Technology-based Industries & the Management of Innovation

Technology-based Industries & the Management of Innovation

• Competitive advantage in technology-intensive Industries– Appropriating the returns to innovation

• Strategies to exploit innovation– Alternative approaches– Timing: to lead or to follow?– Managing risk

• Competing for standards

• Implementing technology strategy– The conditions for creativity– From invention to innovation

OUTLINE

The Development of Technology: From Knowledge Generation to Diffusion

The Development of Technology: From Knowledge Generation to Diffusion

Basic Knowledge

Invention Innovation Diffusion

IMITATION

ADOPTION

Supply side

Demand side

The Development of Technology: Lags Between Knowledge Generation and Commercialization

The Development of Technology: Lags Between Knowledge Generation and Commercialization

BASIC FIRST PRODUCT IMITATION KNOWLEDGE PATENTS LAUNCH

Xerography late 19th and 1940 1958 1974 early 20th centuries

Jet Engines 17th-- early 1930 1957 1959 20th centuries

Fuzzy logic 1960’s 1981 1987 1988

controllers

Appropriation of Value:- How are the Benefits from Innovation Distributed?

Appropriation of Value:- How are the Benefits from Innovation Distributed?

Customers

Suppliers

Imitators and other

“followers”

Innovator

The Profitability of InnovationThe Profitability of Innovation

• Legal protection

• Complementary resources

• Imitability of the technology

•Lead time

Profits from

Innovation

Value of the innovation

Innovator’s ability to

appropriate the value of the innovation

Legal Protection of Intellectual PropertyLegal Protection of Intellectual Property

• Patents —exclusive rights to a new product, process, substance or design.

• Copyrights —exclusive rights to artistic, dramatic, and musical works.

• Trademarks — exclusive rights to words, symbols or other marks to distinguish

goods and services; trademarks are registered with the Patent Office.

• Trade Secrets — protection of chemical formulae,

recipes, and industrial processes.

Also, private contracts between firms and between a firm and its iemployees can restrict the transfer of technology and know how.

Complementary ResourcesComplementary Resources

Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.

Manufacturing Distribution

Service

Complementarytechnologies

OtherOther

Marketing

FinanceCore

technological know-how

Lead TimeLead Time

• If rivals can imitate-- time lag is the major advantage of the innovator.

• But maintaining lead-time advantage requires continuous innovation

• Lead time is reinforced by learning effects

U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation

U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation

Processes Products

Patents to prevent duplication 3.52 4.33

Patents to secure royalty income 3.31 3.75

Secrecy 4.31 3.57Lead time 5.11 5.41

Moving quickly down the learning 5.02 5.09curve

Sales or service efforts 4.55 5.59

1 = not at all effective 7 = very effective

Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.

Risk & Return

CompetingResources

Examples

LicensingOutsourcing

certain functions

Strategic Alliance

Joint Venture

Internal Commercialization

Small risk, but limited returns also (unless patent position very strong

Limits investment, but dependence on suppliers & partners

Benefits of flexibility; risks of informal structure

Shares investment & risk. Risk of partner conflict & culture clash

Biggest risks & benefits. Allows complete control

Few Allows outside resources & capabilitiesTo be accessed

Permits pooling of the resources/capabilities of more than one firm

Substantial resource requirements

Konica licensing its digital camera to HP

Pixar’s movies (e.g. “Toy Story”) marketed & distributed by Disney.

Apple and Sharp build the “Newton” PDA

Microsoft and NBC formed MSNBC

TI’s development of Digital Signal Processing Chips

Alternative Strategies for Exploiting InnovationAlternative Strategies for Exploiting Innovation

The Comparative Success of Leaders and Followers

The Comparative Success of Leaders and Followers

PRODUCT INNOVATOR FOLLOWER WINNER

Jet Airliners De Havilland (Comet) Boeing (707) Follower

Float glass Pilkington Corning Leader

X-Ray Scanner EMI General Electric Follower

Office P.C. Xerox IBM Follower

VCRs Ampex/Sony Matsushita Follower

Diet Cola R.C. Cola Coca Cola Follower

Instant Cameras Polaroid Kodak Leader

Pocket Calculator Bowmar Texas Instruments Follower

Microwave Oven Raytheon Samsung Follower

Plain Paper Copiers Xerox Canon Not clear

Fiber Optic Cable Corning many companies Leader

Video Games Players Atari Nintendo/Sega/Sony Followers

Disposable Diapers Proctor & Gamble Kimberly-Clark Leader

Web browser Netscape Microsoft Follower

PDA Psion, Apple Palm Follower

MP3 music players Diamond Multimedia Sony (&others) Followers

The Strategic Management of Technology:-To Lead or to Follow

The Strategic Management of Technology:-To Lead or to Follow

Key considerations:• Is innovation appropriable and protectable against

imitation? If so, advantages in leadership.• The role of complementary resources

Followers may be able to avoid investing in complementary resources due to better-

established industry infrastructureFirms possessing complementary resources

have the luxury of waiting• Is owning/ controlling industry standard critical to

competitive advantage?if so, advantage in being a leader.

Figure 11.2. Alternative Strategies for Exploiting Innovation

Figure 11.2. Alternative Strategies for Exploiting Innovation

Alternative Strategies for Exploiting Innovation

Alternative Strategies for Exploiting Innovation

Risk & Return

CompetingResources

Examples

LicensingOutsourcing

certain functions

Strategic Alliance

Joint Venture

Internal Commercialization

V. small investment risk, but small returns also limited (unless patent position very strong) Some legal risks

Limits capital investment, but may create dependence on supplies/partners

Benefits of flexibility, risks of informal structure

Shares investment and risk. Risk of partner disagreement and culture clash

Biggest investment requirement and corresponding risks. Benefits of control

Few Permits accessing of outside resources and capabilities

Permits pooling of the resources and capabilities of more than one firm

Substantial requirements in terms of finance, production capability, marketing capability, distribution, etc.

Konica licensing its digital camera to Hewlett Packard

Pixar’s computer animated movies (e.g. “Toy Story”) marketed and distributed by Disney Co.

Apple and Sharp build the “Newton” PDA

Microsoft and NBC formed MSNBC

TI divestment of its Digital Signal Processing Chips

The Strategic Management of Technology:-To Lead or to Follow

The Strategic Management of Technology:-To Lead or to Follow

Key considerations:• Is innovation appropriable and protectable against imitation?

If so, advantages in leadership.• The role of complementary resources

Followers may be able to avoid investing in complementary resources due to better-

established industry infrastructure

Firms possessing complementary resources have the luxury of waiting

• Is owning/ controlling industry standard critical to competitive advantage?

if so, advantage in being a leader.

Uncertainty & Risk Management in Tech-based IndustriesUncertainty & Risk Management in Tech-based Industries

Sources ofuncertainty

Technologicaluncertainty

Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G

Customer acceptance and adoption ratesof innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman

Marketuncertainty

Strategies formanaging risk

Cooperating with lead users early identification of customer requirements

–assistance in new product development

Flexibilility—keep options open—use speed of response to adapt quickly to new information—learn from mistakes

Limiting risk exposure—avoid major capital commitments (e.g. lease don’t buy)—outsource—alliances to access other firms’ resources & capabilities—keep debt low

The Emergence of StandardsThe Emergence of Standards

• Emergence of a dominant design paradigm– Model T in autos– IBM 360 in mainframes– Douglas DC3 in passenger aircraft

• Emergence of technical standards– Emerge in industries where there are network

extremities• Entrenchment of the dominant designs and technical

standards– Learning effects: incremental improvement of the

dominant design– Switching costs– Need for coordinated action by multiple players

Sources of Network ExternalitiesSources of Network Externalities

• User linkages, e.g. – Telephone systems—only value of telephone is connection to

other users– Video game consoles—same platform allows users to

exchange games and play interactively– On-line auction—value of auction depends on number of

buyers and sellers participatingAlso, social identification—listening to same music, watching

same TV shows, wearing same clothes in order to conform

• Availability of complementary products, e.g. – Most PC applications software written for Windows, not Mac.– In economy autos, easier to get parts and repair for a Ford

Focus than for a Maruti or Proton

• Economizing on switching costs, e.g.– In suites of office software, users of Microsoft Office more

likely to avoid switching costs that users of Lotus SmartSuite when they move jobs

Companies that Own Technical StandardsCompanies that Own Technical Standards

COMPANY PRODUCT CATEGORY STANDARD

Microsoft PC operating systems Windows

Intel PC microprocessors *86 series

Matsushita Videocassette recorders VHS system

Iomega High capacity PC disk drives Zip drives

Intuit Software for on-line financial transactions Quicken

AMR Computerized airline reservations system Sabre

Rockwell/ 3Com 56K modems V90

Qualcomm Digital wireless telecom signals CDMA

Adobe Systems Common file format for creating and viewing documents Acrobat

Competing for Standards:Value Appropriation vs. Market Acceptance

Competing for Standards:Value Appropriation vs. Market Acceptance

Maximize value

appropriation

Maximize market

acceptance

LOOSE TIGHT

VHS

IBM-PC Mac

Betamax

The Conditions for Creativity:“Operating” and “Innovating” Organizations

The Conditions for Creativity:“Operating” and “Innovating” Organizations

Operating Organization Innovating Organization

Structure Bureaucratic. Specialization and division of labor. Hierarchical control

Flat organization without hierarchical control. Task-oriented project teams.

Processes Operating units controlled and coordinated by top management which undertakes strategic planning, capital allocation and operational planning.

Processes directed toward generation, selection, funding and development of ideas. Strategic planning flexible, financial and operating controls loose.

Reward

Systems

Financial compensation, promotion up the hierarchy, power and status symbols.

Autonomy, recognition, equity participation in new ventures

People Recruitment and selection based upon the needs of the organization structure for specific skills: functional and staff specialists, general managers, and operatives.

Key need is for idea generators which combine required technical knowledge with creative personality traits. Managers must act as sponsors and orchestrators.

Strategy Implementation: Invention to Innovation

Strategy Implementation: Invention to Innovation

• While invention depends upon creativity, successful innovation requires integrating new knowledge with multiple business functions.

• Need to link R&D departments with other functions (the problem of Xerox’s PARC)

• The role of cross-functional new product development teams as vehicles for integration

• The role of product champions--in achieving integration and counteracting organizational inertia.

Slides used for summarizing case

issues

Slides used for summarizing case

issues

• EMI & the CT Scanner [A] & [B]

• Video Games Case

EMI SCANNER: THE AFTERMATH   

EMI established 3rd generation as a priority. Gives responsibility to US subsidiary.

R&D expenditures mount, project delayed, Houndsfield & team fly out to US to assist.

“Certificate of need” introduced

Demand peaks in 1977: Rapid decline in US sales of CT scanners in 1978-1980

Prices fall rapidly; several competitors exit

Losses at EMI Medical threaten solvency of EMI as a whole

EMI merges with Thorn to form Thorn-EMI

1980: Thorn sells EMI Medical to GE for 20m pounds; Houndsfield receives Nobel prize for medicine.

ISSUES ARISING FROM EMI SCANNER CASE  

 

“A” CASE•Exploiting an innovation:

— alternative strategies — analyzing appropriability

“B” CASE •First mover vs. follower advantage: — The role of complementary resources — Managing the “window of opportunity”

• Industry evolution—changes in industry structure, competition & key success factors • Effective strategy implementation —the need for structure 

Issues Arising from Video Games CaseIssues Arising from Video Games Case

• Hardware-software complementarities: --Where’s the profit? --Strategy of complementarity: Need for coordination --Importance of “killer app.”

• Analyzing the existence and sources of network externalities --user linkages --training costs --availability of complements --social conformity

• How to win in standards wars --1st mover advantage (disadvantage?) --pre-emption --managing expectations --partnering

• Holding on to leadership --backward compatibility