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To accompany contemprory strategy analysis concepts techiniques application chapter11slides

Technology-based
Technology-based Industries
Industries &
&
the
the Management
Management of
of Innovation
Innovation
OUTLIN
E

• 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
The Development
Development of
of Technology:
Technology: From
From
Knowledge
Knowledge Generation
Generation to
to Diffusion
Diffusion
IMITATION

Supply side
Basic
Knowledge

Invention

Innovation

Diffusion

Demand side
ADOPTION


The
The Development
Developmentof
of Technology:
Technology: Lags
LagsBetween
Between


Knowledge
Knowledge Generation
Generationand
andCommercialization
Commercialization

BASIC
KNOWLEDGE

FIRST
PATENTS

PRODUCT
LAUNCH

IMITATION

Xerography

late 19th and
early 20th
centuries

1940

1958

1974

Jet Engines

17th-- early
20th centuries

1930

1957

1959

Fuzzy logic
controllers

1960’s

1981

1987

1988


Appropriation
Appropriation of
of Value:Value:- How
How are
are the
the
Benefits
Benefits from
from Innovation
Innovation Distributed?
Distributed?

Customers

Suppliers
Innovator
Imitators and
other
“followers”


The
The Profitability
Profitability of
of Innovation
Innovation

Profits
from
Innovation

Value of the
innovation
Innovator’s
ability to
appropriate the
value of the
innovation

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


Legal
Legal Protection
Protection of
of Intellectual
Intellectual Property
Property
• Patents
• Copyrights
• Trademarks

• Trade Secrets

—exclusive rights to a new product,
process, substance or design.
—exclusive rights to artistic, dramatic,
and musical works.
— exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
— 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
Complementary Resources
Resources
Manufacturing Distribution

Finance

Core
technological
know-how

Marketing
Other

Service

Complementary
technologies

Other

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


Lead
Lead Time
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.
U.S. Managers’
Managers’Perceptions
Perceptions of
of the
the Effectiveness
Effectiveness of
of
Different
Different Mechanisms
Mechanisms for
for Protecting
Protecting Innovation
Innovation
Processes
Patents to prevent duplication
3.52
Patents to secure royalty income
3.31
Secrecy
4.31
Lead time
5.11
Moving quickly down the learning
5.02
curve
Sales or service efforts
4.55
1 = not at all effective

Products
4.33
3.75
3.57
5.41
5.09
5.59

7 = very effective

Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.


Alternative
AlternativeStrategies
Strategiesfor
forExploiting
ExploitingInnovation
Innovation

Licensing

Risk &
Return

Strategic
Alliance

Joint
Venture

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

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

Few

Allows outside
resources &
capabilities
To be accessed

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

Konica
licensing its
digital
camera to
HP

Pixar’s movies
(e.g. “Toy Story”)
marketed &
distributed by
Disney.

Competing
Resources

Examples

Outsourcing
certain
functions

Apple and
Sharp build
the
“Newton”
PDA

Microsoft
and NBC
formed
MSNBC

Internal
Commercialization

Biggest risks &
benefits.
Allows complete
control

Substantial
resource
requirements
TI’s
development of
Digital Signal
Processing
Chips


The
The Comparative
ComparativeSuccess
Success of
of Leaders
Leadersand
and
Followers
Followers

PRODUCT
Jet Airliners
Float glass
X-Ray Scanner
Office P.C.
VCRs
Diet Cola
Instant Cameras
Pocket Calculator
Microwave Oven
Plain Paper Copiers
Fiber Optic Cable
Video Games Players
Disposable Diapers
Web browser
PDA
MP3 music players

INNOVATOR
De Havilland (Comet)
Pilkington
EMI
Xerox
Ampex/Sony
R.C. Cola
Polaroid
Bowmar
Raytheon
Xerox
Corning
Atari
Proctor & Gamble
Netscape
Psion, Apple
Diamond Multimedia

FOLLOWER
Boeing (707)
Corning
General Electric
IBM
Matsushita
Coca Cola
Kodak
Texas Instruments
Samsung
Canon
many companies
Nintendo//Sony
Kimberly-Clark
Microsoft
Palm
Sony (&others)

WINNER
Follower
Leader
Follower
Follower
Follower
Follower
Leader
Follower
Follower
Not clear
Leader
Followers
Leader
Follower
Follower
Followers


The
The Strategic
Strategic Management
Management of
of Technology:Technology:To
To Lead
Lead or
or to
to Follow
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 betterestablished 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
Uncertainty&&Risk
RiskManagement
Managementin
inTech-based
Tech-basedIndustries
Industries
Technological
uncertainty
Sources of
uncertainty

Market
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

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

Strategies for
managing risk

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


The
The Emergence
Emergence of
of Standards
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
Sources of
of Network
Network Externalities
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 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
Companies that
that Own
Own Technical
Technical Standards
Standards

COMPANY
Microsoft/Intel

Matsushita
Iomega
Intuit

PRODUCT CATEGORY
PC operating systems

Videocassette recorders
High capacity PC disk drives
Software for on-line financial
transactions
Rockwell/ 3Com
56K modems
Dolby Laboratories Sound processing systems
Qualcomm
Digital wireless telecom signals
Adobe Systems
Common file format for creating
and viewing documents

STANDARD
“Wintel” (Windows
OS & Intel *86 series
processors
VHS system
Zip drives
Quicken
V90
Dolby sound reduction
CDMA
Acrobat


Competing
Competing for
for Standards:
Standards:
Value
ValueAppropriation
Appropriation vs.
vs. Market
MarketAcceptance
Acceptance

Maximize
market
acceptance

VHS

Betamax

LOOSE

Maximize
value
appropriation

TIGHT
IBM-PC

Mac


Fighting
Fighting Standards
Standards Wars
Wars
1.
2.
3.
4.

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


The
TheConditions
Conditionsfor
for Creativity:
Creativity:
“Operating”
“Operating” and
and “Innovating”
“Innovating” Organizations
Organizations
Structure

Processes

Reward
Systems
People

Operating Organization

Innovating Organization

Bureaucratic. Specialization and
division of labor. Hierarchical
control
Operating units controlled and
coordinated by top management
which undertakes strategic
planning, capital allocation and
operational planning.
Financial compensation, promotion
up the hierarchy, power and status
symbols.
Recruitment and selection based
upon the needs of the organization
structure for specific skills:
functional and staff specialists,
general managers, and operatives.

Flat organization without
hierarchical control. Task-oriented
project teams.
Processes directed toward
generation, selection, funding and
development of ideas. Strategic
planning flexible, financial and
operating controls loose.
Autonomy, recognition, equity
participation in new ventures
Key need is for idea generators
which combine required technical
knowledge with creative
personality traits. Managers must
act as sponsors and orchestrators.


Strategy
Strategy Implementation:
Implementation:
Invention
Invention to
to Innovation
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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