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click here for freelancing tutoring sitesCase study notesThis case has been updated to include the Apple iPad.

Principally this is case explores the issue of licensing and how successful firms can become unsuccessful. It

is not a case about Apple and why it has become successful.

This case study explores the rise of the Apple Corporation. The Apple iPod is one of the most successful new

product launches in recent years, transforming the way the public listens to music, with huge ramifications

for major record labels. More than 50 million MP3 players are expected to be sold in 2005; over a third more

than last year. Mobile phones have long been regarded as the most credible challengers to MP3 players and

iPods. The launch of digital download services via mobile phones illustrates the dramatic speed of

convergence between the telecom and media industries, which many observers expect to usher in a new era

of growth for mobile phones. Users are willing to pay more for additional services and many analysts predict

that mobile phone handsets will eventually emerge as the dominant technology of the age, combining

personal organisers, digital music players and games consoles in a single device. Indeed, Microsoft founder

Bill Gates has predicted that mobile phones will supersede the iPod as the favoured way of listening to

digital music.

The launch of the Apple ipad in 2010 makes this case even more topical.

This should form the basis of supplementary questions at the end of the case: How will the iPhone succeed?

What about Android and the rise of HTC and Samsung?

The mobile phone market is very competitive.

The iPhone does not use the latest technology. Indeed it offers no new technology, but it may be, as was the

iPod, the simplest technology to use! And this may help it win.

Case study questions1. Explain how the iPod is helping Apple achieve increased sales of its range

of Mac personal computers.Apple was established in the 1970s and became a pioneer in the 1980s; many iPod owners may

not realise Apple was at one time the leading PC manufacturer. This position was lost in the late

1980s and 1990s to HP, Compaq, Dell and generic PC clone manufacturers. Hence, the iPod

offers Apple an opportunity to promote its PCs to the iPod generation.

2. What are the potential benefits and limitations of licensing the iPod software to other MP3 manufacturers?

This is the key issue about the case and involves the licensing issue. In the 1980s, Apple refused to

licence its operating system software to Microsoft. At that time, Microsoft was a small company

compared to Apple. We know what happened. Apple's lead in the PC market was slowly eroded as

Microsoft developed competing technology (i.e. Windows) and licenced it to all PC manufacturers.

Apple's market share fell to 5% of the PC market. It became a small player. History could repeat

itself if Apple again refuses to licence its iTunes software to other MP3 players. On the other hand

it may be that this is a different product and the similarities cannot be drawn with PCs?

Apple wants full control over the hardware and software of its MP3 player, the iPod. But already it

is possible to get an MP3 player with similar specification to that of an iPod at a fraction of the cost.

Can Apple really compete?

Apple has decided to licence its iTunes software to Motorola and one can purchase a Motorola

mobile phone with iTunes software. So there may be evidence that Apple is considering the

licensing question.

This is a complex issue, one in which students have to consider longer-term strategy and deal with

many unknowns such as market changes, competition, the technological frontier where the

technology is changing so rapidly. This reflects, quite nicely, difficult business decisions.

3. With sales of the ipod falling and Apple facing fierce competition from all quarters such as Sony, Dell and other electronics firms as well as mobile phone makers who are incorporating MP3 players into their devices, can the ipod survive?

Indeed, when you can get an MP3 player for £15, why pay £99 for an iPod. How much are you

prepared to pay for styling when the product specifications are the same?

Sony, which has brought out the Sony Walkman MP3 player, is a big brand competing with Apple.

Also many other manufacturers are bringing out their own MP3 players.

However, Apple can perform the following:

Improve features

Develop new products (e.g. Nano)

Reduce price

Improve distribution.

4. If Open Innovation has been so successful for Procter & Gamble and others, why is Apple not adopting this model of innovation?

This case briefly touches upon the unusual level of secrecy that Apple seems to impose on its

suppliers. It is true Apple does seem to operate a much closed model of innovation- it always has.

What works for Apple may not necessarily work for others, but it would seem that Apple does not

need Open innovation at present. Even if others wish to pursue this approach.

5. Can Apple continue to be successful in the long term by adopting a ‘BMW strategy’ (BMW strategy is to target high-premium segments) for its iPod, iPhone and iPad?

This refers to a premium price segment to which BMW successfully provides products. Can we

compare an iPod to a car? Will people willingly pay a premium for a product that does exactly the

same thing as another? Experience from the PC market shows us that people were not prepared

to pay a premium. The car market, on the other hand, shows that people are prepared to pay a

premium. So where does that leave MP3 players?

You can ask students to list products for which they are prepared to pay a premium and those they

are not. But in many categories the evidence suggests price is the key: VCRs, televisions,

camcorders, etc. The evidence shows Sony is struggling to compete with the low cost Koreans in

many of its electronics product categories.

6. What are the advantages and disadvantages of the Apple approach to launching a new product at Apple users first and then the larger Microsoft Windows users second?

The advantages of launching iTunes to the smaller but loyal Apple users segment is that they may

be more likely to gain acceptance among loyal devoted users. It may be regarded as a less risky

approach. However, by doing this Apple runs the risk of competitors seeing what is happening and

responding quickly by offering a similar product to the much larger Microsoft Windows users. The

difference in the size of the market is significant here: 90% Windows users versus 10% Apple

users.

7. Discuss whether Apple’s demands for secrecy from its suppliers may have gone too far.

This builds on Question 4. This darker side of Apple Inc. often goes unnoticed. Some students

seem so brand loyal that they tune out negative publicity. This darker side is worth exploring. It is

briefly mentioned in the case but there are other ‘stories’ including a desire to keep from the public

the true profit margins involved with the products. 500% + margins may start to erode public

goodwill if they knew how much profits were involved.

Case study notesThis case study explores a very unique organisation: W.L. Gore Associates. It explores the role of

organisational management and culture within a very innovative firm, which is responsible for some very

well-known products such as the famous Gore-Tex fabric, and yet few people know much about this

remarkable organisation. It is operated in a way similar to that of a cooperative such as The John Lewis

Partnership in the UK, where the employees are also owners. In addition, the organisation seeks to minimise

management with the emphasis on action and creativity.

Case study questions1. Explain what happened to the Gore-Tex brand after the patent expired.

What activity can firms use to try to maintain any advantage developed during the patent protection phase?

Competitor products emerged (generic versions if you like).

To compete, it was necessary to develop the brand. This is something that has not happened.

What else could it do?

2. List some of the wide range of products that the Gore-Tex fabric has been applied?

All sorts of clothing, shoes, coats, etc. Also, windsurf sales and kite surf sales.

What else could it be applied to?

3. It seems that Gore Associates is heavily orientated towards technology. What are some of the dangers of being too heavily focused on technology?

Myopic views such as not listening to customer views, too focused on technology.

Missing opportunities that may exist, which involve minor changes.

Also, marketing mix considerations need to be considered: price, distribution, promotion, etc.

4. Cooperatives and share-ownership schemes provide many attractions and benefits, but there are also limitations; discuss these.

Can lead to cumbersome slow decision-making.

Can lead to feathering one’s own nest rather than on meeting customer needs.

Difficult and unpopular decisions are avoided, which may lead to more serious problems.

5. What has been the Gore strategy to achieving success in its markets? How is this strategy now being challenged?

This has been based on developing technology for niche markets and becoming the dominant

supplier, often the only supplier of that technology to an industry. This usually leads to growth

through further applications of the technology to other industries and other markets. It is a well-

trodden path of a technology-push strategy. The strategy is now being challenged by competitors

who are entering the markets and offering competing products often inferior but competitively

priced. Gore will need to decide whether to try to compete on the price or to develop a brand for

which consumers are willing to pay a premium.

6. Using CIM (Figure 1.9) illustrate the innovation process within W.L.Gore.CIM has four processes around the outside and the entrepreneur in the middle.

We can try to use this to identify key activities within the innovation process:

Natural sciences cycleMany innovations are applications of existing technology; in such cases, this part of the framework

may not be used. In the Gore-Tex case, the new science is the creation of PTFE, but this was back

in the 1960s.

Integrated engineering cycleAs with so many innovations, this is where most of the technical effort takes place. Gore has spent

the past 50 years applying PTFE to many different applications and they keep finding new uses for

the technology. The stretching of PTFE to create lots of tiny holes in it led to the breathable

membrane – maybe other firms would have seen this as a fault and thrown the technology away. It

is the curiosity in the R&D scientists which often leads to new product ideas.

Differentiated services cycleDuring this phase, the technology is adapted to meet specific needs of customers. In this case,

Gore simply provides the fabric in square metres to different manufacturers to incorporate into their

products. There is little adaptation of the technology. What is important is the negotiations on

licencing and using the Gore-Tex brand. Clearly, Nike, Berghaus and the others would want to use

the patented membrane, but once the twenty years of the patent expires they no longer have to

buy from Gore and indeed some firms do not. It is interesting that some big brands like Berghaus

have their own breathable membrane, which they use in some of their products and they also

continue to use Gore-Tex in other products. Clearly, buying the licence is a crucial part of the

business model for all concerned.

Social sciences cycleAs Gore is selling business to business, this part of the innovation cycle is limited for Gore, but

there would have to be educational effort to explain the product to the end customer. Gore would

probably work with its partners, Nike, Berghaus etc., to develop such literature and merchandise.

EntrepreneurSometimes this can be a single individual; in this case, it was the firm W.L. Gore. There may have been a

project team involved and there may have been an individual project champion.

Case study notesThis case study explores the world of publishing and examines how a new product in this industry reaches

the customer. While many publishers spend enormous sums of money promoting their bestsellers

(Bloomsbury and Harry Potter is an obvious example), sometimes little money, if any, is spent on investing

in the new publishing products and talents of tomorrow, that is, new authors. In effect, some publishers are

simply printing books without the necessary promotion. This case study illustrates that in this relatively

straightforward new product there are many factors, some very surprising, that influence the success or not

of a new book. The roles of the publisher, the agent, the retailer, the buyer and the critic all influence success

in this industry. While all publishers would like to have the next Harry Potter, this case study illustrates that

this is unlikely to happen if they do not invest in new product development today.

What is of concern is that, increasingly, publishers are selecting fewer books to promote, and without

promotion a book is only being printed. Promotion is an integral part of publishing. Indeed, most dictionaries

define publishing as ‘to make widely known’. Printing a book and leaving it piled high in a warehouse is not

making it widely known.

The future of publishing depends on new authors. To be innovative, publishers need to nurture and find new

talent. This is effectively the research and development of publishing. Without this activity, publishers will

soon find they have no new products to sell. Supporting a bestselling author is fine and necessary, but so is

uncovering tomorrow’s J.K. Rowling. The case highlights that the market is increasingly dominated by the big

retailers, who, understandably, adopt a short-term market pull approach. This leads to fewer titles being

promoted and made available (despite increasing titles being printed) and stifles innovation. Consumers are

not always able to communicate their needs; frequently, consumers do not know whether they are going to

enjoy a story about a child and his wizard-like powers until they have read it.

Case study questions1. Explain why you think the Harry Potter series of books have been so

successful.At one level, this is simply getting students to contribute. At another level, it is asking them to think

about how books appeal and what makes some more successful than others. It should also get

them to think about what makes a book successful. The content is part of it but there are others

things to consider. This may surprise some.

Clearly, the books appeal beyond their target market of children.

2. Explain how a new book has three aspects of a product (concept, package and process).

This refers to the need to view a product in slightly wider terms. The concept refers to the

manuscript and the ideas of the author. The package refers to the cover and the merchandising of

the book in store/supporting websites on the Internet. The process refers to the development and

production process involving author, agent, publisher, retailer, buyer, etc.

3. How can publishers exploit writers?This is an allegation that many writers and authors’ groups make. They believe that publishers are

willing to support the bestsellers but not new authors. They argue that publishers do not invest in

new talent and are very conservative. They also believe that new authors are treated very poorly

and receive very little help or support – until of course they are successful when resources are

thrown at them.

5. Using the CIM (Figure 1.9) identify the key actors and processes in the publishing industry.

Natural sciences cycleIn this industry, there is no new science. Even e-books are applications of known technology to

create a simple hand-held screen for viewing text.

Integrated engineering cycleAs with so many innovations, this is where most of the technical effort takes place. In the

publishing industry, there has been little change in book production for many years. Word

processing and desktop publishing have helped lower costs. And this is the same for authors who

can now write and make changes simply and easily.

Differentiated services cycleIn-store merchandising is part of the promotion of a book and, as with advertising, there are many

options available. Developing the film rights for a book involves work by the agent who will need to

contact film studios. Clearly, film studios also approach agents of authors for film rights to

successful novels

Social sciences cycleIn publishing, the main activity is in distribution and promotion. Printing books is a small part of

publishing; the more difficult part is marketing and promotion. The case illustrates some innovative

techniques used by some publishers.

EntrepreneurClearly, the development of a book rests largely with the author. There are, however, other key

individuals involved. The agent working on behalf of the author can be extremely influential as was

seen in this case with J.K. Rowling. The publisher can play an influential role, too.

6. What influence have supermarkets had on book publishing and retailing?Supermarkets rely on high-volume sales with relatively low margins. They have moved into the

book market by relying on selling high volumes of a few book titles (bestsellers only). This is very

different from the traditional bookshop, which has to carry a large stock. Hence, there has been an

increase in sales of bestsellers and a decrease in the number of bookshops.

7. How can small independent publishers compete with the large internationals?By being different, they can offer an improved service to authors and/or publish works that others

refused. They need to be creative and identify small segments that they can target. It is possible to

make comparisons between football teams investing in youth teams and so on to try to improve

and move up the league tables.

8. What has been the rationale of publishing in hardback one year prior to paperback?

Some critics argue that to be taken seriously a book needs to be published in hardback. This may

sound slightly snobbish, but in some sections this view is taken seriously and it is certainly taken

seriously by authors, all of whom it seems want to be seen in hardback. Few consumers may be

aware of this but as a way of illustration almost all books being considered for the prestigious

Booker Prize are published in hardback first. The other key reason was profits. Bestselling books

are often published in hardback a few months before the paperback so that they can generate

more profits – as the margins are bigger on hardbacks.

9. Explain the modern publishing dilemma.The future of publishing depends on new authors. To be innovative, publishers need to nurture and find new

talent. This is effectively the research and development (R&D) of publishing. Publishers are reluctant to

publish books that no one wants, but consumers do not always know whether they are going to enjoy a story

until they have read it.

Case study notesIt is the unique structure of the industry and the patent system that is at the crux of the problem. Europe, the

United States and Japan account for virtually all the profits of the pharmaceutical companies. In most other

markets, profits are driven down by the power and price sensitivity of customers, but in pharmaceuticals,

neither the patient who consumes the drugs nor the doctor who prescribes them is price sensitive. Customers

for medicines are not price sensitive because they do not pay for them. In Europe, it is the taxpayer who

foots the bill.

Competition is another key force that drives down prices in most industries. In electronics – an industry even

more innovative than pharmaceuticals – excess profits from a new product soon disappear as competitors

bring out copies. However, in the pharmaceutical business, it is the patent system that ensures high profits

continue for an average of 10 years.

The industry’s justification for its high prices and patent monopolies is that it encourages innovation, but to

what extent is this true? In most other industries, it is intense competition and a fight to survive and win

market share that drives forward innovation. Without new and better products, companies such as Hewlett

Packard and Canon know they cannot maintain growth and market share. As we have seen in Chapters 1, 2

and 3, innovation is dependent on a collection of factors and the patent system alone cannot stimulate

innovation. It is necessary but not sufficient.

Case study questions1. Explain how the pricing of drugs contributes to the acquisition of supra-

normal profits in the pharmaceutical industry.Profits resulting in a mean return of 35 per cent on investment are impressive indeed, and some

extremely well-run companies in other industries have never been able to achieve this sort of

return. It is suggested this is because of a lack of competition caused by the use of patents and the

monopoly effect this creates and because of the way most drugs are purchased, that is via

government departments of health; in other words, there is a lack of price sensitivity.

2. It is because drugs are absolutely essential to life that the pharmaceutical industry is able to justify large profits. Discuss the merits of this argument. Consider also that bread and milk companies do not make huge profits.

The pharmaceutical industry is an extremely powerful industry and is able to influence politicians

around the world. Almost every state would want a thriving pharmaceutical industry (it is a growing

modern industry). Hence, this industry is able to influence decision-makers. Indeed, it has done so in

the case of patenting life forms and gene technology and on the issue of patent extensions. The

key point here is the lack of competition caused by the patent system. In other industries, firms are

able to eventually get round patents or use a slightly different technique. In the pharmaceutical

industry, a chemical formula is very objective with no grey areas.

3. Explain why drugs are not price-sensitive.Partly due to patents and partly due to the way they are purchased by Government Health

Departments. These have set budgets for certain treatments; this information is known to the

pharmaceutical industry and it influences the price set.

4. Explain why the patent system may not be working as it was originally intended.

This is because it prevents competition. In many other industries, while patents provide protection

to firms for a limited period, eventually firms are able to develop alternative systems (i.e. get

around the patent). In the pharmaceutical industry, due to the nature of the science and the way

the patents are written, alternative competitive products do not emerge.

5. Use CIM (Figure 1.9) to illustrate the innovation process in this case.Natural sciences cycleMany innovations are applications of existing technology, in such cases this part of the framework

may not be used. In the pharmaceutical industry there clearly are examples of new science. And

every year there are Nobel prizes awarded for significant knowledge contributions.

Integrated engineering cycleAs with so many innovations this is where most of the technical effort takes place. The pharma

industry spends much effort trying to find out the properties of drugs and their impact on humans.

This is the first stage of the product development process.

Differentiated services cycleDuring this phase, the technology is adapted to meet specific needs of customers. A good example

of where the pharma industry has been successful in this area is the drug Asprin. It has been

applied to many different areas and is claimed to offer benefits to many different conditions.

Manufacturers have thus targeted and promoted the drug at these opportunities.

Social sciences cycleSignificant efforts are made in this part to try to get customers, regulators, etc. to support the

concept. In the pharma industry regulators play a big role here. The industry is heavily regulated to

try to protect consumers.

EntrepreneurSometimes this is an individual, sometimes a project team.

In the pharma industry like many large industrialised industries. There will be project leaders who

are responsible for developing products/projects and their skills help push ideas through

development to completion.

6. Nobel Prize winning economist Joseph Stiglitz argues that prizes rather than patents could stimulate scientific competition. Explain how this might work.

The fundamental problem with the patent system is simple: it is based on restricting the use of

knowledge. Because there is no extra cost associated with an additional individual enjoying the

benefits of any piece of knowledge, restricting knowledge is inefficient. But the patent system not

only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes

medications unaffordable for people who don’t have insurance. There is an alternative way of

financing and incentivising research that, at least in some instances, could do a far better job than

patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed

as widely as possible: a medical prize fund that would reward those who discover cures and

vaccines. Since governments already pay the cost of much drug research directly or indirectly,

through prescription benefits, they could finance the prize fund, which would award the biggest

prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions

of people.

Case study notesThis case study explores the use of cork as a way of sealing wine in a bottle, which is referred to as a closure

in the wine industry. This 400-year-old industry with all its associated working practices has continued

largely unaffected by technology changes in almost all other industries – until, that is, the 1990s when

synthetic plastic closures were used by some wine producers instead of natural cork. With a requirement of

over 17 billion wine bottle closures a year, the cork industry could arguably afford a little competition, but it

seems the cork industry had not recognised the significant changes taking place in the wine industry to which

it acts as a supplier (Cole, 2006). The wine industry was experiencing a revolution where new producers

from Australia, California and Chile had new and different requirements. In a matter of a few years, the

industry had changed completely.

Finally, while the battle over closures rages, the so-called traditionalists argue that the wine industry is

merely exploiting profits in the short-term by producing large-volume homogenised wine and that this may

harm the wine industry in the long-term because consumers will grow bored with the uniformity of style.

Case study questions1. To what extent is the cork industry guilty of complacency and a lack of

innovation?To a large extent it is guilty. This is because of the following reasons: First, it did little to consider

potential threats from replacement products. Second, it did little, if any, R&D. Third, it also allowed

its quality of production to deteriorate and this helped to contribute to the call for a better product.

2. If consumers love corks why are the producers not providing what their customers want?

This is a key question and should make students realise that sometimes the consumers do not get

what they want and sometimes the industry decides what it wants. In this case, the big buyers –

supermarkets – have influenced the decision as they demand a better-quality closure. In addition,

the new worldwide wine brands are also demanding a better-quality product and these two factors

have changed the industry.

3. Is it wine quality or costs that have driven producers to synthetic?Initially, synthetic was more expensive but economies of scale have brought the cost down. But the

initial driver was quality and an inferior product from the cork industry.

4. How could technology forecasting have helped the cork industry?Technology forecasting is undertaken in industries that operate at the forefront of technology.

However, the cork industry should have been able to recognise that a potential threat might be

forthcoming from the synthetic cork producers. Also, competitor analysis might have been able to

provide an early warning signal of a competitor threat.

5. What level of R&D investment would be required to help the industry diversify and develop new opportunities for its materials?

This is a very difficult question to answer, but students should start considering what other similar

industries spend. This may provide an indication on level of expenditure. Clearly, at present, very

little investment is made in R&D, but that is part of the problem. A starting point would generally be

agriculture industries. Also, the trade bodies of these industries often invest on behalf of the

industry. For example, the UK cereal and grain industry spends money on R&D on behalf of its

members who are grain and cereal farmers.

6. What portfolio of R&D projects would you establish for the cork industry?Here, students need to think about how R&D can help a business (see Chapter 8). R&D should help the existing businesses compete, develop new businesses and finally provide access to new

technologies of the future. Diversification would be one possibility. The questions that arise are:

Where else could cork be applied? What are the properties of cork that could be exploited by other

products/markets? Another area could be improving the quality of the existing products. Finally, the

analysis includes what opportunities exist for the product within other products and what strategic

alliances can be developed.

Some lobby groups have been arguing that the synthetics have been causing the destruction of the

cork forests. But the issue is slightly more complicated as the forests that were planted for harvest

were not natural in the first place. Secondly, one may argue that the forests could remain – it does

not necessarily mean that they will disappear. Also, cork could be used for other applications.

7. What role have the wine buyers (end-users and others in the supply chain) played in contributing to the fall in demand for cork as a closure?

It is the wine buyers – supermarkets – that have played a crucial role in the demise of corks.

Supermarkets did not want customers bringing back faulty bottles of wine. Their margins were so

small that they could not profit from large numbers of returns. Professional buyers/tasters also

preferred screw caps because if you are opening a large number of bottles a day it is simply easier

to open a screw cap.

8. Use CIM (Figure 1.9) to illustrate the innovation process in this case.Natural sciences cycleMany innovations are applications of existing technology, in such cases this part of the framework

may not be used. In the Gore-Tex case, the new science is the creation of PTFE but this was back

in the 1960s.

Integrated engineering cycleAs with so many innovations this is where most of the technical effort takes place. Gore has spent

the past 50 years applying PTFE to many different applications and they keep finding new uses for

the technology. The stretching of PTFE to create lots of tiny holes in it led to the breathable

membrane- maybe other firms would have seen this as a fault and thrown the technology away. It

is the curiosity in the R&D scientists which often leads to new product ideas.

Differentiated services cycleDuring this phase, the technology is adapted to meet specific needs of customers. In this case

Gore simply provides the fabric in square meters to different manufacturers to incorporate into their

products. There is little adaptation of the technology. What is important are the negotiations on

licencing and using the Gore-Tex brand. Clearly, Nike, Berghaus and the others would want to use

the patented membrane, but once the twenty years of the patent expires they no longer have to

buy from Gore and indeed some firms do not. It is interesting that some big brands like Berghaus

have their own breathable membrane which they use in some of their products and they also

continue to use Gore-Tex in other products. Clearly, buying the licence is a crucial part of the

business model for all concerned.

Social sciences cycleAs Gore is selling business to business this part of the innovation cycle is limited for Gore but there

would have to be educational effort to explain the product to the end customer. Gore would

probably work with its partners, Nike, Berghaus, etc., to develop such literature and merchandise.

EntrepreneurSometimes this can be a single individual; in this case it was the firm W L Gore. There may have

been a project team involved and there may have been an individual project champion.

9. In terms of closures, what are the disadvantages that the cork industry needs to address and what are the advantages that it could promote?

This is the challenge for the industry. Consumers clearly still enjoy cork and the theatre of using

the corkscrew, the pop, etc. However, the synthetic still provides this. Some wines seem to survive

longer with cork as a closure, so this is something that the industry can develop. It also needs to

improve the production quality. This is largely a marketing challenge, but it is one that calls for

creativity and innovation.

10.Will the cork industry have to concede defeat to the Zork?At first glimpse, it would seem the Zork offers all the benefits of the cork and the screw cap. It

provides the theatre and can be resealed. This would seem to be a major challenge, but it is

expensive.

Case study notesThis case study explores the development of high definition video and the format war between Sony’s Blu-

ray and Toshiba’s HD-DVD. A format war describes competition between mutually incompatible proprietary

formats that compete for the same market, typically for data storage devices and recording formats for

electronic media. A useful historical example of one of the first format wars was between railway width

gauges on railway lines in the UK during the industrial revolution of the early 1800s. Isambard Kingdom

Brunel developed a 2.1 m width gauge for his Great Western Railway because it offered greater stability and

capacity at high speed. While George Stephenson developed a 1.44 m width gauge for the first main-line

railway, the Liverpool to Manchester Railway; the de facto standard for the colliery railways where

Stephenson had worked. Needless to say the narrower 1.44 m gauge won simply because more of this track

had been laid, but trains today could be travelling much faster if the wider gauge had been adopted.

Case study questions1. What does this case tell us about whether or not it is the best technology

and or being first in the market that determines the winner of these product format battles?

Clearly, having the best technology does not guarantee success, but having poor technology can

guarantee failure, so the technology has to be good. But there are many other factors that need to

be considered such as distribution and supply. As well as licencing and getting other

manufacturers on board to produce your system.

2. Illustrate some other business sectors where different formats coexist and some where a single format is preferred.

Computing operating systems: Windows/Apple/Linux;

Mobile phones?

MP3 players – different file formats

3. What were the relative advantages and disadvantages of the Blu-ray format (versus HD-DVD)?

Table 7.5: 'DVD performance detailsCapacity

Blu-ray HD-DVDROM single layer:

ROM dual layer:

RW single layer:

RW dual layer:

Highest test:

Theoretical limit:

23.3/25GB

46.6/50GB

23.3/25/27GB

46.6/50/54GB

100GB

200GB

Single layer:

Dual layer:

-

-

Highest test:

Theoretical limit:

15GB

30GB

-

-

45GB

60GB

Table 7.6: Studios supporting HD-DVD and Blu-rayStudios (movie and game) listed as supporting membersBlu-ray HD-DVD20th Century Fox

Buena Vista Home Entertainment

Electronic Arts

MGM Studios

Paramount Pictures

Sony Pictures Entertainment

The Walt Disney Company

Vivendi Universal Games

Warner Bros.

Buena Vista Home Entertainment

New Line Cinema

Paramount Pictures

The Walt Disney Company

Universal Studios

Warner Bros.

4. Why was the PlayStation the first Bluray player and subsequently when Blu-ray players were launched, why did the PlayStation remain cheaper? Consider possible reasons for this.

The first Blu-ray player launched by Sony (the primary developer of the Blu-ray format) was

actually the PlayStation 3, which featured the ability to play Blu-ray disks. This gave Sony

something of an upper hand for some time, because its PlayStation 3 games console has a built-in

Blu-ray player. Sony had therefore sold more than 10 m Blu-ray units while only about 1 m HD-

DVD players have been sold, mostly in Japan.

The PlayStation 3 was originally launched at a price of around £500, the first ‘pure’ Blu-ray player

was launched later and at a price of around £800. Obviously, in comparison to the PlayStation this

player lacked a number of features, particularly the ability to play games. Interestingly, one of the

earliest machines to play HD-DVD was also a games console, the Xbox 360, which was

Microsoft’s primary competitor against the PlayStation (and priced around £200 cheaper).

Interestingly, both of these consoles were notably more expensive than Nintendo’s Wii, which was

attracting much attention around this time. Despite the high technological performance of both the

PlayStation and Xbox, Nintendo has been able to gain a majority share in the market (and this is

also despite the PlayStation’s ability to play Blu-ray disks).

5. What additional factors helped Blu-ray win the battle? What role did licencing and networks play in the relative success of each format?

It is also worth noting that in the years prior to the launch of these formats, and immediately

afterwards, Sony acquired a number of film studios. Sony was also rumoured to be paying some

studios large sums to take on and stick with its format.

A much more difficult factor to unravel is the list of networks (formal and informal) that each group

of firms developed. In some cases it was clear with firms listing associate members of each board.

Once again Blu-ray had a longer list of members and interesting parties. It seemed Sony had learnt

from its mistakes with VCR and it was not going to make the same mistake again (see Table 7.7).

Table 7.7: Interlinkages and networks between firms

Companies listed as Members of the Board or Managing MembersBlu-ray HD-DVDApple Computer Corp.

Dell, Inc.

Hewlett Packard Company

Hitachi, Ltd.

LG Electronics Inc.

Mitsubishi Electric Corporation

Panasonic (Matsushita Electric)

Pioneer Corporation

Royal Philips Electronics

Samsung Electronics Co., Ltd.

Sharp Corporation

Sony Corporation

TDK Corporation

Thomson

Twentieth Century Fox

Walt Disney Pictures and Television

Memory-Tech Corporation

NEC Corporation

Sanyo Electric Co.

6. What related industries contributed to the format war and how did they influence its outcome?

Few may be willing to admit it, but sex sells, and there is certainly a case that more convenient

nudity (and the pornographers preferred choice between HD-DVD and Blu-ray) will play some role

in determining which of the two formats are, ultimately, successful.

7. With the increasing popularity and use of downloading films what influence will the DVD format winner play in this related battle.

Music downloading destroyed the CD industry; the same may happen in DVD. Why would people

go out to the shops to buy disks when they can buy high-definition movies straight away online?

What does this suggestion say for the future of Blu-ray?

Interestingly, despite Apple giving its backing to the Blu-ray format; it has yet to produce a single

computer with a Blu-ray drive. Instead, Apple seems to be concentrating on movies delivered

across the internet, through iTunes and the new Apple TV, rather than on physical discs. So

although Blu-ray has won this battle, it may not have won the war. As home internet speeds

become faster and consumers get used to video on-demand services, the movie market could

undergo a similar change to the music sector, with films downloaded rather than physically bought.

Enter a new format war of online video . . .

8. What are the implications for innovation strategy, R&D expenditure and marketing for firms engaged in or likely to be engaged in a format war?

That there has to be joined up thinking between all three. Marketing has a role to play early on

especially in terms of Public Relations etc. Clearly, technology alone will not ensure victory,

relationships with a wide variety of partners is required.

9. List the key factors that seem to determine the eventual winner in industry format wars. Divide these into primary and secondary factors.

This can be constructed on the board using two columns.

The list can be long and may include:

Technology superiority;

Industry support within;

Industry support outside;

Support from the supply chain;

Effective licensing strategy;

Effective marketing strategy; etc.

Case study notesThere are many stories that have emerged over the years concerning Pfizer’s product Viagra. Some of these

are true, but many are simply fictional stories developed to try and reinforce a particular argument. One of

the most common stories is that Viagra was the result of luck. This case study explores the long 13-year

journey from laboratory to the marketplace and explores some of the key challenges faced by Pfizer: most

notably, project evaluation considerations, when the available market research evidence suggests a small

market for the product; and, product launch considerations, when impotence is such an unpopular topic that

it is almost impossible for advertisers to refer to it without alienating the very consumer base they are trying

to reach.

Case study questions1. Was Viagra the result of serendipity or is this journalistic licence to help

sell a story, where the real story is a complex one of difficult decisions full of risks?

It is true that the general press has consistently presented Viagra as an innovation that was the

result of luck and an accident. This is a good illustration of the problem of the public perception of

science (discussed in Chapter 1). It is true there is an element of good fortune (as with all

research) and it originated from another research project, but fundamentally this research can be

traced back to novel prize winning science. This is not good luck and fortune; it is hard work and

dedication. Moreover, the case illustrates that at every turn the Pfizer team was faced with very

difficult decisions and it was very effective management that eventually delivered a successful

project; good management at the R&D level and at the marketing level.

2. Explain why it was so necessary to ensure marketing was involved in the early stages of this new product development project.

As the case illustrates, although there were technical challenges, one of the most difficult decisions

was whether to proceed with a new product development project for a product where there was no

established market. It was marketing’s input that helped convince the team that it may be possible

to educate the market and build a brand around a drug for impotence.

3. Explain how despite the enormous resources of Pfizer a lack of available information made the evaluation of the new product proposal so very difficult.

This refers to market data and market knowledge. Put simply, because up to the mid 1990s

impotence was considered a psychological condition and certainly not treatable with a drug, there

was no market data available and there was no market for impotence drugs. This complete

transformation of viewing the condition as treatable with a pill revolutionised not only this sector of

medicine but many others as well.

4. Explain how the Viagra case needs to be viewed as a successful example of excellent applied science but also an excellent example of good marketing.

The applied science part is worth highlighting as it illustrates how attention to detail can reveal

opportunities. In this case, it was the clinical trial scientist who noted and explored further the

strange side effects of the angina drug. This was not simply dismissed but explored further, leading

to a research project, etc. On the marketing side, it played an equally important role by not only

exploring the possibility of uncovering a market but also by educating it and developing a brand.

This is a highly sensitive area. In the US, sex is something that is not discussed openly and in

many ways the US is very conservative, especially by European standards. The idea that a

company could launch television ads or billboard ads openly discussing impotence was almost

unbelievable at that time. But the marketing team succeeded in a very difficult task by handling it

carefully and very sensitively.

5. How can Pfizer manage the threat posed to Viagra by new entrants to the market?

This will require students to draw on their marketing knowledge. Branding and advertising will help,

but as the competition is also improving its products, Viagra will also need to improve its quality

and performance or it will lose its market share. It seems the competitors have already improved

their products and in some tests achieved better results than Viagra. More R&D may help, but

price cutting may also help. In addition, the firm is considering loyalty schemes and other

promotional campaigns such as buy one get one free, and so on.

6. How has Pfizer helped create a market for Viagra and thereby contributed to disease mongering?

This is clearly a serious allegation. The evidence from Australia would seem to suggest that Pfizer is guilty,

but that is for others to decide. What this case reveals is the whole aspect of disease mongering and the scale

and size of this issue. On one hand, we have health supplements such as vitamin pills where the producers

claim benefits that the medical professional is doubtful of. And on the other hand, we have more serious

drugs with genuine side effects that once again are being promoted as delivering benefits and the producers

make wild claims that may or may not be true. There is a fine line between sales and education. On the other

hand, one may argue the pharmaceutical industry is simply applying the marketing concepts from FMCG

markets to drugs.

Case study notesCSI and genetic fingerprinting: A case studyThe US drama ‘CSI: Crime Scene Investigation’ (CSI) has been one of television’s greatest success stories

of all time. It is a huge hit all over the world. The show's popularity owes a great deal to the writers and

actors who bring the stories to life. But another intriguing element is the cutting-edge technology used by the

crime lab trying to solve crimes. Collecting and analysing DNA evidence tops the list of the lab's forensic

toolkit, and its ubiquity in shows like ‘CSI’ and the UK’s ‘Silent Witness’ and ‘Waking the Dead’ has

increased public awareness to the point that many jurors in real-world courtrooms expect to see DNA

evidence presented – whether a case calls for it or not. Indeed, such television programmes as CSI have come

in for fierce criticism from police chiefs and prosecutors who argue that they portray an inaccurate image of

how police solve crimes. There have, however, been some positive outcomes of the so-called CSI effect and

that is the bringing of science to a mass audience and encouraging interest in science amongst children.

The extraordinary growth in the business of DNA fingerprinting has been matched only by the mass appeal

of the CSI television shows. In just a few years the industry has grown into a 20 billion dollar technology

intensive colossus. But where and when did this all begin? This case study shows how a UK scientist – Alec

Jeffreys, driven by curiosity, uncovered a technique for DNA fingerprinting. First, we need to look at the

background to this development.

CSI and genetic fingerprintCase study questions1. What are the benefits of undirected research (curiosity-driven research)?2. Should firms undertake undirected or curiosity-driven research or should

all research be linked to products and businesses?3. Show how this case illustrates the power and influence of radical

innovation and incremental innovation.4. Given the contribution to society that DNA fingerprinting has made, why

is Alex Jeffreys not a household name?5. Explain why the adoption of technology in this case seems to have

happened very quickly.6. Discuss how this case illustrates benefits and limitations of the public

understanding of science.7. Discuss the impact of the CSI phenomenon 8. Explain the prosecutor’s fallacy and why it is a problem.

Case study notesThe case study has been updated to include developments in smart phones.

This case study provides an excellent example of why firms engage in technology transfer. It also provides

practical evidence to illustrate the benefits of technology transfer.

In April 2001, Ericsson, the Swedish telecommunications equipment group, and Sony of Japan established a

joint venture in mobile phones. The venture, based in London, brought together the loss-making handset

businesses of the two companies. The news was generally accepted as good for both companies. It would

combine Sony’s consumer products expertise with Ericsson’s extensive knowledge of mobile phone

networks. Ericsson is the world’s leading maker of wireless networks. It would give Ericsson access to

Sony’s multimedia technology, branding expertise and knowledge acquired from Japan’s early start in third

generation mobile phone technology. Sony would gain access to Ericsson’s telecommunications technology

and its distribution. The two companies hoped to create a market leader to threaten the dominance of Nokia

of Finland within five years. In 2000, the two companies together shipped 50 million or $7.2 billion worth of

mobile phones, giving them a 12 per cent market share and third position after Nokia of Finland and

Motorola of the United States.

Case study questions1. Ericsson is the world leader in mobile phone networks and has many

years of experience of handsets. Explain how Sony’s technology portfolio has helped the joint venture.

The move into a new business area such as mobile phones is welcomed by investors who argue

that Sony has been too slow to move away from its traditional businesses such as music stereos,

televisions, VCRs, DVDs and camera recorders. The mobile phone market is viewed, possibly

incorrectly, as a new vibrant highly profitable market.

Moreover, the problem for Sony is that competition is fierce in many of its existing markets; indeed

prices have been falling, leading to a squeeze on margins for Sony. Certain products, such as low-

end stereos made by Aiwa, Sony's 61 per cent-owned subsidiary, are being increasingly

dominated by low-cost Chinese and South Korean manufacturers. In addition, the games division,

which accounted for 44 per cent of operating profits in 1998, has been mired in losses. Increasing

competition from Nintendo’s GameCube and Microsoft’s Xbox will put further pressure on Sony’s

PlayStation2.

Sony’s technology portfolio will be useful in the mobile phone handset product.

Sony’s technology portfolio includes the following:

HDTVs, Flat-panel Plasma and LCD WEGA® TVs, FD Trinitron® WEGA® CRT TVs, CRT rear

projection TVs, and Grand WEGA® LCD rear projection TVs;

Hi-Fi components (AV receivers), shelf systems and speakers;

Walkman® personal stereos, MiniDisc Walkman® players/recorders and personal digital music

players;

Cybershot® and Mavica® digital still cameras;

Memory Stick® flash media;

VAIO® desktop and notebook computers;

Video-conferencing products;

Visual-imaging products;

Professional digital photography systems;

E-communication and digital signage;

Batteries;

Semiconductor devices.

Students need to discuss how the technologies may be helpful.

2. Use the CIM (Figure 1.9) to illustrate the innovation process in this case.Natural sciences cycleMany innovations are applications of existing technology, in such cases this part of the framework

may not be used. In this case, the technology can be traced back to ‘Business’ radio

communication devices such as those as used by Taxi firms and Emergency Services. These

allow one party to talk at a time. Few people realise that a mobile phone is much more like a radio

than a conventional wired telephone. Indeed, mobile phone technology is a development of radio

technology rather than wired telecommunications technology. That is it picks up signals from

transmitters. It seems that the technology existed for many years and was extremely slow to

develop.

Integrated engineering cycleAs with so many innovations this is where most of the technical effort takes place. If one considers,

that ‘one-way business radio’ has been around for 50 years. It seems funding to develop the

technology was not forthcoming because people didn’t perceive how popular cellular radio would

become nor how cheap the service would eventually be.

Unquestionably since the early 1990s, when mobile phones began to emerge the technology

development has been rapid and diverse. Initially the emphasis was on reducing the size of the

brick like products. This happened within three/four years. Simultaneously, network coverage

increased and improved. Then battery life improved considerably. Next it was screen

improvements then keyboard and cameras etc.

Differentiated services cycleDuring this phase, the technology is adapted to meet specific needs of customers. This is where

there have been huge developments. The range of services developed for the mobile phone is

increasing almost daily. It may soon be the device we use to pay for other products and services.

Social sciences cycleThis cycle overlaps with the one above. In this case, there was a significant amount of educating

and informing to be undertaken. But, also the development of networks had to be undertaken in

cooperation with local governments and national governments so that mobile phone masts could

be built all over the country.

EntrepreneurSometimes this can be a single individual. In this case it was the firm; Motorola is often credited

with being one of the first firms to develop the mobile phone but there were others as well

including: Siemens, Nokia, Ericsson. The role of national governments cannot be overlooked here

because they also encouraged the development and building of national infrastructures of

networks.

3. Explain why Sony and Ericsson were finding it increasingly difficult to sustain R&D over all of their businesses.

The increasing technological content of mobile phones, as illustrated above, has forced many firms

in the industry to search for technology partners who can provide the additional technology

required such as multimedia, digital camera, games, and so on. For these firms, to try to develop

expertise in these areas would be too expensive and too slow because of the rapid technological

changes that are occurring in the mobile phone market. Indeed, the mobile phone market is an

excellent example of the increasing complexity of technology and the increasing range of

technology found within products. This has led to a shortening of product life cycles within the

mobile phone market. Many users now change their handset after 18 months to 2 years.

Companies are also finding it increasingly difficult to sustain R&D capability over all areas of their

business as the complexity of these areas increases. Internal R&D is increasingly focused on core

competencies, while R&D in all other business activities is progressively covered by collaborations,

partnerships and strategic alliances.

4. Explain why Ericsson is maintaining a large R&D division focusing on handsets when its joint venture with Sony is also conducting R&D and product development of handsets.

Notwithstanding the joint venture with Sony, Ericsson intends to retain a large research and

development division focusing on handsets, which is vital to ensure its network business stays in

touch with consumer demands.

This is an interesting strategic issue. One could argue that it suggests a lack of confidence in the

JV and that Ericsson intends to eventually go it alone. However, it is not unreasonable for a firm

that provides the infrastructure for a product to also need to be informed about the product that is

handsets themselves.

5. Discuss why the mobile phone handset market seems to be more like the fashion industry.

The rapid pace of technology change and the intensity of competition in the mobile phone handset

market have created a remarkably dynamic market. In addition, handset manufacturers are acutely

aware that once a person has bought a mobile phone handset they may be unwilling to buy

another, hence the industry has responded by ensuring there is a steady stream of updates and

new features which ensures the handset market behaves in a way similar to the fashion clothing

industry. Without this product obsolescence manufacturers would risk huge falls in revenue.

6. Many firms are outsourcing more and more of their activities and focusing on core activities. What are the advantages for Sony Ericsson in bringing manufacturing back under its control?

The main advantages are increased control of activities.

Sony Ericsson is planning to bring more of its mobile phone manufacturing plants under its own

control to smooth out supply-chain problems and help improve its market share. It is in talks to

raise its stake in Beijing Ericsson Putian Mobile Communication, a manufacturing facility outside

Beijing, and could consider other similar deals in the future. The company is keen to avoid a repeat

of 2002, when it failed to take full advantage of booming pre-Christmas demand for phones

because of component shortages, resulting in loss of market share. However, the decision to bring

more factories under direct control is a reversal of parent company Ericsson's earlier policy –

followed in 2001 just before setting up the joint venture – of outsourcing all its handset

manufacturing to companies such as ‘Flextronics’. About 30 per cent of Sony Ericsson phones are

produced in factories controlled by the company while 70 per cent of production is outsourced.

Sony-Ericsson is aiming for 50 per cent production in factories being controlled by the company.

7. What are the advantages and disadvantages of outsourcing?The disadvantages of outsourcing are as follows:

Main negative outcomes of outsourcing

Main references

1 Dependence on the

supplier

Alexander and Young (1996); Aubert et al. (1998)

2 Hidden costs Earl (1996); Alexander and Young (1996); Aubert et

al. (1998); Lacity and Hirschheim (1993);

Barthelemy (2001)

3 Loss of competencies Bettis et al. (1992); Martisons (1993); Quinn and

Hilmer (1994); Khosrowpour et al (1995); Alexander

and Young (1996); Aubert et al. (1998); Doig et al.

(2001)

4 Service provider’s lack of Earl (1996); Aubert et al. (1998); Kaplan (2002)

necessary capabilities

5 Social risk Lacity and Hirschheim (1993); Barthelemy and

Geyer (2000)

6 Inefficient management Wang and Regan (2003); Lynch (2002)

Adapted from Quélin and Duhamel (2003).

8. This is a fierce industry in which to try to compete. Should Sony Ericsson quit?

Many students may think that a firm with a successful product should stay in the game, but as

Nokia have decided some markets may not be financially profitable for the firm. Even with a good

product. Also, these firms may decide they could put their money somewhere else and get a better

return!

While the decision to quit is probably not realistic at this time it is nonetheless something students

could consider. And what would they do if it was their money?

9. What is the market share/profitability of the Apple iPhone in this market?The rapid ascent of Android, which now powers devices from the Verizon Droid to Samsung’s new

Galaxy S, shows the power of software. The momentum, particularly at the expensive end of the

market, is with iPhones and Android phones. The global market share of the Symbian platform

backed by Nokia fell in 2009 while the iPhone OS rose to 15 per cent from 11 per cent in 2009.

Android grew rapidly, supported by mobile operators without the iPhone, rising from 2 per cent to

10 per cent.

Finally, the network operators that subsidise and sell handsets – have a vested interest in diversity. The

iPhone has been a sales success for those operators who dealt with Apple, but Apple has been able to drive a

hard bargain with network operators on subsidies and other terms. For that reason, network operators have

been supporting Android to regain bargaining power with Apple.

Case study notesNestled alongside the Olympic Park in the heart of Munich’s industrial district, to the north of the city, sits

Munich Gases: a German industrial gas company with a long history of supplying gases and liquids to firms

across Europe. Its product range is dominated by liquid oxygen which it supplies to health care markets and

carbon dioxide which it supplies to the drinks and beverages industry. With a market capitalisation of €10

billion Munich Gases is one of the industry leaders. It also has a proud history of successful R&D which has

helped to maintain its dominant position over the past 80 years. This case study tells the story of how

Munich Gases uncovered a multi-billion dollar market opportunity for whitening teeth, and explored how

best to exploit it.

Case study questions1. Should the Munich Gases invest €10 million in this new product project?Students simply need to consider all the facts supporting investment and then all the unknowns.

Clearly, there is no right answer and much would depend on the current portfolio of products that

the company holds.

2. What other factors may yet decide the fate of this project?The wider economic issues may influence the decision to invest. Also, safety reports that

determine the product is unsafe to use. Consumer testing of the concept may suggest consumers

would not purchase.

3. Which market should Munich Gases select? The consumer product market or professional/business market?

This is the key decision. Both options are possible. One is less risky but the consumer market

carries the potential for greater rewards. The professional market may be easier to enter. Of

course it may be possible to enter both in the long-term.

4. Sketch out five different possible business models. Of these determine which is the most profitable and which is most likely to succeed?

Creativity is required here. The business model should contain:

i. A graphical representation (usually in the form of a flow chart);

ii. A list of activities, on the part of both the business owner and potential customers;

iii. A likely sequence for those activities (which may later be altered in the light of customer

behaviour);

iv. A set of indicators or metrics for measuring the linkage between the activities.

There is a key question that needs to be addressed:

How will this business make money?

To answer this question it is necessary to address a series of additional questions such as:

Who is the target customer?

What customer problem or challenge does the business solve?

What value does it deliver?

How does it reach, acquire and keep customers?

How does it define and differentiate its offering?

How does it generate revenue?

What is the cost structure?

What is the profit margin?

5. How will the powerful toothpaste brand owners react?If, a consumer market product is developed one of the big brands would surely want to be

associated with the product. If not they could fight the product with propaganda etc. Care is

required here, and it would be better to have one of the big FMCG brand management companies

on your side rather than try to fight them all.

6. Should Munich Gases secure an entry into the market with one of Europe’s leading multiples (e.g. Lidl, Tesco, Carefour, Aldi)?

This could be an alternative way to enter the market. The retailers will provide direct access to

consumers. The product will be on the shelf and should generate sales.

7. Should Munich Gases secure the endorsement of one of Europe’s leading toothpaste brands (e.g. Aquafresh; Signal; Macleans) before entering the market?

The answer is surely yes. A good business deal could be developed here that means all parties

win.

8. How can the firm reassure uneasy consumers about the safety of plasma in their mouths?

Probably through education and reassurance. It may be possible to get endorsement from a

professional group or even possibly a well-known male/female model.

Case study notesSince launching their business in 1999 ‘innocent’ has not only witnessed the rise of its own business but also

the rise of the smoothie market and the rise of competitors. While being the market leader, the recent

purchase of the number two smoothie brand, PJ Smoothies, by the multinational PepsiCo firm means that

‘innocent’ can expect fierce competition as it attempts to be the dominant smoothie brand in Europe. This

case study tells the story of how ‘innocent’ developed a business idea into a product and launched it into the

UK market with very limited funds. At that time, the smoothie market was in its infancy, although ‘innocent’

was not the first into the market and could not benefit from any early entrant advantages. Nonetheless, the

launch of the product coincided with the rapid growth of the market, especially in the form of own-label

smoothies from Sainsbury, Tesco and M&S.

Case study questions1. ‘innocent’ are very clear about the image it wishes to project to the

public. This is one based around being different, fun-loving and having a carefree approach to life. This hippie style image has helped the brand become acceptable to the young urban professionals at whom it is aimed. But beneath the surface of this image there is evidence of a very different business that could be characterised as ruthless, single-minded, profit driven and very business orientated. Where is the evidence of the latter?

There are clear benefits in trying to portray a devil-may-care approach to life, the so-called hippie style; this appeals to the target audience. However, the evidence available suggests something

different. The background of the three is one of privilege (one of the three founders attended

Winchester college). This may not be the rags to riches story they like to imply. Furthermore, while

the founders like to portray themselves as alternative and outrageous they all benefited from

conventional excellent university education at Cambridge University. This was followed by

successful careers in banking and management consultancy in the City of London. Finally, the

decision to take a few months unpaid leave from their employment while trying to establish the

business suggests a risk-averse style that differs considerably from the one they like to portray.

2. The success of the business is partly based on extremely good communications with retailers. How is this achieved?

‘innocent’ place emphasis on communication with retailers rather than consumers. It is their view

that it is retailers who buy their products and who will display and stock them. ‘innocent’ try to keep

retailers happy; they give lots of promotional materials to retailers and invite them all for

entertainment days.

You could discuss the role of suppliers and their relationship with retailers/consumers.

3. What type of financing did ‘innocent’ secure? Does it matter?Viewers of the BBC series Dragons Den will recognise this issue. For all start-up businesses

leveraging in finance to pay for manufacturing, distribution or promotion costs a lot of money. Very

often, entrepreneurs have to sell a significant stake of the business 20–60 per cent to get £100,000

of investment. This is usually because the business idea has yet to be fully tested and a large

injection of cash is a risk that may result in all that money being lost.

In the case of ‘innocent’, Maurice Pinto, a wealthy American businessman invested £2,50,000 and

became the fourth shareholder in the group, retaining a 20 per cent stake. The money provided

salaries for the three entrepreneurs, office space, cash to buy production capacity at bottling

plants, promotional material and labelling for the bottles.

4. Would you sell out to Coca-Cola for £400 million? As one of the three shareholders you could pocket £100 million. If not, why not?

Students will like discussing this. Getting their hands on a lot of money is usually too tempting. But

even bigger riches are available if you look at Bill Gates or Dyson. Despite receiving many offers,

both these entrepreneurs did not sell out during the growth stages of their businesses. Both are

now billionaires (50 and 1, respectively).

5. ‘innocent’ benefited from a key advantage: what was this, and explain how it helped in the product development process.

The entrepreneurs were all members of the target market. They were young, wealthy and worked

in a large city. The target market was 20/30 somethings who wanted to try something different,

something healthy. It was an expensive beverage at £2. A can of coke is 60p!

The product development process involved trying out and testing ideas, packaging, flavours,

pricing, etc. Sometimes, firms get the marketing of a product or service wrong. In this case, the

decision-makers were part of the target market, hence they were able to draw on their own

experience when making the decision regarding the bundling of the offer.

6. How is ‘innocent’ ‘virtual’ and how is this different from traditional food and drink manufacturers? What advantages and disadvantages does this provide?

‘innocent’ do not own any manufacturing or packaging resources. Hence, all production, bottling

and packaging of the beverage are undertaken by contract bottling plants. This is a weakness in

terms of level of control but offers advantages in terms of flexibility, capital investment, etc.

Other considerations:

delivery, reliability, quality, leakage of intellectual property from contractors to other manufacturers,

control of the brand and its value is less secure if there is too much reliance on others.

7. Use CIM (Figure 1.9) to illustrate the innovation process.Natural sciences cycleMany innovations are applications of existing technology; in such cases, this part of the framework

may not be used. In this case, there is no new science. This is such a case. Indeed, there is limited

technical innovation in this case.

Integrated engineering cycleAs with so many innovations, this is where most of the technical effort takes place. In this case,

there was little new technology. There was a certain amount of new manufacturing techniques

required because of the high fruit content and improving the shelf life without adding additional

chemicals. But mostly this case was about branding and launching a new product.

Differentiated services cycleDuring this phase, the technology is adapted to meet the specific needs of customers. In this case,

emphasis was placed on the creation of a brand image is crucial here, and especially so for

products in FMCG markets. For all new entrants into an existing market, the aim is to try to get

existing users to change to your brand of fruit smoothie and to try to attract new buyers who

currently purchase bottled water or Coca-Cola, for example. The brand image developed and

carefully nurtured by ‘innocent’ is one based on fun, and an almost hippie approach to life. This is

reflected in the packaging, promotion and logo used for the product.

Design has played a big role in the product’s success, from the logo and shape of the bottles to the

delivery vans. Careful consideration of design and packaging has contributed to the success of the

business. The brand was totally unknown, so ‘innocent’ had to rely on people being intrigued

enough to try the product. It is not a cheap drink, so it had to appeal to the consumer and it had to

stand out and look like something you would want to pick up. Finally, like all beverage producers,

‘innocent’ relied on the taste to be sufficiently good to ensure a repeat purchase.

Social sciences cycleThis cycle can often involve negotiations with regulators or governments.

‘Innocent’ has not spent large sums of money on television, press or radio promotion. Emphasis is

placed on packaging design and retailers who stock and shelf the product. Advertising copy tends

to be witty and straightforward, as does other communications material. The relationship with

retailers has been built up through regular communication, including a newsletter, which combines

product information and fun stories.

EntrepreneurSometimes this can be a single individual; in this case, it was the three friends – the owners of the

business. They have grown the business from small beginnings in London and created an

international brand. The firm owns little equipment such as manufacturing sites. Its business model

is similar to that of Coca-Cola, whereby it sells the licence to produce around the world.

In the early days of the business, raising money to finance the business development was crucial

and this was a key part of the business’ success.

Large sums of money are now required to position the brand in the minds of the consumer. This is

something brands like Coca-Cola have spent over 100 years doing.

Case study notesThis case study explores how Halford’s investigated a poor-performing product category, namely, motor oil,

and, largely through packaging design, developed a hugely successful business. The packaging-design

changes introduced were later copied by the brand leaders in the industry, namely, Castrol and Mobil.

Case study questions1. Discuss how Halfords used packaging as a strategic tool.The firm commissioned the international design group Pentagram with a brief to redevelop its

brand of motor oil. This would probably involve redesigning the container, relabelling it and

repositioning it in the market. Pentagram decided to look closely at the possibility of considerably

improving the dispensing of oil from the container into the engine. Further studies revealed that the

problem seemed to centre on the inability to accurately direct the flow of oil. In addition, the handle

for the container is in line with the spout, helping to direct flow of oil. The issue of labelling was

solved simply by offering three types of motor oil. A premium-grade oil for most 16-valve petrol

engines, a diesel-grade for diesel engines and one for standard-grade. The three different oils

were offered in three different colours, making them different and distinguishable on the shelf. The

final container also incorporated a viewer for oil level.

2. Should Halfords have explored the possibility of developing a new brand of motor oil?

Though this was a possibility, the cost would have been much higher and there is limited evidence

of success of retailers developing brands other than their own store brands. Moreover, the Halfords

brand was acceptable and could be used to develop a successful product.

3. Use the attributes in Table 13.2 to explore whether more radical packaging could be developed for this product category.1. Dispensing handle and directing pouring;

2. Storage time limit device on storage;

3. Stability discolouring warning if product is unstable;

4. Handling ease of carrying;

5. Opening/resealing screwcap;

6. After use to be used as a useful storage container; and

7. Disposal improve ease of disposal, e.g. ability to screw into a ball

4. Arguably this was a product whose sales were declining and could have been dumped. Can you think of any other ‘mature’ products that could benefit from an investment in packaging design?

Virtually all mature products can benefit from an investment in packaging and branding investment.

Indeed, there are some famous FMC food products that have been reinvigorated through new

packaging such as Branston Pickle, now offered in a single squeeze sachet; Heinz Tomato

Ketchup, now offered in a plastic squeeze bottle; and many more.

5. Use CIM (Figure 1.9) to illustrate the innovation process.Natural sciences cycleMany innovations are applications of existing technology; in such cases, this part of the framework

may not be used. In this case, there is no new science. This is such a case. Indeed, there is limited

technical innovation in this case. There is new design only.

Integrated engineering cycle

As with so many innovations, this is where most of the technical effort takes place. In this case,

there was little new technology. There is new design only.

Differentiated services cycleDuring this phase, the technology is adapted to meet specific needs of customers. In this case, it is

the design of a new package that forms the centre part of the innovation process. This part of the

innovation process is the most significant in this case.

The external design agency: Pentagram set up a series of consumer focus groups to try to explore

the issues that influence purchase and to explore how consumers use the oil. Pentagram decided

to look closely at the possibility of improving considerably the dispensing of oil from the container

into the engine. The final container also incorporated a viewer for oil level. All these packaging

attributes propelled the Halfords brand up the sales league, and many of the leading manufacturer

brands have been forced to incorporate them into their own brand.

Social sciences cycleThis cycle can often involve negotiations with regulators or governments.

This case clearly illustrates the value of packaging and labelling in product development. The motor

oil itself remained unchanged, but the packaging and labelling of the oil were considerably altered,

enabling Halfords to reposition its oil as a slightly more upmarket store-brand oil.

EntrepreneurSometimes this can be a single individual; in this case, it was a combination of the Halfords product

development team and the external design agency.

Case study notesThe case study has been updated.

This case study explores the remarkable success of eBay and illustrates how continuous development of its

new services has enabled it to remain the world’s leading auction site and deliver extraordinary financial

results for investors.

Ms Whitman, CEO has transformed eBay from a purely domestic group that held auctions in 300 categories

into a global enterprise, operating in 18 countries and offering 16,000 categories. She has expanded the range

of goods sold from mainly collectibles – Beanie Babies dolls accounted for 8 per cent of items sold at the

time of the IPO – to include used cars, motorcycles, computers, time-share holiday homes and even golf tee-

off times. A Gulfstream corporate jet has been sold on eBay for $4.9 million. However, eBay risks alienating

its customers and the whole eBay community by introducing fixed-price sales. IBM is now its biggest

customer. This move away from auction and onto mainstream sales goes against the principles on which

eBay was established.

The purchase of Skype raises many opportunities. Will eBay block potential in the adult market – an area

where a great many developers see potential? Especially when history teaches us that from the VCR industry

to the Internet, the adult industry has been at the forefront of developing technologies and markets.

Case study questions1. eBay is one of the only major Internet-based firms to consistently make a

profit from its inception. What is eBay’s business model? Why has it been so successful?

eBay’s business model is in some ways a traditional intermediary. It takes a small cut of the money

from every trade from the seller and the buyer (now with Paypal). The amounts of money are very

small and it is simply because the business is online that this enables eBay to make the

transaction cost so low. This in turn means that while it may only make a few pennies from every

trade, millions of pennies soon add up to millions of dollars.

2. Other major websites, like Amazon.com and Yahoo, have entered the auction marketplace with far less success than eBay. How has eBay been able to maintain its dominant position?

It is true that eBay was not first in the market. It was one of the first and it bought up other online

auction houses around the world. There are many reasons that lie behind eBay’s success, but the

community of users cannot be overstated. It has worked hard to try to maintain the spirit of the

traditional community of traders. It has used this to develop new services and it is the community of

traders that has driven the new service development. eBay does not need to spend large sums of

money trying to understand what the customers want because the customers constantly request

and suggest changes.

The purchase of Paypal was a significant investment and successful move. eBay’s own online

payment system was not liked. The purchase of Skype has yet to deliver. However, many

opportunities exist.

3. Why did eBay ban the leaving of negative feedback on buyers? What has been the impact of this change?

eBay felt it had to act because buyers (the people parting with their cash) were receiving negative

comments partly in retaliation from sellers who did not like any form of criticism. Even when the

criticism may have been justified such as slow delivery or the item was not as described.

Ultimately, buyers have power and eBay has returned some of the power back to them. If buyers

began to walk away, the whole business model could have collapsed.

The impact of the change has been marginal. This is partly because of the continued growth albeit

at a slower pace.

4. eBay makes every effort to conceptualise its users as a community (as opposed to, say ‘customers’ or ‘clients’). What is the purpose of this conceptual difference and does eBay gain something by doing it?

It is the eBay community which has designed the business model. eBay supports the desire to

respond to the user community by employing approximately 5,000 people, about half of whom are

involved in customer support and about 20 per cent of whom are in technology. eBay does not

need to spend large sums of money trying to understand what their customers want because their

customers constantly request and suggest changes. In 2003, for example, over 1,00,000

messages, in which tips were shared and system glitches highlighted, were posted by users each

week. The technology systems that eBay has introduced over time enable the company to trace

every move of every potential customer, yielding rich information that can be acted upon. In

addition, category managers for eBay play a crucial role in the company’s development. Unlike

others, say product managers in large firms, their roles involve listening, adapting and enabling. It

is their responsibility to develop tools that help users buy and sell more effectively.

5. eBay has long been a marketplace for used goods and collectibles. Today, it is increasingly a place where major businesses come to auction their wares. Why would a brand-name vendor set up shop on eBay?

In 2004, eBay began offering commercial sellers the concept of a shop on the site, where they

could direct consumers to view more of their merchandise. This has proved extremely popular for

the large sellers.

The move in 2004 to sell an increasing number of goods at fixed prices, rather than through

auction, was seen as controversial among some suppliers. So too has the strategy of attracting

large corporate sellers – such as IBM, now the biggest supplier – which has raised fears among

smaller, traditional clients. Such moves risk antagonising the ‘power sellers’, the army of

entrepreneurs that have formed the bedrock of eBay’s sellers and make their living by trading on

the site. They provide the liquidity that makes eBay the dominant online auctioneer. Many sellers

welcome the changes because of the new buyers they attract to the site. Others, however, believe

corporations will get special treatment from eBay and this will destroy its culture.

6. Many analysts have argued that by moving to fixed-price sales eBay is risking alienating its traditional community of garage/car boot traders. How can eBay stop becoming just another site for selling?

The answer surely lies in placing emphasis on its community of traders. This eBay community

includes more than a hundred million registered members from around the world. It is this

community that can make eBay different. It made eBay different, but recent strategic moves may

be moving eBay away from its community of users to a more corporate business model. Ensuring

the eBay community remains in control and has the power to change and influence trading will

help.

7. Given the growth opportunities available to eBay, which ones and in which order should it develop?

VOIP, the online payment system (Paypal) and the eBay community should create new

experiences and encourage new developer solutions at the intersection of the three businesses.

How open the enlarged business is to the innovation in the developer community could well

determine its success. There is a shared opportunity for the company and independent developers.

eBay will undoubtedly find ways to achieve a return on the huge investment it has made in Skype,

but the rewards could be all the richer if it opens the platform to outside influences. It is worthy of

note that what was a weakness for eBay – its technology – has now become a strength.

Case study notesThis case study illustrates many of the obstacles and difficulties of launching a new product. The product in

question used new technology that was initially rejected by existing manufacturers; it was priced at more

than double that of existing products, but eventually captured more than 50 per cent of the UK vacuum

cleaner market in less than four years.

Conventional wisdom would surely suggest that Dyson Appliances Ltd would fail within a few months.

After all, it appeared to be a small company with an eccentric manager at its helm, trying to sell an

overpriced product of limited appeal in a very competitive market with less expensive, conventional, mass-

market products made by respected manufacturers whose names were, quite literally, household words. The

result was very different.

Dyson invests heavily in R&D and believes that this is the key to success. Not all firms support this view.

The level of investment in R&D varies considerably. The high value he places on creativity sets Dyson apart

from other firms and helps explain his insistence on maintaining what, in Britain, are considered insanely

large annual investments in research and development. Nearly 17 per cent of revenue regularly goes to

supporting the company's R&D efforts, a figure some 10 times greater than the average in the UK. Because

of these ongoing research expenditures, a company that started with just one product now offers more than a

dozen – all either upright or canister vacuum cleaners, each a more refined and technologically advanced

model than its predecessors.

Case study questions1. Explore the key problems Dyson had to overcome?This is a long list: design problems; a lack of money; lack of support from the UK government; lack

of interest from existing manufacturers; lack of interest from retailers, etc.

2. Characterise the type of innovation and new product development in the mature vacuum cleaner market prior to Dyson. Are there other industries in this situation?

The emphasis was on motor power and suction. Increasing the size of the motor was deemed

necessary to convince customers that the product was better. Prior to Dyson the vacuum cleaner

was virtually a commodity product. Some retailed for as little as £40. Even the best-selling brand

was £100. Dyson transformed the industry. NPD in the industry was on process innovation and

cutting costs.

3. Manufacturing the product has turned out to be hugely profitable, yet this was not the original plan; why not?

Originally, Dyson was after a quick return on his money through royalties. He did not want to be a

manufacturer. But being forced into manufacturing has turned out to be extremely profitable. This

is similar to the Victorian entrepreneurs from Stephenson, Carnegie, Watt, etc.

4. Explain the rationale behind Electrolux and Hoover’s decision not to purchase the licence from Dyson. Given Hoover’s recent development of the Triple Vortex vacuum cleaner, how do you assess this decision? What level of royalty would have been reasonable for both parties, that is, Dyson and Hoover?

They clearly did not believe in the technology and/or thought the licence deal was too expensive.

They also believed that their own technologists could deliver something similar. There are two

strategies available here, both of which have benefits and risks.

5. Why is negotiating a licence for a new product so difficult?This is because of the large number of unknowns, usually, unknown and untested technology – it

could be wonderful or turn out to be a white elephant.

Examine the Dyson example; was his request greedy?

Many would say yes, given the unproven product.

Often, there is so much uncertainty about whether the product will work or whether there is a

market.

Linked to this is the question of what is fair and reasonable.

6. How can businesses try to ensure that their senior managers (both buyers and new business development managers) do not dismiss exciting technology and with it potentially profitable business?

This refers to the rejection by domestic appliance manufacturers of Dyson’s product. There is no

simple answer it is a collection of things that need to be done. Marketing and business

development managers need to be technically aware and not technically illiterate. Good

communication between technical and marketing departments can help here. New product

proposals need to be viewed by a cross-functional team so that a multiple-perspective is achieved.

7. What is the role of patents? To what extent is it an effective system for protecting intellectual property?

The role is to provide a monopoly for the inventor. The objective is to act as an incentive to the

inventor or entrepreneur. Creativity can lead to commercial rewards. Many people argue it is a

system for large multinational firms only.

8. Not all firms invest in R&D. What should be the level of expenditure on R&D for a firm?

See Chapters 8 and 9 for industry comparisons of R&D expenditure. Some industries spend very

little; what could happen if R&D expenditure is substantially increased?

9. Explain the very different market entry strategy used for the US?The entry strategy for the US was based on an established brand developed at home. Extensive

and unique advertising was used in the US to launch the product. It was a very successful launch.

One of the key problems faced was securing distribution agreements with the big US retailers

(department stores, JC Penny). The retailers wanted reassurance that Dyson could deliver the

products to the stores on time. This meant Dyson had to fill warehouses across the US with

products. The penalty for failing to deliver was severe.

Dyson chose not to defend his patents in the US because he did not want to spend lots of money

on lawyer’s fees.

Case study notesThe case study has been updated.

It would be difficult to examine the subject of innovation and new product development without reference to

3M. The company has become synonymous with product innovation. Year after year, 3M appears in the

Fortune 500 rankings as the most innovative company. This case study explores why this is so.

Virtually all students will have used a 3M product, but very few will have extensive knowledge of the

company or the vast range of products that it manufactures. Part of the rationale for including this 3M case

study is to ensure that all students become more familiar with one of the most innovative companies in the

world.

The case summarises some of the key successful techniques that the company uses. Many of these are not

exclusively used by 3M. Indeed, one of the most important messages to get across to students is that the key

to successful product innovation is good management. Moreover, it is the unique combination of activities

that is, by definition, difficult to replicate that makes 3M successful.

The company has established an effective culture that nurtures innovation and it has developed a range of

management techniques and strategies that together have delivered long-term success.

After four and a half years at 3M, McNerney left to take the CEO position at Boeing. Now his successor,

George Buckley, seems to recognise the negative impact the process-focused program had on the company’s

creativity. Many of the workers say they feel reinvigorated now that the corporate emphasis has shifted back

to growth and innovation from McNerney’s focus on process and short-term profits (see Chapter 3 for more

on the innovation dilemma).

This case study has highlighted some of the key activities and principles that contribute to 3M’s

performance. Many of these are not new and are indeed used by other companies. In 3M’s case, they may be

summarised as an effective company culture that nurtures innovation and a range of management techniques

and strategies that together have delivered long-term success. Many companies pay lip service to the

management principles and practice set out in this case study. There is evidence that 3M supports these fine

words with actions.

The struggle between efficiency and creativity is one many public companies face. The market values of

company stocks are impacted more by short-term results rather than long-term prospects; and executives

have an incentive to drive those results.

There are no easy answers and the best solution most likely lies somewhere between the two extremes of

either process control or open-ended innovation.

Case study questions1. There are many examples of successful companies. To what extent is 3M

justifiably highlighted as the ‘innovating machine’?During the 1980s and 1990s, 3M delivered consistently good results and continued to deliver many

new products across a wide range of industries. It was rightly classified as a highly successful and

innovative firm. Indeed, it won the Fortune 500 most innovative company award for several years

during this time. At about the same time, the business world analysts and business schools started

taking an ever closer look at the influence of innovation on firm performance and hence, at the

time, 3M was highly regarded and the label has remained.

It is true there are many other very successful and innovative firms such as Nokia, Sony, Apple,

Microsoft, etc. Furthermore, arguably 3M’s performance has not been as strong as it was in the

past. Some analysts have argued that it has not delivered in terms of return on its investment in

R&D.

2. In the 3M case study, what is meant by the statement: ‘the message is more important than the figures’?

This refers to ensuring that employees realise that the 3M reward innovation even if there are

times when the guidelines, for whatever reason, may be ignored. While a business may not deliver

25 per cent of sales from new products, so long as it delivers 15, 16, 17 per cent, that will probably

be acceptable. Hence, it is about ensuring that the culture of innovation is enforced.

3. Discuss the merits and problems with the so-called ‘15 per cent rule’. Consider cost implications and a busy environment with deadlines to meet. To what extent is this realistic or mere rhetoric?

The idea that scientists can spend almost one day a week on projects that they find interesting

seems a wonderful luxury – some may say an unrealistic paradise. What happens when there are

turbulent times, unexpected events that cause disruption to the firm, surely then, critics would

suggest employees would be required to drop what they are doing and ‘help out’. The firm’s

response may well be that the 15 per cent is flexible and while they may be times when it is not

feasible, over a long time frame, scientists are afforded approximately 15 per cent of their time.

Moreover, they will be some who choose not to use this time. Once again, this is a flexible

guideline that is about trying to ensure there is slack in the R&D environment for creativity.

4. Encouraging product and brand managers to achieve 25 per cent of sales from recently introduced products would be welcomed by shareholders, but what happens if a successful business delivers profits without 25 per cent of sales from recently introduced products?

Take the Post-It notes business for instance – for many years in the early period of its

development, it could barely keep up with demand for existing products; so the idea that it had to

deliver new products was almost humorous and certainly difficult to achieve. Moreover, any firm

would probably have said keep doing what you are doing, the profits are great. The point here is

once again the emphasis on delivering innovation and new products, in particular, forced the firm

to at least think of the future and start considering new products. Arguably, this helped the firm

deliver a whole range of different versions of the original yellow Post-It note. So we had different

sizes, different colours and later, different types in the form of book marks and other forms of

labels.

5. Some people may argue that 3M’s success is largely due to the significance given to science and technology and this is the main lesson for other firms. Discuss the merits of such a view and the extent to which this is the case.

It is unquestionably the case that the firm has an impressive record when it comes to investing in

science and technology over a 70-year period. But science and technology alone is not enough as

many once-successful firms will testify. Indeed, in the late 1990s, 3M came under severe pressure

from investors to show some return from its investment in R&D; this was because profits were

sluggish and the new product pipeline was looking empty. Good science alone is not enough;

Alexander Flemming was credited with discovering penicillin, but it was 30 years later that a US

pharmaceutical firm profited from antibiotics.

6. Explain how the innovation dilemma affected 3M.The Six Sigma programme is a series of management techniques designed to increase efficiency.

For the most part, the implementation of the Six Sigma programme was successful as it focused

on the operations (manufacturing/logistics) side of the business. However, when 3M’s R&D

personnel were asked to adopt Six Sigma processes, the results were less favourable. While

established operational processes like manufacturing require strict monitoring, measuring, and a

regimented set of procedures, the innovation process requires a different approach.

3M felt stifled by the new structure and pressured to produce more new products faster. The result

was a greater number of incremental product-line extensions than true new product innovations.

Traditionally, 3M drew at least one-third of sales from products released in the past five years, but

in 2006 that fraction has fallen to one-quarter of sales. In 2004, 3M was ranked No. 1 on the

Business Week/BCG list of Most Innovative Companies. In 2007, the company dropped to number

seven.