MARKETING STRATEGY AND INNOVATION AT MICHELIN Tushar Malhotra and Paul D. Berger Bentley University, Waltham, MA, USA ABSTRACT: The great management guru, Peter F. Drucker, once made a very profound observation that, “Because the purpose of business is to create customers, a business enterprise has two and only two basic functions – marketing and innovation. They do not address the central idiosyncrasies of such competition, and so fail to capture the essence of competing in these markets. Sheremata, W. (1997). New York: Free Press. Consumers coordinate their choice of hardware based on their expectations of software availability (or other components). Christensen, C. M. (1997). One of the most notable aspects of competition in these markets is that it becomes a do or die proposition. If product benefits are large enough, and consumers expect the new network can attain some minimally sufficient size, product benefits can clearly substitute for network benefits. Objectives are … Read your article online and download the PDF from your email or your account. Given a competition between two firms in an emerging network market, they focus on a basic strategic choice: Should a firm prefer to compete within or between standards? Whether innovation in a network market is likely to capture share and profits clearly depends on several factors. Many of today’s products consist of information rather than physical components, which can clearly increase irreducible technological uncertainty.6 This, in turn, increases investors’ risk. Besen, S., & Farrell, J. Besen and Farrell (1994) are among the few who have tried to take a comprehensive look at competition in these markets from a strategic management perspective. Scherer, F. M. (1992). Increasing returns and the new world of business. Despite this commonality, few in the management community have studied competition in network markets. https://www.northeastern.edu/graduate/blog/types-of-innovation Some of the legitimate ways firms build expectations are through sources of competitive advantage such as established reputations, well-known brand names, and visible access to capital. Clio and the economics of QWERTY. If preferences differ and network effects become insignificant at some relatively small network size, then multiple networks can coexist and incompatibility may confer more benefits than initially apparent. Its value increases as the number of fax machines with which it can communicate increases. Innovation is very … If one firm has proprietary access to that technology, the end result is one monopoly and monopoly profits. The key question for firms is whether competing for, or within, the market is more profitable. However, they must also choose the extent of improvement they will provide, whether they will compete through radical or incremental innovation (David & Greenstein, 1990; Sheremata, 2004). The distinguishing feature of a network market is the presence of network effects, which means increases in network size confer a benefit to those in the network. Lee, E., Lee, J., & Lee, J. In the home video case, the recorder/ playback device (the VCR) was the hardware; the videotape was the software. This concept of two-sided markets … Liebowitz, S. J., & Margolis, S. E. (1994). The lackluster performance of the Sony Reader also resulted from the company’s misguided channel strategy. We see this periodically, for example, when consumers value features of Apple’s computer systems more than the network benefits conferred by the dominant Wintel (Windows and Intel) standard. If a challenger does determine that competing through an incompatible product is unavoidable or beneficial, it must then determine how much improvement (product benefit) it needs to provide consumers to compensate them for network benefits forgone. Management Science, 52(12), 1838-1848. Challengers with high R&D fixed costs require high revenues to recoup their investment. To provide a snapshot of peer strategies and an overview of strategic actions and common challenges, we conducted a detailed analysis of the 40 largest utilities by market capitalization in North America, Europe, and Asia-Pacific, a group we call the Global Top 40 (see “The GT40,” below). Brookings Papers on Economic Activity, 3, 783-831. Although these studies have focused on nonnetwork markets, we need only look at what differentiates a network market and factor that into their analyses. Christensen, C. M., Verlinden, M., & Westerman, G. (2002). Finally, we distinguish among different types of network markets, by pointing out that the type of innovation a challenger should use to compete is a function of market and technological characteristics. Farrell, J., & Saloner, G. (1985). Economists have long held that competition should be more profitable when firms differentiate products, that is when they produce products that satisfy strongly held tastes for a variety of product characteristics (Scherer, 1992). Innovation-related theories that claim to be “one size fits all” typically are not (Abernathy & Utterback, 1978). All of these tactics can affect expectations and, therefore, influence the market to tip toward a firm’s product. We have fortified our analysis of elements such as financial capacity, organizational adaptability, market positioning, and … More recently, economic models indicate that the question of whether a challenger or incumbent monopolist has sufficient incentive to compete through innovation depends on (a) the degree to which the innovation destroys the monopolist’s market power and (b) the extent of technological uncertainty. Consumers will simply not switch to a new and incompatible technology unless it offers significant improvements in performance (Shapiro & Varian, 1999). "Objectives represent the fundamental strategy of a business. Consider the benefit of adding one more person to a party in a small house. Founded in 1936, the Academy of Management is the oldest and largest scholarly management association in the world. This research-paper addresses this emerging area of knowledge and focuses on technological innovation as a strategy in these markets, particularly product and systems innovation. When R&D costs are fixed and production economies of scale exist, investors incur greater risk and uncertainty as to whether they can recover their investments. Cambridge, UK: Cambridge University Press. Joe Farrell (1989) gave a wonderful example of this when he described how horses tethered together cannot coordinate themselves to satisfy differing preferences. Economists claim these consumers would be better off if they could coordinate their decisions, because that would allow a large enough market to exist. That said, traditional strategic frameworks simply do not address the unique facets of competition in network markets. More in-depth analyses can bridge the gap between critiques of network externalities theory and its potential to help firms compete. But, innovation in and of itself can be complex. Porter, M. E. (2001). Economic Journal, 99(394), 116-131. Alternatively, entrepreneurs can bet the farm on one “shot,” knowing radical innovation offers them a greater chance of success than incremental innovation. If consumers adopt the losing technology, their prior investments in learning, skills, hardware, and software libraries lose substantial value. The journal is open to a variety of perspectives, including those that seek to improve the effectiveness of, as well as those critical of, management and organizations. Most of the variables just described are common in industrial organization (IO) economics, a field that examines characteristics of demand and supply to predict how different strategies (firm conduct) affect market structure (whether the market remains competitive or not), given firm positions (performance). Challengers can successfully compete against dominant firms in network markets through innovation. Whether the historical ideas are implemented on business strategies and modern business techniques? West, J., & Dedrick, J. This problem falls squarely in the domain of strategic management, whose mission is to help firms compete no matter how dire the straights. As a result, most management studies to date have focused on how firms should compete in emerging network markets—those that have not yet tipped—before the winner takes all. If consumers do not expect software components to be available, for example, they will not buy hardware components and, hence, the overall system. They will not be able to access future improvements associated with the winning technology. Reconsideration of the winner-take-all hypothesis: Complex networks and local bias. Hence, competition among systems brings up the issue of coordination (Katz & Shapiro, 1994). Taking steps to participate in these types of programs can help small business compete in competitive markets. However, slight shifts in interfaces between components can create incompatibilities and what is, theoretically, a simple import can become a very complicated exercise. Sure, thought leadership has become a buzzword. Challengers in markets that have tipped must make two strategic choices regarding innovation type. Fulfilling this objective contributes to competitive advantage by increasing Sony’s business efficiency and corresponding profitability. Consistently, Christensen has shown that powerful incumbents often engage in “disruptive” innovation. Initial formulations of network markets have revolved around the idea that powerful incumbents with entrenched monopoly power result from tipping. The latest business intelligence report analyses the Non Cloud Personal and Entry Level Storage (PELS) market in terms of market reach and customer base in key geographic market regions. The third section then analyzes competition in this postemergent phase: how can a challenger compete after a monopolist has won a standards war and captured a “winner-take-all” position? It is difficult for multiple operating systems to coexist because the threshold at which network effects wane is quite high. Inside the black box: Technology and economics. American Economic Review, 73(4), 741-748. Only large improvements can compensate consumers for network benefits forgone and investors for a high degree of risk. Antitrust Bulletin, 43, 547-582. Technology adoption in the presence of network externalities. Certain cost structures have similar effects, and should lead challengers to prefer radical over incremental innovation. Drucker also went on to say that "the two most important … Objectives must make possible concentration of resources and efforts (human resources, capital, physical facilities, etc.). Our proven strategy, including our freemium business model and diversified product portfolio with exposure to highly profitable segments, provides multiple avenues for long-term growth. This research-paper attempts to summarize basic concepts relevant to competition in these markets. Cusumano, M. A., Mylonadis, Y., & Rosenbloom, R. S. (1992). There needs to be multiple objectives – not one right objective (balance a variety of needs and goals). The greater the network size the dominant firm provides, the greater the product benefit the challenger must provide. © 2004 Academy of Management This sample Innovation as a Strategy in Network Markets Research Paper is published for educational and informational purposes only. It merely consists of additional characteristics—stripes, if you will. A network market is not a completely different animal from a non-network market. Katz, M., & Shapiro, C. (1986). Our purpose – Opening up a world of opportunity – explains why we exist. Compatibility has been broadly defined as the ability of a product to work well with another (Farrell, 1989). Finally, we need to know more about how characteristics of demand and supply affect competition in these markets. Responding to the business impacts of COVID-19. Moreover, the type of innovation matters—radical innovation can favor challengers, as we shall see. American Economic Review, 72, 514-526. They occur in both network and nonnetwork markets. Upside, 11(12), 185-205. Competing technologies, increasing returns, and lock-in by historical events. Porter’s work is particularly relevant to our topic because he built upon economic theory to produce a framework for strategy formulation that has proven remarkably durable. The last part is a discussion on the findings and considerations of the intensity of the relations among strategic Tushman, M. L., & Anderson, P. (1986). They were the first company to promote products through sampling and giving promotional items. Probabilistic patents. Membership in the Academy is open to all individuals who find value in belonging. Chandler, A. D. (1977). An innovation strategy is a commitment to a common innovation mission and a structured set of activities which aim to support the future growth of the organization.. What does an innovation strategy actually look like? They also need to evaluate whether the network effect—the benefit conferred by adding one more user to the network— wanes or ceases to exist at some threshold. This latter body of work is broadly referred to as network externalities theory. Historically, for example, Adobe's portable document format did not succeed until Adobe priced the PDF reader at zero, substantially increasing sales of PDF writers. We’re here to use our unique expertise, capabilities, breadth and perspectives to open up new kinds of opportunity for our customers. The visible hand: The managerial revolution in American business. Rosenberg, N. (1982). Radical innovation provides large improvements and incremental innovation, small ones. Network externality: An uncommon tragedy. These CDs are components of audio systems that are incompatible with the iTunes system. Katz, M., & Shapiro, C. (1994). Katz, M., & Shapiro, C. (1985). New York: McGraw Hill. You can use various creative ideas and innovation to make your business stand out from the crowd.
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