Chapter 6: Innovation Strategies in:

Joachim H. Becker, Sven Pastoors, Ulrich Scholz, Rob van Dun

Towards Sustainable Innovation, page 131 - 146

A five step approach to sustainable change

1. Edition 2017, ISBN print: 978-3-8288-3903-8, ISBN online: 978-3-8288-6655-3,

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127 chapter 6: InnovatIon strategIes Rob van Dun Summary • Entrepreneurs and innovators need strategies to bring novel products, services or processes to the market. Innovations can aim to obtain a leading position in the market, or try to achieve control in a sense that no (or only a few) competitors can enter the same market. The following approaches are some of the most important innovation strategies:Going all-in is only possible for very novel innovations. It is very demanding in terms of resources and requires the company to continue innovating and cut costs. It is probably the riskiest strategy of those being explained in this chapter. • Creative imitation, as a strategy, requires good understanding of what value is created for the customers and in doing so, how they can creatively design a different product or service aimed at the same customers as that of the competitor. 128 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation • Entrepreneurial Judo is a strategy in which the innovator uses their opponent’s (read: competitor) strength against him. • Niches are highly specialized market segments that have their own rules. Companies can manoeuvre themselves in such a niche, making it very hard for competitors to enter the same market profitably. These niches are then controlled by the company. • Ever since firstly coined by Harvard Business School professor Clayton Christensen, disruptive innovation has become one of the most influential theories in the field of innovation and strategy. Both new firms and existing firms aim to turn current noncustomers into customers. 6.1 The significance of innovation strategies Having discussed the importance of entrepreneurial management to new ventures and existing businesses, this section focuses on innovation strategies. A strategy is nothing more than a commitment to a set of coherent, mutually reinforcing policies or behaviours aimed at achieving a specific competitive goal (Pisano, 2015, p1). An innovation strategy is a plan made by an organization to encourage advancements in technology or services, usually by investing in research and development activities (Greer, 2013, p107). Rather than focusing on the internal processes (see chapter  5 Entrepreneurial Management) and the creation of an environment in which innovation may occur (see chapter 7 Fostering Innovation), this chapter focuses on the successful marketing of innovations. Innovation strategies are as important for any business as entrepreneurial management is. In his book Innovation and Entrepreneurship, Peter Drucker (1985) distinguishes four distinct entrepreneurial strategies that still are employed today, namely 129 Chapter 6: Innovation Strategies 1. “Being fustest with the mostest” 2. “Hitting them where they ain’t” 3. Finding and occupying a specialized “ecological niche” 4. Changing the economic characteristics of a product, a market or an industry. The work of Drucker provides the basis for this chapter, complemented with more contemporary works of among other Clayton Christensen. Please note that these strategies are not only suitable for start-up firms, but also the larger established firms that seek to innovate and develop new products/services or enter other industries and markets. 6.2 going all-In (“being fustest with the mostest”) Familiar to the ones ever having played poker, the term all-in refers to shoving all your coins in, risking it all. The player either loses all he has, or at least doubles the number of chips before the big gamble. As the naming suggests, this strategy is mainly defined by trying to become the unchallenged leader in an industry or market. Drucker (1985) refers to this strategy as “Being Fustest with the Mostest”, which is a quote from an American Civil War general when asked why he was successful. This particular strategy is only suitable for products that are truly new, something wildly different from what has been around before. It demands lots of resources being allocated towards this new product. If successful, the firm will be the industry leader for a fair amount of time. If it fails to market this new product, the firm will be significantly damaged. Firms that choose to take this strategy can be very successful financially, being able to charge premium prices for their products and selling them like hot cupcakes. However, even when successful, the company needs to make sure they make their own product obsolete: they need to develop their own successor product, because if they don’t, a competi- 130 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation tor will probably do this. In order to do so, the entrepreneurial firm will need to keep investing in research and development. In addition, the firm who gained leadership through successful innovation and a successful deployment of this strategy, has to make sure it cuts his prices. Although this is a general rule in strategic management, this is especially true in this case. To remain unchallenged, the innovator has to ward off competition, which is eager to capture a bit of market share. As the initial innovator should have been able to obtain economies of scale and rid down the cost-curve, they now have lowered their marginal costs for a while. This advantage has to be paid forward to the customer, as competitors will otherwise seek to enter this market or industry with similar products, as there is a profit-incentive for them to do so. Lowering the prices, however, might prevent these competitors from entering as their costs typically are higher than that of the initial innovator, as they lack learning-effects. A common mistake that entrepreneurs make is that of profit creaming, where they only serve the top-end of the market, where profit margins are greatest and customers are willing to pay a premium for its products. Not lowering their prices attracts a lot of attention from competitors, leaving the vulnerable to “Hitting them where they ain’t” strategies. 6.3 hit them where they ain’t When others have successfully gone all-in and are selling their new and highly innovative products, other players might want to enter the same markets. Although the initial innovator might have firstmover advantages, the next players to enter the market do have one major advantage: they already know that there is a market for a certain product and do not have to risk it all. Moreover, they do not even have to innovate from scratch, but can start with what the in- 131 Chapter 6: Innovation Strategies itial innovator does and make some changes left or right. This is a legitimate strategy, and not mere copycat behaviour that Western companies so often blame the Chinese and Koreans of! Being called “Hitting them where they ain’t” (another civil war general’s quote) they focus on attacking the original innovator where he is not acting or protecting its innovation. This can be done in multiple ways. Creative Imitation Being different from copycat behaviour, firms that deploy creative imitation seek opportunities to do things differently. In order to do so, they obviously need to get creative. It requires a thorough understanding of the market and industry and seeks to find weaknesses in the innovation of a to-be competitor. Being successful with “creative imitation” means that one understands better what the innovation represents than the people who actually made it. This strategy aims at market leadership, too, but it is much less risky than the first strategy. If the new product is already known, it is much easier to find out what customers buy and how to fit their specific needs. The main risk with this strategy – besides misreading the trend in the market – is to offer too many products for too specific needs, resulting in a hard to manage, segmented market. Entrepreneurial Judo The basic idea behind the sport Judo is to try to use the opponent’s strength against himself. Or, alternatively, find a weakness in the opponent’s defence. According to Drucker (1985), this principle can be transferred to innovation. The concept is to try to prevail in a market others created, but simply don’t care about it. This opportunity arises mainly in two situations: with corporations who think the new product or service is not good enough for their customers, or with corporations who try to get just the high-profit part of a market by creaming it. Entrepreneurial Judo aims at entering a market where the established leaders do not defend it or simply do not care about it. It also intends leadership in a market, but it does not challenge the leaders where they are aware of competition, but in areas where they 132 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation do not care what’s going on. This happens a lot and indeed, Asian firms are very quick to react to this, enabling them to quickly enter a market and develop a product that is intended for a different target user. The Japanese, South Korean and Chinese giants are very adept at developing a very competitive product at a fraction of the price of the initial innovation that provides a lot of value for their customers. Case study: the battle for the smartphone customer For almost a decade, Nokia and Motorola where the unchallenged cell phone market leaders in respectively Europe and the US. They were innovative and by no means asleep at the switch. Their R&D teams continuously improved their products. So, phones became better and better, having more and more options. Nokia had WAP, which enabled its users to access the internet, the phones had touchscreens too. Yet, somehow they seemed to have missed out on the smartphone trend. In the meantime, Steve Jobs was back in charge at Apple, which then was mostly selling Mac computers and iPods. He realized that the computer market had become commoditized, meaning that pricecuts happened very fast and winners in this industry where not so much the original equipment manufacturers (OEMs), but Intel and Microsoft, who had their product in almost every single computer. Competition was fierce, with the likes of IBM, Dell, Hewlett Packard, Toshiba and some Asian newcomers such as Acer, Asus and Samsung all competing in the same market. He believed Apple needed to escape this competition by means of innovation and in one instance happened to change the music industry altogether with the introduction of the first iPod portable media player. When this industry became more and more crowded with competitors, he spotted the opportunity for a smartphone. So, Jobs did what he did best: create completely new and highly innovative products that attract so many customers through sleek design and stunning usability. The development of the iPhone took loads of resources and Apple went all-in on this, deploying the “Fus- 133 Chapter 6: Innovation Strategies test with the Mostest strategy”. In one instance, he created a completely new industry. After being shown the vast opportunity and market for Apple’s products, the likes of Sony Ericsson (still the Japanese-Swedish joint-venture then) but more importantly HTC and Samsung went to their drawing tables and quickly start innovating in the same direction. They had the major advantage that there was a proven market and they had an idea what a smartphone, in terms of features, should have, as Apple paved the way. Not that much later, both Korean firms introduced their smartphones, which became an immediate success. But how were they able to capture so much market share that soon? To answer that question, one must note that Apple sold its iPhones for a premium price, only going after that part of the market that was willing to pay up to $800 for a smartphone. Additionally, as Apple achieved economies of scale by expanding its production, as well as learning-effects through the volume that they sold, they reduced their costs, without cutting their prices. Samsung and HTC, being aware of this, saw the opportunity to creatively imitate Apple’s iPhone by carefully considering what represents through value for its customers (although Apple maintains that Samsung completely stole their idea). In doing this, Samsung created its first Galaxy S flagship series and HTC its Desire series. Creative imitations that quickly gained popularity among non-Apple adapts. They did this, because there was a profit-incentive for them, as the price of a phone was far beyond that of their expected costs. Should Apple have lowered their prices, perhaps they might have prevented this from happening. Additionally, Apple focused on a rather narrow part of the market, the top-end. Although profits there are highest, the number of people residing in this segment is relatively small compared to the mid- and low-end of the market. HTC, Samsung and also LG later on understood the opportunity for lower price smartphones and started developing phones with lesser features, selling them at a fraction of the price of the typical flagship phone. 134 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation 6.4 finding a niche Many innovations, especially those of family business and smaller firms are successful as they target a niche that is typically overlooked by the mass producers and bigger players. More often than not, smaller sized enterprises have a very good idea of who their customers are and how they can help them solve their problems by means of innovation. They have stapled themselves to the customer and develop solutions for them, tailored specifically to them. In niche markets, the rules of the game are different. There is only a very limited number of players in those markets and in order to be successful, the products have to stand out in terms of perceived quality or benefits for the customer. There are lots of opportunities to innovate for those niches, more so than in mainstream markets. However, niche markets can be profitable but do not necessarily allow for a lot of growth as they are by definition rather small. In general, the following rules hold through for niche innovators: • They have specialized skills that allow them to serve customers far better than any competitor lacking those skills; • They have entered a marketplace that is so specialized that competitors simply cannot enter them due to vast entry barriers; • They aim at control, rather than leadership in a mass market and • They are not engaged in fierce price competition. 6.5 disruptive Innovation “TechCrunch Disrupt is the world’s leading authority in debuting revolutionary start-ups, introducing game-changing technologies, and discussing what’s top of mind for the tech industry’s key innovators. Disrupt gathers the best and brightest entrepreneurs, investors, hackers, and tech fans for on-stage interviews, the Start-up Battlefield competition, a 24-hour Hackathon, Start-up Alley, Hardware Alley, and After Parties” (TechCrunch, 2015). 135 Chapter 6: Innovation Strategies Nowadays, disruption is the name of the game. Especially in the Silicon Valley. It is popular amongst start-ups and tech companies. Every single one of them seeks to disrupt. There are disrupt conferences, disrupt contests and disrupt competitions. In short, disruption is all the rage. But what is it about and what does it mean for business? It was in 1995 when Clayton Christensen, a Harvard Business School professor first coined the term disruptive technology. In Disruptive Technologies: Catching the Wave (1995) and later in his famous book The Innovator’s Dilemma (Christensen, 1997) he explained how successful companies can overly emphasize customers’ current needs, and fail to adopt new technology or business models that will meet their customers’ unstated or future needs. As a result, those companies might fail. This notion comes very close to Joseph Schumpeter’s creative destruction (1942), which describes how innovative entrepreneurial entry destructs the current established companies through the introduction of new technologies that are simply superior to those of the established firm. Thus, disruptive innovation explains how successful companies still end up failing. Of course, badly managed companies are doomed to fail. It is more interesting to understand why previously successful companies like Kodak, Nortel and Blockbuster that seemed to do everything right did not survive. In every market, there is a trajectory of performance improvement that every customer is able to make use of as products’ performances increase over time. But where this trajectory lies, is different from one customer to the next. Some customers can be satisfied with very basic level of performance whereas others are very demanding and will only be satisfied with very high levels of performance of technology. Disruptive innovations typically enter the market with very low level of performance, but their performances steadily improve. So, in the early days the disruptive innovation is considered to be not good enough by most of the market, but seems perfectly acceptable to those that never really cared for more quality to begin with. Those customers are tempt- 136 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation ed by lower prices or functionality that other technology did not jet provide. A company serving more demanding users that require a lot of technology do not feel threatened by this new competing technology because none of their customers is willing to buy such lowquality products. So, they continue doing business as usual and not pay too much attention to this new kid on the block. The problem is that the disruptive innovation will improve over time until it is good enough for the most demanding customers that now want to have one too. At this time, it is far too late for the established firm to do something about it because they failed to adopt this new technology. Figure 6.1: Disruptive innovation Digital image recording technology was inferior to analogue photo cameras in the very beginning. So, professional photographers and passionate hobbyists would not use them. Less demanding customers did like the fact that they would not have to develop their own 137 Chapter 6: Innovation Strategies pictures in a dark room and could take quite a few before the memory was full. Kodak, making high-quality photo cameras did not feel threatened by this new technology and went on making even better cameras for the most demanding customers. Digital cameras, being the disruptive innovation, quickly got accepted in the low-end of the market. They were able to develop very fast, making the appealing to the mid and even high-end of the market within a couple of years. At that time, Kodak and Fujifilm, not having invested enough in digital recording and still banking on their old analogue technology, quickly lost market share in these markets as their customers now started buying digital cameras from companies like Canon, Sony and Olympus. Another example is the word processor on computers. In the beginning those processors were low quality leaving many users frustrated with the fact that they could not keep up with fast typists. Demanding users, such as professional secretaries that typed all day, simply would not want to have one because they were too slow. So, typewriter companies rationally listened to these customers and went on making even better typewriters. Word processors were a huge success among less demanding customers in the low-end of the market. Those customers did not type very well and for them it was a great benefit that they could fix their mistakes with only one push on a button. This group was willing to forgo the lack of speed in exchange for that new functionality. Due to the fast development of computers, word processors became much quicker until the point that even the fastest typists wanted to use these word processors for everyday use. You’ll be hard-pressed to find a single typewriter today, because they became obsolete in only a couple of years. What these examples have in common is a disruptive innovation that initially only provides little quality and will not be used by most of the market. However, they typically come at a fraction of the costs and give more and more people access to this kind of technology (think about the development in computing, going from mainframe 138 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation computers to the same technology now being used in your phones, tablets, laptops, smart watches etc.). In the early stages, only the lowend of the market that accept low quality are buying these disruptive innovations. In time, however, the have the ability to capture every customer, posing tremendous threats to established firms banking on older technologies. What makes disruptive innovation so interesting is that it’s not about how radical or sophisticated the innovation is, but about the fact that it disrupts the same markets and value networks of established products and technologies. The business model is more important than the technology itself. Disruptive innovations bring great success to entrepreneurs, whilst creatively destructing the established industry leaders. Perhaps, that might be the reason why it gets so much attention. Especially in the Silicon Valley where high-tech entrepreneurs want to compete with industry giants for the same or similar technology. Or, the established firms do not want to become another Kodak, Nortel or Fujifilm and seek ways to disrupt themselves. A disruptive innovation is not a breakthrough innovation that makes good products a lot better, but it has a very specific definition. It transforms a product that historically was so expensive and complicated that only a limited target group could buy them, into something that is so much more affordable and accessible that many customers can make use of a comparable technology. The Innovators Dilemma (Christensen, 1997) consists of top managers having to decide between making even better products for existing customers that can be sold for higher margins or going after new markets with people who are not your customers. This is the dilemma that can be exploited by entrepreneurs. For established firms, it means that they really have to decide between the former or latter strategy. They can either make even better products that they can sell for higher prices or worse products 139 Chapter 6: Innovation Strategies that will ruin their margins. The solution is not that simple. But they have to understand that competing technology that now is pretty worthless and not a threat, can quickly become one if you give it enough time. So, what they have to consider is whether they will defend themselves in the high-end of the market by applying disruptive innovation themselves. By going after the low-end of the market themselves, those established players can fully benefit from the performance increase over time and make their own products obsolete. Because if they do not do it themselves, someone else will. It is an illusion to expect that you can hold on to your customers for very long if there is a simpler and cheaper technology available to them. Copypasting success formulas of the past is a recipe for disaster. It is better to apply disruptive innovation yourselves and protect the company from low-end competitors that apply entrepreneurial judo and/ or disruptive innovation than to be asleep and the switch and admit that you have underestimated an entrepreneurial start-up. It is often not the technology, but the business model that makes an innovation truly disruptive. Every organisation has the capability to disrupt, it is not a privilege for start-ups only. But there needs to be a corporate space where disruptive innovations can flourish. Otherwise corporate antibodies will force the innovation to look like something that has been done before (think copy-pasting) and lead it to failure. That is why entrepreneurial management remains important for all innovation strategies to successfully put into practice. To close this chapter, a few free tips on how to spot disruptive innovation opportunities for entrepreneurial start-ups as well as the existing firm: 1. Look for markets where there is a constraint that limits potential customers from buying. Look for areas where those customers cannot solve their problems because they either do not have to skill to do so, do not have the funds or simply do not have access to a solution. Any product that can solve those poten- 140 Pastoors · Scholz · Becker · van Dun: Towards Sustainable Innovation tial customer’s problems can be a disruptive innovation as you make non-customers customers. 2. Identify which important jobs cannot be done and has people (read: potential customers) frustrated. This is similar to innovation based on process needs. When a product or service is able to ease that person’s pain, a disruptive innovation is able to go after those customers that would otherwise not buy anything. 3. Remember to play the innovation game differently. Do not spend time figuring out how to do things better as they are already done. Do not try to beat competition by creating even more quality. Instead, focus on turning non-users into users by making a product or technology just that much more affordable, simpler and accessible. 4. Do not focus on high-end users but those less demanding. 5. Use focus groups, prototypes and valuable feedback from customers to investigate how their problems can be solved by a different product or technology. For (future) managers willing to innovate, it might be hard to accept that there is no data. Data only exists on the past and this sometimes requires a company or start-up to create data itself by trusting in intuition, bringing something to the market and gathering feedback along the way. Training questions: 1. Name and explain the requirements for the going all-in strategy to be successful 2. Why is creative imitation a far less risky strategy than going all-in? 3. Why can entrepreneurial judo hit the initial innovator or competitor where they are not defending? 4. Give 3 examples of companies/products that in your opinion employed business model innovations. 141 Chapter 6: Innovation Strategies 5. Explain, in your own words, what is so “disruptive” about disruptive innovations 6. Why do you believe disruptive innovations are so popular among both start-ups and existing firms? Recommended literature Anthony, Scott/Johnson, Mark/Sinfield, Joseph/Altman, Elizabeth (2008): Innovator’s Guide to Growth – Putting Disruptive Innovation to Work, Harvard. Christensen, Clayton (2003): The innovator’s solution: creating and sustaining successful growth, Harvard. Gassmann, Oliver/Frankenberger, Karolin/Csik, Michaela (2015): The Business Model Navigator: 55 Models That Will Revolutionise Your Business, St. Gallen. Internet resources Sykes, Timothy (2015): 6 Timeless Strategies to Drive Entrepreneurship Success. Available: [accessed 25 April 2016]. TechCrunch (2015): Disrupt London 2015, online:

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With sustainability having gained a lot of momentum over the last years and companies implementing strategies to create corporate sustainability, there are lots of opportunities for innovation. Thus, the two concepts of sustainability and innovation should not be considered separately – they are closely interlinked with one another. The main goal of sustainable innovation is to develop new products and technologies that have a positive impact on the company’s triple-bottom-line. To meet this aim, they have to be ecologically and economically beneficial as well as socially balanced.

In order to help companies to improve their sustainable innovation process practically, this book is structured into five possible phases of a sustainable innovation process:

Awareness of a sustainability problem

Identification & Definition of the problem

Ideation & Evaluation of the solutions

Testing & Enrichment of the solutions

Implementation of the solutions & Green Marketing