Growth Strategies: Growth Drivers - Innovation and Entrepreneurship

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This is the 5th part of the undergraduate course in Growth Strategies: Growth Drivers - Innovation and Entrepreneurship. Read by Pavel Luksha

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Growth Strategies: Growth Drivers - Innovation and Entrepreneurship

  1. 1. GROWTH STRATEGIES Growth Drivers: Innovation and Entrepreneurship Pavel Olegovich Luksha [email_address]
  2. 2. Value proposition and innovation <ul><li>How are innovations and growth related : </li></ul><ul><ul><li>unsatisfied needs and unnoticed segments </li></ul></ul><ul><ul><li>hypercompetitive environment and global struggle for consumer’s attention </li></ul></ul><ul><ul><li>technological and social changes </li></ul></ul><ul><li>Where do we find innovations : products AND / OR processes ( technologies and management systems ) </li></ul>
  3. 3. Innovation and new product development <ul><li>Firms can create value through tapping incremental or radical innovations, mostly derived from corporate R&D investment </li></ul><ul><li>Incremental innovations build on existing knowledge bases and provide small improvements in the current product lines </li></ul><ul><li>Radical innovations bring about significant technological breakthroughs and create new knowledge and processes </li></ul>
  4. 4. Incremental innovations: Балтика <ul><li>Leadership in Russian beer market (38%), one of two Russian brands in top 100 global list (FT) </li></ul><ul><li>Built a unique brand around its product line in early 1990s </li></ul><ul><li>Regional expansion late 1990s; expansion into malt production in 2000 </li></ul><ul><li>Produces over 30 brands of beer and 10 non-beer brands. Sales of 2.3 Bln USD (2007), reported modest decline in 2008 </li></ul>
  5. 5. Incremental innovation: Вимм-Билль-Данн <ul><li>First company to produce packaged juices (1992) and yoghurts (1993) in Russia. </li></ul><ul><li>Regional expansion in Russia since 1998 (in CIS since 2000) </li></ul><ul><li>Produces over 1000 dairy products and 150 beverages under brands such as ‘ Домик в деревне ’, ‘J7’, ‘ Агуша ’, ‘ Веселый молочник ’, ‘ Любимый сад ’, ‘ Чудо ягода ’, ‘ Ессентуки ’ etc. </li></ul><ul><li>Considered to have potential for further expansion through current crisis: 60% product portfolio in low-elasticity products, good cash position to buy minor competitors </li></ul>
  6. 6. Some types of incremental innovation <ul><li>Fine-tuning to meet ( changing ) consumers’ tastes / demands </li></ul><ul><li>Novelty as the way to keep consumers’ attention in highly competitive markets ( e.g. FMCG) </li></ul><ul><li>Anticipation of trends ( e.g. apparel , perfume ) </li></ul><ul><li>Local adaptations ( local taste , recent event etc. ) </li></ul>
  7. 7. Global players meeting local tastes <ul><li>McDonald’s ‘localization’: vegetarian McCurry in India , McRice in Indonesia, kosher McShawarma in Israel </li></ul><ul><li>FritoLays in Thailand: Nori Seaweed Lay </li></ul><ul><li>KFC in China: top fast food brand due to heavy menu adaptation </li></ul>
  8. 8. Addressing regional differences: VF <ul><li>VF: one of the largest apparel companies, owner of jeans brands Wrangler and Lee </li></ul><ul><ul><li>adjust fabric according to country tastes: e.g. in Latin America consumer prefer more thin and firm fabric </li></ul></ul><ul><ul><li>intra-country localization : VF identified over 40 consumer types within different US states to localize its products accordingly </li></ul></ul>
  9. 9. Unilever’s Axe: timely adaptation of cosmetic line <ul><li>Axe by Unilever </li></ul><ul><ul><li>Unlimited: used the fame of Crouching Tiger Hidden Dragon and the rising popularity of kung fu movies </li></ul></ul><ul><ul><li>Vice: used the fame of Morgan Freeman playing in detective movies </li></ul></ul>Axe Vice ad
  10. 10. AliBaba.Com: a customized solution for Chinese users <ul><li>Website specialized in b2b trade. Primary focus: international traders contacting Chinese manufacturers </li></ul><ul><li>Complimentary websites: Taobao.com (c2c trade for Chinese users), Alipay (online payments within China) </li></ul><ul><li>Pushed eBay out of China (23 Mil visitors annually vs global eBay 60 Mil in 2008) </li></ul>
  11. 11. Imitation: how this works for the Web <ul><li>Mail.Ru < > Hotmail.Com </li></ul><ul><li>Vkontakte < > Facebook </li></ul><ul><li>Odnoklassniki < > Classmates </li></ul><ul><li>RuTube < > YouTube </li></ul><ul><li>Liveinternet < > Livejournal </li></ul>If this works for the US / Europe, this might work for Russia as well. Pro : idea generation costs are low Contra : the ‘success formula’ is still hard to copy
  12. 12. Facebook и Vkontakte: find the 10 differences vkontakte.ru facebook.com 200+ Mil users worldwide 30 + Mil users in Russia and Ukraine
  13. 13. Russia: business format copycats <ul><li>«Крошка Картошка»: Spud U Like (UK ) </li></ul><ul><li>«Мистер Минутка» ( housekeeping services ): Mr Minit ( UK ) </li></ul><ul><li>«Кофе-Бин», «Кофе-Хауз»: Starbucks ( US ) </li></ul><ul><li>«Тинькофф» restaurants etc. </li></ul>
  14. 14. AirAsia <ul><li>First no-frills airline in Asia, based in Malaysia </li></ul><ul><li>Bought in 2001 as a loss-making company with 11 Mil USD debt for 26 cents, became profitable in one year </li></ul><ul><li>Grew from 2 to 84 owned planes (+116 ordered) </li></ul><ul><li>Regional expansion (from 3 to 66 destinations, incl. flights to other continents) </li></ul><ul><li>Associated businesses: ‘no-frills’ hotels, ‘no-frills’ online financial service </li></ul>
  15. 15. Global imitation as local innovation : ‘ Русский стандарт ’ <ul><li>Vodka premium brand in 1998: </li></ul><ul><ul><li>sales over 1 Mil boxes p.a. </li></ul></ul><ul><ul><li>has 67% market share in premium segment </li></ul></ul><ul><li>Consumer credit bank in 1999 </li></ul><ul><ul><li>novel approach for the Russian market ( credit + retail ) </li></ul></ul><ul><ul><li>kept market leadership despite weaker starting position (10% in consumer credit market ) </li></ul></ul>Used McKinsey competencies (knowledge of globally successful solutions )
  16. 16. Local imitation of global solutions: get your market fast <ul><li>How to manage hypergrowth ( A . Izosimov , former BeeLine CEO): </li></ul><ul><li>Put sales at the top </li></ul><ul><li>Don’t try to be too innovative </li></ul><ul><li>Standardize structures and processes : McDonald’s as a s case </li></ul><ul><li>Hypergrowth – highly dynamic growth in ‘empty’ markets : </li></ul><ul><ul><li>mobile telecom market increase five times between 2002 and 2004 ( penetration leapt from 20% to 80%) </li></ul></ul>Source : ( Izosimov, 2008)
  17. 17. Imitation in FMCG market: food products <ul><li>Caviar sauce market : </li></ul><ul><ul><li>‘ Санта Бремор ’ innovation (2001) </li></ul></ul><ul><ul><li>Imitated by : ‘ Русское море ’ , ‘ Балтийский берег ’ , ‘ Реста ’ , ‘ Океан ’ etc . </li></ul></ul><ul><li>Wal-Mart and Target: </li></ul><ul><ul><li>cheaper imitations of vendor products sold by retailer own brand </li></ul></ul>
  18. 18. Imitation : second mover advantage <ul><li>Risks of mistake and possible failure are borne by ‘first mover’ innovator, while imitator copies the solution that is already working </li></ul><ul><li>There is no ‘tail’ of dissatisfied consumers </li></ul><ul><li>Global innovation will suit local imitations and adaptations </li></ul>
  19. 19. So … why innovate? <ul><li>Organic growth from current operations and incremental innovation is not sufficient for survival in the long term </li></ul><ul><li>New sources of revenue must be developed </li></ul><ul><li>Traditional markets and technologies are not sufficient to ensure acceptable growth rates </li></ul><ul><li>To local imitators: global competitors are already here, and they know better </li></ul>Source : ( Leifer et al. 2005)
  20. 20. Radical innovations: high impact and high risk <ul><li>By definition, radical innovations have high impact </li></ul><ul><ul><li>RI change the basis of competition in the market </li></ul></ul><ul><ul><li>RI are new to the world performance: improve performance 5x/10x or cut cost 30-50% or more </li></ul></ul><ul><li>Radical innovations are notably more risky (market uncertainty + technological uncertainty + organization & resource uncertainty) </li></ul>Source : ( Leifer et al. 2005)
  21. 21. DuPont Biomax <ul><li>Polyester material that can be recycled or decomposed, holds up for a period specified </li></ul><ul><li>A ‘problem child’: </li></ul><ul><ul><li>prototype in 1988 </li></ul></ul><ul><ul><li>initially targeted P&G (degradable diapers) </li></ul></ul><ul><ul><li>tried luck with fruit companies (Dole, Chiquita) </li></ul></ul><ul><ul><li>began sales only in 2000s for European customers concerned with environment safety </li></ul></ul><ul><li>Due to increasing concerns for clean environment and companies’ commitment, potential is huge </li></ul>Biomax product range
  22. 22. Managing radical innovations <ul><li>Idea generation: source ideas from within the company through various channels (Intranet…) </li></ul><ul><li>Opportunity recognition: people tasked at finding ideas + evaluation board </li></ul><ul><li>Reduce uncertainties so that project can be transitioned into commercialization phase </li></ul><ul><ul><li>Develop initial applications within current lines of business, or provide technological solutions to known problems, customers, products etc. </li></ul></ul><ul><ul><li>Resistance within: prove new solutions in demonstration markets to overcome natural resistance of operating units </li></ul></ul>Source : ( Leifer et al. 2005)
  23. 23. Some of Russia’s radical innovations <ul><li>‘ Sukhariki’ </li></ul><ul><li>‘ Kvas’ </li></ul><ul><li>Tetris </li></ul><ul><li>Finereader </li></ul><ul><li>‘ Что? Где? Когда? ’ </li></ul><ul><li>‘ КВН ’ </li></ul><ul><li>Soyuz space rocket </li></ul>
  24. 24. Time for the group project Are Russians really poor in innovating globally, and why?
  25. 25. Innovator traps <ul><li>Strategy failures : </li></ul><ul><ul><li>too high expectation : not every innovation should be radical ( Time Inc.: no new journals for 10+ years ) </li></ul></ul><ul><ul><li>too narrow focus : not only product innovation , but also technology or process innovation ( ‘thirty-two years’ ) </li></ul></ul><ul><li>Process failures : </li></ul><ul><ul><li>too tight control : innovation process managed as the ongoing business </li></ul></ul>
  26. 26. Innovator traps (cont.) <ul><li>Structure failures : </li></ul><ul><ul><li>too weak links between the innovator division and the ongoing business (Saturn & GM) </li></ul></ul><ul><ul><li>too weak division integration ( Gillette: toothbrush (OralB), electric appliance ( Braun), battery ( Duracell) ) </li></ul></ul><ul><li>Skill failures : </li></ul><ul><ul><li>low team stability : min 2 yrs of joint work ( Honeywell: actively promoted team managers ) </li></ul></ul><ul><ul><li>weak leadership ( innovative TravelGear boots by Timberland: blocked by sellers ) </li></ul></ul><ul><ul><li>low communication </li></ul></ul>
  27. 27. Innovation and strategic entrepreneurship <ul><li>Innovation is a key outcome firms seek through entrepreneurship and is often the source of competitive success, especially in turbulent, fast-changing environments </li></ul><ul><li>Innovations in established firms are the results of corporate entrepreneurship, a process whereby an individual or a group in an existing firm creates a new venture or develops a new generation of products </li></ul><ul><li>Firms engaging into strategic entrepreneurship are prepared to take risks and innovate. </li></ul>
  28. 28. Strategic entrepreneurship and innovation: Embraer <ul><li>Has been the only company to make a successful entry into the commercial jet market since 1950s </li></ul><ul><li>Serves military & corporate segment, as well as minor airlines and emerging markets </li></ul><ul><li>For the past years, has plowed 6% of revenues into R&D </li></ul><ul><li>In the late 1990s, decided to invest 1 Bln USD to design a new plane for rapidly growing low-cost airlines </li></ul>Embraer EMB120 corporate jet
  29. 29. Strategic entrepreneurship: teaching via the Internet <ul><li>TutorVista: private English-speaking tutors in India to teach Western students over the internet for a fee of $100 per month. Premium services include individual Skype talks and chats with teachers </li></ul><ul><li>Multilingual Center: Spanish lessons with English-speaking Spaniards over the Internet </li></ul>
  30. 30. Cisco venture support <ul><li>Leader in network equipment with solutions in IP telephony, optical networking, security, ATMs, wireless technology </li></ul><ul><li>Prepares potential high-tech entrepreneurs in its (online and offline) Entrepreneur Institute </li></ul><ul><li>Heavily invests into its own R&D and relies on organic growth, but … </li></ul><ul><li>Also acts as a venture capitalist backing startups: ‘smart money for high tech ventures’ – Cisco gets involved with resources, market presence, brand, distribution capacity – highly increasing success probability </li></ul>
  31. 31. Innovation and entrepreneurship within ecosystems <ul><li>Internet enables new models of alliances and community participation where innovation are driven by ‘ecosystems’ </li></ul><ul><li>The key task of the business is to retain its focal position within the community and serve as efficient infrastructure provider to community participants </li></ul><ul><li>The focal position is kept by being the central agent that selects, and captures value from, innovations. </li></ul>
  32. 32. Threadless: using the leverage of the ecosystem <ul><li>Community around the website where designers can publish new T-shirt designs </li></ul><ul><li>Designs are rated by community members . Top-rated designs get a limited print every week. </li></ul><ul><li>Designers get ‘royalties’ if their design is accepted and if there are repeated prints. </li></ul><ul><li>Online model success allowed to launch a specialized retail network (clicks to bricks model) </li></ul>
  33. 33. Google innovation ecosystem Google platform Users Content providers Advertisers Innovators Media companies and individuals 150+ Mil unique users daily Over 1 Mil companies and individuals Enthusiastic programmers , independent software vendors , Google engineers, open-source community
  34. 34. Sun Java: open control model <ul><li>Java is the leading platform-independent solution for applications running in Internet, mobile phones, and DVD players, created by Sun Microsystems </li></ul><ul><li>Development of Java: contribution from users in Java Community Process </li></ul><ul><li>Sun gradually donated Java to ‘open-source’ community while keeping central position as service and solution provider </li></ul>

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