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In what phase of the life cycle is the record-label industry?
How does this life cycle phase affect the types of innovation that should be considered to help WMG be successful?
The decline stage of the life cycle suggests four strategic options: exit, harvest, maintain, or consolidate. None of these
7.3 Innovation and the Industry Life Cycle
LO 7–4
POWERPOINT SLIDES 27–34
STRATEGY SMART VIDEO EXAMPLES
POWERPOINT SLIDES 75 AND 27
This “Dancing Sasquatch” video allows you to offer a more humorous example of crossing the chasm that is just as effective
in conveying the key ideas, but might offer a nice break in a serious lecture.
POWERPOINT SLIDES 74 AND 33
This brief video illustrates the concept of “crossing the chasm” by offering examples of smartphones that succeeded and did
not succeed in capturing the mass market.
EXAMPLES
POWERPOINT SLIDE 33
Social network sites have followed a pattern similar to that illustrated in Exhibit 7.8. Friendster was unable to cross the
chasm. Myspace was successful with the early majority, but only Facebook went on to succeed with the late majority and
laggards.
POWERPOINT SLIDE 33
3D printers had great success with early adopters, but the leading products are having trouble crossing the chasm. What is
causing this stall in the industry life cycle?…Technology barriers that are preventing the development of machines that are
fast enough and easy enough for the mass market in either industrial or consumer customers. Learning curves and economies
of scale have not brought the costs down yet to a point attractive to mass market consumers. (See “3D printer firms fall flat as
buyers wait for new models” B Tita 8/7/15 The Wall Street Journal.)
DISCUSSION TOPICS
POWERPOINT SLIDE 33
The video “Will BMW i3 herald new dawn for electric cars?” (The Wall Street Journal 7/29/13), discusses the problems that
electric cars have had in moving beyond the early adopter market. It gives you the opportunity to open a discussion on what
technology improvements must be made before electric cars can cross the chasm. AACSB 2015 Standard 9 Analytical
thinking (able to analyze and frame problems)
Assume you work for a small firm that developed a better and faster operating system for Netbooks than Microsoft Windows.
Why does Microsoft dominate the operating system market? What strategy might your firm use to unseat Windows in this
market? Microsoft dominates the industry for PC operating system (OS) software with a 90 percent market share. How can
this be? Microsoft’s strategy shaped the industry structure in its favor. Its installed base of Windows operating systems on
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existing computers and its long-term relationships with original equipment manufacturers (OEMs) like Dell and Lenovo
create tremendous entry barriers for newcomers. The buyer power of OEMs in turn is low, given the fact that the successful
perfect complement to Microsoft’s operating system. Every time Microsoft releases a new operating system, demand for
Intel’s latest processor goes up, because new operating systems require more computing power. Due to the complementary
nature of their products, Microsoft’s and Intel’s alternating advances have created a virtuous cycle. The competitive forces of
the PC operating system software industry and Microsoft’s positioning in the industry combine to make the PC-OS software
industry very attractive for Microsoft. Yet, the Wintel standard is not the only competition to consider. Linux provides a free,
and should be introduced through a bottom-up approach. For example, the small firm might introduce the operating system as
a low-cost solution (possibly even free) in order to penetrate the low-end segment. As the small firm gains market share, it
can then begin to acquire more market expertise and further improve quality. For instance, the small firm can utilize network
END OF CHAPTER DISCUSSION QUESTION 1
POWERPOINT SLIDE 34
Select an industry and consider how the industry life cycle has affected business strategy for the firms in that industry
over time. Detail your answer based on each stage: introduction, growth, shakeout, maturity, and decline.
Refer the students to the comprehensive overview of industry life cycle in Exhibit 7.9. The industry life cycle significantly
affects a firm’s business strategy. Strategies for each phase are discussed below:
Introduction—In this phase, a firm’s objective is to achieve market acceptance and seed future growth. Firms typically
invest heavily in R&D and some in marketing, emphasizing unique product features and performance (differentiation).
Network effects are leveraged to propel a firm to the next stage.
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7.4 Types of Innovation LO 7–5
POWERPOINT SLIDES 35–46
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDE 76
This brief video by Marissa Mayer when she was still at Google offers an interesting perspective on creativity and also allows
you to connect this chapter’s theory back to ChapterCase 2 on Yahoo. You can ask students how she put these ideas into
action to boost creativity at Yahoo.
EXAMPLES
POWERPOINT SLIDES 36–37
Process innovation: The tendency is to focus on “cool” product innovations that occur in the introductory stages of an
industry. However, it’s actually the process innovations that build a sustainable competitive advantage in many cases.
Groupon had a neat product idea for daily local coupons e-mailed out to people who provided their accounts. But if Groupon
is to build lasting success, it will have to rework their processes, such as gaining new and repeat businesses to run coupons on
their platform, to make them more competitive with many firms now offering similar services.
Accepting bank deposits made via smartphone photo.
POWERPOINT SLIDES 38–40
Radical innovation (Exhibit 7.10):
Bluetooth connection
Incremental innovation (Exhibit 7.10):
The many flavors of Oreos,
POWERPOINT SLIDES 41–43
Architectural innovation (Exhibit 7.10):
We find many students are not familiar with the older “furniture–sized” photocopy machines that were heavily centralized in
large offices and required nearly constant maintenance to keep running. This same shift in copiers can also be seen with
computer printers as well.
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Disruptive innovation (Exhibit 7.11):
VoIP (Skype is one example) is challenging the traditional landline technology.
The vinyl record player to the cassette tape to the CD, and then to digital MP3 players like the iPod
The emergence of electric arc furnaces, for example, was a disruptive innovation that allowed so-called mini-mills like Nucor
and Chaparral to produce steel in small batches and at lower cost compared with fully integrated steel mills such as U.S. Steel
or Bethlehem Steel. Initially, though, the quality of steel produced by mini-mills was poor and could compete only in the
POWERPOINT SLIDE 40
EXPERIENCED FACULTY: If you want to include competency development plans and core rigidity over an industry life cycle
in your lecture, this humorous video might be a good opener (stop it before the commercial at the end). It shows people on an
escalator that has stopped working. Their core rigidity prevents them from realizing that they can just walk up and off the
escalator, so they behave as if they were stuck. You can use this to talk about the firm’s mental models and how strengths can
limit them when markets change rapidly.
POWERPOINT SLIDE 42
Currently, in the car industry, different technologies are being put forth as potential alternatives to gasoline, including
electric, hybrid (a cross between gasoline and electric), hydrogen, biofuels, solar, steam, and even exotic alternatives like
POWERPOINT SLIDE 42
A non-U.S. example of disruptive innovation is Japanese seafood sales and distribution. Ask your supply chain management
EXPANDED THEORY
Chris Anderson, author and editor of “Wired” explains the “long tail” theory with examples from the music and film
industries in a 9-minute video. The long-tail phenomenon is that 80 percent of offerings in a category are not big hits (see
Exhibit 7.12). It turns out that 80 percent of sales in a given product category (such as movies, books, and songs) come from
“blockbusters” in the “short head” of the distribution curve, which represents only 20 percent of the offerings in a category.
This phenomenon is captured by the Pareto principle, also known as the 80-20 rule, which says that roughly 80 percent of
effects come from 20 percent of the causes. The short head represents the mainstream, where all the blockbusters, best sellers,
and hits are to be found. These products tend to appeal to the largest segment of the market with homogenous tastes. In the
physical world of brick-and-mortar retail stores, these product selections are often the only choice on display, because there
companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices.
In any distribution, the short tail captures only the tip of the iceberg. The long tail, in contrast, captures the bottom of the
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iceberg, the non-obvious choices. By leveraging sophisticated IT systems, online retailers such as Rhapsody, Netflix, and
Amazon are able to aggregate these choices. Even Walmart, the world’s largest retailer, carries only about 55,000 music
Internet as a disruptive innovation enables companies to solve important strategic trade-offs. It lowers the costs of shelf
space, inventory, and distribution to near zero and enables firms to aggregate non-hits and match unique consumer
preferences to supply. Although the early experiences of media and entertainment industries illustrate the long-tail business
model, it is expected that the model can be used to build a business in any product or service that can be digitized. (C.
Anderson. 2006. The Long Tail: Why the Future of Business Is Selling Less of More, New York: Hyperion).
DISCUSSION TOPICS
END OF CHAPTER DISCUSSION QUESTION 2
POWERPOINT SLIDE 37
Describe a firm you think has been highly innovative. Which of the four types of innovation—radical, incremental,
disruptive, or architectural—did it use? Did the firm use different types over time?
When describing the chosen firm, the key principle is that the student understands the differences between the four types of
innovation. A sample company is Samsung, who has been innovative in the TV industry and has utilized several of these
END OF CHAPTER DISCUSSION QUESTION 3
POWERPOINT SLIDE 45
The chapter discussed the Internet as a disruptive innovation that has facilitated online retailing. It also, however, has
presented challenges to brick-and-mortar retailers. How might retailers such as Nordstrom, Neiman Marcus, or Macy’s need
to change their in-store experience in order to continue to attract a flow of customers into their stores to expand sales using
direct selling and store displays of the actual merchandise? If the Internet continues to grow and sales of brick-and-mortar
retailers decline, how might the retailers attract, train, and retain high-quality employees if the industry is perceived as in
decline?
Students are likely to come up with some creative ideas in response to this question. One technique that brick-and-mortar
stores have been using is to build an e-commerce presence and then offer same day pickup in stores. This allows them to
leverage their distributed inventory to give them a customer service advantage over pure Internet retailers. The reverse is also
used, i.e., computers in stores from which a consumer can order “long tail” items for home delivery. Other options might
include offering exclusive products that are available only in store, offering flash sales only in store, using RFD tags to send
messages to mobile phones to promote products in stores that a person passes, or using smart advertising displays in front of
restaurants to promote products in stores in the same shopping center. If stores are going to compete with Internet retailers,
they are going to have to offer something special that online retailers would find difficult to imitate, some options are
expanding their personal shopper offering, innovative merchandising, and outstanding customer service. To attract the best
people, they will need to gain a reputation for being “leading edge” in creativity and innovation in these three areas and
create prestige by who and how they recruit and through career development ladders.
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Strategy Highlight 7.1
POWERPOINT SLIDE 44: HOW DOLLAR SHAVE CLUB IS DISRUPTING GILLETTE
END OF CHAPTER DISCUSSION QUESTION 4
POWERPOINT SLIDE 46
Much has been said about competitive advantage gained from innovations such as the Internet, high-technology
gadgets, and apps. The chapter points out, however, that low-technology innovations such as the razor–razorblade
business model can also create value with incremental innovation. The chapter also noted that Dollar Shave Club
(Strategy Highlight 7.1) is merely using a different business model to try to disrupt Gillette. Think of other low-
technology innovations that are/were novel, useful, and successfully implemented so that the innovating firm gained a
competitive advantage. Find information about the entrepreneurial story behind the innovation.
There are numerous such examples. P&G’s site shows Swiffer mops and dusters and Pampers disposable diapers (most
STRATEGY HIGHLIGHT 7.2
POWERPOINT SLIDE 46: GE’S INNOVATION MANTRA: DISRUPT YOURSELF!
Given the global demographic shifts, health care will be of increasing concern in coming years. This brief strategy highlight
may be useful in helping students consider how to provide better health care less expensively in the decades to come, but it
raises a number of ethical issues in strategy formulation. A two-minute video produced by GE shows the Vscan handheld
device in use. We have found students relate best to seeing it used rather than viewing just a photo of it.
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
EXPERIENCED FACULTY: To what extent is GE ethically responsible for how—and why—the Vscan is used? (To what
extent is any company ethically responsible for how—and why—its product is used?) Note that GE’s website states that it is
Abortion and gender-selection are very challenging topics to manage in a large group setting. Keeping the focus on ethical
theories and more general assessments of corporate responsibility for product use may help. Utilitarian ethical theories would
argue that the Vscan product provides the “greatest good for the greatest number,” thus GE’s decision to market this product
EXERCISE
The new Vscan is self-disrupting in that it may cannibalize sales of other ultrasound equipment and thus cause job losses in
other parts of GE that make sophisticated, large ultrasound machines. As a manager, how would you present this issue to
employees in a positive manner?
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Students will highlight a variety of talking points during this exercise. Three example points are the following: Some jobs
apportioned to high-end imaging systems can be rolled over to the Vscan division to support continued growth or to generate
new ventures in the GE Healthcare practice. The Vscan will provide better health care at an affordable cost to the
underprivileged. The Vscan will generate significantly high revenues and profits for GE Healthcare (Vscan cost is
approximately 5 percent of the high-end ultrasound machines, but the customer base is more than 20 times larger than the
current base for the high-end machines). This may provide other new opportunities for the GE team to move into different
growing businesses. GE Healthcare managers can explain that a revolution in the ultrasound industry is inevitable. By
reverse-innovating, GE is identifying the future of the industry while maintaining its competitive advantage. If GE Healthcare
had become complacent, then another company could have invented the Vscan. Given this, many more jobs would have been
in jeopardy at GE Healthcare. By innovating in-house, employees who worked previously on the high-end ultrasound
machine can be redistributed to the Vscan division. This, combined with voluntary separation incentive payments, will
minimize the number of involuntary layoffs.
EXERCISES
POWERPOINT SLIDE 37
Provide students with a list of innovations and ask them to identify the type of innovation for each. One option is to connect
this exercise to the discussions from Chapter 6 by using Procter & Gamble’s most recent innovations. If you use this option,
remind students to click on both the brand innovations tab and the business/commercial innovations tab.
If you have Chinese students in your class, here is a great exercise to bring global insights into your course. China’s growth
has in the past been driven mainly by exploitation style innovation—process innovation, importing technology from other
countries through foreign direct investment, requiring it from international firms that want access to China’s huge market
demand, or adapting technologies developed in other countries. In “Gauging the strength of Chinese innovation” (E Roth, J
Seong, and J Woetzel Oct 2015 McKinsey Quarterly), the authors argue that continued growth in the future will require
improved exploration style innovation with an emphasis on product innovation. I suggest assigning the executive summary of
the article to the entire class. Ask a team of Chinese students to read the full report and then either lead a class discussion or
make a presentation critically reviewing the findings and presenting examples based on their understanding of the country’s
culture, history, and innovation processes.
7.4 Types of Innovation LO 7–6
POWERPOINT SLIDES 47–51
DISCUSSION TOPICS
POWERPOINT SLIDE 50
Microsoft’s innovation processes are very different from those of Google or Apple. Incremental innovations predominate at
Microsoft (see “Next CEO’s biggest job: Fixing Microsoft’s culture” 8/25/13 The Wall Street Journal). How might the new
CEO of Microsoft use open innovation processes to engage users in innovation of new and existing products? What other
ideas might work? One example is the CEO of Extended Stay America hotel chain gives out “Get Out of Jail Free” cards to
his employees to use when they take a risk on behalf of the company (see “Memo to staff: Take more risks” 3/20/13 The Wall
Street Journal). AACSB 2015 Standard 9 Leading in organizational situations
POWERPOINT SLIDE 49
Discuss how Exhibit 7.13 works in the context of P&G’s open innovation model. If you used the exercise in the earlier
“Types of Innovation: Classification” section on Procter & Gamble, ask students to compare the innovations developed in the
Connect + Develop open innovation process with those developed in the closed system.
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END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDE 70
The chapter compares and contrasts closed versus open innovation. It also describes Procter & Gamble’s Connect + Develop
open innovation system. With your group members, brainstorm to prepare a brief memo with a set of talking points regarding
the following questions:
What are some of the risks of an open innovation approach that a company should consider before embarking on it?
The biggest worry that most firms have about this process is loss or restriction of intellectual property. If someone submits an
Do you believe P&G’s Connect + Develop (C + D) open innovation system has the potential to create a competitive
advantage for the firm? How might P&G’s capabilities be strengthened as a result? If C + D does have the potential to
create a competitive advantage, do you believe it is sustainable? Why or why not?
According to Procter & Gamble’s website they appear to be very satisfied with the effectiveness of the process. They have
product development alliances with other firms that enable them to produce products that are dual-branded or contain the
benefits of products from their firm + those of another, e.g., Cover Girl Smoochies. Since their focus is fast-moving
Larry Huston and Nabil Sakkab, (former) executives at P&G, proclaimed, “Connect + Develop will become the
dominant innovation model in the 21st century.” Do you agree with their statement? Why or why not? If C + D did
become the dominant innovation model, how would this affect its potential to create a competitive edge for a firm?
Students may have different opinions about the future of open innovation processes, but encourage them to support their
Introducing the C + D innovation model requires tremendous organizational change. As Huston and Sakkab
described the change effort: “We needed to move the company’s attitude from resistance to innovations ‘not invented
here’ to enthusiasm for those ‘proudly found elsewhere.’ And we needed to change how we defined, and perceived, our
R&D organization—from 7,500 people inside to 7,500 plus 1.5 million outside, with a permeable boundary between
them.” Identify some of the major obstacles a manager would encounter attempting this kind of organizational
INTEGRATION
Case Analysis and Interactive Labeling: Types of Innovation
This drag-and-drop activity helps students connect various types of innovation to market and technology opportunities.
Students will answer three multiple choice questions after this interactive labeling is completed. Difficulty: Medium
Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on this topic by drawing the 2X2 innovation framework on the board and
asking students to provide products and services that would fit in each of the four categories. While this seems simple, we
have found students will disagree about the placement of several well-known products and the class discussion can help
bring out the need to understand the industry perspective used for analysis for optimal placement into the framework.
Discussion question 2 in the end of chapter material also addresses this subject.
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change. For example, how might P&G’s research employees react? Although you have not been formally introduced
to organizational structure, consider some recommendations for how to accomplish such large–scale organizational
change successfully.
This question offers the opportunity to integrate the students’ work in strategy with what they learned in their organizational
behavior course on organizational design, change management, team processes, and motivation. You could use this as an
opportunity to expand the theory you teach outside the scope of the textbook, such as McKinsey’s 7S model for strategy
7.5 Implications for Strategists
POWERPOINT SLIDES 52–55
EXAMPLE
POWERPOINT SLIDE 53
While the death of Encarta was not a major blow for Microsoft as a whole, the same cannot be said for the effect that online
shopping and e-books had for Borders Group, Inc. Borders filed for bankruptcy protection in February 2011. The firm’s
president, Mike Edwards, said Borders closed 200 superstores and some other properties. Borders owed nearly $200m to
publishers at the time of its Chapter 11 filing. This was later converted to a Chapter 7 filing and full liquidation. There is little
doubt that a major culprit of this bankruptcy for Borders is its slow recognition of the impact of online and e-book sales on its
business. Borders used Amazon for all of its online business until opening its own website (Borders.com) in 2008.
Additionally, the Borders e-reader (from Kobo) was not on the market until June 2010. In comparison, the Amazon Kindle
launched in November 2007, and Barnes & Noble launched the Nook in November 2009.
McKinsey Quarterly has published a video interview with inventor, futurist, and author Ray Kurzweil. The video is in four
sections but if you choose to play all, it runs 13 minutes. Mr. Kurzweil proposes that the growth of technologies is
transforming industries and creating challenges for society.
DISCUSSION TOPIC
POWERPOINT SLIDE 53
EXPERIENCED FACULTY: The video game industry offers the opportunity for a discussion of the practical implications of
several of the concepts in this chapter. The freemium business model games have been a disruptive force rapidly depleting
the market for game consoles. The long tail facilitated by Internet distribution has facilitated this decline. One destructive
wave was driven by social games that reached customers through Facebook, such as Zynga. Recently those games have been
negatively impacted by games originally designed for mobile device use and distributed through Apple and Google app
stores. It is also a market in which Asian and Western markets have required different criteria for success. It is also an
Research Update
Chatterji, A. K. and Fabrizio, K. R. (2013), Using users: When does external knowledge enhance corporate product innovation?
Strat. Mgmt. J.
, doi: 10.1002/smj.2168
EXPERIENCED FACULTY: Using a sample of medical device makers and their collaboration with physicians, this research
focuses on the conditions under which user knowledge can contribute most effectively to corporate innovation. The
underlying literature in this field identifies both the importance of users to corporate innovation (20–80 percent of
important innovations across a number of fields were user-sourced) and the unique quality of user-driven innovation
(users are highly motivated to fulfill unmet needs that they have experienced). Given that cross-boundary interactions
increase administrative costs and communication barriers, the study finds that user-driven open innovation has higher
benefits in the early stages of technology life cycle and in the development of radical innovations.
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industry in which strategic entrepreneur’s have risen to success almost overnight. Students will be very familiar with this
industry and the pace of evolution has been so rapid that they can probably recall several generations of disruptive
EXERCISE
POWERPOINT SLIDE 54
Ask small teams of students to assume that they have an idea for a radical new type of phone charger (show this video
“Nature powered gadgets for outdoor adventure” 8/21/13 The Wall Street Journal). What things would you need to consider
as a new entrant with a radical innovation seeking a competitive advantage? Topics that should be brought up in the
discussion would be effectively communicating with the early adopters, identifying influencers, reducing cost structure and
improving ease of use to cross the chasm, and creating barriers to imitation. What role might open innovation play in R&D to
improve and develop the product? Tying back to Chapter 4, what competencies would the innovator need to succeed in this
industry?
DISCUSSION TOPICS
Strategy Term Project
Term Project Module 7
Where is your firm’s industry on the life cycle as shown in Exhibit 7.4? What are the strategic implications?
What is the firm’s innovation strategy? Does it rely on incremental or radical innovations? Disruptive or
architectural? What are the competitive implications of the firm’s innovation strategies?
Are intellectual property rights important for your firm? Can you find what strategies the firm is implementing to
protect its proprietary position? Identify a recent innovation by your firm. What is your firm’s strategy to cross the
chasm(s) to achieve mass market adoption of their innovation?
What attributes describe the current major customer segment for your firm? Are these changing? If so, is your firm
prepared to meet these new customer demands?
The point of reviewing customer segments here is to think through what a “bottoms–up” disruption in the industry might look
like. This can be an area where students demonstrate some creativity. Ask them to reflect on how other industries may
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How does your firm organize for innovation? Does it use a closed or an open innovation approach? Is its current
approach working out well, or does it need changing? If yes, how?
Encourage the students to go beyond the issue of open versus closed innovation. What can they learn about the firm’s new
product pipeline. For a U.S. firm innovation performance can be roughly measured with a count of new patents over recent
years. Has the innovation productivity been rising or falling? How has the firm performed on this measure versus rivals?
Does the firm have a practice, like Google or 3M, of allowing employees some free time to work on projects of their choice?
Where does the firm do its research: a separate lab to develop a separate creative culture or integrated with manufacturing
and engineering, a lab located in a knowledge cluster or near headquarters, at several locations around the globe (close to
customers), or only in the headquarters company?
my
Strategy
POWERPOINT SLIDES 67–68: DO YOU WANT TO BE AN ENTREPRENEUR?
Thinking about today’s business climate, would you say that now is a good time to start a business? Why or why not?
Interest rates, real estate leases, and an abundance of qualified applicants for many jobs are all favorable factors. Reduced
bank lending for small businesses is a negative. Availability of great human capital is high when jobs are scarce. Also, with
recent low interest rates, investors may be more willing to accept the risks of investing in startups since other avenues are
producing very small returns.
Identify both the up– and downsides of taking on personal debt to finance a higher education.
If subsidized student loans are available, they are likely to have a lower finance cost than car loans, personal loans, or new
business loans. They also have more favorable repayment terms.
INTEGRATION
HP Running Case: Module 7
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.