Strategies for innovation
Learning Objectives
What are the main strategies for mantaining profitability of innovation?
What are the relationship between the strategies? How and why can a firm realize
combinations?
Which is the relationship between strategies, nature of complementary asset and type of
technology?
How can a firm implement an innovation process?
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for innovation
Learning contents
The Block Strategy;
The Run Strategy;
The Team-Up Strategy;
The condition under which a firm can combine the three strategies;
The types of technology and the nature of complemetary assets that influence
the choice of a combination of the three strategy.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits
The firm’s profit froms an innovation is usually only temporary.
As an incunbent or a new entrant an innovator can prolog the time over which it can keep
profits choosing one or more of the following strategies:
The chooice of block, run or team up strategy
at any stage of the value chain is a function of
several factors:
Block
• The firm’s capabilities
• Its type of product or service
•The phase of the evolution of innovation
• Its strategy
Run
•Capabilities
•Product or industries
•Life cycle phase
•Firm strategy
Team-up
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
This strategy allow a firm to provent entry by competitors
By limiting the
competitors’ access to
inimitable and
coreness capabilities
By signaling the
competitors that
post-entry price will
be low
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
The effectiveness of a firm in blocking entry to any stage of the value chain is a function of
how unique and inimitable its competences and assets and are at that stage.
At the development level, intellectual
property protection can make very difficult
for new entrants to offer designs that are
comparable to those of incumbents
At the research stage, close relationship
with universities can provide fast access to
scientific research findings
At the manufacturing stage, example of endowments
that a firm can use to prevent entry are exclusive
access to certain inputs, licenses that allow to
manufacture product at lower cost, ecc.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Block
If all firms are equally capable of performing the activities of each stage of the value chain and
have equal access to the underlying technological and market knowledge then the block strategies
is based on some signals that suggest to potential new entrant that post entry price will be low.
Some of these signals are:
Technology drivers and coshared resources: in the face of the introduction of an innovation in a market, an
incumbent is likely to stay and fight if its existing technology also serves as a technology driver for its other products.
Management committment to existing technology: if the management of a firm is committed to its existing
tecnhnology the firm is not likely to take entry expecially if the technology is one of the major source of revenue of
the firm.
History of retailation: if an incumbent has an history of retaiiatiating against firms that have ventured into its
product-market, that may be a signal that it will lower its prices with entry.
High Minimum Efficient Scale for Industry: if the minimum volume that a firm has to produce in order to attain
the minimum per unit cost possible in the industry is large, entrant are less likely to enter since they can expect to
drop considerably, given how much they have to add to the industry’s capacity.
Idiosyncratic asset: an asset is idiosyncratic to a market if is of litte value in another market. If an incumbent
invests in such assets, it is sending a signal to potential entrants that it can lower its prices post entry.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Run
This strategy is base don the evidence of the rapidity of the innovation process.
A firm must be innovative enogh to build new capabilities
and introduce new product rapidly and do so well ahead
of competitors
We can classify run as a function of their
inpact on the capabilities of the firm in
question and the extent to which the run
cannibalizes existing product.
Obsolescence
of existing
capabilities
Product cannibalization
Low
High
High
Type III
e.g.: Microwave oven
Type II
e.g.: Apple Macintosh
Low
Type IV
e.g.: Shrink of Pentium
Type I
e.g.: Pentium
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Team-up
In a team-up strategy a firm formally cooperates with others to allow it to keep
profiting from innovation.
This cooperation can be in the form of a strategic alliance,
an acquisition or another agreements to cooperate in
adding value in a firm’ s value-creating activities
The type of collaborations are:
Strategic alliances
Distribution agreements
Venture capital
Co-marketing agreements
Acquisitions
Technology agreements
Join ventures
Design agreements
Licensing
Manufacturing agreements
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INNOVATION MANAGEMENT
Strategies for innovation
Strategies for sustaining profits: Team-up
There are five reasons why a firm might want to give away its technology:
1.
To win a standard or dominant design: making a design open invites other
firms to enter the market using it  increment of manifacture of the design 
more complementary innovators  more commitments to developing
complementary products for it.
2.
To increase upstream demand: a firm can give away its technology
downstream to increase demand for its product upstream.
3.
To build capabilities: very often a firm has to license its innovation to
competitors so that it can build competences in an area in which it lacks such
capabilities.
4.
To exploit the second source effect: some customers are reclutant to
incorporate a component in their system unless they are sure that compatible
generations of the component will be forthcoming when they need them.
5.
To access to a market that would otherwise be inaccessible: sometime a firm
have to team-up with a firm in a foreign country so as to enter that market.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Block
•Capabilities
•Product or industries
•Life cycle phase
•Firm strategy
Run
Team-up
They all rest on competences and endowements
as well as on the underlying technological and
market knowledge.
The three strategies can
be reinforcing and
corroborating
A firm ability to joggle all three in the face of the
technological change, deregulation or regulation,
changing customer preferences and expectations,
and global competition is critical to mantaining
entrepreneurial rents
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: Why combinations
Secondary strategy
Block
Block
Run
Main strategy
Run
Team-up
While fithing imitation of its
innovation
by
blocking
competitors, a firm can run
developing
new
product
generations
to
cannibalize
existing ones.
Advantage secured through
blocking last only until such
regulation, deregulation and
changing
in
customer
preferences
render
them
obsolete  the firm have to
team-up to exploit technologies
and markets that are unfamiliar.
In that industries in which new
product development is very
expensive a firm can use
Blocks
to
slow
down
competitors
enough
to
introduce new products.
Where
the
Run
involves
radically different technological
and
market
knowledge
unfamiliar to the firm, it may
need to form alliances.
Team-up
After a firm wins a standard through an alliance, it must still do
something distinctive that allows it to perform better than the
members of its team.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: When combinations
Combinations along the value chain
A firm would successfully run or block or team up only at
those stages of its value chain where it has the capabilities to
underpin each strategy
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Value chain
activities
Combinations along the value chain: Dell Computer Example
Idea Generation
Supply chain
Production
Distribution
Marketing &
Sells
Block
Strategies
Team up
Run
Team up
Block
Run
Team up
Run
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INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies: When combinations
Combinations over Innovation Life Cycle
The strategies that a firm pursues over the life cycle of a technology also vary
Following the emergence of the dominant design the firm may want to introduce
versions of the design more frequently (run) than its competitors.
It may also want to defend its intellectual property or brand name reputation (block)
During the phase of
development of a new
product, an innovator can
team-up to win the
dominant design.
At a discontinuity, the type of strategy pursue
depend on the nature of the discontinuity:
Competence enhancing  run, block or both
Competence destroying  team-up
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Type of technology and nature of complemetary assets
The type of strategy that a firm pursues at any phase of a technology life cycle, is also a function of
the imitability of technology and nature of the complementary assets needed to profit.
Cell I
When imitability of the technology is high a firm can pursue a run
strategy; a firm can keep innovating so that the time competitors catch
up with yesterday’s technology, it has moved on to tomorrow’s
technology. Sometimes, a firm may need to team up in order to run.
Cell II
The firm must develop the complementary assets internally (run) or get
them by teaming up with someone else.
Cell III
Cell IV
When thechnology is difficult to imitate but
complementary assets are easy to come by, a
firm can pursue a block strategy in order to
protect that technology. A firm can also pursue a
run strategy to allow it to stay ahead of its
competitors.
If a firm has both the technology and the complementary
asset, it can pursue block stretegy in order to protect both.
If technology becames obsolete, the firm must team up with
someone that have a new technology.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
Firms that pursue a team up strategy go outside thier boundaries for some of the capabilities that
they need to exploit the technology.
Whether a firm decides to develop a technology internally or go outside for help is also a
function of two factors:
1.
The firm’s familiarity with the new technology and market;
2.
Transaction costs.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
1.
Familiarity of the new technology and market
The more the technological and market
capabilities need to exploit an innovation differ
from a firm’s existing capabilities, the more likely
the firm will fail in trying to exploit the innovation.
Since building these capabilities is often difficult
and takes time, a firm may be better off teaming
up with another firm that has them
Such co-operation allows the firm to learn from its partner and develop its own
capabilities or co-develop capabilities for joint use.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
1.
Familiarity of the new technology and market
Cell I
The firm brings technological capabilities to the table while the partner
bring market capabilities and both companies can form a joint venture to
exploit the new technology.
Cell II
When innovation is competence destroying a firm can pursue one of the
three options to learn and build the new capabilities while not being
handicapped by the existing ones.
Cell III
A firm that faces an unfamiliar new technology but has the market
capabilities can licence the technology from another firm. An important
precaution is to make sure that the licence has the absorptive capacity
to successfully trasfer the technology.
Cell IV
Internal development is preferred in three cases:
1. When the technological change is competence enhancing or incremental;
2. When the firm is not in a rush;
3. When the firm want to protect its technology.
INNOVATION MANAGEMENT
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Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2.
Transaction costs
Transaction costs theory suggest that
whether a firm organizes activity internally
or externally is a function of the cost of
carrying out the activity in either mode.
These costs
depend on four
factors:
The frequency of
transactions
The amount of
uncertainty
How opportunistic
the parties are
The asset specificity of
any assets used in the
activity
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2.
Transaction costs
Opportunism of the parties
A party is opportunistic if it take advantage of an information asymmetry and cheats in pursuing its
own ends: the more uncertainty information that is needed, the more easy is to create room for
opportunism. The chances to exercise opportunism are also a function of asset specificity
Asset specificity
Asset specificity refers to how idiosyncratic an asset in a relationship becomes as the relationship
develops.
Frequency of transaction
Frequency of transaction is how often the transaction between the perties must take place: the
higher the asset specificity and the frequency of transactions, the more chances there are for
opportunism.
e-Business Management School
INNOVATION MANAGEMENT
Strategies for innovation
Relationship between the three strategies
Internal development or external sourcing
2.
Transaction costs
Opportunism is not the only source of transaction cost
Since individuals are cognitively limited, a party to a transaction may be not be able to
articulate the information it has.
Even if the party could articulate it, the other party may not be able to understanding it.
For certain type of informations, transaction costs may be high
even when the parties are not opportunistic
Innovation often requires specialized plants and
individuals, increasing the chances for opportunism.
Radical innovation has the qualities
that would suggest internalization to
minimize transaction costs.
It may be difficult to specify in contracts what is
that expected from each party.
If it fully of uncertainty and leaves
a lot of room for opportunism.
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INNOVATION MANAGEMENT