INNOVATION STRATEGY Setting the direction

AGENDA READINGS Mapping Your Innovation Strategy Creating New Market Space Case: Evolution of the Circus Industry LEARNING OBJECTIVES: What is strategy? What is an innovation strategy? What is value innovation? How can this be applied to understanding the circus industry? What is a disruptive technology/innovation? Prep readings: S. Anthony, M. Eyring, L. Gibson. “Mapping Your Innovation Strategy”. Harvard Business Review, May 2006. W.C. Kim, R. Mauborgne. “Creating New Market Space.” Harvard Business Review, Jan-Feb 1999: pp.83-93. CASE: Evolution of the circus industry (A). M. Williamson, W.C. Kim, R. Mauborgne & B.M. Bensaou. 2002, Case 06/2009-4999: INSEAD (6 pages). Questions: 1. What were the factors the traditional circus competing on? What did you like or dislike about the traditional circus? 2. Is it possible to find new market space in the circus industry? Handouts needed for this class: Even a clown can do it (B), INSEAD Case by M. Williamson Blue Ocean strategy, HBR Ost 2004 by W.C. Kim, R. Mauborgne

STRATEGY? A strategy is the way in which an organization chooses to meet its goals and objectives. A strategy defines appropriate decisions and actions. Strategy: the way a company achieves it’s objectives.

INNOVATION STRATEGY? Innovation strategy determines to what degree and in what way a firm attempts to use innovation to execute its business strategy and improve its performance. What does an innovation strategy include? Target: What market? Ideation: What innovations? Conversion: How to plan, select and develop innovations? Diffusion: How to commercialize? An innovation strategy: how will you achieve innovation in your organization? Pick the market: Where will you play? What is your market? Why is this the right market for you? What opportunities and threats exist in this market? Is this the same market you always target? What does this market want/need? Example – does Harvard Summer School target the same market as Harvard Business School or Medical School? What advantages does Harvard achieve by serving the extension market? Pick the innovation (ideation) What will work – for you and the market? What are the options? Plan, select and develop (conversion) Criteria? Testing? Motivation for employees? Who decides? Commercialize (diffusion) Analyze the results, reassess your criteria, test and launch. This paper takes the Hansen & Birkinshaw Innovation value chain of idea generation, conversion and diffusion and applies to to finding non-obvious opportunities based on non-traditional assumptions.

Typology of Strategies (James Gardner ) Play-to-win strategy Play-not-to-lose strategy Exploration Expectation of a significant competitive advantage Relies on semi-radical and radical innovations New technologies and business models for breakthrough innovations Lead the competition Exploitation Maintaining existing competitive advantage Incremental innovation to strengthen existing products Keeping up with the competition

An example of internal process innovation in PNTL Strategy

Example of Amazon, PTW Complete redesign of business model for delivery of books from publisher to consumer Heavy reliance on technology Responsibility for shipping with publisher Required heavy up front investment Now has expanded beyond books Challenge was that it took 10 years to turn a profit.

VALUE INNOVATION Kim & Mauborgne Research showed that managers of high-growth companies think in terms of value innovation while managers of less successful companies think in terms of conventional strategic choices. And… Represent… Incremental Innovations Radical Innovations % of launches.. 86% 14% % of revenue.. 62% 38% % of profits… 39% 61% Examples provided of Formule 1 Hotels that minimize the perks and maximize convenience, and Kinepolis movie theatres that super-sized the movie theater experience.

VALUE INNOVATION Creating products or services for which there are no direct competitors – and use those offerings to stake out and dominate new market space. Examples: Quicken Software from Intuit Starbucks Home Depot

Comparing Conventional To Value Innovation Logic Conventional Logic Value Innovation Logic Industry assumptions Conditions given Shape conditions Strategic focus Beat the competition Create quantum leap in value Customers Retain & expand, segment & customize Serve masses, focus on commonalities Assets & capabilities Leverage existing Create what is needed Product/Service Offering Maximize value within traditional boundaries Total solutions for customers regardless of boundaries Key tool: how to map your strategy against the competition along main dimensions – existing and value innovation.

Discovering the Value Curve Apply this analysis to the circus industry…

Traditional Circus Industry How would you assess the attractiveness of the circus industry in the early 1980’s? What would you conclude from your industry analysis? What were the factors the traditional circus companies competed on? What do you like or dislike about the traditional circus? How would you assess the attractiveness of the circus industry in the early 1980’s? What would you conclude from your industry analysis? Rivalry Supplier bargaining power – acts provided by individual ‘subcontractors’, some very famous. Star acts can demand significant salaries and top billing. Barriers to entry in little league very low but in big league very high. Threat from substitutes – video games, professional sporting events, theater, etc. Buyer bargaining power What were the factors the traditional circus companies competed on? What do you like or dislike about the traditional circus? Demand side – demand shrinking. Frustrations: Debilitating huckster reputation Feels unprofessional Cold, uncomfortable 3 rings, can’t see everything Kids upset if they don’t get the expensive stuff Even clowns look sad Animals used for human entertainment, they look sad Suspicion about animal (and employee) treatment Animals’ smell Benefits Magic World of amazement and exceptional strength/skills Wonder and illusion Real action and movement Live entertainment outside Sense of danger and risk Fun and light entertainment Family event Realities:

Origins of the Circus Classic circus: Equestrian acts Clowns Acrobats Jugglers Created by Philip Astley in 1768

Evolved to the 19th & 20th Century Ringling Brothers and Barnum & Bailey’s Circus Three-ring format Emphasis on spectacle Mobile circus Typical clowns Star performers such as Tom Mix, Rodeo Rider Clyde Beatty, wild animal trainer Revenue based on ticket sales and concessions (80/20)

Challenges Logistical requirements of tearing down and setting up Core workforce supplemented with local hires Itinerant nature makes estimating ticket sales difficult Marketing and publicity usually happens when the circus arrives in town Venue: tent, civic arenas Locations: towns & cities Logistics: local help plus core workforce plus star performers set up and tear down permanent tours simultaneous, subcontracted acts leased animals Value: spectacular, spectacle, exotic, novelty (once/year) Business model: ticket sales = 80%; concessions = 20%; unpredictable income Marketing – advance teams, entrance performance In 1997 – 90 US travelling circuses; revenue = from $50,000 to $1 million/year; 15-80 performers

Current State Ringling Brothers Modernizes But who is their target market? In 1984 a new option is born Who is the audience for the “non Circus”, Cirque du Soleil? What is different? Even a Clown can do it! http://www.ringling.com/TopLanding.aspx?id=15322 http://www.cirquedusoleil.com/en/shows/o/default.aspx Cirque du Soleil video on Organizational Behavior CD, disc one – 10 mins

Questions When you compare Cirque du Soleil with the conventional circus, which are the factors kept by Le Cirque? Which ones were downplayed and which ones were played up? Which factors were eliminated by Cirque du Soleil? What are the operational and financial implications? What factors were created by Cirque du Soleil? Where did the idea come from?

Cirque du Soleil challenged the assumptions of the industry: Traditional Circus Cirque du Soleil 3 Ring Star Performers Seasonal One Show Child Audience Animals Unrelated Acts No Music/Dance Low Price High Push for concession sales Emphasis on fun/thrills Functional watching environment One ring Non-star Performers Yearly Multiple productions Adult audience No animals Story/theme Individualized Music/Dance High price Profits from tickets Emphasis on artistery Refined watching environment

BLUE OCEAN STRATEGY W. Chan Kim, Renée Mauborgne Create uncontested market spaces where the competition is irrelevant. Invent and capture new demand, and offer customers a leap in value while streamlining costs. As opposed to red ocean strategies which represent all industries in existence – the known market space. Industry boundaries are defined and accepted, and the competitive rules of the game are well understood.

“We reinvent the circus” Cirque du Soleil invented a new industry that combined elements from traditional circus with elements drawn from sophisticated theater.

Red Ocean Versus Blue Ocean Strategy Red Ocean Strategy Blue Ocean Strategy Compete in existing market space. Beat the competition. Exploit existing demand. Make the value/cost trade-off. Align the whole system of a company’s activities with its strategic choice of differentiation or 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 of a company’s activities in pursuit of differentiation and low cost.

Disruptive Innovations Clayton M. Christensen An innovation (or technology) that disrupts an existing market. "Generally, disruptive innovations were technologically straightforward, consisting of off-the-shelf components put together in a product architecture that was often simpler than prior approaches. They offered less of what customers in established markets wanted and so could rarely be initially employed there. They offered a different package of attributes valued only in emerging markets remote from, and unimportant to, the mainstream.“ Christensen, Clayton M. (1997). The innovator's dilemma: when new technologies cause great firms to fail. Harvard Business Press. For example… Disruptive Innovation: Disruptive innovation, a term of art coined by Clayton Christensen, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves ‘up market’, eventually displacing established competitors.  An innovation that is disruptive allows a whole new population of consumers access to a product or service that was historically only accessible to consumers with a lot of money or a lot of skill.  Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics.  For example, the one-laptop-per-child initiative was envisioned by Nicholas Negroponte, cofounder and chairman emeritus of MIT’s media lab. The concept, which he unveiled at the World Economic Forum at davos, Switzerland in January 2005, was to give all children in developing countries a laptop computer of their own. The vision led Negroponte to organize the project as a nonporifit – the OLPC foundation. The challenge was then in the implementation – how to achieve minimal power consumption, a manufacturing cost of US$100 for production runs of millions of units, a cool look, e-book functionality and free or open-source software development. Since its launch computer manufacturers are now developing a commercialized version.

EXAMPLES OF DISRUPTIVE TECHNOLOGIES (from Wikipedia) Innovation Disrupted market 8 inch floppy disk drive 14 inch floppy disk drive Steamships Sailing ships 5.25 inch floppy disk drive Telephones Telegraphy 3.5 inch floppy disk drive Automobiles Rail transport Downloadable Digital Media CDs, DVDs Private jet Supersonic transport Hydraulic excavators Cable-operated excavators Plastic Metal, wood, glass etc Mini steel mills vertically integrated mills Light-emitting diodes Light bulbs Minicomputers Mainframes Digital synthesizer Electronic organ and piano Personal computers Minicomputers, Workstations. Mobile Telephony Mobile Discount Operators Desktop publishing Traditional publishing LCD CRT Computer printers Offset printing Digital calculator Mechanical calculator Digital photography Chemical photography Ultrasound Radiography (X-ray imaging) High speed CMOS video sensors Photographic film Podcasting Broadcast Radio & TV