Digital Media & Innovation: Three Strategic Approaches

to Business Transformation

Richard A. Gershon, Ph.D. Western Michigan University

Columbia University, November 11, 2010

The lessons of business history have taught us that there is no such thing as a static market. Advancements in digital media and global competition have engendered a new competitive spirit that cuts across countries and companies alike.

In 1942, Joseph Schumpeter introduced the principle of “creative destruction” as a way to describe the disruptive process that accompanies the work of the entrepreneur and the consequences of innovation.

In time, companies that once revolutionized and dominated select markets give way to rivals who are able to introduce improved product designs, offer substitute products and services and/or lower manufacturing costs

Today, we use words like “disruptive technology” (Christensen, 1997) to describe the same principle.

Disruptive Technology

Incumbent technology : Challenged by: Solution:

Newspapers Radio, late 1930’s and 1940’s

Become more interpretative innews approach; emphasize pictures

Radio Broadcast Television, 1950s

Deemphasized radio drama andcomedies and focused on music(top 40, sports broadcasting etc.)

Broadcast Television Cable Television, late 1970s and 1980s

Broadcast TV companies slowly bought into cable programmersor created their own cable brands ABC acquired ESPN NBC launches CNBC

Cable Television Direct Broadcast Satellite,1990s, early 21st century

Cable has emphasized high-speed Internet access and cable telephony

Vinyl Records Compact Disk (CD), 1980s

All music production companies eventually transitioned to CD format

Compact Disks(traditional music retail)

iPod, MP3 music file sharing,early 21st century

music is steadily transitioningto E-Commerce model, iTunes

Newspapers / Television

The Internet, 21st century ? ? ?

Table 1.Disruptive Communication and Information Technology

Source: R. Gershon, 2009

Today’s media and telecommunication companies are faced with the same basic question; what are the best methods for staying competitive over time? In a word, innovation.

This presentation will examine the importance of innovation (and innovative thinking) to the long term success of today’s media business enterprise.

Specifically, it will identify three strategic approaches to business transformation.

Three Strategic Approaches to Business Transformation

Successful media innovation occurs when it meets one or more of the following strategies: 1) The innovation is based on a novel principle that

challenges management orthodoxy. 2) The innovation is systemic; that is, it involves a

range of processes and methods. 3) The innovation is part of an on-going commitment

to develop new and enhanced products and services.

Gary Hamel, Harvard Business Review

Business Transformation 1.

The innovation is based on a novel principle that challenges management orthodoxy. The innovation is transformative. It redefines the playing field by introducing an altogether new value proposition. Sony:

“Walkman” portable stereo the Compact Disk (Sony & Philips) “Playstation” videogame system

The aforementioned products are all major contributors to our present day digital lifestyle.

Sony Playstation

The Sony Playstation was the brainchild of an engineer named Ken Kutaragi, who was fascinated with designing an entertainment device that could combine the power of a computer workstation with high resolution graphics. For two years, Kutaragi operated without a sponsor until a friend and senior executive at Sony, interceded on his behalf.

Sony President Norio Ohga was sufficiently impressed that he authorized Kutaragi to begin building a working prototype of his videogame console.

In the beginning, the management at Sony was not enamored with the idea of videogame technology. They did not view themselves as a company that built toys. Worse still, companies like Nintendo and Sega were the established leaders in videogame technology and software.

Ken Kutaragi

Playstation

One of Sony's major challenges was to convince the larger software developers to create innovative games to support the new platform system. Sony's future success in videogame technology would depend on high quality software games.

Playstation I. On December 3, 1994, the Sony Playstation was launched

in Japan with 8 game titles. Sony sold some 300,000 units in the first month alone, more than three times what company strategists had expected. A year later, Playstation debuted in the U.S. and achieved immediate success.

By 1998, Playstation had sold 33 million units worldwide and had become the international leader in videogame consoles. Playstation was responsible for 10% of Sony's worldwide revenues in its first year alone.

Business Transformation 2.

The innovation is systemic; that is, it involves a range of processes and methods. Related to this idea is the importance of business process innovation.

A highly successful business process creates internal and external efficiencies that provides added value to the company and organization. Dell Computer:

Direct to home sales, just-in-time manufacturing Home Box Office:

Cable networking (satellite-to-cable interface) Netflix:

On-line subscription movie rental service, proprietary recommendation software

Successful business process innovation sets into motion a scale of imitation by other competitors in the same industry.

Netflix

Netflix is an on-line subscription based DVD rental service founded by Reed Hastings in 1997.

At the time, the home video market was populated by a number of mom and pop retail outlets as well as the video rental giants: Blockbuster and Hollywood Video.

In the beginning, Netflix launched the service as a pay-per-rental – similar to existing video rental outlets.

The one distinguishing factor - the consumer could order movies on line via the Internet. But the cost structure was the same made worse by the fact that home delivery times were inconsistent.

In September 1999, Netflix changed its business model to an unlimited DVD subscription service (i.e., HBO) with no late fees.

Netflix Innovation Strategies 1) Netflix adopted a prepaid subscription

service that offers its customers a great value proposition (i.e., unlimited DVDs…)

2) Convenience. No late fees; hold on to the videos as long as the customer wants.

3) Rather than adopt a bricks and mortar approach (i.e., Blockbuster), Netflix partnered with the U.S. Postal service to engage in direct delivery of DVDs directly to its customers.

4) Netflx fully utilizes the power of the Internet to promote a proprietary software recommendation system. This has the added benefit of stimulating demand for lesser known movies and taking the pressure off recently released feature films (i.e., long tail principle).

5) Netflix has developed a sophisticated supply-chain management system that enables the company to offer subscribers good selection as well as fast turn around time.

The innovation is part of an on-going commitment to develop new and enhanced products and services.

There is a discernible pattern in product development (both planned and unplanned).

This commitment helps to establish brand identity as well as creating lasting advantage. Apple – Digital media Google – Internet search products and services Amazon – Electronic commerce Sony – Consumer electronics Nokia – Wireless communication

Business Transformation 3.

Apple iPod and iTunes

Steve Jobs, senior technical designer, Jonathan Ive, (and the team from Apple) are responsible for the development of the iPod; portable music device and the iTunes music store. The iPod was built around earlier R&D work by a company called Portal Player.

The combination of the Apple iPod and iTunes media store created the first sustainable music down-loading business model of its kind. This came at a time when music piracy threatened to tear the music industry apart.

Together, the Apple iPod and iTunes redefined the way music product software is sold and distributed to the consumer.

Value Innovationand Boundary Spanning

Apple’s success rests on its ability to look across complementary products and to create new opportunities and added value features. Ex. Using ITunes as the principle information server for the iPad

There are different terms to describe this process. Kim & Mauborgne (2005) use the term “value innovation” as a way to describe this. I call it the principle of “boundary spanning.” The net effect is the same.

Forward looking companies find ways to expand and add value to their current line of product and service offerings. Apple iPod iTunes iPhone iPad

Innovation and Risk

Even the best managed companies are susceptible to innovation failure.

There is always the element of risk when attempting to develop a new product or service. The solution, therefore, is to develop a culture of innovation where risk and experimentation are supported.