Skype Qnd the Chqnge of the Value Curve in Voip Industry
Within this essay, several theoretical concepts would be developed and underpinned practical examples taken from how Skype has revolutionized the telecommunication industry. Firstly, the new value innovation which constitutes Skype would be characterized. Afterwards, the impact of Skype’s new value innovation on its industry would be explained. Secondly, it would be seen how innovation and entrepreneurial intensity of firms introducing new services or products can influence the shape of the industry value curve, using strategic canvas framework.
Thirdly, the identification of new groups of customers that enable the new innovation would be demonstrated. 1 T o begin with it seems relevant to define innovation. According to Steve Job cited in Fortune in 1998, innovation does not depend on the amount of money you spend but on “the people you have, how you’re led, and how much you get it”. Besides according to Drucker (1985, cited in Kuratko and Hodgetts, 2004:137), innovation is “the specific instrument of entrepreneurship [… the act that endows resources with a new capacity to create wealth.
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” Drucker asserts that innovation leads to wealth creation. Kim and Mauborgne nuance the notion of innovation introducing the new value innovation. According to them, “Value Innovation is the cornerstone of blue ocean strategy. It focuses on making the competition irrelevant by creating a leap in value for buyers and for the company, thereby opening up new and uncontested market space. ” This works if there is the simultaneous effort to differentiate and to reduce the cost for buyers.
They emphasize that value innovation benefits to customers and to the company which initiates it (see figure 1, p. 10). Besides, value innovation integrates a different approach than the conventional logic and applies a strategic logic of high growth including five dimensions: industry assumption, strategic focus, customers, assets and capabilities and product/service offering (see figure 2, p. 10) In the case of Skype, the company did this leap and created an uncontested market by transforming the way we communicate, using the shift from analog to digital (Rosenberg J. 2012). In 1876 analog telephone was invented by Graham Bell and in 1960’s it became global. It is just in the 1980’s that digital connections appeared, followed by the entrance of the mobile phone. Infrastructures for the digital technology were developed, and reduced the cost of information transmission. In 2003, Skype used this revolution and revolutionized habits by launching the software which allows users to communicate –peers to peers on internet- with video 2 nd voice, to share files, to tchat and do video conferences, all of that free of charge. This combined voice and video offering gives users much higher value at lower cost than alternatives such as long distance calling, where you cannot see each other (Rosenberg J. , 2012). Furthermore, it ridicules complex and high costs calls from room-based video conferencing and reduces the costs of business or leisure travel. The impact on the industry was huge. “We are in the middle of an incredible revolution of how technology works as a whole.
Voice Over IP has already transformed communication, and we have just begun,” said Jonathan Rosenberg, chief technologist for Skype, during a lecture at Elon University in 2012. Indeed Skype made the competition irrelevant and Avaya, Siemens and Nortel Networks have stopped selling their expensive voice boxes for conferences (Rosenberg J. , 2012). Jonathan Rosenberg insists in the conference saying “Holy cow, this is a market that didn’t exist, and now 12. 5 % of international calls include video”.
The shift has been radical for the industry and Skype represents now 25 % of the total volume of international calls. At last, TeleGeography’s latest data shows that the growth of international call traffic slows down, while Skype’s cross-border traffic continues to soar (see figure 3, p. 11). 3 S econdly, the canvas value curve would be defined and the influence of Skype on the shape of the industry value curve using strategic canvas framework would be considered. According to Kim and Mauborgne the strategy canvas is the central diagnostic and action framework for building a compelling blue ocean strategy.
Blue ocean strategy is an expression used by these two authors to express the uncontested market created by the value innovation; in contrast with the red ocean where firms are competing (see figure 4, p. 11). Being a tool for the BOS, the strategy canvas serves two purposes. Firstly, it clarifies which current competing factors are used by the industry, and so, by the main competitors competing in the red ocean. Secondly, it is an efficient way to refocus users on new competing factors and hence transform non customers to customers (see figure 5, p. 12).
As suitable example of the strategy canvas, the graph was made for Skype (see figure 6, p. 12). Kim and Mauborgne assert that to “reconstruct buyer value elements in crafting a new value curve; we use the four actions framework”. The first one is “eliminate” and it represents the factor that the industry has long competed in. Skype eliminated the cost of global communications (only with peers to peers usage on internet), the obsolescence and the cost of maintenance of video conference equipment. The second one is “reduce” and is related to which factors could be reduced well below the industry standard.
In the case of Skype, it has reduced the time of connection. The third factor is “raise” and considers which factors should be raised well above the industry’s standard. Skype raised the quality of the voice –essential factor according to Jonathan Rosenberg- and the ease of use. At last, the fourth factor is “create” and implies what could be created that the industry has never offered. Skype was the first 4 company in this industry launching new services like the possibility to share files, to tchat and the availability on mobile devices (see figure 7, p. 3) Normally, conventional competition takes place within clearly established boundaries defined by the products and services the industry traditionally offers. But in this case, Skype has clearly redefined the rules of the industry and has pushed the boundaries using a strategic canvas framework. It is pertinent to ask what happens once a company has created a new value curve in terms of competition. Kim and Mauborgne argue that, sooner or later, the competition tries to imitate it. It is exactly what is happening for Skype. Indeed, many companies have tried to copy this value innovation. According to Focus. om (platform of experts on technology) and CreditScore it is the case for ooVoo, Vbuzzer, VoipBuster, Jajah and SightSpeed. For the future Skype intends to develop its availability on different platforms as it knows that it could increase the volume of users. Hence, Skype wants to be compatible with Xbox, Hotmail messenger and Kinect. Furthermore, Google and Facebook plan to invest $ 4 Billion each one in the company, which reveals that Skype is still seen in advance, compared to its competitors and attracts investors. Even if competitors intend to compete with Skype, they are still struggling to do it.
Skype has transformed the value curve of the industry and is still in a “blue ocean”. Indeed, as noted by Microsoft News center, Skype is still the only software which provides at the same time voice call ( P2P), phone call (calling in), video call, instant messaging, desktop sharing and file sharing (see figure 8, p. 13). What would be the next value innovation to maintain the differentiation? 5 F inally, new groups of customers that enable the new value innovation would be identified. Afterwards, this identification would be supported by Skype example.
Most of the time, companies which are competing within a “red ocean” try to attract customers by refining the segmentation and offering tailoring to meet their needs (Kim and Mauborge 2012). Unfortunately this leads to narrow the number of customers who are reachable, creating too-small target markets. Value innovation follows an utterly different logic. Instead of concentrating on customers, they focus on noncustomers. It has been argued by Kim and Mauborgne that there are three ties of noncustomers that can be transformed into customers (see figure 9, p. 14).
It is essential for companies to know who the non-customers are, in order to “unlock them”. The first tier is the one which is closest to the market’s company. Noncustomers within this tier are the more likely to become its customers if the company offers a leap in value. In addition, these “soon-to-be” customers could be loyal and their frequency of purchase could multiply in the near future. The second tier of noncustomers is constituted of people who refuse to use the company’s offering. They are aware of the offering but have consciously decided to be against the market.
For Skype, it could be the case with aged people who know that Skype exists but prefer using their “classic analog phone” for international calls. The last tier is “unexplored” customers who are in markets distant from the company. In reality these people have never considered the market’s offering as an option. Using Skype example, this could be the case of people who do not have an internet access, especially in remote areas. Skype by creating a leap of value for customers has really “unlocked noncustomers”.