TEXNOLOGY-BASED INDUSTRIES AND THE MANAGEMENT OF INNOVATION Chapter 11 Chapter 11

Objectives Analyze how technology affects industry structure and competition Analyze how technology affects industry structure and competition Identify the factors that determine the returns to innovation, and evaluate the potential for an innovation to establish competitive advantage. Identify the factors that determine the returns to innovation, and evaluate the potential for an innovation to establish competitive advantage. Formulate strategies for exploiting innovation and managing technology focusing in particular on: Formulate strategies for exploiting innovation and managing technology focusing in particular on: -the relative advantages of being a leader or a follower in innovation; -identifying and evaluating strategic options for exploiting innovation; -how to win standard battles; - how to manage risk. -the relative advantages of being a leader or a follower in innovation; -identifying and evaluating strategic options for exploiting innovation; -how to win standard battles; - how to manage risk.

Whereas a calculator on the ENIAC is equipped with 18,000 vacuum tubes and weighs 30 tons, computers in the future may have only 1,000 vacuum tubes and perhaps weigh only 1,5 tons. - Popular Mechanics, March,1949 I can think of no conceivable reason why an individual should wish to have a computer in his own home. -Kenneth Olsen, Chairman, Digital Equipment Corporation, 1977

Introduction Our emphasis is the role of technology in creating competitive advantage. Our emphasis is the role of technology in creating competitive advantage. The central focus is innovation. The central focus is innovation. Innovation involves the creation of new products and new industries/biotechnology, fiber-optics/, the enhancement of existing products/laser surgery/, and the application of technology to industrial and business processes. Innovation involves the creation of new products and new industries/biotechnology, fiber-optics/, the enhancement of existing products/laser surgery/, and the application of technology to industrial and business processes.

Competitive Advantage in Technology-intensive Industries The Innovation Process The Innovation Process Invention is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge. Most inventions are the result of novel applications of existing knowledge. Invention is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge. Most inventions are the result of novel applications of existing knowledge.

The Innovation Process Innovation is the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production. An innovation may be the result of a single invention or it may combine many inventions. Many innovations may involve little or no new technology: the personal computer brought together existing components and technologies, but no fundamental scientific breakthroughs. Innovation is the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production. An innovation may be the result of a single invention or it may combine many inventions. Many innovations may involve little or no new technology: the personal computer brought together existing components and technologies, but no fundamental scientific breakthroughs.

From knowledge creation to innovation Chester F. Carlson invented xerography in 1938 by combing established basic knowledge about electrostatics and printing. The first patents were awarded in Patent rights were purchased by Xerox Corporation, which launched its first office copier in Chester F. Carlson invented xerography in 1938 by combing established basic knowledge about electrostatics and printing. The first patents were awarded in Patent rights were purchased by Xerox Corporation, which launched its first office copier in By 1974 the first competitive machines were introduced by IBM, Kodak, Canon… By 1974 the first competitive machines were introduced by IBM, Kodak, Canon…

From knowledge creation to innovation The jet engine, employing Newtonian principles of forces, was patented by Frank Whittle in 1930.The first commercial jet airliner, the Comet, flew in Two years later, the Boeing 707 was introduced. The jet engine, employing Newtonian principles of forces, was patented by Frank Whittle in 1930.The first commercial jet airliner, the Comet, flew in Two years later, the Boeing 707 was introduced.

From knowledge creation to innovation The mathematics of fuzzy logic wre developed by Lotfi Zadeh at Berkeley during the 1960s. By the early 1980s, Dr. Takeshi Yamakawa of the Kyushu Institute of Technology had registered patents for integrated circuits embodying fuzzy logic, and in 1987, a series of fuzzy logic controllers for industrial machines was launched by Omron of Kyoto. By 1991, the world market for fuzzy logic controllers was estimated at $2 billion. The mathematics of fuzzy logic wre developed by Lotfi Zadeh at Berkeley during the 1960s. By the early 1980s, Dr. Takeshi Yamakawa of the Kyushu Institute of Technology had registered patents for integrated circuits embodying fuzzy logic, and in 1987, a series of fuzzy logic controllers for industrial machines was launched by Omron of Kyoto. By 1991, the world market for fuzzy logic controllers was estimated at $2 billion.

From knowledge creation to innovation Innovation is responsible for the creation of new industries and is the basis of competition and competitive advantage throughout the early phases of industries life cycle. Innovation is responsible for the creation of new industries and is the basis of competition and competitive advantage throughout the early phases of industries life cycle. However, just because innovation is important, that does not necessarily mean that pursuing innovation will be profitable for the firm. However, just because innovation is important, that does not necessarily mean that pursuing innovation will be profitable for the firm.

The Profitability of Innovation INNOVATION IS NO GUARANTOR OF FAME AND FORTUNE, EITHER FOR INDIVIDUALS OR FOR COMPANIES! INNOVATION IS NO GUARANTOR OF FAME AND FORTUNE, EITHER FOR INDIVIDUALS OR FOR COMPANIES! The key determinant of profitability of an innovation to the innovator is the share of the value created by that innovation that the innovator is able to appropriate. The value created by an innovation is distributed among four parties: Innovator, Imitators and other Followers, Suppliers, Customers. The key determinant of profitability of an innovation to the innovator is the share of the value created by that innovation that the innovator is able to appropriate. The value created by an innovation is distributed among four parties: Innovator, Imitators and other Followers, Suppliers, Customers.

The Profitability of Innovation The innovator gain profits from the innovation. The innovator gain profits from the innovation. So too do the imitators who are able to copy and modify it So too do the imitators who are able to copy and modify it Dell, Compaq, Acer, and other followers into the personal computer industry earned far more profit than the innovators, MITS and Apple. Dell, Compaq, Acer, and other followers into the personal computer industry earned far more profit than the innovators, MITS and Apple.

The Profitability of Innovation Suppliers may also be key beneficiaries: in personal computers, the suppliers of components / Intel and AMD in microprocessors …/ and operating software /Microsoft/ Suppliers may also be key beneficiaries: in personal computers, the suppliers of components / Intel and AMD in microprocessors …/ and operating software /Microsoft/ Customers also are major recipients of the value created: presumably, the value each of us derives from our PCs is far in excess of the $900 or so that we spent on purchasing it. Customers also are major recipients of the value created: presumably, the value each of us derives from our PCs is far in excess of the $900 or so that we spent on purchasing it.

The profitability of Innovation In a strong regime of appropriability, the innovator is able to capture a substantial share of the value created. In a weak regime of appropriability, other parties derive most of value. Four factors are critical in determining the extent to which innovators are able to appropriate the value of their innovations:1.Property rights 2.Complementary resources 3.Those characteristics of the technology that influence its immitability 4.Lead time In a strong regime of appropriability, the innovator is able to capture a substantial share of the value created. In a weak regime of appropriability, other parties derive most of value. Four factors are critical in determining the extent to which innovators are able to appropriate the value of their innovations:1.Property rights 2.Complementary resources 3.Those characteristics of the technology that influence its immitability 4.Lead time

Property Rights in Innovation Appropriating the returns to innovation depend, to a great extent, on the ability to establish property rights in the innovation. Appropriating the returns to innovation depend, to a great extent, on the ability to establish property rights in the innovation.

Property Rights in Innovation Areas of intellectual property: Areas of intellectual property: Patents are exclusive rights to a new and useful product, process, substance, or design. Obtaining a patent requires that the invention is novel, useful, and not excessively obvious. Patent law varies from country to country. Patents are exclusive rights to a new and useful product, process, substance, or design. Obtaining a patent requires that the invention is novel, useful, and not excessively obvious. Patent law varies from country to country. Copyrights are exclusive production, publication, or sales rights to the creators of artistic, literary, dramatic, or musical works. Examples include articles, books, maps, photographs, and musical compositions Copyrights are exclusive production, publication, or sales rights to the creators of artistic, literary, dramatic, or musical works. Examples include articles, books, maps, photographs, and musical compositions

Property Rights in Innovation Trademarks are words, symbols, or other marks used to distinguish the goods or services supplied by a firm. In the US, they are registered with the Patent Office. Trademarks provide the basis for brand identification. Trademarks are words, symbols, or other marks used to distinguish the goods or services supplied by a firm. In the US, they are registered with the Patent Office. Trademarks provide the basis for brand identification. Trade secrets offer less well-defined legal protection. Their protection relates chiefly to chemical formulae, recipes, and industrial processes Trade secrets offer less well-defined legal protection. Their protection relates chiefly to chemical formulae, recipes, and industrial processes

Property Rights in Innovation The effectiveness of these legal instruments of protection depends on the type of innovation being protected. The effectiveness of these legal instruments of protection depends on the type of innovation being protected. While patents and copyrights establish property rights, their disadvantage is that they make information public. Hence, companies may prefer secrecy patenting as a means of protecting innovations. While patents and copyrights establish property rights, their disadvantage is that they make information public. Hence, companies may prefer secrecy patenting as a means of protecting innovations.

Complementary Resources Innovation brings new product and processes to market. This requires more than invention, it requires the diverse resources and capabilities: -Finance -Complementary technologies -Competitive manufacturing -Marketing-Distribution-Service -Core technological know-how in innovation and so on and so on

Complementary resources The presence of specialized complementary resources means that the innovator has to share his gains with the suppliers of these assets, but the innovator may benefit from the fact that these specialized complementary resources also create a barrier to imitation. The presence of specialized complementary resources means that the innovator has to share his gains with the suppliers of these assets, but the innovator may benefit from the fact that these specialized complementary resources also create a barrier to imitation.

The Characteristics of the Technology The extent to which an innovation can be copied depends not just on legal protection through patents and copyrights, but also on the characteristics of the technology. The extent to which an innovation can be copied depends not just on legal protection through patents and copyrights, but also on the characteristics of the technology.

The Characteristics of the Technology Two characteristics are specially important. The first is the extent to which the knowledge embodied in the innovation is tacit or codifiable. Two characteristics are specially important. The first is the extent to which the knowledge embodied in the innovation is tacit or codifiable. Codifiable knowledge, is that which can be written down. Hence, if it is not effectively protected by patents or copyright, diffusion is likely to be rapid and the competitive advantage not sustainable. Codifiable knowledge, is that which can be written down. Hence, if it is not effectively protected by patents or copyright, diffusion is likely to be rapid and the competitive advantage not sustainable.

The Characteristics of the Technology Innovations based on tacit knowledge cannot be codified: they are built on the know- how, intuition, and insight of employees and the organizational routines and values that link employees/Toyotas systems for developing and producing its cars/ Innovations based on tacit knowledge cannot be codified: they are built on the know- how, intuition, and insight of employees and the organizational routines and values that link employees/Toyotas systems for developing and producing its cars/ The second characteristic is complexity.Even without patent and copyright protection some innovations are very difficult to copy. The second characteristic is complexity.Even without patent and copyright protection some innovations are very difficult to copy.

Lead Time Tacitness and complexity do not provide lasting barriers to imitation, but they do offer the innovator time. The innovators lead time is the time it will take followers to catch up. The challenge for the innovator is to use initial lead time advantages to build the capabilities and market position to entrench industry leadership Tacitness and complexity do not provide lasting barriers to imitation, but they do offer the innovator time. The innovators lead time is the time it will take followers to catch up. The challenge for the innovator is to use initial lead time advantages to build the capabilities and market position to entrench industry leadership The ability to turn lead time into cost advantage is thus a key aspect of the innovators advantage. The ability to turn lead time into cost advantage is thus a key aspect of the innovators advantage.

Alternative Strategies to Exploit Innovation Several alternative strategies are available. Several alternative strategies are available. Licensing requires very little involvement by the innovator in subsequent commercialization; Internal commercialization involves much greater involvement. Licensing requires very little involvement by the innovator in subsequent commercialization; Internal commercialization involves much greater involvement.

Alternative Strategies to Exploit Innovation In between, there are various opportunities for collaboration with other companies.This may take the form of an informal alliance, subcontracting certain activities to outside companies, or a joint venture, a new company created and owned by two or more partners. Figure: Alternative strategies for exploiting innovation In between, there are various opportunities for collaboration with other companies.This may take the form of an informal alliance, subcontracting certain activities to outside companies, or a joint venture, a new company created and owned by two or more partners. Figure: Alternative strategies for exploiting innovation

Alternative Strategies to Exploit Innovation The choice of strategy mode depends on two main sets of factors: The choice of strategy mode depends on two main sets of factors: the characteristics of the innovation, and the characteristics of the innovation, and the resources and capabilities of the firm. the resources and capabilities of the firm.

Characteristics of the Innovation The key issue here is the extent to which the firm can establish property rights through patents. The licensing option is only viable where an innovation has clearly defined patent rights. The advantages of licensing are, first, that it relives the company of the need to develop the full range of complementary resources and capabilities needed for commercialization, and the second, that it can allow the innovation to be commercialized quickly The key issue here is the extent to which the firm can establish property rights through patents. The licensing option is only viable where an innovation has clearly defined patent rights. The advantages of licensing are, first, that it relives the company of the need to develop the full range of complementary resources and capabilities needed for commercialization, and the second, that it can allow the innovation to be commercialized quickly

Resources and Capabilities of the firm A high proportion of major inventions are associated either with individuals or small organizations. A high proportion of major inventions are associated either with individuals or small organizations. The organizations that are best at innovation are often small firms and startup enterprises that do not possess the range of resources required for commercialization. These companies resort typically to licensing, outsourcing, or strategic alliances in order to access the complementary resources needed to take their innovation to market. The organizations that are best at innovation are often small firms and startup enterprises that do not possess the range of resources required for commercialization. These companies resort typically to licensing, outsourcing, or strategic alliances in order to access the complementary resources needed to take their innovation to market.

Timing Innovation: To Lead or to Follow? The extent of first-mover advantages/or disadvantages/ associated with pioneering depends on the following factors: The extent of first-mover advantages/or disadvantages/ associated with pioneering depends on the following factors: 1. The extent to which innovation can be protected by property rights or lead time advantages. If an innovation is appropriable through patent or copyright protection or through a lead time, there is likely to be advantage in being an early mover. 1. The extent to which innovation can be protected by property rights or lead time advantages. If an innovation is appropriable through patent or copyright protection or through a lead time, there is likely to be advantage in being an early mover.

Timing Innovation: To Lead or to Follow? 2. THE IMPORTANCE OF COMPLEMENTARY RESOURCES. 2. THE IMPORTANCE OF COMPLEMENTARY RESOURCES. The more important are complementary resources in exploiting an innovation, the greater the costs and risks of pioneering/Several firms have already failed in their attempts to develop and market an electric automobile/ The more important are complementary resources in exploiting an innovation, the greater the costs and risks of pioneering/Several firms have already failed in their attempts to develop and market an electric automobile/

Timing Innovation: To Lead or to Follow? 3. The Potential to Establish a Standard. The greater the importance of product standards, the greater the advantages of being an early mover in order to influence those standards. 3. The Potential to Establish a Standard. The greater the importance of product standards, the greater the advantages of being an early mover in order to influence those standards.

Timing Innovation: To Lead or to Follow? A small, technology-based firm may have no choice but to pioneer the introduction of an innovation. Given its lack of complementary resources, its only chance of building sustainable competitive advantage is to grab first-mover advantage and use this to develop the necessary complementary resources before more powerful rivals appear. A small, technology-based firm may have no choice but to pioneer the introduction of an innovation. Given its lack of complementary resources, its only chance of building sustainable competitive advantage is to grab first-mover advantage and use this to develop the necessary complementary resources before more powerful rivals appear. Table: Leaders, Followers, and Success in Emerging Industries Table: Leaders, Followers, and Success in Emerging Industries

Managing Risks Emerging industries are risky. There are two main sources of uncertainty: Emerging industries are risky. There are two main sources of uncertainty: Technological uncertainty arises from the unpredictability of technological evolution and complex dynamics through which technical standards and dominant designs are selected Technological uncertainty arises from the unpredictability of technological evolution and complex dynamics through which technical standards and dominant designs are selected Market uncertainty relates to the size and growth rates of the market for a new products. Market uncertainty relates to the size and growth rates of the market for a new products.

COMPETING FOR STANDARDS. Most products tend to develop a dominant design. The Ford model T in cars, the Boeing 707 in passenger jet aircraft, the IBM PC in microcomputers – examples of dominant design. Most products tend to develop a dominant design. The Ford model T in cars, the Boeing 707 in passenger jet aircraft, the IBM PC in microcomputers – examples of dominant design Standards may be set by governments, international agencies, voluntary associations, or markets Standards may be set by governments, international agencies, voluntary associations, or markets

Key Resources needed to Win a Standard War Control over an installed base of customers Control over an installed base of customers Owing intellectual property rights in the new technology Owing intellectual property rights in the new technology The ability to innovate in order to extend and adapt the initial technological advance The ability to innovate in order to extend and adapt the initial technological advance First-mover advantage First-mover advantage Strength in complements Strength in complements Reputation and brand Strength in name. Reputation and brand Strength in name.

Creating the Conditions for Innovation Invention is dependent on creativity. Creativity is not simply a matter of individual brilliance; it depends on the organizational conditions that foster ideas and imagination at the individual and group levels. Invention is dependent on creativity. Creativity is not simply a matter of individual brilliance; it depends on the organizational conditions that foster ideas and imagination at the individual and group levels.

Creating the Conditions for Innovation Innovation is not just a matter of acquiring the resources necessary for commercialization; innovation is a cooperative activity that requires interaction and collaboration between technology development, manufacturing, marketing and various other functional departments of the firm. Innovation is not just a matter of acquiring the resources necessary for commercialization; innovation is a cooperative activity that requires interaction and collaboration between technology development, manufacturing, marketing and various other functional departments of the firm.

The Conditions for Creativity Invention has two primary ingredients: knowledge and creativity Invention has two primary ingredients: knowledge and creativity Research shows that creative people share certain personality traits : they are curious, imaginative, adventurous, assertive, playful, self-confident, risk taking, reflective, and uninhibited. Research shows that creative people share certain personality traits : they are curious, imaginative, adventurous, assertive, playful, self-confident, risk taking, reflective, and uninhibited. Although innovation requires creativity, creativity needs to be stimulated by and directed toward need. Although innovation requires creativity, creativity needs to be stimulated by and directed toward need.

From Invention to Innovation The commercialization of new technology requires linking creativity and technological expertise, with capabilities in production, marketing, finance, distribution, and customer support. There is substantial differences between an organization that conceives and designs an innovative product and one that makes it and takes it to market. The commercialization of new technology requires linking creativity and technological expertise, with capabilities in production, marketing, finance, distribution, and customer support. There is substantial differences between an organization that conceives and designs an innovative product and one that makes it and takes it to market.

From Invention to Innovation Tension between the operating and the innovating parts of organizations is inevitable. Tension between the operating and the innovating parts of organizations is inevitable. The more stable the operating and administrative side of the organization, the greater the resistance to innovation The more stable the operating and administrative side of the organization, the greater the resistance to innovation

Summary The key to successful innovation is not resource allocation decisions, but creating the structure, integration mechanisms, and organizational climate conducive to innovation. Strategies aimed at the exploitation of innovation, choices of whether to be a leader or a follower, and the management of risk must take careful account of organizational characteristics. The key to successful innovation is not resource allocation decisions, but creating the structure, integration mechanisms, and organizational climate conducive to innovation. Strategies aimed at the exploitation of innovation, choices of whether to be a leader or a follower, and the management of risk must take careful account of organizational characteristics.