Technology-based Industries & the Management of Innovation 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 OUTLIN E

The Development of Technology: From Knowledge Generation to Diffusion Basic Knowledge Invention Innovation Diffusion IMITATION ADOPTION Supply side Demand side

The Development of Technology: Lags Between Knowledge Generation and Commercialization BASIC FIRST PRODUCT IMITATION KNOWLEDGE PATENTS LAUNCH Xerography late 19th and early 20th centuries Jet Engines 17th-- early th centuries Fuzzy logic 1960’s controllers MP3 players Early 1990s

Appropriation of Value:- How are the Benefits from Innovation Distributed? Customers Suppliers Imitators and other “followers” Innovator

The Profitability of Innovation Legal protection Complementary resources Imitability of the technology Lead time Profits from Innovation Value of the innovation Innovator’s ability to appropriate the value of the innovation

Legal Protection of Intellectual Property Patents —exclusive rights to a new product, process, substance or design. Copyrights —exclusive rights to artistic, dramatic, and musical works. Trademarks — exclusive rights to words, symbols or other marks to distinguish goods and services; trademarks are registered with the Patent Office. Trade Secrets — protection of chemical formulae, recipes, and industrial processes. Also, private contracts between firms and between a firm and its employees can restrict the transfer of technology and know how.

Complementary Resources Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized. Manufacturing Distribution Service Complementary technologies Other Marketing Finance Core technological know-how

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 Products Patents to prevent duplication Patents to secure royalty income Secrecy Lead time Moving quickly down the learning curve Sales or service efforts = not at all effective7 = very effective Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.

Risk & Return Competing Resources Examples Licensing Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization 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 Shares investment & risk. Risk of partner conflict & culture clash Biggest risks & benefits. Allows complete control Few Allows outside resources & capabilities To be accessed Permits pooling of the resources/capabilities of more than one firm Substantial resource requirements Konica licensing its digital camera to HP Pixar’s movies (e.g. “Toy Story”) marketed & distributed by Disney. Apple and Sharp build the “Newton” PDA Microsoft and NBC formed MSNBC TI’s development of Digital Signal Processing Chips Alternative Strategies for Exploiting Innovation

The Comparative Success of Leaders and Followers PRODUCTINNOVATORFOLLOWERWINNER Jet AirlinersDe Havilland (Comet)Boeing (707)Follower Float glassPilkingtonCorningLeader X-Ray ScannerEMIGeneral ElectricFollower Office P.C.XeroxIBMFollower VCRsAmpex/SonyMatsushitaFollower Diet ColaR.C. ColaCoca ColaFollower Instant CamerasPolaroidKodakLeader Pocket CalculatorBowmarTexas InstrumentsFollower Microwave OvenRaytheonSamsungFollower Plain Paper CopiersXeroxCanonNot clear Fiber Optic CableCorningmany companiesLeader Video Games PlayersAtariNintendo//SonyFollowers Disposable DiapersProctor & GambleKimberly-ClarkLeader Web browserNetscapeMicrosoftFollower PDAPsion, ApplePalmFollower MP3 music playersDiamond MultimediaApple, Sony (&others)Followers

Leaders vs. Followers in Innovation PRODUCTINNOVATORFOLLOWERWINNER Jet AirlinersDe Havilland (Comet)Boeing (707)Follower Float glassPilkingtonCorningLeader X - Ray ScannerEMIGeneral ElectricFollower Office P.C.XeroxIBMFollower VCRsAmpex/SonyMatsushitaFollower Diet ColaR.C. ColaCoca ColaFollower Instant CamerasPolaroidKodakLeader Pocket CalculatorBowmarTexas InstrumentsFollower Microwave OvenRaytheonSamsungFollower Plain Paper CopiersXeroxCanonNot clear Fiber Optic CableCorningmany companiesLeader Video Games PlayersAtariNintendo/SonyFollowers Disposable DiapersProctor & GambleKimberly-ClarkLeader Web browserNetscapeMicrosoftFollower Cholesterol loweringRaisioUnileverFollower margarine MP3 playersDiamond MultimediaAppleFollower

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 better- established industry infrastructure Firm possessing complementary resources has the luxury of waiting Is owning/ controlling industry standard critical to competitive advantage? if so, advantage in being a leader.

Uncertainty & Risk Management in Tech-based Industries Sources of uncertainty Technological uncertainty Selection process for standards and dominant designs emerge is complex and difficult to predict, e.g. future of 3G Customer acceptance and adoption rates of innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman Market uncertainty Strategies for managing risk Cooperating with lead users early identification of customer requirements –assistance in new product development Flexibility —keep options open —use speed of response to adapt quickly to new information —learn from mistakes Limiting risk exposure —avoid major capital commitments (e.g. lease don’t buy) —outsource —alliances to access other firms’ resources & capabilities —keep debt low

The Emergence of Standards Emergence of a dominant design paradigm –Model T in autos –IBM 360 in mainframes –Douglas DC3 in passenger aircraft Emergence of technical standards –Emerge in industries where there are network extremities Entrenchment of the dominant designs and technical standards –Learning effects: incremental improvement of the dominant design –Switching costs –Need for coordinated action by multiple players

Sources of Network Externalities User linkages, e.g. –Telephone systems—only value of telephone is connection to other users –Video game consoles—same platform allows users to exchange games and play interactively –On-line auction—value of auction depends on number of buyers and sellers participating Also, social identification—listening to same music, watching same TV shows, wearing same clothes in order to conform Availability of complementary products, e.g. –Most PC applications software written for Windows, not Mac. –In economy autos, easier to get parts and repair for a Ford Focus or Honda Accord than a Kia, Proton, or Lamborghini Economizing on switching costs, e.g. –E.g. office software (Microsoft Office vs. Lotus SmartSuite)

Companies that Own Technical Standards COMPANYPRODUCT CATEGORYSTANDARD MicrosoftPC operating systemsWindows IntelPC microprocessors*86 series MatsushitaVideocassette recordersVHS system IomegaHigh capacity PC disk drivesZip drives IntuitSoftware for on-line financial transactionsQuicken AMRComputerized airline reservations systemSabre Rockwell/ 3Com56K modemsV90 QualcommDigital wireless telecom signalsCDMA Adobe SystemsCommon file format for creating and viewing documentsAcrobat

Competing for Standards: Value Appropriation vs. Market Acceptance Maximize value appropriation Maximize market acceptance LOOSETIGHT VHS IBM-PC Apple Mac Betamax

Fighting Standards Wars 1.Determine the potential for standards emergence— analyze network externalities 2.Building a bandwagon—enlist partners (requires licensing & sharing returns from the technology) 3.Pre-empting the market—Build user base quickly: May require sharing benefits with consumers (penetration pricing) 4.Manage expectations (the Microsoft advantage) What if you’re a loser? (a) ensure compatibility (b) go for niche How can the winner sustaining the standard? --Don’t fall behind on technology --Ensure backward compatibility --Meet threat of disruptive technology by offering customers a migration path --Reinforce standard with other resources—e.g. brand

The Conditions for Creativity: “Operating” and “Innovating” Organizations

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.