Standards

Innovation leadership & followership Creating an innovative organisation Frugal innovation

Todays session
What do we mean by the business operating environment? What do we mean by technological change? What do we mean by technology life cycle? What are the dynamics of innovation in an industry? What can be the impact of a radical innovation on established businesses? What do we mean by disruptive innovation?

THE OPERATING ENVIRONMENT FOR A BUSINESS

What do we mean by business operating environment?

The macro-environmental influences which might affect an organisation (PESTEL framework) The competitive conditions in the industry in which the organisation operates (Porters five forces) (These are different but may be complementary)

The influence of environmental forces

Forces on the operating environment of a business are normally analysed using the PESTEL framework:

Public policy These can act at Economic conditions: macroeconomic conditions; sectoral/market, market demand; competitive environment; National or Socio-cultural: changing demographics, cultural international change, customer preferences levels Technological change Influence of each Environmental varies between Legal & regulatory markets & sectors

Technological change can act on any of Porters five forces to change the terms of competition in an industry THREAT OF ENTRY
Technological change can increase/ decrease barriers to entry. e.g. Disruptive innovation allowed low cost carriers to enter airline industry

Potential entrants

INTENSITY OF COMPETITION Innovation can increase/decrease rivalry between existing firms in an industry. E.g. Fujis innovations in film increased rivalry with Kodak

Suppliers

Competitive rivalry

Buyers
BARGAINING POWER Technological change can increase/decrease bargaining power of a firms buyers. e.g. E-purchasing

BARGAINING POWER Technological change can increase/decrease bargaining power of a firms suppliers. e.g. Auto makers dependence on component suppliers

Substitutes

THREAT OF SUBSTITUTES Technological change can create direct substitutes for existing products. (e.g. Digital cameras replace film)

DISCUSSION POINTS
Q1: Why should an analyst of global business be concerned about the business operating environment? __________________________________________________________ __________________________________________________________ _________________________________________________________ Q2: What is the difference between PESTEL and Porters five forces? __________________________________________________________ __________________________________________________________ __________________________________________________________

Q3: Think of an example of the impact of technological change on the operating environment of a business? __________________________________________________________ __________________________________________________________

TECHNOLOGICAL CHANGE

Technological change
Types of technological Technological change is change: caused by: Incremental-radical Technology push: new technological knowledge (may be from scientific developments but Continuouscan come from non-scientific discontinuous sources as well (remember the broad Sustaining-disruptive
definition of technology from last week, technological change is about more than changes in artefacts & is different to scientific invention)

Market pull: new demands may stimulate search for new technological solutions

Evolutionary change & creative destruction

Any market has periods of comparative quiet, when firms that have developed superior products, technologies or organisational capabilities can earn positive economic profits These quiet periods are punctuated by fundamental shocks or discontinuities that destroy old sources of advantage & replace them with new ones Firms & entrepreneurs who exploit the opportunities these shocks create achieve competitive advantage during the next period of comparative quiet

Joseph A. Schumpeter,1883-1950

Waves of technological development, 1770-1990 (see Dodgson et al, pp.26-30)

Information & communications technology Fordist mass production Electrical & heavy engineering Steam power & railways Early mechanisation

1770

1840

1890

1940

1990

THE TECHNOLOGY LIFE CYCLE

The technology life cycle (TLC)

Technology reaches its physical limits

Performance

Major technical challenges are overcome

Emerging

Transitional

Mature
Time

The technology life cycle (TLC) for film

(could be measured by image quality and/or speed)

Performance

1940s

1980s c 1890? These products reflected changes in the technologies underpinning photographic film

Emerging

Transitional

Mature Time

The move from one technology to another is called a technological discontinuity

Key issue here is whether the technological discontinuity is competence enhancing or competence destroying for a business
(see session 1)

Uncertainty in the technology life cycle

Uncertainty over rate & timing of technological development C Some emerging technologies may fail to deliver on the early claims of their advocates (A) Some may be superseded by B another technology (B) Only some will reach the stage where they are used in new A products, services, processes (C) Time Where we are on the curve is Mature open to debate (?)

Performance

Emerging

Transitional

Product life cycle is different to the technology life cycle

The product life cycle (PLC)

DISCUSSION POINTS
Q1: Why should an analyst of global business be concerned about the technology life cycle? __________________________________________________________ __________________________________________________________ _________________________________________________________

Q2: What do think are the main sources of uncertainty when analysing the life cycle of a technology? __________________________________________________________ __________________________________________________________ __________________________________________________________ Q3: What do you think are the main management challenges during the (a) emerging phase; (b) mature phase of the TLC? __________________________________________________________ __________________________________________________________ __________________________________________________________

THE DYNAMICS OF INNOVATION IN AN INDUSTRY

Utterback (1996) Chapters 1, 2 &4

The dynamics of innovation in an industry (Abernathy & Utterback, 1978; Utterback,1996)

Product innovation

Rate of major innovation

Process innovation

Experimentation with product design & operational characteristics amongst competitors

Major product innovation slows as a standard (dominant) design emerges. Major process innovation increases

Rate of major innovations declines. Focus on cost, volume & capacity. Incremental innovation in product & process

Fluid phase

Transitional phase

Specific phase

The dynamics of innovation in an industry: e.g. the car industry

Rate of major innovation

1908-1927 Model T Ford

1898
Experimentation with product design & operational characteristics amongst competitors

1914: Trafford Park

Major product innovation slows as a standard (dominant) design emerges. Major process innovation increases Rate of major innovations declines. Focus on cost, volume & capacity. Incremental innovation in product & process

Fluid phase

Transitional phase

Specific phase

Dominant design
A dominant design in a product class is the one that wins the allegiance of the marketplace, the one that competitors & innovators must adhere to if they hope to command a significant market following. The dominant design usually takes the form of a new product (or set of features) synthesised from individual technological innovations introduced independently in prior product variants (Utterback, 1994: p.25)

The dominant design for the motor car (4 wheels; internal combustion engine)

Not (yet?) electric powered

How does a dominant design emerge?

The emergence of a dominant design is not predetermined but is the result of the interplay of technical & market choices Factors other than technology come into play:
A firms access to Collateral assets (Utterback) or complementary assets (Teece, 1986) Industry regulation & government intervention (including standards) Strategic manoeuvring at the firm level Communication between producers & users

The dynamics of innovation influences the evolution of an industry

Product: from high variety, to dominant design, to incremental innovation on standardised products Process: manufacturing progresses from heavy reliance on skilled labour & generalpurpose equipment to specialised equipment operated by low-skilled labour Organisation: from entrepreneurial organic firm to hierarchical mechanistic firm with defined tasks & procedures and few rewards for radical innovation Market: from fragmented & unstable with diverse products & rapid feedback to commodity-like with largely undifferentiated products Competition: from many small firms with unique products to an oligopoly of firms with similar products

DISCUSSION POINTS
Q1: What kind of business strategy would you recommend for a business that is in an industry in the fluid phase? __________________________________________________________ __________________________________________________________ _________________________________________________________

Q2: What kind of business strategy would you recommend for a business that is in an industry in the transitional phase? __________________________________________________________ __________________________________________________________ __________________________________________________________ Q3: What kind of business strategy would you recommend for a business that is in an industry in the specific phase? __________________________________________________________ __________________________________________________________ __________________________________________________________

THE IMPACT OF RADICAL INNOVATION ON A STABLE BUSINESS

Utterback (1996) Chapter 7

Radical technological change

A new technology may have the potential to deliver better product performance or improved production or both Radical technological changes may: Create new businesses Transform incumbents or - Destroy incumbents

Continuous or discontinuous innovation

(Tushman & Anderson, 1986; Utterback, 1996)
Discontinuous innovation is Change that sweeps away much of a firms existing investment in technical skills and knowledge, designs, production technique, plant and equipment (Utterback, 1996: p.200) Discontinuities may be competence enhancing where they build on knowhow embodied in the technology it replaces e.g. turbofan engines built on jet engine technology Discontinuities are competence destroying where they render obsolete the technology that it replaces e.g. vacuum tube producers replaced by integrated circuits

Performance of an established & new product

t1:
New product

Product performance

Established product

new technology appears. The established technology offers better performance or cost than does products incorporating the new technology. The new technology is still to be perfected. It may be seen by incumbents & thier customers as crude, leading to the belief that it will find only limited application.

t2: the new technology enters into a t1 t2 Time

period of rapid improvement just as the established technology enters a stage of slow incremental improvement. The newcomer improves the performance of products/technology to the point where they match (t2) & overtake established products

The response of established technologies to a new technology...

Product performance
Burst of improvement in established technology in response to new technology

New product

Established players rarely sit back . Most respond to the threat posed by new technology.

Established product

Incumbents may seek to fight back by investing more in established technologies

The result may be that the established product may enjoy a brief period of performance improvement

t1

t2

t3

Time

But by t3 the pace of improvement in the new product technology allows it to meet & then surpass the established product

... we call this the sailing ship effect

In the 50 years after the introduction of the steam ship, sailing ships made more improvements than they had in the previous 300 years

The improved sailing ships were still eventually overtaken by steam ships (and some of the new sailing ship designs proved so unwieldy that they sank or ran aground!)

DISRUPTIVE INNOVATION

Sustaining or disruptive innovation

(Clayton Christensen, various papers)

Sustaining innovations improvements

to existing products & services on dimensions historically valued by customers

Disruptive innovations introduce a new value proposition

Low-end disruptive innovations offer existing customers a low-priced, relatively straightforward product New-market disruptive innovations bring a product or service to nonconsumers by making it easier for people to do something that historically required deep expertise or great wealth

Singapore airlines. Ryanair

Disruptive technologies may be ignored or dismissed by incumbents

(Bower & Christensen, 1995)

Sustaining technologies tend to maintain a rate of improvement; that is, they give customers something more or better in the attributes they already value

Disruptive technologies: Initially, simpler, cheaper & lower performing in the attributes that matter most to mainstream customers Promise lower margins, not higher profits Initially, leading firms most profitable customers generally cant use & dont want them Commercialised first in emerging or insignificant markets Ultimately, disruptive technologies substitute for established technologies & products

Sonys TR-63 pocketable transistor radio

How disruptive innovations displace established products/services

a: disruptive innovation meets the performance demanded at the low end of the market and begins to substitute for established product (low-end disruptive innovation) b: performance of established products as a result of sustaining innovation exceeds that demanded even at the highest end of the market creating overshot customers & making incumbent even more vulnerable to low end disruptive innovation a-c: disruptive innovation becomes mainstream but itself becomes vulnerable to disruption

Potential customers for disruptive innovations

Customer group
Non-consumers

Identifier
Lack ability, wealth or access to easily accomplish important tasks for themselves: they either hire someone or put up with suboptimal solution

What could Signals happen

New market disruptive innovation Product/service that help consumers meet existing tasks more easily Rapid rate of growth in new market or new context of use New, improved products & services for existing customers

Undershot customers

Consume a product but are frustrated with its limitations: they display a willingness to pay more for functionality that is important to them Stop paying for further performance improvements in areas that historically merited price premiums

Sustaining upmarket innovation (radical & incremental) Low-end disruptive innovations

Overshot customers

New business model emerges to serve least demanding customers

Why incumbent companies can find it difficult to respond to disruptive innovation: a resource based view
The paradox of disruptive innovation is that well managed companies, doing what is regarded as the right thing can be swept away Incumbents resources do not allow it to respond Incumbents processes (routines) & capabilities are optimised for sustaining innovation & limit its ability to identify & respond to disruptive innovation Values cause what turn out to be incorrect prioritisation/assessment of disruptive innovation Core competencies become core rigidities (Leonard-Barton, 1992)

A resource based view of a business & its strategy

Term
Resources

Definition

What to look for

Tangible & intangible Tangible assets: technology; products; balance assets that a firm sheet; capital equipment; distribution network owns or can access Intangible assets: human capital; organisational knowledge; brands Ways of doing business Difficult problems that the company has repeatedly solved over time Typical processes: recruiting & training; product development; manufacturing; planning & budgeting; market research; resource allocation Business model: Cost structure Size & growth expectations Investment history what has been prioritised in the past?

Processes (routines) & capabilities

Values

Factors that determine prioritisation (motivation)

Strategies that are used by new entrants

New entrant strategy:
Asymmetric motivation

Definition:
New entrant does something that incumbent does not want to do (provides a shield protecting from incumbent response)

Signals:
Size of market relative to firm size Target customers Business model in market relative to existing business models
Mismatch between established processes & processes required for success

Asymmetric skills

New entrant does something incumbent is incapable of doing (provides sword to use during attack on incumbent)

Incumbent response strategies when faced by disruptive innovation

Incumben Definition: t strategy:
Ceding
Incumbent leaves a market to an entrant

Signals:
- Company announces refocusing on core customers - Abandoning lower-tier markets - Plans to discontinue low-end products - Company building or acquiring disruptive innovations - Incumbent targeting entrants market with modified version of core product - Announcements by incumbent that entrants market is a strategic priority

Co-opting

Incumbent attempts to fight an attack using internal resources Incumbent targets entrants customers

Growth-driven

Defensive

Incumbent attempts to build wall around its existing customers to block entrant

-Incumbent bringing new product to lowend of existing customer base - Incumbent announcement that entrants market is not a priority

How can incumbents respond to disruptive innovations? (Christensen et al, 2004)

Establish a spin-off unit to focus on innovative technology

Create learning ventures (& accept and learn from failure)

Selectively use resources from the parent organisation to address the disruption (without leveraging its processes & values) Develop new markets that value the attributes of the disruptive products

Do not wait for a disruptive product to evolve into a sustaining technology in mainstream markets

Criticisms directed at Christensens notion of disruptive innovation (Schuh)

Source of criticism Lack of clarity in definition
Danneels (2004) Govindarajan & Kopalle (2006)

Issues
Is a technology inherently disruptive or is disruption contingent? Can it be defined as disruptive ex ante? Is there a formal measure of disruptiveness? Why do some incumbents win? Why do some disruptive innovations fail? What are the basis of customer decisions? Examples are cherry-picked & have limited generalisability Is the theory valid for business model innovation? Spin-offs are a partial solution at best

Limited predictive value

Danneels (2004) Adner (2002)

Overstretch

Markides (2006) Charitou & Markides (2003) Danneels (2004)

Inadequate recommendations

DISCUSSION POINTS
Q1: Do you think that digital imaging was a disruptive innovation for Kodak? Why?
__________________________________________________________ __________________________________________________________ __________________________________________________________

Q2: Why did digital imaging (invented at Kodak in 1975) drive Eastman Kodak into Chapter 11 bankruptcy (in 2012)?
__________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________ __________________________________________________________

What are your key learning points from this morning?

1. ____________________________________________ ____________________________________________ ____________________________________________ 2. ____________________________________________ ____________________________________________ ____________________________________________

3. ____________________________________________ ____________________________________________ ____________________________________________

Summary
Analysis of global business environment requires an understanding of the potential impacts of technological change Technology life cycle can impact industry structure & influence business strategy Disruptive innovation can undermine the position of incumbents & provide opportunities for new entrants unless incumbents respond

Additional readings
Abernathy, WJ and, Utterback, JM (1978) Patterns of industrial innovation, Technology Review, 80 (7): 4047. Leonard-Barton, D (1992) Core capabilities and core rigidities: A paradox in managing new product development Strategic Management Journal Teece, DJ (1986) Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy, Research Policy, 15 (6): 285305

Your next steps:

Read the recommended texts for this session Research and look further at Kodak and other relevant examples to develop a better understanding of todays discussion & in preparation for individual assignment/exam