What can incumbent firms do to counter disruptive innovations

7.1 Competition Driven by Innovation

Competition is a process driven by the “perennial gale of creative destruction,” in the words of famed economist Joseph Schumpeter. 5 The continuous waves of market leadership changes in the TV industry, detailed in the ChapterCase, demonstrate the potency of innovation as a competitive weapon: It can simultaneously create and destroy value. Firms must be able to innovate while also fending off competitors’ imitation attempts. A successful strategy requires both an effective offense and a hard-to-crack defense.

Many firms have dominated an early wave of innovation only to be challenged and often destroyed by the next wave. As highlighted in the ChapterCase, traditional television networks (ABC, CBS, and NBC) have been struggling to maintain viewers and advertising revenues as cable and satellite providers offered innovative programming. Those same cable and satellite providers now are trying hard to hold on to viewers as more and more people gravitate toward customized content online. To exploit such opportunities, Google acquired YouTube, while Comcast, the largest U.S. cable operator, purchased NBCUniversal. 6 Comcast’s acquisition helps it integrate delivery services and content, with the goal of establishing itself as a new player in the media industry. In turn, both traditional TV and cable networks are currently under threat from content providers that stream via the internet, such as Netflix, YouTube, and Amazon.

As the adage goes, change is the only constant—and the rate of technological change has accelerated dramatically over the past hundred years. Changing technologies spawn new industries, while others die. This makes innovation a powerful strategic weapon to gain and sustain competitive advantage. Exhibit 7.1 shows how many years it took for different technological innovations to reach 50 percent of the U.S. population (either through ownership or usage). As an example, it took 84 years for half of the U.S. population to own a car, but only 28 years for half the population to own a TV. The pace of the adoption rate of recent innovations continues to accelerate. It took 19 years for the PC to reach 50 percent ownership, but only 6 years for MP3 players to accomplish the same diffusion rate.

EXHIBIT 7.1 Accelerating Speed of Technological Change

A graph Source: Depiction of data from the U.S. Census Bureau, the Consumer Electronics Association, Forbes, and the National Cable and Telecommunications Association. Access the text alternative for Exhibit 7.1

What factors explain increasingly rapid technological diffusion and adoption? One determinant is that initial innovations such as the car, airplane, telephone, and the use of electricity provided the necessary infrastructure for newer innovations to diffuse more rapidly. Another reason is the emergence of new business models that make innovations more accessible. For example, Dell’s direct-to-consumer distribution system improved access to low-cost PCs, and Walmart’s low-price, high-volume model used its sophisticated IT logistics system to fuel explosive growth. In addition, satellite and cable distribution systems facilitated the ability of mass media such as radio and TV to deliver advertising and information to a wider audience. The speed of technology diffusion has accelerated further with the emergence of the internet, social networking sites, and viral messaging. Amazon continues to drive increased convenience, higher efficiency and lower costs in retailing. The accelerating speed of technological changes has significant implications for the competitive process and firm strategy. We will now take a close look at the innovation process unleashed by technological changes.

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THE INNOVATION PROCESS

LO 7-1

Outline the four-step innovation process from idea to imitation.

Broadly viewed, innovation describes the discovery, development, and transformation of new knowledge in a four-step process captured in the four I’s: idea, invention, innovation, and imitation (see Exhibit 7.2 ). 7

EXHIBIT 7.2 The Four I’s: Idea, Invention, Innovation, and Imitation

A graphic shows an idea proceeds from invention to innovation, and finally imitation.

The innovation process begins with an idea. The idea is often presented in terms of abstract concepts or as findings derived from basic research. Basic research is conducted to discover new knowledge and is often published in academic journals. This may be done to enhance the fundamental understanding of nature, without any commercial application or benefit in mind. In the long run, however, basic research is often transformed into applied research with commercial applications. For example, wireless communication technology today is built upon the fundamental science breakthroughs Albert Einstein accomplished over 100 years ago in his research on the nature of light. 8

In a next step, invention describes the transformation of an idea into a new product or process, or the modification and recombination of existing ones. The practical application of basic knowledge in a particular area frequently results in new technology. If an invention is useful, novel, and non-obvious as assessed by the U.S. Patent and Trademark Office, it Page 223can be patented. 9 A patent is a form of intellectual property, and gives the inventor exclusive rights to benefit from commercializing a technology for a specified time period in exchange for public disclosure of the underlying idea (see also the discussion on isolating mechanisms in Chapter 4 ). In the United States, the time period for the right to exclude others from the use of the technology is 20 years from the filing date of a patent application. Exclusive rights often translate into a temporary monopoly position until the patent expires. For instance, many pharmaceutical drugs are patent protected.

Strategically, however, patents are a double-edged sword. On the one hand, patents provide a temporary monopoly as they bestow exclusive rights on the patent owner to use a novel technology for a specific time period. Thus, patents may form the basis for a competitive advantage. Because patents require full disclosure of the underlying technology and know-how so that others can use it freely once the patent protection has expired, many firms find it strategically beneficial not to patent their technology. Instead they use trade secrets , defined as valuable proprietary information that is not in the public domain and where the firm makes every effort to maintain its secrecy. The most famous example of a trade secret is the Coca-Cola recipe, which has been protected for over a century. 10 The same goes for Ferrero’s Nutella, whose secret recipe is said to be known by even fewer than the handful of people who have access to the Coca-Cola recipe. 11

Avoiding public disclosure and thus making its underlying technology widely known is precisely the reason Netflix does not patent its recommendation algorithm or Google its PageRank algorithm. Netflix has an advantage over competitors because its recommendation algorithm works best; the same goes for Google—its search algorithm is the best available. Disclosing how exactly these algorithms work would nullify their advantage.

Innovation concerns the commercialization of an invention. 12 The successful commercialization of a new product or service allows a firm to extract temporary monopoly profits. As detailed in the ChapterCase, Netflix began its life with a business model innovation, offering unlimited DVD rentals via the internet, without any late fees. However, Netflix gained its early lead by applying big data analytics to its user preferences to not only predict future demand but also to provide highly personalized viewing recommendations. The success of the latter is evident by the fact that movies that were recommended to viewers scored higher than they were scored previously. To sustain a competitive advantage, however, a firm must continuously innovate—that is, it must produce a string of successful new products or services over time. In this spirit, Netflix further developed its business model innovation, moving from online DVD rentals to directly streaming content via the internet. Moreover, it innovated further in creating proprietary content such as House of Cards and Orange Is the New Black.

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Successful innovators can benefit from a number of first-mover advantages , 13 including economies of scale as well as experience and learning-curve effects (as discussed in Chapter 6 ). First movers may also benefit from network effects (see the discussion of Apple and Uber later in this chapter). Moreover, first movers may hold important intellectual property such as critical patents. They may also be able to lock in key suppliers as well as customers through increasing switching costs. For example, users of Microsoft Word might find the switching costs entailed in moving to a different word-processing software prohibitive. Not only would they need to spend many hours learning the new software, but collaborators would also need to have compatible software installed and be familiar with the program to open and revise shared documents.

Google—by offering a free web-based suite of application software such as word-processing (Google Docs), spreadsheet (Google Sheets), and presentation programs (Google Slides)—is attempting to minimize switching costs by leveraging cloud computing—a real-time network of shared computing resources via the internet (Google Drive). Rather than requiring each user to have the appropriate software installed on his or her personal computer, the software is maintained and updated in the cloud. Files are also saved in the cloud, which allows collaboration in real time globally wherever one can access an internet connection.

Innovation need not be high-tech to be a potent competitive weapon, as P&G’s history of innovative product launches such as the Swiffer line of cleaning products shows. P&G uses the razor–razor-blade business model (introduced in Chapter 5 ), where the consumer purchases the handle at a low price, but must pay a premium for replacement refills and pads over time. As shown in Exhibit 7.3 , an innovation needs to be novel, useful, and successfully implemented to help firms gain and sustain a competitive advantage.

EXHIBIT 7.3 Innovation: A Novel and Useful Idea That Is Successfully Implemented

A Venn diagram shows innovation comes from novel, useful and implemented ideas.

The innovation process ends with imitation. If an innovation is successful in the marketplace, competitors will attempt to imitate it. Although Netflix has some 50 million U.S. subscribers, imitators are set to compete its advantage away. Amazon offers its Instant Video service to its estimated 65 million Prime subscribers ($99 a year or $8.25 a month), with selected titles free. In addition, Prime members receive free two-day shipping on Amazon purchases. Hulu Plus ($7.99 a month), a video-on-demand service, has some 9 million subscribers. One advantage Hulu Plus has over Netflix and Amazon is that it typically makes the latest episodes of popular TV shows available the day following broadcast, on Hulu; the shows are often delayed by several months before being offered by Netflix or Amazon. A joint venture of NBCUniversal Television Group (Comcast), Fox Broadcasting (21st Century Fox), and Disney/ABC Television Group (The Walt Disney Co.), Hulu Plus uses advertisements along with its subscription fees as revenue sources. Finally, Google’s YouTube with its more than 1 billion users is evolving into a TV ecosystem, benefiting not only from free content uploaded by its users but also creating original programming. As of 2017, the most subscribed channels were by PewDiePie (57 million) and YouTube Spotlight, its official channel (26 million) used to highlight videos and events such as YouTube Music Awards and YouTube Comedy Week 14 . Google’s business is, of course, ad supported. Only time will tell whether Netflix will be able to sustain its competitive advantage given the imitation attempts by a number.

7.2 Strategic and Social Entrepreneurship
LO 7-2

Apply strategic management concepts to entrepreneurship and innovation.

Entrepreneurship describes the process by which change agents (entrepreneurs) undertake economic risk to innovate—to create new products, processes, and sometimes new organizations. 15 Entrepreneurs innovate by commercializing ideas and inventions. 16 They seek out or create new business opportunities and then assemble the resources necessary to exploit them. 17 Indeed, innovation is the competitive weapon entrepreneurs use to exploit opportunities created by change, or to create change themselves, in order to commercialize new products, services, or business models. 18 If successful, entrepreneurship not only drives the competitive process, but it also creates value for the individual entrepreneurs and society at large.

Although many new ventures fail, some achieve spectacular success. Examples of successful entrepreneurs are:

· ▪ Reed Hastings, founder of Netflix featured in the ChapterCase. Hastings grew up in Cambridge, Massachusetts. He obtained an undergraduate degree in math and then volunteered for the Peace Corps for two years, teaching high school math in Swaziland (Africa). Next, he pursued a master’s degree in computer science, which brought him to Silicon Valley. Hastings declared his love affair with writing computer code, but emphasized, “The big thing that Stanford did for me was to turn me on to the entrepreneurial model.” 19 His net worth today is an estimated $1 billion.

·

· A photo of Dr Dre. Dr. Dre, rapper, music and movie producer, as well as highly successful serial entrepreneur. ©JC Olivera/Getty Images Entertainment/Getty Images

▪Dr. Dre, featured in ChapterCase 4 , a successful rapper, music and movie producer, and serial entrepreneur. Born in Compton, California, Dr. Dre focused on music and entertainment early on during high school, working his first job as a DJ. Dr. Dre’s major breakthrough as a rapper came with the group N.W.A. One of his first business successes as an entrepreneur was Death Row Records, which he founded in 1991. A year later, Dr. Dre’s first solo album, The Chronic, was a huge hit. In 1996, Dr. Dre founded Aftermath Entertainment and signed famed rappers such as 50 Cent and Eminem. Dr. Dre, known for his strong work ethic and attention to detail, expects nothing less than perfection from the people with whom he works. Stories abound that Dr. Dre made famous rappers rerecord songs hundreds of times if he was not satisfied with the outcome. In 2014, Dr. Dre appeared to become the first hip-hop billionaire after Apple acquired Beats Electronics for $3 billion. In 2015, N.W.A’s early success was depicted in the biographical movie Straight Outta Compton, focusing on group members Eazy-E, Ice Cube, and Dr. Dre, who coproduced the film, grossing over $200 million at the box office, with a budget of $45 million. 20

· ▪ Jeff Bezos, the founder of Amazon.com (featured in ChapterCase 8 ), the world’s largest online retailer. The stepson of a Cuban immigrant, Bezos graduated with a degree in computer science and electrical engineering, before working as a financial analyst on Wall Street. In 1994, after reading that the internet was growing by 2,000 percent a month, he set out to leverage the internet as a new distribution channel. Listing products that could be sold online, he finally settled on books because that retail market was fairly fragmented, with huge inefficiencies in its distribution system. Perhaps even more important, books are a perfect commodity because they are identical regardless of where a consumer buys them. This reduced uncertainty when introducing online shopping to consumers. In 2017 his personal wealth exceeded $80 billion. 21

· ▪ Elon Musk, an engineer and serial entrepreneur with a deep passion to “solve environmental, social, and economic challenges.” 22 We featured him in his role as leader of Tesla in ChapterCase 1 . Musk left his native South Africa at age 17. He went to Canada and then to the United States, where he completed a bachelor’s degree in economics and physics at the University of Pennsylvania. After only two days in a PhD program in Page 226applied physics and material sciences at Stanford University, Musk left graduate school to found Zip2, an online provider of content publishing software for news organizations. Four years later, in 1999, computer maker Compaq acquired Zip2 for $341 million (and was in turn acquired by HP in 2002). Musk moved on to co-found PayPal, an online payment processor. When eBay acquired PayPal for $1.5 billion in 2002, Musk had the financial resources to pursue his passion to use science and engineering to solve social and economic challenges. He is leading three new ventures simultaneously: electric cars with Tesla, renewable energy with SolarCity, and space exploration with SpaceX. 23 (In 2016, Tesla Motors acquired SolarCity, renaming itself simply Tesla).

·

Entrepreneurs are the agents who introduce change into the competitive system. They do this not only by figuring out how to use inventions, but also by introducing new products or services, new production processes, and new forms of organization. Entrepreneurs can introduce change by starting new ventures, such as Reed Hastings with Netflix or Mark Zuckerberg with Facebook. Or they can be found within existing firms, such as A.G. Lafley at Procter & Gamble (P&G), who implemented an open-innovation model (which we’ll discuss in Chapter 11 ). When innovating within existing companies, change agents are often called intrapreneurs: those pursuing corporate entrepreneurship. 24

Entrepreneurs who drive innovation need just as much skill, commitment, and daring as the inventors who are responsible for the process of invention. 25 As an example, the engineer Nikola Tesla invented the alternating-current (AC) electric motor and was granted a patent in 1888 by the U.S. Patent and Trademark Office. 26 Because this breakthrough technology was neglected for much of the 20th century and Nikola Tesla did not receive the recognition he deserved in his lifetime, the entrepreneur Elon Musk is not just commercializing Tesla’s invention but also honoring Tesla with the name of his company, Tesla, which was formed to design and manufacture all-electric automobiles. Tesla launched several all-electric vehicles based on Tesla’s original invention (see ChapterCase 1 ).

Strategic entrepreneurship describes the pursuit of innovation using tools and concepts from strategic management. 27 We can leverage innovation for competitive advantage by applying a strategic management lens to entrepreneurship. The fundamental question of strategic entrepreneurship, therefore, is how to combine entrepreneurial actions, creating new opportunities or exploiting existing ones with strategic actions taken in the pursuit of competitive advantage. 28 This can take place within new ventures such as Tesla or within established firms such as Apple. Apple’s continued innovation in mobile devices is an example of strategic entrepreneurship: Apple’s managers use strategic analysis, formulation, and implementation when deciding which new type of mobile device to research and develop, when to launch it, and how to implement the necessary organizational changes to support the product launch. Each new release is an innovation; each is therefore an act of entrepreneurship—planned and executed using strategic management concepts. In 2015, for example, Apple entered the market for computer wearables by introducing the Apple Watch. In 2017, Apple released the 10th-year anniversary model of its original iPhone, introduced in 2007.

Social entrepreneurship describes the pursuit of social goals while creating profitable businesses. Social entrepreneurs evaluate the performance of their ventures not only by financial metrics but also by ecological and social contribution (profits, planet, and people). They use a triple-bottom-line approach to assess performance (discussed in Chapter 5 ). Examples of social entrepreneurship ventures include Teach For America, TOMS Shoes (which gives a pair of shoes to an economically disadvantaged child for every pair of shoes it sells), Better World Books (an online bookstore that uses capitalism to alleviate illiteracy around the word), 29 and Wikipedia, whose mission is to collect and develop educational information, and make it freely available to any person in the world (see following and MiniCase 14 ).

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The founder of Wikipedia, Jimmy Wales, typifies social entrepreneurship. 30 Raised in Alabama, Wales was educated by his mother and grandmother who ran a nontraditional school. In 1994, he dropped out of a doctoral program in economics at Indiana University to take a job at a stock brokerage firm in Chicago. In the evenings he wrote computer code for fun and built a web browser. During the late 1990s internet boom, Wales was one of the first to grasp the power of an open-source method to provide knowledge on a very large scale. What differentiates Wales from other web entrepreneurs is his idealism: Wikipedia is free for the end user and supports itself solely by donations and not, for example, by online advertising. Wikipedia has 35 million articles in 288 languages, including some 5 million items in English. About 500 million people use Wikipedia each month. Wales’ idealism is a form of social entrepreneurship: His vision is to make the entire repository of human knowledge available to anyone anywhere for free.

Since entrepreneurs and the innovations they unleash frequently create entire new industries, we now turn to a discussion of the industry life cycle to derive implications for competitive strategy.

7.3 Innovation and the Industry Life Cycle
LO 7-3

Describe the competitive implications of different stages in the industry life cycle.

Innovations frequently lead to the birth of new industries. Innovative advances in IT and logistics facilitated the creation of the overnight express delivery industry by FedEx and that of big-box retailing by Walmart. The internet set online retailing in motion, with new companies such as Amazon and eBay taking the lead, and it revolutionized the advertising industry first through Yahoo, and later Google and Facebook. Advances in nanotechnology are revolutionizing many different industries, ranging from medical diagnostics and surgery to lighter and stronger airplane components. 31

Industries tend to follow a predictable industry life cycle : As an industry evolves over time, we can identify five distinct stages: introduction, growth, shakeout, maturity, and decline. 32 We will illustrate how the type of innovation and resulting strategic implications change at each stage of the life cycle as well as how innovation can initiate and drive a new life cycle.

The number and size of competitors change as the industry life cycle unfolds, and different types of consumers enter the market at each stage. That is, both the supply and demand sides of the market change as the industry ages. Each stage of the industry life cycle requires different competencies for the firm to perform well and to satisfy that stage’s unique customer group. We first introduce the life cycle model before discussing different customer groups in more depth when introducing the crossing-the-chasm concept later in this chapter. 33

Exhibit 7.4 depicts a typical industry life cycle, focusing on the smartphone industry in emerging and developed economies. In a stylized industry life cycle model, the horizontal axis shows time (in years) and the vertical axis market size. In Exhibit 7.4 , however, we are taking a snapshot of the global smartphone industry in the year 2018. This implies that we are joining two different life cycles (one for emerging economies and one for developed economies) in the same exhibit at one point in time.

EXHIBIT 7.4 Industry Life Cycle: The Smartphone Industry in Emerging and Developed Economies

A graph showing the difference in product maturity level in developed versus emerging economies. Access the text alternative for Exhibit 7.4

The development of most industries follows an S-curve. Initial demand for a new product or service is often slow to take off, then accelerates, before decelerating, and eventually turning to zero, and even becoming negative as a market contracts.

As shown in Exhibit 7.4 , in emerging economies such as Argentina, Brazil, China, India, Indonesia, Mexico, and Russia, the smartphone industry is in the growth stage. The market for smartphones in these countries is expected to grow rapidly over the next few years. More and more of the consumers in these countries with very large populations Page 228are expected to upgrade from a simple mobile phone to a smartphone such as the Apple iPhone, Samsung Galaxy, or Xiaomi’s popular Mi6.

In contrast, the market for smartphones is in the maturity stage in 2018 in developed economies such as Australia, Canada, Germany, Japan, South Korea, the United Kingdom, and the United States. This implies that developed economies moved through the prior three stages of the industry life cycle (introductory, growth, and shakeout) some years earlier. Because the smartphone industry is mature in these markets, little or no growth in market size is expected over the next few years because most consumers own smartphones. This implies that any market share gain by one firm comes at the expense of others, as users replace older smartphones with newer models. Competitive intensity is expected to be high.

Each stage of the industry life cycle—introduction, growth, shakeout, maturity, and decline—has different strategic implications for competing firms. We now discuss each stage in detail.

INTRODUCTION STAGE
When an individual inventor or company launches a successful innovation, a new industry may emerge. In this introductory stage, the innovator’s core competency is R&D, which is necessary to creating a product category that will attract customers. This is a capital-intensive process, in which the innovator is investing in designing a unique product, trying new ideas to attract customers, and producing small quantities—all of which contribute to a high price when the product is launched. The initial market size is small, and growth is slow.

In this introductory stage, when barriers to entry tend to be high, generally only a few firms are active in the market. In their competitive struggle for market share, they emphasize unique product features and performance rather than price.

Although there are some benefits to being early in the market (as previously discussed), innovators also may encounter first-mover disadvantages. They must educate potential Page 229customers about the product’s intended benefits, find distribution channels and complementary assets, and continue to perfect the fledgling product. Although a core competency in R&D is necessary to create or enter an industry in the introductory stage, some competency in marketing also is helpful in achieving a successful product launch and market acceptance. Competition can be intense, and early winners are well-positioned to stake out a strong position for the future. As one of the main innovators in software for mobile devices, Google’s Android operating system for smartphones is enjoying a strong market position and substantial lead over competitors.

The strategic objective during the introductory stage is to achieve market acceptance and seed future growth. One way to accomplish these objectives is to initiate and leverage network effects , 34 the positive effect that one user of a product or service has on the value of that product for other users. Network effects occur when the value of a product or service increases, often exponentially, with the number of users. If successful, network effects propel the industry to the next stage of the life cycle, the growth stage (which we discuss next).

Apple effectively leveraged the network effects generated by numerous complementary software applications (apps) available via iTunes to create a tightly integrated ecosystem of hardware, software, and services, which competitors find hard to crack. The consequence has been a competitive advantage for over a decade, beginning with the introduction of the iPod in 2001 and iTunes in 2003. Apple launched its enormously successful iPhone in the summer of 2007. A year later, it followed up with the Apple App Store, which boasts, for almost anything you might need, “there’s an app for that.” Popular apps allow iPhone users to access their business contacts via LinkedIn, hail a ride via Uber, call colleagues overseas via Skype, check delivery of their Zappos packages shipped via UPS, get the latest news on Twitter, and engage in customer relationship management using Salesforce.com. You can stream music via Pandora, post photos using Instagram, watch Netflix, access Facebook to check on your friends, or video message using Snap.

Even more important is the effect that apps have on the value of an iPhone. Arguably, the explosive growth of the iPhone is due to the fact that the Apple App Store offers the largest selection of apps to its users. By 2017, the App Store offered more than 2 million apps, which had been downloaded more than 130 billion times, earning Apple some $50 billion in revenues. Moreover, Apple argues that users have a better experience because the apps take advantage of the tight integration of hardware and software provided by the iPhone. The availability of apps, in turn, leads to network effects that increase the value of the iPhone for its users. Exhibit 7.5 shows how. Increased value creation, as we know from Chapter 6 , is positively related to demand, which in turn increases the installed base, meaning the number of people using an iPhone. As of the spring of 2017, Apple had sold some 80 million iPhone 7 models in just six months. The average selling price of an iPhone was $700; with the latest model (iPhone X) priced at $1,000. As the installed base of iPhone users further increases, this incentivizes software developers to write even more apps. Making apps widely available strengthened Apple’s position in the smartphone industry. Based on positive feedback loops, a virtuous cycle emerges where one factor positively reinforces another. Apple’s ecosystem based on integrated hardware, software, and services providing a superior user experience is hard to crack for competitors.

EXHIBIT 7.5 Leveraging Network Effects to Drive Demand: Apple’s iPhone

An illustration. Access the text alternative for Exhibit 7.5

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GROWTH STAGE
Market growth accelerates in the growth stage of the industry life cycle (see Exhibit 7.4 ). After the initial innovation has gained some market acceptance, demand increases rapidly as first-time buyers rush to enter the market, convinced by the proof of concept demonstrated in the introductory stage.

As the size of the market expands, a standard signals the market’s agreement on a common set of engineering features and design choices. 35 Standards can emerge from the bottom up through competition in the marketplace or be imposed from the top down by government or other standard-setting agencies such as the Institute of Electrical and Electronics Engineers (IEEE) that develops and sets industrial standards in a broad range of industries, including energy, electric power, biomedical and health care technology, IT, telecommunications, consumer electronics, aerospace, and nanotechnology. Strategy Highlight 7.1 discusses the unfolding standards battle in the automotive industry.

Strategy Highlight 7.1
Standards Battle: Which Automotive Technology Will Win?
In the envisioned future transition away from gasoline-powered cars, Nissan Chairman Carlos Ghosn firmly believes the next technological paradigm will be electric motors. Ghosn calls hybrids a “halfway technology” and suggests they will be a temporary phenomenon at best. A number of start-up companies, including Tesla in the United States and BYD Auto in China, share Ghosn’s belief in this particular future scenario.

One of the biggest impediments to large-scale adoption of electric vehicles, however, remains the lack of appropriate infrastructure: There are few stations where drivers can recharge their car’s battery when necessary. With the range of electric vehicles currently limited to some 200 miles, many consider a lack of recharging stations a serious problem, so called “range anxiety.” High-end Tesla vehicles can achieve 250 miles per charge, while a lower priced Nissan Leaf’s maximum is range is roughly 85 miles. Tesla, Nissan, and other independent charging providers such as ChargePoint, however, are working hard to develop a network of charging stations. By early 2017, Tesla claimed a network of some 800 supercharger stations throughout the United States and was building more stalls at many stations. It also enabled the in-car map to identify how many stalls were open at each station in real time.

A photo of a Nissan Leaf. The Nissan Leaf, the world’s best-selling electric vehicle. ©VDWI Automotive/Alamy Stock Photo RF

Nissan’s Ghosn believes electric cars will account for up to 10 percent of global auto sales over the next decade. The Swedish car maker Volvo has gone even further by announcing that beginning in 2019 it will no longer produce any cars with internal combustion engines. Rather, all its new vehicles will be fully electric or hybrid. This is a strong strategic commitment by one of the traditional car manufacturers. It is also the first of its kind.

In contrast, Toyota is convinced gasoline-electric hybrids will become the next dominant technology. These different predictions have significant influence on how much money Nissan and Toyota invest in technology and where. Nissan builds one of its fully electric vehicles, the Leaf (an acronym for Leading, Environmentally friendly, Affordable, Family car) at a plant in Smyrna, Tennessee. Toyota is expanding its R&D investments in hybrid technology. Nissan put its money where its mouth is and has spent millions developing its electric-car program since the late 1990s. Since it was introduced in December 2010, the Nissan Leaf has become the best-selling electric vehicle, with more than 250,000 units sold. The most recent Nissan Leaf model has a range of more than 100 miles per charge. In 2017, GM introduced the all-electric Chevy Bolt, with a range of over 200 miles per charge, similar to Tesla’s Model 3.

Toyota, on the other hand, has already sold 10 million of its popular Prius cars since they were introduced in 1997. By 2020, Toyota plans to offer hybrid technology in all its vehicles. Eventually, the investments made by Nissan and Toyota will yield different returns, depending on which predictions prove more accurate.

An alternative outcome is that neither hybrids nor electric cars will become the next paradigm. To add even more uncertainty to the mix, Honda and BMW are betting on cars powered by hydrogen fuel cells. In sum, many alternative technologies are competing to become the winner in setting a new standard for propelling cars. This situation is depicted in Exhibit 7.6 , where the new technologies represent a swarm of new entries vying for dominance. Only time will tell which technology will win this standards battle. 36

EXHIBIT 7.6 Automotive Technologies Compete for Industry Dominance

An illustration. Access the text alternative for Exhibit 7.6

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Since demand is strong during the growth phase, both efficient and inefficient firms thrive; the rising tide lifts all boats. Moreover, prices begin to fall, often rapidly, as standard business processes are put in place and firms begin to reap economies of scale and learning. Distribution channels are expanded, and complementary assets in the form of products and services become widely available. 37

After a standard is established in an industry, the basis of competition tends to move away from product innovations toward process innovations. 38 Product innovations , as the name suggests, are new or recombined knowledge embodied in new products—the jet airplane, electric vehicle, smartphones, and wearable computers. Process innovations are new ways to produce existing products or to deliver existing services. Process innovations are made possible through advances such as the internet, lean manufacturing, Six Sigma, biotechnology, nanotechnology, and so on.

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Process innovation must not be high-tech to be impactful, however. The invention of the standardized shipping container, for instance, has transformed global trade. By loading goods into uniform containers that could easily be moved between trucks, rail, and ships, significant savings in cost and time were accomplished. Before containerization was invented some 60 years ago, it cost almost $6 to load a ton of (loose) cargo, and theft was rampant. After containerization, the cost for loading a ton of cargo had plummeted to $0.16 and theft all but disappeared (because containers are sealed at the departing factory). Efficiency gains in terms of labor and time were even more impressive. Before containerization, dock labor could move 1.7 tons per hour onto a cargo ship. After containerization, this had jumped to 30 tons per hour. Ports are now able to accommodate much larger ships, and travel time across the oceans has fallen in half. As a consequence, costs for shipping goods across the globe have fallen rapidly. Moreover, containerization enabled optimization of global supply chains and set the stage for subsequent process innovations such as just-in-time (JIT) operations management. Taken together, a set of research studies estimated that containerization alone more than tripled international trade within five years of adopting this critical process innovation. 39

Exhibit 7.7 shows the level of product and process innovation throughout the entire life cycle. 40 In the introductory stage, the level of product innovation is at a maximum because new features increasing perceived consumer value are critical to gaining traction in the market. In contrast, process innovation is at a minimum in the introductory stage because companies produce only a small number of products, often just prototypes or beta versions. The main concern is to commercialize the invention—that is, to demonstrate that the product works and that a market exists.

EXHIBIT 7.7 Product and Process Innovation throughout an Industry Life Cycle

a graph Access the text alternative for Exhibit 7.7

The relative importance, however, reverses over time. Frequently, a standard emerges during the growth stage of the industry life cycle (see the second column, “Growth,” in Exhibit 7.7 ). At that point, most of the technological and commercial uncertainties about the new product are gone. After the market accepts a new product, and a standard for the new technology has emerged, process innovation rapidly becomes more important than product innovation. As market demand increases, economies of scale kick in: Firms establish and optimize standard business processes through applications of lean manufacturing, Page 233Six Sigma, and so on. As a consequence, product improvements become incremental, while the level of process innovation rises rapidly.

During the growth stage, process innovation ramps up (at increasing marginal returns) as firms attempt to keep up with rapidly rising demand while attempting to bring down costs at the same time. The core competencies for competitive advantage in the growth stage tend to shift toward manufacturing and marketing capabilities. At the same time, the R&D emphasis tends to shift to process innovation for improved efficiency. Competitive rivalry is somewhat muted because the market is growing fast.

Since market demand is robust in this stage and more competitors have entered the market, there tends to be more strategic variety: Some competitors will continue to follow a differentiation strategy, emphasizing unique features, product functionality, and reliability. Other firms employ a cost-leadership strategy in order to offer an acceptable level of value but lower prices to consumers. They realize that lower cost is likely a key success factor in the future, because this will allow the firm to lower prices and attract more consumers into the market. When introduced in the spring of 2010, for example, Apple’s first-generation iPad was priced at $829 for 64GB with a 3G Wi-Fi connection. 41 Just three years later, in spring 2013, the same model was priced at only one-third of the original price, or $275. 42 Access to efficient and large-scale manufacturing operations (such as those offered by Foxconn in China, the company that assembles most of Apple’s products) and effective supply chain capabilities are key success factors when market demand increases rapidly. By 2017, Gazelle, an ecommerce company that allows people to sell their electronic devices and to buy pre-certified used ones, offered a mere $15 for a “flawless” first-generation iPad.

The key objective for firms during the growth phase is to stake out a strong strategic position not easily imitated by rivals. In the fast-growing shapewear industry, start-up company Spanx has staked out a strong position. In 1998, Florida State University graduate Sara Blakely decided to cut the feet off her pantyhose to enhance her looks when wearing pants. 43 Soon after she obtained a patent for her body-shaping undergarments, and Spanx began production and retailing of its shapewear in 2000. Sales grew exponentially after Blakely appeared on The Oprah Winfrey Show. By 2017, Spanx had grown to more than 250 employees and sold millions of Spanx “power panties,” with estimated revenues of some $500 million. To stake out a strong position and to preempt competitors, Spanx now offers over 200 products ranging from slimming apparel and swimsuits to bras and activewear. Moreover, it now designs and manufactures body-shaping undergarments for men (“Spanx for Men—Manx”). Spanx products are now available in over 50 countries globally via the internet. Moreover, to strengthen its strategic position and brand image in the United States, Spanx is opening retail stores across the country.

The shapewear industry’s explosive growth—it is expected to reach $6 billion in annual sales by 2022—has attracted several other players: Flexees by Maidenform, BodyWrap, and Miraclesuit, to name a few. They are all attempting to carve out positions in the new industry. Given Spanx’s ability to stake out a strong position during the growth stage of the industry life cycle and the fact that it continues to be a moving target, it might be difficult for competitors to dislodge the company.

Taking the risk paid off for Spanx’s founder: After investing an initial $5,000 into her startup, Blakely became the world’s youngest self-made female billionaire. Blakely was also listed in the Time 100, the annual list of the most influential people in the world.

SHAKEOUT STAGE
Rapid industry growth and expansion cannot go on indefinitely. As the industry moves into the next stage of the industry life cycle, the rate of growth declines (see Exhibit 7.4 ). Firms begin to compete directly against one another for market share, rather than trying Page 234to capture a share of an increasing pie. As competitive intensity increases, the weaker firms are forced out of the industry. This is the reason this phase of the industry life cycle is called the shakeout stage: Only the strongest competitors survive increasing rivalry as firms begin to cut prices and offer more services, all in an attempt to gain more of a market that grows slowly, if at all. This type of cutthroat competition erodes profitability of all but the most efficient firms in the industry. As a consequence, the industry often consolidates, as the weakest competitors either are acquired by stronger firms or exit through bankruptcy.

The winners in this increasingly competitive environment are often firms that stake out a strong position as cost leaders. Key success factors at this stage are the manufacturing and process engineering capabilities that can be used to drive costs down. The importance of process innovation further increases (albeit at diminishing marginal returns), while the importance of product innovation further declines.

Assuming an acceptable value proposition, price becomes a more important competitive weapon in the shakeout stage, because product features and performance requirements tend to be well-established. A few firms may be able to implement a blue ocean strategy, combining differentiation and low cost, but given the intensity of competition, many weaker firms are forced to exit. Any firm that does not have a clear strategic profile is likely to not survive the shakeout phase.

MATURITY STAGE
After the shakeout is completed and a few firms remain, the industry enters the maturity stage. During the fourth stage of the industry life cycle, the industry structure morphs into an oligopoly with only a few large firms. Most of the demand was largely satisfied in the shakeout stage. Any additional market demand in the maturity stage is limited. Demand now consists of replacement or repeat purchases. The market has reached its maximum size, and industry growth is likely to be zero or even negative going forward. This decrease in market demand increases competitive intensity within the industry. In the maturity stage, the level of process innovation reaches its maximum as firms attempt to lower cost as much as possible, while the level of incremental product innovation sinks to its minimum (see Exhibit 7.7 ).

Generally, the firms that survive the shakeout stage tend to be larger and enjoy economies of scale, as the industry consolidated and most excess capacity was removed. The domestic airline industry has been in the maturity stage for a long time. The large number of bankruptcies as well as the wave of mega-mergers, such as those of Delta and Northwest, United and Continental, and American Airlines and US Airways, are a consequence of low or zero growth in a mature market characterized by significant excess capacity.

DECLINE STAGE
Changes in the external environment (such as those discussed in Chapter 3 when presenting the PESTEL framework) often take industries from maturity to decline. In this final stage of the industry life cycle, the size of the market contracts further as demand falls, often rapidly. At this final phase of the industry life cycle, innovation efforts along both product and process dimensions cease (see Exhibit 7.7 ). If a technological or business model breakthrough emerges that opens up a new industry, however, then this dynamic interplay between product and process innovation starts anew.

If there is any remaining excess industry capacity in the decline stage, this puts strong pressure on prices and can further increase competitive intensity, especially if the industry Page 235has high exit barriers. At this final stage of the industry life cycle, managers generally have four strategic options: exit, harvest, maintain, or consolidate: 44

· ▪ Exit. Some firms are forced to exit the industry by bankruptcy or liquidation. The U.S. textile industry has experienced a large number of exits over the last few decades, mainly due to low-cost foreign competition.

· ▪ Harvest. In pursuing a harvest strategy, the firm reduces investments in product support and allocates only a minimum of human and other resources. While several companies such as IBM, Brother, Olivetti, and Nakajima still offer typewriters, they don’t invest much in future innovation. Instead, they are maximizing cash flow from their existing typewriter product line.

· ▪ Maintain. Philip Morris, on the other hand, is following a maintain strategy with its Marlboro brand, continuing to support marketing efforts at a given level despite the fact that U.S. cigarette consumption has been declining.

· ▪ Consolidate. Although market size shrinks in a declining industry, some firms may choose to consolidate the industry by buying rivals. This allows the consolidating firm to stake out a strong position—possibly approaching monopolistic market power, albeit in a declining industry.

Although chewing tobacco is a declining industry, Swedish Match has pursued a number of acquisitions to consolidate its strategic position in the industry. It acquired, among other firms, the Pinkerton Tobacco Co. of Owensboro, Kentucky, maker of the Red Man brand. Red Man is the leading chewing tobacco brand in the United States. Red Man has carved out a strong strategic position built on a superior reputation for a quality product and by past endorsements of Major League Baseball players since 1904. Despite gory product warnings detailing the health risk of chewing tobacco and a federally mandated prohibition on marketing, the Red Man brand has remained not only popular, but also profitable.

The industry life cycle model assumes a more or less smooth transition from one stage to another. This holds true for most continuous innovations that require little or no change in consumer behavior. But not all innovations enjoy such continuity.

CROSSING THE CHASM
LO 7-4

Derive strategic implications of the crossing-the-chasm framework.

In the influential bestseller Crossing the Chasm 45 Geoffrey Moore documented that many innovators were unable to successfully transition from one stage of the industry life cycle to the next. Based on empirical observations, Moore’s core argument is that each stage of the industry life cycle is dominated by a different customer group. Different customer groups with distinctly different preferences enter the industry at each stage of the industry life cycle. Each customer group responds differently to a technological innovation. This is due to differences in the psychological, demographic, and social attributes observed in each unique customer segment. Moore’s main contribution is that the significant differences between the early customer groups—who enter during the introductory stage of the industry life cycle—and later customers—who enter during the growth stage—can make for a difficult transition between the different parts of the industry life cycle. Such differences between customer groups lead to a big gulf or chasm into which companies and their innovations frequently fall. Only companies that recognize these differences and are able to apply the appropriate competencies at each stage of the industry life cycle will have a chance to transition successfully from stage to stage.

Exhibit 7.8 shows the crossing-the-chasm framework and the different customer segments. The industry life cycle model (shown in Exhibit 7.4 ) follows an S-curve leading Page 236up to 100 percent total market potential that can be reached during the maturity stage. In contrast, the chasm framework breaks down the 100 percent market potential into different customer segments, highlighting the incremental contribution each specific segment can bring into the market. This results in the familiar bell curve. Note the big gulf, or chasm, separating the early adopters from the early and late majority that make up the mass market. Social network sites have followed a pattern similar to that illustrated in Exhibit 7.8 . Friendster was unable to cross the big chasm. Myspace was successful with the early majority, but only Facebook went on to succeed with the late majority and laggards. Each stage customer segment, moreover, is also separated by smaller chasms. Both the large competitive chasm and the smaller ones have strategic implications.

EXHIBIT 7.8 The Crossing-the-Chasm Framework

A bell curve showing customer segment portions of the overall market potential over time.Source: Adapted from G.A. Moore (1991), Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers (New York: HarperCollins), 17. Access the text alternative for Exhibit 7.8

Both new technology ventures and innovations introduced by established firms have a high failure rate. This can be explained as a failure to successfully cross the chasm from the early users to the mass market because the firm does not recognize that the business strategy needs to be fine-tuned for each customer segment. Formulating a business strategy for each segment guided by the who, what, why, and how questions of competition (Who to serve? What needs to satisfy? Why and how to satisfy them?), introduced in Chapter 6 , the firm will find that the core competencies to satisfy each of the different customer segments are quite different. If not recognized and addressed, this will lead to the demise of the innovation as it crashes into the chasm between life cycle stages.

We first introduce each customer group and map it to the respective stage of the industry life cycle. To illustrate, we then apply the chasm framework to an analysis of the mobile phone industry.

TECHNOLOGY ENTHUSIASTS
The customer segment in the introductory stage of the industry life cycle is called technology enthusiasts. 46 The smallest market segment, it makes up some 2.5 percent of total market potential. Technology enthusiasts often have an engineering mind-set and pursue new technology proactively. They frequently seek out new products before the products are officially introduced into the market. Technology enthusiasts enjoy using beta versions of products, tinkering with the product’s imperfections and providing (free) feedback and suggestions to companies. For example, many software companies such as Google and Microsoft launch beta versions to accumulate customer feedback to work out bugs before the official launch. Moreover, technology enthusiasts will often pay a premium price to have the latest gadget. The endorsement by technology enthusiasts validates the fact that the new product does in fact work.

A recent example of an innovation that appeals to technology enthusiasts is Google Glass, a mobile computer that is worn like a pair of regular glasses. Instead of a lens, Page 237however, one side displays a small, high-definition computer screen. Google Glass was developed as part of Google’s wild-card program. Technology enthusiasts were eager to get ahold of Google Glass when made available in a beta testing program in 2013.

A photo of a woman wearing Google glass. Google Glass allows the wearer to use the internet and smartphone-like applications via voice commands (e.g., conduct online search, stream video, and so on). ©AP Images/Google/REX

Those interested had to compose a Google+ or Twitter message of 50 words or less explaining why they would be a good choice to test the device and include the hashtag #ifihadglass. Some 150,000 people applied and 8,000 winners were chosen. They were required to attend a Google Glass event and pay $1,500 for the developer version of Google Glass.

Although many industry leaders, including Apple CEO Tim Cook, agree that wearable computers such as the Apple Watch or the Fitbit (a physical activity tracker that is worn on the wrist; data are integrated into an online community and phone app) are important mobile devices, they suggest that there is a large chasm between the current technology for computerized eyeglasses and a successful product for early adopters let alone the mass market. 47 They seem to be correct, because Google was until now unable to cross the chasm between technology enthusiasts and early adopters, even after spending $10 billion on R&D per year. 48

EARLY ADOPTERS
The customers entering the market in the growth stage are early adopters. They make up roughly 13.5 percent of the total market potential. Early adopters, as the name suggests, are eager to buy early into a new technology or product concept. Unlike technology enthusiasts, however, their demand is driven by their imagination and creativity rather than by the technology per se. They recognize and appreciate the possibilities the new technology can afford them in their professional and personal lives. Early adopters’ demand is fueled more by intuition and vision rather than technology concerns. These are the people that lined up at Apple Stores in the spring of 2015 when it introduced Apple Watch. Since early adopters are not influenced by standard technological performance metrics but by intuition and imagination (What can this new product do for me or my business?), the firm needs to communicate the product’s potential applications in a more direct way than when it attracted the initial technology enthusiasts. Attracting the early adopters to the new offering is critical to opening any new high-tech market segment.

EARLY MAJORITY
The customers coming into the market in the shakeout stage are called early majority. Their main consideration in deciding whether or not to adopt a new technological innovation is a strong sense of practicality. They are pragmatists and are most concerned with the question of what the new technology can do for them. Before adopting a new product or service, they weigh the benefits and costs carefully. Customers in the early majority are aware that many hyped product introductions will fade away, so they prefer to wait and see how things shake out. They like to observe how early adopters are using the product. Early majority customers rely on endorsements by others. They seek out reputable references such as reviews in prominent trade journals or in magazines such as Consumer Reports.

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Because the early majority makes up roughly one-third of the entire market potential, winning them over is critical to the commercial success of the innovation. They are on the cusp of the mass market. Bringing the early majority on board is the key to catching the growth wave of the industry life cycle. Once they decide to enter the market, a herding effect is frequently observed: The early majority enters in large numbers. 49

The significant differences in the attitudes toward technology of the early majority when compared to the early adopters signify the wide competitive gulf—the chasm—between these two consumer segments (see Exhibit 7.8 ). Without adequate demand from the early majority, most innovative products wither away.

Fisker Automotive, a California-based designer and manufacturer of premium plug-in hybrid vehicles, fell into the chasm because it was unable to transition to early adopters, let alone the mass market. Between its founding in 2007 and 2012, Fisker sold some 1,800 of its Karma model, a $100,000 sports car, to technology enthusiasts. It was unable, however, to follow up with a lower-cost model to attract the early adopters into the market. In addition, technology and reliability issues for the Karma could not be overcome. By 2013, Fisker had crashed into the first chasm (between technology enthusiasts and early adopters), filing for bankruptcy. The assets of Fisker Automotive were purchased by Wanxiang, a Chinese auto parts maker. 50

A photo of Elon Musk and Henrik Fisker. Tesla Motors CEO Elon Musk (left) in front of a Tesla Roadster; Fisker Automotive CEO Henrik Fisker (right) in front of a Fisker Karma. ©Misha Gravenor

In contrast, Tesla, the maker of all-electric vehicles introduced in ChapterCase 1 and a fierce rival of Fisker at one time, was able to overcome some of the early chasms. The Tesla Roadster was a proof-of-concept car that demonstrated that electric vehicles could achieve an equal or better performance than the very best gasoline-engine sports cars. The 2,400 Roadsters that Tesla built between 2008 and 2012 were purchased by technology enthusiasts. Next, Tesla successfully launched the Model S, a family sedan, sold to early adopters. The Tesla Model S received a strong endorsement as the 2013 Motor Trend Car of the Year and the highest test scores ever awarded by Consumer Reports. This may help in crossing the chasm to the early majority, because consumers would now feel more comfortable in considering and purchasing a Tesla vehicle. Tesla is hoping to cross the large competitive chasm between early adopters and early majority with its new, lower-priced Model 3.

LATE MAJORITY
The next wave of growth comes from buyers in the late majority entering the market in the maturity stage. Like the early majority, they are a large customer Page 239segment, making up approximately 34 percent of the total market potential. Combined, the early majority and late majority make up the lion’s share of the market potential. Demand coming from just two groups—early and late majority—drives most industry growth and firm profitability.

Members of the early and late majority are also quite similar in their attitudes toward new technology. The late majority shares all the concerns of the early majority. But there are also important differences. Although members of the early majority are confident in their ability to master the new technology, the late majority is not. They prefer to wait until standards have emerged and are firmly entrenched, so that uncertainty is much reduced. The late majority also prefers to buy from well-established firms with a strong brand image rather than from unknown new ventures.

LAGGARDS
Finally, laggards are the last consumer segment to come into the market, entering in the declining stage of the industry life cycle. These are customers who adopt a new product only if it is absolutely necessary, such as first-time cell phone adopters in the United States today. These customers generally don’t want new technology, either for personal or economic reasons. Given their reluctance to adopt new technology, they are generally not considered worth pursuing. Laggards make up no more than 16 percent of the total market potential. Their demand is far too small to compensate for reduced demand from the early and late majority (jointly almost 70 percent of total market demand), who are moving on to different products and services.

CROSSING THE CHASM: APPLICATION TO THE MOBILE PHONE INDUSTRY
Let’s apply the crossing-the-chasm framework to one specific industry. In this model, the transition from stage to stage in the industry life cycle is characterized by different competitive chasms that open up because of important differences between customer groups. Although the large chasm between early adopters and the early majority is the main cause of demise for technological innovations, other smaller mini-chasms open between each stage.

Exhibit 7.9 shows the application of the chasm model to the mobile phone industry. The first victim was Motorola’s Iridium, an ill-fated satellite-based telephone system. 51 Development began in 1992 after the spouse of a Motorola engineer complained about being unable to get any data or voice access to check on clients while vacationing Page 240on a remote island. Motorola’s solution was to launch 66 satellites into low orbit to provide global voice and data coverage. In late 1998, Motorola began offering its satellite phone service, charging $5,000 per handset (which was almost too heavy to carry around) and up to $14 per minute for calls. 52 Problems in consumer adoption beyond the few technology enthusiasts became rapidly apparent. The Iridium phone could not be used inside buildings or in cars. Rather, to receive a satellite signal, the phone needed an unobstructed line of sight to a satellite. Iridium crashed into the first chasm, never moving beyond technology enthusiasts (see Exhibit 7.9 ). For Motorola, it was a billion-dollar blunder. Iridium was soon displaced by cell phones that relied on Earth-based networks of radio towers. The global satellite telephone industry never moved beyond the introductory stage of the industry life cycle.

EXHIBIT 7.9 Crossing the Chasm: The Mobile Phone Industry

An illustration of mobile phone industry products relative to the customer segment bell curve. Access the text alternative for Exhibit 7.9

The first Treo, a fully functioning smartphone combining voice and data capabilities, was released in 2002 by Handspring. The Treo fell into the main chasm that arises between early adopters and the early majority (see Exhibit 7.9 ). Technical problems, combined with a lack of apps and an overly rigid contract with Sprint as its sole service provider, prevented the Treo from gaining traction in the market beyond early adopters. For these reasons, the Treo was not an attractive product for the early majority, who rejected it. This caused the Treo to plunge into the chasm. Just a year later, Handspring was folded into Palm, which in turn was acquired by HP for $1 billion in 2010. 53 HP shut down Palm in 2011 and wrote off the acquisition. 54

BlackBerry (formerly known as Research in Motion or RIM) 55 introduced its first fully functioning smartphone in 2000. It was a huge success—especially with two key consumer segments. First, corporate IT managers were early adopters. They became product champions for the BlackBerry smartphone because of its encrypted security software and its reliability in always staying connected to a company’s network. This allowed users to receive e-mail and other data in real time, anywhere in the world where wireless service was provided. Second, corporate executives were the early majority pulling the BlackBerry smartphone over the chasm because it allowed 24/7 access to data and voice. BlackBerry was able to create a beachhead to cross the chasm between the technology enthusiasts and early adopters on one side and the early majority on the other. 56 BlackBerry’s managers identified the needs of not only early adopters (e.g., IT managers) but also the early majority (e.g., executives), who pulled the BlackBerry over the chasm. By 2005, the BlackBerry had become a corporate executive status symbol. As a consequence of capturing the first three stages of the industry life cycle, between 2002 and 2007, BlackBerry enjoyed no less than 30 percent year-over-year revenue growth as well as double-digit growth in other financial performance metrics such as return on equity. BlackBerry enjoyed a temporary competitive advantage.

In 2007, BlackBerry’s dominance over the smartphone market began to erode quickly. The main reason was Apple’s introduction of the iPhone. Although technology enthusiasts and early adopters argue that the iPhone is an inferior product to the BlackBerry based on technological criteria, the iPhone enticed not only the early majority, but also the late majority to enter the market. For the late majority, encrypted software security was much less important than having fun with a device that allowed users to surf the web, take pictures, play games, and send and receive e-mail. Moreover, the Apple iTunes Store soon provided thousands of apps for basically any kind of service. While the BlackBerry couldn’t cross the gulf between the early and the late majority, Apple’s iPhone captured the mass market rapidly. Moreover, consumers began to bring their personal iPhone to work, which forced corporate IT departments to expand their services beyond the BlackBerry. Apple rode the wave of this success to capture each market segment. Likewise, Samsung with its Galaxy line of phones, having successfully imitated the look-and-feel of an Page 241iPhone (as discussed in Chapter 4 ), is enjoying similar success across the different market segments.

This brief application of the chasm framework to the mobile phone industry shows its usefulness. It provides insightful explanations of why some companies failed, while others succeeded—and thus goes at the core of strategy management.

In summary, Exhibit 7.10 details the features and strategic implications of the entire industry life cycle at each stage.

EXHIBIT 7.10 Features and Strategic Implications of the Industry Life Cycle

Life Cycle Stages

Introduction

Growth

Shakeout

Maturity

Decline

Core Competency

R&D, some marketing

R&D, some manufacturing, marketing

Manufacturing, process engineering

Manufacturing, process engineering, marketing

Manufacturing, process engineering, marketing, service

Type and Level of Innovation

Product innovation at a maximum; process innovation at a minimum

Product innovation decreasing; process innovation increasing

After emergence of standard: product innovation decreasing rapidly; process innovation increasing rapidly

Product innovation at a minimum; process innovation at a maximum

Product & process innovation ceased

Market Growth

Slow

High

Moderate and slowing down

None to moderate

Negative

Market Size

Small

Moderate

Large

Largest

Small to moderate

Price

High

Falling

Moderate

Low

Low to high

Number of Competitors

Few, if any

Many

Fewer

Moderate, but large

Few, if any

Mode of Competition

Non-price competition

Non-price competition

Shifting from non-price to price competition

Price

Price or non-price competition

Type of Buyers

Technology enthusiasts

Early adopters

Early majority

Late majority

Laggards

Business-Level Strategy

Differentiation

Differentiation

Differentiation, or integration strategy

Cost-leadership or integration strategy

Cost-leadership, differentiation, or integration strategy

Strategic Objective

Achieving market acceptance

Staking out a strong strategic position; generating “deep pockets”

Surviving by drawing on “deep pockets”

Maintaining strong strategic position

Exit, harvest, maintain, or consolidate

A word of caution is in order, however: Although the industry life cycle is a useful framework to guide strategic choice, industries do not necessarily evolve through these stages. Moreover, innovations can emerge at any stage of the industry life cycle, which in turn can initiate a new cycle. Industries can also be rejuvenated, often in the declining stage.

Although the industry life cycle is a useful tool, it does not explain everything about changes in industries. Some industries may never go through the entire life cycle, while others are continually renewed through innovation. Be aware, too, that other external factors that can be captured in the PESTEL framework (introduced in Chapter 3 ) such as fads Page 242in fashion, changes in demographics, or deregulation can affect the dynamics of industry life cycles at any stage.

It is also important to note that innovations that failed initially can sometimes get a second chance in a new industry or for a new application. When introduced in the early 1990s as an early wireless telephone system, Iridium’s use never went beyond that by technology enthusiasts. After Motorola’s failure, the technology was spun out as a standalone venture called Iridium Communications. As of 2017, it looks like Iridium’s satellite-based communications system will get another chance of becoming a true breakthrough innovation. 57 Rather than in an application in the end-consumer market, this time Iridium is considered for global deployment by airspace authorities to allow real-time tracking of airplanes wherever they may be. The issue of being able to track airplanes around the globe at all times came to the fore in 2014, when Malaysia Airlines Flight 370 with 239 people on board disappeared without a trace, and authorities were unable to locate the airplane.

For the last few decades, air controllers had to rely on ground-based radar to direct planes and to triangulate their positions. A major problem with any ground-based system is that it only works over land or near the shore, but not over oceans, which cover more than 70 percent of the Earth’s surface. Moreover, radar does not work in mountain ranges. Oceans and mountain terrain, therefore, are currently dead zones where air traffic controllers are unable to track airplanes.

Iridium’s technology is now used as a space-based flight tracking system. In 2017, Elon Musk’s SpaceX launched the first set of 10 satellites (out of a total of 66 needed) into space to begin constructing a space-based air traffic control system. Such a system affords air traffic controllers full visibility of and real-time flight information from any airplane over both water and land. It also allows pilots more flexibility in changing routes to avoid bad weather and turbulence, thus increasing passenger convenience, saving fuel, and reducing greenhouse-gas emissions. In addition, the new technology, called Aireon, would allow planes to fly closer together (15 miles apart instead of the now customary 80 miles), allowing for more air traffic on efficient routes. A research study by an independent body predicts that global deployment of Aireon would also lead to a substantial improvement in air safety.

Providing the next-generation air traffic control technology and services is a huge business opportunity for Iridium Communications. National air traffic control agencies will be the main customers to deploy the new Aireon technology. This goes to show that a second chance of success for an innovation may arise, even after the timing and application of an initial