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Innovation Theory

  • Yoshiteru Nakamori
Chapter
Part of the Translational Systems Sciences book series (TSS, volume 20)

Abstract

There are countless books that discuss innovation, but this book does not have the ambition to add a new theory of innovation. This chapter explains the definition and theories of innovation that are already authorized and are the minimum necessary to learn. Regarding the definition, you will first learn about creative destruction by Joseph A. Schumpeter, the founder of innovation theory, and then about marketing and innovation by Peter F. Drucker, who is called the founder of modern management. As for theories, you will study disruptive innovation by Clayton M. Christensen and value innovation by W. Chan Kim and R. Mauborgne.

Knowledge Triad 1:

Schumpeter’s thinking is that, to bring about innovation, it is necessary to create ideas that are different from existing concepts and to overcome social resistance. Thus, innovation is represented by a triad, as shown in Fig. 1.1.
Fig. 1.1

The triad to promote innovation (Joseph A. Schumpeter)

The three types of knowledge in the figure—rational knowledge, intuitive knowledge, and social knowledge—will be discussed in detail in the final chapter. It is the author’s conviction that all the theories appearing in this book are explained by these three types of knowledge.

Knowledge Triad 2:

According to Drucker, business management involves setting targets based on strategy and marketing and achieving goals through innovation, which is expressed by the triad in Fig. 1.2.
Fig. 1.2

The triad of business management (Peter F. Drucker)

1.1 Definition of Innovation

Joseph A. Schumpeter (1883–1950), who established the theory that constant innovation causes economic fluctuations, defined innovation as “Innovation is a new combination of production means, resources, labor, and others.” Peter F. Drucker (1909–2005), who was called the inventor of management, said, “Innovation is a concept of economy and society, not technology.” Let us touch on the ideas of these two great pioneers.

1.1.1 Creative Destruction

Every word has a unique meaning depending on the context in which it is used. In the most widely defined case, an innovation is a new idea, method, or invention, or the introduction of new ideas or methods.

However, when Schumpeter built a theory that constant innovation of enterprises fluctuates the economy, the term “innovation” came to represent a very important concept in business administration. It is now generally understood that innovation in the context of business management is to create new economic value by developing new products, devising methods of production and sales, etc.

Joseph A. Schumpeter (1912) defined innovation as follows:

Innovation: A new combination of production means, resources, labor, and others, in a way that is different from the past in economic activities

Schumpeter listed the following five types of innovation:
  1. 1.

    Product innovation: Production of new goods or new quality goods

     
  2. 2.

    Process innovation: Introduction of new production methods

     
  3. 3.

    Market innovation: Development of new sales channels

     
  4. 4.

    Supply chain innovation: Acquisition of new sources of raw materials or semi-finished products

     
  5. 5.

    Organization innovation: Implementation of new organizational methods

     

Let us look at some examples of these innovations below.

Product Innovation:

A typical example of a series of new product developments is the competition in technology development to reduce automobile fuel consumption due to the depletion of natural resources and environmental consideration.
  • A gasoline vehicle can use the existing energy supply infrastructure. However, it causes health damage and global warming.

  • A hybrid vehicle uses both gasoline and electric motors. It consumes less gasoline and is a bit more environmentally friendly.

  • An electric vehicle runs on an electric motor. It helps to protect the global environment. It can charge at home using cheap night-time electricity.

  • A fuel-cell vehicle uses electric energy generated by the chemical reaction of hydrogen and oxygen. It must refuel at a hydrogen station.

Process Innovation:

The relationship between manufacturing and retail is often addressed in terms of new production methods. SPA (a specialty store retailer of private label apparel) is internationally recognized as a successful business model of a company that deals with the planning, manufacturing, and sales of its own products alone. In the conventional apparel industry, respective companies are responsible for planning, manufacturing, and selling. Therefore, it takes considerable time to get from the planning stage to selling. This business model meets the conflicting conditions of low price and high quality that could not be realized with the conventional business model.

Market Innovation:

An example of a new sales channel is online shopping, which is a way to purchase goods and services through the Internet. Online shopping websites are called online shops, e-shops, Internet shops, EC (electronic commerce) sites, etc. Websites that collect and operate various online shops like shopping malls in one place are called online malls, electronic shopping streets, virtual malls, etc.

Supply Chain Innovation:

As an example of searching for a new source of raw materials, rare metals that are indispensable for electronic components can be mentioned. Rare metals (lithium, manganese, etc.) and rare earth elements (lanthanum, cerium, etc.) used for electronic parts and electronic materials are essential resources. However, both supply and price are unstable due to demand increase, the rise of resource nationalism, and the inflow of speculative funds into the metal market. For this reason, the following efforts are being implemented: (1) reduction of usage; (2) development of substitute products (new alloys); (3) development of recycling technology; and (4) development of mines.

Organization Innovation:

An example of the creation of a new organization is the introduction of a franchise system. A franchise is a form of contract where a franchisor gives goodwill (right to business) to franchisees under certain conditions and receives royalties as compensation. The number of industries that have adopted the franchise system has increased and includes: the retail industry (convenience stores, auto supply stores, pastry stores, bakery shops), food service industry (hamburger shops, coffee shops, restaurants), and service industry (tutoring services, home sales businesses, cleaning businesses).

According to Schumpeter (1942), creative destruction describes the process of industrial mutation that constantly revolutionizes the economic structure from within, destroying the old one and creating a new one.

1.1.2 Marketing and Innovation

Peter F. Drucker, a master of business science, made significant progress in innovation theory in relation to marketing. The following is one of his famous quotes (Drucker 1973):

Business: There is only one valid definition of business purpose: to create a customer. Business has only two functions: marketing and innovation.

He explained marketing and innovation as follows (Drucker 1954):
  • All organizations that achieve their goals through the marketing of products and services are companies.

  • However, companies cannot be established by marketing alone.

  • Another important function of a company is innovation.

  • A company is an institution for growth, expansion, and change.

  • In other words, it must continuously create better and more economical products and services.

Drucker’s idea clearly appears in the following sentence (Drucker 1985):

If general perception changes from seeing the glass as half full to seeing it as half empty, there are major innovative opportunities.

Mathematically, there is no difference between “the glass is half full” and “the glass is half empty,” but the meanings of these two statements are different, and so are their consequences. In this way, Drucker further pushed Schumpeter’s idea, arguing:

Innovation : It is a concept of economy and society, not technology.

Regarding the opportunity of innovation, Drucker’s question, “How can you sell a refrigerator to an Eskimo?” is suggestive. Selling a refrigerator to an Eskimo to keep food cold means creating a new market, but this is difficult. Instead, selling a refrigerator that keeps food from getting too cold means developing a new product. A change in the perception that a refrigerator is intended to prevent food from freezing or to properly warm food leads to innovation.

Drucker’s Innovation

As already learned, Schumpeter did not limit innovation to technology. This feature is more thorough with Drucker. Drucker’s innovation includes not only technical innovation but social innovation as well. In other words, it is customer creation.

Drucker classifies customer creation strategies as follows:
  • Utility strategy : Improve the customers’ convenience significantly and promote the use of products and services explosively (e.g., smartphones).

  • Price strategy : Collect a fee for the needs rather than the goods themselves (e.g., set a low price for the printer itself, but make money on ink refills).

  • Customer strategy : Reduce hurdles for purchase from the customer’s point of view (e.g., installment payments, product leasing).

  • Value strategy : Sell the benefits (i.e., value) that customers get, rather than products and services (e.g., sell a phone as a tool to increase the number of customers).

Innovation Opportunities:

Drucker summarizes the sources of innovation opportunities as follows:
  1. 1.

    Exploit unexpected success in the market and convert it into an opportunity.

     
  2. 2.

    Look for dissatisfaction in your customers, which are all the hints you need.

     
  3. 3.

    Identify process needs and correct or redesign your company’s weak spots.

     
  4. 4.

    Monitor changes in industry and market structure and respond appropriately.

     
  5. 5.

    Pay attention to demographics to accurately meet a target market’s desires.

     
  6. 6.

    Do not miss changes in perception, meaning, and mood in order to capitalize.

     
  7. 7.

    Acquire new knowledge about technology and better ways of doing things.

     

Integration of Marketing and Innovation:

The integration of marketing and innovation can be summarized as follows:

Two sides of a coin: Marketing and innovation are two of the most fundamental acts in the business. The aim of marketing is to understand the customer well and to provide the product or service that fits the customer. However, since only one valid definition of business purpose is to create a customer, innovative ideas for that are very important.

Development of new technologies is necessary to bring about innovation, but the strategy is more important, and the creativity to invent strategy is most important. For this reason, the main subject of this book is creativity. Chapter  2 and what follows will introduce methodologies from systems science and knowledge science that bring out creativity.

1.2 Theories of Innovation

Clayton M. Christensen, who built the disruptive innovation theory, states a paradoxical proposition: “Superior management is the biggest reason that an industry leader loses its position.” W. Chan Kim and Renée Mauborgne, who are developing the value innovation theory, use a metaphor called blue ocean to explain the strategy of economic value creation. Now, let us learn these two theories.

1.2.1 Disruptive Innovation

Christensen argues in his epoch-making book The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (1997) that disruptive innovation causes the rise and fall of a company.

Prior to Christensen, innovation was classified based on technology:
  • Incremental innovation : Progressive and continuous change based on an improvement of existing technology

  • Radical innovation : Discontinuous change based on new technology that is drastically different from existing technology

Figure 1.3 shows the difference between incremental innovation and radical innovation.
Fig. 1.3

Difference between incremental innovation and radical innovation

Christensen’s Definition

In contrast, Christensen classified innovation as follows:
  • Sustaining innovation : Innovation with a high probability that existing leading companies will continue to survive

  • Disruptive innovation : Innovation with a high probability that existing leading companies will not survive

Christensen does not equate radical innovation with disruptive innovation, as it is possible for rational management to respond appropriately to both incremental and radical innovation. Christensen looks to see if a company can better handle new innovation as a matter of enterprise organization that manages the technology, not the content of the technology.

The paradox claimed by Christensen is shocking:

Paradox : Organizations capable of good management are more likely to fail in disruptive innovation that will dramatically change the market structure.

According to Christensen, the reason is that excellent enterprises are forced to be conservative. Excellent enterprises listen closely to customers’ opinions and actively invest in new technologies to improve the products that customers demand. Due to the opposition of the marketing department and key customers, existing companies frequently decide not to continue investing in disruptive technology.

A Symbolic Case:

Eastman Kodak1 is often taken up as a symbolic case. Eastman Kodak was the world’s No. 1 photographic filmmaker. Kodak invented the digital camera, a new technology to replace film, in 1975. This was a technological innovation. However, Kodak hesitated to spread this digital technology because to do so could lead to a decline of the film business, which could then lead to the loss of the huge profits gained from film sales and development. Amid Kodak’s hesitation, Fuji Film, one of the rival companies, introduced new digital cameras one after another in the market. Demand for film sharply declined in a short period, and Kodak applied for federal bankruptcy in 2012.

In this way, even a company that has a strong influence on the market can be obliged to leave the market due to the innovation of rival companies.

Two Types of Disruptive Innovation:

Christensen defines the following two types of disruptive innovation:
  • Low-end disruption : This targets customers who do not need the full performance valued by customers at the high end of the market. Here:
    • High-end products are products of the highest quality and price among similar products.

    • Low-end products are products of the lowest quality and price among similar products.

    Existing companies do not want to abandon high profitability, so they cannot fight in line with low-end destructors.

  • New-market disruption : This targets customers who have needs that were previously unserved by existing incumbents, corresponding to the case where consumption occurs in a layer where it has not previously taken place. For example:
    • A new product can be attractive to a potential customer if it is inexpensive and easy to use compared with an existing product even though it is inferior in functionality.

    Existing companies are not deprived of existing customers, so they do not pay attention to new rival companies that have entered the market.

Low-end disruption occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. More specifically, at some point, the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product that has lower performance than the incumbent but exceeds the requirements of certain segments, thereby gaining a foothold in the market. In the aircraft industry, an LCC (low-cost carrier) that offers only specific routes at ultra-low prices while eliminating services is a low-end type innovation.

On the other hand, new-market disruption occurs when a product fits a new or emerging market segment that is not being served by existing enterprises. The Sony transistor radio and Walkman created a new market with the new innovation of miniaturization as a new value axis. The Apple iPad and GoPro digital camera are also typical examples.

Christensen’s most striking theory is the innovator’s dilemma:

Innovator’s dilemma: The dilemma of innovators is the phenomenon that innovators who repeat sustaining innovation toward the high-end market are being driven away by disruptive innovators of the low-end or new-market type.

Excellent companies are said to fall into a trap in that they prioritize the intentions of existing customers and the shareowners seeking short-term benefits. Therefore, excellent companies concentrate on raising their abilities to run existing businesses, making it difficult to create different projects. Furthermore, in the early stages of innovation, it seems that there is no value in entry because the market is small and the uncertainty is high.

Christensen summarizes the procedure for successful disruptive innovation as follows:
  • Developing new products: However, it is said that 75% of trial attempts have failed in new product development.

  • Identifying ideal customers : Identify customers by problems rather than by conditions such as gender, income, etc.

  • Realizing new-market type disruption: Open up a huge potential market by offering affordable products that can be used by customers who do not have the funds or skills to use the more expensive products.

  • Building disruptive channels : Since new products often do not match the business models of retailers and dealers of existing products, it is necessary to develop new sales channels.

  • Determining business scope : You need to decide whether or not to handle all the processes from planning to product development within your company.

Summary of the Paradoxical Proposition:

Let us summarize Christensen’s paradoxical proposition:

Paradoxical proposition : Superior management brings down powerful companies. Customer-focused management and market-oriented management will lead companies to fail. The mechanisms by which organizations generate value inherently impede change. This phenomenon occurs, not because of incorrect management decisions by an existing large company, but because of repeated reasonable and correct decisions. In other words, large companies are overwhelmed by disruptive innovation because they are managed properly.

1.2.2 Value Innovation

Value innovation is a central concept for the creation of new markets proposed by W. Chan Kim and Renée Mauborgne in Blue Ocean Strategy . A blue ocean means a new market without competition (Kim and Mauborgne 2005, 2015).

Companies can succeed by creating blue oceans of uncontested market space as opposed to red oceans where competitors fight for dominance, the analogy being that an ocean full of vicious competition turns red with blood. The cornerstone of the blue ocean strategy is value innovation, a concept originally outlined in Kim and Mauborgne’s 1997 article:
  • Value innovation is the simultaneous pursuit of differentiation and low cost, creating value for the buyer, the company, and its employees, thereby opening up a new and uncontested market space.

  • The aim of value innovation is not to compete but to make the competition irrelevant by changing the playing field of strategy.

  • Value innovation challenges Michael Porter’s idea that successful businesses are either low-cost providers or niche players.

  • Instead, the blue ocean strategy proposes finding the value that crosses conventional market segmentation and offering value and lower cost.

A Success Example:

Kim and Mauborgne (2005) introduced a good example of a business that has adopted the blue ocean strategy in Japan as the haircut chain QB (Quick Barber) House, which has grown rapidly in the past 20 years.
  • What the company emphasizes: Short time (10 min), low price (1000 JPY = about 9.00 USD), and convenient locations

  • What the company does not do: Shampoo, shaves, and massage

  • What the company introduced: Air washer, ticket vending machine, and waiting time indicator

This company specialized only in haircuts by cutting off extra services, appealing to busy customers, reducing personnel expenses, and offering a lower cost. In this way, this company has grown rapidly in a short period without rival competition.

However, a blue ocean quickly turns into a red ocean. On February 1, 2019, the QB House raised their haircut fee to 1200 JPY, including tax. One reason is that the rise in competitors made it difficult to secure the personnel necessary for store operation.

The Blue Ocean Strategy

The blue ocean strategy is formulated as follows:
  1. 1.
    Reconstruct market boundaries.
    • Envision a new market space by various methods.

    • Switch between function oriented and sensibility oriented.

     
  2. 2.
    Focus on the big picture, not on the numbers.
    • Look at the forest. Draw a strategic campus, which will be shown later.

     
  3. 3.
    Reach beyond existing demand by considering three groups of noncustomer layers:
    • Group 1: Those who are at the edge of the market but may soon escape (people who are not currently customers but are closest to the market)

    • Group 2: Those who decided not to use the products and services in this market (people who gave a negative answer after considering whether they could meet their needs)

    • Group 3: Those who are far from the market (people who have never wanted to use products or services in this industry)

     
  4. 4.
    Get the strategic sequence right.
    • Consider utility, price, and introduction cost.

    • Use the Blue Ocean Idea (BOI) index shown in Fig. 1.4.
      Fig. 1.4

      Blue Ocean Idea (BOI) index (Kim and Mauborgne 2005)

     

These four strategies are explained in detail below (although there are some overlapping parts).

Reconstruct the Market Boundaries:

The specific procedure of this strategy is as follows:
  1. 1.

    Look to alternative industries: Learn about products and services that have the same purpose but different functions and shapes.

     
  2. 2.

    Learn from other strategy groups within the same industry: Draw a strategic positioning map of companies within the industry.

     
  3. 3.

    Focus on different buyer groups: Target the buyer group overlooked by rival companies.

     
  4. 4.

    Consider complementary goods and supplementary services: For example, like Starbucks, provide a relaxing environment in which to drink coffee.

     
  5. 5.

    Switch between function oriented and sensibility oriented: This will be discussed in detail shortly.

     
  6. 6.

    Review the future: Make business value innovations that rival companies are not addressing.

     
It is possible to develop completely new products by aiming for sensibility orientation in the function-oriented industry, and in contrast, aiming for function orientation in the sensibility-oriented industry. Examples are as follows:
  • Apple succeeded by incorporating sensibility as design into the function-oriented personal computer industry.

  • UNIQLO has achieved great success by introducing function-oriented products such as Heat Tech to the sensibility-oriented fashion industry. Heat Tech’s functions include heat generation, heat retention, antibacterial properties, and stretching.

Focus on the Big Picture Rather than Numbers:

The strategic campus is used for strategic visualization. This is a tool to compare the strategies of your company with those of rival companies. Figure 1.5 shows an example of the strategic campus, where the horizontal axis lists the competitive factors, and the vertical axis shows their degrees of emphasis. What connects them is called a value curve.
Fig. 1.5

An example of the strategic campus

Reach Beyond Existing Demand:

There are two ways to find new demand:
  1. 1.
    Focus on noncustomers:
    • Group 1: Those who are at the edge of the market but may soon escape

    • Group 2: Those who decided not to use the products and services in this market

    • Group 3: Those who are far from the market

     
  2. 2.
    Explore common needs:
    • To change people in the three noncustomer groups into customers, do not focus on the differences in customer groups but discover their common needs and desires.

    What kind of new demand did QB House create?
    • Group 1: Office workers who want to get a haircut in a short time at the airport, etc. while traveling

    • Group 2: Young people who cut their own hair because they do not need a shampoo or a shave

    • Group 3: Mothers who cut their children’s hair because of high haircut fees

     

Get the Strategic Sequence Right:

Think of strategies in the right order as follows:
  1. 1.

    Increase utilities for buyers such as simplicity, convenience, reduced risk, fun, a favorable image, and environmental friendliness.

     
  2. 2.

    Set a price that more customers can afford.

     
  3. 3.

    Realize a cost that can earn sufficient revenue by rationalization, outsourcing, or price innovation. For example, a Google search is free, but Google benefits when people click on the ads.

     
  4. 4.

    Finally, confirm the procedure for realization with the BOI index.

     

Summary of the Blue Ocean Strategy

The blue ocean strategy is summarized as follows:
  1. 1.

    The blue ocean strategy is a broad concept including not only creative disruption and discontinuous change but also creation without disruption.

     
  2. 2.
    The blue ocean strategy creates new markets within and outside the boundaries of existing markets.
    • QB House fulfills the complementary role of the existing industry by providing services to people who want to get a haircut but have little time to do so while traveling, people who do not want shampoo or massage, and people who want an inexpensive haircut and need to get their hair cut often.

     
  3. 3.

    The aim of the blue ocean strategy is not to find a solution that leads to creative disruption and discontinuous change. The blue ocean strategy redefines tasks and creates complementary products and services rather than eliminating existing products and services.

     
  4. 4.

    Created products and services must dramatically increase value to create many customers. That is, value innovation is the key to the blue ocean strategy.

     

1.3 Chapter Appendix

Practice in Idea Creation:

Consider the following problems:
  1. (A)
    Analyze a recent famous innovation, Uber (see hint below), according to the theory. Note that Didi Chuxing acquired this business in China in 2016.
    1. 1.

      Is Uber a disruptive innovation?

       
    2. 2.

      Does Uber follow the blue ocean strategy?

       
     
  2. (B)
    What kind of innovation are you aiming for in your research? Choose one of the following types of innovation and write your dream as specifically as possible. However, change the term technology to theory in the traditional classification (1 and 2), and change the term company to theory as well in the Christensen classification (3 and 4). Of course, the term theory may be changed, depending on the research purpose, to terms such as technology, method, tool, or system.
    1. 1.

      Incremental innovation: Progressive and continuous change based on the improvement of existing theories

       
    2. 2.

      Radical innovation: Discontinuous change based on a new theory that is drastically different from existing theories

       
    3. 3.

      Sustaining innovation: Innovation with a high probability that existing leading theories will continue to survive

       
    4. 4.
      Disruptive innovation: Innovation with a high probability that existing leading theories will not survive, which has two types of disruption (paraphrased from the original text):
      1. 1.1.

        Low-end disruption: Develop a theory that can be widely used in society, rather than pursuing an academically advanced theory.

         
      2. 1.2.

        New-market disruption: Develop a theory that can be used by people who have not benefited from related theories so far.

         
       
    5. 5.

      Value innovation using the blue ocean strategy: Challenge research in new fields where competitors do not exist.

       
    6. 6.

      Any other type: You can define this.

       
     

Hint (A1-1) About Uber:

Uber Technologies Inc. is a global taxi technology company headquartered in San Francisco, California, with operations in more than 600 cities worldwide. It develops and operates car transportation and food delivery mobile apps. Uber drivers usually use their own cars, although they can rent cars from Uber. Uber has clearly transformed the taxi business, but is it disrupting the taxi business?

Hint (A1-2) Disruption (Christensen et al. 2015):

Disruption describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding and usually most profitable customers, they exceed the needs of some segments and ignore the needs of others.

Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering a more suitable functionality—frequently at a lower price. Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously.

Entrants then move upmarket, delivering the performance that the mainstream customers of the incumbents require while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Hint (A1-3) Disruptive Innovation Model (Christensen et al. 2015):

The diagram in Fig. 1.6 contrasts product performance trajectories (the bold lines showing how products or services improve over time) with customer demand trajectories (the thin lines showing customers’ willingness to pay for performance).
Fig. 1.6

The disruptive innovation model

As incumbent companies introduce higher quality products or services (upper bold line) to satisfy the high end of the market (where profitability is highest), they overshoot the needs of low-end customers and many mainstream customers. This leaves an opening for entrants to find footholds in the less-profitable segments that incumbents are neglecting.

Entrants on a disruptive trajectory (low bold line) improve the performance of their offerings and move upmarket (where profitability is highest for them, too) and challenge the dominance of the incumbents.

Hint (A1-4) Theory (Christensen et al. 2015):

A disruptive innovation originates in low-end or new-market footholds. Low-end footholds exist because incumbents typically try to provide their most profitable and demanding customers with ever-improving products and services, and they pay less attention to less-demanding customers. In fact, incumbents’ offerings often overshoot the performance requirements of the latter. This opens the door to a disrupter focused (at first) on providing those low-end customers with a good enough product. In the case of new-market footholds, disrupters create a market. Put simply, they find a way to turn nonconsumers into consumers.

Hint (A2-1) Uber’s Challenge:

Uber entered the Chinese market in February 2014. Initially, it was accused of being a dispatch service without permission to do business, but then, Uber switched to a business model that is not legally regulated. Uber also created a business tie-up with Baidu and Hainan Airlines, which are leading Chinese enterprises.

In Japan, however, Uber is struggling due to the regulation of the law and the strong resistance of the taxi industry. The blue ocean for Uber is only in the inconvenient countryside in Japan. Changing the city to a blue ocean requires efforts to change laws and public opinion. In 2018, DiDi Mobility Japan Corp. began operating in Japan instead of Uber. But a little later, Uber also entered the Japanese market.

Uber is clearly enhancing the value of using taxis. But does it follow the blue ocean strategy? The rise of Uber was remarkable. It quickly attracted customers who were dissatisfied with conventional taxis. However, it is struggling due to the opposition of the existing taxi industry, the rise of others in the same industry, and so on. The blue ocean can turn into a red ocean in the blink of an eye. As a matter of fact, Uber Technologies was forced to withdraw from China in 2016 and from Asia in 2018.

Hint (A2-2) The Red Ocean’s Trap:

Kim and Mauborgne (2015) argue that there are 10 misconceptions to the blue ocean strategy as follows:
  1. 1.

    Since it is customer oriented, you should emphasize existing customers.

     
  2. 2.

    To create the blue ocean, you must advance to fields other than the core business.

     
  3. 3.

    Advanced technology is indispensable for the blue ocean strategy.

     
  4. 4.

    To create the blue ocean, you must be the first in the new market.

     
  5. 5.

    It is, in essence, a differentiation strategy.

     
  6. 6.

    It is a low-cost strategy that emphasizes low prices.

     
  7. 7.

    It is the same as innovation.

     
  8. 8.

    It is a niche strategy centered on marketing.

     
  9. 9.

    It considers competition to be bad, even when competition is preferred.

     
  10. 10.

    It is the same as creative disruption and discontinuous change.

     

Hint (A2-3) Comments from the Founders:

It is a misunderstanding that the blue ocean strategy is a differentiation strategy.
  • Differentiation strategy, as in the case of Mercedes Benz, provides premier value under high cost and high price. On the other hand, the blue ocean strategy simultaneously realizes differentiation and low cost.

  • While focusing on raising and creating to aim for differentiation, do not neglect cost reduction by reducing and eliminating.

It is also a misunderstanding that the blue ocean strategy is a low-cost strategy that emphasizes low prices:
  • The blue ocean strategy pursues differentiation and low cost at the same time. However, rather than focusing on the low cost itself, it tries to bring greater value to customers while keeping costs down.

  • It tries to acquire a large number of customers with strategic pricing rather than a low price. In addition to reducing and eliminating, do not forget the viewpoint of raising and creating.

Answer (A-1) (Christensen et al. 2015):

The answer is NO.
  • A disruptive innovation, by definition, starts from one of those two footholds, but Uber did not originate in either one.

  • It is difficult to claim that the company found a low-end opportunity: That would have meant taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean.

  • Uber was launched in San Francisco (a well-served taxi market), and Uber’s customers were generally people already in the habit of hiring rides.

  • Disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. Uber has gone in exactly the opposite direction by building a position in the mainstream market first and subsequently appealing to historically overlooked segments. Most of the elements of Uber’s strategy seem to be sustaining innovations.

Answer (A-2):

The answer is YES.
  • What has Uber raised or created?
    • A system that enables customers to call cars and pay fees by mobile phone

    • Comfortable car space, driver’s polite manners, honest fees

  • What has Uber reduced or eliminated?
    • Permanent employees, company cars (Uber drivers use their own cars.)

    • Denial of boarding, payment by cash

  • Uber certainly introduced a value innovation.

  • Uber follows the blue ocean strategy. However,

  • It is clear that a blue ocean is difficult to find.

  • Sometimes you can reach a blue ocean by overcoming great social resistance.

  • The reality is that a blue ocean will soon change to a red ocean.

Footnotes

  1. 1.

    From the company’s founding by George Eastman in 1888, Kodak followed the razor and blades strategy of selling inexpensive cameras and making large margins from consumables—film, chemicals, and paper. As late as 1976, Kodak commanded 90% of film sales and 85% of camera sales in the USA (https://en.wikipedia.org/wiki/Kodak).

References

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Copyright information

© Springer Nature Singapore Pte Ltd. 2020

Authors and Affiliations

  • Yoshiteru Nakamori
    • 1
  1. 1.Professor Emeritus, School of Knowledge ScienceJapan Advanced Institute of Science and TechnologyNomiJapan

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