CH. 6 TECHNOLOGY-BASED INDUSTRIES AND THE MANAGEMENT OF INNOVATION

ALLEN HICKS

ANTHONY BROWN

CHRISTIAN GRANDORF

BRADEN WALKER

LEARNING OBJECTIVES• Analyze how technology affects industry structure and

competition

• Identify the factors that determine the returns to innovation and evaluate the potential for an innovation to establish competitive advantage

EBOOK READERS

• The initial introduction of eBook readers

• The competition heats up

• The arrival of the iPad

• The impact of e-readers on related industries

LEARNING OBJECTIVES• Formulate strategies for exploiting innovation and managing

technology, focusing in particular on:

• The relative advantages of being a leader or a follower in innovation

• Identifying and evaluating strategic options for exploiting innovation

• How to win standard battles

• How to manage risk

• Design the organizational conditions needed to implement such strategies successfully

COMPETITIVE ADVANTAGE

• The principal link between technology and competitive advantage is innovation.

• It is the quest for competitive advantage that leads firms to invest in innovation.

• Innovation is why new industries emerge

• Innovation is why some firms dominate their industries.

INNOVATION• Definition: is the creation of new products and processes

through the development of new knowledge or from new combinations of existing knowledge.

• Innovation is the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production.

• An innovation may be the result of a single invention.

INNOVATION• Not all inventions progress into innovation.

THE PROFITABILITY OF INNOVATION

THE PROFITABILITY OF INNOVATION

• The profitability of an innovation to the inventor depends on the value created by the innovation and the share of that value that the innovator is able to appropriate.

• The regime of appropriability is used to describe the conditions that influence the distribution of returns to innovation.

• Strong regime = large share of value for innovator

• Weak regime = large share of value for other parties

FOUR FACTORS

•Property rights

•Tacitness and Complexity of the Technology

•Lead-time

•Complementary resources

PROPERTY RIGHTS IN INNOVATION

• Intellectual property:

• Patents

• Copyrights

• Trademarks

• Trade secrets

• The effectiveness of intellectual property law depends on the type of innovation being protected.

TACITNESS AND COMPLEXITY OF THE TECHNOLOGY

• The extent to which an innovation can be imitated by a competitor depends on the ease of which the technology can be comprehended and replicated.

• We need to know the extent of which the technical knowledge is codifiable.

• Ex: Coca-Cola’s recipe is codifiable and in the absence of trade secret protection can be easily copied.

LEAD-TIME• Property rights and Tacitness and complexity don’t last

forever, but they give the innovator one thing, time.

• Lead-time is the time it will take for competitors to catch up.

COMPLEMENTARY RESOURCES

• The resources and capabilities needed to finance, produce, and market the innovation.

INNOVATION• Advantage: Relieves the company of the need to develop the full

range of complementary resources and capabilities needed for commercialization and allow the innovation to be commercialized quickly

• Disadvantage: the success of the innovation in the market is totally dependent on the commitment and effectiveness of the licensees

RESOURCES AND CAPABILITIES

• Start-up firms posses few of the complementary resources and capabilities needed to commercialize their innovations

• Large established corporations, can draw on their wealth of resources and capabilities

ADVANTAGES OF EARLY MOVERS

• The extent to which innovation can be protected by property rights or lead-time advantages

• The importance of complementary resources.

• The potential to establish a standard

MANAGING RISKS• Technological uncertainty

• Market uncertainty

• Cooperating with lead users

• Limiting risk exposure

• Flexibility

COMPETING FOR STANDARDS

• A standard is a format, an interface, or a system that allows interoperability.

• It is standards that allow us to search the Internet, ensure that our lightbulbs fit our lamps, and the speed limit are all examples.

• Standards can be public or private.

TYPES OF STANDARDS

• Public (or open) standards are those that are available to all either free or for a nominal charge. Set by public bodies and industry associations.

• Private (or proprietary) standards are those where the technologies and designs are owned by companies or individuals.

Microsoft

Windows

TYPES OF STANDARDS (CONT.)

• Mandatory standards are set by government and have the force of law behind them.

• De Facto standards emerge through voluntary adoption by producers and users

NETWORK EXTERNALITIES

• A network externality exists whenever the value of a product to an individual customer depends on the number of other users of that product. The classic example is the telephone.

NETWORK EXTERNALITIES

• Do not require everyone to use the same product or even use the same technology, but rather that the different products are compatible with one another through some form of a common interface.

WHERE DO THEY COME FROM?

• Economizing on switching costs.

• Microsoft Office is widely used across many levels.

• Products where users are linked to a network.

• Video games, software, telephone, etc.

• Availability of complementary products and services

• Few leading software firms are writing Mac-based applications.

WHAT DO THEY DO?

• Network externalities are intended to create positive feedback.

• Tipping is when a system has reached a certain threshold that cumulative force becomes unstoppable

WINNING STANDARDS WARS

• Before you go to war, assemble allies.

• Support of consumers, suppliers, even competitors.

• Pre-empt the market

• Enter early, fast cycle product development, key customers, adopt penetration pricing.

• Manage expectations

• Convince customer, suppliers, and the producers of complementary goods that you will emerge as the victor.

KEY RESOURCES

• Control over installed base of customers

• Owning intellectual property rights

• The ability to innovate

• First mover advantage

• Strength in complements

• Reputation and brand name

CREATING THE CONDITIONS FOR INNOVATION

• Innovation requires resources

• People

• Facilities

• Information

• Time

• Managing creativity requires a unique environment

http://www.youtube.com/watch?v=86GBn_pbVj8

FROM INVENTION TO INNOVATION

• Balancing creativity and commercial direction

• Creativity must be directed and harnessed

• There is often friction between innovators and those responsible for managing the company

ORGANIZATIONAL APPROACHES

• Cross functional development teams

• Product champions

• Buying innovation

• Open innovation

• Corporate incubators

SUMMARY

SUMMARY