Technology and Innovation Strategy PDF

TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TECHNOLOGY and INNOVATION STRATEGY - Class participation 20% (ask question, discuss…) - Hackaton competition 30% makes sense economically to Metaverse - Written exam 50% 0  TECHN...

TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TECHNOLOGY and INNOVATION STRATEGY - Class participation 20% (ask question, discuss…) - Hackaton competition 30% makes sense economically to Metaverse - Written exam 50% 0  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci WHAT IS TECHNOLOGY TECHNOLOGY is about how to make things and services that are useful and enjoyable → about production! It regards machineries, tools and knowledge that are: - Embedded in final products and services (product technology) - Mediate between inputs and outputs (process technology) Technology is practical (related to concrete problems and devices – knowhow) and also theoretical (practically applicable although not necessarily already applied – know-why). It refers to practical knowledge, skills and artefacts that can be used to develop products and services as well as their production processes and delivery system. To conclude, technology is much broader than just Information Technology IT → technology is the application of tools, material processes and techniques to human activity. Where technology comes from? Technology is in the middle between science and economics. SCIENCE – TECHNOLOGY – ECONOMICS SCIENCE is unrelated with economics. It is referred to the principals of behaviour and it makes sense to some certain phenomena. ECONOMICS is about how we live, about our decision during our routine. TECHNOLOGY is between the general rules (science) and the practical way of life (economics). This distinction was born during the 1st Industrial Revolution → nowadays, technology is not an independent variable, but firms are built on the role of technology. We care about technology through the function of Research and Development R&D. Discoveries Inventions Innovations SCIENCE TECHNOLOGY BUSINESS Basic Research Applied Research Development ➔ R&D is not anymore independent → but the more is collaborative, the more technology characterize the vision of a firm! ➔ The complexity of nowadays technological world implies that firms start joint venture and external project involving technology. 1  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci The importance of Technology INVENTION Technology is important in the creation of value. SCHUMPETER is the father of entrepreneurialism. It came up with an important model which teaches that IMITATION INNOVATION entrepreneurs are the people able to transform inventions → to innovation. These people help the diffusion of innovation and at the same time they create imitation. The last touchpoint is that from imitation of innovation we reach other inventions and the cycle restarts. RENT DIFFUSION The more entrepreneurship means more innovation and more growth for a country! NB technology is important because is the engine of growth! Then, prof. SOLOW captured the idea that countries which are more able than other in terms of human and physical capital perform a way more than the others. To conclude, prof. ROMER and NORDHAUS are very important. The first one figured out that specifically one type of technology (digital technology) has very positive effect, since it makes growth filled by itself → it is not affected by exogenous factors! Nowadays technology We are in the middle of the 4th Industrial Revolution. All the industries are being unshaped by digital technology, which is the engine of that Revolution → data + IoT This digital transformation includes: AI, Robotics, Spatial discoveries… Obviously, technology has some pros and some cons. Most of the consequences are ethic problems, while some others are referred to the practical life (inflation, pollution, wars…). 2  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 1. PARMACEUTICAL INDUSTRY Merck and Pfizer The PHARMACEUTICAL industry is characterized by FRAGMENTATION and CONSOLIDATION (the largest 10 companies still accounted to less than 50% of worldwide industry sales). It is a GROWTH ORIENTED sectors due to increasing life expectancy, rising in incomes and discovery of new drugs for major diseases (especially for developing countries). The market accounts for the North America ($266B), then Europe ($170B) and China ($11.7B). HIGH ENTRY To develop and create a drug it takes a lot of years (10-15y) and BARRIERS money ($802mln) INDUSTRY PATENT and R&D- Massive amount of R&D in order to protect drugs (14% of sales) BASED - IP and counterfeiting concerns BLOCKBUSTERS "Jackpot" drugs which are able to reach $1B sales -> DISRUPTIVE Research is long and uncertain (0.001%). 3/10 drugs cover R&D costs UNCERTAINTY -> Food and Drug Administration (DANGER for long-term side effect) MARKETING and Pharma companies employ vast sales forces to call directly on SALES doctors. They count on avg 35%. NB knowledge and capabilities accumulated in the pursuit of one therapeutic area could often be leveraged to others → exploring of therapeutic areas! Obviously, fast-growing therapeutic categories (ex. diabetes, Alzheimer…) attracted the most research money; while other diseases affected so few people (ex. malaria) that they had often been ignored by pharmaceutical companies. LIFESTYLE drugs ME-TOO drugs Making people feel better without resolving the problem They are copies of those already on the market NB new age of “personalized medicine” – developing drugs based on individual’s genetic profile It continues after commercialization in order to investigate side effects! How does the process work? DRUG DEVELOPMENT DRUG DRUG DISCOVERY (the easiest part) 1. Pre-Clinical COMMERCIALIZATION 2. Clinical (safe, effective, progressive) Government Approval NB the traditional process was based on TESTING different compounds in order to achieve a solution → the firm which tested most had a competitive advantage! Other features of this industry are: MERGERS and ACQUISITIONS = Pfizer is the incumbent in the market OUTSOURCING = is important to externalize some costs and R&D (in China and India) PUBLIC OPINION = it is crucial for a pharma giant to have good reputation (keeping good relationships with opinion leaders and universities and massive use of reps) 3  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci HIGH GROSS MARGIN = higher risk → pharmas usually have 85-90% gross profit margin PHARMA FMCG Sales 100% 100% Cost of Goods sold 15% 50% = GROSS PROFIT MARGIN 85% 50% … (commercial, R&D…) … … HIGH RISK LOW-MEDIUM RISK = EBITDA 25% 15% There are NO substitutes, because the only potential substitutes are related to ethical decisions (good lifestyle, eat various, no meat, do sports…). Drugs are typically divided into: O.T.C. – 20% ETHICAL – 80% They follow the whole process to the pharmacy and Detailers, FOA, payers, doctors, prescriptions then to the final consumer → Web of contracts ➔ It is one of the MOST PROFITABLE sectors → ROEavg = 20% The industry EVOLUTION The industry has been disrupted by the birth of BIOTECHNOLOGY (cfr. recombinant DNA, monoclonal antibodies). Processes switched from random screening (1960s) → to rational drug design (1970s) → to genetics (2000s). This allowed the entry of new actors throughout the drug production process: DRUG DISCOVERY DRUG COMMERCIALIZATION Public Organizations DRUG DEVELOPMENT Drug delivery companies Biotech firms Biotech (CMO, CDO...) In terms of marketing, lots of firms had massive salesforce team that used “detailing” → they called doctors and other influential healthcare workers in order to promote the company’s drug! Regarding international trade, future trends are tending to concentrate R&D in North America, with exports to Europe and Middle-East, and trade between Europe and Africa. Furthermore, diseases with limited cures have a fast track in the FDA process (“Orphan Drugs”). The integration R&D-Marketing is fundamental to make the process efficient and successful. R&D MARKETING 1. DRUG DISCOVERY Identify target molecules Market analysis Identify potential lead compounds Market screening 2. DRUG DEVELOPMENT Biological test Product portfolio management Phase I → safety In house VS Outsourcing Phase II-III → efficacy 3. DRUG NDA and documentation Launch plan → INDUSTRIALIZATION COMMERCIALIZATION Expert opinion Communication and sales Launch PDT lifecycle In general, the value of the industry is decreasing. Technology is an entry barrier and recent trends are changing the market forces: 4  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Forces 80’s and 90’s Ca. 2005 BTE High ↓ RIVALRY Intense ↑↑↑ SUPPLIER POWER Low ↑↑↑ BUYER POWER Low ↑ SUBSTITUTES Few Few COMPETITION and the role of Technology Regarding competition, the US introduced the “Hatch Waxman act”, which aimed to reduce the monopoly of diseases treatment → when a patent expires, competitors can skip all the process of discovery, development and commercialization (obtaining patents and authorizations) in order to produce generics using the expired patent → “ME TOO DRUGS” ➔ These dynamics forced companies to reduce the time to market of drugs (time between the application of a patent and the commercialization of the drug) → OUTSOURCING (10.2y → 1.2y) Competition has also been affected by BIOTECH entry → creators + suppliers of drugs → The entry of biotech introduced a huge number of potential competitors! SMALL biotech BIG biotech They started to supply pharma firms They became competitors in the drugs market GLOBALIZATION caused an increase in the market power of ASIA → the drug market has been disrupted by the molecular biology and systemic biology (use of data). o Together with this, FDA restrictions were stricter making drugs more expensive to the final customers. Thus, new associations such as MCO and government grew in popularity thanks to the attempt of reducing prices → different pricing increase re-selling drugs! PFIZER vs MERCK The 2 giants have different approach about technology as a driver of an innovation: MERCK → investing in R&D, in order to attract excellent scientists and reaching effective science → NEW MORE DRUGS R&D = assessing projects in the early stages of development (labs prominence firm) → developing Blockbuster drugs → reputation and hiring best scientists (HUMAN CAPITAL) IN-HOUSE >>> M&A, but from 1990s it increased partnerships (marketing rights, complement internal R&D, collaborative basic research) MARKETING = they focused only on high quality drugs, without putting attention on sales and marketing. However, nowadays the trend is switching to “label product”, rather than the quality itself (ex. Zocor). → Marketing shifted to “key franchise” + new data-driven approaches → cross-functional coordination! 5MERGING was not seen as long-term competitive Different salesforces, each rep was focused on promoting advantageous by Merck. Rather they preferred to pursue one main drug and “backup” drug, meeting with physician↑ complementary and collaborative in-house research!  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci PFIZER → investing in M&A, in order to buy firms and acquire new drugs and new patents → cut costs by reducing staff in R&D and less effective science → FEWER NEW DRUGS R&D = declining R&D productivity, so not focusing on blockbusters → recent sales were disappointing → a lot of delayed launch of anticipated drugs M&A >>> IN-HOUSE, a lot of mergers (ex. Warner-Lambert, Pharmacia) in order to launch new drugs and cut costs of research → cons? Loss of scientists, also because of closing labs! MARKETING = push on aggressive sales force (one of the world largest advertising expenditures – 9.000 reps). Forcing doctors on prescribing behaviour. Valuation of the reps based on reach and frequency. Who will win? a. EQUITY and STOCK PRICE-> in terms of stock price index it is observable a higher stock price from the side of Pfizer in comparison with Merck’s, but at the same time Merck has experienced a more constant and higher ROE (30% - 50%), compared to Pfizer (10% - 30%) b. MERGERS -> Pfizer aim to become the giant of pharmaceuticals. This implies more availability of patents, which means a higher market power. c. ORGANIZATIONAL -> from a scientist’s point of view, Merck is more attractive. The reason is connected to the organizational strategy of the 2 firms. While Pfizer is a marketing and sales giant, Merck is a hub of scientist which feel free to follow their research instinct d. STRATEGY -> regarding developing countries (mostly China, but in general Asia and Africa), the firm that will start to invest before in developing countries may take over massive market share e. GENERICS -> due to the increase of R&D expenditure, but the decrease in new chemicals entities, the firm that will invest/possess more in generics can take over the market share (generics: 20% → 56%). In order to maintain generics in the long run, Pfizer is advantaged due to its marketing approach. f. PIPELINE -> the track record of successfully taking drugs to market, and drugs that have passed FDA scrutiny. Time and costs to launch a new drug. Pfizer is not good as Merck’s, it had not developed a blockbuster since Viagra in 1998. Nowadays, the Pharma industry is today the “LIFE SCIENCE” industry → particularly thanks to the revolution induced by big data, prevention and diagnostics are key for the future! The recent COVID 19 pandemic has further demonstrated that the broad sector of life science represents an essential pillar for the future. 6  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS TECHNOLOGY impacts the competitive environment. Especially regarding the rivalry among existing competitors (tech-based firm or M&A-based firm?). INNOVATION can be leveraged as a differentiation strategy. - Merck more innovation (but less M&A) to produce BLOCKBUSTERS - Pfizer less innovation (but more M&A) to acquire firms → COST CUTTING COMPETENCES at the core of technology/innovation a. Core Competences → unique resources that are hard to imitate and substitute; give rise to important technologies and innovations i. good scientists, good research environment, R&D b. Complementary assets → resources hat help funnel technologies and innovations to the marketplace i. MFCG, Marketing, Salesforce MERCK – science led PFIZER Develop new markets with less rivalry, Buyer power, rivalry and entry encourages differentiation in prices. merger. Superior capability is marketing ➔ Do good science ➔ Keep the pipeline filled ➔ Hunter of new drugs, not gatherer 7  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 2. VIDEOGAME INDUSTRY Nintendo and Sony The videogame industry started in the middle 1970s. It was a completely new industry from arcade games → to houses (first = Magnavox with Odyssey) and it is characterized by dynastic succession (5/6y) due to: ✓ Superior graphics ✓ Realistic action ✓ Big first mover advantage and low prices The main target is KIDS + TEENAGERS (≈ toy industry) and usually consoles are sold at loss to regain on cartridges/games. Sony has dominated the videogame industry since 1994, but Nintendo Wii’s ease of use, innovative motion-sensitive controller and simple but fun games had made the console a hit with all demographics, despite its less advanced technology. ➔ Nintendo had stolen a market share of people who were traditionally not addicted to videogame! → new target/broad audience (”casual games”) Before 1970s →→→ After 1970s Game producers - Technology became more productive, and it Consumers can go to manufactured fixed allowed to produce smaller and more stores and find consoles consoles through stores flexible consoles → bring to HOUSES with cartridges - Technology has boundaries → more POWERFUL TARGET Kids + Teenagers Close to the marginal costs -> Cannibalization? PRICE razor-blade strategy - Between consoles - Between games Punctuality of delivery and launch TIME INDUSTRY First Mover Advantage is crucial Too many developers -> lower retail prices and quality -> no more money for Allow third parties to produce software COMPATIBILITY compatible cartidges? Atari VS Activision Licensing agreements Image quality + reality + speed of GAMING processing High volatility and change of LEADERSHIP leadership BLOCKBUSTERS Mario Bros, FIFA, Zelda... 8  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci The industry EVOLUTION After Magnavox, a long series of competitors tried to enter, such as I. 1972-1983 = Atari, Fairchild Camera, Activision VCS console – games on interchangeable cartridges and a novel joystick → games (Pong, Space Invaders) and consoles separated! → Diffusion of independent developers (ex. Activision) II. 1983-1990 = Nintendo III. 1988-1994 = Sega IV. 1995-1998 = Sony V. 2001-2005 = Microsoft Regarding COMPATIBILITY, there are 2 different approaches: LOCK-OUT unwanted developers FREELY AVAILABLE Installing an authentication chip – third parties have Atari did not lock out unwanted developers with its console to sign a licensing agreement in order to develop VCS 2600 in 1970s. This caused the lawsuit against games, as Nintendo did with the NES in 1983. Activision. Control of the market (quality, n° of suppliers, cap Too many developers → lower retail prices (1$) → no on n° of games per developer) + royalty from third money from software → poor quality + cheap prices parties developers ➔ Retailers have low margins! During the 1980s, the videogame market plunged loosing 97% of sales in 3 years due to the proliferation of cheap and low quality software. During the 1990s, Nintendo took the leadership with the NES and the industry started to become more familiar with the day by day of consumers → having a console at home started to be perceived usual. Revenues ↑, focus on 1-2 hit games per year the technology improved from 4/8bit to 32bit with prices between 200-450 Euro. Then, SEGA replaced Nintendo with Genesis in 1988. The firm took advantage of Nintendo’s delay launching the new console + the incompatibility between old and new Nintendo’s consoles. Sega locked out unlicensed game developers (relying on royalty fees) and came out bundled. → COOL IMAGE among teenagers → Lots of titles With the entry of SONY in 1995, firms started some partnerships with third parties’ developers (especially Sony), in order to increase the game offers only for their platform. NINTENDO – entrant from Toy industry SONY – entrant from Electronics industry Third-party gross profit = 11$ per unit Third-party gross profit = 18$ per unit ➔ 20$ royalty ➔ 9$ royalty and support to third-party ➔ Cartridge format ➔ CD-ROM format o More expensive o More storage capacity o Less flexible o Cheaper to manufacture o Easy to increase production TARGET → teens + kids TARGET → more mature ➔ Sony attracted more outside support than Nintendo!!! Then Sega tried to launch a very high-quality console, but due to problems within the supply chain, the firm was forced to reduce the supply of machines available at launch – and also only 4 games were ready! 9  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Sony came out with PlayStation 2 in 2000, a superior graphic with internet connectivity console. The firm was able to exploit its customer base and strong relationships with game developers. Microsoft attempted to enter the market in 2001 with Xbox, but they failed because: × Sony’s first-mover advantage × Xbox priced too high × Console’s design was too large × No really focus of Microsoft – they just entered because they were worried about Sony × Weak relationship with Japanese game developers – it was not able to establish partnerships NB furthermore, they cannibalized their own computers industry, causing $8B loss! At the end of the day, Sony is the only platform which was able to maintain the leadership position for 2 console generations in a row! Current Challenges However, with the increasing in revenues and quality, industry operating margins decreased (because market reached maturity + no radical innovation). So, starting from the 2000s, with the emergence of internet connectivity and DVDs, the goal switched from making profit from consoles and cartridges → to making profits from cartridges and additional services (ex. PSN). - FASTER CHIPS - BETTER GRAPHICS - MULTIMEDIA FUNCTIONS - ONLINE During the 2000s, consoles are typically sold bundled with some blockbuster games. New trends: - WII in 2006 → less advanced consoles with a lower graphic processor. But the console is innovative, user-friendly and family addicted (AUDIENCE ↑↑) o Wireless and motion-sensing controllers o Active gaming to dictate actions o MII channel → build customized characters - FREE-TO-PLAY (ex. Fortnite) - DIGITAL format SALES What Sony should do? Sony should implement a comprehensive strategy, learning from the industry structure and from the past experience mistakes: BRAND IDENTITY = it should NOT change is brand identity trying to focus on Wii’s customers, Sony has trusted and consolidated clients over different generations (since PS1), since Sony’s market power has lasted for two generations (only console that did it) CHANGIN THE PRICE PERSPECTIVE = Sony could lower even more its console price and spread the price in some lock in complementary services such as PSN (→ XBOX LIVE), the strategy of loss leader 10  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci IMPROVE PARTNERSHIPS = in order to enhance the game experience → exclusive features with some best seller games (ex. Legends cards on FIFA), only on PlayStation PUSH SALES of DIGITAL GAMES in order to: o Remove costs of DVDs o Offer a service to gamers (ex. FIFA has always run out of stocks the first week of sales ) INVEST ON E-GAMING SUPPORT FREE-TO-PLAY – Freemium services (inducing consumers to pay premium services) → this is fundamental to fight substitutes (such as mobile phones free games) NETWORK EFFECT → compatibility between different products can challenge the future (PS + Spotify + Netflix + …) 11  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS PRODUCT INNOVATION focused on the formation of product standards. Radical Innovation → it requires a different set of skills and capabilities and it favours the emergence of a dominant design Incremental Innovation → based on the same skills and capabilities In this case, markets like to converge in a specific type of product innovation which is the PRODUCT STANDARD (or Dominant Design), such as Atari’s console, Sony’s graphic… ➔ It is adopted by the majority of the producers typically creating a stable architecture on which the industry can focus its efforts. It presents a set of product attributes that are liked by consumers and stakeholders of the industry. TECHNOLOGY evolves over time across different standards and comes from different backgrounds (ex. Nintendo from toy industry, Xbox from PC industry…). The evolution of technologies follows a cycle. Competition stimulates radical innovation, thus the emerging of a DD (ex. Sony’s graphic) → then we have incremental change aimed to lower the costs (process innovation) → then there is a technical discontinuity → so competition moves to design competition → new DD ADOPTION is crucial for the formation of a standard. The first mover advantage in develop the best alternative of a DD is fundamental (ex. Sony with PS editions, Wii…). NB “crossing the chasm” in Rogers’ curve → some comps are not capable to cross the chasm (when they try to reach the critical mass), getting lost during the evolution of the industry → the success of a DD depends on the ability to reach them! Regarding the Rogers curve, we can also identify respectively the distribution of adopters (blue line) and the adoption curve (yellow line). PLATFORM ARCHITECTURE stimulates adoption → the role of suppliers is crucial! In the videogame industry, partnerships between game developers and hardware makers are crucial to improve the whole ecosystem (supply chain, customers, partners and distribution) → partnerships + joint venture + incentives (ex. Microsoft was not able to build a network of developers) Important to identify partners, competitors and potential competitors → nurturing the network! COMPETITORS COMPLEMENTORS Your customers value your product less when they have Your customers value your product more when they the other player’s product have the other player’s product 12  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 3. BOOKSELLING INDUSTRY Amazon VS B&N In the 1990s, the book industry in the US reached $26B revenues with an annual growth of 5.4% of consumers expenditure in books. The market is suffering from substitutes (cable TV, VCRs, videogames…) → it is a very differentiated market in terms of price and volume. It is a cyclical market, concentrated on weekends and in the fourth quarter of the year. Most books began with authors, who sold the rights of their works to publishers in change of a flat royalty rate (10%-15%). Traditional Bookselling The concentration among PUBLISHERS was massive (40.000 among the US but 20 of them accounted for 88% of the market share) → acquisition by media conglomerates. They sold books on a consignment business (they could be returned to published for full credit). ➔ Problem of high return rates → publishers started to offer 3-5% discounts for waiving return WHOLESALERS and RETAILERS played an important role in the industry → books flowed through wholesalers and retailers, rather than directly (they received discounts 44% - 55% + cooperative marketing funds 3%). Which can go to: Book Buyer Publishers Wholesalers - 24% Dir. Subscribed - 13% Dir. Institutions - 25% Retailers - 35% WHOLESALERS RETAILERS Focus on geography, subject area, type of publishers They grew adding mall-based bookstores and then → few of them had national scope superstores. The market has been revolutionized by - Free and faster delivery importing techniques from other retailing categories: Problems: Pitching books piled high on tables - Avg net profit margin < 1.5% Order a little of everything and quickly restock - Publishers offer better discounts and terms fast-moving titles - Shrinking share of independent booksellers Building purchasing patterns NB Wholesalers are fundamental for publishers to avoid risk (simil GDO in Italy) → solvency of SEs and also because of the large differentiation of the market (SKUs) The trend was moving to SUPERSTORES as the new market standard. These locations were characterized by an immersive experience (atmosphere, cafes, more books, lower price for some categories, massive number of options, book signings, restrooms, extended hours…). Thus, they relied on huge surfaces destination shopping, and they encouraged browsing. ➔ Sense of community (positive relationship time spent - money spent) → HIGH DIFFERENTIATION o Category killers ($20avg superstores > $10avg mall-based) → MARKET SCOPE Superstores in 1991 Superstores in 1996 97 points – 280$ millions 788 points – 3.3$ billion 13  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci The intro of superstores – Barnes & Noble B&N was the largest bookstore chain in the world with sales of 2.45$ billion in 1996. London Riggio opened the first superstore in 1975 in NY. In 1985, B&N acquired much larger mall- based B. Dalton for 300$ mln → the company started to grow its superstore operations from 4 units to more than 400 (they tested several superstore prototypes in suburban locations). B&N adopted a diversification strategy: ✓ B&N imprint books (significant discounts) ✓ A mail-order book business (marketing) ✓ Seasonal calendar kiosks ➔ Nevertheless, B&N revenues were dominated by its bookstores! B&N advantage Centralization of the procurement of books → leverage on scale economies in procurement (greater discounts, superior access to books, longer payment terms) PROCUREMENT and - Large warehouse in New Jersey LOGISTICS - Fast shipping - Own online inventory tracking system (WINGS) Stores were leased - Penetration of new markets Expansion in terms of superstore STORE OPERATIONS infrastructure - Clustering with existing one Huge number of titles with customization selection → BookMaster Superstores had a lower price structure and discounts. They were characterized by differentiation along different dimension MARKETING (selection, service, location, coffees, in-person experiences, signings…) - Customization to local conditions and Brand name How the industry evolved – Amazon Amazon was an online-based bookselling founded by Bezos in 1997. Despite the first years of losses, Amazon’s business expected to continue to incur in losses for the next future. Bezos realized that books could have been a good opportunity for online retailing, and it could have been a good base for branching out later into the online sales of other products (ex. CDs, electronics…) → low barriers to entry! AMAZON advantage Collecting books from wholesalers (and NOT publishers, because they were slow → Ingram was happy to sell Amazon, since wholesalers were losing money ) to its warehouse. It PROCUREMENT and operated on a just in time procurement, which allows several benefits: LOGISTICS - Multiplied inventory turns - Reduction in working capital requirements - Low return rates Headquarters in Seattle - Proximity to the largest book distribution warehouse in the world by Ingram STORE OPERATIONS - Large pool of high-tech talents in the region - IT background → software firm (focused on user-friendly web page) - West coast → East coast better than vice-versa Very user-friendly platform with discounts and automatic email system (+ hot-link) MARKETING Huge range of services (book reviews, recommendations…) + word-of-mouth 14  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Sum-up comparison: BACK-END FRONT-END “In sourcing” of the wholesaling function through Brand image and style centralization of procurement (long-run) Experiential shopping B&N IT system as interface between suppliers, From products to bundling warehouse and stores Increase W2B Private label (store brand) People and IT User-friendly software Strong relationships with wholesalers and Customer interface and suggestions especially Ingram (→ they were losing market “my list” Amazon share in favour of superstores) Price discounts Location and other connections (delivery operations) Even if it was losing money, in 2000s, Amazon was in a better position because it convinced wholesalers to sell books to it, since the wholesalers industry was shrinking; B&N, on the other side, was not able to catch Amazon since their main business was superstore and they did not believe on e-commerce. Thus, they were disincentivized to invest online, due to the superstore inertia! However, B&N tried to launch the online-retailing but the company did not have enough expertise. The B&N online services were organized as an entirely separate company. B&N.com – Booksellers firm Amazon – IT firm Sales were led by general interest and fiction Sales were led by computer, technical and categories captured by AOL’s preferences business books Amazon evolved becoming an IT-cloud company and massively diversified (books, electronics, amazon prime, amazon music…). So, let’s see B&N restructuring and Amazon responses: Pros Cons Hiring B&N CIO Increased commissions to Associates (8% → 15%) Human capital – engineering knowhow Advertisement ↑ Amazon Build its own warehouse in Delaware Discount ↑ Personalized book recommendation service PLATFORM (more category products) Exclusive bookseller on AOL’s marketplace Losing CIO Use of same suppliers → fast delivery Outsourcing for rec. system Rich graphics Fear of defocalization from the core business Minimize sales tax with “front-end” operations ➔ Brand Identity unchanged (few people B&N Synergies through “back-end” operations hired for online branch) Multiple services (Firefly, collaborative filtering…) Joint venture with other major Websites Leverage brand name 15  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS COMPETENCE ENHANCING vs COMPETENCE DESTROYING A technological discontinuity across standards can be competence: i) ENHANCING → it is built on the same knowhow (B&N with superstores, Videogames platforms) ii) DESTROYING → it is built on radically new skills (Amazon with website, Cameras, Tesla with EV) Ex. Biotech VS Organic Chemistry Commerce VS E-Commerce Traditional Bookselling VS Online Technology evolves over time thanks to science and markets and specifically, it evolves through DISCONTINUITIES. Coming back to the distinction: i) ENHANCING → they may reshuffle the market share of an industry ii) DESTROYING → they may put at risk leadership and survivorship of firms (ex. Kodak) ➔ Competences are embedded in the organization because of know-how to do things (organizational competences) and because of agents (skills but also cognition) FIRST MOVERS in competence destroying change have an advantage over the incumbents. They can be: Competitors from other businesses Newly founded Startups They may have useful knowhow They can leverage to build the idea on this new knowhow team, without having fixed costs to maintain Nintendo from content-toys → to videogame Sony from electronics → to videogame Amazon from IT → online bookselling Microsoft from computing → to videogame B&N from traditional book → to superstores STANDARDS take a lot of time to emerge, especially when they are competence destroying based. Some markets can be faster because the industry is characterized by constant pacing of new standards (ex. Gaming – 5/6y for a standard to emerge), while some others are more reluctant (ex. Cars, Pharma, E-commerce). - Very hard to forecast a standard ex ante → a standard can be defined as such only de facto and ex post - Curve of technological innovation → before the emergence of a standard, there are several attempts, and the standard typically emerges at the top of product + process innovation (cfr. Product Life Cycle) o Abernathy and Utterback 16  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 4. AUTOMOBILE INDUSTRY Tesla In general, the AUTOMOTIVE INDUSTRY is characterized by high entry barriers, due to: - Massive investments required for mass production - Economies of scale only at high volumes - Distribution and assistance networks The ELECTRIC CAR industry is still currently a bubble → data shows that the n° of electric cars sold worldwide is still a very small percentage. Moreover, Tesla shows impressive negative number on its financial statements: even if sales are growing, Net Losses are massive (around $900M) However, the market capitalization of Tesla is much higher than its competitors (GM, Ford, BMW…). Tesla value is subjected to speculation → main drivers: Musk figure Future projection of cashflows Market share is increasing, and it is the leader in the EV market, which is going to grow! Tesla business model Tesla leveraged two major discontinuities in this industry: i) ELECTRIFICATION → address global warming ii) AUTONOMY → ability of a car to drive itself from departure to destination DIRECT to Direct sales without car dealers CONSUMERS -> few complexities and order online OPEN SOURCE Patents shared for free to accelerate the INNOVATION transition to sustainable transports BUSINESS MODEL NO HAGGLE POLICY No discounts, prices are not negotiable VEHICLE SERVICE The car does not require maintenance MODEL 4G Wi-Fi connection which allows the car to SOFTWARE PLATFORM self learn from other vehicles WEBSITE AS A SOCIAL Users can connect with each other and Tesla NETWORK -> Elon's blog on the website LOW MARKETING Resources focus on R&D -> only marekting EXPENSES in Tesla brand image and world of mouth INTEGRATION and Acquisition of Energy, AI... DIVERSIFICATION Tesla Insurance 17  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Tesla has a differentiated strategy, in time order: Price Year Performance Comment 92.000$ 2007 Faster acceleration than Ferrari ROADSTER 200.000$ 2017 250 mph, 0-60mph in 1.9s MODEL S 73.500$ 2009 4-door, up to 100kWh, 210-330 miles Mass production 80.000$ - 2012 250-330 miles Delayed launch to 2015 MODEL X 144.000$ 35.000$ 2016 250 miles 1.000$ deposit MODEL 3 450.000 deliveries by 2020 39.000$ 2019 230 miles Customer demand expected MODEL Y 60.000$ 280 miles stronger than Model 3 40.000$ 2019 250 miles Functional truck with CYBERTRUCK 70.000$ 500 miles exoskeleton steel The firm started a diversification strategy, which has several synergies with its core business and allowed the firm to be VERTICALLY INTEGRATED: TESLA ENERGY → Solar Roof, Powerwall, Powerpack TESLA AI → expertise from data + acquisition of DeepScale allowed Tesla to create its own AI-chip that affords full self-driving TESLA INSURANCE → micro-targeted pricing for car insurance to Tesla owners, based on the driver’s driving risk Do not retrofit ICE cars to build The industry was not initially electric cars, but start from scratch! scalable (50.000$ loss each TESLA’s strategy (1) car) + lots of time production 1. BUILD A SPORT CAR → signaling that electric cars are as powerful as gas cars a. Hype – the best electric car b. Proof of concept – Tesla groupies could try demonstrative prototypes c. Cool image – record speed (“an electric car is more than a golf cart”) + Lotus partnership 2. USE THAT MONEY TO BUILD AN AFFORDABLE CAR → signaling this business can be extended to average costumers a. Model S built for scalable production (from scratch) = Larger market → larger production → costs ↓ b. Improved quality and line extension → Model X 3. USE THAT MONEY TO BUILD A MORE AFFORDABLE CAR → Model 3 as he first mass- market electric vehicle, completely affordable and cheap → DEMOCRATIZATION 4. PROVIDE ZERO-EMISSION ELECTRIC POWER GENERATION OPTIONS → sustainability mission through diversification → SolarCity ➔ Tesla as the world’s first fully integrated clean-tech energy company ➔ The mission for tesla was to accelerate sustainable transportation and sustainable energy! 5. DON’T TELL ANYONE → the company is still losing money 18  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TESLA’s strategy (2) 1) CREATE STUNNING SOLAR ROOFS with SEAMLESSLY INTEGRATED BATTERY STORAGE → SolarCity has been turned into one of the first fully integrated sustainable energy companies (energy generation + energy storage) 2) EXPAND THE ELETRIC VEHICLE PRODUCT LINE → to address all major segments (SUVs, pickup trucks, heavy-duty semis) → democratization (+ trucks, + cybertrucks) NB risk of cannibalization!!! 3) DEVELOP SELF-DRIVING capability → 10 times more reliable than manual o Fully autonomous vehicles (sensor feeding, AI, learning algorithms…) 4) ENABLE CARS TO MAKE MONEY FOR PEOPLE → turn the car into an income-generating asset (offer an Uber-like service made up of Tesla vehicles, without drivers)! Finally, in order to make economies of scale, Tesla is now expanding its gigafactories model. Tesla has been the first firm to heavily invest in EV, thus competitors are still behind → competence destroying new market has allowed Tesla to have a competitive advantage (competitors in the automotive business were stuck into investing in traditional cars) - Leader in the US electric cars market - High competition in China, due to government support to local EV makers o Chinese people live in apartment complexes, often with no private parking options to charge the car - Europe is still reluctant to EV and the car market is very fragmented ➔ Competition is mostly for TECHNOLOGY, AUTHONOMY and PRICE 19  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS DISCONTINUITY is a breakthrough innovation that changes the state-of-the-art technology in a given industry. Discontinuities are very powerful, and they have an influence on the competitive game of a sector → if the leader of a discontinuity is a new entrant (ex. Tesla in the automotive industry), and the other firms are not investing to catch-up, the new entrant will have all eyes on it! - They are hard to be identified, since they may be linked to converging technologies - They start from a niche → forward-thinking entrepreneurs can leverage them to take leadership positions (even in a market with high entry barriers) BUSINESS MODEL is how the company intends to make money out of the business idea. CROSSING THE CHASM requires significant improvements compared to the original product version both in: - The value proposition → take the mass market perspective - Product features (cheap, affordable, easy…) ➔ Evolve the original product in order to give benefits to consumers and increase the appeal! Regarding Tesla, the firm has been apparently able to cross the chasm in a sense that it started a differentiation strategy in order to intercept not only the early adopters, but also the mainstream market. This step has been done thanks to the Model Y and the Model 3 (cheaper, more familiars, uncertainty reduced…). DOMINANT DESIGN can be defined only ex post, after a period where several options are offered → EV lacks the DD!!! For this reason, the sector is going to grow and Tesla value is subjected to speculation → growth in EV is linked to: ❖ We do not have a DD ❖ We have a lot of SPACE in the market ➔ However, from a financial perspective, EV market is not working! Expectations are playing an important role in terms of market capitalization! EXPECTATION that a specific company will be the one to define the DD for the electric car market → it can generate massive market capitalization growth! Ex. Tesla in the EV market META in the Metaverse Pfizer in Covid vax 20  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 5. PHOTOGRAPHY INDUSTRY Mass production Value Proposition Kodak Low cost International Kodak was founded in 1880 in New York. Distribution BLACK and WHITE ERA | its competitive advantage was based on: Extensive advertising ✓ User-friendly product ✓ Strong marketing approach (“You press the button, we do the rest”) Customer focus ✓ Relationships with retailers ➔ The firm used a razor-blade strategy → lower price of R&D cameras, higher prices for films COLOR FILM ERA | Kodak pushed on R&D and kept the entry barriers high → no enter attempts! → Film’s composition balance of chemical and physical properties → Know-how in manufacturing very hard to imitate In 1960s, Kodak’s photo-finishing process became the industry standard! Kodak adopted an incremental R&D, in order to avoid anything risky or completely disruptive (“procedures and policies to maintain the status quo”). DIGITAL ERA | In 1981, Sony announced the Sony Mavica, that even if it wasn’t a proper digital camera, it has been considered the “pioneer of the digital era” → DISRUPTION! Kodak was able to fill the gap only in 1990 with the Kodak Photo CD. CHEMICALS - until 1980s ELECTRONICS - from 1980s Cameras + Films Cameras and CDs TRADITIONAL PHOTO DIGITAL IMAGING You push the button, we do the rest You push the button, and then you do the rest by yourself! Based on chemistry Based on digital Razor-blade strategy No more razor-blade → find venues to deliver cameras Chemical skills + know-how Different kind of skills required Massive R&D in Chemical Higher quality Silver halide Less costs More competition More services More margins for retailers DISRUPTION → Kodak Photo CD in 1990 Before: Kodak or Fuji → Camera Retailer → CONSUMER  Kiosks  Kodak After: Kodak or Fuji → Camera Retailer → CONSUMER → personal image developing ➔ The whole business of films is killed (where Kodak had competitive advantage) → RAZOR-BLADE killed CD did not work for several reasons: amount of storage, price… ➔ They made a lot of diversifications (diagnostics, imaging, bioscience…) – mismatching policies! 21  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Exploration and Diversification Kodak acquired multiple DIVERSIFICATION bioscience and lab research firms Consumers learned they could get high- STRATEGY quality pictures with film that cost much Fuji Film enter the market with less than Kodak's a 400-speed color film and COMPETITION heavily invested on marketing and sponsorships Retailers devoted more space to private labels because they could make higher margins Kodak wanted to enter the digital business but they needed: There was a mismatching between EXPLORATION - New technologies + people what they wanted to do and the policy - Act fast to anticipate customers they were maintaining! need FILM-BASED DIGITAL Kodak believed both in They tried to apply the knowledge acquired in hybrid films and electronic digital imaging to the motion picture business IMAGING imagin technology and commercial products Kodak was moving to an information-based company, acquiring several firms! The goal was to blend old with new technology (particularly with cameras) → keep alive the photo finishing (= have the best of both worlds). ➔ Attempt to apply the knowledge acquired in other businesses! Fisher’s strategy The new CEO, Fisher, focused on: ✓ CORPORATE → stop diversification and focus on the business, focus on imaging and development of China as a market that can absorb film ✓ MISSION → Electronic + Imaging → try to find synergies but separating the 2 operations ✓ CULTURE and ORGANIZATION → division of electronics, attempt to create an open and confrontational culture (typical of high-tech companies), attempt to create an electronic culture ➔ He attempted to be present in all the five links of the imaging chain, since Kodak possessed the capabilities to do it → Kodak as a high-tech company! ➔ Fisher realized that doing everything was not sustainable! !!! PROBLEM !!! Kodak insiders resisted Fisher’s initiatives → he hasn’t been able to change the deep mentality of a mass of middle-sales managers. “fear draw paralysis” → their arguments were that Kodak would have never succeeded in that market and that the digital market was not profitable! The CEO tried to introduce the Motorola style of open discussion, but the management was to hold to the razor-blade culture! 22  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci From 1998-2003, Fisher developed the company under 2 pillars: 1. “NETWORK and CONSUMABLES”-based business model 2. HORIZONTAL COMPANY (outsourcing most of digital photographic equipment and build alliances) But, Kodak was caught off guard by Fuji, which slashed prices in 1998 to grab mkt share in the US → Kodak’s mkt share dropped from 46% to 42% in one year! Fisher stepped down and Daniel Carp became CEO, that added 1 pillar: 3. PROTIFABLE BRIDGE between the old and new worlds of photography Carp aimed to change the pillars of Kodak (CORE COMPETENCES → CORE RIGIDITIES), which were based on Network and Consumables – based business model and on a horizontal view → importing Motorola experience → CORPORATE RESTRUCTURING With heavy investments in developing software for image manipulation (enhancing what could be done on a computer to a digital picture and at a retail store to a traditional film). EARLY KODAK – Fisher NEW KODAK – Carp Film, Paper, Chemicals Image capture (cameras), services (online photo manipulation), image output (kiosks, inkjet printers) SUCCESSFUL UNSUCCESFUL Picture maker Kiosks Digital cameras – unprofitable Retail stores Inkjet printers Regarding the current digital imaging industry: DIGITAL MINI-LABS DIGITAL KIOSKS High-quality digital files Eliminated scanners from the system Fuji had 60% of the mini-labs mkt Kodak dominated the offering of kiosks 23  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS COMPETENCE-DESTROYING CYCLES → Kodak is an example of a firm which was not able to take the rhythm of new Industry Standards (traditional photography → digital imaging, horses → cars, retail → ecommerce, music → clouds). INCUMBENT TRAP → if you are very growth oriented it is good, but if you remain stick and rigid to your core competences → you lose the grip with competitors and once a disruption takes over, another firm will take the leadership (ex. Fuji Film). You as an incumbent should be able to transform your core competences, avoiding the risk that they become core rigidities! HIERARCHIES → rigidity within the hierarchy can be damaging. The CEO should be able to identify the PIVOTAL POSITIONS (people that have a strong cultural influence and concrete impact within the firm) and change their mentality, in order to drive the whole management chain → work on Jaws company culture Within the whole panel of work position of a company, there are some of those positions → PIVOTAL POSITIONS = they are positions disproportionally influencing the company performances. So, it does not make sense to meet ALL the people that are working for every position. In terms of CEO, you have to understand the drivers of managers and the PIVOTAL POSITIONS! Middle Managers TOP STRATEGY Jaws company culture COGNITION → change the mind of people that work for you, thus acting on their cognitive frameworks, is one of the most important pillars within a company. In Kodak, for example, managers were sticked to old-school imaging and they still tried to apply the logic of the chemical industry to a completely different world! ➔ Cognitive inertia is the difficulty to understand the nature of the new business! 24  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 6. DIABETES INDUSTRY Eli Lilly Lilly’s principal competitor in the worldwide insulin business was Novo Nordisk, which introduced insulin pens to the EU market several years earlier with great success → but pens were a more convenient way for patients to take insulin (< 10 seconds). Insulin was Lilly’s second-largest revenue source, with over $5B sales. Early 1900s | No effective treatment for diabetes (only diet) From 1920s | Pancreatic extraction of insulin from animals and subsequent injection into human patients affected by diabetes → Eli Lilly first company, followed by Novo Nordisk Main issues related to insulin at this stage: - impurity (can cause side effects) - human resistance (some humans are resistant to animal-derived insulin) - insulin shortage (decreased red meat consumption → Lilly genetically engineered these bacteria that could synthetise and secrete human insulin) Until 1980s | Eli Lilly was basically a monopolist, thanks to its organizational structure and R&D. But then, the firm developed HUMULIN (100% pure insulin), which however did not disrupt the market because: - Premium price - Retailers reluctant to add another SKU ➔ Eli Lilly stopped investments on insulin! ➔ Insulin started to be seen as a commodity pharma product! HUMULIN (Eli Lilly) PENS (Novo) Develop the best technology – TECH DRIVEN Start from the market need – MARKET DRIVEN Incremental innovation Completely disruptive Premium price Price razor blade Retailers had already too many SKUs NB Lilly was not able to find a solution compatible with the mismatch in flow rates of insulin injection among patients → pens are a way more user-friendly (Lilly launched Match, which solved the problem of multiple injections, but in any case, it was the same product) Lilly’s Organizational structure Lilly followed an opportunistic path of growth → entering a business of treating particular disorders by serendipity (random success played an important role in the fortunes of pharma corps) 25  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci RESEARCH LABS Discovery of all new compounds DEVELOPMENT GROUP Development of the formulations MEDICAL DIVISION Design and Management of the clinical trials ORGANIZATION FUNCTIONAL MANUFACTURING Manufacturing the drugs ORGANIZATION MARKET RESEARCH Keep track of all diseases Divided into Endocrine, Central Nervous MARKETING System, Internal Medicine "Affiliates" (Lilly had significant position in DISTRIBUTION and SALES companies within each country) -> detailing FINANCING Aligned with the affiliates' structure Lilly’s SALESFORCE did much of its selling through “detailing” → salespeople call on physicians to explain the advantages of their drugs and persuade them to prescribe their company’s drugs over comps! But, from 1980s, this business was not effective anymore due to: governments limitations + crowding within doctors’ schedules (too much detail) Problems in the treatment of DIABETES Effective treatment of diabetes required extensive behavioural change by patients (which are not typically required from a chronic disease): multiple injections + monitoring + food diet + physical exercise + weight monitoring. Lilly’s managers believed that for diseases toward the bottom of the map, physicians were the primary determiners of therapy; nevertheless, for chronic diseases requiring behavioural modification, the patent effectively determined the nature of its therapy (ex. some patients do not follow medical indications) → high societal costs! ➔ Lilly viewed success in the diabetes care business as an issue of effective consumer marketing, rather than it being a traditional pharmaceutical business!!! 26  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci The industry’s innovative response Technology to measure blood glucose levels was expensive and PORTABLE BLOOD large, exclusively in laboratories GLUCOSE Miles Laboratories developed a portable blood glucose meter (accurate, fast, auto-sufficient patients) IT for INTERACTION Data generated from blood glucose tests could be stored -> Analyse data PHYSICIANS - -> Compare to larger patient population PATIENTS -> Recommend adjustments Novo Nordisk's pen was a faster and more convenient way to inject insulin DEVELOPMENT of Increase in profits, revenues and EU mkt shares INSULIN PENS Lilly introduced a pen in 1991, but not before 1995 in the US (they were worried of cannibalization and discouraged by all the money already spent for Humulin) Lilly founded CDS in 1994 as an outlet where patients could get CONTROLLED the information, educational materials, diet management aids and equipment DIABETES SERVICES -> Provide motivation and education for patients! NB Lilly did not see their cure as a traditional pharma business, it was not their role to change the consumer’s behaviour. But, in reality, the main issue of this disease was to change the culture in the consumer’s behaviour! NB Novo was in a market (European) where multiple shots were already an habit → the pen was well-accepted by market behaviour of European people (easier match technology – consumes)! On the other side, a change within the customer’s opinion for Lilly was hard in the US. 27  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci TAKEAWAYS DISRUPTIVE INNOVATION is an innovation that helps create a new market and value network, and eventually goes on to disrupt an existing market and value network, displacing an existing technology. In tech terms, a disruption is an innovation that improves a product/service in ways that the market does not expect. → a discontinuity can sometimes derive from a change which is not necessarily competence-destroying, but it is more architectural (ex. mini fan, mini copier…). It is not about a radical change → rather it is a re-shuffling of some dimension (ex. better serving time profile and changing “package”) o In the digital age, this is becoming more important! Ex. Uber – Taxi Hotel – Airbnb Travel agencies – Expedia LOW-END disruptive HIGH-END disruptive The innovation is cheaper and of lower quality, The innovation offers better performance but on compared to existing products dimensions that current customers do not greatly ↓ value The innovation appeals to a low-end price ↓ sensitive segment The innovation appeals to a super-premium niche ↓ ↓ Over the time, the innovation’s performance on Over the time, further developments improve the the mainstream attributes increases → innovation’s performance on the attributes mainstream customers are attracted → the mainstream customers value to attract more of sustaining innovation is disrupted these customers Ex. Canon copiers Ex. disk drive industry (14 vs 8 inch disk drives) NB in both cases, mainstream market does not value the innovation’s particular attributes at the time of product innovation. MARKET DRIVEN How to manage a disruptive innovation – R&D + MKTG First of all, technical performance must always be associated with a detailed understanding of user needs → they are the key in the development of new technologies, but they are often overlooked in the resource allocation process. TECH DRIVEN A disruptive innovation can be defined as such only ex post. This means that the innovation concerns some performance attributes that MAY be appreciated in the future by mainstream market (but it is a possibility) → try to identify as soon as possible where market needs are going! So, there is a need of COORDINATION between R&D and Marketing functions. The threat behind Disruptive Innovations is based on 2 classic mistakes: 28  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci × R&D labs can get it right, but the Marketing department is driven by mainstream customers who drive the resource allocation process × Marketing department can get it right, but the R&D is driven by a technology orientation and its evolutionary trajectory Can incumbent develop Disruptive innovations? DIs are sometimes developed by entrants, but sometimes by established firms. For example, let’s give a look at the disk drive industry: - Incumbents’ marketing departments did beta-testing on DI, but early adopters rejected it o By simply listening to their customers, they developed sustaining innovations ▪ New companies (sometimes spin-offs) developed DIs for niches Customers in established markets embraced the new architecture for gains in speed, cost and flexibility o Incumbents take the new models off the shelves to fight back emerging competition In conclusion, the investment of the one who introduce the innovation on traditional performance parameters also enhance the performance of the technology on the core market! What are the alternatives for an established companies against a disruptive innovation? 1) Focus on existing distinctive competences (ex. Gillette VS Wilkinson in 1960s) 2) Attack who threatens you (ex. BA VS Ryan Air) 3) Innovate in the same way (ex. Barnes and Nobles VS Amazon) 4) Innovate in a different way (ex. The introduction of Swatch) 29  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci DYNAMIC CAPABILITIES The number of patents of a specific industry is very high at the beginning of the industry, while it is decreasing with time (cfr. Abernathy and Utterback): 1- At the beginning = RADICAL INNOVATIONS ➔ “Ferment” era → R&D race 2- “Transition” era 3- At the end = INCREMENTAL INNOVATIONS ➔ “Consolidation” era At the same time, the evolution of the industry brings to invest more and more in process innovation → once the DD Design is revealed, firms increase investments in PROCESS (efficiency ↑). Once the industry reaches the maturity stage, a new industry starts to grow and the process re- start following the same path → DISCONTINUITY The period of discontinuity can be exogenous (ex. Camera) or endogenous (ex. Automotive, Biotech). Once this period occurs, firms have to completely change the competences! When technology switches, firms have to be capable of changing ORGANIZATIONAL and COMPETENCES structure. But what about low-tech/innovation-intensive industries? There are some sectors (ex. music, design) that are characterized by low levels of technology. Some studies show that these sectors follow a similar pattern. → ex. in the case of Fashion, the industry structure shows the emergence of DD (maschile, minimale, kitch) which consists of different styles, and the attempts of every comp to follow these DDs! → ex. in the case of modern Music, the industry structure follows different ways of expressing music which become DD (ex. rock, blues, disco, pop, rap, house, trap…). → ex. in the case of TV formats, we have the emergence of some DD (reality shows, TV series, mini-series… ➔ Industry shakeouts occur also in innovation-intensive sectors where technology is less important (ex. fashion, design…). In these cases, firms are able to survive and shakeouts impact leaderships: HIGH-TECH LOW-TECH Shakeouts determine one survivor, and Shakeouts impact leadership and other firms survive the other firms are killed in niche positions or non-leadership positions ➔ The reason is connected to IDENTITY These types of DDs put into discussion the identity of firms → so basically, leaders need to be adjourned with competences and creativity (ex. the Armani style) in order to maintain their leaderships, not in a way of new competences but in order to interpret in a different way the competence you already have. What is the best thing to do in a dynamic environment? o Maintain identity and coherence o Reinterpret the market in your style 30  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci Olivetti Olivetti was based on MECHANICAL competences → everything was organized to improve the mechanical skills within the functions. In 1950s, the advent of electromechanics introduced the logic of calculus in different ways. So, the firm caught the opportunity and followed the path of electronic, making alliances (ex. Alliance of Bull) and opening new labs (ex. New Canaan). These labs were composed by a number of people that was characterised by different skills (mechanical, electronic, engineering…). ➔ In early 1960s, Olivetti came out with the first COMPUTER (semi-conductor with cathodic tube) In order to continue the typesetting and calculator business in the mechanical technology, Olivetti decided to sustain the Mechanical Competences with ventures, but it failed in high level of debt (private equity and banks in Italy caused high costs of capital) → BUDGET PROBLEMS The period of transition has been very foggy and experts within the sector were discouraging investments in the direction of a New Dominant Design. With the deaths of Adriano Olivetti and Mario Tchou, the company has been re-organized, and the market has switched to IBM (70% of mkt share). FIAT (a mechanical factory) acquired Olivetti, but the new DD (which was the electronic function of Olivetti) has been sold to General Electric. The fortune of Olivetti was that Piergiorgio Perotto decided to come back to Ivrea and invest in Electronics → first PC! The type of engine of this device is electronic-based intelligence, and it has been a hit in the market. Despite this, the entire R&D by Olivetti was still trying to produce mechanics without electronics → the problem was that these alternative products were not efficient as electronic ones! NB this case shows that with the emerge of new DD, a firm has to switch its capabilities do adapt its structure and catch-up with what the market needs! Ex. Apple followed this path – TV → computers → Tablets → Smartphones → Watches Ex. U2 band followed this path DYNAMIC CAPABILITIES Companies that are capable to move and overcome the technological discontinuities are always good in ORGANIZATION capabilities. The theory of adaptation is a basic insight of what a company should do to follow a market change → the survivors are not the strongest or the most intelligent but are the ones who are the most adaptable to change! ➔ CORE COMPETENCES = they are made of technologies, organization system, human capital, flux of information through, specific incentives… Each era is characterized by a proper set of core competencies. Then, a discontinuity brings to a new set of core competencies → the firm which is more adaptable to switch to the new set of competences is able to survive = FLEXIBILITY! ➔ DYNAMIC = capacities to renew competences so as to achieve congruence with the changing business environment 31  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci ➔ CAPABILITIES = the role of management in appropriately adapting, integrating and reconfiguring internal and external organizational skills, resources and functional competences to match the requirements of a changing environment DYNAMIC CAPABILITIES are the firm’s abilities to integrate, build and reconfigure internal and external competences to address rapidly changing environments. CORE COMPETENCES t1 DISCONTINUITY CORE COMPETENCES t2 - Technologies - Technologies - Organization --> SENSE - Organization - Human Capital --> SEIZE - Human Capital - Incentives --> RECONFIGURE - Incentives DANGER OF CORE RIGIDITIES They depend on a lot of variables (ex. Kodak) → sources of inertia: skills, cognition, hierarchies, organizational culture NB Olivetti was able to adapt its mechanical competencies (based on visionary leaders, organizational separation, co-optation, R&D) into electronic competencies! Ex. Bocconi decided to change its paradigms in 1990s. The university aimed to become Top class around the world → start lessons in English (but professors did not speak English)! It took a lot of time, but this is an example of how to overcome a core rigidity → 20 years to reach the Top! SENSING → spotting and identifying opportunities o Direct internal R&D and select technologies o Tap supplier and complementor innovation o Tap developments in exogenous science and technology o Identify target market segments SEIZING → R&D, investments and competence building o Identifying the business model and customer solution o Selecting decision-making protocols o Enterprise boundaries and control platforms RECONFIGURING → recombination and organizational change o Decentralization and near decomposability o New governance o Co-specialization o Knowledge management 32  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci How to deal with CHANGE Adapting to change is very hard but it is extremely convenient. - Not always (ex. Polaroid are always the same) There are 2 schools of thought: 1. Louca and Mendonca → firms struggle adapting tech and are replaced 2. O’Reilly and Tushman → there are several cases explaining how to have success in adaptation ➔ But, if you want to adapt you need to find ways to create new coherent competences, which allow you to overcome core rigidities! a. Education → Knowhow = starting from 1990s, literature introduced students to challenge with inertia and to take into consideration this core rigidities problem b. Digital Transformation = huge wave induced by technology across industry in the last 10 years which spurred entrepreneurship and revamped the notion of creative destruction What we need to change? The problem of making new capabilities is to establish new knowhow which is based on new knowledge. This depends on the capacity to move from a set of capabilities → to another set of capabilities! ➔ Dynamic Capabilities are Higher Order of Capabilities and allow the transition 1. Sense Higher Order of Capabilities means that they are like a DERIVATIVE of 2. Seize COMPETENCES. While organizational competences are functional, HOC 3. Reconfigure represent the levers to change the status quo in conditions of change! Any strategic decision has an implication into the organizational behaviour (structure, incentives, systems) → alignment between the decisions and structure! A portion of the organization has to dedicate to Exploration, while the other portion has to Exploit what it has been explored before. MASTERING the PRESENT ORGANIZING for the FUTURE Monitoring the current business Capturing future trends Leveraging existing competences Developing future competences NB the fear is that we are not used to take too many risks in all the organizations → sometimes it is necessary, but the path is not easy and not well defined! NB certain people can make the change, other people cannot → identify as soon as possible who can do it and who is able to do it (PIVOTAL ROLE) At the end of the day, Dynamic Capabilities means having an AMBIDEXTROUS ORGANIZATION. This means setting up always something that could bring advantages to you in the future, allowing the substitution very fast when it is time to do it. Not only we have learned that people change, and not only we have demonstrations of empirical evidence regarding future changes → STAKEHOLDERS outside see you as a leader, so the only solution is to EXPLOIT + EXPLORE In order to be an ambidextrous company: 33  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci ORGANIZATIONAL RECIPES for innovation There are 3 recipes: 1) CORPORATE VENTURE CAPITAL It is about having an organization and invest in companies/businesses so that they can help in fostering innovation (by diversifying risk) a. It is an independent unit that goes out from the company and acts as a VC Ex. Apple Music has been bought from the market (Music Beat), when Apple’s business model was still the old iTunes model (pay for songs/CD) 2) BUSINESS DEVELOPMENT It consists of building a division with its proper R&D, manufacturing, sales → EXPLORING Instead of searching into the market (VC), you create an internal division that aims to explore, without losing the grip with the external movements a. Create a unit inside the company but structurally separated with the purpose to create new businesses! 3) AGILE ORGANIZATION It is fundamental to make choices between alignment-oriented and adaption-oriented activities in the context of their day-to-day work. This is composed by 4 steps: a. Strong and Clear leadership b. Incentives that sponsor Ambidexterity c. Project-based organization d. Electric and Open-minded people i. Big techs → they have the start-up mindset (rotation, change…), even if they are huge The real ISSUE is that changing level consists of the board of control has to deal with change. A lot of time, it happens that we have developments, good human resources, efficient processes… but the board is not inclined to support innovation. ➔ The thing is that boards are focused simply on control, and not on innovation ➔ GOVERNANCE is the main driver to deal with change! A lot of stereotypes need to be overcame: o Seniority o Diversity o Listening to the others 34  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci 7. MOVIES INDUSTRY Disney and Pixar Box office revenues Pay-per-view and video MOVIE industry Disney on-demand Home video sales Walt Disney started in 1934, when it (best $$$ source in L-T) produced some movies, and the strategy Television showing was focused on distributing toys and memorabilia through stores. The culture within the firm was very open and Merchandise Toys, apparels, books collaborative → leadership relied on all employees to generate story ideas! The first big divergence happened Videgames between the top management: ▪ Eisner → management and big Sequels to Less marketing costs, allow to extend the life of ego = very clear view on who was succesful movies the original movie good at its job → he was able to identify and manage the PIVOTAL ROLES ▪ Katzenberg → maniacal and product focused = work ethic and passion for animation Then, due to disappointment around movies after “The Lion King”, the firm suffered from large staff, large budget and lots of time spent, salaries increased. ➔ Katzenberg left the company and founded Fiduciary responsibility → Eisner did not act to do the best for the firm (firm comes before anything else) DreamWorks (with Spielberg) and tried to steal some → he should have promoted Katzenberg of Disney’s best animators In 2002, the new CEO embarked on an aggressive cost-cutting mission (cost of production, less employees, salaries, less characters seen in each frame, less amount of motion in the background) → This was a wrong move, since they were downgrading the product! So, in 2003, Disney set up its own CG animation department → it costed money, tension and depressed morale within the studio (lots of delayed movies). Throughout the period, Disney came to relay more on Pixar → REVENUES + CHARACTERS Pixar Inc. Pixar has been a very successful firm in the animation market. Founded in 1986 by Steve Jobs (as a computer hardware and software firm), the company used 3D computer-generated models and made use of its own proprietary computer animation technology, thus it was able to make animated films faster than its competitors and less costly. Pixar produced in-house excellent 3 proprietary technologies and it focused on short films, also making profits from animated television commercials for companies and products. 35  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci PIXAR's CULTURE METHODICAL STORY CAME FIRST PROCEDURE 1. Everyone must have the freedom to Creativity at all levels communicate with others Primacy of People of the organization 2. Feel everyone safe to offer ideas 3. Stay close to innovations happening in the academic community The 2 companies started to collaborate in 1986 and they made a deal in 1991 where Disney had more advantageous terms (Pixar = receiving a participation fee based on total revenue and fund the overage if production costs exceed a certain budget). Then, Disney acquired 5% of Pixar and made another 10y deal, where Pixar would exclusively produced for Disney at least 5 original full-length animated movies and: - Production Cost would be shared equally - Disney would fund all of the marketing expenses - Pixar would receive no share of any revenues from Disney themes parks - Disney retained the exclusive distribution and exploitation rights to all feature films Disney Pixar 60% of the total movie’s profit 40% of the total movie’s profit Jobs tried to re-negotiate an arrangement with more favourable economic terms → it obtained the rights to produce sequels and to decide who would get television rights The treatment of SEQUELS has been a pain in the neck during negotiations. Jobs wanted to return the rights of 2 yet-to-be released films (The Incredibles and Cars), blocking Disney’s attempts to produce sequels for the 2 movies. So, final offer was: 1. Disney could distribute each of Pixar’s films for 5 years, after which the rights would be returned to Pixar 2. Pixar wanted Disney to give up its co-ownership of past films The 2 CEO, Jobs and Eisner hated each other. So, in 2003, Pixar identified Sony, Warner Bros and 20th Century Fox as potential suitors; in 2004, Pixar announced the end of the relationship with Disney (Disney board members confirmed Eisner was Disney was too much compliance with itself! mismanaging the Pixar partnership and expressed concern CORE CAPABILITIES of Disney were obsolete. that the relationship was in danger). → And Pixar knew that Disney was willing to pay a lot (identify the GOOD BUYER) What did increase Pixar bargaining power: ✓ Disney did not have enough tech expertise → Pixar had a better tech-position ✓ Jobs proved that Tech + Creative can work together → imitate Pixar was hard 36  TECHNOLOGY and INNOVATION STRATEGY | Federico Ceci ➔ Pixar had a competitive advantage very SPACE and TIME make the difference negotiating a deal: hard to imitate, hence Disney should have At t1 → Pixar needed Disney acquired the company! At t2 → Disney needed Pixar more than vice-versa Acquisition? PRO CONTRO Animation was integral to Disney’s corporate It would transform Disney into the studio of strategy (characters from films drove retail in its the 1930s (a “boutique” that was unencumbered theme parks and consumer product divisions) by a large bureaucratic apparatus) - Who would end up running animation in the combined entity? - Would Pixar simply be left alone, as had occurred when Disney acquired Miramax? One solution could be to put Steve Jobs in the board of Disney (but it was already CEO of Apple) → some writers suggested that brand association with Apple would be a positive outcome of the deal! Dangers related to the price valuation → analysts retained it too expensive: - Dilution with Disney trading at a P/E of 17 - Potential creative talent exodus PRO CONTRO Great Movie strike rate Doubts on CGIA Pixar had top CGIA capabilities Significant premium > 30time P.E. Commercial leverage of Pixar characters ➔ Price too high??? Pixar had almost 0 debt and $1B assets Can Pixar work inside Disney? – corporate DISNEY view Pre-emptive defensive move culture Good knowledge of the company – 10y No economies of scale (as usual with vertical Keep on doing their core business (media integration)