QUINTEN KRZYSKO GARRETT MIZE JONATHAN SCHNEIDER ALLISON SCOTT ALEX STEAKLEY Foundations of Strategy Chapter 6

Chapters Focus Business environments where technology is a key driver of change and an important source of competitive advantage.  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 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  Little investment/little return, few resources  Outsourcing certain functions  Limited investment, external resources  Strategic alliance  Flexible/ informal structure, permits pooling of resources and capabilities of more than 1 firm  Joint venture  Shares investment risk w/ partner, same as strategic alliance  Internal Commercialization  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  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 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 1 st key to winning is determining if the market will converge around a single technical standard 2 nd 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 technology The ability to innovate 1 st mover advantage Strength in components Reputation and brand name

Competitive Advantage in Technology- Intensive 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

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  Strong: innovator captures most of the value of the innovation  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  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  Generic comp resourc. – the innovator is in a much stronger position to capture value  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  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  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  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  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  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