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Technology- based Industries & the Management of Innovation. OUTLINE. Competitive a dvantage in t echnology- i ntensive Industries Appropriating the returns to innovation Strategi es to exploit innovation Alternative approaches Timing: to lead or to follow? Managing risk

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technology based industries the management of innovation
Technology-based Industries & the Management of Innovation

OUTLINE

  • 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
the development of technology from knowledge generation to diffusion
The Development of Technology: From Knowledge Generation to Diffusion

IMITATION

Supply side

Basic Knowledge

Invention

Innovation

Diffusion

Demand side

ADOPTION

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

approp r ia tion of value how are the benefits f rom innovation distributed
Appropriation of Value:- How are the Benefits from Innovation Distributed?

Customers

Suppliers

Innovator

Imitators and other “followers”

the profitability of innovation
The Profitability of Innovation

Value of the innovation

  • Legal protection
  • Complementary
  • resources
  • Imitability of the
  • technology
  • Lead time

Profits from Innovation

Innovator’s ability to appropriate the value of the innovation

legal protection of in tellectual property
Legal 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 areregistered 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.

complementary resources
Complementary Resources

Distribution

Manufacturing

Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.

Finance

Service

Core

technological know-how

Complementary

technologies

Marketing

Other

Other

lead time
Lead 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 3.57 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.

slide10

Alternative Strategies for Exploiting Innovation

Outsourcing certain functions

Strategic Alliance

Joint Venture

Internal Commercialization

Licensing

Biggest risks & benefits.

Allows complete control

Limits investment, but dependence on suppliers & partners

Benefits of flexibility; risks of informal structure

Shares investment & risk. Risk of partner conflict & culture clash

Small risk, but limited returns also (unless patent position very strong

Risk & Return

Allows outside resources & capabilities

To be accessed

Few

Permits pooling of the resources/capabilities of more than one firm

Substantial resource requirements

CompetingResources

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

Examples

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

leaders vs followers in innovation
Leaders 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

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.

uncertainty risk management in tech based industries
Uncertainty & Risk Management in Tech-based Industries

Selection process for standards and

dominant designs emerge is complex

and difficult to predict, e.g. future of 3G

Technological

uncertainty

Sources of

uncertainty

Market

uncertainty

Customer acceptance and adoption rates

of innovations notoriously difficult to

predict, e.g. PC, Xerox copier, Walkman

  • Cooperating with lead users
  • early identification of customer requirements
    • assistance in new product development

Strategies for

managing risk

Limiting risk exposure

—avoid major capital commitments

(e.g. lease don’t buy)

—outsource

—alliances to access other firms’

resources & capabilities

—keep debt low

Flexibility

—keep options open

—use speed of response to adapt

quickly to new information

—learn from mistakes

the emergence of standards
The 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 externalities
Sources 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)
companies that own technical standards
Companies 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

Betamax

VHS

LOOSE

TIGHT

Apple

Mac

IBM-PC

fighting standards wars
Fighting Standards Wars
  • Determine the potential for standards emergence—analyze network externalities
  • Building a bandwagon—enlist partners (requires licensing & sharing returns from the technology)
  • Pre-empting the market—Build user base quickly: May require sharing benefits with consumers (penetration pricing)
  • 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

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.