Technology-based Industries &
the Management of Innovation
OUTLIN
E
• Competitive advantage in technology-intensive
Industries
– Appropriating the returns to innovation
• Strategies to exploit innovation
– Alternative approaches
– Timing: to lead or to follow?
– Managing risk
• Competing for standards
• Implementing technology strategy
– The conditions for creativity
– From invention to innovation
The Development of Technology: From
Knowledge Generation to Diffusion
IMITATION
Supply side
Basic
Knowledge
Invention
Innovation
Diffusion
Demand side
ADOPTION
The Development of Technology: Lags Between
Knowledge Generation and Commercialization
BASIC
KNOWLEDGE
FIRST
PATENTS
PRODUCT
LAUNCH
IMITATION
Xerography
late 19th and
early 20th
centuries
1940
1958
1974
Jet Engines
17th-- early
20th centuries
1930
1957
1959
Fuzzy logic
controllers
1960’s
1981
1987
1988
Appropriation of Value:- How are the
Benefits from Innovation Distributed?
Customers
Suppliers
Innovator
Imitators and
other
“followers”
The Profitability of Innovation
Profits
from
Innovation
Value of the
innovation
Innovator’s
ability to
appropriate the
value of the
innovation
• Legal protection
• Complementary
resources
• Imitability of the
technology
•Lead time
Legal Protection of Intellectual Property
• Patents
• Copyrights
• Trademarks
• Trade Secrets
—exclusive rights to a new product,
process, substance or design.
—exclusive rights to artistic, dramatic,
and musical works.
— exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
— protection of chemical formulae,
recipes, and industrial processes.
Also, private contracts between firms and between a firm and its
iemployees can restrict the transfer of technology and know how.
Complementary Resources
Manufacturing Distribution
Finance
Core
technological
know-how
Service
Complementary
technologies
Marketing
Other
Other
Bargaining power of owners of complementary
resources depends upon whether complementary
resources are generic or specialized.
Lead Time
• If rivals can imitate-- time lag is the major
advantage of the innovator.
• But maintaining lead-time advantage requires
continuous innovation
• Lead time is reinforced by learning effects
U.S. Managers’ Perceptions of the Effectiveness of
Different Mechanisms for Protecting Innovation
Processes
Patents to prevent duplication
3.52
Patents to secure royalty income
3.31
Secrecy
4.31
Lead time
5.11
Moving quickly down the learning
5.02
curve
Sales or service efforts
4.55
1 = not at all effective
Products
4.33
3.75
3.57
5.41
5.09
5.59
7 = very effective
Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.
Alternative Strategies for Exploiting Innovation
Licensing
Risk &
Return
Strategic
Alliance
Joint
Venture
Shares
investment &
risk. Risk of
partner
conflict &
culture clash
Small risk, but
limited returns
also (unless
patent position
very strong
Limits
investment, but
dependence on
suppliers &
partners
Benefits of
flexibility;
risks of
informal
structure
Few
Allows outside
resources &
capabilities
To be accessed
Permits pooling of the
resources/capabilities of
more than one firm
Konica
licensing its
digital
camera to
HP
Pixar’s movies (e.g.
“Toy Story”)
marketed &
distributed by
Disney.
Competing
Resources
Examples
Outsourcing
certain
functions
Apple and
Sharp build
the
“Newton”
PDA
Microsoft
and NBC
formed
MSNBC
Internal
Commercialization
Biggest risks &
benefits.
Allows complete
control
Substantial
resource
requirements
TI’s
development of
Digital Signal
Processing
Chips
The Comparative Success of Leaders and
Followers
PRODUCT
Jet Airliners
Float glass
X-Ray Scanner
Office P.C.
VCRs
Diet Cola
Instant Cameras
Pocket Calculator
Microwave Oven
Plain Paper Copiers
Fiber Optic Cable
Video Games Players
Disposable Diapers
Web browser
PDA
MP3 music players
INNOVATOR
De Havilland (Comet)
Pilkington
EMI
Xerox
Ampex/Sony
R.C. Cola
Polaroid
Bowmar
Raytheon
Xerox
Corning
Atari
Proctor & Gamble
Netscape
Psion, Apple
Diamond Multimedia
FOLLOWER
Boeing (707)
Corning
General Electric
IBM
Matsushita
Coca Cola
Kodak
Texas Instruments
Samsung
Canon
many companies
Nintendo/Sega/Sony
Kimberly-Clark
Microsoft
Palm
Sony (&others)
WINNER
Follower
Leader
Follower
Follower
Follower
Follower
Leader
Follower
Follower
Not clear
Leader
Followers
Leader
Follower
Follower
Followers
The Strategic Management of Technology:To Lead or to Follow
Key considerations:
• Is innovation appropriable and protectable against
imitation?
If so, advantages in leadership.
• The role of complementary resources
Followers may be able to avoid investing in
complementary resources due to betterestablished industry infrastructure
Firms possessing complementary resources
have the luxury of waiting
• Is owning/ controlling industry standard critical to
competitive advantage?
if so, advantage in being a leader.
Figure 11.2.
Alternative Strategies
for
Alternative
Strategies
for Exploiting
Exploiting Innovation
Innovation
Licensing
Risk &
Return
Strategic
Alliance
Joint
Venture
Shares
investment and
risk. Risk of
partner
disagreement
and culture clash
V. small investment
risk, but small
returns also limited
(unless patent
position very
strong) Some legal
risks
Limits capital
investment, but
may create
dependence on
supplies/partners
Benefits of
flexibility, risks
of informal
structure
Few
Permits
accessing of
outside
resources and
capabilities
Permits pooling of the
resources and capabilities of
more than one firm
Konica
licensing its
digital camera
to Hewlett
Packard
Pixar’s computer
animated movies (e.g.
“Toy Story”) marketed
and distributed by
Disney Co.
Competing
Resources
Examples
Outsourcing
certain
functions
Apple and
Sharp build the
“Newton” PDA
Microsoft and
NBC formed
MSNBC
Internal
Commercialization
Biggest investment
requirement and
corresponding risks.
Benefits of control
Substantial
requirements in terms
of finance, production
capability, marketing
capability, distribution,
etc.
TI divestment of
its Digital Signal
Processing Chips
The Strategic Management of Technology:To Lead or to Follow
Key considerations:
• Is innovation appropriable and protectable against imitation?
If so, advantages in leadership.
• The role of complementary resources
Followers may be able to avoid investing in
complementary resources due to betterestablished industry infrastructure
Firms possessing complementary resources
have the luxury of waiting
• Is owning/ controlling industry standard critical to competitive
advantage?
if so, advantage in being a leader.
Uncertainty & Risk Management in Tech-based Industries
Technological
uncertainty
Sources of
uncertainty
Market
uncertainty
Selection process for standards and
dominant designs emerge is complex
and diifficult to predict, e.g. future of 3G
Customer acceptance and adoption rates
of innovations notoriously difficult to
predict, e.g. PC, Xerox copier, Walkman
Cooperating with lead users
early identification of customer requirements
–assistance in new product development
Strategies for
managing risk
Flexibilility
—keep options open
—use speed of response to adapt
quickly to new information
—learn from mistakes
Limiting risk exposure
—avoid major capital commitments
(e.g. lease don’t buy)
—outsource
—alliances to access other firms’
resources & capabilities
—keep debt low
The Emergence of Standards
• Emergence of a dominant design paradigm
– Model T in autos
– IBM 360 in mainframes
– Douglas DC3 in passenger aircraft
• Emergence of technical standards
– Emerge in industries where there are network
extremities
• Entrenchment of the dominant designs and technical
standards
– Learning effects: incremental improvement of the
dominant design
– Switching costs
– Need for coordinated action by multiple players
Sources of Network Externalities
• User linkages, e.g.
– Telephone systems—only value of telephone is connection to
other users
– Video game consoles—same platform allows users to
exchange games and play interactively
– On-line auction—value of auction depends on number of
buyers and sellers participating
Also, social identification—listening to same music, watching
same TV shows, wearing same clothes in order to conform
• Availability of complementary products, e.g.
– Most PC applications software written for Windows, not Mac.
– In economy autos, easier to get parts and repair for a Ford
Focus than for a Maruti or Proton
• Economizing on switching costs, e.g.
– In suites of office software, users of Microsoft Office more
likely to avoid switching costs that users of Lotus SmartSuite
when they move jobs
Companies that Own Technical Standards
COMPANY
Microsoft
Intel
Matsushita
Iomega
Intuit
AMR
Rockwell/ 3Com
Qualcomm
Adobe Systems
PRODUCT CATEGORY
PC operating systems
PC microprocessors
Videocassette recorders
High capacity PC disk drives
Software for on-line financial
transactions
Computerized airline
reservations system
56K modems
Digital wireless telecom signals
Common file format for creating
and viewing documents
STANDARD
Windows
*86 series
VHS system
Zip drives
Quicken
Sabre
V90
CDMA
Acrobat
Competing for Standards:
Value Appropriation vs. Market Acceptance
Maximize
market
acceptance
VHS
Betamax
LOOSE
Maximize
value
appropriation
TIGHT
IBM-PC
Mac
The Conditions for Creativity:
“Operating” and “Innovating” Organizations
Structure
Processes
Reward
Systems
People
Operating Organization
Innovating Organization
Bureaucratic. Specialization and
division of labor. Hierarchical
control
Operating units controlled and
coordinated by top management
which undertakes strategic
planning, capital allocation and
operational planning.
Financial compensation, promotion
up the hierarchy, power and status
symbols.
Recruitment and selection based
upon the needs of the organization
structure for specific skills:
functional and staff specialists,
general managers, and operatives.
Flat organization without
hierarchical control. Task-oriented
project teams.
Processes directed toward
generation, selection, funding and
development of ideas. Strategic
planning flexible, financial and
operating controls loose.
Autonomy, recognition, equity
participation in new ventures
Key need is for idea generators
which combine required technical
knowledge with creative
personality traits. Managers must
act as sponsors and orchestrators.
Strategy Implementation:
Invention to Innovation
• While invention depends upon creativity, successful
innovation requires integrating new knowledge with
multiple business functions.
• Need to link R&D departments with other functions (the
problem of Xerox’s PARC)
• The role of cross-functional new product development
teams as vehicles for integration
• The role of product champions--in achieving integration
and counteracting organizational inertia.
Slides used for
summarizing case
issues
• EMI & the CT Scanner
[A] & [B]
• Video Games Case
EMI SCANNER: THE AFTERMATH
 EMI established 3rd generation as a priority. Gives
responsibility to US subsidiary.
 R&D expenditures mount, project delayed, Houndsfield
& team fly out to US to assist.
“Certificate of need” introduced
 Demand peaks in 1977: Rapid decline in US sales of CT
scanners in 1978-1980
 Prices fall rapidly; several competitors exit
 Losses at EMI Medical threaten solvency of EMI as a
whole
 EMI merges with Thorn to form Thorn-EMI
1980: Thorn sells EMI Medical to GE for 20m pounds;
Houndsfield receives Nobel prize for medicine.
ISSUES ARISING FROM EMI SCANNER CASE
“A” CASE
• Exploiting an innovation:
— alternative strategies
— analyzing appropriability
“B” CASE
• First mover vs. follower advantage:
— The role of complementary resources
— Managing the “window of opportunity”
• Industry evolution—changes in industry structure,
competition & key success factors
• Effective strategy implementation
—the need for structure
Issues Arising from Video Games Case
• Hardware-software complementarities:
--Where’s the profit?
--Strategy of complementarity: Need for coordination
--Importance of “killer app.”
• Analyzing the existence and sources of network
externalities
--user linkages
--availability of complements
--training costs
--social conformity
• How to win in standards wars
--1st mover advantage (disadvantage?)
--pre-emption
--managing expectations
--partnering
• Holding on to leadership
--backward compatibility