Chapter 10: Innovative Strategies That Change the Nature of Competition

Question 1

Innovative strategies

aka “revolutionary strategies,” or “disruptive innovations”

Answer 1

Strategies that offer a different value proposition

to customers using different resources and capabilities

Question 2

Invention

Answer 2

The creation of an idea or method; a novel concept

describes the creation of a unique or novel concept, method, or process that is often turned into a tangible outcome—such as new product.

Question 3

Innovation

Answer 3

The conversion of a novel concept (an invention) into

a product, process, or business model that generates revenues and profits.

Question 4

Innovation vs Invention

Answer 4

Innovation differs from invention in that innovation
refers to the use of a novel idea or method, whereas invention refers more directly to the
creation of the idea or method itself

Question 5

As shown in Figure 10.1, an innovation needs to be

Answer 5

(1) novel, (2) useful, and (3) successfully

implemented in order to help companies succeed in the marketplace.

Question 6

Two types of innovation

Answer 6

1) Incremental innovation

2) Radical innovation

Question 7

Incremental innovation

aka “sustaining” innovations

Answer 7

Building on a firm’s established knowledge base to create minor improvements to the product or
service a firm offers.

For example, when Gillette offers a razor with five blades instead of four, or when Samsung
offers a TV with an LED screen instead of a plasma screen, those are incremental innovations

Question 8

Radical innovation

Answer 8

Innovation that draws on a different knowledge base, technologies, or methods to deliver value in a truly
unique way.

Examples of products based on radical innovations
include the computer (versus the typewriter), CT scanner (versus the X-ray), cell phone (versus the landline phone), and MP3 player (versus the CD player)

Question 9

Innovative strategy

Answer 9

A strategy that introduces a fundamentally different business model than rivals.

Question 10

Business model

Answer 10

refers to the rationale of how an organization

delivers and captures value

Question 11

More specifically, business models typically differ on one of three dimensions:

Answer 11

1. The choice of customer segments to serve and the unique value (value proposition) offered
   by the company
2. The choice of activities the company performs and the resources used to deliver value to customers
3. The way a company generates revenue streams to get paid for the value it delivers. The term revenue model is sometimes used to refer to the approach, or pricing strategy, a company uses to get paid for the value it delivers through its business model

Question 12

Revenue model

Answer 12

The approach, or pricing strategy, a company uses to get paid for the value it delivers through its business model.

Question 13

Understanding Business Models (Strategy in practice)

Answer 13

1. Value propositions. A firm seeks to solve customer problems and satisfy needs with a particular unique value or value proposition.
2. Customer segments. The value propositions are designed to meet the needs of one or several customer segments.
3. Channels. Value propositions are delivered to customer segments
   through communication, distribution, or sales channels.
4. Customer relationships. Customer relationships are established and maintained with each customer segment.
5. Revenue streams. Revenue streams result from value propositions that are successfully offered to customers through pricing strategies.
6. Key resources. Key resources are the assets required to offer and deliver the company’s value proposition.
7. Key activities/capabilities. Value propositions are developed and delivered through key activities or capabilities.
8. Key partnerships. Some resources and activities that are critical to delivering the value proposition are outsourced to partners outside the company.
9. Cost structure. The business model elements above result in the cost structure for delivering the value proposition to the customer. These costs must be covered by the revenue streams in order for a firm to be profitable.

Question 14

Disruptive innovation

Answer 14

Radical innovative strategies in which companies in the same industry find the innovation so disruptive
that they can no longer do business as usual.

Example: Netflix disrupting Blockbuster’s strategy

Question 15

Dominant logic

Answer 15

strategists mean the primary logic behind how the company is trying to deliver unique value to customers.

For example, the dominant logic behind the strategies of Netflix (versus Blockbuster) and
Amazon (versus Barnes & Noble) was to lower costs by eliminating retail stores and shipping
directly to the customer

Question 16

Low-End Disruptive

Answer 16

Producing a low-cost product or service for the
low-end or most price-sensitive segment of the market, and then gradually moving upmarket as the
product or service improves its technology and processes.

Question 17

High-End/Top-Down Disruptive Innovations

Answer 17

But in stark contrast to the low-end variety, high-end disruptive innovations actually outperform
existing products when they’re introduced, and they sell for a premium price rather than at a
discount

Example: Apple’s iPod outplays the Sony Walkman, flash drives fly past zip drives and floppy disks

Question 18

Mass customization

Answer 18

When a company mass-produces the various modules of the product and then allows the customer to select which modules will be combined together.

Question 19

Blue ocean strategy

Answer 19

Creating new demand in an uncontested market space

Where sharks competing for the same scarce food
create a red ocean of blood because of intense rivalry, blue ocean success relies on swimming
to empty water—in other words, offering value that is very different from anything on the market.

Question 20

Nonconsumption

Answer 20

individuals who do not currently purchase a product or service

Question 21

Three “free” strategies that companies use:

Answer 21

Strategy 1: Cross-Sell (Freemium) Strategy

Strategy 2: Third-Party Pay Strategy

Strategy 3: Bundling Strategy

Question 22

Strategy 1: Cross-Sell (Freemium) Strategy

Answer 22

The cross-sell strategy involves offering a free basic product to gain widespread initial use, after which users are offered a nonfree premium version (often called freemium) or are sold products not directly tied to the free product.

Example: Buying the full version of an app on iPhone

Large-scale success with this strategy requires either: (1) a free product that appeals to a very large product user base (e.g., roughly 1.5 billion people with computers are interested in using Skype to make phone calls);

or (2) a high conversion rate, meaning a high percentage of free users are willing to convert to paid customers for premium features

Question 23

High conversion rate

Answer 23

When a high percentage of free users
are willing to convert to paid
customers for premium features.

Question 24

Strategy 2: Third-Party Pay Strategy

Answer 24

Firms using a third-party pay strategy—
sometimes called a two-sided market—provide free products to a community of product users
as a method of generating revenue from a third party that pays to access those users

Question 25

Third-party pay strategy

Answer 25

Providing free products to a community of product users as a method of generating revenue
from a third party that pays to access those users

Example: Google offering free searches but with tons of ads

The secret to third-party pay is to provide a valuable free service that attracts either:

(1) a very large community of product users that can then be segmented in a particular way for
advertisers (the way Google does with search),

or (2) a targeted community of users that comprises
a customer segment, or group of individuals similar on a key dimension

Question 26

Strategy 3: Bundling Strategy

Answer 26

A bundling strategy involves offering a free product
with a paid product or service.

For example, Hewlett-Packard may give away a free printer with the purchase of a computer, or Verizon may give away a free cell phone with the purchase of a service contract. Of course, the “free” effect here is largely psychological, since the customer
must actually pay in order to get the product for free.

Question 27

Hypercompetition

Answer 27

Term coined by Professor Rich D’Aveni to refer
to his argument that competitive intensity has increased and that periods of competitive advantage
have decreased.

Question 28

Innovation and the Product/Business/

Industry Life Cycle (S-Curve)

Answer 28

Innovation and the Product/Business/

Industry Life Cycle (S-Curve)

Question 29

Product life cycle

Answer 29

1) Introduction
2) Growth
3) Maturity
4) Decline

Question 30

Introduction Stage

Answer 30

During the introduction stage, the company tries to get early adopters—those types of buyers
willing to try out the latest new gadget—to test the potential of its new product

-R&D, product development, and design are key competencies.

Example: VR headsets

Question 31

Growth Stage

Answer 31

Sales accelerate during the growth stage as the initial innovation gains traction and increased
market acceptance.

Demand increases as the early majority, a new group of buyers, is convinced that the product concept works as demonstrated by early adopters in the introduction stage

As the product starts to gain widespread acceptance, a standard (or dominant design) emerges that signals the market’s agreement about a common set of engineering and design features

Examples: Tablets and smartphones

Question 32

Maturity Stage

Answer 32

Growth starts to slow as total market penetration
increases. What little growth there is comes from buyers called the late majority entering the
market, people who want not only a proven concept but also a low price

Process innovation and operational efficiency are typically more important to success than product innovation

Example: Laptops

Question 33

Decline Stage

Answer 33

The decline stage is often initiated by new products entering the market that cause demand to
fall.

Examples: Walkman vs iPod, Computer vs tablets / laptops