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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