Competitive Advantage in Technology-Intensive Industries “It is the quest for competitive advantage that causes firms to invest in innovation” (260).

Invention vs. Innovation The creation of new products/processes through the development of new knowledge or new combinations of existing knowledge. The initial commercialization of invention by producing and marketing a new good by using a new method of production.

The Innovation Process Invention  Innovation Introduction  Diffusion Demand Side: Through customers Supply Side: Through imitation by competitors *Note: Not all inventions progress to innovation, primarily because patent owners can’t find a viable market.

The Innovation Process Basic Knowledge Invention Innovation Diffusion Competitors Imitation Customers Adoption

The Profitability of Innovation There is no evidence that either R&D intensity or frequency of new product introductions directly correlate with profitability. Profitability = Value created by the innovation Regime to Appropriability: The conditions that influence the distribution of returns to innovation

Regime to Appropriability Strong Regime Weak Regime Innovator is able to acquire a substantial share of the value created. Other parties derive most of the value gained.

Four Factors in Determining Extent the Innovator is Able to Appropriate Value of Their Innovation Property Rights Tacitness and Complexity of the Technology Lead-Time Complementary Resources

Property Rights The rights to Intellectual Property Patents: Rights to a new and useful product, process, substance, or design. Copyrights: Exclusive production, publication, or sales rights to literature, media, etc. Trademarks: Words, symbols, or other marks that distinguish good/service. Trade Secrets: Legal protection for formulas, recipes, processes, and other private knowledge. Patents: Invention must be novel/original to acquire the patent. Copyrights: Articles, books, photographs, musical compositions, NFL owns copyrights to broadcast their game. Trademarks: Provide bases for brand identification Trade Secrets: Sales rep that left his firm can’t use/steal clients after he’s gone or at a new company.

Tacitness and Complexity Extent to which an innovation can be imitated depends on how easy technology can be comprehended and replicated. Two Factors: Codifiable Knowledge: Can the innovation be written down on paper? Complexity: How difficult is it to replicate this product/process? Codifiable Knowledge: If it is written down, can be copied and isn’t protected by patents/copyrights, as a consequence diffusion will quickly follow. Ex: Coca-Cola’s recipe is codifiable, and because they don’t have any trade secret protection, it is easily copied by other companies such as Walmart. Complexity: A clothing style can be easily imitated/replicated, while a microprocessor for apple might not be so easy (or Fortune Brand’s new home security system)

Lead-Time The time it will take followers to catch up to the innovation. Purpose: For innovators to use this lead-time to build on their advantages. Microsoft

Complementary Resources Diverse resources and capabilities needed to finance, produce and market the innovation. Often times accessed through alliances with other firms. Alliance with other firm Example: Fortune Brand has bought out multiple major cabinet companies (logos/Pictures), One reason behind why they first started doing this is because it is cheaper to get certain types of wood through them than the wood they were supplied through ThermaTru Doors.

The importance of property rights? Patent Copyright Trademark Trade Secret

How to Exploit Your Innovation Licensing Strategic Alliance Joint Venture Internal Commercialization

Resources and Capabilities Outsourcing Internal Commercialization

Weigh the advantages!!! Lead or Follow? Grab the prize!! Eat the costs… Weigh the advantages!!!

Managing Risks Lead Users Limit risk exposure Flexibility

Competing for Standards The emergence of the digital, networked economy has made standards increasingly important and companies that own and influence industry standards are capable of earning returns that are unmatched by any other type of competitive advantage. A standard is a format, an interface, or a system that allows interoperability

Types of Standards Public or Open Standards Available to everyone either for free or a nominal charge. They don’t require privately owned IP Set by public bodies and industry associations Private or Proprietary Standards The technologies and designs are owned by companies or individuals.

Classified by who sets them Mandatory standards Set by the government and have the force of law behind them De facto Standards Emerge through voluntary adoption by producers and users

Why Standards Appear: Network Externalities Standards emerge in markets that are subject to network externalities. Whenever the value of a product to an individual customer depends on the number of users of that product. Negative Network externalities Compatibility

Network Externalities arise from: Products where users are linked to a network Availability of complementary products or services Economizing on Switching Costs

Network Externalities create Positive Feedback Once a technology or system gains market leadership, it attracts a growing proportion of new buyers. Trying to avoid tipping (once a market leadership is lost , a downward spiral occurs) Once a certain threshold is reached, cumulative forces become unstoppable. The markets subject to significant network externalities tend to be dominated by a single supplier.

Technological and Design Standards are Resilient Learning Effects - cause the dominant technology and design to be continually improved and refined. Collective Lock-Ins – Existing standard is inferior, switching to a superior technology may not occur

Winning Standard Wars First key issue is to determine whether we are competing in a market that will converge around a single technical standard. Second strategic issue is recognizing the role of positive feedback. Controlling the positive feedback: Before you go to war, assemble allies Pre-empt the market Manage expectations

…continued Create broad alliances to grow bandwagon and gain market leadership Achieve compatibility with existing products Advantage goes to the competitor that adopts an evolutionary strategy rather than one that adopts revolutionary strategy

Key Resources Needed to Win a Standards War: Control over an installed base of customers Owning IP rights in the new technology The ability to innovate in order to extend and adapt the initial technological advance First mover advantage Strength in complements Reputation and Brand Name Be aware of tipping points and launch strategic initiatives earlier to resolve standard wars quicker.

Creating the Conditions for Innovation Strategic analysis can tell us a great deal about making money out of innovation, but if we cannot generate innovation there isn’t much use. While invention depends on creativity, innovation requires collaboration and cross-functional integration

Managing Creativity Invention is an act of creativity requiring knowledge and imagination. Creativity is stimulated by human interaction.

Organizing For Creativity Creativity requires management systems that are quite different from those appropriate for efficiency. Creative abrasion is the term used for fostering innovation through the interaction of different personalities and perspectives.

Balancing Creativity and Commercial Direction For creativity to create value-both for the company and for society-it must be directed and harnessed. The critical linkage between creative flair and commercial success is market need.

Organizational Approaches to the Management of Innovation Innovation upsets the established routines and threatens the status quo. As innovation has become an increasing priority for established corporations, chief executives have sought to emulate the entrepreneurial spirit of technology-based start-ups.

Product Champions These provide a means for incorporating individual creativity within organizational processes and for linking invention to subsequent commercialization. The key to a product champion is to permit individuals who are sources of creative ideas to lead the teams.

Buying Innovation Many large companies buy smaller start-ups. Large companies buy these smaller start-ups because they have advantages in the early stages of the innovation process.

Open Innovation Instead of companies developing their own technologies ‘in-house’. Open innovation is more market-based system where companies buy in technology while also licensing out their own technologies.

Corporate Incubators These are business developments established to fund and nurture new businesses. This was more popular at the end of the 1990s during the IT boom. Few companies have achieved sustained success from this.