1. Developing an Entrance Strategy

2. Innovation = Invention + Commercialization

3. Choosing your Competitive Terrain Your opportunity register will contain many possibilities for additions to your product and service lines. These in turn will demand shifts in your firm’s capabilities to allow you to compete in new markets with unfamiliar business models. Finally, you will need to decide how ‘best’ to enter your competitive terrain

4. Trajectory of your Markets and Capabilities ‘Vision’ Where you think your firm, product and market will be at some point in the future Is how you summarize your view of the competitive trajectory you will take

5. What is Your Commitment to this Product Business segment portfolio ranking Business Segment Revenues ($000) Contributio n ($000) Cumulative % of Revenue Cumulative % of Profit Annual Growth Qualitative Assessment Segment 1892851.45%32.56%4.00%Cash Cow Segment 2546331.21%73.26%8.00% Star Performance Segment 325514.45%5.81%15.00% Marginal Niche Segment 45-102.89%-11.63%8.00%Loss Leader

6. Action Steps prior to an Entry STEP 1: Decide on the appropriate business segments for the ranking (products, services, cus­tomers, geographies, or other types of business). Develop your equiv­alent of Table 1. Review the basic recommendations for each cell in the map, paying particular attention to how the business categories have shifted in the past. STEP 2: Revisit the opportunity register and categorize opportunities according to whether their potential is in building new arenas or in model-transforming arenas. STEP 3: For the most appealing arena-building opportunities, assess their upside potential, risk, and adoption characteristics STEP 4: Determine the revenue, profit and growth potential of future arena-building opportunities associated with the innovations in your opportunity register. STEP 5: Carry out projection of the ranking into the future. Determine which opportunities and existing businesses are worth further serious consideration and which should be restructured or sold. STEP 6: Determine where your capital, people, and capabilities will be obtained for any new business segment investments. STEP 7: Identify the people and groups that will be needed to make an innovation and associated new business segment work. Start planning your strategy for managing the actors in each cell.

7. ‘Vision’ in an Uncertain Future Real Options

8. What’s Different about Innovation Innovations distinguish themselves from more conventional investments in three ways: (1) technology development and marketing both need intense, adaptive management; (2) there is no history of investment performance which might yield insights in the value of the innovation; and (3) the potential value of the innovation depends on future events and managerial decisions which cannot be foreseen. This sets up impediments to commercializing an innovation that can make resource planning and investment extremely difficult. Innovations are inherently riskier, with added risk compensated for by high returns  research suggests on average about three to four times as great as traditional products and services, but significantly higher for ‘blockbusters.’

9. Innovation is about the Future Discounted Cash Flow, Pro Forma Accounting and other standard techniques  Don’t work for innovations  Because there is no business history  All decisions are in the future Decision determine the ability to make ‘follow-on’ investments.  E.g., start-ups are often required to prove a technology concept and market in stages, funded by multiple rounds of financing In such circumstances, Real Options are used

10. Example of a Real options Valuation (and the value of discovery ) Let an investment decision extends over two periods – today (period 1) and a year from today (period 2). Assume a $1000 investment today will generate cash inflows next year that discounted to today’s dollars are either $800, $1100, or $2000 with equal probability. (worth $300, next slide) If the manager can delay the investment until next year, and avoid investing if cash inflows turn out to only be $800.  By waiting and gathering information (i.e., what is only being forecast in the DCF model), then expected return is $550 (two slides down). This ‘real option’ to defer the decision until next year is worth today is worth $25=$550-$300.

11. Option with three possibilities What if the third option can be delayed until we know more?

12. Option with two possibilities This ‘real option’ to defer the decision until next year is worth today $25=$550-$300.

13. Decision Tree for Assets-in-place (top) versus Real Options (bottom) Scenarios The real options approach assumes that pivotal managerial decisions are made, and that an uncertain world subsequently unfolds Decision trees assume that the manager makes a decision, and then finds out what happens They are related, but give different results Scenario Analysis is a third, more ad hoc approach

14. Different Industries Display Different Rates of Change and thus different Risk Levels Past is indicator of FutureFuture is Volatile

15. Real Options Commonly Found in Innovation Strategy Real options provide a richer language for innovators than their financial counterparts  Because real options take into account the manner in which management learns about their innovation, and  The particular steps that are taken to manage that risk of the life of the product or service Real options in innovation come in three different forms  positioning,  scouting, and  stepping-stone options.

16. Positioning Options Positioning options create the right to wait and see. Investments that put the company in a position to capitalize on uncertain external events, should they occur such as the emergence of a new market on the Internet or of a successful technology that has been competing for market dominance Are positioning options Such options are useful when the uncertainty you face is mostly out of your control but you need to be positioned to act in case fortune turns your way.

17. Positioning Option Example AT&T, from about 1998 to 2003, spent billions of dollars on taking attractive positions, Acquiring cable companies such as Tele-Communications and MediaOne; Entering into joint ventures with British Telecom and Japan Telecom, and Working with Microsoft for set-top box software All in pursuit of a convergence of telephone, internet, gaming and television services on top of one technological platform This is a market that AT&T could possible dominate with their network position;  but Microsoft, Sony and Nintendo may be in a better consumer position with their game consoles. For AT&T, billions of dollars is a reasonable price to pay for a positioning option when you consider the size of the potential industry, which may represent $100 billions of dollars in annual revenue.

18. Scouting Options Scouting options, can be considered as entrepreneurial experiments They are investments made with the intention of discovering and/or creating markets for products and services  by deploying capabilities that you have (perhaps recently) developed in potential new arenas They help you explore new terrain from your current competence base

19. Scouting Option Example By staking out several contrasting positions in a market,  you can systematically pretest the market acceptance of an innovation  and test your coverage for adverse contingencies Scouting options can also provide you information concerning what data needs to be tracked, and Helps develop the scanning and intelligence systems that will ultimately be needed when the product or service comes to market

20. Stepping-Stone Options Stepping-stone options are a series of small investments that lead you towards a larger goal one small step at a time (3M’s ‘small steps’ They are consciously staged attempts to sequentially discover new competences to pursue highly promising but very uncertain potential markets or technologies You choose stepping-stone options when you want to expose your company to opportunities  in which there is high uncertainty both about the final shape of a high-potential market and  about the likelihood of being able to develop the necessary competences to serve it

21. Stepping-Stone Option Examples Kyocera used stepping-stone options to pursue the industrial ceramics business in the 1960s Instead of investing to crack high-level applications like automobile engine cylinders or turbine blades as did many other smart companies, General Electric included Kyocera initially invested in low-end applications for known niche markets For instance, the company developed ceramic scissor blades for the textile industry Through this initial effort, the company resolved considerable technical uncertainty, such as how to process clays and how to make precise edges with consistent quality  This created an initial technological competence which, as it evolved, took Kyocera along a trajectory of increasing technical sophistication The firm is now a major global supplier of semiconductor chip substrates and other materials for the digital age

22. Project Options in Technology - Operations and Market Space

23. Example of one firm’s Project Portfolio Mapped in Technology -Operations and Market Space

24. Problem of Adoption Risk Unilever in 1973 filed a British patent application for a hardened, randomized margarine that reportedly contained only 3.2% trans fatty acids  considered the leading health hazard in huge global market for margarine and cooking oil – so less is better  The patent was lauded by European oil chemists as "the greatest technological advance of recent years. Despite its importance, the road to ‘selling’ this was hard The innovation made sense in the final market, but didn’t excite the target audience This was because the annual savings for a refinery manager to switch to the new catalyst were modest—perhaps $15,000 per year per converter Moreover, the refinery manager wouldn't personally benefit from the savings, which would appear on the plant expense budget and were not part of the criteria on which refinery managers were evaluated Should a batch of oil be lost, on the other hand, the manager would be held responsible and the cost could exceed $150,000 per batch This high-risk/low-reward proposition to switch to the new catalyst was a predictably hard sell, and our entrepreneur got nowhere with his "I'll save you money—trust me" pitch.

25. The most important sales are your first three sales Your first three sales of any particular combination of features that you envision for your innovation should be seen as qualitatively different from all other sales They not only provide you with your first real feedback on the innovation; but they also provide the basis for word-of- mouth and viral marketing, both good and bad

26. Lead-steer customers Who should you choose as your first three customers? Lead-steer customers are opinion leaders in their industry, who are likely to be well regarded by their peers. Corporations like those on the "most-admired" lists published in magazines such as Business Week are prime candidates for lead-steer customers. Individuals who represent a segment that is highly desirable to you might be more appropriate for your particular innovation. The objective is to use these customers' enthusiasm about your innovation and business model to

27. Your first 3 Customers are your Most Important! They should be Lead-steer customers  Opinion leaders in their industries  Highly regarded by peers  Customers with blogs, review or other sites These will help you to test your assumptions about attribute maps and consumption chains Risk LowRisk High Benefit Low 2 nd Priority (make risk of not buying higher than of buying) Forget it! (postpone until value  or risk  Benefit High 1 st Priority (easy sell) 3 rd Priority (‘if it doesn’t work, send me the bill’)

28. Competitors cannot let your Entry go Uncontested Other firms in your market, or producing substitutes for your product Will try to limit your success in the best way they can. Depending on the scale of their business And their commitment to this market

29. Who are your Competitors ? How do you expect them to respond to your entry? State why you categorize them as such Usually because of their market power, the coreness of the product to their capabilities, and their interest in this market Capacity to produce is High Capacity to produce is Low Commitment to enter market is Low Sleeping Dogs (track them) Bystanders (monitor) Commitment to enter market is High Combatants (Your main focus) Skirmishers (selective in their responses due to resource limits; monitor)

30. What Entry Tactics should you Choose? Objective: Avoid debilitating competitive interaction  By using speed, skill and surprise  Rather than your scarce resources Assets should be bought only as a last resort As in war, there are a limited set of battle proven tactics available for entry

31. Entry Tactics Offensive tactics Rapid dominance Planned attack / frontal assault Flanking maneuver Pincer movement Double envelopment Attrition warfare Interdiction / control of lines of communication and supply Preemptive attack Raiding Divide and Conquer Guerrilla Warfare Defensive tactics Mutual support Scorched earth policy Booby traps Center Peel Trench warfare Hedgehog defense Deception Tactics Stealth and Camouflage Disinformation Feint Force multiplication