MP3 / MD740 Strategy & Information Systems Oct. 6, 2004 Technological Leapfrogging Disruptive Technologies

Issues Covered Technological Leapfrogging –Lessons from winners and losers in three generations of video game consoles –Strategies for newcomers to displace leaders –Strategies for incumbents to preserve their lead Disruptive Technologies –Why do once-dominant firms fail? –How can a firm limit failures? –How should a firm approach innovation to maximize success opportunities?

16 Bit Game Consoles Source: Schilling 2003

32/64 Bit Game Consoles (failed) Source: Schilling 2003

32/64 Bit Game Consoles Source: Schilling 2003

128 Bit Game Consoles Source: Schilling 2003

Components of Consumer Value for Network Goods Technological Functionality Installed base (exchange) Complementary Goods Availability (extrinsic benefits) Panel A Incumbent product Switching Costs (stability) Panel B New entrant, compatible with existing installed base and complementary goods Switching Costs (stability) Technological Functionality Installed base (exchange) Complementary Goods Availability (extrinsic benefits) Compatible technologies can tap into the same installed base and complementary products as the incumbent. This dramatically lowers (or eliminates) switching costs, leaving the products to compete on technical functionality.

Components of Consumer Value for Network Goods Technological Functionality Installed base (exchange) Complementary Goods Availability (extrinsic benefits) Switching Costs (stability) Panel A Incumbent product Panel C New, incompatible entrant Technological Functionality Radical innovation may be necessary if an incompatible technology is to overthrow an established standard. The technical benefits of the new innovation must exceed the exchange, extrinsic, and stability benefits of the incumbent.

Similar principles in non-network markets Functionality/ Effectiveness Switching Costs (stability) FreshDirect Late Entering Rival Functionality/ Effectiveness FreshDirect faces threats that its model may be copied. However, new competitors have to offer functionality that exceeds the features of FreshDirect and the switching cost to move to a new service (e.g. learn a new website, re- enter your orders, the loss of any valuable ‘recommendation’ services). Rivals can offer a lower- priced service, but low-price implies scale & efficiency, an advantage for the early mover.

Product Performance Time Performance demanded at the high end of the market Performance demanded at the low end of the market Progress due to sustaining technologies Disruptive technological innovation Progress due to sustaining technologies Existing profit, staffing, and customer pressures stall innovation Traditional market & financial analysis cause blindness Why Do Leaders Fail?

Creating the Killer-App Blindness & Pressures –existing customers & market pressure –financial performance measures Identify Technologies –external conversations (VCs, academics, technologists) –internal conversations (engineering, mktg, planning) Managing an Option Portfolio of Innovations –separate organizations –hedge financial risk, market focus, incentive