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Strategic Management and Implementation TMU. Johannes M. Pennings June 2004 www-management.wharton.upenn.edu/pennings. Strategy and Innovation. Part I, Day 1 What is strategy? Frameworks External vs Internal Focus: Customer & Knowledge Strategy and Design Part II, Day 1

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strategic management and implementation tmu

Strategic Management and Implementation TMU

Johannes M. Pennings

June 2004

www-management.wharton.upenn.edu/pennings

Pennings TUM

Strategic Management Innovation

strategy and innovation
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Interia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

slide3

The (Institutionalized) Strategic Management Shopping Mall

Value Disciplines

Competing for

the Future

Activity

Systems

Dual

Strategies

Capabilities-Based

Competition

Vision

Time-Based

Competition

Resource-Based

View

Multimarket

Competition

Strategic Innovation

Value Chain

Time/Event

Pacing

Core-Competence

5-Forces model

Co-opetition

Eco-Systems

Virtual

Integration

Strategy as

Revolution

Collective

Strategy

Profit Pools

Strategic

Groups

7-S Framework

Value Migration

Pennings TUM

Strategic Management Innovation

slide4
Strategic Management … Confusion Reigns.

“[W]aves of new approaches [have been] proposed. […] Each approach made its contribution in turn, yet how any of them built on or refuted the previously accepted wisdom was unclear. The result: Each compounded the confusion about strategy that now besets managers”.

Source: Collis & Montgomery (1995) “ Competing on Resources: Strategy in the 1990s”, Harvard Business Review.

Pennings TUM

Strategic Management Innovation

slide5
“People seem to disagree about almost every aspect of strategy making […] they disagree about which issues to address in developing strategy, they disagree about the process of developing strategy, and they even disagree as to whether one can think about strategy at all”.

C. Markides (2000) All the Right Moves: A Guide to Crafting Breakthrough Strategy

Pennings TUM

Strategic Management Innovation

slide6
Strategic Management:

... deals with the formulation and implementation of a set of decisions, the purpose of which is the realization of a sustainable competitive advantage (manifested in long-term above average profitability).

Pennings TUM

Strategic Management Innovation

many frameworks of strategy
Many Frameworks of Strategy
  • Porter and Five Forces
    • Competitive advantage due to cost leadership or market differentiation
  • Mintzberg and Stream of Decisions
    • Not rational but emergent
  • BCG and low to high growth markets
  • New ”School” and competencies that produces a platform fro strategizing

Pennings TUM

Strategic Management Innovation

porter strategy the link between the firm and its environment
Porter:Strategy, the Link between the Firm And its Environment

THE FIRM

Goals and

Values

Resources

andCapabilities

Structure and

Systems

THE

INDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

STRATEGY

STRATEGY

sources of competitive advantage
Sources of Competitive Advantage

COST

ADVANTAGE

Similar product

at lower cost

COMPETITIVE

ADVANTAGE

Price premium

from unique product

DIFFERENTIATION

ADVANTAGE

Pennings TUM

Strategic Management Innovation

strategy and innovation10
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Interia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

porter s framework forces driving industry competition
Porter’s FrameworkForces Driving Industry Competition

Potential

Entrants

Threats of New

Entrants

Bargaining Power

over Suppliers

Industry

Competitors

Buyers

Suppliers

Bargaining Power of

Buyers

Threat of

Substitutes

Substitutes

Pennings TUM

Strategic Management Innovation

mintzberg on strategy

ع

ع

ع

ع

ع

ع

Mintzberg on Strategy
  • Plan (Intended)Also a Ploy (a Tricka Way to ? a Competitor)
  • Pattern (Realized)
  • Position
  • Perspective

ع

ع

Pennings TUM

Strategic Management Innovation

the concept of strategy

Cognitive

Forces

Intended

Strategy

Deliberate Strategy Process

Unrealized

Strategy

Realized

Strategy

Emergent Strategy

Process

Organizational

and/or

Environmental

Forces

Inconsistent Behavior

THE CONCEPT OF STRATEGY
slide14

BCG

Hi Growth

Lo Growth

Pennings TUM

Strategic Management Innovation

Market Share

strategy and innovation15
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Inertia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

shifting from an industry focus porter to a resource focus
Shifting From an Industry Focus(Porter) to a Resource Focus

THE FIRM

Goals and Values

Resources and

Capabilities

Structure and

Systems

THE

INDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

THE

INDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

STRATEGY

STRATEGY

The Firm-Strategy

interface

The Strategy-Environment

Interface

Pennings TUM

Strategic Management Innovation

shifting from an industry focus porter to a resource focus17
Shifting From an Industry Focus(Porter) to a Resource Focus

THE FIRM

Goals and Values

Resources and

Capabilities

Structure and

Systems

THE

INDUSTRY

ENVIRONMENT

Competitors

Customers

Suppliers

STRATEGY

STRATEGY

The Firm-Strategy

interface

The Strategy-Environment

Interface

Pennings TUM

Strategic Management Innovation

new school resources capabilities
New School: Resources & Capabilities
  • The role of resources and capabilities in strategy formulation.
  • The resources of the firm
  • Organizational capabilities
  • Appraising the profit potential of resources and capabilities (sustainability and appropiability).
  • Developing the firm’s resources and capabilities.

Pennings TUM

Strategic Management Innovation

value migration
Value Migration

“We have to be willing to cannibalize what we’re doing today in order to ensure our leadership in the future. It’s counter to human nature but you have to kill your business while it is still working”.

Lewis Platt, Hewlett-Packard

Pennings TUM

Strategic Management Innovation

value migration20
Value Migration

“Financial accounting, balance sheets, profit-and-loss statements, allocating of costs, etc. are an x-ray of the enterprise’s skeleton. But much as the diseases we most die from - heart disease, cancer, Parkinson’s - do not show up in a skeletal x-ray, a loss of market standing or a failure to innovate do not register in the accountant’s figures until the damage is done”.

P. Drucker (1993)

Developing (strategic) leading indicators

Pennings TUM

Strategic Management Innovation

rationale for the resource based approach to strategy
Rationale for the Resource-based Approach to Strategy
  • When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.
  • Resources and capabilities are the primary sources of profitability
  • But note that platform of capabilities can become a TRAP

Pennings TUM

Strategic Management Innovation

evolution of honda a strategy based upon resources and capabilities
Evolution of Honda: A Strategy Based Upon Resources and Capabilities

50cc 2-cycle engine

Related products:

ground tillers, marine

engines, generators,

pumps, chainsaws

Founding of

Honda motor

company

405cc

motor

cycle

4 cycle

engines

1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

First product:

clip-on engine

for bicycles

The 50cc

super

-cub

N360 mini

car

1000cc

Goldwing

touring

motor cycle

Acura Car

division

Pennings TUM

Strategic Management Innovation

resources as the basis for superior profitability
Resources as the Basis for Superior Profitability

Patents

Brands

Retaliatory

capability

Barriers to Entry

Industry

Attractiveness

Monopoly

Market share

Rate of Profit

in Excess of the

Competitive Level

Firm size

Financial resources

Vertical Power

Process technology

Plant size

Low-cost inputs

Cost

Advantage

Competitive

Advantage

Brands

Product technology

Marketing

capabilities

Differentation

Advantage

Pennings TUM

Strategic Management Innovation

the relationships between resources capabilities and competitive advantage
The Relationships Between Resources, Capabilities and Competitive Advantage

INDUSTRY KEY

SUCCESS FACTORS

COMPETITIVE

ADVANTAGE

STRATEGY

ORGANIZATIONAL

CAPABILITIES

  • RESOURCES
  • TANGIBLE INTANGIBLE HUMAN
  • Financial
  • Physical
  • Specialized skills
  • and knowledge
  • Communication &
  • interactive abilities
  • Motivation
  • Technology
  • Reputation
  • Culture
  • Structure

Pennings TUM

Strategic Management Innovation

the rent earning potential of resources and capabilities
The Rent-Earning Potential of Resources and Capabilities

Scarcity

THE EXTENT OF THE

COMPETITIVE ADVANTAGE

ESTABLISHED

Relevance

Durability

THE PROFIT

EARNING POTENTIAL

OF A RESOURCE OR

CAPABILITY

SUSTAINABILITY OF THE

COMPETITIVE ADVANTAGE

Mobility

Replicability

Property rights

Relative bargaining

power

APPROPRIABILITY

Embeddedness of

resources

Pennings TUM

Strategic Management Innovation

growth of service sector partly explains increase in strategy as firm knowledge
Growth of service sector partly explains increase in Strategy as Firm Knowledge

Source: World Bank, 1998

Pennings TUM

Strategic Management Innovation

growth of service sector in sweden similar to other eu countries
Growth of service sector in Sweden, similar to other EU countries

Employment

Percent

Agriculture

Service

Industry

Source: IUI

Pennings TUM

Strategic Management Innovation

the new forces
The new forces

Deregulation

Globalization

Traditional sources

of competitive leverage

Pennings TUM

Strategic Management Innovation

Digitization

Source: Unleashing the Killer App

revolutionary changes
Revolutionary changes
  • Digitization - Computing power and communications bandwidth becoming cheap enough to treat as disposable (Moore’s law)
    • Compare doubling grains of dirt on a chess board
  • Globalization – China, World is a large network, global network of suppliers and buyers, 24 hour operations, shop on a global basis
  • Deregulation - Free market better regulator than government, e.g., airlines, communications, banking

Pennings TUM

Strategic Management Innovation

business week 1998
Business Week 1998

Pennings TUM

Strategic Management Innovation

business week and us companies where is haider bank of china etc
Business week and US Companies….Where is Haider, Bank of China, etc. ?

Source: Business Week

Pennings TUM

Strategic Management Innovation

valuation ratios
Valuation Ratios

Coca-cola 19 Beverages

Oracle 15 Computer software/services

Cisco Systems 14 Computer software/services

Computer Associated International 14 Computer software/services

Schering Plough 12 Health care

Amgen 10 Health care

Gillette 10 Consumer Products

Metronic 9 Health care

Kellog 9 Food

Microsoft 9 Computer software/services

Pharmacia & UpJohn 9 Health care

First Date 9 Computer software/services

Pfizer 8 Health care

Abbot Laboratories 8 Health care

Mereck 7 Health care

Johnson & Johnson 7 Health care

Bristol-Myers-Squibb 7 Health care

Pepsico 7 Beverages

Phillip Morris 6 Tobacco

Eds 6 Computer software/services

Pennings TUM

Strategic Management Innovation

slide33
Competitive advantage is becoming increasingly dependent on firm’s ability to create and leverage knowledge

Key idea: Firms are good at transferring tacit knowledge (Kogut & Zander, 1992)

External leakage and imitation

Firm

knowledge

Internal codification

Dissemination

Transfer

Competitive advantage

(if resources & capabilities are hard to replicate or imitate)

Pennings TUM

Strategic Management Innovation

identifying organizational capabilities functional approach
Identifying Organizational capabilities :Functional Approach

FUNCTION CAPABILITY EXEMPLARS

Corporate Financial management Exxon, Coca Cola

Management General Electric,

Strategic Control Emerson Electric, GE

Coordinating decentralized ABB, Shell

business units

Managing Acquisitions ING, ConAgra

MIS Speed and responsiveness through American Airlines

rapid information transfer Benneton

R&D Research capability Mereck, AT&T

Development of innovative new products Sony, 3M

Manufacturing Efficient volume manufacturing Electrolux

Continuous Improvement Nucor, Motorola

Flexibility Benetton

Design Marketing Design Capability Apple, Swatch,

Brand Management Proctor & Gamble,

PepsiCo

Sales & Distribution Promoting reputation American Express

Responsiveness to market trends The Gap

Sales Responsiveness Microsoft, Glaxo

Efficiency and speed of distribution DHL

Customer Service KLM

Pennings TUM

Strategic Management Innovation

the framework for analyzing knowledge capabilities and other resources
The Framework for Analyzing Knowledge, Capabilities and other Resources

STRATEGY

4. Select a strategy

POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

3. Appraise the rent-earning

potential of resources/

capabilities

5. Identify resource gaps that need

to be filled.

2. Identify capabilities

CAPABILITIES

1. Identify the firm’s resources.

Appraise strengths and

weaknesses

RESOURCES

Pennings TUM

Strategic Management Innovation

summary
Summary
  • We are moving into a knowledge-based economy as new forces are changing the face of business
  • A company’s market value is increasingly dependent upon the value of its intellectual capital or intangible assets
  • A company’s competitive advantage is based on a firm’s ability to create and leverage its knowledge
  • Thus, knowledge sharing across divisions, countries, functions is emerging as a major business priority

Pennings TUM

Strategic Management Innovation

strategy and innovation37
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Inertia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

internal and external design strategy and innovation
Internal and External Design: Strategy and Innovation
  • Brief Review of Organizational Design and and External Relationships
  • Structure, Culture, Networking of Internal Organization Design
  • Brief Review of External Design

Pennings TUM

Strategic Management Innovation

internal and external design strategy and innovation39
Internal and External Design: Strategy and Innovation
  • Brief Review of Organizational Design and and External Relationships
  • Structure, Culture, Networking of Internal Organization Design
  • Brief Review of External Design

Pennings TUM

Strategic Management Innovation

internal design aspects
Internal Design Aspects
  • Specialization ( grouping by skills, process, customers, products, etc.)
  • Coordination
  • Hierarchy
  • Functional and Divisional Structure

Pennings TUM

Strategic Management Innovation

the basic tasks of organization
The Basic Tasks of Organization

Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

ORGANIZATIONAL CHALLENGE: design structure & systems that:

  • Permit specialization of knowledge
  • Facilitate coordination by grouping individuals & link groups with systems of communication, decision making, & control
  • Deploy incentives to align individual & firm goals and share knowledge among them

For coordination to be effective requires COOPERATION

But goals of employees = goals of owners

THE AGENCY PROBLEM

Pennings TUM

Strategic Management Innovation

general motors organization structure 1997
General Motors Organization Structure, 1997

Board of Directors

Corporate Functions

President’sCouncil

North American Operations

Delphi Automotive Systems

GM Acceptance Corporation

International Operations

Hughes Electronics

GM Europe

Midsize & Luxury Car Group

Small Car Group

GM Power Train Group

Vehicle Sales, & Marketing Group

Development & Technical Cooperation Group

Asian & Pacific Operations

Latin American, African, & Middle East Operation

Pennings TUM

Strategic Management Innovation

general electric s organization structure 1995
General Electric’s Organization Structure, 1995

Board of Directors

Corporate Staff Functions: Tax, Treasury, Audit. M&A, Legal, Business Public Relations, Government Development Relations, Leadership Development

Corporate Executive Office

Aircraft Engines

Capital Services

Lighting

NBC

Electrical Distribution & Control

Motors

Appliances

Industrial Power Systems

Medical Systems

Plastics

Information Services

Transportation Systems

Service Divisions

Aerospace Environmental GE Licensing/ Marketing

Technology Programs Supply Trading &Sales

Pennings TUM

Strategic Management Innovation

organization design
By FUNCTION(sales, production, customer service, etc.)

By PURPOSE (market, product, segment, region, etc.)

Organization design

Sales

Finance

Service

And

Parts

Service

And

Parts

New

Cars

Used

Cars

Pennings TUM

Strategic Management Innovation

functional structure

CEO

R&D

Manufacturing

Marketing

Finance

Accounting

HR

Functional Structure

Pennings TUM

Strategic Management Innovation

multidivisional structure by region product or customer
Multidivisional Structure (By Region, Product, or Customer)

CEO

Division 1

Division 2

Division 3

Division 4

R&D

R&D

R&D

R&D

Manufacturing

Manufacturing

Manufacturing

Manufacturing

Marketing

Marketing

Marketing

Marketing

Finance

Finance

Finance

Finance

Accounting

Accounting

Accounting

Accounting

HR

HR

HR

HR

Pennings TUM

Strategic Management Innovation

slide47

Brand manager

Multidivisional Structure at Proctor & Gamble

Pennings TUM

Strategic Management Innovation

pros cons of basic organizational designs
Functional Structure

Pros: fosters group identity, permits greater specialization and so increases skill levels, facilitates supervision.

Cons: creates strong contrasts and thus conflict between functional units, makes it harder to trace responsibility for performance (no unit is a profit centre), fails to develop well-rounded general managers.

Multidivisional Structure

Pros: simplifies co-ordination across functions within units, can be very large and still maintain control, facilitates idiosyncratic treatment of customers when they differ greatly.

Cons: reduces collegiality, duplicates staff functions and foregoes opportunities to share them, reduces chances for skill specialization.

Pros & Cons of Basic Organizational Designs

Pennings TUM

Strategic Management Innovation

dilbert on cross functional conflict
Dilbert on cross-functional conflict

Pennings TUM

Strategic Management Innovation

the fundamental law of organizational design
The Fundamental Law of Organizational Design

To the extent that youdifferentiate,

you must integrate.

Pennings TUM

Strategic Management Innovation

task interdependence
Task Interdependence
  • Pooled interdependence
    • Units share a common resource.
  • Sequential interdependence
    • One unit’s output is another unit’s input.
  • Reciprocal interdependence
    • Units must work with each other to produce common output.

high Cost of Managing low

low Priority for Linking high

Pennings TUM

Strategic Management Innovation

forms of task interdependence

Need for

Integration

Coordinating Mechanism

1. Pooled Interdependence

Regional HQ

Standardize

Low

Hotel C

Hotel A

Hotel B

2. Sequential Interdependence

Medium

Plan

ServiceDevelopment

Customer Contact

3. Reciprocal Interdependence

Mutually

Adjust

High

ProductDevelopment

Manufacturing

Sales/Mktng

Forms of Task Interdependence

Needs Assessment

Pennings TUM

Strategic Management Innovation

an information processing model of organizational design wheel vs circle

Unpredictability of the Task

Environmental Effects on the Task

Task Uncertainty

Information-Processing Requirements to do the Task

Interdependence of Task Elements

Fit

Grouping

Information-Processing Capacity of the Structure

Linking

Management Processes

An Information-Processing Model of Organizational Design (Wheel vs Circle)

Pennings TUM

Strategic Management Innovation

linking mechanisms
Linking Mechanisms
  • Hierarchy (i.e., a boss)
  • Rules and procedures (formal or informal)
  • Liaison roles
  • Task forces, cross-unit teams
  • Integrator roles/departments
  • Matrix structures

Information Processing Capacity

high low

Costs of Managing the Linkage

low high

Pennings TUM

Strategic Management Innovation

liaison roles cross unit groups

Manager

A

B

Manager

Cross-Unit Group

A

B

Liaison Roles & Cross-Unit Groups

Liaison

Pennings TUM

Strategic Management Innovation

integrators project brand program account managers

General Manager

Manufacturing

Engineering

Marketing

Program

Project

Manager

Program

Integrators(Project, Brand, Program, & Account Managers)

Pennings TUM

Strategic Management Innovation

matrix structures

General Manager

Manufacturing

Engineering

Marketing

Program

Project

Manager

Program

Matrix Structures

Pennings TUM

Strategic Management Innovation

new organizational forms
New Organizational Forms

Process-based organizations Organizing around business

processes

Recognizing corporate processes

- entrepreneurial process

- competence building process

- renewal process

Project-based organization, engineering cos., consulting also Firm’s “Formulas” cos., also manufacturing cos. e.g. Oticon

Parallel structures separate structures of separate management processes e.g. 3M, TQM, change management process

Network and Virtual Organization the boundaryless corporation e.g. Sun Microsystems, Cisco Systems, Italian clothing manufacturers

Pennings TUM

Strategic Management Innovation

firm as a bunch of silos or interconnected departments
Firm as a bunch of silos or interconnected departments

Pennings TUM

Strategic Management Innovation

strategy and innovation60
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Interia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

external design
External Design
  • Contracting
  • Licensing
  • Consortia
  • Partnerships
  • Alliances
  • Joint Ventures
  • Acquisitions

Relationship with

Us?

Pennings TUM

Strategic Management Innovation

firms sharing assets
Firms Sharing Assets
  • Governance or Control (Who is in Charge?)
  • Ownership

Pennings TUM

Strategic Management Innovation

slide63

Firm A

Firm B

Internal or External Hybrid

Pennings TUM

Strategic Management Innovation

strategy and structure
Strategy and Structure
  • Internal and external Strategic Perspective
    • Porter, BCG and Knowledge Based View
  • Internal: Functional to Divisional and Network Design
  • External: Licensing to Equity Joint Ventures and Acquisitions
  • ……Strategic management of Innovation:
    • Knowledge as Platform for Strategizing
    • Design inside and outside the firm for Strategizing

Pennings TUM

Strategic Management Innovation

strategy and innovation65
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Inertia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

strategy and innovation66
Strategy and Innovation
  • Resources and capabilities provide a basis for firms to stay in the market, but also to exit early (too early)
    • Stay: Nokia, IBM,
    • Exit: Mannesmann, Polaroid, Swissair, Marconi
  • Sink or swim depends on???

Pennings TUM

Strategic Management Innovation

innovation and strategy
Innovation and Strategy

1. Death of “Dominant Design”

  • Firm versus its environment
  • Some examples
  • What watch do you wear?

2. Unlocking the Firm from “Old”

3. Locking into the “New”Design

Pennings TUM

Strategic Management Innovation

dominant design
Dominant Design
  • A product or service with a clear identity, a standard that we take for granted and has become widely diffused
    • Car
    • Windows
    • Pizza
    • Endoscopy
    • Mobile Phone

Pennings TUM

Strategic Management Innovation

patterns of technological market evolution

performance/cost

time

Patterns of Technological/Market Evolution

Pennings TUM

Strategic Management Innovation

strategic focus evolves with the s curve
Strategic Focus Evolves with the S-curve
  • Compare “product life cycle”
  • Emergence of dominant design
  • From product to process innovation
  • From functionality to volume and standardization

Pennings TUM

Strategic Management Innovation

technological substitution

performance/cost

time

Technological Substitution

Pennings TUM

Strategic Management Innovation

slide72

E.g., Cash Machine

E.g. ICT

Pennings TUM

Strategic Management Innovation

innovation a matter of life and death
Innovation:a matter of life and death
  • Think of a product that got pushed out of existence?
  • Why did substitution occur?
  • What happened to the “Owners” of that dominant design?
  • Examples in your Industry, Sector

Pennings TUM

Strategic Management Innovation

slide74

Sail-ship built around 1910,

capsized on maiden voyage, off Southampton

Pennings TUM

Strategic Management Innovation

wooden tennis rackets
Wooden Tennis Rackets

Pennings TUM

Strategic Management Innovation

slide76

A 1998 racket that is now the dominant design

Pennings TUM

Strategic Management Innovation

ergonomic designs which never made it
Ergonomic Designs (which never made it!)

Pennings TUM

Strategic Management Innovation

evolution of tennis racket as dominant designs
Evolution of Tennis Racket as Dominant Designs

Graphite (plastic)

wooden

Pennings TUM

Strategic Management Innovation

tennis racket manufacturers
Tennis Racket Manufacturers
  • Outside Firms often Major Innovators
    • Prince with Metal and Titanium Racket
    • Star Players Play Big Role in Acceptance of New Paradigms
    • Best Ideas Need not be Winners!

Pennings TUM

Strategic Management Innovation

substitution
Substitution
  • Old products languish, but hang on, long after new technology emerges
  • New products often launched by firms outside traditional industry
  • New technology creates new markets
  • Penetration of new technology typically begins with tiny sub-markets

Pennings TUM

Strategic Management Innovation

example of mechanical watches dying paradigm
Example of Mechanical Watches dying paradigm
  • Mechanical engineering
  • Swiss
  • Guild-like handicraft
  • Jewelry-like

Pennings TUM

Strategic Management Innovation

slide82
Pennings TUM

Strategic Management Innovation

slide83
Pennings TUM

Strategic Management Innovation

watch as a closed assembly system
Watch as a Closed Assembly System

Pennings TUM

Strategic Management Innovation

watch as a closed assembly system85
Watch as a Closed Assembly System
  • Note that a watch is more than time keeping device:
    • Marketing - expensive to cheap; “push” to “pull”
    • Distribution -jewelry stores to drugstores
    • Production - craft, mass to automated
    • State - cartel protection to global openness
  • so changes in dominant design not only in product but also institutions, practices, competencies, distribution and regulation-protectionism

Pennings TUM

Strategic Management Innovation

watch s dominant design take aways
Watch’s Dominant Design: take-aways
  • S-curve for both product & process innovation.
  • Global watch industry went to three significant technology-market discontinuities:
  • Dominant design switches with three outcomes:
    • bankruptcy
    • entrepreneurship
    • weathering the storm

Pennings TUM

Strategic Management Innovation

other examples new paradigm often results in displacement of incumbents by new entrants
Other Examples: New paradigm often results in displacement of incumbents by new entrants
  • Mechanical to electronic to auto-kinetic watches
  • Wired to wireless telecom
  • Bank branches to ATMs
  • Vacuum tubes to transistors
  • Propulsion to jet engines
  • Typewriters to word processors
  • 35MM Camera to Digital Photos
  • Disk drives for desktop to laptop PCs
  • Brick&mortar bookstores to e-book retail

Pennings TUM

Strategic Management Innovation

strategy and innovation88
Strategy and Innovation
  • Part I, Day 1
    • What is strategy? Frameworks
    • External vs Internal Focus: Customer & Knowledge
    • Strategy and Design
  • Part II, Day 1
    • Strategic Management of Innovation
    • Market and Firm Inertia
      • Photography Industry

Pennings TUM

Strategic Management Innovation

technological substitution89

performance/cost

time

Technological Substitution

Digital

35MM

Pennings TUM

Strategic Management Innovation

from 35mm to digital cameras
From 35MM to Digital Cameras

Digital with FLASH CARD

35MM with FILM

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Strategic Management Innovation

paradigm
35MM

Digital

Paradigm

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Strategic Management Innovation

key players value chain
Key Players, Value Chain
  • Players:
    • Kodak, Canon, Minolta, Fuji, Agfa-Gevaert, Sony, Zeiss Ikon, Polaroid (bankrupt in 2002), Casio
  • Value Chain:
    • (1) Housing, (2)Shutter mechanism, (3) Optics, (4) Flash and Power source, (5) Development, (6) Printing, (7) Wholesale and (8) Retail

Pennings TUM

Strategic Management Innovation

evolution in this ecology
Evolution in this “ecology”
  • !: 80-85….2: 86-90….3: 91-95….. 4: 96-03
  • Photography Group
  • Adjacent Groups (Computer HW and SW)
  • Development Infrastructure

Pennings TUM

Strategic Management Innovation

evolution of photography
Evolution of Photography

86-90

91-95

96-2003

80-85

Polaroid Bankrupt

Price-adjusted

Quality full

Match

Digital sales

Exceeds

Conventional

Sales

PC Revolution

Internet and

Email limited to

Universities

Photo CD with

CD Player

1. Complementary

technologies

And

2. Firms with NE

Strategies, hugging

Aging Paradigms

35MM Cameras

And Early DI (Sony

MAVICA

No Substitution

Paradigm and

its Trajectory

Very “Obvious”

‘Counter’

Innovations

APS

Convergence

In Full

Swing

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Strategic Management Innovation

paradigm95
35MM :

Complements are development, paper

50Mn plus pixels

Limited duplication, transmission

Analog

Hard, Real

Key Players Kodak, Agfa, Fuji, also Canon

Companion Paradigms: Film and film reels, Movie Production, Projection

Digital:

Complements are PC, WWW, Email

Number of pixels growing

Duplication

Digital

Soft, Virtual

Key Players Canon, Sony, Minolta, and perhaps Kodak

Companion Paradigms: Editing, Visual arts, Movie Production

Paradigm

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Strategic Management Innovation

key photography elements of product service delivery
Key photography elements of product/service/delivery

Relative

Value

Digital

Immediate

Viewing

Image

Sharing

Price

Resolution

Features

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Strategic Management Innovation

slide97

Photographic Process – Digital vs. Film Paradigm

Traditional Film Image Lifecycle

Slide

Album

Camera

Slides

Consumer

Image

Re

-

purchase

Developing

Prints

Taken

Cycle

Film

Negatives

Photo

Album

Frequent re

-

purchases

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Strategic Management Innovation

slide98

Imaging / Photography Value Chain

Imaging

Equipment

Imaging

Media

Imaging

Transfer

Imaging

Storage

Imaging

Display

Traditional Industry

Players

  • Canon
  • Nikon
  • Kodak
  • Olympus
  • Minolta
  • Polaroid
  • Kodak film
  • Fuji film
  • Agfa film
  • Kodak Paper
  • Fuji Paper
  • Various Album Manufacturers
  • Kodak Chemicals

Imaging

Equipment

Imaging

Media

Imaging

Transfer

Imaging

Storage

Imaging

Display

Digital

Industry

New Players

  • Microsoft Software
  • Adobe Software
  • Kodak Software
  • Dell Software
  • H-P Printers / Ink
  • Epson Printers / Ink
  • Lexmark Printers / Ink
  • Ofoto online
  • H-P paper
  • CVS.com
  • AH.com
  • CD-ROMs
  • SanDisk
  • Sony
  • Intel
  • Toshiba
  • PC Manufacturers
  • Mobile Phones
  • Palm Pilots / PDAs
  • Sony
  • H-P

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Strategic Management Innovation

smile
…..smile….

Pennings TUM

Strategic Management Innovation

slide100

Photography Industry - Milestones

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Strategic Management Innovation

cameras
Cameras
  • Old versus New Paradigm
    • “Razor Blade”
    • Polaroid Dead and Kodak out of the Dow (DJIA)
    • Movie Theaters and Hollywood next?
    • Film, Paper and Album replaced by Digital
    • …..and WWW and Email
    • What is Next ?

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Strategic Management Innovation

kodak options
Kodak Options
  • Majority of Kodak’s revenues come from sales of films not cameras, and digital cameras do not use any film. How difficult for Kodak to give up its cash cow product.
  • The economics of traditional photography are much more attractive for producers than those of digital. A constraint on Kodak?
  • Finally, given that Kodak supports a vast organization on the basis of film sales, and that digital won’t yield profits for some time to come, how will this organization be supported in lieu of film sales.

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Strategic Management Innovation

slide103

Patents, Strategic Alliances, Joint Ventures…..

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Strategic Management Innovation

kodak s response to digital disruption
Kodak’s Response to Digital Disruption
  • Approached digital photography as a threat to its core business
    • Saw cannibalization of existing film-based business
    • Focused on current consumer behavior vs. emergent technologies (Paradigm Hugging)
    • Focused on traditional film competitors (e.g. Fuji)

Pennings TUM

Strategic Management Innovation

kodak s response to digital disruption105
Kodak’s Response to Digital Disruption

Before December 2001:

  • Kodak’s organization was organized by end-user market
  • The work of digital champions had to be divided among the various segments rather than as a unified strategy
  • Besides having the difficulty of charging one group with the responsibility to develop Kodak’s digital strategy, simple funding for R&D efforts would be divided among the existing segments
  • Given this structure, digital imaging was a threat to the established paradigm and its “owners”

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Strategic Management Innovation

kodak refocuses
Kodak Refocuses
  • Kodak restructured in 2002 to better integrate digital technology into its product line
      • Photography
      • Health Imaging
      • Commercial Imaging
  • Refocused on the business of “Photography”
    • Recognized the need to meet multiple market segments:
      • Consumers with differing needs, shopping habits, Internet usage, technical sophistication
      • Partnering with other firms

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Strategic Management Innovation

kodak s prospects
Kodak’s Prospects
  • Kodak is not the leader it once was; its core competencies in paper and film have become core rigidities
  • The photography market is likely to be much more fragmented
  • As we will see on June 13, we need a dedicated integrated business unit for new paradigm to overcome core rigidities

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Strategic Management Innovation

so far lessons
So far… lessons:

1. Death of “Dominant Design”

  • Firm versus its environment
  • Innovations
  • Inertia and Paradigm Huggers

2. Unlocking the Firm or Industry from “Old” Paradigm

Photography Industry

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Strategic Management Innovation

first day
First Day
  • Concept of Strategy
  • External (Customer, market) and Internal (Knowledge) View
  • Tools for Strategizing (Internal Structure and External Structures)
  • The Strategic Challenge for Players in their Industry in overcoming Inertia

Pennings TUM

Strategic Management Innovation

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