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e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Learning Objectives
What are the main strategies for mantaining profitability of innovation?
What are the relationship between the strategies? How and why can a firm realize
combinations?
Which is the relationship between strategies, nature of complementary asset and type of
technology?
How can a firm implement an innovation process?
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Learning contents
Strategies for innovation
The Block Strategy;
The Run Strategy;
The Team-Up Strategy;
The condition under which a firm can combine the three strategies;
The types of technology and the nature of complemetary assets that influence
the choice of a combination of the three strategy.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits
The firm’s profit froms an innovation is usually only temporary.
As an incunbent or a new entrant an innovator can prolog the time over which it can keep profits choosing one or more of the following strategies:
Block
Run Team-up
•Capabilities•Product or industries•Life cycle phase•Firm strategy
The chooice of block, run or team up strategy at any stage of the value chain is a function of several factors:
• The firm’s capabilities
• Its type of product or service
•The phase of the evolution of innovation
• Its strategy
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
This strategy allow a firm to provent entry by competitors
By limiting the competitors’ access
to inimitable and coreness capabilities
By signaling the competitors that
post-entry price will be low
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
The effectiveness of a firm in blocking entry to any stage of the value chain is a function of how unique and inimitable its competences and assets and are at that stage.
At the development level, intellectual property protection can make very difficult for new entrants to offer designs that are
comparable to those of incumbents
At the manufacturing stage, example of endowments that a firm can use to prevent entry are
exclusive access to certain inputs, licenses that allow to manufacture product at lower cost, ecc.
At the research stage, close relationship with universities can provide fast access to
scientific research findings
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
High Minimum Efficient Scale for Industry: if the minimum volume that a firm has to produce in order to attain the minimum per unit cost possible in the industry is large, entrant are less likely to enter since they can expect to drop considerably, given how much they have to add to the industry’s capacity.
Idiosyncratic asset: an asset is idiosyncratic to a market if is of litte value in another market. If an incumbent invests in such assets, it is sending a signal to potential entrants that it can lower its prices post entry.
History of retailation: if an incumbent has an history of retaiiatiating against firms that have ventured into its product-market, that may be a signal that it will lower its prices with entry.
Management committment to existing technology: if the management of a firm is committed to its existing tecnhnology the firm is not likely to take entry expecially if the technology is one of the major source of revenue of the firm.
If all firms are equally capable of performing the activities of each stage of the value chain and have equal access to the underlying technological and market knowledge then the block strategies is based on some signals that suggest to potential new entrant that post entry price will be low.
Some of these signals are:Technology drivers and coshared resources: in the face of the introduction of an innovation in a market, an incumbent is likely to stay and fight if its existing technology also serves as a technology driver for its other products.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Run
This strategy is base don the evidence of the rapidity of the innovation process.
A firm must be innovative enogh to build new capabilities and introduce new product rapidly and do so well ahead
of competitors
We can classify run as a function of their
inpact on the capabilities of the firm in
question and the extent to which the run
cannibalizes existing product.Type III
e.g.: Microwave oven
Type II
e.g.: Apple Macintosh
Type IV
e.g.: Shrink of Pentium
Type I
e.g.: Pentium
High
High
Low
Low
Product cannibalization
Obsolescence of existing capabilities
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Team-up
In a team-up strategy a firm formally cooperates with others to allow it to keep profiting from innovation.
This cooperation can be in the form of a strategic alliance, an acquisition or another agreements to
cooperate in adding value in a firm’ s value-creating activities
The type of collaborations are:
Strategic alliances
Venture capital
Acquisitions
Join ventures
Licensing
Distribution agreements
Co-marketing agreements
Technology agreements
Design agreements
Manufacturing agreements
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Team-up
There are five reasons why a firm might want to give away its technology:
1. To win a standard or dominant design: making a design open invites other firms to enter the market using it increment of manifacture of the design more complementary innovators more commitments to developing complementary products for it.
2. To increase upstream demand: a firm can give away its technology downstream to increase demand for its product upstream.
3. To build capabilities: very often a firm has to license its innovation to competitors so that it can build competences in an area in which it lacks such capabilities.
4. To exploit the second source effect: some customers are reclutant to incorporate a component in their system unless they are sure that compatible generations of the component will be forthcoming when they need them.
5. To access to a market that would otherwise be inaccessible: sometime a firm have to team-up with a firm in a foreign country so as to enter that market.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
The three strategies can be reinforcing and
corroborating
They all rest on competences and endowements as well as on the underlying technological and
market knowledge.
A firm ability to joggle all three in the face of the technological change, deregulation or regulation,
changing customer preferences and expectations, and global competition is critical to mantaining
entrepreneurial rents
Block
Run Team-up
•Capabilities•Product or industries•Life cycle phase•Firm strategy
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: Why combinations
Secondary strategy
Block Run Team-up
Main
strategy
Blo
ck While fithing imitation of its innovation by blocking competitors, a firm can run developing new product generations to cannibalize existing ones.
Advantage secured through blocking last only until such regulation, deregulation and changing in customer preferences render them obsolete the firm have to team-up to exploit technologies and markets that are unfamiliar.
Ru
n In that industries in which new product development is very expensive a firm can use Blocks to slow down competitors enough to introduce new products.
Where the Run involves radically different technological and market knowledge unfamiliar to the firm, it may need to form alliances.
Team
-up
After a firm wins a standard through an alliance, it must still do something distinctive that allows it to perform better than the members of its team.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: When combinations
Combinations along the value chain
A firm would successfully run or block or team up only at those stages of its value chain where it has the capabilities to
underpin each strategy
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Idea Generation Production Distribution
Block
Team up Run
Team up
Supply chainMarketing &
Sells
Block
Run
Team up
Run
Relationship between the three strategies
Combinations along the value chain: Dell Computer Example
Val
ue
chai
n
acti
viti
esS
trat
egie
s
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: When combinations
Combinations over Innovation Life Cycle
The strategies that a firm pursues over the life cycle of a technology also vary
During the phase of development of a new
product, an innovator can team-up to win the dominant design.
Following the emergence of the dominant design the firm may want to introduce versions of the design more frequently (run) than its competitors.
It may also want to defend its intellectual property or brand name reputation (block)
At a discontinuity, the type of strategy pursue depend on the nature of the discontinuity:
Competence enhancing run, block or both
Competence destroying team-up
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Type of technology and nature of complemetary assets
The type of strategy that a firm pursues at any phase of a technology life cycle, is also a function of the imitability of technology and nature of the complementary assets needed to profit.
Cell I
When imitability of the technology is high a firm can pursue a run strategy; a firm can keep innovating so that the time competitors catch up with yesterday’s technology, it has moved on to tomorrow’s technology. Sometimes, a firm may need to team up in order to run.
Cell II
The firm must develop the complementary assets internally (run) or get them by teaming up with someone else.
Cell III
If a firm has both the technology and the complementary asset, it can pursue block stretegy in order to protect both. If technology becames obsolete, the firm must team up with someone that have a new technology.
Cell IV
When thechnology is difficult to imitate but complementary assets are easy to come by, a firm can pursue a block strategy in order to protect that technology. A firm can also pursue a run strategy to allow it to stay ahead of its competitors.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
Firms that pursue a team up strategy go outside thier boundaries for some of the capabilities that they need to exploit the technology.
Whether a firm decides to develop a technology internally or go outside for help is also a function of two factors:
1. The firm’s familiarity with the new technology and market;
2. Transaction costs.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
1. Familiarity of the new technology and market
The more the technological and market capabilities need to exploit an innovation differ
from a firm’s existing capabilities, the more likely the firm will fail in trying to exploit the innovation.
The more the technological and market capabilities need to exploit an innovation differ
from a firm’s existing capabilities, the more likely the firm will fail in trying to exploit the innovation.
Since building these capabilities is often difficult and takes time, a firm may be better off teaming
up with another firm that has them
Such co-operation allows the firm to learn from its partner and develop its own capabilities or co-develop capabilities for joint use.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
1. Familiarity of the new technology and market
Cell I
The firm brings technological capabilities to the table while the partner bring market capabilities and both companies can form a joint venture to exploit the new technology.
Cell II
When innovation is competence destroying a firm can pursue one of the three options to learn and build the new capabilities while not being handicapped by the existing ones.
Cell III
A firm that faces an unfamiliar new technology but has the market capabilities can licence the technology from another firm. An important precaution is to make sure that the licence has the absorptive capacity to successfully trasfer the technology.Cell IV
Internal development is preferred in three cases:
1. When the technological change is competence enhancing or incremental;
2. When the firm is not in a rush;
3. When the firm want to protect its technology.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2. Transaction costs
Transaction costs theory suggest that whether a firm organizes activity internally
or externally is a function of the cost of carrying out the activity in either mode.
Transaction costs theory suggest that whether a firm organizes activity internally
or externally is a function of the cost of carrying out the activity in either mode.
These costs depend on four
factors:
The amount of uncertainty
How opportunistic the parties are
The asset specificity of any assets used in the
activity
The frequency of transactions
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2. Transaction costs
Opportunism of the parties
Asset specificity
A party is opportunistic if it take advantage of an information asymmetry and cheats in pursuing its own ends: the more uncertainty information that is needed, the more easy is to create room for opportunism. The chances to exercise opportunism are also a function of asset specificity
Asset specificity refers to how idiosyncratic an asset in a relationship becomes as the relationship develops.
Frequency of transaction
Frequency of transaction is how often the transaction between the perties must take place: the higher the asset specificity and the frequency of transactions, the more chances there are for opportunism.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2. Transaction costs
Opportunism is not the only source of transaction cost
Since individuals are cognitively limited, a party to a transaction may be not be able to articulate the information it has.
Even if the party could articulate it, the other party may not be able to understanding it.
For certain type of informations, transaction costs may be high even when the parties are not opportunistic
Radical innovation has the qualities that would suggest internalization to minimize transaction costs.
If it fully of uncertainty and leaves a lot of room for opportunism.
It may be difficult to specify in contracts what is that expected from each party.
Innovation often requires specialized plants and individuals, increasing the chances for opportunism.