Chapter 7

Business Strategy: Innovation and Entrepreneurship

 The AFI Strategy Framework

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 Chapter 7 Outline
7.1 Competition Driven by Innovation
– The Innovation Process
7.2 Strategic and Social Entrepreneurship
7.3 Innovation and the Industry Life Cycle
– Introduction Stage
– Growth Stage
– Shakeout Stage
– Maturity Stage
– Decline Stage
– Crossing the Chasm
7.4 Types of Innovation
– Incremental vs. Radical Innovation
– Architectural vs. Disruptive Innovation
– Open Innovation
7.5 Implications for the Strategist

©McGraw-Hill Education.
 Learning Objectives

LO 7-1 Outline the four-step innovation process from idea to imitation.

LO 7-2 Apply strategic management concepts to entrepreneurship and
innovation.
LO 7-3 Describe the competitive implications of different stages in the
industry life cycle.
LO 7-4 Derive strategic implications of the crossing-the-chasm
framework.
LO 7-5 Categorize different types of innovations in the markets-and-
technology framework.
LO 7-6 Compare and contrast closed and open innovation.

©McGraw-Hill Education.
 Competition Driven by Innovation

©McGraw-Hill Education.
 Dominant Positions Can Quickly Change Due to Innovation

• Traditional networks vs. cable providers

• Cable providers vs. streaming content
• Typewriters to PC’s to mobile devices
• Innovation can be a powerful strategic weapon to
gain and sustain competitive advantage.

©McGraw-Hill Education.
 Exhibit 7.1 Accelerating the Speed of Technological Change

SOURCE: Depiction of data from the U.S. Census Bureau, the Consumer Electronics
Association, Forbes, and the National Cable and Telecommunications Association.
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 What Causes Rapid Technological Diffusion and Adoption

• Initial innovations are foundational for other rapid

innovation.
• New business models make innovation possible.
– Ex: Dell’s direct to consumer model
• Satellite and cable distribution systems
– Enable mass media such as radio and TV
• The emergence of the internet
– Social networking
– Viral messaging

©McGraw-Hill Education.
 Exhibit 7.2 The Innovation Process

• Idea
• Invention
• Innovation
• Imitation

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 Idea, Invention, Innovation, and Imitation

• Idea
– Abstract concepts or research findings
• Invention
– Transformation of an idea into product or process
– The modification and recombination of existing ones
• Innovation
– Commercialization of an invention by entrepreneurs
• Imitation
– Copying a successful innovation
©McGraw-Hill Education.
 Exhibit 7.3 What Is Innovation?

A novel and useful idea that is successfully implemented

©McGraw-Hill Education.
 Strategic and Social Entrepreneurship

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 Entrepreneurship

• Undertake economic risk to innovate

– Results in new products, processes, & organizations
• Agents who introduce change
• Examples:
– Reed Hastings: Netflix
– Oprah Winfrey: Harpo Productions
– Elon Musk: Tesla Motors, Solar City, SpaceX, PayPal

©McGraw-Hill Education.
 Strategic Entrepreneurship

• The pursuit of innovation using tools & concepts

from strategic management
• Fundamental question is:
– How to combine entrepreneurial actions…
– How to create new opportunities…
– How to exploit existing opportunities…
– …in the pursuit of competitive advantage
• Example: Apple
– Innovation in mobile devices

©McGraw-Hill Education.
 Social Entrepreneurship

• The pursuit of social goals AND

• Creation of a profitable business
• Example: Jimmy Wales
– Founder of Wikipedia
• 500 million users per month

– One of the first to grasp the power of an open source

method
– Goal: provide knowledge on very large-scale
– Wikipedia supports via donations not advertising
• Typifies a sense of idealism
©McGraw-Hill Education.
 Innovation and the Industry Life Cycle

©McGraw-Hill Education.
 Innovations Can Lead to New Industries

• IT and Logistics:
– Created overnight express deliveries (Fed Ex)
– Created big-box retailing (Walmart)
• The Internet:
– Online retailing (Amazon & eBay)
– Revolutionized advertising (Yahoo, Google, Facebook)
• Nanotechnology:
– Medical diagnostics and surgery
– Lighter and stronger airline components
©McGraw-Hill Education.
 The Five Phases of an Industry Lifecycle

1. Introduction
2. Growth
3. Shakeout
4. Maturity
5. Decline
• Supply and demand changes as industries age
• Each stage requires different competencies

©McGraw-Hill Education.
 Exhibit 7.4 Lifecycle of the Smartphone Industry
in Emerging and Developed Economies

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 Introduction Stage

• Core competency: R&D

• Strategic objective: market acceptance & future
growth
• Emphasis: uniqueness & performance
• Capital-intensive
– Trying new ideas
– Producing small quantities
• Initial market size: small
• Growth: slow
• Barriers to entry: high

©McGraw-Hill Education.
 Exhibit 7.5 Introduction Stage: Network Effects

• The positive effect that one user has on the value of a product
for other users
• Example: Apple’s iPhone

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 Growth Stage

• Demand increases rapidly.

– First-time buyers rush to purchase.
– Proof of concept completed
• Competitive rivalry: muted (due to growth)
• Product / service standards emerge
– A common set of features and design choices
• Basis of competition: process innovation
• Core competencies:
– Manufacturing
– Marketing

©McGraw-Hill Education.
 Exhibit 7.6 Growth Stage: Product vs. Process Innovation

©McGraw-Hill Education.
 Shakeout Stage

• Firms begin to compete more intensely.

– Weaker firms forced out
– The industry consolidates
– Only the strongest competitors survive.
• Biggest competitive weapon: low price

©McGraw-Hill Education.
 Maturity Stage

• Few large firms remain.

– They enjoy economies of scale.
• Additional market demand is limited.
• Market has reached maximum size.
• Competitive intensity: increases

©McGraw-Hill Education.
 Decline Stage

• Demand falls, often rapidly.

• Strong pressure on prices
• Four strategic options to pursue:
– Exit: bankruptcy / liquidation
– Harvest: reduce further investments
– Maintain: support at a given level
– Consolidate: buy rivals

©McGraw-Hill Education.
 Exhibit 7.7 Crossing the Chasm

Many innovators do not successfully transition from one stage of

the industry life cycle to the next.

SOURCE: Adapted from G.A. Moore (1991), Crossing the Chasm: Marketing and
Selling Disruptive Products to Mainstream Customers (New York: HarperCollins), p. 17.
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 Technology Enthusiasts

• 2.5% of the total market potential

• Often have an engineering mind
• Pursue new technology proactively
• Enjoy using beta versions
• Tinker with the product’s imperfections
– Often provide (free) feedback and suggestions
• Example: 8,000 beta testers of Google Glass

©McGraw-Hill Education.
 Early Adopters

• 13.5% of the total market potential

• Demand is driven by:
– Imagination and creativity
– Intuition and imagination
– “What can this new product do for me / my business?”
• Firm needs to communicate the product’s potential
applications in a more direct way.
• Example: people in line at Apple Stores waiting for
the Apple Watch

©McGraw-Hill Education.
 Early Majority

• 34% of the total market potential

• Main consideration: “Is this practical?”
• Weigh the benefits and costs carefully.
• Observe early adopters using the product.
– Rely on endorsements
• This group is key to catching the growth wave.
• Example: Fisker vs. Tesla

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 Late Majority

• 34% of the total market potential

• Not as confident in their ability to master the
technology
• Prefer to wait until standards have emerged
• Prefer to buy from well-established firms

©McGraw-Hill Education.
 Laggards

• 16% of total market potential

• Adopt a new product only if necessary
• Generally don’t want new technology
• Typically not pursued as future customers
• Their demand is small

©McGraw-Hill Education.
 Exhibit 7.8 Crossing the Chasm:
Applied to the Mobile Phone Industry

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 Exhibit 7.9 Features and Strategic Implications
of the Industry Life Cycle (1 of 2)
Life Cycle Stages
Introduction Growth Shakeout Maturity Decline

Core competency R&D, some R&D, some Manufacturing, Manufacturing, Manufacturing,

marketing manufacturing, process process process
marketing Engineering engineering, engineering,
marketing marketing, service
Type and Level of Product Product After emergence Product Product
innovation innovation at innovation of standard: innovation innovation
a maximum; decreasing; product low; process at a minimum;
process process innovation innovation high process
innovation at a innovation decreasing innovation
minimum increasing rapidly; at a maximum
process
innovation
increasing rapidly
Market growth Slow High Moderate and None to moderate Negative
slowing down
Market size Small Moderate Large Largest Small to moderate
Price High Falling Moderate Low Low to high
Number of Few, if any Many Fewer Moderate but Few if any
competitors large
 Exhibit 7.9 Features and Strategic Implications
of the Industry Life Cycle (2 of 2)
Life Cycle Stages
Introduction Growth Shakeout Maturity Decline

Mode of Non-price Non-price Shifting from Price Price or non-price

Competition competition competition non-price to price competition
competition

Type of Buyers Technology Early adopters Early majority Late majority Laggards
enthusiasts

Business-Level Differentiation Differentiation Differentiation, or Cost-leadership Cost-leadership,

Strategy integration or integration differentiation,
strategy strategy or integration
strategy
Strategic Achieving Staking out a Surviving by Maintaining Exit, harvest,
Objective market strong strategic drawing on “deep strong strategic maintain, or
acceptance position; pockets” position consolidate
generating “deep
pockets”
 Types of Innovation

©McGraw-Hill Education.
 Markets and Technology Framework

• A conceptual model to categorize innovations:

– Market (existing/new) dimension
– Technology (existing/new) dimension
• Four types of innovation emerge:
– Incremental
– Radical
– Architectural
– Disruptive
• Each type of innovation has different strategic
implications

©McGraw-Hill Education.
 Exhibit 7.10 Types of Innovation

©McGraw-Hill Education.
 Incremental vs. Radical Innovation

• Incremental Innovation:
– Builds on established knowledge base
– Results from steady improvement
– Targets existing markets with existing technology
– Example: Gillette blades: from one to six!
• Radical Innovation:
– Draws on novel methods & materials
– Forms from an entirely new knowledge base, or
– Forms from a recombination of existing knowledge
– Targets new markets with new technology

©McGraw-Hill Education.
 Examples of Radical Innovation

• The iPhone
• The Ford Model T
• The X-Ray
• The Airplane
• Genetic engineering
• Decoding of the human genome

©McGraw-Hill Education.
 Why Are Incumbent Firms Focused On
Incremental Innovation?

• Economic Incentives:
– Established companies are focused on defending their
position
• Organizational Inertia:
– Established companies rely on formalized business
processes and structures
• Innovation Ecosystem:
– Established companies are part of an ecosystem:
• Suppliers, buyers, complementors

©McGraw-Hill Education.
 Architectural vs. Disruptive Innovation

• Architectural Innovation:
– Leverages existing technology into new markets
– Alters the architecture of a product
– A new product, with known components, used in a novel
way
• Disruptive Innovation:
– Leverages new technologies in existing markets
– New product / process meets existing customer needs

©McGraw-Hill Education.
 Exhibit 7.11 Characteristics Required of a Disruptive Force

• Begins as a low cost solution to existing problem

• The rate of technological improvement increases

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 Examples of Disruptive Innovation

• Digital photography
– Improved over time
– Higher definition pictures
– Has largely replaced film photography
• Laptops disrupted desktops
– Now tablets / large screen phones are disrupting laptops

©McGraw-Hill Education.
 Strategy Highlight 7.1

How Dollar Shave Club Is Disrupting Gillette

• Gillette: six blades, $10 per cartridge
• Dollar Shave Club: low cost alternative
– 1 razor & 5 cartridges per month for $1
– Using business model innovation
• Results:
– 12,000 people signed up within the first 48 hours.
– Received $20 million in venture capital funding
– It remains to be seen whether they can disrupt this
industry.

©McGraw-Hill Education.
 How to Respond to Disruptive Innovation

• Continue to innovate
– Stay ahead of the competition
• Guard against disruptive innovation
– Protect the low end of the market
• Disrupt yourself
– Rather than wait for others to disrupt you
– Called reverse innovation

©McGraw-Hill Education.
 Strategy Highlight 7.2

GE’s Innovation Mantra: Disrupt Yourself!

•Typical high end ultrasound machine: $250,000
•GE first developed a $30,000 device
•GE then developed a $5,000 device
– Called the Vscan
– It’s a cross between an iPod and a flip phone
– Doctors can hang it around their neck

©McGraw-Hill Education.
 Closed vs. Open Innovation

• Closed Innovation
– New products discovered, developed, and commercialized
internally
• Open Innovation
– Ideas and innovation can originate from external sources
• Customers
• Suppliers
• Universities
• Start-ups
• Competitors

©McGraw-Hill Education.
 What Caused the Shift from Closed to Open Innovation?

• Increasing supply and mobility of skilled workers

• Exponential growth of venture capital
• Availability of options to commercialize ideas
– Ex. Spinning out new ventures
• Increasing capability of suppliers globally

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 Exhibit 7.12 Closed Innovation vs. Open Innovation

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 Exhibit 7.13 Contrasting Principles:
Closed vs. Open Innovation

Closed Innovation Principles Open Innovation Principles

The smart people in our field work for us. Not all the smart people work for us. We need
to work with smart people inside and outside
our company.
To profit from R&D, we must discover it, External R&D can create significant value;
develop it, and ship it ourselves. internal R&D is needed to claim (absorb) some
portion of that value.
If we discover it ourselves, we will get it to We don’t have to originate the research to
market first. profit from it; we can still be first if we
successfully commercialize new research.
The company that gets an innovation to market Building a better business model is often more
first will win. important than getting to market first.
If we create the most and best ideas in the If we make the best use of internal and external
industry, we will win. ideas, we will win.
We should control our intellectual property (IP), We should profit from others’ use of our IP, and
so that our competitors don’t profit from it. we should buy others’ IP whenever it advances
our own business model.

SOURCE: Adapted from H. W. Chesbrough (2003), Open Innovation: The New Imperative for Creating and Profiting from Technology (Boston: Harvard Business School Press).
©McGraw-Hill Education.
 Absorptive Capacity

• A firm’s ability to:

– Understand external technology developments
– Evaluate them
– Integrate them into current products or create new ones

©McGraw-Hill Education.
 Implications for the Strategist

©McGraw-Hill Education.
 Innovation Drives Competition

• Innovation helps drive strategy.

• Innovation results in a temporary monopoly.
• Entrepreneurs are agents that introduce change.
– New inventions
– New products & services
– New production processes
– New forms of organization

©McGraw-Hill Education.
 To Overcome the Chasm, You Must

• Formulate a business strategy guided by:

– The who, what, why, and, how questions of competition
(Chapter 6)
• Meet customer needs.
– Needs are different for each industry life cycle stage.
• Bring competencies and capabilities to the table.
– Needs are different for each industry life cycle stage.

©McGraw-Hill Education.
 How to Develop Innovation

• Induce it through structures and systems.

• Allow for autonomous behavior.
• Champion it through supporting new projects.
• Cooperative strategies
– Licensing, strategic alliances, joint ventures, and
acquisitions

©McGraw-Hill Education.
 Chapter 7 Summary

©McGraw-Hill Education.
 Take Away Concepts (1 of 6)

LO 7-1 Outline the four-step innovation process from idea to imitation.

•Innovation describes the discovery and development of new knowledge in a
four-step process captured in the Four I’s: idea, invention, innovation, and
imitation.
•The innovation process begins with an idea.
•An invention describes the transformation of an idea into a new product or
process, or the modification and recombination of existing ones.
•Innovation concerns the commercialization of an invention by entrepreneurs
(within existing companies or new ventures).
•If an innovation is successful in the marketplace, competitors will attempt to
imitate it.

©McGraw-Hill Education.
 Take Away Concepts (2 of 6)

LO 7-2 Apply strategic management concepts to entrepreneurship and

innovation.
•Entrepreneurship describes the process by which change agents undertake
economic risk to innovate—to create new products, processes, and
sometimes new organizations.
•Strategic entrepreneurship describes the pursuit of innovation using tools
and concepts from strategic management.
•Social entrepreneurship describes the pursuit of social goals by using
entrepreneurship. Social entrepreneurs use a triple-bottom-line approach to
assess performance.

©McGraw-Hill Education.
 Take Away Concepts (3 of 6)

LO 7-3 Describe the competitive implications of different stages in

the industry life cycle.
• Innovations frequently lead to the birth of new industries.
• Industries generally follow a predictable industry life cycle, with five
distinct stages: introduction, growth, shakeout, maturity, and decline.
• Exhibit 7.9 details features and strategic implications of the industry
life cycle.

©McGraw-Hill Education.
 Take Away Concepts (4 of 6)

LO 7-4 Derive strategic implications of the crossing-the-chasm framework.

•The core argument of the crossing-the-chasm framework is that each stage of the
industry life cycle is dominated by a different customer group, which responds
differently to a new technological innovation.
•There exists a significant difference between the customer groups that enter early
during the introductory stage of the industry life cycle and customers that enter later
during the growth stage.
•This distinct difference between customer groups leads to a big gulf or chasm, which
companies and their innovations frequently fall into.
•To overcome the chasm, managers need to formulate a business strategy guided by
the “who, -what, -why, -and -how” questions of competition.

©McGraw-Hill Education.
 Take Away Concepts (5 of 6)

LO 7-5 Categorize different types of innovations in the markets-

and-technology framework.
• Four types of innovation emerge when applying the existing versus new dimensions of
technology and markets: incremental, radical, architectural, and disruptive innovations
(see Exhibit 7.10).
• An incremental innovation squarely builds on an established knowledge base, and
steadily improves an existing product or service offering (existing market / existing
technology).
• A radical innovation draws on novel methods or materials and, is derived either from
an entirely different knowledge base or from the recombination of the existing
knowledge base with a new stream of knowledge (new market / new technology).
• An architectural innovation is an embodied new product in which known components,
based on existing technologies, are reconfigured in a novel way to attack new markets
(new market / existing technology).
• A disruptive innovation is an innovation that leverages new technologies to attack
existing markets from the bottom up (existing market / new technology).

©McGraw-Hill Education.
 Take Away Concepts (6 of 6)

LO 7-6 Compare and contrast closed and open innovation.

•Closed innovation is a framework for R&D that proposes impenetrable firm

boundaries. Key to success in the closed innovation model is that the firm
discovers, develops, and commercializes new products internally.
•Open innovation is a framework for R&D that proposes permeable firm
boundaries to allow a firm to benefit not only from internal ideas and
inventions, but also from external ones. The sharing goes both ways: some
external ideas and inventions are in-sourced while others are spun-out.
•Exhibit 7.13 compares and contrasts principles of closed and open
innovation.

©McGraw-Hill Education.
 Key Terms
• Absorptive capacity
• Architectural innovation
• Crossing-the-chasm framework
• Disruptive innovation
• Entrepreneurs
• Entrepreneurship
• First-mover advantages
• Incremental innovation
• Industry life cycle
• Innovation
• Innovation ecosystem
• Invention
• Markets-and-technology framework
©McGraw-Hill Education.
• Network effects
• Open innovation
• Organizational inertia
• Patent
• Process innovation
• Product innovation
• Radical innovation
• Reverse innovation
• Social entrepreneurship
• Standard
• Strategic entrepreneurship
• Trade secret
• Winner-take-all markets
 Chapter 7 Cases & Exercises

©McGraw-Hill Education.
 Chapter Case 7: Consider This… (1 of 2)

• Netflix re-shaped the TV Industry:

– Delivery: online streaming
– Access: episodes can be viewed on-demand
– Management: programming developed based on
algorithms
• Challenges:
– How to ensure viewing is uninterrupted (buffering)
– Available titles + broadband limitations hinder growth

©McGraw-Hill Education.
 Chapter Case 7: Consider This… (2 of 2)

• Does paying providers (Comcast) to ensure seamless

access:
– Violate net neutrality? Are you for or against this?
– Are broadband providers incentivized to align with Netflix?
• What other services can Netflix offer to increase U.S.
demand?
• What challenges does Netflix face outside of the
U.S.?

©McGraw-Hill Education.
 My Strategy Exercise Do You Want to Be an
Entrepreneur? (1 of 2)

• There’s a public debate about whether

entrepreneurs are better off skipping college.
– Viewpoints to Skip College:
• It’s possible to be an entrepreneur without a degree.
• Famous entrepreneurs neglected higher education.

– Viewpoints to Pursue College:

• A degree helps to study the dynamics of business.
• Many entrepreneurs have obtained their degree.

• Large student loans can inhibit entrepreneurship.

©McGraw-Hill Education.
 My Strategy Exercise Do You Want to Be an
Entrepreneur? (2 of 2)

• Is now is a good time to start a business?

• Do you see higher education as a benefit or
detriment to entrepreneurship?
• What are the pros / cons of assuming personal debt
to finance higher education?
• Does geography matter for your business?
• How would the strategic management framework
enhance your startup’s chances to gain / sustain
competitive advantage?

©McGraw-Hill Education.
 Small Group Exercise #1

• You work for Warner Music Group.

– Large music record label
– Sales declining primarily due to piracy
• Develop a strategy to improve this situation.
– What are the key issues?
– In what life cycle phase is this industry?
– How does this life cycle phase affect innovation?

©McGraw-Hill Education.
 Small Group Exercise #2

• Procter & Gamble’s Connect+Develop open

innovation system
• Prepare answers to these questions:
– What are the risks to an open innovation approach?
– Could P&G’s approach create a competitive advantage?
– Will this system will become dominant innovation model in
the 21st century?
– What obstacles would a manager encounter to implement
this change?

©McGraw-Hill Education.
 End of Chapter 7

©McGraw-Hill Education.
 Strategy Smart Videos

©McGraw-Hill Education.
 Strategy Smart Videos (1 of 6)

• The History of Wikipedia

• An Example of Social Entrepreneurship
• Link:
– https://www.youtube.com/watch?v=oVFPW0r4jWk
• 2:47 Minutes

©McGraw-Hill Education.
 Strategy Smart Videos (2 of 6)

• CNet
• A Short History Of Smartphone Design
– (Crossing the Chasm, the Smart Phone Industry)
• Link:
– https://www.youtube.com/watch?v=bxCKeFSXI44
• 2:12 Minutes

©McGraw-Hill Education.
 Strategy Smart Videos (3 of 6)

• Geoffrey Moore, Author of Crossing the Chasm

Theory
• Discusses An Amusing Way Of Crossing The Chasm
• Link:
– https://www.youtube.com/watch?v=izP5n1SBEaI
• 4:08 Minutes

©McGraw-Hill Education.
 Strategy Smart Videos (4 of 6)

• Marissa Mayer (CEO Yahoo, former VP Google)

• Innovative Ideas Come From Everywhere
• Link:
– http://ecorner.stanford.edu/authorMaterialInfo.html?mid
=1524
• 3:09 Minutes

©McGraw-Hill Education.
 Strategy Smart Videos (5 of 6)

• Steve Jobs
• Steve Jobs Talks Innovation at his 2005 Stanford
Commencement Address
• Link:
– https://www.youtube.com/watch?v=UF8uR6Z6KLc
• 15:05 Minutes

©McGraw-Hill Education.
 Strategy Smart Videos (6 of 6)

• Steve Jobs on Creativity and Innovation

• A student made this video as part of an English
project.
• Links:
– https://www.youtube.com/watch?v=UJYLe7qPNzY
• 4:44 Minutes

©McGraw-Hill Education.
 Chapter Case 7

©McGraw-Hill Education.
 Chapter Case 7: Netflix (1 of 2)

• Streaming video is re-shaping the television industry.

– Netflix accounts for 1/3 of downstream internet traffic
• The rise of Netflix
– Netflix started after Reed Hastings was annoyed by a $40
late fee at Blockbuster
– Monthly DVD subscriptions through the mail began
• Got off to a slow start
– Approached Blockbuster to purchase 49% of the company,
they declined
• Blockbuster lost 75% of value from ‘03-’05

©McGraw-Hill Education.
 Chapter Case 7: Netflix (2 of 2)

• Netflix began streaming content online.

– Adjusted quickly to consumer preferences
– Streaming available on many types of devices
– Broadcast networks began to take notice
• Netflix began creating their own content.
– Achieved huge success
• Emmys and Golden Globe awards
• Netflix has achieved huge success.
– 60 million subscribers
– Stock appreciated by 4,100%

©McGraw-Hill Education.
 Appendix 1 The AFI Strategy Framework
The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with
five different circles on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The five
outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4)
Formulation, Corporate Strategy, and (5) Implementation.

Each of these outer five circles have a brief description beside them to explain what the circle means:

Under the first outer circle titled "Getting Started", it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic
Leadership: Managing the Strategy Process (Chapter 2)".

Under the second outer circle titled "External and Internal Analysis", it says: Part 1, Strategy Analysis, "External Analysis: Industry
Structure, Competitive Forces and Strategic Groups (Chapter 3)", "Internal Analysis: Resources, Capabilities and Core
Competencies (Chapter 4)", and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)".

Under the third outer circle titled "Formulation: Business Strategy", it says: Part 2, Strategy Formulation, "Business Strategy:
Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter
7)".

Under the fourth outer circle titled "Formulation: Corporate Strategy", it says: Part 2, Strategy Formulation, "Corporate Strategy:
Vertical Integration and Diversification (Chapter 8)", "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter
9)", and "Global Strategy: Competing Around the World (Chapter 10)".

Under the fifth outer circle titled "Implementation", it says: Part 3, Strategy Implementation, "Organizational Design: Structure,
Culture and Control (Chapter 11)", and "Corporate Governance and Business Ethics (Chapter 12)".

Return to slide

©McGraw-Hill Education.
 Appendix 2 Exhibit 7.1 Accelerating the Speed of
Technological Change

As an example, it took 84 years for half of the U.S. population to

own a car, but only 28 years for half the population to own a TV.
The pace of the adoption rate of recent innovations continues to
accelerate. It took 19 years for the PC to reach 50 percent
ownership, but only 6 years for MP3 players to accomplish the
same diffusion rate.

Return to slide

©McGraw-Hill Education.
Appendix 3 Exhibit 7.4 Lifecycle of the Smartphone Industry
in Emerging and Developed Economies

In a stylized industry life cycle model, the horizontal axis shows

time (in years) and the vertical axis market size. This image takes
a snapshot of the global smartphone industry in the year 2016.
This implies that we are joining two different life cycles (one for
emerging economies and one for developed economies) in the
same exhibit at one point in time. In emerging economies,
smartphones are in the Growth stage. In developed economies
however, they are in the Maturity stage.

Return to slide

©McGraw-Hill Education.
 Appendix 4 Exhibit 7.5 Introduction Stage:
Network Effects

It demonstrates how the installed base of users for the iPhone

result in more use of apps, which increase the value of the
iPhone, which thus increases the demand for the iPhone.

Return to slide

©McGraw-Hill Education.
 Appendix 5 Exhibit 7.7 Crossing the Chasm

This image shows a traditional bell curve, that is similar to the Industry
Lifecycle, however, there are different phase names and there is a space
between the Early Adopters and the Early Majority, titled The Chasm.
The chasm framework breaks down the 100 percent market potential into
different customer segments, highlighting the incremental contribution each
specific segment can bring into the market.
Technology Enthusiasts: 2.5%
Early Adopters: 13.5%
Early Majority: 34%
Late Majority: 34%
Laggards: 16%

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 Appendix 6 Exhibit 7.8 Crossing the Chasm:
Applied to the Mobile Phone Industry

Blackberry, while it was accepted by the early adopters and early majority,
the iPhone was also able to capture the late majority and laggards as well.
In 2007, RIM’s dominance over the smartphone market began to erode
quickly. The main reason was Apple’s introduction of the iPhone. Although
technology enthusiasts and early adopters argue that the iPhone is an inferior
product to the BlackBerry based on technological criteria, the iPhone enticed
not only the early majority, but also the late majority to enter the market. For
the late majority, encrypted software security was much less important than
having fun with a device that allowed users to surf the web, take pictures,
play games, and send and receive e-mail.

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 Appendix 7 Exhibit 7.11 Characteristics Required of a
Disruptive Force

This image shows dashed lines representing different market

segments, from Segment 1 at the low end to Segment 4 at the
high end. Low-end market segments are generally associated
with low profit margins, while high-end market segments often
have high profit margins. The technology trajectory used by a
disruptive innovator to invade market segments must move from
the bottom up.

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 Appendix 8 Exhibit 7.12 Closed Innovation vs. Open
Innovation

In the closed innovation model (Panel A), the firm is conducting all research
and development in-house, using a traditional funnel approach. The
boundaries of the firm are impenetrable. Outside ideas and projects cannot
enter, nor does the firm allow its own research ideas and development
projects to leave the firm.
The open innovation model (Panel B), depicts a firm that allows information
and innovation to be shared outside of the firm. In the open innovation
model, a company attempts to commercialize both its own ideas and research
from other firms. It also finds external alternatives such as spin-out ventures
or strategic alliances to commercialize its internally developed R&D. The
boundary of the firm has become porous, allowing the firm to spin out some
R&D projects while in-sourcing other promising projects.

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