1. 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

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

3. 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
20th centuries
Fuzzy logic 1960’s
controllers 4

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

5. 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

6. 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

7. 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.

8. 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

9. 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
1 = not at all effective 7 = very effective
Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987. 11

10. 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

11. 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

12. 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.

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

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

20. The Conditions for Creativity: “Operating” and “Innovating” Organizations19

21. 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

22. Slides used for summarizing case issues
EMI & the CT Scanner [A] & [B]
Video Games Case

23. 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
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.

24. 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 

25. 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