Technology-based Industries & the Management of Innovation

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OUTLIN E

Competitive advantage in technology-intensive Industries

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Appropriating the returns to innovation Strategies to exploit innovation

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Alternative approaches

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Timing: to lead or to follow?

Managing risk Competing for standards Implementing technology strategy

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The conditions for creativity

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From invention to innovation

The Development of Technology: From Knowledge Generation to Diffusion

Basic Knowledge Invention

Supply side

IMITATION Innovation Diffusion

Demand side

ADOPTION

The Development of Technology: Lags Between Knowledge Generation and Commercialization Xerography Jet Engines Fuzzy logic controllers BASIC FIRST PRODUCT IMITATION KNOWLEDGE PATENTS LAUNCH late 19th and 1940 1958 1974 early 20th centuries 17th-- early 1930 1957 1959 20th centuries 1960’s 1981 1987 1988

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

Customers Suppliers Imitators and other “followers” Innovator

The Profitability of Innovation

Profits from Innovation Value of the innovation Innovator ’s ability to appropriate the value of the innovation

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Legal protection

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Complementary resources

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Imitability of the technology

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Lead time

Legal Protection of Intellectual Property

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Patents

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Copyrights

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Trademarks

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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 iemployees can restrict the transfer of technology and know how.

Complementary Resources

Manufacturing Distribution Finance Marketing Service Core technological know-how Complementary technologies Other Other Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.

Lead Time

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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

Patents to prevent duplication Patents to secure royalty income Secrecy Lead time Moving quickly down the learning curve Sales or service efforts

Processes Products

3.52

4.33

3.31

4.31

5.11

5.02

3.75

3.57

5.41

5.09

4.55

5.59

1 = not at all effective 7 = very effective

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

Alternative Strategies for Exploiting Innovation 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 Few Allows outside resources & capabilities To be accessed Benefits of flexibility; risks of informal structure Shares investment & risk. Risk of partner conflict & culture clash Biggest risks & benefits. Allows complete control 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

The Comparative Success of Leaders and 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/Sega/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 Strategic Management of Technology: To Lead or to Follow

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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 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.

Exploiting Innovation

Innovation

Risk & Return Competing Resources Examples Licensing Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization

V. small investment risk, but small returns also limited (unless patent position very strong) Some legal risks Limits capital investment, but may create dependence on supplies/partners Few Konica licensing its digital camera to Hewlett Packard Permits accessing of outside resources and capabilities Pixar’s computer animated movies (e.g. “Toy Story”) marketed and distributed by Disney Co.

Benefits of flexibility, risks of informal structure Shares investment and risk. Risk of partner disagreement and culture clash Biggest investment requirement and corresponding risks. Benefits of control Permits pooling of the resources and capabilities of more than one firm Apple and Sharp build the “Newton” PDA Microsoft and NBC formed MSNBC Substantial requirements in terms of finance, production capability, marketing capability, distribution, etc.

TI divestment of its Digital Signal Processing Chips

The Strategic Management of Technology: To Lead or to Follow

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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 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 & Risk Management in Tech-based Industries Technological uncertainty Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G Sources of uncertainty Market uncertainty Customer acceptance and adoption rates of innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman Strategies for managing risk Flexibilility Cooperating with lead users early identification of customer requirements

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assistance in new product development —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 Emergence of Standards

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Emergence of a dominant design paradigm

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Model T in autos

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IBM 360 in mainframes

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Douglas DC3 in passenger aircraft Emergence of technical standards

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Emerge in industries where there are network extremities Entrenchment of the dominant designs and technical standards

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Learning effects: incremental improvement of the dominant design

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Switching costs Need for coordinated action by multiple players

Sources of Network Externalities

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User linkages, e.g.

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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.

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Most PC applications software written for Windows, not Mac.

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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.

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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 that Own Technical Standards

COMPANY Microsoft Intel Matsushita Iomega Intuit AMR Rockwell/ 3Com Qualcomm Adobe Systems PRODUCT CATEGORY PC operating systems PC microprocessors Videocassette recorders High capacity PC disk drives Software for on-line financial transactions Computerized airline reservations system 56K modems Digital wireless telecom signals Common file format for creating and viewing documents STANDARD Windows *86 series VHS system Zip drives Quicken Sabre V90 CDMA Acrobat

Competing for Standards: Value Appropriation vs. Market Acceptance

Maximize market acceptance

LOOSE

VHS Betamax Maximize value appropriation IBM-PC Mac

TIGHT

The Conditions for Creativity: “Operating” and “Innovating” 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 Implementation: Invention to Innovation

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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.

Slides used for summarizing case issues

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EMI & the CT Scanner [A] & [B]

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Video Games Case

EMI SCANNER: THE AFTERMATH

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EMI established 3 rd generation as a priority. Gives responsibility to US subsidiary.

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R&D expenditures mount, project delayed, Houndsfield & team fly out to US to assist.

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“Certificate of need” introduced

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Demand peaks in 1977: Rapid decline in US sales of CT scanners in 1978-1980

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Prices fall rapidly; several competitors exit

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Losses at EMI Medical threaten solvency of EMI as a whole

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EMI merges with Thorn to form Thorn-EMI

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1980: Thorn sells EMI Medical to GE for 20m pounds; Houndsfield receives Nobel prize for medicine.

ISSUES ARISING FROM EMI SCANNER CASE

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“A” CASE Exploiting an innovation: — alternative strategies — analyzing appropriability “B” CASE

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First mover vs. follower advantage: — The role of complementary resources — Managing the “window of opportunity”

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Industry evolution —changes in industry structure, competition & key success factors

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Effective strategy implementation —the need for structure

Issues Arising from Video Games Case

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Hardware-software complementarities: - Where’s the profit?

--Strategy of complementarity: Need for coordination - Importance of “killer app.” Analyzing the existence and sources of network externalities --user linkages --availability of complements --training costs --social conformity How to win in standards wars --1 st mover advantage (disadvantage?) --pre-emption --managing expectations --partnering Holding on to leadership --backward compatibility