executive master in international postal management patrick foley april, 2010

Executive Master in International Postal Management

Patrick Foley

April, 2010

Executive Master in International Postal Management

Innovation

Managing in Complex and Uncertain Times:

Red and Blue Oceans

Tuesday 13th April, 2010

Patrick Foley

Innovation has a range of meanings and applications

Definitions of innovation A successfully commercialised invention

A learning process where knowledge is enhanced and applied

The solution of problems through discovery and creation

The successful production, assimilation and exploitation of novelty

A new or different solution to a new or existing problem

Device + Marketing

Systematic entrepreneurship

The process of turning an idea into income - commercialising invention

The search for, discovery experimentation, development, imitation and adoption of new products, new processes and new organisational set-ups

The effort to create purposeful, focused change in an enterprise’s economic or social potential

Innovation

Innovation = Invention + Commercial Exploitation

Is inventing the light bulb enough?Is inventing the light bulb enough?No : it must pass the five tests of a new No : it must pass the five tests of a new

innovationinnovation

1. Function Test (does it perform the function?)2. Mass Production Test (can it be mass

produced?)3. Market test (will it sell/ is there a solid

market channel?)4. Financial test (Can we do all the above at a

profit?)5. Permission Test (can it be legally used in

the context intended)

Innovation and Value Creation

The production process must be capable of meeting the design

specifications.

Also, the design should facilitate ease of

production and take advantage of production systems, technologies

etc.

Delivery, installation, commissioning and after

sales service and support must all meet or exceed the customers

expectations.

PRODUCTION

CUSTOMER

NEEDS

PRODUCT DESIGNS & SERVICES

The Marketing and Sales departments must understand the customer and translate this knowledge into product design parameters.

Also, advances in product design can occur ahead of needs.

Sources of innovation fall into two distinct categories

Source: Professor Peter F. Drucker, Innovation and Entrepreneurship: Practice and Principles; Harvard Business Review: Innovation, 1991

Unexpected occurrences

Incongruities

Process needs

Industry & market changes

Demographic changesDemographic changes

Changes in perceptionChanges in perception

New knowledge

Demographic changesDemographic changes

Changes in perceptionChanges in perception

New knowledge

Four sources of opportunity exist within a company or industry

Three exist outside a company’s social & intellectual environment

In all cases, the outcome is the creation of something new and transformational

The unexpected

Examples of innovative inventions

Du Pont’s Nylon, G.D. Searle’s NutraSweet, Alexander Fleming’s penicillin

The incongruity

Process needs

Changes in industry or market structure

Demographics

Changes in perception

New knowledge

Alcon Industries’ cataract enzyme, Ro-Ro container ships

AT&T’s automatic switchboard, Mergenthaler’s Linotype, Ochs, Pulitzer and Randolph Hearst’s modern advertising

Nokia’s mobile phones, investment banking, the car

BUPA’s healthcare insurance, Japan’s robotics industry, Club Mediterranee’s travel & resort business

Pfizer’s Viagra, organic food

J.P.Morgan’s commercial banking, Douglas & Boeing’s commercial aircraft, the computer

Inte

rnal

opp

ortu

nitie

sE

xter

nal

opp

ortu

nitie

s

What type of competitive advantage does/could the innovation contribute to?

What is the driver of Innovations Cost Advantage?

How does the innovation help to differentiate?

Red Ocean versus Blue Ocean Strategy

The imperative for red ocean and blue ocean strategies are starkly different

Red Ocean StrategyRed Ocean Strategy

Compete in existing market space

Beat the competition

Exploit existing demand

Make the value/cost trade off

Align the whole system/activities with either differentiation or low cost

Compete in existing market space

Beat the competition

Exploit existing demand

Make the value/cost trade off

Align the whole system/activities with either differentiation or low cost

Blue Ocean StrategyBlue Ocean Strategy

Create uncontested market space

Make the competition irrelevant

Create and capture new demand

Break the value/cost trade off

Align the whole system/activities in pursuit of differentiation and low cost

Create uncontested market space

Make the competition irrelevant

Create and capture new demand

Break the value/cost trade off

Align the whole system/activities in pursuit of differentiation and low cost

Porter’s Five Forces ModelPOTENTIALENTRANTS

SUPPLIERS

SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Threat ofnew entrants

Bargaining power of buyers

(customers)

Threat of substitute products or services

Bargaining power of suppliers

Source: M.E. Porter, Competitive Advantage (1985)

(Competitive forces) determine the profit potential of the industry and therefore, its attractiveness

(Competitive forces) determine the profit potential of the industry and therefore, its attractiveness

Forces DeterminingIndustry Attractiveness

1. Intensity of Direct Competition– Excess production capacity– Standardised products– Large number of competitors– Low market growth– Commitment to industry


2. Buyer Power

– Price sensitivity of buyers

• A function of buyer profitability/perceived benefits

• Proportion of product’s cost in their total expenditures

– Negotiating power

• Few buyers

• Many manufacturers

• Little differentiation

• Low switching costs

• Opportunities for backward integration (for industrial buyers)


3. Threat of new entry

– Weak barriers to entry (and demonstrated profitability) encourage new firms to enter industries

• Patents & the diffusion of proprietary knowledge (e.g., pharmaceuticals)

• Legislation (e.g., airlines)

• Economies of scale (i.e., minimum efficient scale)

• Capital requirements (e.g., telecoms)

• Strength & importance of brands

• Threat of retaliation

• Access to distribution channels


4. Threat of substitutes

– Indirect competitors that can undermine demand and prices

• Alternative products (e.g., cotton / wool)

• New products (e.g., telex -> fax -> e-mail)

• Elimination of need (e.g., choice fuels eliminating fuel additives)

• Generic substitution (e.g., broad categories of ‘leisure’ products competing for discretionary spending)

• Abstinence


5. Power of suppliers

– Suppliers limit industry attractiveness and profitability if they can increase input costs faster than they can be passed on

• Few suppliers available

• Suppliers have unique products

• Switching costs are high

• Threat of forward integration

• Large number of small customers

Porter’s Five Forces Model The model systematically captures the business logic that

all managers are intuitively familiar with: – An industry that has weak suppliers and buyers…

– High barriers to entry…

– No substitutes…

– and is a monopoly...POTENTIALENTRANTS

SUPPLIERS

SUBSTITUTES

BUYERS

INDUSTRYCOMPETITORS

Rivalry amongexisting firms

Weak Weak

High

NoneNo rivalry

(monopoly)

Will be very profitable!

Generic Strategies

DifferentiationDifferentiation Cost LeadershipCost Leadership

FocusFocus

Broad Scope(Industry wide)

Narrow Scope(Market Segment)

S o u r c e o f A d v a n t a g e

Porter (1980)

Porter’s Competitive Advantage

Remember that a companies overall business strategy will drive all other strategies.

Porter defined these competitive advantages to represent various business strategies found in the marketplace.

Cost leadership strategy firms include Walmart, Suzuki, Overstock.com, etc.

Differentiation strategy firms include Coca Cola, Progressive Insurance, Publix, etc.

Focus strategy firms include the Ritz Carlton, Marriott, etc.

STEP Framework

STEP Analysis Factors

Potential Impact

H – high

M – Medium

L – Low

U - Undetermined

Type of Impact

+ Positive

- Negative

? Unknown

Time Frame

0-6 Months

6-12 Months

12-24 Months

24+ Months

∆ Impact

> Increasing

= Unchanging

< Decreasing

Socio-cultural– Demographics– Social Trends

Technological– Available infrastructure– Product / Process technology– E-commerce / routes to market

Economic– Economic cycles– Unemployment / inflation– Tariffs

Political-Legal– Stability of government– Regulations (e.g., employment law)

Differentiation Strategy Variants Shareholder value model: create advantage through

the use of knowledge and timing (Fruhan) Unlimited resources model: companies with a large

resource can sustain losses more easily than ones with fewer resources (Chain Store vs Mom & Pop).

The problem with Porter and these variants are that the rate of change is no longer easily managed and sustained.

Understanding Competitors


1. Size, Growth, and Profitability Position– Indicates level of resources (e.g., to defend or

advance a market position)– Commitment to segment or industry (e.g.,

pursuing growth at the expense of profitability)


2. Strategic objectives of competitors

– Differentiation via:

• Product line breadth

• Product quality

• Service support

• Distribution channel

• Brand

– Cost leadership via:

• Scale

• Experience

• Sourcing

Product Innovation

Customer Intimacy

Operating Excellence


3. Competitors’ branding objectives

– Intended brand positioning indicates likely strategic initiatives

• ‘Innovative’ -> high R&D investment

• ‘User friendly’ -> investment in service & support

• ‘Value’ -> investment in efficient systems & manufacturing

– Identifies unmet positions

• Opportunities for building market share

• Increasing profitability

Hypercompetition

Often a characteristic of new markets and industries, hypercompetition occurs when technologies or offerings are so new that standards and rules are in flux, resulting in competitive advantages that cannot be sustained. In response, companies must constantly compete in price or quality, or innovate in , supply chain management ,new value creation, or have enough financial capital to outlast

other competitors.

Assumptions of D’Avenis Hypercompetition and the New 7 Ss Framework model:– Every advantage is eroded.– Sustaining an advantage can be a deadly

distraction.– Goal of advantage should be disruption, not

sustainability– Initiatives are achieved through series of small

steps.

D’Aveni’s new 7 Ss The 7 Ss are useful for determining different aspects of a business strategy and

aligning them to make the organization competitive in the hypercompetitive arena.

The 7 Ss are:1. Superior stakeholder satisfaction: maximize customer satisfaction by

adding value strategically2. Strategic soothsaying: use new knowledge to predict new windows of

opportunity3. Positioning for speed: prepare the org. to react as fast as possible4. Positioning for surprise: surprise competitors5. Shifting the rules of competition: serve customers in novel ways6. Signaling strategic intent: communicate intensions in order to stall

competitors7. Simultaneous and sequential strategic thrusts: take steps to stun and

confuse competitors in order to disrupt or block their efforts

Vision for DisruptionIdentifying and creating

opportunities for temporaryadvantage via understanding•Stakeholder satisfaction• Strategic soothsaying

to ID new ways to serve current customers better or serve

those not being served

Capability for DisruptionSustaining the momentum by

developing abilities for:• Speed

• Surprisethat can be applied across

many actions to builda series of temporary

advantages

Tactics for DisruptionSeizing the initiative to

gain advantage by• Shifting the rules

• Signaling• Strategic thrusts

with actions that shape,mould or influence

the direction or nature ofcompetitors’ responses

MarketDisruption

Limitations of Traditional View

A key limitation of all the above strategies is that it ignores the dynamics of competition in the marketplace.

While the issue of foremost importance for the company is the customer, D’Aveni notes that competitive interaction among firms typically goes through six stages

Hypercompetition

D’Aveni developed a model that stated that sustainable competitive advantage could NOT be sustained.

Called the “Hypercompetition and the New 7 Ss Framework”.

Competitive advantage is rapidly erased by competition and the market.

Strategic Competitive Advantage

Profits from asustained

competitiveadvantage

Time

LaunchExploitation

Counterattack

Profits from aseries of actions

Time

Exploitation

Launch

Counterattack

Firm has already moved to advantage 2

Traditional View

Hypercompetition

Hypercompetition

Four arenas of competition

• Cost & Quality (C-Q)• Timing and know-how (T-K)• Strongholds (S)• Deep pockets (D)

Coke vs. Pepsi

Coke: 1886; Pepsi: 1893

1933: Pepsi struggling to stave off bankruptcy. Dropped price of its 10c, 12 oz. bottle to 5c, making it a better value

Ad jingle “twice as much for a nickel” better known in the US than the Star Spangled Banner

Pepsi Coke

Pri

ce /

Oun

ce

Pri

ce /

Oun

ce

Pepsi

Coke

Perceived Quality Perceived Quality

Coke vs. Pepsi, Contd..

Pepsi Coke

Pri

ce /

Oun

ce

Pri

ce /

Oun

ce

First move:PepsiChallenge


Pepsi keeps price advantage through 60s and 70s, when Pepsi charged its bottlers 20% less for its concentrate

With rising ingredient costs, Pepsi could no longer offer twice as much for the same price. So it raised price to Coke’s level giving it a war chest to fuel an aggressive ad campaign

Battle shifted from Price to Quality, with Pepsi targeting the youth What followed was the Pepsi Challenge & “Real Thing” Coke ads

Youth & MiddleClass Segments 2nd move:

Coke’s Ad war

Pri

ce /

Oun

ce

Pri

ce /

Oun

ce


Perceived quality caught up. Deeper pocketed and lower cost Coke initiated a price war in selective markets where Pepsi was weak in the 70s. Pepsi responded with its discounts and by the end of the 80s, 50% of food store sales were on discount

Other companies moved into the lower left quadrant of the market. But the two major players forced price down to “ultimate value.”

To break price spiral, Coke launched New Coke to keep Coke loyals and induce switching among Pepsi buyers. Rejected by market.

Attempts to move to next arena via niches in caffeine and sugar substitutes

GenericsRC Cola

Coke &PepsiPriceSpiral NewCoke

ActualClassic Coke& Pepsi

NewCokeIntended

Coke vs. Pepsi, Contd..

Price-Quality Maneuvers

Price War

Full line Producers

Niching & Outflanking

Move to Ultimate Value

Attempt to redefine Quality

Commodity like Market

Return to Price Wars

Move to the next Arena

The Cycle of Price-Quality Competition - MovingUp the Escalation Ladder

Firm builds a Tech. ResourceBase to create advantage

Then moves into a new marketfirst: Pioneer

Followers imitate products & overcome switching costsand brand loyalties

Pioneer throws up impediments to imitation

Followers overcome impedimentsand replicate pioneer’s resource base

First mover uses a TransformationStrategy & abandons product design/

technology based approach

Builds resources to match followersmanufacturing skills

Price War

First mover uses a LeapfrogStrategy to a new resource base

First mover movesdownstream into

higher value addedproducts

Escalating costs &risks each cycle

Cycle of Timing / Know-HowCompetition

Build entry barrier around market Ato exclude competition

Build entry barrier around market Bto exclude competition

Circumvent barriers and attackniche in market B

Short Run: Withdraw from niche or fail to respond

Delayed Response: Barriers to contain entrant to a segment of B

Entrant breaches barriersor triggers price war in B

Incumbent’s stronghold in B weak-ens as it grows more competitive

Long Run:Incumbent attacks entrant’s market A to punish

Entrant responds in market A or inmarket B

Standoff until one party gains theupper hand in market A or B

Both strongholds erodeor merge into one

market

Price WarOther firmdivests

One firm builds newstronghold

Cyclerestarts withentry into anew market

If one firm dominates

STRONG-HOLDSARENA

Deep pocket develops

Launches attack todrive out small firms

Antitrust laws invoked - work

occasionally

Small firms forcedto outmaneuver

deep pocket

Hostile takeoverof large firm

Small firm escalatesown resource base

Cooperative strategy develops

Avoidance strategyniching, etc.

Large scalealliances form with equally deep pockets

Deep pocket advantage is elim

inated or neutralized

Buyers or suppliers develop a

countervailingforce

New attempt to escalate resources

Cycle of DeepPockets Competition

Framework Key Idea Application to Information Systems

Porter’s generic strategies framework

Firms achieve competitive advantage through cost leadership, differentiation, or focus.

Understanding which strategy is chosen by a firm is critical

D’Aveni’s hyper-competition model

Speed and aggressive moves and countermoves by a firm create competitive advantage

The 7 Ss give the manager suggestions on what moves and countermoves to make.

.

Ansoff’s Growth Vector Matrix

Market penetration

Market development

Diversification

Product / Service development

Pre

sen

tN

ew

Present New

MA

RK

ET

PRODUCTS / SERVICES

Source: D.T. Brownlie & C.K. Bart, Products and Strategies, MCB University Press, Vol.11, No.1, 1985, p.29

Using the Ansoff Matrix in the Objective-setting Process

Market penetration (1)

Market development (3) Diversification (4)

Product / Service development (2)

Esta

blish

ed

New

Established

New

MA

RK

ET

PRODUCTS / SERVICES

High Risk

Reality: Innovation is a Complex Process– Major overlap between Basic and Applied Research, as well

as between Development and Commercialization – Principal Investigators and/or Patents and Processes are

Mobile, i.e., not firm-dependent – Many Unexpected Outcomes– Technological breakthroughs may precede, as well as stem

from, basic research

The Myth of the Linear Model of Innovation

Basic ResearchApplied Research

Development Commercialization

Myth: Innovation is a Linear Process

Basic Research

AppliedResearch

Development

Commercial-ization

Quest for Basic Understanding•New Knowledge•Fundamental Ideas Potential Use

•Application of Knowledge to a Specific Subject•“Prototypicalization”

Development of Products•Goods and Services

Feedback: Market Signals/Technical Challenge• Desired Product Alterations or New Characteristics•Cost/design trade-off

Feedback:Applied Researchneeded to designnew product characteristics

Feedback:• Basic Research needed for discovery •Search for new ideas and solutions to solve longer-term issues

NewUnanticipatedApplications

Non-Linear Model of Innovation

Principles of successful innovation

Analyse the sources of all new opportunities– These will have different importance at different times depending on the context –

new knowledge may be of little relevance to someone innovating a social instrument to satisfy a need that changing demographics or tax laws have created. Think laterally and with vision.

Be aware of everything and everyone around you– Innovation is both conceptual and perceptual – go out and look, ask and listen.

Successful innovators use both the right and left sides of the brain. They look at figures and people. They work out analytically what the innovation has to be to satisfy an opportunity. They look at potential users to study their expectations, their values and their needs.

Principles of successful innovation

Focus on simple and specific areas– To be effective, an innovation has to be simple and focused. It should do only one thing

otherwise it confuses people. Even the innovation that creates new users and new markets should be directed toward a specific clear and carefully designed application. Effective innovations start small. They try to do one specific thing and are based around a simple notion. They are not grandiose. By contrast, grandiose ideas for things that will ‘revolutionise an industry’ are unlikely to work.

Aim for transformational innovations– The successful innovation aims from the beginning to become the standard setter, to determine

the direction of a new technology or a new industry, to create the business that is – and remains – ahead of the pack. If an innovation does not aim at leadership from the beginning, it is unlikely to be innovative enough.

Be systematic and persistent– Innovation is work rather than genius. It requires knowledge. It often requires ingenuity. And it

requires focus. Innovators rarely work in more than one area – an innovator in financial areas is unlikely to embark on innovations in health care. Most of all, innovation requires hard, focused, purposeful work - if diligence, persistence and commitment are lacking, talent, ingenuity and knowledge are to no avail.

Continuum of Innovations

Incremental Radical

Extension of existing product or process Product characteristics well- defined Competitive advantage on low cost production Often developed in response to specific market need "Demand-side" market/customer pull

New technology creates new market R&D invention in the lab Superior functional performance over "old" technology Specific market opportunity or need of only secondary concern "Supply-side" market/technology push

Dimensions of innovative space

Product Service Process BusinessModel

What is changed

Perceived extent of change

low

high

New to the world products/services

New to the market products/services

New product/service line in a country

Additions to product service lines

Product improvements/revisions

New applications for existing products/services

Repositioning of existing products/services

Cost reductions for existing products/services

A range of options: innovativeness as it applies to products and services

Treacy and Wiersema propose that a business should follow four rules for success:

1. Become best at one of the three value disciplines.

2. Achieve an adequate performance level in the other two disciplines.

3. Keep improving one’s superior position in the chosen discipline so as not to lose out to a competitor.

4. Keep becoming more adequate in the other two disciplines, because competitors keep raising customers’ expectations.

The Strategy Focused Organization

Operational Excellence

• Companies that pursue this are not primarily product or service innovators, nor do they cultivate deep, one-to-one relationships with customers.

• Operationally excellent companies provide middle-of-the-market products at the best price with the least inconvenience.

Product Leadership

• Its practitioners concentrate on offering products that push performance boundaries.

• Their proposition to customers is an offer of the best product, period.

Customer Intimacy

• Firms following this value discipline focus on delivering not what the market wants but what specific customers want.

• Customer-intimate companies do not pursue one-time transactions; they cultivate relationships.

Pursuing Value Innovation: Pursuing Value Innovation: The Six Paths FrameworkThe Six Paths Framework

1. Across substitute industries

2. Across strategic groups

3. Across the chain of buyers

4. Across complementary

offerings

5. Across functional or emotional appeal

6. Across time/trends Eliminate

What factors should be that eliminated the industry has

taken for granted?

Raise

What factors should be raised well beyond the

industry standard?

Create

What factors should be

created that the industry has never offered?

New Value Curve

Reduce

What factors should be reduced well below the

industry standard?

Challenges in New-Product Development

– Incremental innovation– Disruptive technologies

Why do new products fail?– A high-level executive pushes a favorite idea

through in spite of negative research findings.– The idea is good, but the market size is

overestimated.– The product is not well designed.

Challenges in New-Product Development

– The product is incorrectly positioned in the market, not advertised effectively, or overpriced.

– The product fails to gain sufficient distribution coverage or support.

– Development costs are higher than expected.

– Competitors fight back harder than expected.

Market Definition, Size, Growth and Profitability

What is the market? How can it be defined? How big is it/what’s the size of the

opportunity? What will affect its future growth? What will affect its future profitability? How much can you expect to capture? How long will it be before others solutions

erode your market share?

Factors affecting Growth and Profitability of Markets

All our assumptions so far have not considered factors that could impact on the growth and profitability of our selected markets

A number of models exist to systematically work through key factors to identify the most important ones – Environmental Audit– Industry Analysis

“Value innovation is about making the competition irrelevant by creating uncontested marketspace. We argue that beating the competition within the confines of the existing industry is not the way to create profitable growth.”

—Chan Kim & René Mauborgne from Blue Ocean Strategy

Value Innovation v. Conventional Strategic Thinking

Dimension Conventional Value Innovation LogicStrategic Thinking

Industry Conditions are given Conditions can be changedStrategy Build competitive Competition is not benchmarkfocus advantage to Pursue quantum leap in value

beat competitionCustomer Existing customers Mass marketsfocus Segment, customise Key commonalities Capabilities, Leverage existing What would we be doing if weassets ones started anew?Products, Determined by What is the total solution for services industry boundaries the customer?

The Value Innovation Concept

What factors should be eliminated that our industry takes for granted?

What factors should be reduced well below the industry standard?

Costs

ValueInnovation

Buyer value

What factors should be raised well above the industry standard?

What factors should be created that the industry has never offered?

Cost advantages from high volume

Cost savings from eliminating & reducing

Superior value by raising & creating

Factors of Competition

Value Curve of Formule 1 in the French Low Budget Hotel Industry

High

Low

Relative Level

Key elements of product, service, and delivery

Eatin

gFa

cilit

ies

2 Star

Arc

hite

ctur

al

Aes

thet

ics

Lou

nge

App

eal

Roo

m si

ze

24-H

our

Rec

eptio

nist

Roo

mFu

rnitu

re/

Am

eniti

es BedQ

ualit

y

Hyg

iene

Sile

nce

Pric

e

1 Star

F 1

using“Value Curves” to plot relative strategic positioning

Results of Formula 1’s Strategy

Cost per room 100,000 FF 270,000 FFCost of staff 20-23% of sales vs. 23-25% Profit Margins > 2x industry averageOccupancy rates > 3x industry average

From customers’ perspective:

Hygiene > average 2* hotelBed quality > average 2* hotelSilence > average 2* hotelPrice 100 FF 200 FF of industry

From Formula 1’s perspective:

executive master in international postal management patrick foley april, 2010

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