This document discusses various aspects of managing technological innovation in business, including: 1. Definitions of key terms like technology strategy, core competence, applied vs. basic research, and the industrial R&D laboratory. 2. Factors to consider for project selection like market potential, payback period, and skills available. 3. Phases of new product development like demonstrating technical and commercial feasibility before full commercial operation. 4. Growth patterns of start-up firms pursuing new technologies and challenges they may face.

1. Management of Technological Innovation in Business

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. Definition: Elements of Management Control Guide Administer

4. Technological Elements of Management Business Strategy Technology Forecasting Technological and Market Intelligence Support and Finance Human Resources Management Risk Capital Technological Operations Technology Acquisition, Implementation and Integration Management of Research and Development New Product Development

5. Definitions Technology Strategy : Anticipating and Planning for Technical Change A ‘High-Tech’ Company : High Margins (‘Economic Rents’) due to Limited Competition by Dint of a Technological Monopoly Core Competence : A Skill in Technology, Marketing, Production, and/or Finance that Defines a Firm’s Competitive Advantage Core Technology : A Technology Necessary to a Product or to its Production or Servicing, and Not Substitutable: Don’t Outsource This!

6. Distinguish Between Applied Research : Seek New Knowledge Toward a Practical Objective Long- vs. Short-Term Research – Best Classification for Private Sector Management of Research Curiosity Motivated Research : Acquire New Knowledge for its Own Sake Basic Research : Push Back Frontiers of Knowledge – May be Curiosity Motivated or Applied

7. The Industrial Research and Development (R&D) Laboratory (Thomas Edison’s Most Important Invention) Industrial Research and Development Now Constitutes about 2/3 of US R&D

8. Classic Problem of Corporate Conglomerate: R&D at Corporate HQ or at Business Unit? Corporate: Respond to Strategic Challenges and Opportunities Business Unit: Responds to Immediate Needs of Existing Business

9. This issue is now moot Private R&D soared during the 1990s and is still high -- But it’s mostly development of new products tied to existing product areas Long-range research at the corporate level is much reduced, in part because of modularization

10. Technology Management Cases Start-Up Firm, Innovative Technology Mature Firm, Innovative Technology Start-Up Firm, Mature Technology Mature Firm, Mature Technology

11. 1. Mature Firm, Innovative Technology

12. Project Selection Criteria (Summary) Sales Potential Growth Potential Payback Period and Profitability Competitor Reaction Legal and Ethical Capital Available Skills Available Physical Resources Available Management Support and Champion Community Acceptance

13. What and how big is the market? Who will use it? For what? What are they doing for that purpose now? What is its advantage over existing technology (customer value-added)? Remember: any innovation faces an uphill battle -- RULE OF THUMB: to displace an entrenched technology, a new technology needs a 10-fold cost/performance advantage

14. New Products: Phase Development in Order To Minimize Risk Research Costs are ~1/10 of Development Costs So Demonstrate Technical Feasibility at Low Cost Demonstrate Commercial Feasibility if Milestones are Met Gradually Scale Up to Full Commercial Operation

15. Introducing New Operating Technology in a Mature Organization Rationalize Before You Introduce Technology GM-Perot Merger: Contrast with Saturn: Be Aware of the Organizational and Human Consequences of Introduction of New Technology Co-Opt or Retrain Those Responsible for Implementation:

16. So Keep Venture Divisions Separate from Main Line -- Or Out-Source Innovation to Smaller and More Nimble Companies, Since Radical Innovations Often Come from Outside an Industry Example: Big Pharma Companies Buy Innovative Products from Biotech Start-Ups

17. A Further Aside on Big Pharma 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 Future Emphasis on Personalized Medicine (Tailoring Recommendations to Individual Genome) puts this Model at Risk

18. New Worry: No Firm, No Matter How Large, Can Master All The Technology it Needs or All the Markets it Might Want to Enter So Create Strategic Alliances with Firms that Have the Technology or Know the Market

19. 2. Mature Firm, Mature Technology

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. Big Mistake: Mature Businesses Can Use Technology, Too McDonald’s Wal-Mart FedEx Ikea Re-Engineer System Cost Control Bulk Purchasing Minimize Inventory Eliminate Unnecessary Steps Quality Control Standardize Product Innovate as Needed (But Don’t Imitate Wal-mart’s Labor or Gender Practices!)

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. The High-Tech Business Venture New Product Based on New Technology Focus on Identified Market and its Requirements Initial Venture Team: Technology and Product Design Production Management Marketing Management Capital and Financial Management

24. Critical Events in the Life of a Venture Start-Up Capital Develop New Product Establish Production Sales Grow Revenue Grows Production Expands 2d Round of Finance Find New Markets Meet Competitive Challenges Improve Production Improve and Diversify Products Develop Organization and Management EXIT (Liquidate): Go Public or Sell Out

25. Threats to Cash Flow of New Ventures Sales Projections and Production Outrun Sales, Inventory Piles Up Sales Outrun Production Production or Delivery Lags Demand Delayed or Insufficient Revenue Lag in Meeting Competitive Threat and Developing Second Generation Product

26. Growth Patterns of New Ventures Ideal : Rapid Initial Growth, Followed by Slower Expansion, Ending as a Large Firm Rare : Rapid Initial Growth, Followed by Severe Problems that are Successfully Resolved, with Resumption of Growth

27. Growth Patterns of New Ventures (2) 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 Sad but Frequent : First Serious Troubles Kill Under-Capitalized Company Despite Initial Growth To the Investor, it may not be Worth it to Save Even a Good Idea: There’s a Better Use for the Money. This is why Government may invest in a company whose technology is deemed vital to national security.

28. The Business Plan The Document Critical to the Initial Success of the Firm Input to the ‘Deal Flow’ of the Venture Capital Firm Only A Few Percent of Deals Proffered are Financed

29. Purposes of the Business Plan Chart the Course of the New Venture: the Product, the Market, the Strategy Set Milestones for Product Development and Launch, Market Development, Expansion Identify Needed Resources: Money, Staff, Facilities, Strategy Attract Risk Capital! 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.

30. Outline of the Business Plan Executive Summary: Attract Interest Enterprise Strategy and Technology Strategy Who’s the Customer? What’s the Value-Added? What’s the Price? Product/Service Strategy: Technical Specifications, Risks, Schedule

31. Outline of the Business Plan (2) Expected Competition Manufacturing and Marketing Strategy, Including Distribution and Sales Management Team and Organization Staffing Plan Financial Plan Benchmarking

32. Sources of Capital Personal Resources: US Entrepreneur Is Expected To Be ‘In Hock to the Eyeballs’ An ‘Angel’ (Relative or Rich Individual) Strategic Alliance with Potential Customer, Technical Partner, Eventual Manufacturer Venture Capitalist (VC)

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. The Venture Capitalist: the ‘Barracuda’ Normally an Active Investor An Interesting Job, Involved in Companies at Many Stages of the Product Cycle , but not as a first job Expects High Risks, High Returns Judges the Management Team, not the Technology Benefits from Low Capital Gains Tax Most Deal in Mezzanine or Secondary Finance Only a Few Specialize in First Round Financing, Exit Strategy: ‘Go Public’ or Sell to Established Company

35. 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

36. The Valley Of Death

37. US Capital Markets are Extraordinarily Flexible Compared to Other Countries, which are Trying to Emulate the US Model with Mixed Success BUT Dot-Com Boom and Bust Show Tendency to Herd Mentality, Over-Investment Followed by Under-Investment Venture Capital Revived – and Then Collapsed Again with the Recession Perhaps a Bit of Humility is Appropriate after 1990s’ Triumphalism

38. Globalization, Technology Transfer and the Value Chain:

39. The Value Chain Definition: A connected series of organizations, resources, and knowledge streams involved in the creation and delivery of value to final customers. 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.

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. How Technology is Acquired Non-Proprietary Technology Hire an Expert Take Courses Read Books Proprietary Technology Direct Foreign Investment (DFI) License the Technology Purchase the Technology Buy the Company that Owns the Technology Except for Passive DFI, These Require Investment of Personnel and Money Develop it Yourself by Doing Research, Development and Engineering (R, D & E)

42. Strategic Choice From the Viewpoint of the Technology Owner Integrate: Keep the Technology In-House Maintain Control of Quality Timing Product Design Technology Essential if Technology is ‘Tacit’: i.e., Unarticulated, not Reduced to a Rule or Software Modularize: Subcontract to Specialists, Often Offshore Information Technology Allows Detailed Specification of Components New Emphasis on “Plug and Play” Trade-Off: Transfer Enough Technology so they can do the job, but not so much as to create a Competitor Some Offshore Vendors Even Become Product Designers These Must Choose Whether to Aspire to Having their own Brands, or Whether to Maintain the Trust of their Clients

43. Offshore Minimize Labor Costs Exploit Local Skills Take Advantage of Local Clusters Minimize Expenditure on Environment and Worker Safety (?) Local Procurement Speed Delivery Facilitate Just-in-Time Production Speed Response to Change in Markets Ease Management Control Assure Product Quality Safeguard Intellectual Property

44. From MNC Viewpoint, the Trade-Off Depends on Skills Clusters Size of Home and Overseas Markets Culture of Firm Need to be Close to Market Transport Costs Communication Difficulties Need for Close Management Control Need for Just-in-Time Supplies Need for Quick Response to Market Changes Role of Tacit Knowledge in the Integration of Design and Manufacture

45. Viewpoint of the Technology Recipient Firm Desire to Move Up-Market to Higher Technology and More Profitable Links of Value Chain. This May Not be Easy. Higher Links May Require Different Skills, or Public Policies and Infrastructure Investments Be Tightly Held Endanger Relationships with Existing Customers Must Invest in Technology Absorption and Eventually in Own Research

46. After a Successful Move Up-Market , A New Decision Must be Made as Competition Looms: Sell or Fight This Depends Partly on Company’s (and the Investors’ and the Bank’s) Ambition and Appetite for Risk