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Strategic Management II Project

Disruptive Innovation and Open Innovation


Submitted to: Prof. Sabyasachi Sinha

Submitted by: Group 8, Section F


Ankit | Prabit | Indhu | PrasannaVadhana | Smita

Introduction
Our group has been most impressed by two topics in particular: Disruptive innovation and Open innovation. Both of the above mentioned topics are particularly important in todays fast moving world of cut throat competition and everyday changing technology. We will begin with describing in brief what these theories are and then will try to substantiate them by giving suitable examples.

Disruptive Innovation
A disruptive innovation helps to create a new market and value network, and eventually destroys the existing market and value network (over a few years or decades) by replacing the old technology. This term is used in business and technology literature to describe innovations that improve product in a way that the market does not expect. It is usually the first to develop a different set of customers in a new market and later in existing markets through lower prices. The theory of disruptive innovation was coined by Harvard professor Clayton M. This term has been described in detail in his book The Innovator's Dilemma. The book analyses cases of the record industry and the industry of excavation equipment. The theory explains the phenomenon in which an innovation transforms a market or an existing area by introducing simplicity, convenience, accessibility where complication and high cost are dominant. Initially, a revolutionary innovation caters to a niche market that may seem attractive or trivial to stakeholders in the industry, but the end result is that the new product or concept completely redefines the industry.

Examples of Disruptive Innovation There have been several examples of innovations which have changed the course of history significantly. Starting from invention of wheel to the invention disk drives to the invention of smart phones, there have been tremendous advantages both from the customers stand point of view as well as the innovators point of view. We will study in detail how the invention of iPhone by Apple changed the human history and redefined the standards for mobile handsets.

Initially when launched, iPhone did not have many new features that some companies were already offering in the market, and had several inferior features like camera of very poor quality, connectivity issues etc. Apple understands that different features are perceived differently by people and this is what the biggest differentiation factor is for Apple. This was primarily the source of disruptive innovation for Apple. Apple was one of the first companies to come up with a touch display in a mobile handset for general consumers. It is this touch screen user interface in the iPhone, which makes it easy to use; the integration with online music library -iTunes and the online application store allows people to download and install a wide variety of apps and songs to the existing plethora of pre-installed apps. In addition, the way the company handled the creation of the platform is a lesson for everybody. More the users, more is the revenue generation opportunity for the application developers and more they are willing to come up with newer apps. The creation of Steve Jobs was not just a cell phone; it was a work of art. Processing capacity and not voice, is what has disturbed the cell phone market. While other manufacturers of smartphones offer web browsers, they were all too complex to navigate and difficult to use. In contrast, Apple's browser makes surfing the Internet easily. Compared to its competitors, the iPhone user interface is simple and intuitive. You can have access to e-mail, text, video, photography, cards, books, music, games and mobile shopping by a just touch on responsive screen. After introducing a product that was revolutionary in some respects, but lacking in other, Apple began a structured process improvement functions and adding features to satisfy the customers. This is the essence of continuous improvement. For example, in the year 2008, iTunes made an

entry, which cemented the role of the iPhone as a multi-functional tool that can perfectly provide music and video on demand. Unbelievable disruption: Accomplishments by the i-phone In spite of facing stiff competition from both mobile OS provider (Googles Android) and mobile handsets provider (Samsung), iPhone remains the trendsetters with some of the most remarkable achievements: iPhone itself is a bigger business than Microsoft The phone has shipped more than 250 million units and generated more than 8 billion dollars for Apple iPhone and iPad have made Apple the most valuable company in the world, completing a 15 year disruptive comeback which saved the almost bankrupt company. The iPhone isn't just the most disruptive innovation ever; it is symbolic of a leap in what we expect from technology and how our interactions with it have evolved. It's difficult to think about how different the world was six years back, almost as hard as it is to remember how we survived without the internet and email.

Open Innovation
Open innovation is a term promoted by Henry Chesbrough, an executive director and professor at the Centre for Open Innovation at the University of California situated in Berkeley. The core idea of open innovation is that in todays world the companies cannot rely only on internal innovations and its own R&D, instead it can buy proprietary rights and licenses to use processes and innovations of other companies. Likewise, internal inventions not being used in a firm's business should be taken outside the company (e.g. through licensing or by developing spin-offs or joint ventures).

The ecology of open innovation can be expected to go beyond the use of external sources of innovation such as customers, competitors, and academic institutions, and may also well be an internal change in the use of management and employment of intellectual property. In this sense, it is understood as timely encouragement and exploring a wide range of internal and external sources for innovation opportunities. Benefits Open innovation offers a plethora of benefits to companies operating on a program of global collaboration: Risks Implementing a model of open innovation is naturally associated with a number of risk and challenges, which include : The ever-present probability of revealing information which was not meant to be shared Increased risk for the hosting organization to lose its competitive advantage as a consequence of revealing its intellectual property Controlling innovation becomes more complicated and regulation of contributors affect a more difficult It is not easy to devise means to properly identify and internalize external innovation Devising strategies in order to ensure that innovations are in line with organizational goals and extend beyond the firm so that there is maximum return from external innovation Examples of Open Innovation The theory uses different models and approaches to explain Open Innovation. Various theories like Customer Immersion, Product Plat forming, Idea Competition, Collaborative product design have been used to come up with excellent examples which aided the companies in the growth witnessed. We have taken the example of Netflix which utilized Idea Competitions to come up with a suggestion algorithm for its customers. It Reduces the cost of conducting research and development It increases the potential for improvement in development productivity It aids in incorporation of customers early in the development process There is an increase in accuracy levels in both market research and targeting of customers There is tremendous potential for viral marketing

The Netflix Prize was an open competition for the best collaborative filtering algorithm to generate user ratings for films. This is based on previous ratings without other ancillary information about the users or films, i.e. without either the films or the users being identified except by numbers assigned for the contest. The competition was held by Netflix which is an online rental service for DVDs. Prizes were awarded based on improvement over the algorithm possessed by Netflix , called Cinematch, or the scores of the years gone by, if a team has made improvement beyond a certain threshold. An algorithm that predicts for each movie in the quiz set its average grade. Cinematch uses "straightforward statistical linear models with a lot of data conditioning". Using only the training data, Cinematch scores an RMSE of 0.9514 on the quiz data, roughly a 10% improvement over the trivial original algorithm. Cinematch has a similar performance on the test set, 0.9525. In order to win the final prize of 1,000,000 dollars, the participating teams had to improve this by another 10%, to achieve 0.8572 on the test set. On 21 September 2009, the final grand prize of 1,000,000$US was awarded to the BellKor's Pragmatic Chaos team which bested Netflix's own algorithm for predicting ratings by 10.06%. Thus for a small amount, Netflix was able to improve its algorithm by ten percentage. Had it not been open innovation, Netflix would have to spend a lot more to develop the algorithm and retain more customers.

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