Technology-based Industries &
the Management of 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 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
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
MP3 players
Early 1990s
1994
1997
1999
Appropriation of Value:- How are the
Benefits from Innovation Distributed?
Customers
Suppliers
Innovator
Imitators and
other
“followers”
The Profitability of 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 Protection of Intellectual 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 Resources
Manufacturing Distribution
Finance
Core
technological
know-how
Service
Complementary
technologies
Marketing
Other
Other
Bargaining power of owners of complementary
resources depends upon whether complementary
resources are generic or specialized.
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
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 Strategies for Exploiting 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 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//Sony
Kimberly-Clark
Microsoft
Palm
Apple, Sony (&others)
WINNER
Follower
Leader
Follower
Follower
Follower
Follower
Leader
Follower
Follower
Not clear
Leader
Followers
Leader
Follower
Follower
Followers
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
margarine
Raisio
Unilever
Follower
MP3 players
Diamond Multimedia
Apple
Follower
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 betterestablished 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
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 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
• 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
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
VHS
Betamax
LOOSE
Maximize
value
appropriation
TIGHT
IBM-PC
Apple
Mac
Fighting Standards 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 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
• 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.