Technology-based Industries & the Management of Innovation OUTLINE 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 1

The Development of Technology: From Knowledge Generation to Diffusion IMITATION Supply side Basic Knowledge Invention Innovation Diffusion Demand side ADOPTION 3

The Development of Technology: Lags Between Knowledge Generation and Commercialization BASIC FIRST PRODUCT IMITATION KNOWLEDGE PATENTS LAUNCH Xerography late 19th and 1940 1958 1974 early 20th centuries Jet Engines 17th-- early 1930 1957 1959 20th centuries Fuzzy logic 1960’s 1981 1987 1988 controllers 4

Imitators and other “followers” Appropriation of Value:- How are the Benefits from Innovation Distributed? Customers Suppliers Innovator Imitators and other “followers” 8

The Profitability of Innovation Value of the innovation Legal protection Complementary resources Imitability of the technology Lead time Profits from Innovation Innovator’s ability to appropriate the value of the innovation 7

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 iemployees can restrict the transfer of technology and know how. 9

Complementary Resources Distribution Manufacturing Finance Service Core technological know-how 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 13

U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation Processes Products Patents to prevent duplication 3.52 4.33 Patents to secure royalty income 3.31 3.75 Secrecy 4.31 3.57 Lead time 5.11 5.41 Moving quickly down the learning 5.02 5.09 curve Sales or service efforts 4.55 5.59 1 = not at all effective 7 = very effective Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987. 11

Alternative Strategies for Exploiting Innovation Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization Licensing 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 Small risk, but limited returns also (unless patent position very strong Risk & Return Allows outside resources & capabilities To be accessed Few Permits pooling of the resources/capabilities of more than one firm Substantial resource requirements CompetingResources 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 Examples

The Comparative Success of Leaders and Followers PRODUCT INNOVATOR FOLLOWER WINNER Jet Airliners De Havilland (Comet) Boeing (707) Follower Float glass Pilkington Corning Leader X-Ray Scanner EMI General Electric Follower Office P.C. Xerox IBM Follower VCRs Ampex/Sony Matsushita Follower Diet Cola R.C. Cola Coca Cola Follower Instant Cameras Polaroid Kodak Leader Pocket Calculator Bowmar Texas Instruments Follower Microwave Oven Raytheon Samsung Follower Plain Paper Copiers Xerox Canon Not clear Fiber Optic Cable Corning many companies Leader Video Games Players Atari Nintendo/Sega/Sony Followers Disposable Diapers Proctor & Gamble Kimberly-Clark Leader Web browser Netscape Microsoft Follower PDA Psion, Apple Palm Follower MP3 music players Diamond Multimedia Sony (&others) 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 better- established 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 Exploiting Innovation Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization Licensing 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 Shares investment and risk. Risk of partner disagreement and culture clash Biggest investment requirement and corresponding risks. Benefits of control Risk & Return Permits accessing of outside resources and capabilities Substantial requirements in terms of finance, production capability, marketing capability, distribution, etc. Few Permits pooling of the resources and capabilities of more than one firm CompetingResources Konica licensing its digital camera to Hewlett Packard Pixar’s computer animated movies (e.g. “Toy Story”) marketed and distributed by Disney Co. Apple and Sharp build the “Newton” PDA Microsoft and NBC formed MSNBC TI divestment of its Digital Signal Processing Chips Examples

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 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. 16

Uncertainty & Risk Management in Tech-based Industries Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G Technological uncertainty Sources of uncertainty Market uncertainty 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 Limiting risk exposure —avoid major capital commitments (e.g. lease don’t buy) —outsource —alliances to access other firms’ resources & capabilities —keep debt low Flexibilility —keep options open —use speed of response to adapt quickly to new information —learn from mistakes 14

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 5

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 5

Companies that Own Technical Standards COMPANY PRODUCT CATEGORY STANDARD Microsoft PC operating systems Windows Intel PC microprocessors *86 series Matsushita Videocassette recorders VHS system Iomega High capacity PC disk drives Zip drives Intuit Software for on-line financial transactions Quicken AMR Computerized airline reservations system Sabre Rockwell/ 3Com 56K modems V90 Qualcomm Digital wireless telecom signals CDMA Adobe Systems Common file format for creating and viewing documents Acrobat 5

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

The Conditions for Creativity: “Operating” and “Innovating” Organizations 19

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. 20

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 --training costs --availability of complements --social conformity How to win in standards wars --1st mover advantage (disadvantage?) --pre-emption --managing expectations --partnering Holding on to leadership --backward compatibility