Types of Innovation
Module 8: Innovation Strategies
• 8.1Types of Innovation
• 8.2 Implementing Innovation
• 8.3 Responding to Innovation in the
Market
• 8.4 Product life cycle
• 8.5 Conclusion
Learning Objectives
After covering this module, you should be
able to understand and articulate answers to
the following questions:
• 1. What are the four types of innovation?
• 2. What are the four stages of the product
life cycle and crossing the chasm?
• 3. What are the ways firms might cooperate
with their competitors?
Introduction
• There are four types of innovation that depend on if
existing or new markets are reached or if existing or new
technology is used. Firms may also find it advantageous to
cooperate at certain levels, such as through a joint
venture, strategic alliance, merger, acquisition,etc
Types of Innovation
[Link] mover
Types of Innovation
1. Being a First Mover: Advantages and Disadvantages
• A famous cliché contends that “the early bird gets the worm.” Applied to the
business world, the cliché suggests that certain benefits are available to a first
mover into a market that will not be available to later entrants. A first-mover
advantage exists when making the initial move into a market allows a firm to
establish a dominant position that other firms struggle to overcome. For
example, Apple’s creation of a user-friendly, small computer in the early 1980s
helped fuel a reputation for creativity and innovation that persists today.
• Kentucky Fried Chicken (KFC) was able to develop a strong bond with Chinese
officials by being the first Western restaurant chain to enter China. Today, KFC is
the leading Western fast-food chain in this rapidly growing market.
• Genentech’s early development of biotechnology allowed it to overcome many
of the pharmaceutical industry’s traditional entry barriers such as financial
capital and distribution networks and become a profitable firm.
• Decisions to be first movers helped all three of these firms to be successful in
their respective industries
Disadvantage of first mover
• On the other hand, a first mover cannot be sure that customers will
embrace its offering, making a first move inherently risky.
[Link] Innovation
Types of Innovation
• Innovation can be classified into four types:
• 1. Incremental Innovation
• 2. Disruptive Innovation
• 3. Architectural Innovation
• 4. Radical Innovation
The type of innovation is dependent on two factors:
1. Market – does the innovation create a new market, or address
the existing market?
2. Technology – does the innovation use a new technology or an
existing technology?
[Link] innovation
• Incremental innovation can be described as making improvements on an
existing product or service. The improvements are based on using existing
technology and are directed at the existing market. In the automobile
industry, the improvements made each year to the newest model of car are
incremental innovations. No new markets are formed, and existing
technology is used to make the car better.
[Link] Innovation
• Some firms have the opportunity to shake up their industry by introducing a
disruptive innovation—an innovation that conflicts with, and threatens to
replace, traditional approaches to competing within an industry
• Disruptive innovation occurs when a new product or service engages the
existing market with a new technology. The iPad has proved to be a
disruptive innovation since its introduction by Apple in 2010. Many
individuals quickly abandoned clunky laptop computers in favor of the sleek
tablet format offered by the iPad. And as a first mover, Apple was able to
claim a large share of the market.
• Disruptive innovations occur when firms introduce offerings that are so
unique and superior that they threaten to replace traditional approaches.
Existing markets are disrupted by new technology.
[Link] Innovation
[Link] Innovation
• When new products or services are developed using new technology that
open up new markets, the result is called radical innovation. The airplane is
a good example of a radical innovation. It used an entirely new aeronautical
technology to open up a whole new market for people traveling. Traveling
across the one place to another by car or train.
[Link] Innovation
• Architectural innovation occurs when new products or services use existing
technology to create new markets and/or new consumers that did not
purchase that item before. For example, the smart watch used existing cell
phone technology and was repackaged into a watch. This opened up a new
market of purchasers by repackaging an existing technology. Typically, firms
alter the architecture of the product to create a new product that opens up
sales to new markets.
Key Takeaway
• Being the first mover can provide a firm a competitive
advantage, but competitors who wait may be the ultimate
winners.
• There are four types of innovation that firms employ to
increase their strength in the marketplace
Exercises
• 1. Provide an example of a product that, if invented,
would work as a disruptive innovation. How
widespread would be the appeal of this product?
• 2. How would you propose to develop a new cloth if
your goal was to compete in the fashion industry?
Product Life Cycle and Crossing the
Chasm
• When innovation creates a new product, it typically goes through four stages
within the marketplace. This is true whether it is a high-tech product like a
new video game system or a more mundane product like a laundry
detergent. The four stages are:
1. Introduction: The product is launched, with the hopes that it catches on.
Sales are low.
2. Growth: The product catches on, and sales increase with time. Competitors
jump in, but the rivalry among competitors is not really strong yet, and
there are plenty of sales for all.
3. Maturity: Sales begin to level out, growth slows, and competition increases.
Shake-out occurs, with some competitors leaving the market or being
acquired by others.
4. Decline: Sales start declining. More consolidation occurs, with firms looking
for exit strategies. A few firms remain.
Product Life Cycle and Crossing the
Chasm
The Cost per Customer Acquisition (or CAC) is the metric that determines how much it
costs a company to get a new customer.
Product Life Cycle and Crossing the
Chasm
Preventing the decline of a product after the maturity
stage
• To prevent the decline of their product after the maturity stage, firms will
often “relaunch” their product with a new and improved model. Innovation
again plays a role, making improvements to the product, so that consumers
will purchase the latest model.
Innovation”
“relaunch”
The profits during the four phases of the product life
cycle.
• Profits generated during the product life cycle
also usually follow a traditional pattern.
During the research and development phase
of the product, the firm is investing funds into
the product, generating a negative profit.
• Losses continue during the introduction
phase, when sales are low and marketing
expenses are high. Firms tend to recoup their
investment in R&D and marketing during the
growth phase, with maximum profits at the
beginning of the maturity phase. Once
competition heats up in the maturity phase,
price competition kicks in, and lower prices
mean lower profits.
Profits During the Product Life Cycle
“Crossing the Chasm.”
“crossing the chasm.”
• Another phenomenon that occurs in the innovation process with new technology
is called “crossing the chasm.” When a new technology is launched, often there
are technology innovators/enthusiasts who will purchase the new technology to
check it out. A few more, called early adopters, will also want to try out the new
product.
• But how does the firm get the product into the mainstream market? How do they
get it to catch on? This can often be challenging. Can the product make the leap
to the mainstream? This is called “crossing the chasm,” and often requires a
different marketing approach.
“crossing the chasm.”
• The figure on the left illustrates this concept, breaking down the market into
customer segments. Innovators and early adopters make up about 15% of the
market. Firms must determine a business strategy for each segment of the
market. If they cannot convince the early majority to buy their product, the
product fails.
Making Cooperative Moves
• Franklin Roosevelt once quipped, “Competition has been shown to be useful
up to a certain point and no further, but cooperation, which is the thing we
must strive for today, begins where competition leaves off.” There are four
commonly used cooperative moves used by firms below.
[Link] Ventures
• Joint ventures involve two or more organizations that contribute to the
creation of a new entity.
[Link] Alliances
• A strategic alliance is a cooperative arrangement between two or more
organizations that does not involve the creation of a new entity. For
example, Twitter formed a strategic alliance with Yahoo! Japan. The alliance
involved relevant Tweets appearing within various functions offered by
Yahoo! Japan .The alliance simply involves the two firms collaborating
through a contractual relationship as opposed to creating a new entity
together.
[Link]
• Another way for firms to cooperate to the advantage of both firms and their
stockholders is through mergers. Two firms decide to combine into one
entity, often gaining strength in the market. Combining forces makes the
new firm a much stronger competitor against its competitors. Sometimes
both firms’ identities remain in the name of the new company,. At other
times, only one of the firm’s names remains, or a new name is selected for
the merged companies.
4. Acquisitions
• Whereas mergers typically occur with like-size companies, acquisitions are
usually done by the larger firm acquiring the smaller firm. The end result is
basically the same, with two companies combining into one. Sometimes the
acquired firm is absorbed into the acquiring company, but sometimes it
retains its identity. Besides combining the strengths of both organizations
with the intent of having a stronger performing company, mergers, and
acquisitions reduce the number of competitors in the industry.
Difference between Merger and
Acquisition
Difference between Merger and
Acquisition
Internal Development
• Another method to expand a firm is through internal development. If a firm
wants to add a new product or service line, rather than acquire that
expertise by buying a company, the firm can develop that capability
themselves. Although this is more of a competitive rather than a cooperative
move, this is where a firm’s strength of entrepreneurial orientation (EO)
comes into play, and when intrapreneurship is important..
Internal Development
Key Takeaways
• New products and services typically follow a
predictable product life cycle and must be able to
“cross the chasm” to attract buyers beyond the
early adopters.
• Sometimes it is advantageous for a firm to make a
cooperative move with a competitor, with strategies
such as a joint venture, strategic alliance, merger,
or acquisition.
• Internal development is also a method to add
innovative capability.
Exercises
• 1. What are examples of firms that “relaunch” their
products once in the maturity stage of the product life
cycle?
• 2. Why might local restaurants not be in the position to
respond to large franchises or chains? What can local
restaurants do to avoid being ruined by chain
restaurants?
• 3. How could a family jewelry store use one of the
cooperative moves mentioned in this section?? What
type of organization might be a good cooperative
partner for a family jewelry store?
• 4. What are some reasons why merger smight fail?