STIA305 07

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  • Corporate: Respond to Strategic Challenges and Opportunities (Recall Bucolic Post-War Corporate Laboratories) Business Unit: Responds to Immediate Needs of Existing Business Production Bottlenecks and Quality Glitches Improvements in Existing Products Extensions in Product Line Response to Customer Requests
  • Private R&D soared during the 1990s and is still high But it’s mostly development of new products to take advantage of the explosion in information technology (maturing phase of Kondrateev cycle) Research is mostly tied to existing product areas Long-range research at the corporate level is much reduced, in part because of modularization: only IBM remains of the former giants (GE, AT&T, etc.), And even its efforts are smaller.
  • Rationalize Before You Introduce Technology GM-Perot Merger: Automate a Poor System at Great Expense  A Fast, Inefficient System Contrast with Saturn: Introduce Japanese Management, Add a Little ‘Technology’ Be Aware of the Organizational and Human Consequences of Introduction of New Technology Co-Opt or Retrain Those Who Will be Responsible for Implementation: Unions, Teachers, Salesmen, Distributors
  • Only Blockbusters Justify >$1/2 Billion in Development Costs to Meet FDA Requirements Profits Depend on a Few Such Blockbusters – A Very Fragile System As Patents Expire, Tremendous Pressures to Replace Blockbusters with New Cash Cows Stimulus to Research but also to Fraud, Cutting Corners Companies Fiercely Defend Intellectual Property Rights Future Emphasis on Personalized Medicine (Tailoring Recommendations to Individual Genome) puts this Model at Risk Much Weaker Economies of Scale Requires Redesign of FDA Testing Procedures
  • Venture Capital is Normally Available in the US at Most Levels of Risk, Except for High Risk, Long Term Applied Research Projects Carried out in Government Laboratories The “Valley of Death” Between First Working Model and a Viable Business This Follows from the Institutional Divide between Basic Research (Usually at a University or Government Laboratory, Funded with Public Money) and Product Development (in a Private Firm, with Private Money) A Few, Important but Relatively Modest Government Programs Try to Bridge this Gap
  • Venture Capital is Normally Available in the US at Most Levels of Risk, Except for High Risk, Long Term Applied Research Projects Carried out in Government Laboratories The “Valley of Death” Between First Working Model and a Viable Business This Follows from the Institutional Divide between Basic Research (Usually at a University or Government Laboratory, Funded with Public Money) and Product Development (in a Private Firm, with Private Money) A Few, Important but Relatively Modest Government Programs Try to Bridge this Gap
  • Desire to Move Up-Market to Higher Technology and More Profitable Links of Value Chain. This May Not be Easy: Higher Links in the Value Chain May Require Different Skills, or Public Policies and Infrastructure Investments The Most Lucrative Parts of the Value Chain – Especially Brand Definition and Knowledge of Consumer Demand, but Sometimes Processing and Associated Technology -- May be Tightly Held Must Invest in Technology Absorption and Eventually in Own Research
  • STIA305 07

    1. 1. Management of Technological Innovation in Business
    2. 2. Most Technological Innovation Takes Place in Business You Must Understand the Business Viewpoint Even if You’re in Security, Health or Environment, if you Want to Guide or Stimulate Innovation
    3. 3. Definition: Elements of Management <ul><li>Control </li></ul><ul><li>Guide </li></ul><ul><li>Administer </li></ul>
    4. 4. Technological Elements of Management <ul><li>Business Strategy </li></ul><ul><ul><li>Technology Forecasting </li></ul></ul><ul><ul><li>Technological and Market Intelligence </li></ul></ul><ul><li>Support and Finance </li></ul><ul><ul><li>Human Resources Management </li></ul></ul><ul><ul><li>Risk Capital </li></ul></ul><ul><ul><li>Technological Operations </li></ul></ul><ul><ul><li>Technology Acquisition, Implementation and Integration </li></ul></ul><ul><ul><li>Management of Research and Development </li></ul></ul><ul><ul><li>New Product Development </li></ul></ul>
    5. 5. Definitions <ul><li>Technology Strategy : Anticipating and Planning for Technical Change </li></ul><ul><li>A ‘High-Tech’ Company : High Margins (‘Economic Rents’) due to Limited Competition by Dint of a Technological Monopoly </li></ul><ul><li>Core Competence : A Skill in Technology, Marketing, Production, and/or Finance that Defines a Firm’s Competitive Advantage </li></ul><ul><li>Core Technology : A Technology Necessary to a Product or to its Production or Servicing, and Not Substitutable: Don’t Outsource This! </li></ul>
    6. 6. Distinguish Between <ul><li>Applied Research : Seek New Knowledge Toward a Practical Objective </li></ul><ul><li>Long- vs. Short-Term Research – Best Classification for Private Sector Management of Research </li></ul><ul><li>Curiosity Motivated Research : Acquire New Knowledge for its Own Sake </li></ul><ul><li>Basic Research : Push Back Frontiers of Knowledge – May be Curiosity Motivated or Applied </li></ul>
    7. 7. The Industrial Research and Development (R&D) Laboratory <ul><li>(Thomas Edison’s Most Important Invention) </li></ul><ul><li>Industrial Research and Development Now Constitutes about 2/3 of US R&D </li></ul>
    8. 8. Classic Problem of Corporate Conglomerate: R&D at Corporate HQ or at Business Unit? <ul><ul><li>Corporate: Respond to Strategic Challenges and Opportunities </li></ul></ul><ul><ul><li>Business Unit: Responds to Immediate Needs of Existing Business </li></ul></ul>
    9. 9. This issue is now moot <ul><li>Private R&D soared during the 1990s and is still high -- But it’s mostly development of new products tied to existing product areas </li></ul><ul><li>Long-range research at the corporate level is much reduced, in part because of modularization </li></ul>
    10. 10. Technology Management Cases Start-Up Firm, Innovative Technology Mature Firm, Innovative Technology Start-Up Firm, Mature Technology Mature Firm, Mature Technology
    11. 11. 1. Mature Firm, Innovative Technology
    12. 12. Project Selection Criteria (Summary) <ul><li>Sales Potential </li></ul><ul><li>Growth Potential </li></ul><ul><li>Payback Period and Profitability </li></ul><ul><li>Competitor Reaction </li></ul><ul><li>Legal and Ethical </li></ul><ul><li>Capital Available </li></ul><ul><li>Skills Available </li></ul><ul><li>Physical Resources Available </li></ul><ul><li>Management Support and Champion </li></ul><ul><li>Community Acceptance </li></ul>
    13. 13. What and how big is the market? <ul><li>Who will use it? For what? What are they doing for that purpose now? </li></ul><ul><li>What is its advantage over existing technology (customer value-added)? </li></ul><ul><li>Remember: any innovation faces an uphill battle -- </li></ul><ul><ul><li>RULE OF THUMB: to displace an entrenched technology, a new technology needs a 10-fold cost/performance advantage </li></ul></ul>
    14. 14. New Products: Phase Development in Order To Minimize Risk <ul><li>Research Costs are ~1/10 of Development Costs </li></ul><ul><li>So Demonstrate Technical Feasibility at Low Cost </li></ul><ul><li>Demonstrate Commercial Feasibility if Milestones are Met </li></ul><ul><li>Gradually Scale Up to Full Commercial Operation </li></ul>
    15. 15. Introducing New Operating Technology in a Mature Organization <ul><li>Rationalize Before You Introduce Technology </li></ul><ul><ul><li>GM-Perot Merger: </li></ul></ul><ul><ul><li>Contrast with Saturn: </li></ul></ul><ul><ul><li>Be Aware of the Organizational and Human Consequences of Introduction of New Technology </li></ul></ul><ul><ul><li>Co-Opt or Retrain Those Responsible for Implementation: </li></ul></ul>
    16. 16. So Keep Venture Divisions Separate from Main Line <ul><li>-- Or Out-Source Innovation to Smaller and More Nimble Companies, Since Radical Innovations Often Come from Outside an Industry </li></ul><ul><li>Example: Big Pharma Companies Buy Innovative Products from Biotech Start-Ups </li></ul>
    17. 17. A Further Aside on Big Pharma <ul><li>Only Blockbusters Justify >$1/2 Billion in Development Costs to Meet FDA Requirements </li></ul><ul><li>Profits Depend on a Few Such Blockbusters – A Very Fragile System </li></ul><ul><li>As Patents Expire, Tremendous Pressures to Replace Blockbusters with New Cash Cows </li></ul><ul><li>Future Emphasis on Personalized Medicine (Tailoring Recommendations to Individual Genome) puts this Model at Risk </li></ul>
    18. 18. <ul><li>New Worry: No Firm, No Matter How Large, Can Master All The Technology it Needs or All the Markets it Might Want to Enter </li></ul><ul><li>So Create Strategic Alliances with Firms that Have the Technology or Know the Market </li></ul>
    19. 19. 2. Mature Firm, Mature Technology
    20. 20. Old Theory: Boston Consulting Group (BCG) Divides Businesses into Dogs : Sell! Cash Cows : Milk! Low Hold Stars : invest! High Low High Growth/Market Share
    21. 21. Big Mistake: Mature Businesses Can Use Technology, Too <ul><li>McDonald’s </li></ul><ul><li>Wal-Mart </li></ul><ul><li>FedEx </li></ul><ul><li>Ikea </li></ul><ul><li>Re-Engineer System </li></ul><ul><li>Cost Control </li></ul><ul><ul><li>Bulk Purchasing </li></ul></ul><ul><ul><li>Minimize Inventory </li></ul></ul><ul><ul><li>Eliminate Unnecessary Steps </li></ul></ul><ul><li>Quality Control </li></ul><ul><li>Standardize Product </li></ul><ul><li>Innovate as Needed </li></ul><ul><li>(But Don’t Imitate Wal-mart’s Labor or Gender Practices!) </li></ul>
    22. 22. 3. Start-Up Firm, State-of-the-Art Technology (These Firms are Vulnerable, but May Have Technologies Critical for Security, Environment, Health or Other Public Purposes)
    23. 23. The High-Tech Business Venture <ul><li>New Product Based on New Technology </li></ul><ul><li>Focus on Identified Market and its Requirements </li></ul><ul><li>Initial Venture Team: </li></ul><ul><ul><li>Technology and Product Design </li></ul></ul><ul><ul><li>Production Management </li></ul></ul><ul><ul><li>Marketing Management </li></ul></ul><ul><ul><li>Capital and Financial Management </li></ul></ul>
    24. 24. Critical Events in the Life of a Venture <ul><li>Start-Up Capital </li></ul><ul><li>Develop New Product </li></ul><ul><li>Establish Production </li></ul><ul><li>Sales Grow </li></ul><ul><li>Revenue Grows </li></ul><ul><li>Production Expands </li></ul><ul><ul><li>2d Round of Finance </li></ul></ul><ul><ul><li>Find New Markets </li></ul></ul><ul><li>Meet Competitive Challenges </li></ul><ul><li>Improve Production </li></ul><ul><li>Improve and Diversify Products </li></ul><ul><li>Develop Organization and Management </li></ul><ul><li>EXIT (Liquidate): Go Public or Sell Out </li></ul>
    25. 25. Threats to Cash Flow of New Ventures <ul><li>Sales Projections and Production Outrun Sales, Inventory Piles Up </li></ul><ul><li>Sales Outrun Production </li></ul><ul><li>Production or Delivery Lags Demand </li></ul><ul><li>Delayed or Insufficient Revenue </li></ul><ul><li>Lag in Meeting Competitive Threat and Developing Second Generation Product </li></ul>
    26. 26. Growth Patterns of New Ventures <ul><li>Ideal : Rapid Initial Growth, Followed by Slower Expansion, Ending as a Large Firm </li></ul><ul><li>Rare : Rapid Initial Growth, Followed by Severe Problems that are Successfully Resolved, with Resumption of Growth </li></ul>
    27. 27. Growth Patterns of New Ventures (2) <ul><li>More Frequent : Rapid Initial Growth Levels Off as Competitors Enter Market. Company Finds Market Niche and Establishes Itself as Small or Medium Firm or Subsidiary of Larger Company </li></ul><ul><li>Sad but Frequent : First Serious Troubles Kill Under-Capitalized Company Despite Initial Growth </li></ul><ul><ul><li>To the Investor, it may not be Worth it to Save Even a Good Idea: There’s a Better Use for the Money. </li></ul></ul><ul><ul><li>This is why Government may invest in a company whose technology is deemed vital to national security. </li></ul></ul>
    28. 28. The Business Plan <ul><li>The Document Critical to the Initial Success of the Firm </li></ul><ul><li>Input to the ‘Deal Flow’ of the Venture Capital Firm </li></ul><ul><li>Only A Few Percent of Deals Proffered are Financed </li></ul>
    29. 29. Purposes of the Business Plan <ul><li>Chart the Course of the New Venture: the Product, the Market, the Strategy </li></ul><ul><li>Set Milestones for Product Development and Launch, Market Development, Expansion </li></ul><ul><li>Identify Needed Resources: Money, Staff, Facilities, Strategy </li></ul><ul><li>Attract Risk Capital! </li></ul><ul><li>A university or an NGO needs a business plan, too, if it’s trying to launch a product -- even if the motive isn’t profit. </li></ul>
    30. 30. Outline of the Business Plan <ul><li>Executive Summary: Attract Interest </li></ul><ul><li>Enterprise Strategy and Technology Strategy </li></ul><ul><ul><li>Who’s the Customer? What’s the Value-Added? What’s the Price? </li></ul></ul><ul><li>Product/Service Strategy: Technical Specifications, Risks, Schedule </li></ul>
    31. 31. Outline of the Business Plan (2) <ul><li>Expected Competition </li></ul><ul><li>Manufacturing and Marketing Strategy, Including Distribution and Sales </li></ul><ul><li>Management Team and Organization </li></ul><ul><li>Staffing Plan </li></ul><ul><li>Financial Plan </li></ul><ul><li>Benchmarking </li></ul>
    32. 32. Sources of Capital <ul><li>Personal Resources: US Entrepreneur Is Expected To Be ‘In Hock to the Eyeballs’ </li></ul><ul><li>An ‘Angel’ (Relative or Rich Individual) </li></ul><ul><li>Strategic Alliance with Potential Customer, Technical Partner, Eventual Manufacturer </li></ul><ul><li>Venture Capitalist (VC) </li></ul>
    33. 33. The More Sweat Equity You Have, the Less You Have to Give Up to the Venture Capitalist. (But Don’t Be Too Greedy: 100% of Zero is Zero)
    34. 34. The Venture Capitalist: the ‘Barracuda’ <ul><li>Normally an Active Investor </li></ul><ul><ul><li>An Interesting Job, Involved in Companies at Many Stages of the Product Cycle , but not as a first job </li></ul></ul><ul><li>Expects High Risks, High Returns </li></ul><ul><li>Judges the Management Team, not the Technology </li></ul><ul><li>Benefits from Low Capital Gains Tax </li></ul><ul><li>Most Deal in Mezzanine or Secondary Finance </li></ul><ul><ul><li>Only a Few Specialize in First Round Financing, </li></ul></ul><ul><ul><li>Exit Strategy: ‘Go Public’ or Sell to Established Company </li></ul></ul>
    35. 35. <ul><li>Venture Capital is Normally Available in the US at Most Levels of Risk, Except for </li></ul><ul><ul><li>High Risk, Long Term Applied Research Projects </li></ul></ul><ul><ul><ul><li>Carried out in Government Laboratories </li></ul></ul></ul><ul><ul><li>The “Valley of Death” Between First Working Model and a Viable Business </li></ul></ul>
    36. 36. The Valley Of Death
    37. 37. <ul><li>US Capital Markets are Extraordinarily Flexible Compared to Other Countries, which are Trying to Emulate the US Model with Mixed Success </li></ul><ul><ul><li>BUT Dot-Com Boom and Bust Show Tendency to Herd Mentality, Over-Investment Followed by Under-Investment </li></ul></ul><ul><li>Venture Capital Revived – and Then Collapsed Again with the Recession </li></ul><ul><ul><li>Perhaps a Bit of Humility is Appropriate after 1990s’ Triumphalism </li></ul></ul>
    38. 38. Globalization, Technology Transfer and the Value Chain:
    39. 39. The Value Chain <ul><li>Definition: A connected series of organizations, resources, and knowledge streams involved in the creation and delivery of value to final customers. </li></ul><ul><li>Brand Definition and Marketing Often Constitute the Most Profitable Link and Can Squeeze the Margins Even of Efficient Suppliers, Although Sometimes a Key Technology Can Command High Margins. </li></ul>
    40. 40. Moving Up the Value Chain Carries Big Rewards, but Also Big Risks It’s Your Product. You Find the Market, Develop the Product, Redesign it if it Doesn’t Sell, Fix it if it Doesn’t Work, and Keep up with the Competition. If the Market Disappears, You’re Stuck.
    41. 41. How Technology is Acquired <ul><li>Non-Proprietary Technology </li></ul><ul><ul><li>Hire an Expert </li></ul></ul><ul><ul><li>Take Courses </li></ul></ul><ul><ul><li>Read Books </li></ul></ul><ul><li>Proprietary Technology </li></ul><ul><ul><li>Direct Foreign Investment (DFI) </li></ul></ul><ul><ul><li>License the Technology </li></ul></ul><ul><ul><li>Purchase the Technology </li></ul></ul><ul><ul><li>Buy the Company that Owns the Technology </li></ul></ul><ul><ul><li>Except for Passive DFI, These Require Investment of Personnel and Money </li></ul></ul><ul><li>Develop it Yourself by Doing Research, Development and Engineering (R, D & E) </li></ul>
    42. 42. Strategic Choice From the Viewpoint of the Technology Owner <ul><li>Integrate: Keep the Technology In-House </li></ul><ul><li>Maintain Control of </li></ul><ul><ul><li>Quality </li></ul></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><li>Product Design </li></ul></ul><ul><ul><li>Technology </li></ul></ul><ul><li>Essential if Technology is ‘Tacit’: i.e., Unarticulated, not Reduced to a Rule or Software </li></ul><ul><li>Modularize: Subcontract to Specialists, Often Offshore </li></ul><ul><ul><li>Information Technology Allows Detailed Specification of Components </li></ul></ul><ul><ul><ul><li>New Emphasis on “Plug and Play” </li></ul></ul></ul><ul><ul><li>Trade-Off: Transfer Enough Technology so they can do the job, but not so much as to create a Competitor </li></ul></ul><ul><ul><li>Some Offshore Vendors Even Become Product Designers </li></ul></ul><ul><ul><ul><li>These Must Choose Whether to Aspire to Having their own Brands, or Whether to Maintain the Trust of their Clients </li></ul></ul></ul>
    43. 43. <ul><li>Offshore </li></ul><ul><ul><li>Minimize Labor Costs </li></ul></ul><ul><ul><li>Exploit Local Skills </li></ul></ul><ul><ul><li>Take Advantage of Local Clusters </li></ul></ul><ul><ul><li>Minimize Expenditure on Environment and Worker Safety (?) </li></ul></ul><ul><li>Local Procurement </li></ul><ul><ul><li>Speed Delivery </li></ul></ul><ul><ul><ul><li>Facilitate Just-in-Time Production </li></ul></ul></ul><ul><ul><li>Speed Response to Change in Markets </li></ul></ul><ul><ul><li>Ease Management Control </li></ul></ul><ul><ul><li>Assure Product Quality </li></ul></ul><ul><ul><li>Safeguard Intellectual Property </li></ul></ul>
    44. 44. From MNC Viewpoint, the Trade-Off Depends on <ul><li>Skills </li></ul><ul><li>Clusters </li></ul><ul><li>Size of Home and Overseas Markets </li></ul><ul><li>Culture of Firm </li></ul><ul><li>Need to be Close to Market </li></ul><ul><li>Transport Costs </li></ul><ul><li>Communication Difficulties </li></ul><ul><li>Need for Close Management Control </li></ul><ul><li>Need for Just-in-Time Supplies </li></ul><ul><li>Need for Quick Response to Market Changes </li></ul><ul><li>Role of Tacit Knowledge in the Integration of Design and Manufacture </li></ul>
    45. 45. Viewpoint of the Technology Recipient Firm <ul><li>Desire to Move Up-Market to Higher Technology and More Profitable Links of Value Chain. This May Not be Easy. Higher Links May </li></ul><ul><ul><li>Require Different Skills, or Public Policies and Infrastructure Investments </li></ul></ul><ul><ul><li>Be Tightly Held </li></ul></ul><ul><ul><li>Endanger Relationships with Existing Customers </li></ul></ul><ul><li>Must Invest in Technology Absorption and Eventually in Own Research </li></ul>
    46. 46. After a Successful Move Up-Market <ul><li>, A New Decision Must be Made as Competition Looms: Sell or Fight </li></ul><ul><ul><li>This Depends Partly on Company’s (and the Investors’ and the Bank’s) Ambition and Appetite for Risk </li></ul></ul>

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