Innovation Management

An effective innovation strategy answers three key questions: How will we Create value? Xerox GM Saturn and Jobs Bank Whole system against innovation How will we Capture value? How will we Deliver value? 8

Step 1: Creating Value How will the technology evolve? How will the market change? How will consumer preferences and behavior change? Where will innovations come from? What is our value proposition?

Step 2: Capturing Value How should we design the business model? Where should we compete in the value chain? How should we compete if standards are important?

Step 3: Delivering Value How do we manage the core business and growth simultaneously? How do we use our strategy to drive real resource allocation? What organizational structure, processes, measurements, and incentive mechanisms do we use?

Question: Can you think of an industry that has gone through drastic changes in the past several decades in terms of technology, business models, and major players? Personal computers Retail Photography Video games

Examples Personal computers Retail Photography Video games

A harder question: Can you think of an industry that has not gone through drastic changes in the past several decades in terms of technology, business models, and major players? Soft drinks Ready-to-eat breakfast cereals Diamonds Business education?

Examples Soft drinks Ready-to-eat breakfast cereals Rough diamonds Business education?

The Traditional Model of Industry Life Cycle Fermentation Shakeout Maturity Decline Sales volume Examples: fax machines, dial-up Internet service Time

An Alternate Model of Industry Life Cycle Emergence Convergence Coexistence Dominance Sales volume Established Industry VHS vs. DVD Cell phones vs. landline phones Dial-up vs. high-speed Internet services Yellow pages vs. Internet-based local service Emerging Industry Time

The Industry Life Cycle as an S curve Performance Maturity Discontinuity Takeoff Dial-up vs. high-speed Internet services AOL, Nintendo (cartridge vs. DVD-based games) Ferment Time 17 6

Transitions often challenge existing organizations severely

But they also create major opportunity Corning glass Cookware to optical fiber IBM Mainframes to PCs to Services Nintendo Playing cards to video games

Where do innovations come from? 24 36

Sources of innovation according to Peter F. Drucker Industry and market changes Demographic changes New knowledge Changes in perception Unexpected occurrences Incongruities Process needs Industry and market changes: E-commerce Demographic changes: assisted-living, senior communities New knowledge: biotechnology, nanotechnology Changes in perception: health consciousness, Whole Foods Unexpected occurrences: Post-it, Viagra Incongruities: Univ. of Phoenix, online education Process needs: e-Bay, Alibaba, UPS

The second of three key questions... How will we Create value? How will we Capture value? How will we Deliver value? 9 3 3

Or: What Determines the Innovator’s Share? Suppliers Customers Imitators, followers Innovator 54

Sources of Uniqueness Intellectual property protection Secrecy Speed Patents Finite length The right to prohibit “producing” Copyrights The right to prohibit “copying” Secrecy Trade secrets & non-compete clauses “Tacit” knowledge Causal ambiguity Speed 59

Uniqueness is powerful but often difficult to maintain Legal mechanisms can be costly to create, and then even more costly to enforce: and sometimes they require public disclosure Secrecy may be difficult to maintain Speed is hard work, and sometimes imitable 60

What are Complementary Assets? Those assets that allow a firm to make money, even if the innovation is not unique. The answer to the question: If our innovations were instantly available to our competitors, would we still make money? Why? 61

In the best case, complementary assets should be tightly held Complementary assets that are tightly held are not easily available to entrants or to most competitors 62

Types of Complementary Assets Things you can do Manufacturing capabilities Sales and service expertise Strategic alliances Things you own Brand name Distribution channels Customer relationships COMPETENCIES Competencies: Wal*Mart, Dell, Kodak’s relationships with retailers in photo development market Resources: Coca-cola brand equity, De Beer’s mines RESOURCES 63

Exercise: Complementary assets are: Uniqueness is: Position: Soft drinks Windows Office Book publishing Travel agencies Your industry/firm Complementary assets are: Available Tightly held Easy to maintain B A Uniqueness is: Hard to maintain C D 67

Uniqueness & Complementary Assets over the Life Cycle: Maturity Takeoff Electronics PCs Ferment 52 80

Managing discontinuities means managing complementary assets: Maturity Performance Discontinuity Takeoff Which of my complementary assets is critical? Pharmaceutical firms IE vs. Netscape Intel Ferment Time 17 6

Complementary Assets/Uniqueness speak to Rivalry, the Threat of Entry & Substitutes. Entrants Suppliers Rivals Buyers Isolating mechanisms Entry and mobility barriers Substitutes 69

Porter reminds us to think about the structure of the value chain: Entrants Suppliers Rivals Buyers Substitutes 69

The last of three key questions... How will we Create value? How will we Capture value? How will we Deliver value? 9 3 3

Discontinuous Innovation as a strategic problem Genuine uncertainty It’s not going to happen – certainly not now Cannibalization It will compete with our current products Shifts in the customer base Our current customers don’t want it Margin erosion It will make less money In retrospect, what should Apple have done in 1981 in response to IBM? Open up design, license OS to IBM Apple vs. Microsoft: Who was in a better position to develop a game system to compete with Nintendo? What opportunities did Microsoft: search engine, web browser, anti-virus, PDF, etc What opportunities did Sony miss: music player, music download, cell phones GM vs. Toyota: fuel cell vs. hybrid Barnes Noble vs. Amazon Kodak Auction houses Christie’s, Lloyds

New S curves may be hard to spot in advance

The new opportunity doesn’t meet our current customer’s needs

The new opportunity doesn’t offer nearly the same margins and profit opportunity

Discontinuous Innovation as an Organizational Problem

My experience has been that creating a compelling new technology is so much harder than you think it will be that you're almost dead when you get to the other shore. --Steve Jobs

Discontinuous Innovation as an organizational problem Time horizons & Incentives Fear of (individual) cannibalization Overload Competency Traps Newspaper vs. Internet IBM mainframe vs. PCs Boca Raton, FL 1980 PARC Saturn SPRING HILL, Tennessee early 1990’s Biotechnology

Case discussion: Kodak (A) 1. Evaluate Kodak’s strategy in traditional photography. Why has the company been so successful throughout the history of the industry? 2. Compare traditional photography to digital imaging. What are the main structural differences? Will digital imaging replace traditional photography? How have value creation and value appropriation changed in digital imaging relative to traditional photography? 3. How would you assess Fisher’s attempt to transform Kodak? 4. What is Kodak’s current position in digital imaging? Evaluate Kodak’s strategies from the mid-1980s onward.