Foundations of Strategy
Chapter 6
QUINTEN KRZYSKO
GARRETT MIZE
JONATHAN SCHNEIDER
ALLISON SCOTT
ALEX STEAKLEY
Chapters Focus
 Business environments where technology is a key
driver of change and an important source of
competitive advantage.
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Facebook, MySpace, eHarmony, Match.com
 Primary concern will be the use of technology as a
tool of competitive strategy
You will learn
 How technology affects industry structure and
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competition
Returns to innovation & evaluate the potential for an
innovation to establish competitive advantage
Formulate strategies for exploiting innovation and
managing technology
How to win standard battles
How to manage risk
Strategies to exploit innovation: How and when
to enter
 Alternative strategies to exploit innovation
 Licensing
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Outsourcing certain functions
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Flexible/ informal structure, permits pooling of resources and
capabilities of more than 1 firm
Joint venture
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Limited investment, external resources
Strategic alliance
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Little investment/little return, few resources
Shares investment risk w/ partner, same as strategic alliance
Internal Commercialization
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Large investment , substantial amount of resources
Characteristics of innovation
 The extent to which a firm can establish clear
property rights in an innovation critically determines
the choice of strategy
 Licensening is only viable where ownership is an
innovation is clearly defined by patent or copyrights.
(pharmaceuticals)
How and when to enter
 Resources and capabilities of the Firm
 Start up firms possess few of the complementary resources and
capabilities needed to commercialize their innovations
(licensing, outsourcing, alliance or joint ventures)
 Large established corporations are better placed for internal
commercialisation
Timing innovation: to lead or to follow?
 Evidence is mixed on whether it is better to be leader
or follower
 Early mover advantages
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Extent of innovation protection
Importance of complementary resources
Potential to establish a standard
 Optimal timing also is dependent of resources and
capability fir has at disposal
Managing risk
 Technological uncertainty
 Arises from unpredictability of technological evolution
 Market uncertainty
 Relates to the size and growth rates of the markets for new
product
Managing risk continued
 Cooperating with lead users
 In early phases of development be careful monitoring and
responding to trends to avoid major errors
 Limiting risk exposure
 Financial risk can be minimized by avoiding adversity,
avoiding debt and keeping fixed cost low
 Flexibility
 Response to unpredicted events, being flexible means keeping
options open and delaying commitment
Competing For Standards
 Standard is a format, interface, or system that allows
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interoperability
Standards allow us to do many things
Can be public or private
Can be mandatory or de facto
Delayed emergence of a standard may kill a
technology all together
Network Externalities
 Exist when the value of a product to an individual
customer depends on the number of other users of
that product
 Do not need everyone to use the same product or
even the same technology
 Only require that products are compatible through
some interface
 Network externalities can create positive feedback or
have a negative effect, this is called tipping
Winning Standards War
 In markets subject to network externalities, control
over standards is the primary basis for competitive
advantage
 1st key to winning is determining if the market will
converge around a single technical standard
 2nd key is to recognize the role of positive feedback
Winning Standards War Cont.
 You need to have allies before going to war
 Enter the market early, adopt penetrating pricing,
make deals with key customers, and achieve fast
cycle product development
 Convince customers and suppliers you will emerge as
the victor
 Winner of these battles often adopt an evolutionary
strategy not a revolutionary strategy
Key Resources needed to Win a Standards War
 Control over an installed base of customers
 Owning intellectual property rights in the new
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technology
The ability to innovate
1st mover advantage
Strength in components
Reputation and brand name
Competitive Advantage in TechnologyIntensive Industries
 It is the quest for competitive advantage that causes
firms to invest in innovation
 And innovation is the main reason why some firms
are able to dominate their industries
The Innovative Process
 Invention
 Innovation
 Diffuses
Demand side: through customers purchasing the good or service
 Supply side: through imitation by competitors
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Profitability of Innovation
 No consistent evidence that either R&D intensity or
frequency of a new product introductions are
positively associated with profitability
 Profitability depends on the value created by the
innovation
Regime of Appropriability
 Regime of appropriability: conditions that influence
the distribution of returns to innovation
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Strong: innovator captures most of the value of the innovation
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Property rights, complexity of technology, lead-time, and
complementary resources
Weak: other parts derive most of the value
Property Rights in Innovation
 Intellectual Property
 Effectiveness depends on the type of innovation
 New manufacturing processes, patents may fail to prevent
rivals
 Patents disadvantage: make info public
 Hard to keep private
Complexity of the Technology
 How easily the innovation can be replicated depends
on how easily the technology can be comprehended
 First depends on how codifiable the technology is
 Second how complex it is
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Complexity : look for non easily copied ideas
Complementary Resources
 Bringing new products to market requires not just
invention, it also requires the diverse resources and
capabilities needed to finance and market the
innovation
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Generic comp resourc. – the innovator is in a much stronger
position to capture value
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Adobe Systems’ Acrobat Portable Document Format
 PDF- still able to capture most of the value because it is
compatible with almost any software application
Managing Creativity
 Creativity associated with personality traits
 Curious, uninhibited, imaginative people
 Creativity stimulated by human interaction
 Play
 Permits unconstrained forms of experimentation
 Low cost experimentation has expanded thanks to
computer modeling and simulation capabilities
Organising for Creativity
 Creatively oriented people tend to prefer an incentive
based work environment
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Space and resources to be spontaneous
Experience freedom and have fun in tasks
Praise, recognition, and opportunities for educational growth
more important than managerial responsibilities
 Work environment that is secure, not cosy
 Microsoft meetings: Open criticism and intense
disagreements, spurs progress towards better solutions
Organisational Approaches to Management of
Innovation
 Tension between operating and innovating parts of
company inevitable, but both are necessary
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Innovation upsets established routines and changes status quo
More stable operations, ore resistance to innovation
 Initiatives aimed at stimulating development and
new technology
Cross Functional Product Development Teams
 Highly effective for integrating creativity with
functional effectiveness
 Deploy broad range of specialist knowledge, while
integrating that knowledge with flexibility
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i.e. Japanese companies Product Development Teams staffed
by specialists from different departments with leadership from
a heavyweight manager who protected from corporate
influence
Product Champions
 Permit individuals who are sources of creative ideas
to lead teams that develop those ideas
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Follow through their ideas to an organisational level
 Commitment to their innovations
Buying Innovation
 Buying
 Obtaining innovation from other, smaller firms
 Licensing, outright purchase of patents, or acquiring whole
company
 Corporate Incubators
 Developments made to fund new businesses based on
technologies that have been developed internally
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Limited applications within a company’s established businesses
Very popular in IT boom at end of 1990’s
Very few firms obtained success through incubators
Summary
 Technological change often changes industry
dynamics, altering amongst other things cost
structures, models of revenue generations, rivalry,
entry barriers and the relative bargaining strength of
buyers and suppliers.
 Firms that succeed in technologically intensive
industries recognize the strategic characteristic of
their market and adapt effectively