Strategic Management of
Technological Innovation –
Melissa Schilling
INTRODUCTION
Importance of Technological Innovation
• Technological innovation now the single most
important driver of competitive success in many
industries
– Many firms earn over one-third of sales on products
developed within last five years
– Globalization has increased competitive pressure
• Product innovations help firms protect margins by
offering new, differentiated features.
– Sony produces more than 75 models of its Walkman that differ
in size, color, music format and other features
• Process innovations help make manufacturing more
efficient.
2
Importance of Technological Innovation
– Advances in information technology have enabled
faster innovation
• CAD/CAM systems enable rapid design and shorter
production runs
– Importance of innovation and advances in
information technology have lead to:
• Shorter product lifecycles (more rapid product
obsolescence)
• More rapid new product introductions
• Greater market segmentation
3
Why Innovation Is Becoming
More Important
• Technology is changing fast, new products come from new
competitors
• Fast changing environment, product lifetimes shorter, need to
replace products sooner
• Products are increasingly difficult to differentiate
• Customers are more sophisticated, segmented and
demanding, and expect more in terms of customization,
newness, quality and price
• Customers have more choice
• Apparently separate technologies come together
• Markets forming and changing fast
• With markets and technology changing fast, and good ideas
quickly copied, there is continual pressure to devise new and
better products, processes and services faster
4
Innovation Is A Positive Message
• Tell people you are going to cut headcount - and lose their
support
• Tell people you are going to downsize - and lose their
support
• Tell people you are going to reengineer - and 80% won't
cooperate
• Tell people you are going to be innovative - and win their
enthusiastic support
5
Impact on Society
• The aggregate impact of technological innovation
can be seen in GDP (gross domestic product – the
total annual output of an economy).
• The average GDP per capita for the world has risen
steadily since 1971, particularly in the developed
economies
• Economist Robert Solow showed that the growth in
GDP was not solely on growth in labor and capital
inputs but technological changes as well (Nobel
prize 1981)
• GDP relates to improved quality of life and thus
technological innovation has a positive impact on
society
6
Impact on Society
• Innovation enables a wider range of goods and
services to be delivered to people worldwide
– More efficient food production, improved medical
technologies, better transportation,etc.
– Increases Gross Domestic Product by making labor
and capital more effective and efficient
– However, may result in negative externalities,
• E.g., pollution, erosion, antibiotic-resistant bacteria
7
Impact on Society
GDP per Capita, 1971-2003; National Science Board
8
Impact on Society
• The majority of R&D funds spent in OECD countries come
from industry, and percentage has been increasing.
• The role of the government in supporting this research has
been declining
9
Innovation by Industry:
The Importance of Strategy
• Successful innovation requires carefully crafted strategies
and implementation processes.
• Innovation funnel
– Most innovative ideas do not become successful new
products.
• Pharmaceutical industry – 1 out of 10,000 compounds succeeds
as a new drug, 12 years from discovery to market at a cost of
$350 million
10
Research Brief
How long does new product development take?
– Study by Abbie Griffin of 116 firms developing B2B
innovations found:
• Length of development cycle varies with innovativeness of
project
• Incremental improvements took 8.6 months from concept
to market introduction
• Next generation improvements took 22 months.
• New-to-the-firm product lines took 36 months
• New-to-the-world products took 53 months.
• Half of the companies had reduced their cycle time by an
average of 33% over last five years.
11
Discussion Questions
1. Why is innovation so important for firms to compete
in many industries?
2. What are some of the advantages of technological
innovation? Disadvantages?
3. Why do you think so many innovation projects fail
to generate an economic return?
12
Part One: Industry Dynamics of
Technological Innovation
• The sources from which innovation arises, including
the role of individuals, organizations, government
institutions, and networks,
• Types of innovations, and common industry patterns
of technological evolution and diffusion,
• The factors that determine whether industries
experience pressure to select a dominant design, and
what drives which technologies dominate others,
• Effects of timing of entry, and how firms can identify
(and manage) their entry options.
13
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 2
SOURCES OF INNOVATION
Getting an Inside Look:
Given Imaging’s Camera Pill
– The Camera Pill: A capsule that is swallowed by
patient that broadcasts images of the small
intestine
– Invented by Gavriel Iddan & team of scientists
• Iddan was a missile engineer – no medical background
• Project initiated by Dr. Scapa, a gastroenterologist
• Iddan applied guided missile concept to problem of
viewing the small intestine
– Developing the Camera Pill
• Many hurdles to overcome: size, image quality, battery life
• Formed partnership with Gavriel Meron (CEO of Applitec)
for capital to commercialize
• Formed partnership with team of scientists lead by Dr. C.
Paul Swain to combine complementary knowledge
• Resulted in highly successful, revolutionary product.
Sources of Innovation
15
Getting an Inside Look:
Given Imaging’s Camera Pill
Discussion Questions:
1. What factors do you think enabled Iddan, an engineer with
no medical background, to pioneer the development of
wireless endoscopy?
2. To what degree would you characterize Given’s
development of the camera pill as “science-push” versus
“demand-pull”?
3. What were the advantages and disadvantages of Iddan
and Meron collaborating with Dr. Swain’s team?
Sources of Innovation
16
Overview
• Innovation can arise from many different sources and the
linkages between them.
Sources of Innovation
17
Creativity
• Creativity: The ability to produce work that is useful and
novel.
– Individual creativity is a function of:
• Intellectual abilities (e.g., ability to articulate ideas)
• Knowledge (e.g., understand field, but not wed to
paradigms)
• Style of thinking (e.g., choose to think in novel ways)
• Personality (e.g., confidence in own capabilities)
• Motivation (e.g., rely on intrinsic motivation)
• Environment (e.g., support and rewards for creative ideas)
• Risk taker (e.g., willingness to take reasonable risks)
• Persistence (e.g., tolerate ambiguity and willingness to
overcome obstacles)
Sources of Innovation
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Creativity
– Organizational Creativity is a function of:
• Creativity of individuals within the organization
• Social processes and contextual factors that shape how those
individuals interact and behave
– Methods of encouraging/tapping organizational creativity:
• Idea collection systems (e.g., suggestion box)
– In 1895 John Patterson, founder of National Cash Register (NCR),
created the first sanctioned suggestion box program
• Originators of adopted ideas were awarded $1 – a revolutionary
concept
– Honda – more than 75% of ideas are implemented
– Bank One – idea repository where employees can collaborate
• Creativity training programs
• Culture that encourages (but doesn’t directly pay for) creativity.
Sources of Innovation
19
Transforming Creativity into Innovation
•
•
•
Innovation is the implementation of creative ideas into
some new device or process.
Requires combining creativity with resources and
expertise.
Inventors
– One ten-year study found that inventors typically:
1. Have mastered the basic tools and operations of the field in which they
invent, but they will have not specialized solely on that field.
2. Are curious, and more interested in problems than solutions.
3. Question the assumptions made in previous work in the field.
4. Often have the sense that all knowledge is unified. They will seek
global solutions rather than local solutions, and will be generalists by
nature
• Such individuals may develop many new devices or
processes but commercialize few.
Sources of Innovation
20
Theory in Action – The Segway and the iBOT
Sources of Innovation
21
Theory In Action –
Segway Human Transporter
• The Segway HT: A self-balancing, two-wheeled scooter
invented by Dean Kamen http://www.usfirst.org/about/bio_dean.htm
− Kamen holds more than 150 U.S. and foreign patents
− Has received numerous awards and honorary degrees
− Never graduated from college
− To Kamen, the solution was not to come up with a new answer
to a known problem, but to instead reformulate the problem
• Developing the Segway
− DEKA http://www.dekaresearch.com/index.html has a balance
of “ideation” and “execution” people
− Philosophy of “kissing frogs”: produce and evaluate a wide range
of potential solutions.
− Segway required numerous external partnerships
− By 2003, had been adopted primarily for commercial and
Sources of Innovation
industrial applications.
22
iBOT Mobility System
• iBOT mobility system
http://www.ibotnow.com/functions/mobility-system.html
– Advanced wheelchair that enables users to climb stairs,
negotiate sand, rocks and curbs
– Incorporates a sophisticated balancing system
– Predecessor to Segway
• Collaboration with external partners
– Venture capitalists
– Silicon Sensing Systems developed the gyroscopic sensor
system
– Michelin developed unique “Balance” tires
– Pacific Science helped create the Segway’s electronic motor
– Saft developed a “smart charging” battery
– Had to satisfy government regulations to be allowed on
sidewalks
Sources of Innovation
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Transforming Creativity into Innovation
• Innovation by Users
– Users have a deep understanding of their own needs, and
motivation to fulfill them.
• Laser sailboat developed by Olympic sailors without any formal
market research or concept testing based on their own preferences
– Highly successful in the 70s and 80s
• Indermil – a tissue adhesive based on Superglue. Managers tried to
exploit Superglue’s tendency to bond to skin to develop an
alternative to sutures for surgical applications.
– Experiments in the 70s and 80s failed.
– A presentation by a reconstructive surgeon who had operated on burn
victims in response to the Bradford football stadium fire of 1985
brought the project back to life.
• The doctors had used Superglue to repair skin and stick skin grafts
in place.
• Years later, the patients had almost perfect skin repair
• The CEO gave his full support and serious funding. By 2003 the
product was selling in 40 countries
Sources of Innovation
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Theory In Action
The Birth of the Snowboarding Industry
– First snowboards not developed by sports equipment
manufacturers; rather they were developed by
individuals seeking new ways of gliding over snow
• Tom Sims made his first “ski board” in wood shop
class.
• Sherman Poppen made a “snurfer” as a toy for his
daughter – later held “snurfing” contests
• Jake Burton added rubber straps to snurfer to act as
bindings
– By 2001 there were approximately 5.3 million
snowboarders in the United States and the US market
for snowboarding equipment had surpassed $235
million
Sources of Innovation
25
Transforming Creativity into Innovation
• Research and Development by Firms
– Research refers to both basic and applied research.
• Basic research aims at increasing understanding of a
topic or field without an immediate commercial
application in mind.
• Applied research aims at increasing understanding of
a topic or field to meet a specific need.
– Development refers to activities that apply
knowledge to produce useful devices, materials, or
processes.
– R&D thus refers to a range of activities that extend
from early exploration of a domain to specific
commercial implementations
Sources of Innovation
26
Transforming Creativity into Innovation
• Research and Development by Firms
– Most firms consider in-house R&D to be their most important
source of innovation.
– A firm’s R&D expenditures as a percentage of its revenues has a
strong correlation with its sales growth rate, sales from new
products and profitability.
Sources of Innovation
27
Transforming Creativity into Innovation
• Research and Development by Firms
– Science Push (50s and 60s) approach suggests that innovation
proceeds linearly:
Scientific discovery  inventionmanufacturing  marketing
• Discoveries in basic science were the primary source of innovation which
were then translated into commercial applications
– Demand Pull (mid 60s) approach argued that innovation
originates with unmet customer need:
Customer suggestions  invention  manufacturing
• Research staff would develop new products in efforts to respond to
customer problems or suggestions
– Most current research argues that innovation is not so simple,
and may originate from a variety of sources and follow a variety
of paths.
•
•
•
•
In-house R&D
Linkages to customers or other potential users of innovations
Linkages to external sources of scientific and technical info
Linkages to competitors, suppliers and complementors
Sources of Innovation
28
Transforming Creativity into Innovation
• Firm Linkages with Customers, Suppliers, Competitors, and
Complementors
– Include alliances, participation in research consortia, licensing arrangements,
joint ventures
– Most frequent collaborations are between firm and their customers,
suppliers, and local universities.
• Firms considers users their most valuable source of new ideas
– Complementors are organizations that produce complementary goods such
as DVD moves for DVD players
Sources of Innovation
29
Transforming Creativity into Innovation
• Firm Linkages with Customers,
Suppliers, Competitors, and
Complementors
– External versus Internal Sourcing of
Innovation
• External and internal sources are complements
– Firms with in-house R&D also heaviest users of
external collaboration networks
– In-house R&D may help firm build absorptive capacity
(the ability of an organization to assimilate and utilize
new knowledge) that enables it to better use
information obtained externally.
Sources of Innovation
30
Transforming Creativity into Innovation
• Universities and Government-Funded Research
– Universities
• Many universities encourage research that leads to useful
innovations
• Bayh-Dole Act of 1980 allows universities to collect royalties on
inventions funded with taxpayer dollars
– Led to rapid increase in establishment of technology-transfer offices.
• Offices that facilitate the transfer of technology developed in a
research environment to commercial applications (see article from
WSJ)
• Revenues from university inventions are still very small, but
universities also contribute to innovation through publication of
research results.
Sources of Innovation
31
Transforming Creativity into Innovation
• Universities and Government-Funded Research
– In 1950s and 1960s US govt funded over 65% of R&D money, 26% by 2000 but
slack picked up by industry
• Dollar amount of government funding has increased despite percentage drop
– Governments invest in research through:
• Their own laboratories
• Science parks (foster collaboration between govt, universities and private forms) and
incubators (provide funding and advice to nurture the development of new technology
that has potential for important societal benefits but highly uncertain direct returns)
• Grants for other public or private research organizations
Sources of Innovation
32
Transforming Creativity into Innovation
• Private Nonprofit Organizations
– Many nonprofit organizations do in-house R&D, fund
R&D by others, or both.
Top 20 US Nonprofit R&D performers, 1997
Sources of Innovation
33
Innovation in Collaborative Networks
• Collaborations include (but are not limited to):
–Joint ventures
–Licensing and second-sourcing agreements
–Research associations
–Government-sponsored joint research programs
–Value-added networks for technical and scientific
exchange
–Informal networks
• Collaborative networks are especially important in
high-technology sectors where individual firms rarely
possess all necessary resources and capabilities
Sources of Innovation
34
Innovation in Collaborative Networks
• Technology Clusters are regional clusters of
firms that have a connection to a common
technology e.g., Silicon Valley’s semiconductor
firms, lower Manhattan’s multimedia cluster
– Though today’s information technology enables fast,
cheap and easy communication across the globe,
knowledge does not always transfer so easily
– Encompass an array of industries that are linked
through relationships between suppliers, buyers and
producers of complements.
Sources of Innovation
35
Innovation in Collaborative Networks
– Agglomeration Economies (benefits firms reap by
locating in close geographical proximity to each
other):
• Proximity facilitates knowledge exchange.
– A willingness to exchange through building trust via interaction
– Develop common ways to understand and articulate the
knowledge
• Cluster of firms can attract other firms to area.
• Supplier and distributor markets grow to service the
cluster.
• Cluster of firms may make local labor pool more
valuable by giving them experience.
• Cluster can lead to infrastructure improvements (e.g.,
better roads, utilities, schools, etc.)
Sources of Innovation
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Innovation in Collaborative Networks
– Downside of Agglomeration Economies
• Proximity of many competitors serving a local market
can lead to competition that reduces their pricing
power via a vis buyers and sellers
• Increase in the likelihood of a firm’s competitors
gaining access to the firm’s proprietary knowledge
• Can lead to traffic congestion, excessively high housing
costs and increased pollution
Sources of Innovation
37
Innovation in Collaborative Networks
• Likelihood of innovation activities being geographically
clustered depends on:
– The nature of the technology
• e.g., its underlying knowledge base or the degree to which it can be protected by
patents or copyright, the degree to which its communication requires close and
frequent interaction;
– Industry characteristics
• e.g., degree of market concentration or stage of the industry lifecycle,
transportation costs, availability of supplier and distributor markets; and,
– The cultural context of the technology
• e.g., population density of labor or customers, infrastructure development, national
differences in how technology development is funded or protected.
– Pharmaceutical industry is clustered in the UK and France, not in
Germany or Italy
• May be a result of the national systems of research funding and the
need to share complex technological expertise
– Clothing manufacturing is clustered in Italy but not in the other three
• may be due to cultural factors that influenced the historical rise of
industrial districts
Sources of Innovation
38
Innovation in Collaborative Networks
–Technological spillovers (spread of knowledge
across organizational or regional boundaries) occur
when the benefits from the research activities of
one entity spill over to other entities.
• Likelihood of spillovers is a function of:
– Strength of protection mechanisms (e.g., patents, copyright,
trade secrets)
– Nature of underlying knowledge base (e.g., tacit, complex)
– Mobility of the labor pool
– e.g.,a firm’s patenting activities and profits were influenced by
the R&D spending of other firms and universities in its
geographical region (Adam Jaffe)
• Significant influence on innovative activity
Sources of Innovation
39
Knowledge Brokers
• Hargadon and Sutton point out that some firms (or individuals)
play a pivotal role in the innovation network– that of knowledge
brokers.
– Knowledge brokers are individuals or firms that transfer
information from one domain to another in which it can be usefully
applied.
• They possess the ability to recognize and capture potential solutions that
may be matched to problems in an unexpected way
– Seek to exploit potential synergies of combining existing technologies
• Robert Fulton saw steam engines used in mines and applied them to boats
– By serving as a bridge between two separate groups of firms,
brokers can find unique combinations of knowledge possessed by
the two groups.
• Thomas Edison’s lab borrowed ideas from different industries to create
innovations in telegraphs, telephones, phonographs, light bulbs and many
others
Sources of Innovation
40
Discussion Questions
1. What are some of the advantages and disadvantages of a) individuals
as innovators, b) firms as innovators, c) universities as innovators, d)
government institutions as innovators, e) nonprofit organizations as
innovators?
2. What traits appear to make individuals most creative? Are these the
same traits that lead to successful inventions?
3. Could firms identify people with greater capacity for creativity or
inventiveness in their hiring procedures?
4. To what degree do you think the creativity of the firm is a function of
the creativity of individuals, versus the structure, routines, incentives,
and culture of the firm? Can you give an example of a firm that does a
particularly good job at nurturing and leveraging the creativity of its
individuals?
Sources of Innovation
41
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 3
TYPES AND PATTERNS OF INNOVATION
Honda and Hybrid Electric Vehicles
• Honda had an established record of developing
environmentally-friendly cars and manufacturing
processes.
• Introduced its first hybrid electric vehicle (HEV) in Japan
in 1997.
– HEVs have increased fuel efficiency and decreased emissions
– HEVs do not have to be plugged into an electrical outlet
• Honda chose a different hybrid engine design than
Toyota.
– Honda chose not to collaborate or license its technology to
others – wanted to maintain its independence.
• Toyota, which engaged in both collaboration and
licensing, sold almost three times as many HEVs.
• Honda was also developing fuel-cell vehicles at the same
time, though they would take much longer to
commercialize.
Types & Patterns of Innovation
43
Honda and Hybrid Electric Vehicles
Discussion Questions:
1. Are hybrid electrical vehicles a radical innovation or an
incremental innovation? Are they competence enhancing or
competence destroying, and from whose perspective? How
would you answer these questions for fuel-cell vehicles?
2. What factors do you think will influence the rate at which
hybrid electric vehicles are adopted by consumers?
3. What would be the advantages or disadvantages of Honda
and Toyota using the same engine standard?
4. Is Honda’s strategy of producing a different engine standard
than Toyota and not collaborating or licensing to other
automakers a good one? What would you recommend?
5. Why do you think Honda simultaneously developed both
hybrid vehicles and fuel-cell vehicles?
Types & Patterns of Innovation
44
Ericsson’s Gamble on 3G Wireless
• Ericsson, founded as a telegraph repair shop in
1876; by end of 2002 was the largest supplier of
mobile telecommunications systems in the world.
• First generation of cell phones had been analog.
Second generation (2G) was digital. By end of
1990s, sales of 2G phones were beginning to
decline.
• Telecom leaders began to set their sights on 3G
phones that would utilize broadband channels,
enabling videoconferencing and high-speed web
surfing.
• In late 1990s, Ericsson began focusing on 3G
systems, and put less effort on developing and
promoting its 2G systems.
Types & Patterns of Innovation
45
Ericsson’s Gamble on 3G Wireless
• Ericsson experienced a significant erosion in
profits
– In 2001, lost more than $2 billion; ROA went from
8.4% to -8.5%
• Transition to 3G turned out to be more complex
than expected
– Pace of rollout slowed by lack of affordable 3G
handsets and competing 3G network standards
– Billions of euros spend on upgrading networks and
purchasing licenses from government auctions
– Companies now very deep in debt which caused
loss of investor support
– Users did not value 3G features as much as hoped
Types & Patterns of Innovation
46
Overview
• Several dimensions are used to categorize
innovations.
– These dimensions help clarify how different
innovations offer different opportunities (and pose
different demands) on producers, users, and
regulators.
• The path a technology follows through time is
termed its technology trajectory.
– Many consistent patterns have been observed in
technology trajectories, helping us understand how
technologies improve and are diffused.
Types & Patterns of Innovation
47
Types of Innovation
• Product vs Process Innovation
– Product innovations are embodied in the outputs of an
organization – its goods or services.
• Ericsson’s development of 3G wireless networks and
network services
– Process innovations are innovations in the way an
organization conducts its business, such as in techniques
of producing or marketing goods or services.
• Improving the effectiveness or efficiency of production –
reducing defect rates, increasing quantity produced in a
given time
– Product innovations can enable process innovations and
vice versa.
Types & Patterns of Innovation
48
Product vs. Process Innovation
• New processes may enable the production of new products
– A new metallurgical technique enabled the development of the
bicycle chain which in turn enabled the development of
multiple-gear bicycles
• New products may enable the development of new
processes
– The development of advanced workstations enabled the
implementation of computer-aided-manufacturing processes
that increase the speed and efficiency of production
• What is a product innovation for one organization might be
a process innovation for another
– UPS created a new distribution service (product innovation)
that enables its customers to distribute their goods more
widely or more easily (process innovation)
Types & Patterns of Innovation
49
Types of Innovation
• Radical vs Incremental Innovation
– The radicalness of an innovation is the degree to
which it is new and different from previously existing
products and processes.
• Radicalness is also defined in terms of risk
– 3G wireless technology required
• Investment in new networking equipment and
infrastructure
• Development of new phones greater display and
memeory capabilities as well as a stronger battery
and/or better power utilization
• Degree of user acceptance of the technology was
unknown
Types & Patterns of Innovation
50
Types of Innovation
• Radical vs Incremental Innovation
– Incremental innovations may involve only a minor
change from (or adjustment to) existing practices.
– The radicalness of an innovation is relative; it may
change over time or with respect to different
observers.
• digital photography a more radical innovation for Kodak
(chemical photography expertise) than for Sony
(electronics expertise).
Types & Patterns of Innovation
51
Types of Innovation
• Competence-Enhancing vs
Competence-Destroying Innovation
– Competence-enhancing innovations build on the firm’s
existing knowledge base
• Intel’s Pentium 4 built on the technology for Pentium III.
– Competence-destroying innovations renders a firm’s
existing competencies obsolete.
• Electronic calculators rendered Keuffel & Esser’s slide rule
expertise obsolete.
• HP and TI thrived as they had existing competencies in the
electronic components needed in electronic calculators.
– Whether an innovation is competence enhancing or
competence destroying depends on the perspective of a
particular firm.
Types & Patterns of Innovation
52
Types of Innovation
• Architectural vs Component Innovation
– A component innovation (or modular innovation) entails
changes to one or more components of a product system
without significantly affecting the overall design.
• adding gel-filled material to a bicycle seat
– An architectural innovation entails changing the overall
design of the system or the way components interact.
• transition from high-wheel bicycle to safety bicycle.
– In the 1800s, the front wheel of a bicycle has a very large circumference in
order to provide speed; gears did not exist yet
– When gears and chains were invented, the bicycle took on a whole new
design
– Most architectural innovations require changes in the
underlying components also.
Types & Patterns of Innovation
53
The High Wheel Bicycle
• In 1870 the first all metal machine appeared. The pedals
were still attached directly to the front wheel. Solid rubber
tires and the long spokes of the large front wheel provided a
much smoother ride than its predecessor.
– The front wheels became larger and larger as makers
realized that the larger the wheel, the farther you could
travel with one rotation of the pedals.
• Safety issue: because the rider sat so high above the center
of gravity, if the front wheel was stopped by a stone or rut
in the road, the entire apparatus rotated forward on its front
axle, and the rider was dropped unceremoniously on his
head.
Types & Patterns of Innovation
54
The Hard-Tired Safety
• Improvements in the metals used in the bicycle, enabled
the manufacturing of small chains and sprockets and were
light enough for a human being to power.
• The design with two wheels of the same size returned,
with speed provided through the use of gears instead of
large wheels.
• They were safer than the high-wheelers but lacked the
long, shock-absorbing spokes of the high-wheelers.
– Buyers had to choose between safety and comfort until,
a few years later, when Dr. Dunlop developed the
pneumatic tire for his child’s bike.
Types & Patterns of Innovation
55
Technology S-Curves
• Both the rate of a technology’s improvement, and its rate of
diffusion to the market typically follow an s-shaped curve.
• Plot technology’s performance against the amount of effort
and money invested in the technology
S-curves in Technological Improvement
Technology improves
slowly at first because it is
poorly understood.
Then accelerates as
understanding increases.
Then tapers off as
approaches limits.
Types & Patterns of Innovation
56
Technology S-Curves
• S-curves in technology performance
and market diffusion are related
– better performance faster adoption
– greater adoption  further investment in
improvements
• But they are fundamentally different
processes
• If the effort invested is not constant
over time, the resulting s-curve can
obscure the true relationship
Types & Patterns of Innovation
57
Technology S-Curves
• In 1985, Gordon Moore, cofounder of Intel,
noted that the density of transistors on
integrated circuits had doubled every year
since the IC was invented
–The rate has since slowed to doubling every
18 months but the rate of acceleration is
still very steep
Types & Patterns of Innovation
58
Improvements in Intel's
Transistor Density Over Time
• In 1985, Gordon Moore, cofounder of Intel, noted that the density of
transistors on integrated circuits had doubled every year since the IC
was invented
– The rate has since slowed to doubling every 18 months but the
rate of acceleration is still very steep
Types & Patterns of Innovation
59
Transistor Density versus
Cumulative R&D Expenses
• However, Intel’s R&D dollars per year has also been
increasing rapidly
– The big gains in transistor density have come at a big cost in
terms of effort invested
Types & Patterns of Innovation
60
Technology S-Curves
• Technologies do not always get to reach their limits
– May be displaced by new, discontinuous
technology.
• A discontinuous technology fulfills a similar market need
by means of an entirely new knowledge base.
– E.g., switch from carbon copying to photocopying, or vinyl
records to compact discs
• Technological discontinuity may initially have lower
performance than incumbent technology.
– E.g., first automobiles were much slower than horse-drawn
carriages.
– Firms may be reluctant to adopt new technology
because performance improvement is initially slow
and costly, and they may have significant
investment in incumbent technology
Types & Patterns of Innovation
61
Discontinuous Technology
• If the returns to effort invested in new technology are
much higher than effort invested in the incumbent
technology, in the long-run it is more likely to displace the
incumbent technology
Disruptive technology has a steeper s-curve
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Technology S-Curves
• S-Curves in Technology Diffusion (spread of
technology through a population)
– Adoption is initially slow because the technology is
unfamiliar.
– It accelerates as technology becomes better understood.
– Eventually market is saturated and rate of new adoptions
declines.
– Technology diffusion tends to take far longer than
information diffusion.
• Technology may require acquiring complex knowledge or
experience.
• Technology may require complementary resources to make it
valuable (e.g., electric lights didn’t become practical until
development of bulbs and vacuum pumps, cameras not
valuable without film).
Types & Patterns of Innovation
63
Technology S-Curves
• S-curves of diffusion are in part a function of scurves in technology improvement
– Learning curve leads to price drops, which
accelerate diffusion
Types & Patterns of Innovation
64
S-Curves as a Prescriptive Tool
• Managers can use data on investment and
performance of their own technologies or data on
overall industry investment and technology
performance to map s-curve.
• While mapping the technology’s s-curve is useful for
gaining a deeper understanding of its rate of
improvement or limits, its use as a prescriptive tool is
limited.
– True limits of technology may be unknown
– Shape of s-curve can be influenced by changes in the
market, component technologies, or complementary
technologies.
– Firms that follow s-curve model too closely could end
up switching technologies too soon or too late.
Types & Patterns of Innovation
65
S-Curves as a Prescriptive Tool
• The benefits a company can achieve by switching to a
new technology depends on a number of factors
– Advantages of the new technology
– New technology’s fit with the company’s current abilities
– New technology’s fit with the firm’s position in
complementary resources – lacks them or may make
compatible products
– Expected rate of diffusion of the new technology
• Firms that follow s-curve model too closely could end
up switching technologies too soon or too late.
Types & Patterns of Innovation
66
Diffusion of Innovation &
Adopter Categories
• Everett M. Rogers created a typology of adopters:
– Innovators are the first 2.5% of individuals to adopt an innovation. They
are adventurous, comfortable with a high degree of complexity and
uncertainty, and typically have access to substantial financial resources.
– Early Adopters are the next 13.5% to adopt the innovation. They are
well integrated into their social system, and have great potential for
opinion leadership. Other potential adopters look to early adopters for
information and advice, thus early adopters make excellent "missionaries"
for new products or processes.
– Early Majority are the next 34%. They adopt innovations slightly before
the average member of a social system. They are typically not opinion
leaders, but they interact frequently with their peers.
– Late Majority are the next 34%. They approach innovation with a
skeptical air, and may not adopt the innovation until they feel pressure
from their peers. They may have scarce resources.
– Laggards are the last 16%. They base their decisions primarily on past
experience and possess almost no opinion leadership. They are highly
skeptical of innovations and innovators, and must feel certain that a new
innovation will not fail prior to adopting it.
Types & Patterns of Innovation
67
Diffusion of Innovation &
Adopter Categories
Types & Patterns of Innovation
68
Technology Trajectories
and “Segment Zero”
• Technologies often improve faster than customer requirements demand
• This enables low-end technologies to eventually meet the needs of the mass
market. Mass market begins to feel they are paying for features they don’t
need.
• Thus, if the low-end market is neglected, it can become a breeding ground
for powerful competitors.
- This market was coined “segment zero” by Andy Grove, former CEO of Intel
Types & Patterns of Innovation
69
Technology Trajectories
and “Segment Zero”
• Technologies often improve faster than
– customer requirements demand and/or
– customers can learn and adapt them to their work
• This enables low-end technologies to eventually meet the
needs of the mass market.
• Thus, if the low-end market is neglected, it can become a
breeding ground for powerful competitors.
– The “segment zero” that Intel focused on was low-end
personal computers
– It’s margins were unattractive at the beginning but, as the
technology curve advanced, the needs of the mass market
were met at a lower price than the high-end technology
Types & Patterns of Innovation
70
Technology Cycles
• Technological change tends to be cyclical:
– Each new s-curve ushers in an initial period of turbulence,
followed by rapid improvement, then diminishing returns,
and ultimately is displaced by a new technological
discontinuity.
– Utterback and Abernathy characterized the technology
cycle into two phases:
• The fluid phase (when there is considerable uncertainty about
the technology and its market; firms experiment with different
product designs in this phase)
• After a dominant design emerges (bringing a stable architecture
to the technology), the specific phase begins (when firms focus
on incremental improvements to the design and manufacturing
efficiency).
Types & Patterns of Innovation
71
Technology Cycles
– Anderson and Tushman also found that technological
change proceeded cyclically.
• Each discontinuity inaugurates a period of turbulence and uncertainty
(era of ferment) until a dominant design is selected, ushering in an era
of incremental change.
Types & Patterns of Innovation
72
Technology Cycles
–Anderson and Tushman found that:
• A dominant design always rose to command the majority of
market share unless the next discontinuity arrived too early.
• The dominant design was never in the same form as the original
discontinuity, but was also not on the leading edge of technology.
It bundled the features that would meet the needs of the majority
of the market.
– During the era of incremental change, firms often
cease to invest in learning about alternative designs
and instead focus on developing competencies related
to the dominant design.
– This explains in part why incumbent firms may have
difficulty recognizing and reacting to a discontinuous
technology.
Types & Patterns of Innovation
73
Discussion Questions
1. What are some of the reasons that established firms
might resist the adoption of a new technology?
2. Are well-established firms or new entrants more
likely to a) develop and/or b) adopt new
technologies? What are some reasons for your
choice?
3. Think of an example of an innovation you have
studied at work or school. How would you
characterize it on the dimensions described at the
beginning of the chapter?
4. What are some of the reasons that both technology
improvement and technology diffusion exhibit sshaped curves?
Types & Patterns of Innovation
74
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 4
STANDARDS BATTLES
AND DESIGN DOMINANCE
The Rise of Microsoft
• In 1980, Microsoft didn’t even have a personal computer (PC)
operating system – the dominant operating system was CP/M written
and sold by Gary Kildall through his company Digital Research
• As the market for personal computers grew and IBM realized they
were missing out on what might be a significant industry, they rushed
to get a PC to market.
– Kildall, for some unclear reason, did not get back to IBM fast
enough so they turned to Bill Gates who was already writing
software for IBM.
– Gates bought an operating system from Seattle Computer Company
and called it MS DOS. It was a clone of CP/M.
• The success of the IBM PCs (and clones of IBM PCs) resulted in the
rapid spread of MS DOS, and an even more rapid proliferation of
software applications designed to run on MS DOS. Microsoft’s
Windows was later bundled with (and eventually replaced) MS DOS.
• Had Gary Kildall signed with IBM, or had other companies not been
able to clone the IBM PC, the software industry might look very
different today!
76
The Rise of Microsoft
Discussion Questions:
1. What factors led to Microsoft's emergence as the
dominant personal computer operating system
provider? Is Microsoft's dominance due to luck, skill, or
some combination of both?
2. How might the computing industry look different if Gary
Kildall had signed with IBM?
3. Does having a dominant standard in operating systems
benefit or hurt consumers? Does it benefit or hurt
computer hardware producers?
77
Overview
• Many industries experience strong pressure to
select a single (or few) dominant design(s).
• Once selected, producers and customers focus
their efforts on improving their efficiency in
manufacturing, delivering, marketing or deploying
this dominant design rather than continue to
develop and consider alternatives
• There are multiple dimensions of value that shape
which technology rises to the position of the
dominant design.
– The strategies of firms can influence several of
these dimensions, enhancing the likelihood of their
technologies rising to dominance.
78
Why Dominant Designs Are Selected
• Increasing returns to adoption
– When a technology becomes more valuable the more it
is adopted.
– The more they are used, the more they are understood
and thus improved
• Revenues generated can be used to further develop and refine
the technology
– As a technology becomes more widely adopted,
complementary assets are often developed that are
specialized to operate with the technology
• This results in a self-reinforcing mechanism that increases the
dominance of a technology regardless of its superiority or
inferiority to competing technologies
79
Why Dominant Designs Are Selected
• Two primary sources of increasing returns to adoption are learning effects
and network externalities.
– The Learning Curve: As a technology is used, producers learn to
make it more efficient and effective often with reduced input costs or
waste rates
• The cost of producing a unit falls as the number of units produced increases.
• This pattern has been found to be consistent across a wide range of
products and services including automobiles, ships, semiconductors, drugs
and even heart surgery techniques
80
Why Dominant Designs Are Selected
–Prior Learning and Absorptive Capacity
• A firm’s prior experience influences its ability to recognize and
utilize new information.
– Use of a particular technology builds knowledge base about that
technology
• Even failures can provide a useful learning experience and build a
base of knowledge for future use
– The knowledge base helps firms use and improve the technology
Suggests that technologies adopted earlier than others are likely to
become better developed, making it difficult for other technologies
to catch up.
– As a technology becomes more widely adopted, complementary assets
are often developed that are specialized to operate with the technology
• This results in a self-reinforcing mechanism that increases the
dominance of a technology regardless of its superiority or inferiority
to competing technologies
81
Why Dominant Designs Are Selected
–Network or Positive Consumption
Externalities
• In markets with network externalities, the benefit
from using a good increases with the number of other
users of the same good.
• Network externalities are common in industries that
are physically networked
– e.g., railroads, telecommunications
• Network externalities also arise when compatibility or
complementary goods are important
– e.g., many people choose to use Windows in order to maximize the
number of people their files are compatible with, and the range of
software applications they can use.
82
Why Dominant Designs Are Selected
• A technology with a large installed base attracts developers of
complementary goods; a technology with a wide range of
complementary goods attracts users, increasing the installed base. A
self-reinforcing cycle ensues
– Example of the cycle: Microsoft’s dominance of the OS market and
GUI market is due to the early adoption of their product which led to
a large installed base and the development of complementary
products. This further increased the installed base and reinforced the
cycle.
83
Theory In Action
A Standards Battles in Digital Audio Formats
• 1982:Sony and Phillips jointly developed the CD that replaced the vinyl
LP and split the royalties
• Late 1990s: CD market was saturated, looking for new audio format for
continued growth of the market and prevent music piracy
• 1996: record companies and electronics companies joined together to
form the DVD Audio Consortium to create a new high-fidelity audio
format.
• 1999: Sony and Philips unveiled their own high-fidelity audio format,
Super Audio CD, setting the stage for a standards battle similar to the
VHS versus Beta battle in video recorders.
• Fearing a format war that would select one standard as dominant (and
one as failed), many manufacturers decided to bear the extra cost of
producing “Universal players” that would support both formats.
• Neither format has been extremely successful, and popularity of MP3
format may further dampen demand.
84
Why Dominant Designs Are Selected
• Government Regulation
– Sometimes the consumer welfare benefits of having a
single dominant design prompts government
organizations to intervene, imposing a standard.
• 1953: FCC approved the NTSC color standard in television
broadcasting to ensure compatibility to monochrome TV sets
broadcasting in the U.S.
• 1998: EU adopted a single wireless telephone standard the
general standard for mobile communications (GSM) to avoid
proliferation of incompatible standards and facilitate exchnage
within and between members countries
• The Result: Winner-Take-All Markets
– Natural monopolies
• Firms supporting winning technologies earn huge rewards; others
may be locked out.
85
Why Dominant Designs Are Selected
– Increasing returns to adoption indicate that technology trajectories
are characterized by path dependency:
• End results depend greatly on the events that took place leading up to
the outcome.
– Early technology offerings may become entrenched and block subsequent
superior technologies from being accepted
– Aggressive sponsorship by a large and powerful firm may ensure acceptance
but lock out alternatives
– A dominant design can have far-reaching influence; it shapes future
technological inquiry in the area.
• Firms will tend to use and build on their existing knowledge base rather
than enter unfamiliar areas
– Winner-take-all markets can have very different competitive dynamics
than other markets.
• Technologically superior products do not always win.
• Such markets require different firm strategies for success than markets
with less pressure for a single dominant design.
– Winners know how to manage the multiple dimensions of value that shape
design selection
86
Multiple Dimensions of Value
• In many increasing returns industries (the rate of return from
a product or process increases with the size of it’s installed
base), the value of a technology is strongly influenced by
both:
– Technology’s Standalone Value
– Network Externality Value
• A Technology’s Stand-alone Value
– Includes such factors as:
• The functions the technology enables customers to perform
• Its aesthetic qualities
• Its ease of use, etc.
– Kim and Mauborgne developed a “Buyer Utility Map” that provides a
guide for managewrs to consider multiple dimensions of technological
value and multiple stages of the customer experience
• The benefits have to be considered with respect to the cost to the customer
of obtaining or using the technology – the benefits to cost ratio determines
value
87
Multiple Dimensions of Value
88
Multiple Dimensions of Value
– Network Externality Value
• In industries characterized by network externalities, the value of
technological innovation to users will be a function not only of its
stand-alone benefits and cost, but also of the value created by:
– The size of the technology’s installed base
– The availability of complementary goods
• A new technology that has significantly more standalone
functionality than the incumbent technology may offer less overall
value because it has a smaller installed base or poor availability of
complementary goods.
– Value to customers of Windows OS is due to stand-alone value (makes
it easy use computer), the installed base (number of users you can
interact with) and availability of compatible software. This is what
makes it difficult for OSs that are better than Windows to gain a
foothold in the market
– NeXT Computers were extremely advanced technologically, but could
not compete with the installed base value and complementary good
value of Windows-based personal computers. They were not
compatible with Wintel machines which had become the standard.
89
Multiple Dimensions of Value
– To successfully overthrow an existing dominant
technology, new technology often must either offer:
• Dramatic technological improvement (e.g., in videogame consoles,
it has taken 3X performance of incumbent)
– Greater stand-alone value is not enough, needs greater overall value
see Fig 4.4(b)
• Compatibility with existing installed base and complements see
4.4(c)
– Super Audio CD (SACD) from Sony and Philips is a new audio format
based on Direct Stream Digital technology.
• It is much better than standard CD technology but they made it
backward compatible so that people would not have to throw out
their existing CDs when they buy the new player and the new disks
can be played on old CD players as well
• Thus they maintained compatibility with the existing installed base
and complementary goods
90
Multiple Dimensions of Value
91
Multiple Dimensions of Value
• When comparing the value of a new technology to an existing one, users are
weighing a combination of:
– Objective information; actual benefits, installed base and complementary goods
– Subjective information: perceived benefits, base and complementary goods
– Expectations: anticipated benefits, base and complementary goods
• These three may be proportional or not
– For example, perceived installed base may be greater than actual.
– How is this accomplished? Marketing, stretching the truth, vaporware
• When Sega and Sony introduced their 32-bit video game consoles, Nintendo was far from
having one in production. Instead, Nintendo began promoting the development of a 64bit system in 1994 even though it didn’t appear until 1996. But many customers believed
Nintendo and held off buying the 32-bit systems.
• Post mortem: Sony developed the PlayStation2 with more than 2x the processing power
of the Nintendo 64, made it backward compatible, made sure there was a large supply of
game titles available at launch, marketed it as if it would the product everyone would by
and sold it at a very low price. Nintendo never regained market dominance
92
Multiple Dimensions of Value
Actual, Perceived and Expected Components of Value
93
Multiple Dimensions of Value
• When customer requirements for network externality value
are satiated at lower levels of market share, more than one
dominant design may thrive.
– This may be the case in the video game console industry.
While a larger market share may increase network externalities
so that customers have more games and more people to play
against, those benefits can be achieved without attaining a
majority of the market
• Sony has a majority share of the US video game market and
neither Nintendo’s GameCube nor Microsoft’s Xbox has greater
than a 20% market share
• Yet, there is still an abundance of game titles for all three
consoles and a significant pool of people to play games against
• Such markets may not experience great pressure to select a
single dominant design; ,multiple platforms may successfully exist
94
Are Winner-Take-All Markets Good for
Consumers?
• Economics emphasizes the benefits of competition.
However, network externalities suggest users sometimes
get more value when one technology dominates.
• Some would argue that Microsoft has clearly engaged in
anticompetitive behavior in its quest to dominate the PC
operating system market, others would counter that it’s
overwhelming market share has created greater
compatibility among computers and software applications.
• How can a regulatory board determine if a firm has become
too dominant?
• One way is to compare the network externality returns to
market share (value customers reap by more people using
the same product) with corresponding monopoly costs
(benefits form gets when their product is dominant)
95
Are Winner-Take-All Markets Good for
Consumers?
• Network externality benefits to customers rise with cumulative
market share
– Greater availability of complementary goods
– More compatibility among users
– More revenues that can be channeled into further developing the
technology
• Monopoly costs to customers also rise with cumulative market
share
– Price gouging
– Restricted product variety
– Product innovation may be stifled or purposely delayed
96
Are Winner-Take-All Markets Good for
Consumers?
• Network externality returns to market share often exhibit an s-shaped
curve
• Monopoly costs to market share are exponentially increasing
• The two costs trade off against each other
– Where monopoly costs exceed network externality benefits, intervention may
be warranted. Optimal market share is at point where lines cross.
– A firm can choose not to charge the highest price the market will bear – some
say that Microsoft does not charge the maximum price for Windows OS but
they are able to control the evolution of the market by selectively aiding some
suppliers or complementors more than others
97
Discussion Questions
1. What are some of the sources of increasing returns to adoption?
2. What are some examples of industries not mentioned in the
chapter that demonstrate increasing returns to adoption?
3. What are some of the ways a firm can try to increase the overall
value of its technology, and its likelihood of becoming the
dominant design?
4. What determines whether an industry is likely to have one or a
few dominant designs?
5. Are dominant designs good for consumers? Competitors?
Complementors? Suppliers?
98
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 5
TIMING OF ENTRY
The Personal Digital Assistant Industry
• From 1990-1993, a flurry of companies began
developing PDAs and analysts predicted millions would
be sold by 2004.
• However, market confusion and under-developed
enabling technologies slowed PDA adoption. Many PDA
companies ran out of money by 1994.
• The surviving companies included those that specialized
in industrial devices, and Palm Computing, which had
entered relatively late and produced a streamlined PDA.
• By 2003, another storm was on the horizon for the PDA
industry: the arrival of smartphones, and much larger
competitors such as Nokia, Ericsson, and Samsung.
• By 2006, over 13 million smartphones had been shipped,
and PDA sales had virtually ground to a halt.
5-100
Overview
• Increasing returns suggests that timing of entry
can be very important. First movers don’t always
have the advantage.
• There are a number of advantages and
disadvantages to being a first mover, early follower
or late entrant. These categories are defined as
follows:
– First movers are the first entrants to sell in a new
product or service category (“pioneers”)
– Early followers are early to market but not first.
– Late entrants do not enter the market until the product
begins to penetrate the mass market or later.
5-101
First-Mover Advantages and
Disadvantages
• Being a first mover can confer the advantages of:
– Brand loyalty and technological leadership
• First movers can build a reputation as a leader in that area of technology
which can help it maintain a lead even after competition enters the arena
– Preemption of scarce assets
• Radio frequency allocation by the FCC for wireless communication services
can cause a scarcity of resources for late comers
– Exploiting buyer switching costs
• Inertia to change increases the longer a product is around
– QWERTY keyboard developed to prevent keys from jamming, even
though not a problem today other keyboards have not been
successful
– Reaping increasing returns advantages.
• First mover may rise in market power through increased returns and
eventually make it the dominant design
• Intel become dominant design due to Gate’s BASIC, complementary
products and adoption of the 8088 by IBM
5-102
First-Mover Advantages and
Disadvantages
• However, first movers often bear disadvantages also:
– Study of 50 product categories showed that market pioneers have
a 47% rate of failure and a mean market share of 10%
• Early followers averaged almost 3x the market share of the pioneers
• The market may often perceive the first movers as having the
advantage but that is because of misperceptions
– The first mover in the disposable diaper market was Chux. P&G didn't
come on the scene until 30 years later but because Chux disappeared
history was reinterpreted and P&G were thought of as the first mover.
– Other studies show first movers earn greater revenues but lower
profits because of the higher R&D expenses, development of
supplier and distribution channels and marketing costs that they
incur
• A later entrant can capitalize on all the groundwork done by the first
mover and improve upon it at less expense
5-103
First-Mover Advantages and
Disadvantages
– The market often perceives first movers as having
advantages because it has misperceived who was first.
5-104
First-Mover Advantages and
Disadvantages
– High research and development expenses
• First mover spends money on exploratory research that results in
failure before achieving success as well as developing
complementary goods and a market
– Undeveloped supply and distribution channels
• A new-to-the-world technology often has no appropriate suppliers
or distributors. The first mover has to develop and produce on
their own or assist others in the development and production of
the needed supplies
– DEKA need a ball bearing no one else produced. They developed the
machine to produce the ball bearing.
5-105
First-Mover Advantages and
Disadvantages
– Immature enabling technologies and complements
• PDA developers had created useful palm-size devices but the
battery and modem technologies needed to support the PDAs was
not developed enough
– Uncertainty of customer requirements
• Since there is no way to know what features customers will want
from a new technology and how much they will pay for them, first
movers may have to revise their offerings when they get customer
feedback
– In the late 80s Kodak introduced the 8mm video camera expecting a
large number of customers due to its design and quality. They were
too expensive and consumers had not recognized a need for them so
Kodak withdrew them from the market.
– By the early 1990s, consumers were ready for the product and other
competitors has entered the market
5-106
Factors Influencing Optimal
Timing of Entry
1. How certain are customer preferences?
– When new-to-the-world technologies are first
developed, customers may have difficulty
understanding the technology and its role in
their life
• Which features are important and which
unnecessary are unclear to producers and
customers
– Early e-commerce sights included exciting graphics
and sounds to make themselves competitive. Due to
lack of high-speed internet and powerful PCs by most
customers, these features annoyed customers
5-107
Factors Influencing Optimal
Timing of Entry
– In fact, because video game consoles are sold at cost or less to
build an installed base, with profits coming from game sales, the
CD/DVD feature was so desirable that it was bought more for
that feature than to play games.
• Sony lost money because few customers bought games. Their
strategy backfired
• Microsoft learned from this mistake and disabled the DVD playback
feature on the Xbox unless consumers purchased an add-on DVD
playback kit
– If customer needs are well understood, it is more feasible to
enter the market earlier.
• Some innovations are developed in response to well-understood
customer needs
– The developers of Tagament (medication for chronic heartburn or
ulcers) faced little uncertainty. Customers wanted an affordable, easyto-use solution to their discomfort. Once developed and approved, the
developers raced the product to market in hopes of patenting it and
securing market share
5-108
Factors Influencing Optimal
Timing of Entry
2. How much improvement does the innovation
provide over previous solutions?
– An innovation that offers a dramatic improvement
over previous generations will accrue more rapid
customer acceptance as its value will be appreciated
by the consumer
3. Does the innovation require enabling technologies,
and are these technologies sufficiently mature?
– If the innovation requires enabling technologies
(such as long-lasting batteries for cell phones), the
maturity of these technologies will influence optimal
timing of entry.
5-109
Factors Influencing Optimal
Timing of Entry
4. Do complementary goods influence the value of the
innovation, and are they sufficiently available?
– Not all innovations require complementary goods, but for those
that do (e.g., games for video consoles), availability of
complements will influence customer acceptance.
5. How high is the threat of competitive entry?
– If there are significant entry barriers, there may be less need to
rush to market to build increasing returns ahead of others.
– If the threat of competitive entry is high, the firm may need to
enter earlier to establish brand image, capture market share and
secure relationships with suppliers and distributors
5-110
Factors Influencing Optimal
Timing of Entry
6. Are there increasing returns to adoption?
– If so, allowing competitors to get a head start can be very risky as it
becomes more difficult to catch up
7. Can the firm withstand early losses?
– The first mover bears the bulk of R&D expenses and may endure a
significant period without revenues at the beginning of the s-curve
– The earlier a firm enters, the more capital resources it may need.
• GO and Momenta developed technologically advanced PDAs but couldn’t
withstand the long market confusion about PDAs and ran out of capital
• IBM and Compaq survived because they were large and diversified
• Palm was a late entry so it did not have a long takeoff period but even so it
was forced to seek outside capital
– Firms with significant resources may be able to more easily catch up to
earlier entrants
• Nestle was a very late entry to the freeze-dried coffee market but used its
substantial resources to develop a superior products and rapidly build
market awareness. This enabled it to quickly overtake the lead from GFs
Maxim
5-111
Factors Influencing Optimal
Timing of Entry
8. Does the firm have resources to accelerate market
acceptance?
– Firms with significant capital resources can invest in aggressive
marketing and supplier and distributor development, increasing
the rate of early adoption.
9. Is the firm’s reputation likely to reduce the
uncertainty of customers, suppliers, and
distributors?
– Innovations from well-respected firms may be adopted more
rapidly, enabling earlier successful entry.
– Customers, suppliers and distributors will use the firm’s track
record to assess its technological expertise and market
prowess
• When Microsoft announced that they were entering the PDA
market, many distributors decided to MS’s product since MS’s
track record suggested they might dominate the market
5-112
Research Brief
Whether and When to Enter?
– Will Mitchell studied 30 years of data on whether and
when an incumbent in one subfield of the medical
diagnostic imaging industry would enter another
subfield. He found:
• If only one firm can produce an inimitable good, it can enter if
and when it wants. If several firms could produce a good that
will subsequently be inimitable, they race to capture the market.
• If good is highly imitable, firms prefer to wait while others invest
in developing the market.
• Firms were more likely to enter if they had specialized assets
(e.g., well established distribution system) that would be useful
in the new subfield or if their current products were threatened
by the new subfield.
• Firms entered earlier when their core products were threatened
and there were several potential rivals.
5-113
Strategies to Improve Timing Options
• To have more choices in its timing of entry, a
firm needs to be able to develop the innovation
early or quickly.
• A firm with fast-cycle development processes can
be both an early entrant, and can quickly refine
its innovation in response to customer feedback.
• In essence, a firm with very fast-cycle
development processes can reap both first- and
second-mover advantages.
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Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 6
DEFINING THE ORGANIZATION’S
STRATEGIC DIRECTION
Genzyme’s Focus on “Orphan Drugs”
• Genzyme was founded in 1981 by scientists studying
genetically inherited enzyme diseases
• Adopted a very unusual strategy of developing drugs for
rare diseases rather than “blockbuster” drugs.
– Developing a drug takes 10-14 years at an average cost of $800
million to perform the research, run the clinical trials, get FDA
approval and bring the drug to market
– Blockbuster drugs earn revenues of $1 billion or more and are sold
to millions of people with chronic illnesses
– Genzyme concentrated on the “orphan drug” market that had a
market of only a few thousand people
• Requires smaller clinical trials, less advertising, smaller sales force,
less competition
• Insurance companies would be willing to cover the drugs due to the
severity of the diseases and a limited number of patients for the drug
Organization’s Strategic Direction
6-116
Genzyme’s Focus on “Orphan Drugs”
• In 1983, the FDA established the “Orphan Drug Act,” giving seven
years market exclusivity to developers of drugs for rare (<200,000
patients) diseases.
• Also chose unusual strategy of doing its own manufacturing and sales
rather than licensing to a large pharmaceutical company.
• Diversified into side businesses to fund its R&D
– Chemical supplies
– Genetic counseling
– Diagnostic testing
• The company went public in 1986, raising $27 million
– Their first drug, Cerezyme, was sold to 4,500 patients at a yearly
cost of $170,000 (annual revenue of $800 million). The drug is
required to be taken for the lifetime of the patient.
• By 2006, Genzyme was the world’s third largest biotech company
proving that a profitable business could be built around small disease
populations
Organization’s Strategic Direction
6-117
Overview
• A coherent technological innovation strategy
leverages the firm’s existing competitive position and
provides direction for future development of the firm.
• Formulating this strategy requires:
– Appraising the firm’s environment,
– Appraising the firm’s strengths, weaknesses,
competitive advantages, and core competencies
– Articulating an ambitious strategic intent.
– Determining the key resources and capabilities the firm
needs to develop or acquire to meet its long-term
objectives
Organization’s Strategic Direction
6-118
Assessing the Firm’s Current Position
• External Analysis
– Two common methods are Porter’s Five-Force Model and
Stakeholder Analysis.
– Porter’s Five-Force Model
• Has been used to analyze whether a particular industry as a
whole will be profitable or to determine an individual firm’s
chances for success via a vis its competitors
–
Discount retail industry as a whole is very competitive and thus
unattractive for new entrants but an individual entrant such as WalMart could be profitable because of its scale, use of advanced
technology, location strategies, etc.
1. Degree of existing rivalry. Determined by number of firms,
relative size, degree of differentiation between firms, demand
conditions, exit barriers (for firm to leave the market)
2. Threat of potential entrants. Determined by attractiveness
of industry, height of entry barriers (e.g., start-up costs, brand
loyalty, regulation, etc.)
3. Bargaining power of suppliers. Determined by number of
suppliers and their degree of differentiation, the portion of a
firm’s inputs obtained from a particular supplier, the portion of
a supplier’s sales sold to a particular firm, switching costs, and
potential for backward vertical integration - firm produce its
own supplies
Organization’s Strategic Direction
6-119
Assessing the Firm’s Current Position
4.
5.
Bargaining power of buyers. Determined by number of buyers,
the firm’s degree of differentiation, the portion of a firm’s inputs sold
to a particular buyer, the portion of a buyer’s purchases bought from
a particular firm, switching costs, and potential for forward vertical
integration - supplier enters firm’s business
Threat of substitutes. Determined by number of potential
substitutes, their closeness in function and relative price.
•
•
•
Substitutes are not competitive products but can fulfill a
strategically equivalent role for the customer
Other coffeehouses are competitors to Starbucks but bars,
restaurants, beer, soft drinks are substitutes
Buses are substitutes for airlines
Organization’s Strategic Direction
6-120
Assessing the Firm’s Current Position
– Recently Porter has acknowledged the role of
complements.
•
•
The availability, quality and price of complements will
influence the threats and opportunities posed by the
industry
Must consider:
–
–
–
•
how important complements are in the industry,
whether complements are differentially available for the
products of various rivals (impacting the attractiveness of
their goods), and
who captures the value offered by the complements.
The ink cartridge market is extremely profitable to
desktop printer manufacturers and thus the cartridge of
one company is incompatible with the printer of another
company
–
The market is so profitable that third-party vendors produce
clones or refill the empty cartridge with ink
Organization’s Strategic Direction
6-121
Assessing the Firm’s Current Position
• Five-Force Model
6-122
Assessing the Firm’s Current Position
Stakeholder Analysis
1. Who are the
stakeholders?
2. What does each
stakeholder want?
3. What resources do
they contribute to
the organization?
4. What claims are
they likely to make
on the
organization?
6-123
Assessing the Firm’s Current Position
• Internal Analysis
– Identify the firm’s strengths and weaknesses. In Porter’s
model of a value chain, activities are divided into primary
activities and support activities
• Primary activities are those directly related to the product or
service provided by the firm
• Support activities are those indirectly related to the main
business of the firm
– Each activity can then be considered from the view of
how it contributes to the overall value produced by the
firm and what the firm’s strengths and weaknesses are in
that activity
6-124
Assessing the Firm’s Current Position
6-125
Value-Chain Analysis
for Take2 Interactive Software
• Take2 Interactive Software
– Produces Grand Theft Auto video game
– R&D is considered a primary activity, but the
support activity of the technology
development is not considered
• Because all the game manufacturing is
performed by the console producers rather
than by Take2, its primary technology
activities center on design and games which is
part of R&D
Value-Chain Analysis
for Take2 Interactive Software
Value-Chain Analysis
for Take2 Interactive Software
Assessing the Firm’s Current Position
– Once the key strengths and weaknesses are identified,
the firm can assess which strengths have potential to be
a source of
sustainable competitive advantage to
implement its strategic intent for the future
– To be a source of sustainable competitive advantage,
resources must be Rare, Valuable, Durable and
Inimitable
• Rare and valuable resources may yield a competitive
advantage, but that advantage will not be sustainable if the
firm is incapable of keeping the resources or if other firms
can imitate them
– A positive brand image can be a rare and valuable resource, but it requires
ongoing investment to sustain it or else it will erode
– Technological advances are reverse-engineered, skillful marketing
campaigns are copied, innovative HR practices copied, etc.
Organization’s Strategic Direction
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Assessing the Firm’s Current Position
– Resources are difficult (or impossible) to imitate when
they are:
• Tacit – resources of an intangible nature, such as
knowledge, that can not be readily codified in written form
• Path dependent – dependent on a particular historical
sequence of events
• Socially complex – they arise through the interaction of
multiple people
• Causally ambiguous – the relationship between a resource
and the outcome it produces is poorly understood
– Talent is considered to be a tacit and causally
ambiguous resource; an inherent trait that can not be
trained and the methods by which individuals acquire it
or tap into it is poorly understood
– A first-mover advantage is a path-dependent advantage
Organization’s
Strategic Direction
that can not
be copied;
only one firm can be first
6-130
Identifying Core Competencies and Capabilities
• Once a baseline internal analysis has been established, a firm can move
on to identifying its core competencies and formulate its strategic intent
• Core Competencies: A set of integrated and harmonized abilities that
distinguish the firm in the marketplace.
• Competencies typically combine multiple kinds of abilities e.g.,
– Managing the market interface
– Building and managing an effective infrastructure
– Technological abilities
• Several core competencies may underlie a business unit and several
business units may draw from same competency.
– The organization’s structure and incentives must encourage cooperation and
exchange of resources across strategic business unit boundaries
• Core competencies should:
– Be a significant source of competitive differentiation
– Cover a range of businesses
– Be hard for competitors to imitate
• Sony’s core competency is miniaturization which arises from harmonizing
multiple technologies (liquid crystal displays, semiconductors, etc.) and is
leveraged into multiple markets (TVs, radios, PDAs, etc.)
Organization’s Strategic Direction
6-131
Identifying Core Competencies and Capabilities
• Prahalad & Hamel compare competencies to roots from which
grow core products such as major components or
subassemblies
• Core products, in turn give rise to business units, whose fruits
are the various end products of the company
• Individuals in the corporation should be viewed as corporate assets that can be
redeployed across the organization and not wed to a particular business unit
Organization’s Strategic Direction
6-132
Identifying Core Competencies and Capabilities
• Prahalad & Hamel offer the following tests to identify the firm’s core
competencies
• Is it a significant source of competitive differentiation?
Does it provide a unique signature to the organization?
Does it make a significant contribution to the value a
customer perceives in the end product?
• For example, Sony’s skills in miniaturization have an immediate impact on the utility
customers reap from its portable products.
• Does it transcend a single business? Does it cover a range
of businesses, both current and new?
• For example, Honda’s core competence in engines enables the company to be successful in
businesses as diverse as automobiles, motorcycles, lawn mowers, and generators.
• Is it hard for competitors to imitate? In general,
competencies that arise from the complex harmonization
of multiple technologies will be difficult to imitate. The
competence may have taken years (or decades) to build.
This combination of resources and embedded skills will be
difficult for other firms to acquire or duplicate.
Strategic Direction
• According to Organization’s
Prahalad
and Hamel, few firms are likely to 6-133
Research Brief –
Identifying the Firm’s Core Competencies
– Gallon, Stillman and Coates offer a step-by-step
program for identifying core competencies.
• Module 1 -- Assemble a steering committee, appoint a program
manager, and communicate the overall goals of the project to all
members of the firm. An exhaustive inventory of capabilities should be
compiled.
• Module 2 -- Constructing an inventory of capabilities categorized by
type. Assess their strength, importance, and criticality.
• Module 3 – Organize capabilities by both their criticality and the
current level of expertise within the firm for each.
• Module 4 – Distill competencies into possible candidates for the firm to
focus on. No options should be thrown out yet.
• Module 5 -- Testing the candidate core competencies against Prahalad
and Hamel's original criteria.
• Module 6 -- Evaluate the firm’s position in the core competency vis a
vis the competition. The firm can now identify any areas in which it
needs to develop or acquire missing pieces of a particular competency.
Organization’s Strategic Direction
6-134
Risk of Core Rigidities
• When firms excel at an activity, they can become over committed
to it and rigid.
– Incentives and culture may reward current competencies while
thwarting development of new competencies.
– Dynamic capabilities are competencies that enable the firm to
quickly respond to change, emerging markets and major technological
discontinuities
• e.g., firm may develop a set of abilities that enable it to rapidly deploy new
product development teams for a new opportunity; firm may develop
competency in working with alliance partners to gain needed resources
quickly.
• Corning has made its own evolvability one of its most important core
competencies
– Invests heavily in research areas likely to provide scientific breakthroughs
– Develops pilot plants to experiment with new products and production
processes
– Manages its relationships with alliance partners as an integrative and flexible
system of capabilities that extend the firms boundaries not as individual
relationships focused on particular projects
Organization’s Strategic Direction
6-135
Strategic Intent
• Strategic Intent
– A firm’s purpose is to create value not just by cutting costs or improving
operations but by developing new businesses and markets and leveraging
corporate resources
– Strategic intent is a long-term goal that is ambitious, builds upon and stretches
firm’s core competencies, and draws from all levels of the organization.
• Canon’s obsession with overtaking Xerox, Apple’s mission of ensuring that everyone has
a personal computer and Yahoo’s goal of becoming the world’s largest Internet
shopping mall (Hamel & Prahalad)
• Typically looks 10-20 years ahead, establishes clear milestones for employees to target
• Without it, firms follow their customers instead of leading them
• Firm should identify resources and capabilities needed to close gap between strategic
intent and current position.
6-136
The Balanced Scorecard
• Kaplan and Norton point out that a firm’s methods of
measuring performance will strongly influence whether and how
the firm pursues its strategic objectives
• They argue that effective performance measurement is more
than just reliance on financial indicators. It should incorporate:
– Financial perspective
• Goals: meet shareholder’s expectations, double corporate value in 7
years
• Measures: return on capital, net cash flow, earnings growth
– Customer perspective
• Goals: improve customer loyalty, offer best-in-class customer service
• Measures: market share, percent of repeat purchases, customer
satisfaction surveys
6-137
Theory In Action
– Internal perspective
• Goals: reduce internal safety incidents, build best-in-class franchise
teams, improve inventory management
• Measures: number of safety incidents per month, franchise quality
rating, inventory costs
– Innovation and learning perspective
• Goals: accelerate and improve new product development, improve
employee skills
• Measures: percentage of sales from products developed within the
past 5 years, average length of the new product development
cycle, employee training targets
– The scorecard may have to be adapted to fit different markets and
businesses, but a 2002 survey found that approximately 50% of
Fortune 1,000 companies in the US and 40% in Europe use some
version of the balanced scorecard
6-138
Theory In Action
6-139
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 7
CHOOSING INNOVATION PROJECTS
Boeing’s Sonic Cruiser
• Boeing was developing a new midsized jet, the “Sonic
Cruiser,” which would travel 15-20% faster than existing
commercial jets. It was expected to cost $10 billion to
develop.
• However, in 2002 air ticket sales were down, several
airlines faced bankruptcy, and aircraft were put into storage
to reduce capacity.
– Despite this, Boeing forecasted that the worldwide aircraft fleet
would double by 2021.
• Boeing also noted that the company needs to create a new
aircraft every 12 to 15 years or else the people with the
skills and experience will be either leave the company or
retire and the next generation of employees will not have
that knowledge passed on to them.
141
Boeing’s Sonic Cruiser
• The Sonic Cruiser was scrapped but development
of the 787 Dreamliner began and is scheduled to
fly in 2009
– 50 percent of the primary structure, including the
fuselage and wing, will be made of composite materials.
This eliminates 1,500 aluminum sheets and 40,000 50,000 fasteners.
– health-monitoring systems will be incorporated that will
allow the airplane to self-monitor and report maintenance
requirements to ground-based computer systems.
142
The Development Budget
• Most firms face serious constraints in capital
and other resources they can invest in
projects.
• Firms thus often use capital rationing: they
set a fixed R&D budget and rank order
projects to support.
– R&D budget is often a percentage of previous
year’s sales.
– Percentage is typically determined through
industry benchmarking, or historical
benchmarking of firm’s performance.
143
The Development Budget
• R&D Intensity (R&D as a percent of sales) varies considerably
across and within industries.
Industry
Software & Internet
Health
R&D as a Percent of Sales
12.7%
11.2
Computing & Electronics
7.6
Technology
4.3
Aerospace & Defense
4.1
Automotive
4.1
Industrials
2.3
Consumer Products
2.1
Telecom
1.9
Chemicals & Energy
1.5
144
The Development Budget
• Top 20 Global R&D Spenders, 2004
– Microsoft’s 21% is higher than the 12.7% of the Software 7
Internet industry
– GM’s 3% is below the auto industry’s 4.1%
Company
R&D
Expenditures
($billions)
R&D as
percent of
sales
Microsoft
$7.8
21%
Pfizer
7.7
15%
Ford
7.4
DaimlerChrysler
Company
R&D
Expenditures
($billions)
R&D as
percent
of sales
GlaxoSmithKline
5.2
14%
Intel
4.8
14%
4%
Volkswagen
4.7
4%
7.0
4%
Sony
4.7
7%
Toyota
7.0
4%
Nokia
4.6
13%
General Motors
6.5
3%
Honda
4.4
5%
Siemens
6.2
7%
Samsung Electronics
4.3
6%
Matsushita Electric
5.7
7%
Novartis
4.2
15%
IBM
5.7
6%
Roche Holding
4.1
17%
Johnson & Johnson
5.2
11%
Merck
4.0
18%
145
Theory In Action
Financing New Technology Ventures
– Large firms can fund innovation internally; new start-ups
must often obtain external financing.
– In first stages of start-up and growth, entrepreneurs may
have to rely on family, friends, and credit cards.
– Start-ups might be able to obtain some funding from
government grants and loans (SBA, DOE, NASA, etc)
– If idea and management are especially promising,
entrepreneur may secure funds from “angel investors”
(typically seed stage and <$1 million) or venture
capitalists (multiple early stages, >$1 million).
• In 2005, angel investors funded approximately 50,000
ventures valued at $23.1 billion
146
Venture vs Traditional Capital
• Traditional
–
–
–
–
–
More fluid
Bears lower return
Invested based on immediate future
Concerned with past performance
Loaning bank is creditor and requires collateral
• Venture capital
–
–
–
–
–
Less fluid
Requires high return rate
Invested based on longer-run future
Concerned with product and market potential
Venture capitalist and partner are co-owners
• Venture capitalist brings credibility to the company and mentoring
Angel Funding
• The angel investor market in the first half of 2007 has shown
signs of a small retreat from the growth of the past several
years, with total investments of $11.9 billion, a decrease of
6% over the first half of 2006, (Center for Venture
Research at the University of New Hampshire
http://wsbe.unh.edu/cvr)
• A total of 24,000 entrepreneurial ventures received angel
funding in the first half of 2007, a 2% decline from the first
half of 2006.
• The number of active investors in the first half of 2007 was
140,000 individuals (8% above Q1Q2 2006) though the total
dollar size of the market and the number of investments
exhibited a slight decline from Q1Q2 2006
• Reflecting this trend is the decrease in the average deal size
by 4% over the first half of 2006 and an increase (10%) in
the number of investors per deal.
Angel Funding Sector Analysis Q1Q2 2007
• Healthcare services/medical devices/equipment and software
remained the sectors of choice, with 22% and 14%,
respectively, of total angel investments in the first half of
2007.
• This was followed closely by biotech at 10%.
• Electronics/computer hardware, IT services, retail and
industrial/energy garnered close to 10% each.
• The remaining investments were approximately equally
weighted across high tech sectors, with each having 3-5% of
the total deals.
Sector
Health
Software
Biotech
Electronics
IT Services
Retail
Industrial/Energy
Deals
22%
14%
10%
8%
7%
6%
6%
Angel Funding Analysis
• Angels continue to be the largest source of seed and start-up capital in the
United States, with 42% of the first half of 2007 angel investments in the
seed and start-up stage.
– This preference for seed and start-up investing is followed closely by
post-seed/start-up investments of 48%.
• While angels are not abandoning seed and start-up investing, it appears
that market conditions, the preferences of large formal angel alliances, and
a possible slight restructuring of the angel market are resulting in angels
engaging in more later-stage investments.
• This restructuring of the angel market has in turn resulted in fewer dollars
available for seed investments, thus exacerbating the capital gap for seed
and start-up capital in the US.
• In the first half of 2007 angels exited their investments primarily through
sale of the business (acquisitions by another firm), with 61% of the first
half 2007 exits through trade sales.
• Exits by initial public offerings represented 6% of exits and bankruptcy
occurred in 33% of the exits.
• For all these exits the average rate of return was 30-40% and roughly half
(52%) were at a profit.
Venture Capital Funding Analysis
• Venture capitalists invested $29.4 billion in 3,813 deals in
2007—marking the highest yearly investment total since 2001.
– The total invested in 2007 represents a 10.8 percent increase in dollars
and a five percent increase in deal volume over 2006.
– Much of the increase in investments over the prior year can be
attributed to record investment levels in the Clean Technology and Life
Sciences sectors as well as strong investment levels in Internet-specific
companies.
• Investments in the fourth quarter of 2007 totaled $7.0 billion
in 963 deals, marking the fourth straight quarter with
investments totaling more than $7 billion—a phenomenon not
seen since 2001.
Source http://www.nvca.org/pdf/07Q4MTRelEmbargoFINAL.pdf
VC Sector and Industry Analysis
• The Life Sciences sector (Biotechnology and Medical Device industries
together) set an all-time record for venture capital investing in 2007 with
$9.1 billion in 862 deals, compared to $7.6 billion going into 786 deals in
2006.
– The most significant growth was seen in the Medical Device industry, which
rose 40% in 2007 to $3.9 billion going into 385 deals. For the year, Life
Sciences accounted for 31% of all venture capital invested, which also
represents an all-time high.
– Life Sciences also retained its position as the number one investment sector
for 2007.
• Software investing remained relatively flat in 2007, consistent with levels
over the last five years with $5.3 billion going into 905 deals, compared
to $5.1 billion going into 920 deals in 2006.
– Despite the lack of growth, it still remained the largest single industry
category for the year both in terms of deals and dollars, edging out
Biotechnology for the top position.
152
VC Sector and Industry Analysis
• The Clean Technology sector (alternative energy, pollution
and recycling, power supplies and conservation) which
represented two of the five biggest deals of the year,
experienced significant growth in 2007 with $2.2 billion
invested in 201 deals.
– This investment level represents a 46% growth in dollars and a 57%
growth in deal volume over 2006 when $1.5 billion was
invested in 128 companies.
• Internet-specific companies received $4.6 billion in 748 deals
in 2007, an increase of 12% and 8%, respectively, over 2006
when these companies received $4.1 billion in 691 deals.
– ‘Internet-specific’ refers to a company whose business model is
fundamentally dependent on the Internet, regardless of the
company’s primary industry category. These companies accounted for
16 percent of all venture capital dollars in 2007, approximately the
153
same percentage as in 2006.
VC Sector and Industry Analysis
• The Media and Entertainment industry saw more venture
capital dollars in 2007, with $1.9 billion going into 340 deals
compared to 2006 when $1.7 billion went into 318 deals.
• Other industries that saw increases in deals and dollars during
the year include Business Products and Services, Financial
Services, IT Services, and Retailing/Distribution.
• Telecom companies saw a decrease in investment in 2007
with 290 deals receiving $2.1 billion dollars, a drop from the
$2.6 billion in 301 deals they captured in 2006.
• Other industries that experienced declines in deals and dollars
in 2007 include Healthcare Services, Semiconductors, and
Electronics/Instrumentation.
154
Total equity investments into
venture-backed companies Q1 2001—Q4 2007
155
Most active venture investors 2007
• The most active venture firms in the US closed 20 or more
deals each in 2007.
• For the third year in a row, Draper Fisher Jurvetson topped
the list of most active venture firms for the full-year,
completing 100 deals in 2007, up from the 82 deals they
participated in during 2006.
• Like last year, New Enterprise Associates and Intel Capital
rounded out the top three firms.
• Making a big move up the list was Canaan Partners; whose
50 deals completed in 2007 was 28 percent higher than the
39 deals completed in 2006. For the year, the top 10 firms
invested in eight percent of all the deals done in 2007.
156
Most active venture investors 2007
http://www.pwcmoneytree.com/MTPublic/ns/moneytree/filesource/exhibits/National_MoneyTree_full_year_Q4_2007_Final.pdf
157
Quantitative Methods for Choosing Projects
• The difference between the present value of cash inflows and the present
value of cash outflows. NPV is used in capital budgeting to analyze the
profitability of an investment or project.
• NPV compares the value of a dollar today to the value of that same dollar in
the future, taking inflation and returns into account. If the NPV of a
prospective project is positive, it should be accepted. However, if NPV is
negative, the project should probably be rejected because cash flows will also
be negative.
• For example, if a retail clothing business wants to purchase an existing store,
it would first estimate the future cash flows that store would generate, and
then discount those cash flows into one lump-sum present value amount, say
$565,000.
– If the owner of the store was willing to sell his business for less than $565,000, the
purchasing company would likely accept the offer as it presents a positive NPV investment.
– Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy
the store, as the investment would present a negative NPV at that time and would,
therefore, reduce the overall value of the clothing company.
158
Quantitative Methods for Choosing Projects
• NPV = Net Present value = Present value of net cash flows
– Each cash inflow/outflow is discounted back to its PV and then
they are summed.
or shortened
t - the time of the cash flow
N - the total time of the project
r - the discount rate (the rate of return that could be earned on an investment in
the financial markets with similar risk.)
Ct - the net cash flow (the amount of cash) at time t
(for educational purposes, C0 is commonly placed to the left of the sum to
emphasize its role as the initial investment.).
159
Quantitative Methods for Choosing Projects
• Commonly used quantitative methods include discounted cash flow
methods and real options.
– Discounted Cash Flow (DCF)
• Net Present Value (NPV): Expected cash inflows are discounted and
compared to outlays.
• In Excel use the formula NPV(interest rate, cell range of cashflows)
$943.39
160
Quantitative Methods for Choosing Projects
• Internal Rate of Return (IRR): The discount rate
that makes the net present value of investment zero.
– It is an indicator of the efficiency of an investment,
as opposed to NPV, which indicates value or
magnitude.
– The IRR is the annualized effective compounded
return rate which can be earned on the invested
capital, i.e., the yield on the investment.
– A project is a good investment proposition if its IRR is
greater than the rate of return that could be earned
by alternate investments (investing in other projects,
buying bonds, even putting the money in a bank
account).
• Thus, the IRR should be compared to any alternate
costs of capital including an appropriate risk premium.
161
Quantitative Methods for Choosing Projects
– Mathematically the IRR is defined as any discount rate that
results in an NPV of zero of a series of cash flows.
– In general, if the IRR is greater than the project's cost of
capital, or hurdle rate (minimum rate of return that must
be met for a company to undertake a particular project),
the project will add value for the company.
162
Quantitative Methods for Choosing Projects
163
Quantitative Methods for Choosing Projects
• Strengths and Weaknesses of DCF Methods:
– Strengths
• Provide concrete financial estimates
• Explicitly consider timing of investment and time value of money
– Weaknesses
• May be deceptive; only as accurate as original estimates of cash
flows.
• May fail to capture strategic importance of project
– Technology development plays a crucial role in building and leveraging
firm capabilities and creating options for the future
• Intel’s investment in DRAM technology must have been considered a
total loss by NPV methods, however it laid the foundation for Intel’s
ability to develop microprocessors which proved enormously
profitable
• Thus, some managers and scholars have promoted the idea of
treating new product development decisions as real options
164
Quantitative Methods for Choosing Projects
• Real Options: Applies stock option model to
nonfinancial resource investments. e.g., with
respect to R&D:
– The cost of the R&D program can be
considered the price of a call option.
– The cost of future investment required to
capitalize on the R&D program (such as the
cost of commercializing a new technology that
is developed) can be considered the exercise
price.
– The returns to the R&D investment are
analogous to the value of a stock purchased
with a call option.
165
Quantitative Methods for Choosing Projects
• Real options are based on stock options
– A call option on a stock enables an investor to
purchase the stock at a specified price (the exercise
price) in the future
• If, in the future, the stock is worth more than the
exercise price, the holder of the option will typically
exercise the option by buying the stock
– If the stock is worth more than the exercise price plus the
price paid for the original option, the option holder makes
a profit
– If it is worth less, the option holder will typically choose not
to exercise the option, allowing it to expire. The amount
paid for the initial option is a loss.
• If the stock is worth more than the exercise price but not
more than the exercise price plus the amount paid for
the original option, the stockholder will typically exercise
the option. The amount lost is less than if the option
166
were to expire.
Quantitative Methods for Choosing Projects
– Examples of real call options
167
Value of a call option at expiration
• The value of a call option
is zero as long as the price
of the stock remains less
than the exercise price
• If the value of the stock
rises above the exercise
price, the value of the call
rises with the value of the
stock, dollar for dollar
(thus the 45-degree angle)
168
Quantitative Methods for Choosing Projects
• Options are valuable when there is uncertainty (as in
innovation)
– Some research shows that an option approach results in better
technology investment decisions than a cash flow analysis
approach
• However, real options models have some limitations:
– Many innovation projects do not conform to the same
capital market assumptions underlying option models.
• May not be able to acquire option at small price: may require full
investment before its known whether technology will be successful.
• Value of stock option is independent of call holder’s behavior, but the
future returns of the of R&D investment can be significantly
influenced by the firm’s capabilities, complementary assets, and
strategies.
– Rather than being an observer (as in the option scenario), the investor
can be an active driver of the value of the investment
169
Qualitative Methods of Choosing Projects
• Many factors in the choice of development projects are extremely difficult (or
misleading) to quantify.
• Almost all firms thus use some qualitative methods.
– Screening Questions may be used to assess different dimensions of the
project decision including:
• Role of customer (market, use, compatibility and ease of use, distribution
and pricing)
• Role of capabilities (existing capabilities, competitors’ capabilities, future
capabilities)
• Project timing and cost (time to complete, first to market, readiness of
market, project cost, other costs)
– Can create a scoring mechanism that can weight the questions according
to importance
– Even if Boeing’s Sonic Cruiser project would not be profitable based on
quantitative analysis, it may be necessary just to pass on the skills and
experience of building an airplane to the next generation of employees.
That value is difficult to asses quantitatively but is revealed by qualitative
analysis
170
Qualitative Methods of Choosing Projects
– The Aggregate Project Planning Framework
• Managers map their R&D projects according to levels of risk, resource commitment
and timing of cash flows
171
Qualitative Methods of Choosing Projects
• Advanced R&D Projects: develop cutting-edge technologies;
often no immediate commercial application.
• Breakthrough Projects: incorporate revolutionary new
technologies into a commercial application.
• Platform Projects: not revolutionary, but offer fundamental
improvements in cost, quality and performance of a technology
over preceding generations of products.
• Derivative Projects: incremental improvements in products
and/or processes to provide a variety in design features.
– Toyota’s Camry platform offers LE, SE and XLE models to
appeal to different market segments
• Derivative projects pay off the quickest, and help service the
firm’s short-term cash flow needs. Advanced R&D projects
take a long time to pay off (or may not pay off at all), but can
position the firm to be a technological leader.
172
Qualitative Methods of Choosing Projects
– Managers then compare actual balance of projects with desired
balance of projects.
• A typical firm experiencing moderate growth might allocate 10%
of it’s R&D budget to breakthrough innovation, 30% to platform
projects and 60% to derivative projects
• A firm pursuing a more significant growth might allocate higher
percentages to breakthrough and platform projects
• A firm that needs to generate more short-term profit might
allocate a higher percentage to derivative projects
173
Qualitative Methods of Choosing Projects
– Mapping the company’s R&D portfolio encourages the firm to
consider both short-term cash flow needs and long-term
strategic momentum in its budgeting and planning
• A firm that invests heavily in in derivative products that may be
immediately commercialized with little risk may appear to have
good returns on its R&D investment in the short run, but then
be unable to compete when the market shifts to new newer
technology
• A firm that invests heavily in advanced R&D or breakthrough
projects may be on the leading edge of technology but run into
cash flow problems from a lack of revenues generated from
recently commercialized platform or derivative projects
• Jack Welch, former CEO of GE – “You can’t grow long term if
you can’t eat short term. Anyone can manage short. Anyone
can manage long. Balancing those two things is what
management is”
– Because the development of a new drug takes 10-15 years at a
cost of $800 million and drug companies have become reliant on a
few blockbuster drugs for a significant share of their revenues,
174
drugs firms could experience extreme volatility in their sales
Drug Firms’ Reliance on a Few
Blockbuster Products, 2000
175
Qualitative Methods of Choosing Projects
– Q-Sort is a simple method for ranking ideas on
different dimensions.
• Used for many diverse purposes – from identifying
personality disorders to establishing scales of customer
preferences
• Individuals in a group are each given a stack of cards
with an object or idea on each card (e.g., a potential
project).
• A series of project selection criteria are presented
(technical feasibility, market impact, fit with strategic
intent) and, for each criterion, the individuals sort their
cards in rank order (e.g., best fit with strategic intent) or
in categories (technically feasible vs infeasible) according
to that criterion
• Individuals compare their ran ordering and use these
comparions to structure a debate about the projects
• After several rounds of sorting and debating, the group is 176
Combining Quantitative and
Qualitative Information
• Managers may use multiple methods in combination.
– Use quantitative methods to estimate the cash flows
anticipated from a project when balancing their R&D
portfolio on a project map
• May also use methods that convert qualitative
information into quantitative form (though this has
similar risks as discussed with quantitative methods)
– Conjoint Analysis estimates the relative value
individuals place on attributes of a choice which
can then be used in development and pricing
decisions.
• Individuals given a card with products (or projects) with
different features and prices.
• Individuals rate each in terms of desirability or rank them.
• Multiple regression then used to assess the degree to
which an attribute influences rating. These weights
quantify the trade-offs involved in providing different
177
features.
Conjoint Analysis
• Conjoint analysis is a popular marketing research technique that marketers
use to determine what features a new product should have and how it
should be priced.
• Conjoint analysis became popular because it was a far less expensive and
more flexible way to address these issues than concept (market) testing.
• Suppose we want to market a new golf ball. We know from experience and
from talking with
• golfers that there are three important product features:
– Average Driving Distance
– Average Ball Life
– Price
• There is actually a range of feasible alternatives for each of these features:
Average
Driving
Distance
Average
Ball Life
Price
275 yards
54 holes
$1.25
250 yards
36 holes
$1.50
225 yards
18 holes
$1.75
178
Conjoint Analysis
• Obviously, the market’s “ideal” ball would be:
Average
Driving
Distance
Average
Ball Life
Price
275 yards
54 holes
$1.25
• and the “ideal” ball from a cost of manufacturing perspective would be:
Average
Driving
Distance
Average
Ball Life
Price
225 yards
18 holes
$1.75
– assuming that it costs less to produce a ball that travels a shorter distance and has a
shorter life.
• The basic marketing issue: We’d lose our shirts selling the first ball and the
market wouldn’t buy the second. The most viable product is somewhere in
between, but where? Conjoint analysis lets us find out where.
179
Conjoint Analysis
• A traditional research project might start by
considering the rankings for distance and ball life as
follows:
Rank
Avg Driving
Distance
Rank
Avg Ball
Life
1
275 yards
1
54 holes
2
250 yards
2
36 holes
3
225 yards
3
18 holes
• This type of information doesn’t tell us anything that
we didn’t already know about which ball to produce.
180
Conjoint Analysis
• Now consider the same two features taken conjointly.
• The next two figures show the rankings of the 9 possible
products for two buyers assuming price is the same for all
combinations.
181
Conjoint Analysis
• Both buyers agree on the most and least preferred
ball. But as we can see from their other choices,
Buyer 1 tends to trade-off ball life for distance,
whereas Buyer 2 makes the opposite trade-off.
• The knowledge we gain in this analysis is the
essence of conjoint analysis.
182
Conjoint Analysis
• Next, let’s figure out a set of values for driving distance and a second
set for ball life for Buyer 1 so that when we add these values together
for each ball they reproduce Buyer 1's rank orders.
• Here’s one possible scheme.
– Note that we could have picked many other sets of numbers that would
have worked, so there is some arbitrariness in the magnitudes of these
numbers even though their relationships to each other are fixed.
183
Conjoint Analysis
•
Next suppose that the table below represents the trade-offs Buyer 1
is willing to make between ball life and price.
•
Starting with the values we just derived for ball life, the next table
shows a set of values for price that when added to those of ball life
reproduce the rankings for Buyer 1 in the table above.
184
Conjoint Analysis
• We now have in the table below a complete set of values
(referred to as “utilities” or “part-worths”) that capture Buyer
1's trade-offs.
• We can now use this information to determine which ball to
produce.
185
Conjoint Analysis
• Suppose we were considering one of two golf balls shown in the
table below
• The values for Buyer 1, when added together, give us an estimate
of his preferences.
• Applying these to the two golf balls we’re considering, we get
these results
• We’d expect buyer 1 to prefer the long-life ball over the distance
ball since it has the larger total value
186
Theory In Action: Courtyard by Marriot
• Marriot used conjoint analysis to help it develop a midprice hotel line.
• First used focus groups to identify customer segments and attributes they
cared about in a hotel. These included:
– external surroundings, room, food, lounge, services, leisure activities and
security
• Then created potential hotel profiles that varied on these features and
asked participants to rate the profiles.
– For example, under the services factor was reservations
• Two levels were devised- Call the hotel directly or call an 800 reservation number
– A sample of hotel customers were given 7 cards, each containing one of the
factors above with a dollar value assigned to each level of service within a
factor. A maximum of $35 could be budgeted to creating a profile of features
• If the budget was exceeded, features had to be eliminated or a less expensive level
of services had to be chosen
• The participants set their own priorities and made their own trade-offs. This help
management understand what was important to different customer segments
187
Theory In Action: Courtyard by Marriot
• Participants werethen asked to rate each of the profiles
created
• Regression was then used to assess how different levels
of service within a specific attribute influenced customer
ratings of the hotel overall
• Based on the results, Marriott developed Courtyard
concept: relatively small hotels with limited amenities,
small restaurants and meeting rooms, courtyards, high
security, and rates of $40-$60 a night.
• By the end of 2002, there were 553 Courtyard hotels and
their average occupancy rate of 72% was well above the
industry average
188
Combining Quantitative and
Qualitative Information
• Data Envelopment Analysis (DEA) uses linear
programming to combine measures of projects based
on different units (e.g., rank vs. dollars) into an
efficiency frontier.
– Projects can be ranked by assessing their distance from
efficiency frontier.
– As with other quantitative methods, DEA results only as
good as the data utilized; managers must be careful in
their choice of measures and their accuracy.
– DEA has been applied in many situations such as:
• health care (hospitals, doctors), education (schools,
universities)
• banks, manufacturing
• benchmarking, management evaluation
• fast food restaurants, retail stores
189
Data Envelopment Analysis
• Assume that there are three players (DMUs – decision making units), A,
B, and C, with the following batting statistics. Player A is a good contact
hitter, player C is a long ball hitter and player B is somewhere in
between.
– Player A: 100 at-bats, 40 singles, 0 home runs
– Player B: 100 at-bats, 20 singles, 5 home runs
– Player C: 100 at-bats, 10 singles, 20 home runs
• Analysis
– Player A: No combination of players B and C can produce 40 singles
with the constraint of only 100 at-bats. Therefore player A is
efficient at hitting singles and receives an efficiency of 1.0.
– Player B: Can be constructed as a combination of players A and C.
(For example, a 50-50 combination would yield 25 singles and 10
home runs).
– Player C: No combination of players A and B can produce his total of
20 home runs in only 100 at bats so player C is efficient
190
Data Envelopment Analysis
• Graphically, we can see that Player B is inside the optimal efficiency
frontier created by A and C and is thus operating at a sub-optimal level
– B’s efficiency can be determined by comparing him to a virtual player
formed from player A and player C.
– The virtual player, called V, is approximately 64% of player C and
36% of player A. (measure AV/AC and CV/AC.)
– The efficiency of player B is then calculated by finding the fraction of
inputs that player V would need to produce as many outputs as
player B. The efficiency of player B is OB/OV which is approximately
68%.
191
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 8
COLLABORATION STRATEGIES
The XenoMouse
• Abgenix spent seven years and $40 million to produce a
genetically-engineered mouse that could produce
antibodies that would treat human illnesses.
• One antibody, ABX-EGF showed great promise for treating
several types of cancer. Abgenix had to decide whether to:
– License ABX-EGF to a pharmaceutical company which
would do all further testing and commercialization (bear
little risk and receive license royalties)
– Use a joint venture with a biotechnology company to
complete the testing and commercialization (bear
moderate risk and split profits)
– Pursue the ABX-EGF project as a solo venture (bear all
risks and keep all profits)
193
Overview
• Firms must often choose between performing
innovation activities alone or in collaboration.
• Collaboration can enable firms to achieve more,
at a faster rate, and at less cost and risk.
• However, collaboration also entails sharing
control and rewards, and may risk partner
malfeasance.
• The advantages of going solo are compared with
those of collaborating, and then different forms
of collaboration are compared.
194
Reasons for Going Solo
• Whether a firm chooses to engage in solo development or
collaboration will be influence by:
– Availability of capabilities (does firm have needed
capabilities in house? Does a potential partner?)
• In 1970s Monsanto developed powerful herbicide, but killed
plants unless applied very carefully. Needed to develop
plants that could resist herbicide to make it easier to apply
and use in larger quantities. Biotech industry still quite young
and no appropriate partners who had this knowledge.
Monsanto went solo.
– Protecting proprietary technologies (how important is
it to keep exclusive control of the technology?)
• Abgenix needed cash and access to development and
marketing capabilities it did not have but would have to give
up exclusive control over the drugs developed.
195
Reasons for Going Solo
– Controlling technology development and use (how
important is it for firm to direct development process and
applications?)
• Honda did not join the Alliance of Automobile Manufacturers
which was fighting against tougher fuel and emission
standards
– Pragmatic reasons: felt it would limit their discretion over its
development of environmentally friendly autos which Honda
wanted to be a leader in
– Cultural reasons: Honda’s culture emphasized retaining
complete control over the firm’s technology development and
direction. Honda President Yoshino – “it’s better for a person to
decide about his own life rather than having it decided by
others.”
– Building and renewing capabilities (is the project key
to renewing or developing the firm’s capabilities?)
• Boeing philosophy about development of the Sonic Cruiser
196
Advantages of Collaborating
• Collaborating can offer the following advantages:
•
•
•
•
•
Obtaining needed skills or resources more quickly
Reducing asset commitment and increase flexibility
Learning from partner
Sharing costs and risks
Can build cooperation around a common standard
Worldwide formation of strategic technology alliances is rising.
197
Types of Collaborative Arrangements
• There are numerous types of collaborative arrangements, each with its
own advantages or costs.
– Strategic Alliances: formal or informal agreements between two
or more organizations (or other entities) to cooperate in some way.
Doz and Hamel note that a firm’s alliance strategy might emphasize
combining complementary capabilities or transferring capabilities. It
might also emphasize individual alliances or a network of alliances.
198
Types of Collaborative Arrangements
– Joint Ventures: A particular type of strategic alliance
that entails significant equity investment and often
establishes a new separate legal entity.
– Licensing: a contractual arrangement that gives an
organization (or individual) the rights to use another’s
intellectual property, typically in exchange for royalties.
– Outsourcing: When an organization (or individual)
procures services or products from another rather than
producing them in-house.
– Collective Research Organizations: Organizations
formed to facilitate collaboration among a group of
firms.
199
Research Brief
Using Alliances and Licensing to Establish a Standard
Charles Hill
describes a range
of strategies
designed to help
a firm’s
technology
become
dominant.
200
Choosing a Mode of Collaboration
• Firms should match the trade-offs of a
collaboration mode to their needs.
201
Choosing and Monitoring Partners
• Partner Selection
– Resource fit: How well does the potential partner fit the
resource needs of the project? Are resources complementary or
supplementary?
– Strategic fit: Does the potential partner have compatible
objectives and styles?
– Impact on Opportunities and Threats: How would
collaboration impact bargaining power of customers and
suppliers, degree of rivalry, threat of entry or substitutes?
– Impact on Internal Strengths and Weaknesses: Would
collaboration enhance firm’s strengths? Overcome its
weaknesses? Create a competitive advantage?
– Impact on Strategic Direction: Would the collaboration help
the firm achieve its strategic intent?
202
Choosing and Monitoring Partners
• Partner Monitoring and Governance
– Successful collaborations require clear yet flexible
monitoring and governance mechanisms.
• May utilize legally binding contractual arrangements.
– Helps ensure partners are aware of rights and obligations.
– Provides legal remedies for violations.
• Contracts often include:
– 1. What each partner is obligated to contribute.
– 2. How much control each partner has in arrangement.
– 3. When and how proceeds of collaboration will be
distributed.
– 4. Review and reporting requirements.
– 5. Provisions for terminating relationship.
203
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 9
PROTECTING INNOVATION
The Digital Music Distribution
Revolution
• In 1991, Fraunhofer IIS of Germany invents the MP3 format; by late
1990’s the format is wildly popular.
– Compressed digital audio to 1/10th the of the original size with minimal
compromise in audible quality
– A song was now a file that could be shared over the Internet
• Franuhofer pursued a partially open licensing approach by partnering
with Thomson Multimedia as the exclusive licensing representative of
MP3 patents in 1995
– Thomson then negotiated agreements with Apple, Adobe, Creative Labs
and Microsoft to name a few.
– This gave consumers easy access to the technology
– Other companies developed competing technologies Sonywith ATRAC
and MS with WMA but MP3 was dominant
• In 1999, Shawn Fanning releases Napster, a free software program
that allows users to easily share MP3 files (“peer-to-peer”)
– The RIAA starts to worry about illegal trade of copyrighted music. In
2001 it gets a court ruling against Napster, taking it offline.
– However, new peer-to-peer music services began to sprout up to meet
the demand of the large population of “music pirates.”
9-205
The Digital Music Distribution
Revolution
• Napster offered to partner with the RIAA and develop a legitimate digital
distribution model. The RIAA turned down the offer, won the legal battle but
were still challenged by a new business model that they were not prepared
for.
– Warner Music and Sony Entertainment developed their own subscription services
but they used proprietary digital file formats and very restrictive digital rights
management schemes that frustrated the users. They also had a limited selection
of recordings.
• In 2003, Apple opens its iTunes Music Store – a one-stop-shop for music
files from the five major record labels. Now record industry is earning
significant revenues from MP3s.
– Began with a catalogue of 200,000 songs for 99 cents each. 50 million downloads
the first year.
– Built security features (Fairplay DRM - digital rights management)to prevent illegal
sharing which was not as restrictive as the older model
– A number of factors lead to iTunes success
•
•
•
•
•
“cool” image
Used MP3 format
Attractive price
Success of the iPod
Large selection of songs due to licensing agreements with all five major labels
9-206
The Digital Music Distribution
Revolution
• In 2006, France pushes Apple to loosen its restrictions on
iTunes music and iPods and allow songs downloaded
from the French iTunes Music Store to be played on noniPod MP3 players and that iPods should play competing
file formats.
– May 2006, The French government reconsidered a proposal to
force Apple Computer to make the songs it sells through its
iTunes Music Store playable on devices that compete with its
iPods.
– Aug 4, 2006 Apple's rivals can now request information necessary
to make their services and MP3 players interoperable with iTunes
and iPods, but Apple must be compensated. (Cnet news.com)
– Sept 2007 Amazon launches DRM free music store
– March 4, 2008 Warner Music has signed a deal with media site
7digital.com to offer its music without copy protection. Apple’s
Itunes Plus offers DRM free music but only EMI tracks (bbc news)
9-207
The Digital Music Distribution
Revolution
• Many independent musicians welcomed MP3 and digital distribution
tools to promote their music
– Previously, music distribution was costly and required capital, typically
provided by record labels. It was difficult to get a record deal and the
terms were not attractive to the artists
• New models of digital distribution were emerging:
– Creative Commons
• License agreements to make files public, legal, and free
• Musicians can advertise their music and sign away certain copyright privileges
so that the music can be downloaded and distributed without risk of
infringement suits
– Podcasting
• whole “shows” could be downloaded
• Musicians pass up immediate potential revenue for the opportunity to gain
exposure and a fan base
• NPR introduced podcasts on Aug 31, 2005 and by Nov 8, 2005, there were 5
million downloads. As of Feb 2006, more than 13 million downloads have
been generated
• Forrester predicts podcasting will grow from 700,000 households in the US in
2006 to 12.3 million households in the US by 2010
9-208
The Digital Music Distribution
Revolution
April 4, 2008
Apple Inc. has surpassed Wal-Mart to become America's No. 1 music store, the first time
that a seller of digital downloads has ever beaten the big CD retailers.
Apple sold more albums in January and February than any other U.S. retailer, market
research firm NPD Group said Thursday, underscoring how the music industry is on the
front edge of a digital media shift that is upending businesses as diverse as bookstores and
video game makers.
U.S. consumers still buy more CDs than digital downloads, but the gulf is narrowing rapidly.
Only five years after launching its iTunes digital store, Apple has dominated the fastgrowing download market so completely that it jumped ahead of individual CD sellers such
as Wal-Mart, Best Buy and Target.
9-209
Appropriability
• Appropriability: The degree to which a firm is able to
capture the rents from its innovation.
– Appropriability is determined by how easily or quickly
competitors can copy the innovation.
• Some innovations are inherently difficult to copy
– tacit: knowledge that cannot be readily codified or
transferred in written form
– socially complex: arises through complex interactions
between people (team of uniquely talented research
scientists); sum of group effort is greater than the individual
contributions
• Many innovations are relatively easy for competitors to
imitate
– Firms attempt to protect these innovations through patents,
trademarks, copyrights or trade secrets.
9-210
Patents, Trademarks & Copyrights
• Most sources attribute the origin of
formalized protection of IP to 15th century
England where the monarchy granted certain
privileges to manufactureres abd traders as
signified by “letters patent” which were
marked by the king’s great seal
– In 1449, Henry VI granted John Utynam a 20
year monopoly on a method of producing
stained glass that was unknown in England
• Copyright protection arrived in 1710 when
Parliament gave protection to books and
other written works
9-211
Patents, Trademarks & Copyrights
• Trademarks (marks of ownership) can be traced
back to 3500 BCE but trademark laws did not
emerge until the 1700s
– In 1791, Thomas Jefferson supported the requests of
sailcloth makers by recommending the establishment
of trademark protection based on the commerce
clause of the constitution
– The 1st internationational trademark agreement was
reached in 1883 at the Paris Convention for the
Protection of Industrial Property
9-212
Patents, Trademarks & Copyrights
• Patents, trademarks and copyrights each protect
different things.
– Patents: rights granted by the government that excludes
others from producing, using, or selling an invention.
– Must be useful, novel, and not be obvious.
• Utility patents protect new and useful processes, machines,
manufactured items or combination of materials.
• Design patents protect original and ornamental designs for
manufactured items.
• Plant patents protect distinct new varieties of plants.
– In 1998, many software algorithms became eligible for
patent protection, previously covered only under copyright
laws
• It unleashed a flood of applications for software patents
9-213
Patents, Trademarks & Copyrights
• To apply for a patent, the inventor must explain how
to make use of the invention and make claims about
what it does that makes it a new invention
– In the US, the patent is reviewed by an examiner who
may make modifications to the scope of the claims of
the patent
– The patent is then published and can be challenged by
other inventors (e.g., infringes on an existing patent)
– If the standards are met, then the patent is issued
• Patents are issued for 20 years
9-214
Patents, Trademarks & Copyrights
• The patent process can take 2-5 years, and involves
a number of costs.
Fee Types ($US)
Regular Fee Small Entity
Fee
Patent Filing Fees
Basic patent filing fee—utility
1000
500
Design patent filing fee
430
215
Plant patent filing fee
660
330
Patent Issuance Fees (paid after Patent Office approves patent)
Utility patent issue fee
1,400
700
Design patent issue fee
800
400
Plant patent issue fee
1100
550
Publication fee
300
300
Patent Maintenance Fees (to keep patent in force)
Due at 3.5 years after issuance of patent
900
450
Due at 7.5 years after issuance of patent
2,300
1,150
Due at 11.5 years after issuance of patent
3,800
1,900
9-215
Patents, Trademarks & Copyrights
• Patent Laws Around the World
– Countries have their own laws regarding patent
protection. Some treaties seek to harmonize
these laws.
• Paris Convention for the Protection of
Industrial Property
– Foreign nationals can apply for the same patent rights in
each member country as that country’s own citizens.
– Provides right of “priority” – once inventor has applied for
protection in one member country, they can (within certain
time period) apply for protection in others and be treated as
if they had applied on same date as first application.
• Patent Cooperation Treaty (PCT)
– Inventor can apply for patent in a single PCT receiving office
and reserve right to apply in more than 100 countries for up
to 2 ½ years. Establishes date of application in all member
countries simultaneously. Also makes results of patent
process more uniform.
9-216
Patents, Trademarks & Copyrights
9-217
Patents, Trademarks & Copyrights
– Trademarks and Service Marks: a word,
phrase, symbol, design, or other indicator that is
used to distinguish the source of goods form
one party from goods of another (e.g., Nike
“swoosh” symbol)
• Rights to trademark are established in legitimate use of
mark; do not require registration.
• However, marks must be registered before suit can be
brought over use of the mark.
• Registration can also be used to establish international
rights over trademark.
– Two treaties simplify registration of trademarks
in multiple countries: Madrid Agreement
Concerning the International Registration
of Marks, and the Madrid Protocol. Countries
that adhere to either or both are in Madrid
Union (77 members)
9-218
Patents, Trademarks & Copyrights
– Copyright: a form of protection granted to
works of authorship.
• Copyright prohibits others from:
–
–
–
–
–
Reproducing the work in copies or phonorecords
Preparing derivative works based on the work
Distributing copies or phonorecords for sale, rental, or lease
Performing the work publicly
Displaying the work publicly
• Work that is not fixed in tangible form is not eligible.
• Copyright is established in first legitimate use.
• However, “doctrine of fair use” stipulates that others can
typically use copyrighted material for purposes such as
criticism, new reporting, teaching, research, etc.
• Copyright for works created after 1978 have protection
for author’s life plus 70 years.
9-219
Patents, Trademarks & Copyrights
• Copyright Protection Around the World
– Copyright law varies from country to country.
– However, the Berne Union for the Protection of
Literary and Artistic Property (“Berne Convention”)
specifies a minimum level of protection for member
countries.
– Berne convention also eliminates differential rights to
citizens versus foreign nationals.
9-220
Patents, Trademarks & Copyrights
Wall
Street
Journal
4/18/20
08
(Steve
Vander
Ark vs
J.K.
Rowling)
9-221
Trade Secrets
• Trade Secret: information that belongs to a business
that is generally unknown to others.
–Firm can protect proprietary product or process as
trade secret without disclosing detailed information
that would be required in patent.
–Enables broad class of assets and activities to be
protectable.
–To qualify:
• Information must not be generally known or ascertainable.
• Information must offer a distinctive advantage to the firm
that is contingent upon its secrecy.
• Trade secret holder must exercise reasonable measures to
9-222
protect its secrecy.
The Effectiveness and Use of
Protection Mechanisms
• In some industries, legal protection mechanisms
are more effective than others
– e.g., in pharmaceutical patents are powerful; in
electronics they might be easily invented around.
• It is notoriously difficult to protect manufacturing
processes and techniques.
– Nov 2002, P&G sued Potlatch Corp for stealing
trade secret methods for producing Bounty and
Charmin products by hiring two of P&Gs paper
manufacturing experts. Settled out of court
• In some situations, diffusing a technology may
be more valuable than protecting it (open source
software)
– However, once control is relinquished it is difficult 9-223
Theory In Action
IBM and the Attack of the Clones
• In 1980, IBM was in a hurry to introduce a personal
computer (PC). It used off-the-shelf components such as
Intel microprocessors an operating system from
Microsoft, MS DOS.
• It believed that its proprietary basic input/output system
(BIOS) would protect the computer from being copied.
• However, Compaq reverse engineered the BIOS in a
matter of months without violating the copyright, and
quickly introduced a computer that behaved like an IBM
computer in every way. Compaq sold a record-breaking
47,000 IBM-compatible computers its first year, and
other clones were quick to follow.
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The Effectiveness and Use of
Protection Mechanisms
• Wholly Proprietary Systems vs. Wholly Open Systems
– Wholly proprietary systems may be legally produced or augmented only by their
developers. May not be adopted as readily due to higher costs and inability to mix
and match components
– Wholly open system may be freely accessed, augmented and distributed by
anyone. Quickly commoditized and provide little appropriabiliy of rents to the
developers
– Many technologies lie somewhere between these extremes.
9-225
The Effectiveness and Use of
Protection Mechanisms
– Advantages of Protection
• Proprietary systems offer greater rent appropriability.
• Rents can be used to invest in further development,
promotion, and distribution.
• Give the firm control over the evolution of the technology
and complements
– Microsoft Windows (see next slide)
– Advantages of Diffusion
• May accrue more rapid adoptions if produced and
promoted by multiple firms
• Technology might be improved by other firms (though
external development poses its own risks).
– UNIX was first developed by AT&T in 1969 by Bell Labs
– A Dept of Justice injunction forbade AT&T from selling software
commercially but they made the source code available through licensing
– Each licensee added their own features which led to incompatible versions
– AT&T sold UNIX to Novell who eventually handed over the rights to the
X/Open standards setting body
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The Effectiveness and Use of
Protection Mechanisms
– Video game console producers use a wholly proprietary strategy
for their consoles but a limited licensing policy for their games
• This encourages developers to produce games for the systems
while enables the console producers to maintain a great deal of
control over the games produced
• Xbox game developers must first apply and be accepted into one of
the Xbox programs in order to receive development tools. The
games are subject to a rigorous approval process
– Microsoft Windows
• Protected by copyright and only MS can augment the software
• Does allow access to portions of the source code to facilitate
development of complementary goods, licenses the rights to such
providers to produce complementary applications and licenses OEMs
to distribute the software by bundling it with hardware
9-227
Theory in Action
Sun Microsystems and Java
• In 1995, Sun developed a software programming language
called Java that enabled programs to be run on any operating
system (e.g., Windows, Macintosh). This would lessen pressure
for one operating system to be dominant.
• Members of the software community felt that Sun should make
Java completely “open” – they argued that “Java is bigger than
any one company.”
• However, Sun was afraid that if Java were completely open,
companies would begin to customize it in ways that would
fragment it as a standard.
• Sun decided to distribute Java under a “community source”
program: no license fees, but all modifications to Java required
compatibility tests performed by Java’s own standards body
(Java Community Process)
9-228
Production Capabilities, Marketing
Capabilities, and Capital
•
Factors influencing benefits of protection vs. diffusion
– Can firm produce the technology at sufficient volume
or quality levels?
• When JVC was promoting VHS, they knew they were
at a marketing and manufacturing disadvantage
compared to Sony. They pursued OEM and licensing
agreements with Hitachi, Matsushita, Mitsubishi and
Sharp to boost the technology’s production rate
– Are complements important? Are they available in
sufficient range and quality? Can the firm afford to
develop and produce them itself?
– Is there industry opposition against sole source
technology?
• Sony and Philips jointly created the original CD format
and split the royalties. The other leading consumer
electronics producers and record producers joined
9-229
Production Capabilities, Marketing
Capabilities, and Capital
– Can the firm improve the technology well enough and fast
enough to compete with others?
• Netscape couldn’t compete against MS so they gave access to
their source code to the external development community and
incorporated their improvements into the products
– How important is it to prevent the technology from being
altered in ways that fragment it as a standard?
• If a technology needs standards, then retaining some degree of
control is critical (Java)
– How valuable is architectural control to the firm? Does it have
a major stake in complements for the technology?
• The ability of a firm to determine the structure, operation,
compatibility and development of a technology is even more
important when the firm is a significant producer of complements
9-230
Chapter 10
ORGANIZING FOR
INNOVATION
Procter & Gamble’s
“Organization 2005”
• In 2003 Procter & Gamble was the world’s largest household and
personal products company, with $43.4 billion in net revenues. It
had almost 7,500 scientists working in 20 technical centers on four
continents.
• In 1999, P&G’s CEO Durk Jager had initiated a major
reorganization, “Organization 2005,” intended to accelerate
innovation.
– New product development would be more decentralized,
conducted in both U.S. and foreign markets.
– Products would be tested in U.S. and foreign markets
simultaneously.
– Regional business units were replaced with global business units
based on product lines.
– Business services would be centralized.
• By 2000, stockholders had become impatient for results, and Jager
was pressured to step down.
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Procter & Gamble’s
“Organization 2005”
Discussion Questions:
1. What are some of the advantages and disadvantages
of replacing P&G’s regional divisions with with global
product divisions? What impact was this likely to have
on P&G’s innovation processes?
2. What are some of the advantages and disadvantages
of centralizing P&G’s business services?
3. What are some of the challenges of changing the
culture of a company as big as P&G?
4. Was Organization 2005 a good idea? Should P&G’s
board of directors have given Jager more time?
10-233
Overview
• A firm’s size and structure will impact its rate and
likelihood of innovation.
• Some structures may foster creativity and
experimentation; others may enhance efficiency and
coherence across the firm’s development activities.
• There may also be structures that enable both
simultaneously.
• Some structural issues are even more significant for
the multinational firm.
10-234
Size and Structural Dimensions of the
Firm
• Size: Is Bigger Better?
– In 1940s, Schumpeter argued that large firms would be
more effective innovators
• Better able to obtain financing
• Better able to spread costs of R&D over large volume
– Large size may also enable…
• Greater economies of scale and learning effects
• Taking on large scale or risky projects
10-235
Size and Structural Dimensions of the
Firm
– However, large firms might also be disadvantaged
at innovation because…
• R&D efficiency might decrease due to loss of managerial
control
• Large firms have more bureaucratic inertia
• More strategic commitments tie firm to current
technologies
– Small firms often considered more flexible and
entrepreneurial
– Many big firms have found ways of “feeling small”
• Break overall firm into several subunits
• Can utilize different culture and controls in different units
10-236
Theory In Action
Xerox and the Icarus Paradox
• In Greek mythology, Icarus was so enthralled with his
exceptional wax wings that he flew close to the sun,
melting his wings and crashing to his death.
Icarus Paradox: That which you excel at can be your
undoing.
• Similarly, in 1960s and 70s, Xerox had such a
stranglehold on the photocopier market, it did
not pay attention to new Japanese competitors
making inexpensive copiers.
• By the mid-1970s, Xerox was losing market
share to the Japanese at an alarming rate and
had to engage in a major restructuring and
10-237 turnaround.
Size and Structural Dimensions of the
Firm
• Structural Dimensions of the Firm
– Formalization: The degree to which the firm utilizes
rules and procedures to structure the behavior of
employees.
• Can substitute for managerial oversight, but can also
make firm rigid.
– Standardization: The degree to which activities are
performed in a uniform manner.
• Facilitates smooth and reliable outcomes, but can stifle
innovation.
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Size and Structural Dimensions of the
Firm
– Centralization: The degree to which decision-making
authority is kept at top levels of the firm OR the
degree to which activities are performed at a central
location.
• Centralized authority ensures projects match firm-wide
objectives, and may be better at making bold changes in
overall direction.
• Centralized activities avoid redundancy, maximize
economies of scale, and facilitate firm-wide deployment
of innovations.
• But, centralized authority and activities might not tap
diverse skills and resources, and projects may not closely
fit needs of divisions or markets.
–Some firms have both centralized and
decentralized R&D activities.
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Size and Structural Dimensions of the
Firm
• Centralized and Decentralized R&D
Activities
10-240
Theory In Action
Shifting Structures at 3M
• Under McKnight 3M had both a central research laboratory and
decentralized R&D labs. His “grow and divide” philosophy
encouraged divisions to be split into small, independent and
entrepreneurial businesses.
• Lou Lehr consolidated the 42 divisions and 10 groups into 4
business sectors. He also established a three-tiered R&D system:
central research laboratories for basic research, sector labs for core
technologies, and division labs for projects with immediate
applications.
• Jake Jacobsen encouraged more disciplined project selection and
shifted focus from individual entrepreneurs to teams.
• “Desi” Desimone eased company back toward a looser, more
entrepreneurial focus with less centralization.
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Size and Structural Dimensions of the
Firm
• Mechanistic versus Organic Structures
– Mechanistic Structures have high formalization and
standardization.
• Good for operational efficiency, reliability.
• Minimizes variation  may stifle creativity
– Organic structures have low formalization and
standardization;described as “free flowing”
• Encourages creativity and experimentation
• May yield low consistency and reliability in manufacturing.
10-242
Size and Structural Dimensions of the
Firm
• Size versus Structure
– Many advantages and disadvantages of firm size are
actually due to structural dimensions of formalization,
standardization, and centralization.
• Large firms typically make greater use of formalization and
standardization because of challenges of oversight.
• The Ambidextrous Organization: The Best of
Both Worlds?
– Some divisions (e.g., R&D, new product lines) may be
small and organic.
– Other divisions (e.g., manufacturing, mature product
lines) may be larger and more mechanistic.
– Can also alternate through different structures over time.
10-243
Modularity and “Loosely-Coupled”
Organizations
• Modular Products
– Modularity refers to the degree to which a system’s
components can be separated and recombined.
– Products may be modular at user level (e.g., Ikea
shelving systems), manufacturing level (e.g., Sony’s
Walkman), or other levels.
– A standard interface enables components to be
combined easily.
– Modularity can enable many different configurations to
be achieved from a given set of components.
10-244
Modularity and “Loosely-Coupled”
Organizations
• Loosely-Coupled Organizational
Structures
10-245
– In a loosely-coupled organization, activities not
tightly integrated; achieve coordination through
adherence to shared objectives and standards.
– Shared standards and information technology
reduce need for integration.
– Less need for integration enables firms to pursue
more flexible configurations; may specialize in a
few activities and outsource others.
– Results in a network of loosely connected firms or
divisions of firms.
– May not be good when very close coordination is
needed, or when there is high potential for
conflict.
Managing Innovation Across Borders
• Centralization versus decentralization is a
particularly important issue for multinational
firms.
– Foreign markets offer diverse resources, and have
diverse needs.
– Innovation tailored to local markets might not be
leveraged into other markets.
• Customization might make them poor fit for other
markets.
• Divisions may be reluctant to share their innovations.
• Other divisions may have “not invented here” syndrome.
10-246
Managing Innovation Across Borders
• Bartlett and Ghoshal identify four strategies
of multinational innovation
– Center-for-global: all R&D activities centralized a single
hub
• Tight coordination, economies of scale, avoids redundancy,
develops core competencies, standardizes and implements
innovations throughout firm.
– Local-for-local: each division does own R&D for local
market
• Accesses diverse resources, customizes products for local needs.
– Locally leveraged: each division does own R&D, but
firm attempts to leverage most creative ideas across
company.
• Accesses diverse resources, customizes products for local needs,
improve diffusion of innovation throughout firm and markets.
10-247
Managing Innovation Across
Borders
– Globally linked: Decentralized R&D labs but each plays
a different role in firm’s strategy and are coordinated
centrally.
• Accesses diverse resources, improve diffusion of innovation
throughout firm and markets, may help develop core
competencies.
• Bartlett and Ghoshal encourage transnational
approach: resources and skills anywhere in firm
can be leveraged to exploit opportunities in any
geographic market. Requires:
1. Reciprocal interdependence among divisions
2. Strong integrating mechanisms such as personnel rotation,
division-spanning teams, etc.
3. Balance in organizational identity between national brands and
global image
10-248
Discussion Questions
1. Are there particular types of innovation activities for which
large firms are likely to outperform small firms? Are there
types for which small firms are likely to outperform large
firms?
2. What are some of the advantages and disadvantages of
having formalized procedures for improving the effectiveness
or efficiency of innovation?
3. What factors should a firm take into account when deciding
how centralized its R&D activities should be? Should firms
employ both centralized and decentralized R&D activities?
4. Why is the tension between centralization and decentralization
of R&D activities likely to be even greater for multinational
firms than firms that compete in one national market?
5. What are some of the advantages and disadvantages of the
transnational approach advocated by Bartlett and Ghoshal?
10-249
Chapter 11
MANAGING THE NEW
PRODUCT DEVELOPMENT
PROCESS
frog design
• frog design is a 300+ employee global design firm known for its
“techno hip” style
• frog developed the design for the Apple Macintosh and the Sony
Trinitron TV, among other things.
• frog’s development process uses teams, and a “discover, design, and
deliver” approach:
– Discover: Activities to generate novel design solutions, including facilitated
brainstorming sessions, structured ideation sessions. Activities employ a
combination of intuition, emotion, and analysis.
– Design: Activities to transform idea into tangible solutions, including design
charrettes, and rudimentary prototypes. Relies heavily on feedback from
potential consumers.
– Deliver: Solutions are refined and documented. Product specifics, models,
tools, and production details turned over to client. frog may provide
training, testing, and/or manufacturing support.
• Phases of the above stages may overlap or occur in parallel.
11-251
frog design
Discussion Questions:
1. How do frog’s activities affect its ability to a) maximize
the fit with customer needs, b) minimize development
cycle time, and c) control development costs?
2. What are the advantages and disadvantages of
involving customers fairly early in the design process?
3. What are the pros and cons of using CAD/CAM and
photorealistic renderings instead of functional
prototypes in the development process?
4. Would frog’s approach be more suitable for some
kinds of development projects than others? If so, what
kinds would be appropriate or inappropriate for?
11-252
Overview
• Despite the intense attention paid to innovation,
failure rates are still very high.
• More than 95% of new product development
projects fail to earn an economic return.
• This chapter summarizes research on how to make
new product development more effective and
efficient.
11-253
Sequential versus Party Parallel
Development Processes
• Before mid-1990s, most US
companies used sequential
NPD process; now many use
partly parallel process.
• Partly parallel process
shortens overall development
time, and enables closer
coordination between stages.
• In some situations, however,
a parallel development
process can increase risks.
11-254
Project Champions
• As of 2001, 68% of North American firms, 58% of
European firms, and 48% of Japanese firms reported
using senior executives to champion their NPD
projects.
• Benefits of Championing
– Senior execs have power to fight for project
– They can gain access to resources
– They can communicate with multiple areas of firm
• Risks of Championing
– Role as champion may cloud judgment about project
– May suffer from escalating commitment
– Others may fear challenging senior executive
11-255
• May benefit firm to develop “antichampions” and
encourage expression of dissenting opinion.
Theory In Action
The Development of Zantac
• In the 1970s, David Jack of Glaxo Holdings began working on an
ulcer drug. Unfortunately, SmithKline Beecham beat Glaxo to
market, introducing Tagamet in 1977.
• Jack decided to introduce an improved product, and implemented
the first parallel process in pharmaceuticals to beat Merck and Eli
Lilly to market.The compressed development process would shorten
development time, but was also expensive and risky.
• Fortunately, Paul Girolami, Glaxo’s director of finance, chose to
champion the project, and encouraged Jack to develop
improvements to the product which would differentiate it.
• By 1987, Glaxo’s Zantac was outselling Tagamet. Jack and Girolami
were knighted, and Girolami became Glaxo’s chairman.
11-256
Research Brief
Five Myths About Product Champions
–
Markham and Aiman-Smith argue that a number of myths
have become widely accepted about champions.
1. Projects with champions are more likely to be successful in
2.
3.
4.
5.
11-257
the
market (many factors determining market success are
typically beyond champion’s control)
Champions get involved because they are excited about
project
rather than from self-interest (results suggest that
champions more
likely to support projects that benefit their
own departments)
Champions are more likely to be involved with radical
innovation
projects (equally likely to be involved with
incremental projects)
Champions are more likely to be from high (low) levels in firm
(either is equally likely)
Champions are more likely to be from marketing (15% from
R&D, 14% from marketing, rest were from other functions or were
Involving Customers and Suppliers in
the Development Process
• Involving Customers
– Customer is often best able to identify the
maximum performance capabilities and minimum
service requirements of new product.
– Customers may be involved on NPD team.
– Firms may also use beta testing to get customer
input early in the development process.
– Some studies suggest that it is more valuable to
use “lead users” than a random sample of
customers.
• Lead users: Customers who face the same general
needs of marketplace but experience them earlier than
rest of market and benefit disproportionately from
solutions.
11-258
Research Brief
•
•
•
•
•
11-259
The Lead User Method of Product Concept
Development
Hilti AG used the lead user method to develop a new
pipe hanger.
First customers with lead user characteristics were
identified through phone interviews.
Lead users participated in a three-day product concept
generation workshop. At end of workshop, a single
design was selected as best.
Hilti then presented this design to 12 long-term
customers; 10 of the 12 preferred the new design and 9
of the 10 were willing to pay a 20% price premium for it.
The lead user method reduced the cost and time of the
project by almost half.
Involving Customers and Suppliers in
the Development Process
• Involving Suppliers
– Involving suppliers on NPD team or consulting as an
alliance partner can improve product design and
development efficiency.
– Suppliers can suggest alternative inputs that reduce
cost or improve functionality.
11-260
Tools for Improving the New Product
Development Process
• Stage-Gate Processes
– Utilize tough go/kill decision points in the development process
help filter out bad projects.
11-261
Tools for Improving the New Product
Development Process
• The time and cost of projects escalates with each stage,
thus stage-gate processes only permit a project to
proceed if all assessments indicate success.
11-262
Tools for Improving the New Product
Development Process
• The stage-gate process can be modified to better
fit a firm’s particular development needs.
– E.g., Exxon Research and Engineering’s stage-gate system
– 68% of U.S. firms, 56% of European firms and 59% of
Japanese firms use some type of stage-gate process to
manage their NPD process.
11-263
Quality Function Deployment –
The House of Quality
• QFD improves communication and coordination between engineering,
marketing, and manufacturing.
11-264
Quality Function Deployment –
The House of Quality
• Steps for QFD
1.
2.
3.
4.
5.
6.
7.
8.
9.
11-265
Team identifies customer requirements.
Team weights requirements in terms of relative importance.
Team identifies engineering attributes that drive performance.
Team enters correlations between different engineering
attributes.
Team indicates relationship between engineering attributes
and customer requirements.
Team multiplies customer importance rating by relationship to
engineering attribute and then sums for each attribute.
Team evaluates competition.
Using relative importance ratings for engineering attributes
and scores for competing products, team determines design
targets.
Team evaluates the new design based on the design targets.
Design for Manufacturing
• Design for Manufacturing often involves a set of design rules that
reduce cost and development time, while boosting quality.
11-266
Computer-Aided Design/
Computer-Aided Manufacturing
• Computer-Aided Design (CAD) is the use of
computers to build and test designs.
– Enables rapid and inexpensive prototyping.
• Computer-Aided Manufacturing (CAM) is the use
of machine-controlled processes in manufacturing.
– Increases flexibility by enabling faster changes in
production set ups. More product variations can be
offered at a reasonable cost.
11-267
Theory In Action
Computer-Aided Design of an
America’s Cup Yacht
• Normally designing America’s Cup yachts
required several months to develop smallerscale models at a cost of $50,000 per prototype.
• Using computer-aided design, Team New
Zealand was able to consider many design
specifications in a matter of hours at little cost,
enabling more insight into design trade-offs.
• Computer-aided design also avoided inaccurate
results from using scaled-down prototypes.
11-268
Tools for Measuring New Product
Development Performance
• Measuring performance of NPD process can help
company improve its innovation strategy and
process.
– Measures of NPD performance can help management:
• identify which projects met their goals and why,
• benchmark the organization’s performance compared to
that of competitors, or to the organization’s own prior
performance,
• improve resource allocation and employee compensation,
and
• refine future innovation strategies
– Important to use multiple measures to provide
fair representation
11-269
Tools for Measuring New Product
Development Performance
• New Product Development Process Metrics
include:
1. What was the average cycle time (time-to-market) for
development projects? How did this cycle time vary for
projects characterized as breakthrough, platform, or
derivative projects?
2. What percentage of development projects undertaken
within the last five years met all or most of the deadlines
set for the project?
3. What percentage of development projects undertaken
within the last five years stayed within budget?
4. What percentage of development projects undertaken
within the last five years resulted in a completed
product?
11-270
Tools for Measuring New Product
Development Performance
• Overall Innovation Performance measures
include:
1. What is the firm’s return on innovation? (This measure
assesses the ratio of the firm’s total profits from new
products to its total expeditures, including research and
development costs, the costs of retooling and staffing
production facilities, and initial commercialization and
marketing costs.)
2. What is the percentage of projects that achieve their sales
goals?
3. What percentage of revenues are generated by products
developed within the last five years?
4. What is the firm’s ratio of successful projects to its total
project portfolio?
11-271
Theory In Action
Postmortems at Microsoft
• At Microsoft, almost all projects receive
postmortem reports.
– Team will spend 3-6 months creating report
– Report will be anywhere from <10 pgs to >100 pgs.
– Tend to be extremely candid and can be quite critical.
– “The purpose of the document is to beat yourself up.”
– Report describes team and development activities,
product size, product quality, and evaluation of what
worked well, what didn’t work well, and what group
should improve.
– Distributed to team and senior management.
11-272
Discussion Questions
1. What are some of the advantages and disadvantages of a
parallel development process? What obstacles might a firm
face in attempting to adopt a parallel process?
2. Consider a group project you have worked on at work or
school. Did your group use mostly sequential or parallel
processes?
3. Are there some industries in which a parallel process would
not be possible or effective?
4. What kinds of people make good project champions? How
can a firm ensure that it gets the benefits of championing
while minimizing the risks?
5. Is the Stage-Gate process consistent with suggestions that
firms adopt parallel processes? What impact do you think
using Stage-Gate processes would have on development cycle
time and development costs?
6. What are the benefits and costs of involving customers and
suppliers in the development process?
11-273
Managing Innovation Across
Borders
– Globally linked: Decentralized R&D labs but each plays
a different role in firm’s strategy and are coordinated
centrally.
• Accesses diverse resources, improve diffusion of innovation
throughout firm and markets, may help develop core
competencies.
• Bartlett and Ghoshal encourage transnational
approach: resources and skills anywhere in firm
can be leveraged to exploit opportunities in any
geographic market. Requires:
1. Reciprocal interdependence among divisions
2. Strong integrating mechanisms such as personnel rotation,
division-spanning teams, etc.
3. Balance in organizational identity between national brands and
global image
11-274
Discussion Questions
1. Are there particular types of innovation activities for which
large firms are likely to outperform small firms? Are there
types for which small firms are likely to outperform large
firms?
2. What are some of the advantages and disadvantages of
having formalized procedures for improving the effectiveness
or efficiency of innovation?
3. What factors should a firm take into account when deciding
how centralized its R&D activities should be? Should firms
employ both centralized and decentralized R&D activities?
4. Why is the tension between centralization and decentralization
of R&D activities likely to be even greater for multinational
firms than firms that compete in one national market?
5. What are some of the advantages and disadvantages of the
transnational approach advocated by Bartlett and Ghoshal?
11-275
Chapter 12
MANAGING NEW PRODUCT
DEVELOPMENT TEAMS
New Product Development at Dell
Computer
• In 1993 Dell began developing a new notebook computer.
Its first line of notebook computers (introduced in
1992)had technical problems that resulted in recalling
17,000 units.
• Dell had traditionally used a small R&D budget,
autonomous teams consisting mostly of developers, and an
informal process. It was often successful, but outcomes
were inconsistent.
• For the new notebook, Dell decided to use cross-functional
teams with project leaders. Teams would be dedicated to
project from start to finish. Teams would direct (and be
held accountable for) each phase.
12-277
New Product Development at Dell
Computer
Discussion Questions:
1. What are some of the advantages of Dell's adoption of
a more structured new product development process?
Are their risks of abandoning its previous informal
approach?
2. How does including engineers from different functions
impact Dell's development process?
3. What are the benefits and costs of keeping the same
team members on the development project for its
complete duration?
4. If you were a senior manager at Dell, are their any
recommendations you would make for further
improving the development process?
12-278
Overview
• Many organizations now use cross-functional teams
to lead and manage the NPD process.
• There is considerable variation in how these teams
are formed and managed.
• The chapter will look at size, composition, structure,
administration, and leadership of teams.
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Constructing New Product
Development Teams
• Team Size
– May range from a few members to hundreds.
– Bigger is not always better; large teams create
more administrative costs and communication
problems
– Large teams have higher potential for social
loafing.
• Team Composition
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– Including members from multiple functions of
firm ensures greater coordination between
functions.
– In 2000, 77% of U.S. firms, 67% of European
firms, and 54% of Japanese firms used crossfunctional teams.
Constructing New Product
Development Teams
– Diversity in functional backgrounds increases
breadth of knowledge base of team.
– Other types of diversity (e.g., organizational
tenure, cultural, gender, age, etc.) can be
beneficial as well.
• Provides broader base of contacts within and beyond
firm.
• Ensures multiple perspectives are considered.
– However, diversity can also raise coordination
costs.
• Individuals prefer to interact with those they perceive as
similar (“homophily”)
• May be more difficult to reach shared understanding.
• May be lower group cohesion.
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– Extended contact can overcome some of these
Research Brief
Boundary-Spanning Activities in NPD Teams
– Ancona and Caldwell studied 45 NPD teams to
identify the roles team members engage in to
collect information and resources within and beyond
the firm. Found three primary types:
• Ambassador activities: representing team to others and
protecting from interference.
• Task coordination activities: coordinating team’s activities
with other groups.
• Scouting activities: scanning for ideas and information that
might be useful to the team.
– Scouting and ambassador activities more beneficial
early in development cycle; task coordination
activities beneficial throughout life of team.
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Structure of New Product
Development Teams
• One well-known
typology of team
structure classifies
teams into four types:
– Functional
– Lightweight
– Heavyweight
– Autonomous
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Structure of New Product
Development Teams
– Functional Teams
• Members report to functional manager
• Temporary, and members may spend less than 10% of
their time on project.
• Typically no project manager or dedicated liaison
personnel.
• Little opportunity for cross-functional integration.
• Likely to be appropriate for derivative projects.
– Lightweight Teams
• Members still report to functional manager.
• Temporary, and member may spend less than 25% of
their time on project.
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Structure of New Product
Development Teams
• Typically have a project manager and dedicated liaison
personnel.
• Manager is typically junior or middle management.
• Likely to be appropriate for derivative projects.
– Heavyweight Teams
• Members are collocated with project manager.
• Manager is typically senior and has significant authority to
command resources and evaluate members.
• Often still temporary, but core team members often
dedicated full-time to project.
• Likely to be appropriate for platform projects.
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Structure of New Product
Development Teams
– Autonomous Teams
• Members collocated and dedicated full-time (and often
permanently) to team.
• Project manager is typically very senior manager.
• Project manager is given full control over resources
contributed from functional departments and has
exclusive authority over evaluation and reward of
members.
• Autonomous teams may have own policies, procedures
and reward systems that may be different from rest of
firm.
• Likely to be appropriate for breakthrough and major
platform projects.
• Can be difficult to fold back into the organization.
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Theory In Action
“Platform Teams” at Chrysler
– From 1988 to 1996, Chrysler reduced its development
cycle from 60 months to 24 months, and kept its
development costs remarkably low.
– The primary mechanism it used to accomplish this was
the formation of cross-functional autonomous
development teams (called “platform teams”).
– Members were collocated, and given considerable
autonomy to achieve target prices.
– Close contact kept teams fast, efficient, and flexible.
By 1998 Chrysler’s vehicle lineup was considered one
of the most innovative in industry.
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The Management of New Product
Development Teams
• Team Leadership
– Team leader is responsible for directing team’s
activities, maintaining alignment with project
goals, and communicating with senior
management.
– Team leaders impact team performance more
directly than senior management or champions.
– Different team types need different leader types:
• Lightweight teams need junior or middle manager.
• Heavyweight and autonomous teams need senior
manager with high status, who are good at conflict
resolution, and capable of influencing engineering,
manufacturing, and marketing functions.
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The Management of New Product
Development Teams
• Team Administration
– Many organizations now have heavyweight and
autonomous teams develop a project charter and
contract book.
• Project charter encapsulates the project’s mission and
provides measurable goals. May also describe:
–
–
–
–
–
–
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Who is on team
Length of time members will be on team
Percentage of time members spend on team
Team budget
Reporting timeline
Key success criteria
The Management of New Product
Development Teams
• Contract book defines in detail the basic plan to achieve
goals laid out in charter. It provides a tool for monitoring
and evaluating the team’s performance. Typically
provides:
– Estimates of resources required
– Development time schedule
– Results that will be achieved
• Team members sign contract book; helps to establish
commitment and sense of ownership over project.
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The Management of New Product
Development Teams
• Managing Virtual Teams
– In virtual teams, members may be a great distance
from each other, but are still able to collaborate
intensely via videoconferencing, groupware, email, and
internet chat programs.
• Enables people with special skills to be combined without
disruption to their personal lives.
• However, may be losses of communication due to lack of
proximity and direct, frequent contact.
• Requires members who are comfortable with technology,
have strong interpersonal skills and work ethic, and can
work independently.
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Research Brief
Virtual International R&D Teams
– Gassman and von Zedtwitz studied 34 technology-intensive
multinationals and identified four patterns of virtual international
R&D teams:
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Discussion Questions
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1. Why are the tradeoffs in choosing a team's size and
level of diversity?
2. What are some of the ways that managers can
ensure that a team reaps the advantages of
diversity while not being thwarted by some of the
challenges team diversity raises?
3. Can you identify an example of a development
project, and what type of team you believed they
used? Do you think this was the appropriate type of
team given the nature of the project?
4. What are some of the advantages and
disadvantages of co-location? Are there some types
of projects for which “virtual teams” are
inappropriate?
Strategic Management of
Technological Innovation
Melissa Schilling
Chapter 13
CRAFTING A DEPLOYMENT
STRATEGY
Deployment Tactics in the U.S. Video Game Industry
• 1972, Nolan Bushnell founded Atari and introduced the game Pong
(http://www.xnet.se/javaTest/jPong/jPong.html) that was played on a
TV set with an Atari console. Pong earned $1million revenue in its first
year
• By 1984, video game console and game sales reached $3 billion in the
US alone. Console makers did not provide strict security and
unauthorized games of poor quality flooded the market. Sales dropped
dramatically and by 1985 the video game industry was declared dead.
• Much to everyone’s surprise, Nintendo and Sega entered the market
with 8-bit systems. They spent $15 million on advertising. Nintendo
had a near monopoly from 1985-1989.
– Nintendo made games in-house and through 3rd part developers with strict
licensing policies
• Limited number of titles a licensee could produce
• Developer had to pre-order a minimum number of cartridges
• Developer could not make similar games for other consoles
– Very profitable policies but they were sanctioned by the FTC and alienated
distributors and developers
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Deployment Tactics in the U.S. Video Game Industry
• In 1989, Sega was able to overthrow Nintendo’s dominance by
introducing the 16-bit Genesis system 1½ years before Nintendo.
– Backward compatible to their 8-bit games
– Nintendo introduced its 16-bit system in 1991 but Sega had too much of a
jump on them and was the market leader
• Nintendo did not make it backward compatible
• In 1995, Sony was able to break into the video game industry by
introducing a 32-bit system, investing heavily in game development,
and leveraging its massive clout with distributors.
– By 1996, Sony’s installed base was 2.9 million units vs Sega’s 1.2 million
units
• In late 2001, Microsoft entered the video game industry with a 128-bit
system. It had an advanced machine, and spent a lot on marketing and
games, but Playstation2 (also 128-bit) already had an installed base of
20 million.
– On the first weekend of PS2 sales (March 4, 2000), 1 million units were
sold. The website had more than 100,000 hits in one minute and had to
temporarily shut down
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Deployment Tactics in the U.S. Video Game Industry
• In late 2005, Microsoft introduces the Xbox 360, beating the
Playstation3 to market.
• The figures as of 5/4/2008 (http://vgchartz.com/) are in the chart
below – the game never ends and has now extended into the handheld market as well.
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Overview
• Only part of the value of any technological innovation
is determined by what the technology can do.
• A large part is determined by the degree to which
people understand it, access it and integrate it with
their lives.
• An effective deployment strategy is thus a key element
in a technological innovation strategy.
– It is not just a way for the firm to earn revenues but is a core
part of the innovation process itself
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Overview
– Deployment strategies can
• influence the receptivity of customers, distributors and
complementary goods providers
• Reduce uncertainty about the product, lower resistance to
switching from competitors and accelerate adoption
– 3DO and Phillips introduced the first two 32-bit systems but they failed
because they were priced too high and had few games
– Sega’s 32-bit system was priced right but weak distribution hobbled its
deployment
– Sony, on the other hand, used intense marketing, low prices, strong
game availability and aggressive distribution to ensure a very successful
launch of the Playstation
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Launch Timing
•
The timing of a market launch can be an important
deployment strategy
–
•
Nintendo held back on releasing its 16-bit system for fear of
cannibalizing their 8-bit system even though Sega had released
Genesis
Strategic Launch Timing
– Firms can use the timing of product launch to take advantage of
business cycle or seasonal effects
• e.g., video game consoles are always launched just before Christmas.
– Timing also signals customers about the generation of technology
the product represents.
• e.g., if a next generation console is launched too soon after a previous
generation console, the market may not want to spend money on a
new console after having just purchased a previous generation console.
– Xbox next generation but launched too close to PS2s launch
– Timing must be coordinated with production capacity and
complements availability, or launch could be weak.
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Launch Timing
– Optimizing Cash Flow versus Embracing
Cannibalization
• Traditionally firms managed product lifecycles to optimize
cash flow and return on investment
– would not introduce new generation while old generation
selling well.
• However, in industries with increasing returns this is risky
– Competitors can gain a substantial lead that will be difficult
to overcome
• Often better for firm to invest in continuous innovation
and willingly cannibalize its own products to make it
difficult for competitors to gain a technological lead.
– Cannibalization: when a firm’s sales of one product (or at
one location) diminish its sales of another (or another
location).
– In the late 1980s, Nintendo did not want to cannibalize their
8-bit system despite Sega’s launch of a 16-bit system and
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thus lost market share
Licensing and Compatibility
• Protecting a technology too little can result in low quality
complements and clones, a fragmented market and little revenue
for the developer
• Protecting too much may impede development of complements.
• Firm must carefully decide:
– How compatible to be with products of others
• If firm is dominant, generally prefers incompatibility with others’ platforms but
may use controlled licensing for complements.
• If firm is at installed base disadvantage, generally prefers some compatibility
with others and aggressive licensing for complements.
– Whether to make product backward compatible
• If installed base and complements are important, backward compatibility usually
best – leverages installed base and complements of previous generation, and
links generations together. Can be combined with incentives to upgrade.
– Sony did this with PS2 which gave incentive to current customer base to upgrade and
not forfeit existing games they own from previous generation of console
– Microsoft does this with Windows; backward compatible with major s/w applications
developed for previous generations
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Pricing
• Price simultaneously influences product positioning, rate of
adoption, and cash flow.
– In order to determine a pricing strategy, a firm has to decide on its
objectives
• Industry has intense price competition and/or overcapacity objective
short-run strategy may be simply survival
– Cover variable and some fixed costs
• In the long-run the firm will want to create additional with a strategy
of maximizing current profits
– Firm estimates costs and demand and then sets the price to maximize cash
flow or rate of return on investment
• For new technological innovations, firms often emphasize maximum
market skimming or maximum market share
– Market skimming strategy (high initial prices)
• Signals market that innovation is significant
• Recoup development expenses (assuming there’s demand)
• Attracts competitors, may slow adoption
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Pricing
– When seeking high volume, firms will emphasize maximum market
share objective
– Penetration Pricing is used to achieve this goal (very low price or free)
• Accelerates adoption, driving up volume, build installed base,
attract developers of complementary goods
• Requires large production capacity be established early
• Risky; may lose money on each unit in short run
• Common strategy when competing for dominant design
• Honda priced the hybrid car Insight below cost because believed
it would be profitable in the long run and presented Honda as a
“green” car company
• Video console developers have sold their consoles at or below
cost but profit from game sales and licensing royalties
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Pricing
– Can manipulate customer’s perception of price
• Free initial trial or introductory pricing enables consumer to
overcome uncertainty about the new technology, become familiar
with the technology and appreciate the benefits
• Initial product free but pay for monthly service
• Cable television model
• Firms also use introductory pricing for a stipulated amount of
time to test the market’s response without committing to a longterm pricing structure
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Distribution
• Selling Direct versus Using
Intermediaries
– Selling direct
– Gives firm great control over selling process, price and
service
– Firm can capture more information about customers and can
facilitate the customization of products
– Can be expensive and/or impractical
– Intermediaries may include:
• Manufacturers’ representatives: independent agents
that may promote and sell the product lines of one or a
few manufacturers.
– Useful for direct selling when its impractical for manufacturer
to have own direct sales force for all markets.
• Wholesalers: firms that buy manufacturer’s products in
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Distribution
• Retailers: firms that sell goods to public
– Provide convenience for customers
– Enable on-site examination and service
• Original equipment manufacturers (OEMs):
– A company that buys products (or components) from other
manufacturers and assembles them or customizes them and sells under
its own brand name. E.g., Dell Computer
– Aggregates components from multiple manufacturers
– Provides single point-of-contact and service for customer
– Also called Value Added Resellers (VARs)
– In some industries, information technology has enabled
disintermediation or reconfiguration of intermediaries.
– Digital product may be delivered directly to the consumer over the
Internet
– E.g., online investing enables customers to bypass brokers; online
bookselling requires retailer to provide delivery services, online grocery
shopping shifts “the last mile” from the consumer to grocer
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Distribution
•
These factors help determine whether and what
types of intermediaries the firm should use:
1. How does the new product fit with the distribution
requirements of firm’s existing product lines?
a. Is there is an existing distribution channel and does
the new product fit into it?
2. How numerous and dispersed are customers, and
how much product education or service will they
require? Is installation or customization required?
a. Customers dispersed but require little training use
mail order or online ordering
b. Customers dispersed and require moderate training
or service use intermediaries
c. Customers not dispersed but require extensive
training or service may need to provide this directly
3. How are competing products or substitutes sold? The
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sales channel can influence the customer’s perception
Distribution
• Strategies for Accelerating Distribution
– Alliances with distributors
• Providing distributor with stake in product’s success or exclusivity
contract can motivate them to promote more.
– Sega had limited distribution for its Saturn launch, Nintendo had
unlimited distribution for Nintendo-64 and Sony had unlimited
distribution and extensive experience negotiating with retailing
giants such as Wal-Mart
– Bundling relationships
• Sell in tandem with product already in wide use.
– MS Windows on almost all PCs, MS IE via AOL
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Distribution
– Contracts and sponsorship
• Provide price discounts, special service contracts or advertising
assistance to distributors, complementary goods providers or large
and influential end users.
– New medical technology is donated or lent to large teaching
hospitals so that the benefits can be seen first hand by doctors and
administrators which increases future purchases
– Guarantees and consignment
• When there is uncertainty about a product, distributors can be
given guarantees to take back unsold stock thereby reducing the
risk to intermediaries and complements providers.
– Distributors were reluctant to carry Nintendo’s NES after crash of
video-game market in the 1980s. Nintendo agreed to accept
payment for sold consoles rather than require up front payment
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Marketing
• Major marketing methods include advertising,
promotions, and publicity/public relations.
– Advertising
• Requires effective message
• Requires media that conveys message to appropriate
target market
– Varies in match to audience, richness, reach, and cost.
• Must strike appropriate balance between entertainment or
aesthetics (to make memorable) versus information
content (to make useful)
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Marketing
• Advantages and Disadvantages of Advertising Media
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Marketing
– Promotions
• Temporary selling tactics that include:
–
–
–
–
–
–
Samples or free trial
Cash rebates after purchase
Including an additional product (a “premium”) with purchase
Incentives for repeat purchase
Sales bonuses to distributor or retailer sales representatives
Cross promotions between two or more non-competing
products to increase pulling power
– Point-of-purchase displays to demonstrate the product’s
features
– Publicity and Public Relations
• Attempt to generate free publicity and word-of-mouth
(e.g., mention in articles, television programs, etc.)
• Produce own internally generated publications
• Sponsor special events
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Theory In Action
Generating Awareness for Domosedan
– Farmos wanted to build awareness of its new innovation in
animal painkillers.
– Asked university professors and advanced practitioners to
help with testing process for drug – acted as premarketing
tool.
– Drug was featured in conferences, articles, dissertations.
– Farmos also hosted a large dinner party for all practicing
veterinarians at the drug’s launch.
– Domosedan was adopted rapidly around the world and
became a commercial success.
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Marketing
• Tailoring the Marketing Plan to Intended
Adopters
• Innovators and Early Adopters respond to marketing
that offers significant technical content and emphasizes
leading-edge nature of product.
– Need media with high content and selective reach
• Early Majority responds to marketing emphasizing
product’s completeness, ease o fuse, consistency with
customer’s life, and legitimacy.
– Need media with high reach and high credibility
• Late Majority and Laggards respond to marketing
emphasizing reliability, simplicity, and cost-effectiveness.
– Need media with high reach, high credibility, but low cost.
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Marketing
• Often hard to transition from selling to early adopters to
early majority, resulting in “chasm.”
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Marketing
• Using Marketing to Shape Perceptions and
Expectations
–Perceptions and expectations of value can
be as important as actual value. To
influence, can use:
• Preannouncements and press releases
– Can build “mind share” in advance of actual market share
– Can forestall purchases of competitors’ products
• Reputation
– Provides signal to market of likelihood of success
• Credible commitments
– Substantial irreversible investments can convince market of
firm’s confidence and determination
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Research Brief
Creating an Information Epidemic
– Gladwell notes that some individuals have a
disproportionate impact on marketplace behavior:
1. Connectors
– Have exceptionally large and diverse circle of acquaintances
– Knack for remembering names and important dates
2. Mavens
– Driven to obtain and disseminate knowledge about one or more
of their interests
– Will track prices, tend to be consumer activists
– Take great pleasure in helping other consumers
3. Salespersons
– Naturally talented persuaders
– Acute ability to send and respond to nonverbal cues; can infect
others with their mood!
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Discussion Questions
1. Can you identify one or more circumstances when
a company might wish to delay introducing its
product?
2. What factors will (or should) influence a firm’s
pricing strategy?
3. Pick a product you feel you know well. What
intermediaries do you think are used in bringing
this product to market? What valuable services do
you think these intermediaries provide?
4. What marketing strategies are used by the
producers of the product you identified for question
3? What are the advantages and disadvantages of
these marketing strategies?
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