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Ch11

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  • 1. 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
  • 2. 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
  • 3. 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 MP3 players Early 1990s 1994 1997 1999
  • 4. 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
  • 5. 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
  • 6. 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 employees can restrict the transfer of technology and know how.
  • 7. Complementary ResourcesComplementary Resources Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized. Manufacturing Distribution Service Complementary technologies OtherOther Marketing Finance Core technological know-how
  • 8. 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
  • 9. 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 3.57 Lead time 5.11 5.41 Moving quickly down the learning 5.02 5.09 curve 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.
  • 10. Risk & Return Competing Resources Examples Licensing Outsourcing 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 & capabilities To 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
  • 11. 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//Sony Followers Disposable Diapers Proctor & Gamble Kimberly-Clark Leader Web browser Netscape Microsoft Follower PDA Psion, Apple Palm Follower MP3 music players Diamond Multimedia Apple, Sony (&others) Followers
  • 12. Leaders vs. Followers in InnovationLeaders vs. Followers in Innovation 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/Sony Followers Disposable Diapers Proctor & Gamble Kimberly-Clark Leader Web browser Netscape Microsoft Follower Cholesterol lowering Raisio Unilever Follower margarine MP3 players Diamond Multimedia Apple Follower
  • 13. 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 Firm possessing complementary resources has the luxury of waiting • Is owning/ controlling industry standard critical to competitive advantage? if so, advantage in being a leader.
  • 14. Uncertainty & Risk Management in Tech-based IndustriesUncertainty & Risk Management in Tech-based Industries Sources of uncertainty Technological uncertainty Selection process for standards and dominant designs emerge is complex and difficult to predict, e.g. future of 3G Customer acceptance and adoption rates of innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman Market uncertainty Strategies for managing risk Cooperating with lead users early identification of customer requirements –assistance in new product development Flexibility —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
  • 15. 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
  • 16. 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 participating Also, 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 or Honda Accord than a Kia, Proton, or Lamborghini • Economizing on switching costs, e.g. – E.g. office software (Microsoft Office vs. Lotus SmartSuite)
  • 17. 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
  • 18. 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 Apple Mac Betamax
  • 19. Fighting Standards WarsFighting Standards Wars 1. Determine the potential for standards emergence— analyze network externalities 2. Building a bandwagon—enlist partners (requires licensing & sharing returns from the technology) 3. Pre-empting the market—Build user base quickly: May require sharing benefits with consumers (penetration pricing) 4. Manage expectations (the Microsoft advantage) What if you’re a loser? (a) ensure compatibility (b) go for niche How can the winner sustaining the standard? --Don’t fall behind on technology --Ensure backward compatibility --Meet threat of disruptive technology by offering customers a migration path --Reinforce standard with other resources—e.g. brand
  • 20. 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.
  • 21. 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.

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