Strategic Management of Technology

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Strategic Management of Technology Innovation

• Dr. Clyde Neu
• Professor
• School of Business Administration

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The Innovators Dilemma When New Technologies
Cause Great Firms to Fall
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Losing a leadership position

• when radical innovation arrives.
• Listen only to current customers (instead of new
  ones).
• Invest only in new technologies that will provide
  more products like customers are now satisfied
  with.
• Pursue only innovations that seem to promise the
  best, near-term returns.

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Sustaining versus

• disruptive technologies.
• Sustaining Technologies those that continue the
  rate of improvement of established products.
• Disruptive Technologies Those that do not appeal
  to existing customers rather, they offer
  features that only new customers value.

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Disruptive technologies

• Typically, cheaper, simpler, smaller and more
  convenient to use (i.e., relatively crude or
  unsophisticated at the outset).
• Usually means that they offer less than
  established customers want today.
• However, improvements in first generation
  disruptive technologies may catch up to the
  future needs of current customers.

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Disruptive technologies

• Usually offer low margins since they are cheaper
  and simpler than mainstream products.
• Typically are introduced to small, insignificant
  (or less significant) markets.
• Do not appeal to profitable, established
  customers of leading firms, who do not want or
  cannot use them.

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Observations

• Sustaining innovations usually come from
  established companies.
• Disruptive innovations, on the other hand,
  usually are introduced by new competitors.

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Observations

• continued.
• A pattern follows where the disruptive
  technology, which initially offers less
  capability than current markets (customers) want,
  catches up with the needs of customers of the
  previous technology through sustaining
  innovations.

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Performance improvements

• Performance Improvement
• required by mainstream
• marketplace
• Performance Expected trajectory of
• performance improvement
• of disruptive technology
• Time

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The pattern

• First, disruptive technologies often are
  developed by established firms.
• When the issue of formal project approval is
  raised with senior management, marketing
  personnel seek reactions from powerful mainstream
  customers, who often have no use for the product.

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The pattern continued

• Established firms then step up the pace of
  sustaining technology development to win
  competition against other established firms.
• Frustrated employees from established firms often
  form new companies and find markets for
  disruptive technologies.

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The pattern continued

• Next, these new entrants move up-market, as they
  improve their products to the point where they
  take over the large established markets.
• Established firms belatedly jump on the bandwagon
  to defend their customer base often too late,
  as new firms have developed advantages.

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Observations continued

• An established companys value network often
  prevents it from embracing a disruptive
  technology since its current customers and its
  cost structures keep it from moving down-market
  (i.e., into small markets where demand exists,
  but where profits are lower).

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Observations continued

• These companies, instead, move up-market (i.e.,
  into larger, more profitable markets),
  surrendering low-end markets to the new
  competitors.
• Example Integrated steel mills have given up one
  product line after another to mini-mills, which
  have lower cost structures and are better suited
  to compete in low-end markets.

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Observations continued

• In low-end markets, new competitors have a chance
  to gain a foothold.
• From there, the new challengers attack
  relentlessly upward, taking more and more of the
  market away from the (former) leaders.

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Example

• In 1987, a new disruptive technology appeared on
  the scene thin-slab casting of steel. However,
  because it did not provide a smooth surface free
  of defects (as required in sheet steel), large
  integrated mills instead invested in conventional
  facilities (i.e., rolling mills) to protect their
  ability to serve their mainstream customers.

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Example continued

• Nucor, a mini-mill, seized the opportunity of
  investing in thin-slab casting to improve the
  quality of the product. By 1996, Nucor had won
  higher-margin business away from the integrated
  mills and captured 7 percent of the North
  American market for sheet steel. The integrated
  mills had lost their leadership of this industry.

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Strategy 1

• Give responsibility for disruptive technology to
  organizations whose customers need the technology
  (i.e., customers who will ask for the disruptive
  product).
• One approach spin out an independent
  organization and embed it among emerging
  customers that need the technology.

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Strategy 2

• Match the size of the organization to the size of
  the market.
• Embed the project in an organization that is
  small enough to appreciate small-market
  opportunities.

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Strategy 2 continued

• Note It is critical to enter emerging markets
  when they are small (in order to gain most of the
  revenues as those markets develop).
• Give small organizations where it is critical
  to the organizations growth and profitability
  the responsibility to commercialize disruptive
  technologies.

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Strategy 3

• Plan to fail early and inexpensively through
  trial and error in the search for the market for
  the disruptive technology.

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Strategy 3 continued

• Recognize that only sustaining technological
  innovations can be targeted at known markets
  where it is possible to take a planned,
  research-oriented approach to developing and
  marketing new products.

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Strategy 3 continued

• Disruptive innovation, however, must be
  commercialized in emerging markets where it will
  be impossible to predict revenues, costs, or even
  which customers will buy the product.

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Strategy 3 continued

• Its equally impossible to predict the precise
  needs of the emerging market or the precise
  customers who may want a disruptive innovation
  so be flexible in product design.

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Strategy 3 continued

• Finally, conserve enough resources to follow a
  different strategy than first envisioned if early
  releases of the product point to a new
  application or direction.

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Examples

• In 1991, HP over-designed a revolutionary 1.3
  inch disc drive with very expensive features in
  anticipation of sales to the personal digital
  assistant (PDA) market.
• When sales did not materialize, HP tried to sell
  the device in the home video game market, but it
  was too expensive HP withdrew from the market in
  1994.

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Examples continued

• Honda (accidentally) introduced a stripped down
  motorcycle in the U.S. in 1959, which was rapidly
  accepted in a new disruptive (low-end) market
  (off-road dirt biking).
• Honda did not deplete its resources and later was
  able to introduce larger bikes to compete with
  other companies in the over-the-road distance
  driving market.

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Strategy 4

• Develop new markets that value disruptive
  products, rather than try to adapt the technology
  to mainstream customers.

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Strategy 4 continued

• Recognize that established firms see the
  challenge of a disruptive technology as a
  technological one and seek to improve it enough
  to suit their known markets.

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Strategy 4 continued

• Emerging companies, on the other hand, see the
  challenge of a disruptive technology as a
  marketing one. They work to find a market that
  values the disruptive features of the product.

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Example

• U.S. Steel assumed that the market needed only
  high-quality steel, instead of asking where the
  market might be for low-price sheet steel with
  poor surface appearance.
• Nucor, on the other hand, located a low-end
  market that needed the less attractive product
  this gave it a foothold in the sheet steel
  market, an area where it had never had any
  opportunity in the past.

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Emerging companies

• Find markets that embrace the disruptive
  technology as it stands.
• They first create a customer base, and then move
  up-market, ultimately addressing the mainstream
  market much more efficiently.

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Established firms

• in the meantime may have embarked on a path to
  give customers more than they need (i.e.,
  successive generations of products with more
  performance and cost than customers require).
• A performance oversupply results.

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Dealing with a

• performance oversupply.
• Push upward, toward higher-end customers,
  abandoning the lower end of the market.
• Nucor moved up-market to capture 7 of the
  market for high-quality sheet steel.
• Honda moved up-market to capture a respectable
  share of the large, over-the-road motorcycle
  market.

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Four phases of change

• in the basis of competition.
• Functionality the product that comes closest to
  satisfying the market need (i.e., as to function)
  is the strongest in the market.
• Products may be differentiated by function in
  emerging markets, and relatively high prices may
  be obtained for them.

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Four phases of change

• Reliability When two or more products satisfy
  the markets demand for functionality, the basis
  of competition shifts to reliability.
• Customers choose the more reliable product (e.g.,
  based perhaps on product warranties).

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Four phases of change

• Convenience As soon as two or more vendors
  satisfy the reliability demanded by the market,
  the basis of competition shifts to convenience.
• Customers will prefer products that are the most
  convenient to use, and vendors with whom it is
  easiest to do business.

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Four phases of change

• Price When more than one vendor offers
  convenience, the basis of competition changes one
  last time to price the product becomes a
  commodity.
• While one (or more) product may still offer more
  in the way of convenience, reliability, or
  functionality than another, the features are more
  than the market demands.

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Dealing with a

• performance oversupply.
• Keep pace with the needs of a certain category of
  customers, catching each change in the basis of
  competition.
• When the performance of 3.5-inch disc drives
  matched the mainstream customers demands for
  capacity, reliability became the basis for
  competition.

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Dealing with a

• performance oversupply.
• Change the markets demand for functionality so
  that customers demand the performance improvement
  the company can provide.
• As long as computer users continue to need more
  and more capacity due to software packages that
  consume more memory (i.e., more functionality),
  customers will demand products and there will not
  be an oversupply.

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Conclusions

• Companies that keep disruptive technologies
  bottled up in their labs, working to improve them
  until they suit mainstream markets, will not be
  as successful as firms that find markets that
  embrace the disruptive technologies as they
  stand.

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Conclusions continued

• By creating a customer base and then moving
  up-market, these companies will ultimately
  address the mainstream market much more
  effectively.

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