Strategic Management 3e Instructor Manual
ChapterCase: Netflix: Disrupting the TV industry
7.1 Competition Driven by Innovation (LO 7-1)
7.2 Strategic and Social Entrepreneurship (LO 7-2)
CONNECT INTEGRATION
Case Analysis: Elon Musk Entrepreneurship Zip2 to Tesla
7.3 Innovation and the Industry Life Cycle (LO 7-3, LO 7-4)
CONNECT INTEGRATION
Case Analysis: Innovation and the Industry Life Cycle
7.4 Types of Innovation (LO 7-5, LO 7-6)
CONNECT INTEGRATION
Interactive Labeling: Types of Innovation
7.5 Implications for the Strategist
Strategy Term Project
my
Strategy
Chapter 7
Business Strategy: Innovation and Entrepreneurship
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POWERPOINT SLIDES 1–4
In this chapter, we turn our attention to innovation. We start by defining innovation and reviewing how it can affect
competition. Then, we look at the creation of new businesses with strategic or social entrepreneurship. We bring in a dynamic
perspective by discussing how innovation changes over the industry life cycle and the challenges of “crossing the chasm.”
We review a typology of innovation, with a particular emphasis on disruptive innovations and their role in changing an
industry’s landscape. Changes driven by technologies related to the Internet and the increasing availability of broadband
access are a pervasive theme of this chapter and are highlighted in a discussion of open versus closed innovation. We close
with a discussion of the practical implications of these ideas for strategists.
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.
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ChapterCase
POWERPOINT SLIDES 65–66
Background: The TV industry has experienced several waves of innovation that completely reshaped its competitive
landscape. Until the 1980s, TV in the U.S. was dominated by three broadcast networks: ABC, CBS, and NBC. By law they
were required to broadcast at no charge to viewers. The business model of early TV networks was to create large audiences
by offering programming such as quiz shows, news, and soaps; and in turn make money by selling spots to advertisers. By
2015, the audience for the old-line broadcast networks had shrunk by two-thirds. The first wave of disruption came in the
form of cable-television such CNN, ESPN, Nickelodeon (and dozen other channels) as well as HBO. Cable operators such
Time Warner and Comcast charged high monthly subscription fees (between $75–$100). Although the broadcast networks
lost a large part of their audiences to cable channels, which in turn reduced their advertising income, they made up the
difference in charging cable providers for carrying their content. A second wave of disruption in the TV industry is now
gaining huge momentum: Streaming content over the Internet.
Also important was the way that Netflix distributed content. Hulu, coming from existing television networks, saw the Internet
as just another way to distribute shows. They released one episode at a time, over the period of a season. Netflix understood
that in the mobile Internet age, subscribers view their devices as a way shift time. Subscribers do not want to be tied to being
at one website at a particular time every week to receive the latest installment. So Netflix offered subscribers the ability to
download an entire season of episodes at once. This gave rise to the phenomenon of “binge watching,” where subscribers
would download a series and then spend a weekend watching the entire season. This proved to be extremely successful for
whatever they want, wherever they want, whenever they want. The technology of streaming video has cleared the chasm, and
is quickly being adopted by late majority users and even laggards.
order followed the market structure. Big networks would invest in original programming in order to win audience share as
well as some lesser fare that could pad margins. Local stations would buy the rights to reruns and old movies. There was a
level playing field where everyone knew who they were competing with and why. New business model: Digital convergence
= industry borders dissolve. Players: The Networks: While it’s easy to write off the old traditional networks, their business
remains surprisingly strong, maintaining impressive operating margins and steady growth. They continue to play an
Showtime’s Homeland. HBO also offers an app, HBO GO, that could conceivably evolve into a competitor to Netflix,
although it currently requires a cable subscription to use. Apple: While rumors of a full-fledged Apple TV abound, they still
haven’t released a product. Moreover, although Steve Jobs thought that he had cracked the TV problem before he died, even
if he were still alive it is unlikely he would be able to repeat the coup he pulled off with the music industry. The TV players
remain highly vibrant and profitable and are unlikely to be bowed, which is why Apple has had trouble inking content deals
and, with their hard nosed approach, will most likely continue to falter.
For a critical assessment of Netflix, see “What’s wrong with Netflix?” P Tassi 10/17/15 Forbes.
CONSIDER THIS DISCUSSION QUESTIONS
Netflix started to pay one broadband provider (Comcast) to ensure fast and seamless access to its end users. As hinted, other
broadband providers (AT&T, Verizon, and Time Warner) will want to extract a similar kind of “toll” from Netflix. Does this
violate net neutrality (the rule that Internet service providers should treat all data equally, and not charge differentially by
user, content, site, etc.)? Why or why not? Do you favor net neutrality? Explain why. As Internet service providers extract
more fees from Netflix, the company continues to invest heavily in its proprietary “Open Connect” network, which allows
Netflix to connect its servers directly to those of Internet service providers (via peering). Since most users upgrade their
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Internet connections to faster broadband in order to watch video, are the incentives of broadband providers aligned with
Netflix, or will the broadband providers continue to extract significant value from this industry? Apply a five forces analysis.
Students will have different opinions on this question based on their perspective on net neutrality. For example, does net
neutrality mean that broadband suppliers do not slow down large users of bandwidth, does it mean that any firm that is
willing to pay for “peering” is allowed to do it, or does it mean that all sites are treated equally? Frankly, if Netflix is using a
huge chunk of broadband capacity during prime hours, then what net neutrality might mean to some people is that broadband
suppliers should not slow down or otherwise limit video streaming nor should they charge fees to video streaming sites or
consumers for providing unlimited access to broadband (lest video streaming sites become as expensive for consumers as
cable TV). Broadband providers are likely to have very different incentives than Netflix. The case identifies Comcast as
having incentives to favor its own NBC Universal content. All broadband providers are likely to see Netflix growth as
requiring continued increase in capital investment for them, in order to manage increasing volumes of video at peak load
times.
Netflix growth in the United States seems to be maturing. What other services can Netflix offer that might
further demand in the United States?
This part of the discussion can be organized into a few different categories: diversification of streaming products—leveraging
question), TV set top boxes, or apps.
International expansion appears to be a major growth opportunity for Netflix. Elaborate on the challenges
Netflix faces going beyond the U.S. market. What can Netflix do to address some of the challenges
encountered when going international?
You may want to revisit this question when you are covering global expansion in Chapter 10. International expansion
presents challenges to Netflix in two areas: ecosystem infrastructure and content. Content will need to be adjusted for
language, for cultural preferences, and in some cases for government censorship. Infrastructure problems relate to availability
7.1 Competition Driven by Innovation LO 7–1
POWERPOINT SLIDES 5–11
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDE 76
This 15-minute video lecture by Steve Jobs might be a bit too long for class. However, a great way to use it would be to
assign it as pre-lecture viewing and ask students to identify comments and examples in his speech that tie to the learning
objectives of this chapter. You could then invite them to share that at the beginning or at the end of your lecture.
EXAMPLES
POWERPOINT SLIDES 9–10
NEWER FACULTY: Discussion of the innovation process shown in Exhibit 7.2 is worth spending a few moments on in class.
Many students will come into the classroom confused over the difference between inventions and innovations. It is important
to set the framework here at the start of the chapter for a better understanding of the concepts to follow.
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POWERPOINT SLIDE 6
NEWER FACULTY: There are many examples of creative destruction that you might offer to supplement those in the text. One
drug discovery and development paradigm. These same companies are struggling to maintain their dominance as relative
newcomers like Amgen and Genentech are leveraging advances in genomics, genetic engineering, and biotechnology to
produce drugs that are better targeted to treat diseases and that eventually can be designed for individual patients.
EXPERIENCED FACULTY: Another example is the digital marketing revolution in the way firms communicate with
customers. In “The coming era of ‘on-demand’ marketing” (McKinsey Quarterly April 2013), the firm forecasts that
POWERPOINT SLIDE 10
The successful commercialization of a new product or service allows a firm to extract temporary monopoly profits. Apple’s
innovation by launching the iPhone reshaped the smartphone industry in its favor, resulting in a temporary competitive
advantage. To sustain a competitive advantage, however, a firm must continuously innovate—that is, it must produce a string
of successful new products or services over time. In this spirit, not only has Apple introduced incrementally improved
keep the lead? Will this market have network effects? Sony launched the first e-reader, but lost market dominance to
Amazon’s Kindle, based on Amazon’s business model that took advantage of its competitive advantage in content.
To further capitalize on a firm’s first-mover advantage, a company could form exclusive partnerships with suppliers of
hardware and content providers. This leads to network effects and increased demand for the product. Furthermore, a firm
should investigate developing robust distribution channels and continuing R&D investment to fuel future incremental
DISCUSSION TOPICS
EXPERIENCED FACULTY: Apple disrupted the phone market with the first iPhone and created the tablet market with the first
iPad. Why do they still hold a commanding share of the tablet market, while Android makers lead in cell phones? Students
will have a variety of ideas on this topic, but the goal will be to get them to build from the theoretical drivers of first-mover
NEWER FACULTY: Making innovations successful often relies on being the first to commercialize a technology. What are
some practices a firm could use to enhance its first-mover advantage? Does the stage of the industry life cycle affect the
available practices? Are there long-term consequences for the firm from these practices? The stage of the life cycle definitely
affects the available practices. For instance, in the growth stage, suppliers and content providers might be more willing to
form a partnership because they fear losing the contract to their competitors (case in point is the now expired exclusive
partnership AT&T had with the iPhone). Just as benefits are created by such partnerships, long-term consequences are also
possible: reduced flexibility for both the first mover and supplier. If a disruptive technology is introduced in the existing
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marketplace, both companies in a first-mover partnership could be handcuffed, which can wreak havoc on their business
strategies.
improbable success.
Ethical/Social Issue: Innovation rates benefit from gender diversity on new product development (NPD) teams and yet the
number of women entering STEM fields has declined steeply over the last few decades. Tell students to imagine that they ran
EXERCISES
Have students investigate a new technology on the market and use it as a basis for building or assessing critical reasoning
skills. One example you might use is Samsung’s smartwatch (see “For smartwatch, Samsung’s timing counts” 9/3/13 The
Wall Street Journal). For this exercise, ask students to make a list of the advantages of being a first mover from the text. For
each of the first-mover advantages: Is it relevant to this product? If so, write a one sentence logical argument for why the first
mover will gain this benefit and a one-sentence description of a piece of evidence supporting that argument that he/she found
in his/her research. Then repeat the process for Apple’s advantages and disadvantages as a second mover with Apple Watch.
POWERPOINT SLIDE 8
While it is easy to recognize that today’s undergraduates may not even be able to visualize the ‘ancient’ process of
conducting research for term papers using encyclopedias, card catalogues, and print journals in the stacks, many of these
millennials may not even have much experience with Encarta. To give them an appreciation of industry evolution, you may
want to send them to the university library with an assignment to research a topic using encyclopedias and journals not
available for online search (at my university this would include full text of recent Harvard Business Review articles). The
topic of the research does not need to be consistent (it could be directed toward a paper they need to write in a different class,
or it could be directed toward the firm the student is using for the Strategy Term Project in this textbook. What is important
7.2 Strategic and Entrepreneurship LO 7–2
POWERPOINT SLIDES 12–15
EXAMPLES
POWERPOINT SLIDE 13
NEWER FACULTY: For an expanded discussion beyond what is in the textbook on Sara Blakely of Spanx, see this interview
from The Wall Street Journal 10/11/13.
As an example of intrapreneurship, Kellogg’s acquired Kashi (Chapter 9) to benefit from the more rapid growth rate in
healthier food choices. Initially, they kept a hands-off approach to managing the firm and allowed the firm’s entrepreneurial
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culture and processes to continue. Then, they increased parental control, eliminated the separate Kashi sales force, and
POWERPOINT SLIDE 13
The textbook describes a few serial entrepreneurs and a Connect exercise focuses on serial entrepreneur Elon Musk, but the
flip side of that is that as firms mature they often need different skill sets in their CEO than the entrepreneurial expertise of
DISCUSSION TOPICS
POWERPOINT SLIDE 13
Beyond starting and running new businesses, entrepreneurs are change agents who transform innovation into reality. Apple
Inc. is known as one of the world’s most innovative companies, and its co–founder Steve Jobs was credited with Apple’s
most important breakthrough innovations. Steve Jobs also founded Pixar, one of the most successful film studios of all time.
Leveraging 3D computer animation, Pixar has created blockbuster hits such as Toy Story 1, 2, and 3, A Bug’s Life, Monsters
Research Update
Chen, J. and Thompson, P. (2015), New Firm Performance and the Replacement of Founder-CEOs.
Strat. Entrepreneurship J
.,
9: 243–262. doi: 10.1002/sej.1203
EXPERIENCED FACULTY: Founder CEOs are often replaced due to a mismatch between the founder’s abilities and the
growth expectation needs of the firm. These researchers found that replacing a founder CEO was not directly predictive of
success. Firms with a replacement CEO had a greater chance of failure, but those firms that survived grew considerably
faster than firms that retained a founder as CEO.
INTEGRATION
Case Analysis: Elon Musk Entrepreneurship: Zip2 to Tesla
This case analysis extends the example of successful entrepreneur Elon Musk from the textbook (page 205). The case
covers Musk’s diversity of startup experiences, including the social dimensions which are often prominent in his vision
for the business. Students will read the case and then answer the four questions following it. Difficulty: Medium Blooms:
Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts in this case analysis by comparing the three example
entrepreneurs discussed in the textbook (Jeff Bezos, Oprah Winfrey, and Elon Musk) with Jimmy Wales from the
ChapterCase opener. What are the major differences in how these individuals have approached entrepreneurship? How
have these differences impacted the organizations they have founded?
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Extended Discussion
POWERPOINT SLIDE 15
Strategy Smart Video Example
POWERPOINT SLIDE 73
This brief video describes Wikipedia in the context of social entrepreneurship.
Most students used Encarta or something like it during their earlier years in school. Of course, they are all using
Wikipedia now (though they don’t always admit this to their instructors!). Even so, we find most have never given
much thought to how Wikipedia stays in business. Instead of funding the business with banner ads or membership fees,
the founders set it up to operate largely with volunteers and cash donations as a not-for-profit structure (go to
http://en.wikipedia.org/wiki/Main_Page and click on “donate to Wikipedia”). Point out the “disappearance” of over $1
billion in value as a result of disruptive technology. In 1991 the encyclopedia market was $1.2 billion annually. By
2009, when Microsoft shut down Encarta, there was virtually no revenue left for firms creating an encyclopedia. But
did the value really disappear? NO… The value is now spread across wide swaths of humanity that are able to access a
breadth and depth of knowledge in nearly 300 languages never before possible. So what used to be $1.2 billion in sales
revenue for a handful of firms is now spread to billions of people in “consumer surplus” (Chapter 5). This same “social
good” argument can be made for many of the digital shifts now underway in newspapers, music, and books.
How can Wikipedia maintain and grow its ability to harness the crowdsourcing of its “Wikipedians” to maintain
high-quality (and quickly updated) content? AACSB 2015 Standard 9 Making sound decisions and exercising good
judgment under uncertainty Attracting and retaining Wikipedians is vital to the future success of Wikipedia. Recent
surveys illustrate a potential challenge—only 15 percent of women contribute to Wikipedia, and the average age of
contributors is the mid-20s. To grow, Wikipedia should undertake a variety of strategies, all of which solicit help from
the underrepresented. Wikipedia should partner with translation companies in order to increase the content of
underrepresented languages. Wikipedia could also partner with computer training companies to educate women and
digital immigrants on the proper method to update Wikipedia. Lastly, Wikipedia could partner with colleges and
universities to improve content. For example, professors could create projects that require students to update content
where they are subject matter experts. These are just three ways for Wikipedia to improve and grow content. Students
will undoubtedly have many more suggestions.
As Wikipedia keeps growing, do you think it can continue to rely exclusively on donations (in time and money)?
What other “business models” could be considered? Would any of those “violate the spirit of Wikipedia”?
available exclusively to a set of users that paid subscription fees of some type. Either of these methods would change
the spirit of what the original founder intended Wikipedia to become.
What, if anything should Wikipedia do to ensure that its articles indeed present a “neutral point of view”?
Shouldn’t the crowdsourcing approach ensure objectivity? Does a “neutral point of view” matter to Wikipedia’s
How has the “long tail” affected Wikipedia? The “long tail” has had a significant effect on Wikipedia. Wikipedia
provides a forum for subject matter experts (who previously might have been unheard) to provide specific and accurate
content, efficiently and cheaply.
What type of innovations should Wikipedia use to gain or sustain a competitive advantage? Students should be
market power. Incremental innovations will extend the time for Wikipedia’s success; meanwhile, radical innovations
will threaten the company’s dominant position.
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EXERCISES
POWERPOINT SLIDE 14
To illustrate how difficult it is for firms to be innovative in their thinking when they have a great deal of experience in an
area, I bring 10 items to class and arrange them in order on a table. The only requirement for these items is that they be varied
(banana, shoe, pencil, book, coffee cup, chair, etc.). Then I tell students that they are being asked to develop a new name for
each of these items and write it on a piece of paper. I hold up each item in order, then I add an eighth item—a verb—by
jumping or skipping. I give them only about 2–3 seconds between showing each item, then I go through them a second time.
At the end, I ask them to score themselves, giving themselves zero points if their new name is the same as the old name in a
different language than English, 1 point if the name is a noun in the same family (for example, apple for banana), 2 points if
levels of creativity in their team? This humorous video would be a good jumping off point for such a discussion. It describes
the boss who excelled at killing good ideas. AACSB 2015 Standard 9 Thinking creatively
POWERPOINT SLIDE 14
For an exercise in critical reasoning skills, assign one of these questions to each group of students. Ask the students to
watch an episode of Shark Tank, then answer their question in either a team paper or an informal presentation in class.
For one of the startups that received funding, what traits of that business made it attractive to the investor? Why?
For one of the startups that received funding, what traits or experiences of the entrepreneur made the business attractive to
the investor? Why?
For one of the businesses, what resources or capabilities were they looking for in the sharks, in addition to money? Why?
For one of the businesses that did not receive funding, what was the fatal flaw that discouraged investors? Why?
Look at the ABC website to learn something about one of the sharks, what experience does he/she have as an entrepreneur?
7.3 Innovation and the Industry Life Cycle
LO 7–3
POWERPOINT SLIDES 16–26
EXAMPLES
POWERPOINT SLIDE 17
To expand on the Google Glass example in the text, mention that GM and BMW are developing smart windshields for cars
that can display location-based information, as well as social media updates (see “A Computer for your car’s windshield”
12/4/12 The Wall Street Journal).
POWERPOINT SLIDE 19
Discussion of Exhibit 7.4 can be enhanced with this video, “Google’s Android seizes smartphone market” (The Wall Street
Journal 8/12/13), that describes the growth of Android in the emerging markets.
POWERPOINT SLIDE 21
NEWER FACULTY: Apple’s ability to leverage network effects is shown in Exhibit 7.5. Most students will immediately
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If a customer is comfortable with the Apple app store products and the interface with iTunes to purchase and organize their
apps, they are far less likely to explore Android (from Google) or Windows 10 (from Microsoft) even if these latter firms
introduce a really attractive hardware/software phone package or features.
POWERPOINT SLIDE 23
NEWER FACULTY: Standards are extremely important because they represent a common set of engineering features and
design choices. Standards reduce industry uncertainty and confusion and ensure product quality, performance, and safety. As
standards become dominant, the competitive nature of an industry intensifies. Firms begin to reap economies of scale and
learning, prices begin to fall, and distribution channels are expanded. As shown in Exhibit 7.6, the basis of competition
transitions more toward process innovation (lean manufacturing, Six Sigma, and others) instead of product innovation.
introduced, they came only with the traditional QWERTY keyboard layout. A software developer created an iPhone app to
allow users to add the Dvorak layout. But since it is not an “approved Apple App,” users must hack into their systems to
install the unofficial program. (Caution: Such “jail breaking” voids the iPhone’s warranty.) This example shows how hard it
can be to overthrow entrenched standards, even when they are inferior and the cost of alternative options is quite low.
DISCUSSION TOPICS
POWERPOINT SLIDE 21
Ask students to brainstorm the issue of network effects for the newly developing virtual reality headset industry (see “Oculus
adds movies and TV” D Seetharaman 9/25/15 The Wall Street Journal). How critical will content availability and user base
size be in determining which firms’ products will be able to cross the chasm?
INTEGRATION
Case Analysis: Innovation and the Industry Life Cycle
This case analysis uses the typewriter–to-computer transition to discuss some of the major factors involved in industry life
cycle and innovation. The brief case complements the textbook and students should read the textbook before completing
this activity. Students will read the case and then answer the five questions following it. Difficulty: Medium Blooms:
Analyze AACSB: Analytic
Follow-Up Activity: The industry life cycle is closely related to the next section of the textbook on crossing the chasm.
The textbook adroitly uses the smartphone industry as an application example tying together these two frameworks.
Discussion question 1 in the end of chapter material asks the students to use these concepts for a different industry. This
could be the basis for some small group discussions, and the instructor may want to assign industries or in some other
way assure a variety of chosen industries across the classroom.
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END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
You are a co-founder of a start-up firm making electronic sensors. After a year of sales, your business is not growing rapidly,
but you have some steady customers keeping the business afloat. A major supplier has informed you it can no longer supply
your firm because it is moving to serve large customers only, and your volume does not qualify. Through you have no current
orders to support an increased commitment to this supplier, you do have a new version of your sensor coming out that you
hope will increase the purchase volume by over 75 percent and qualify you for continued supply. This supplier is important
to your plans. What do you do? AACSB 2015 Standard 9 Ethical understanding and reasoning (able to identify ethical issues
and address the issues in a socially responsible manner)
This can be a common issue for a start-up firm, and students will have a variety of opinions on what the firm should do. The
co-founder could consider a cost-benefit analysis when evaluating this problem. If the firm can identify another supplier(s)
who will produce the sensors and mitigate the risk of losing the current supplier, then this should be considered an option.
Likewise, the co-founder could elect to continue with the current supplier, but just increase the purchase volume to account
for the anticipated sales. In this instance, the startup can be confident that the sensor quality is maintained. Additionally,
he/she could negotiate a new sensor price, with the current supplier assuming economies of scale will be achieved during
production. Would the startup go ahead and purchase the increased quantity even if their sales don’t justify it, thus creating
an inventory problem? Students will come up with other factors to consider, with the general theme that this is not an easy
decision to make.
EXERCISES
POWERPOINT SLIDE 19
Ask student teams to draw a projected industry life cycle for self-driving cars. When they have had a few minutes to discuss
this, guide a group discussion on what uncertainties auto makers are experiencing in this area. This discussion should lead to
an identification of PESTEL factors, such as technology developments, societal attitudes, legal barriers, and consumer
behaviors that are highly uncertain. How might the firms reduce their risk? Students may suggest alliances or staged
investments. You can extend that discussion further in the future by talking about what it would take for autonomous driving
cars to cross the chasm. (See “Automakers accelerate efforts to develop self-driving Ccrs” 9/10/13 The Wall Street Journal
and this video from The Wall Street Journal 10/29/15.) AACSB 2015 Standard 9 Making sound decisions and exercising
good judgment under uncertainty
END OF CHAPTER SMALL GROUP EXERCISE 1
POWERPOINT SLIDES 69 AND 26
Your group works for Warner Music Group (www.wmg.com), a large music record label whose sales are declining
largely due to digital piracy. Your supervisor assigns you the task of developing a strategy for improving this situation.
What are the key issues you must grapple with to improve the position of Warner Music Group (WMG)?
Students will have a variety of answers to this question. It is difficult to prevent the piracy of music, especially in this digital
Research Update
Karniouchina, E. V., Carson, S. J., Short, J. C., and Ketchen, D. J. (2013), Extending the firm vs. industry debate: Does industry life
cycle stage matter?
Strat. Mgmt. J
., 34: 1010–1018. doi: 10.1002/smj.2042
EXPERIENCED FACULTY: These researchers find that the industry life cycle shapes the antecedents to firm performance,
such that business-unit effects are stronger in the early phases of the industry life cycle and the impact of industry effects
grows stronger in the maturity and decline phases.