There is a key type of innovation for a web startup?

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There is a key type of innovation for a web startup? An analysis through the most successful internet companies.

We always talk about innovation that can disrupt the market. But do we really need it? Are the most
important companies in the internet industry based on a disruptive innovation? Or should we rather
concentrate on just improve existing products on existing markets pursuing sustaining innovation?
After a brief introduction with a classification of different types of innovations, in order to answer
these questions this paper will analyze three of the most important companies in different areas of
internet. Such as Google for search, Facebook for social networking and Amazon for e-commerce,
hence we will try to understand whether there is a predominant type of innovation source of such a
huge success.
As a result we will discover that a start up must provide disruptive innovation to succeed. Moreover
there is an interlinked relevance among disruptive innovation and the innovation object, led by a
new product, a new process or a new business model.

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There is a key type of innovation for a web startup?

  1. 1. There is a key type of innovation for a web startup? An analysis through the most successful internet companies Paper within: Heuristics for economics students 2012 Author: Fabio Miceli Tutor: Prof. Hans Verboven
  2. 2. AbstractWe always talk about innovation that can disrupt the market. But do we really need it? Are the mostimportant companies in the internet industry based on a disruptive innovation? Or should we ratherconcentrate on just improve existing products on existing markets pursuing sustaining innovation?After a brief introduction with a classification of different types of innovations, in order to answerthese questions this paper will analyze three of the most important companies in different areas ofinternet. Such as Google for search, Facebook for social networking and Amazon for e-commerce,hence we will try to understand whether there is a predominant type of innovation source of such ahuge success.As a result we will discover that a start up must provide disruptive innovation to succeed. Moreoverthere is an interlinked relevance among disruptive innovation and the innovation object, led by anew product, a new process or a new business model.A basic introduction on innovation perceived by someone as new” (Kotler, 1991).To study innovation as a source of social and Secondly, screening the huge landscape ofeconomic growth, as also a driver of innovations, we will classify innovationscompetitiveness, we must previously define based on the extent of the change that theywhat innovation is and which types of these provide, focusing on two main types of these:we will consider relevant for this essay. sustaining innovation and disruptiveFirst of all we choose an exhaustive definition innovation. This distinction is strategicallyof innovation by Trott that is “the relevant to better understand the success (ormanagement of all activities involved in the failure) of a company, as to evaluate theirprocess of idea generation, technology impact on the market.development, manufacturing and marketing of A sustaining innovation “targets demanding,a new (or improved) product or high-end customers with better performancemanufacturing process or equipment” (Trott, than what was previously available. Some2005, p. 15). Moreover Kotler explain clearly sustaining innovations are the incrementaland briefly the detail that “an innovation year-by-year improvements that all goodrefers to any good, service, or idea that is companies grind out. Other sustaining innovations are breakthrough, leap-frog-  2 
  3. 3. beyond-the-competition products” Meanwhile a process innovation is “the(Christensen, 2012). implementation of a new or significantlyDisruptive innovations, in contrast, “don’t improved production or delivery method. Thisattempt to bring better products to established includes significant changes in techniques,customers in existing markets. Rather, they equipment and/or software. Processdisrupt and redefine that trajectory by innovations can be intended to decrease unitintroducing products and services that are not costs of production or delivery, to increaseas good as currently available products. But quality, or to produce or deliver new ordisruptive technologies offer other benefits— significantly improved products” (Oslotypically, they are simpler, more convenient, Manual, 2005, p. 9).and less expensive products that appeal to The business model is the last kind of objectnew or less-demanding customers” that we would analyze and it represents the(Christensen, 2012). core economic factor of an internet start up:So disruptive doesn’t represent a technical “is the method of doing business by which abreakthrough, buts rather a brand new market company can sustain itself, that is generateor business that usually begin with a low revenue. The business model spells out how aquality product. company makes money by specifying whereFurthermore we will also introduce a second it is positioned in the value chain”1. Innovateclassification based on the object of and discover new ways to make money in theinnovation, that can involve a product, a rough environment of internet can beprocess or a business model. fundamental to assure a long-term growth.According to the Oslo Manual (2005) aproduct innovation is “the introduction of agood or service that is new or significantly Organizing the world’s informationimproved with respect to its characteristics orintended uses. This includes significant Nowadays everybody knows how to look forimprovements in technical specifications, information: just type something on thecomponents and materials, incorporated google bar. But why did google become sosoftware, user friendliness or other functional famous and almost the first choice when wecharacteristics. Product innovations can need information?utilize new knowledge or technologies, or can The secret of the search engine is anbe based on new uses or combinations of algorithm, PageRank, that completelyexisting knowledge or technologies”.                                                          1 [online available:]  http://digitalenterprise.org/models/models.html  15/05/12   3 
  4. 4. changed the way to provide results. Thanks to keywords to be on the Search Engine Resultsthis algorithm Google ranks websites based Page (SERP).on popularity instead of displaying them Moreover the user interface was somethingrandomly on the page as competitors used to totally new, clear and minimalistic: a whitedo. Results were extremly precises and background with an appealing colored scriptincredibly fast. in the middle and the search bar just beneath.Before Google the market was already They also improved the advertisingpopulated by many companies like Yahoo, organization dividing the organic search, as aExcite, Altavista and more but they were result of PageRank work, to the paid search,concentrated on developing web portals on a column on the right of the page.features struggling to each other instead of On this way the advertising wouldn’t haveproviding better search results. Thus, this has been confused with the classic results columnbeen a great opportunity at the right time to thanks to a perfect integration of colors andprovide a valuable new product to an already structure. This will still help users to findcrowded competitive market. anything they are looking for and alsoHence Larry Page and Sergey Brin, founders advertiser to be reached easily.of Google Inc., didn’t create any new market This new business model was an amazingbut introduced a sustaining breakthrough insight compared to the old way of displayinnovation that was highly better than the and broadcast advertising. A cheaper, wellothers. This technical innovation was the first organised, glocal and misurable method thatstep to persuade customers to switch to allowed not only big spenders likeGoogle search. multinational companies but also small andAnyway this wouldn’t have been enough to medium enterprises and single entrepreneursmake the business sustainable because you to invest money on Google.need to combine it with a sustainable business So we can conclude that the success of themodel, to generate revenues. So this is the company is based on two main innovations:disruptive innovation that Google established the first concern a technical breakthrough onon the web, selling a new unknown product: its core competence, make search, and akeywords. Keywords are the words you type consequent business model disruptivein the search bar and Google’s guys (thanks to innovation which create the new market ofIdealab Inc.) understood that these words keywords that allow the company to be thecontains lots of useful information. Marketers most used search engine on internet andwould be definitely interested in buying generating revenues for billions of dollars.  4 
  5. 5. A world more open and connected Being part of the network, mostly for Harvard University students at the beginning, was aDiscover why Facebook has succeed is much social tag, a business card to introducemore complex and less clear. Social networks themselves to the world.were already widespread and websites such as Stay in touch with new and old friends were amyspace.com and friendster.com were must but other reasons may include feelingsleading the market. of affiliation and belonging, need forSuddenly a 19-year-old Harvard guy, Mark information, goal achievement, self-identity,Zuckerberg, launched in 2004 a new platform values and notions of accepted behaviorto stay connected with other students at (Ridings and Gefen, 2004).university. The website was a close social Facebook also allow people to keep an eye onnetwork initially limited to Harvard students, friends lives, satisfying their need ofbut every week requests for the platform from “voyeurism”. In complex it is a place whereother universities grew. For this reason they one can express yourself and a tool toexpanded to other colleges in the Boston area communicate easily with peers, for the firstfirst, in Ivy League colleges and the Stanford time with an established identity layer amongUniversity after. So they increased gradually virtual and real life.with all the others universities before opening For this reason the website became a treasureto high school students and, when network of personal information like age, relationshipeffetcs became significant, to anyone aged 13 status, political orientation and so forth, forand over. users as well for marketers and advertiser.The growth was incredibly fast and they had On the other hand when Facebook went12 million monthly active users in 2006, 145 online people with just an .edu mail addressmillion in 2008, 608 million in 2010 were able to join the social network and this(Facebook, 2012). gave two relevant advantages:Analyzing more deeply the Facebook story - The contribution to built an exclusivewe can discover and formalize two main environment which people loved.sources of this huge success: the first related - The possibility to enter in a unsatisfiedto human behaviour and social sciences and market niche of college students becausethe second related to a market need and the college kids were usually not myspace orbusiness strategy rather than tecnology. friendster users.On one hand Facebook is an answer for a We should also underline the ability of Marksocial need, sometimes for helping a curious Zuckerberg and his the team to stay focusedmind and other times a narcisist’s dream. on the mission statement of the company  5 
  6. 6. during all the tough path of the start up, build the most succesful e-commercefacing all challenges very well. company ever.As a result Facebook has all the Based on his analisys, that revealed a strongcharacteristics to be indicated as a disruptive growth potential of internet usage, he cameinnovation. Technologies improvement, out with a short list of 20 products that couldalthough were numerous, represented a be easily sold on the web. He used parametersmarginal contribution and we can tag them as like familiarity of the product, market size,a sustaining innovation . Instead a new competition in that market, inventorycombination of them, the new open market of management, discount opportunities andcollege students and the forward-looking shipping costs to figure out the onlineinsight of Facebook’s founders marked the potential of each item. Comparing strenghtssuccess of this start up, through a perfect and weaknesses of these products, books wereanswer to people’s need, perfectly almost all times first in this special ranking.combinated with a winning strategy. He had the same approach looking for the best place to start up: gathering data he had quantifiable reasons to pick out Seattle as theThe earths most customer centric most strategic place to start the business as acompany well connected, top-flight programming talent city and close to the largest book distributionAmazon.com, the most famous e-commerce center in the United States.website, is the result of an accurate market Also the name of the company has been aresearch linked to the vision of his founder, marketing choice lead by the fact that onlineJeff Bezos and we should follow all the path, websites were listed in alphabetical order,from the idea generation to the start up, to hence to be first in the list the name shouldexplain why strategic decisions mixed to a start with an A.new technology and a new customers service Amazon.com opened in 1995 with a databasehave been the real innovation. of more than one million titles, offeringHe started investigating on internet business considerable discounts, has beenpossibilities in 1994 when the World Wide distinguished since the beginning as aWeb went mainstream, bringing itself huge customer friendly website. They developed aopportunities, and focusing on its commercial recommendation center to offer books basedcapabilities. The study he conducted was on habits, preferences and past purchases, ameticulous as useful and was the first step to secure credit card payment system and a community of customers, all supported by an  6 
  7. 7. in-house innovative technological service, understanding and solving theinfrastructure. On the other side, as a virtual inventory issues for producers and distributors.retailer, it was a lean start up with no All these types of innovations were totallyinventory, no warehouse and with no related disruptive, redefining a new trajectory,costs, carrying a considerable innovation as a showing how to purchase easily, in a moredistribution channel, solving one of the most convenient way with just a few clicks.important and expensive problems in thedistribution industry.Moreover, as a pioneer entrant, Amazon Conclusionwould benefit of few advantages being thefirst mover. In particular on the internet This study started so to better understand themarket major advantages concern on role of different types of innovation forproprietary technology, preemption of startups in the internet industry. We analyzedsuperior resources, lock-in effects, network three majors companies in this sector and weeffects (Lieberman and Montgomery, 1988, discovered their key factors of success,1998) and the generation of a valuable brand always closely related to innovation.recognition, even if a long term sustainability Google largely improved the researchis not guaranteed without patents investments. technology and invented the new market ofSales increased rapidly and the main goal was the keywords, creating a new sustainableto get big fast in order to achieve reasonable business model; Facebook, with its strategy,economy of scales. Thanks to new investors completely disrupted the college studentsthe company had the possibility to grow market, offering a new way to stay connectedquickly, thus, expanding from its existing with peers and a bridge among real andbusiness of selling books to selling a wide virtual life; Amazon taught a new useful wayvariety of products as DVDs, music CDs, to purchase to the world, saving money andcomputer software, video games, electronics time.and more. The ingredients behind these startups areAccording to this successful story we can multiple but always driven by an ambitiousrealize that every single idea was strategic to vision of its founders and by an achiveble ascome out with innovations concerning well as a methodical strategy.processes: providing products to clients Thus, we can conclude that, despite everypromoting a new way to purchase, developing start up has its story, the recurring element ina wide customer relationship management to all these companies is the disruptiveachieve a high quality level and a customized  7 
  8. 8. innovation that they realized and we can tag it business model innovation). In fact theseas the keystone for such a huge success. three companies has disrupted in at least oneMoreover these three cases revealed a type of innovation: the business model ofparticular relation among disruptive Google, the new percieved product ofinnovation and the object of the innovation Facebook, the sale process of Amazon.(process innovation, product innovation or  8 
  9. 9. ReferencesBrandt R.L. (2011). One Click: Jeff Bezos and the Rise of Amazon.com. New York, NY:Portfolio/Penguin Books Limited.Chesbrough H. (2002). The role of the business model in capturing value from innovation: evidencefrom Xerox Corporation’s technology spin-off companies. Harvard Business School, 01-002, 2-13.Christensen C. M. (2012). Disruptive Innovation. In: Soegaard, Mads and Dam, Rikke Friis(eds.), Encyclopedia of Human-Computer Interaction. Aarhus, Denmark: The Interaction-Design.org Foundation.Available online at http://www.interaction-design.org/encyclopedia/disruptive_innovation.html.DIW econ. (2009). Competition in the web search market. Berlin.Drucker P.F. (1998). The discipline of innovation. Boston, MA: Harvard Business Review.European Commission, Eurostat. (2005). Oslo Manual (3rd edition).Frey C., Cook J. (2004). How Amazon.com survived, thrived and turned a profit. Seattle post-intelligencer reporters.Gangadharbatla H. (2008). Facebook me: Collective self-esteem, need to belong, and internet self-efficacy as predictors of the igeneration’s attitudes toward social networking sites. Texas TechUniversity.Langville A.N., Meyer C.D. (2006). Googles PageRank and Beyond: The Science of Search EngineRankings. Princeton (NJ): Princeton University Press.Lieberman M.B. (2002). Did First-Mover Advantage Survive the Dot-Com Crash? AndersonGraduate School of Management, 4-10.Magretta J. (2002). Why business models matter. Boston, MA: Harvard Business Review.Porter M. (2001). Strategy and internet. Boston, MA: Harvard Business Review.Porter M. (2002). Harvard business review on advances in strategy. Boston, MA: Harvard BusinessSchool Press.  9 
  10. 10. Potts J., Cunningham S., Hartley J., Ormerod P. (2008). Social network markets: a new definition ofthe creative industries. Journal of cultural economics.Skarczynski P. and Gibson R. (2008). Innovation to the Core: A Blueprint for Transforming HowYour Company Innovates. Boston, MA: Harvard Business School Press.Spector R. (2008). Amazon.Com: Get Big Fast. New York, NY: HarperBusiness.Stern L. A. & Taylor K. (2007). Social Networking on Facebook. Journal of the Communication,Speech & Theatre Association of North Dakota, 20, 9-19.Traill B., Grunert K. G. (1997). Product And Process Innovation In The Food Industry. London,UK: Springer.  10 

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