EMBA Managing Innovation 1

Managing Innovation
Courses notes

Contents
1. a. b. i. ii. iii. c. d. e. 2. a. b. c. Innovation Management...................................................................................................2 Introduction and context...............................................................................................2 Source and types and patterns of innovation...............................................................3 Sources.....................................................................................................................3 Types of Innovation...................................................................................................4 Patterns of innovation...............................................................................................7 Standards and design dominance...............................................................................10 Market entry timing....................................................................................................11 Application of above...................................................................................................11 Case Study Corning Incorporated.................................................................................12 Company background.................................................................................................12 Build strategic growth.................................................................................................14 Looking forward..........................................................................................................17

Looking forward

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1. Innovation Management
a. Introduction and context
Framing Successful internal management of innovation requires understanding the context: Industry (Porter approach) Technology (how technologies effects the industry?) Supporting structures What drives customer needs/desires Today, well focus on elements external to the firm. Example: how really invented the television? RCA has developed televisions (Radio Corporation of America): they had transmission towers around the USA by controlling the towers and the transmission media, they were able to control the deployment of the colored televisions. The guy who has invented the colored television couldnt push his innovation on the market by himself. Schumpeter (1943) Capitalist engine results from innovation and new organizational forms. New combining systems, technologies, organization can generate innovation. Creative Destruction: destroying old economic structures and creating new ones. When creating something new, we destroy something old. What drives innovations, evolutions? Business strategy in the context of its creation, and in its role of creative destruction. How we want to operate our business? How we want to create value? What did this new opportunity will destroy? Price and quality competition pale next to the competition from innovation. Low costs and low prices are not always relevant in regard of the competition from innovation. Even the threat of innovation influences strategy Look over our shoulder: where is the next innovation which can threat my current business? (E.g. Kodak, Sony (MP3)) need to catch the wave of innovation. See article creative destruction Rosenbloom & Cusumano (1987) See article The birth of the VCR Industry Three firms succeeded, three did not. WHY? Paper touches topics/issues we will cover today and some you might want to learn more about: Relationships & alliances Competitors tried to work together, in order to create synergies, to learn faster, to share the risks In the case of VCR: 2 different standards if they do not work together, the competitors will suffer from several standards by working together, they push their own common standard Where do new products come from? Awareness of top management where these products should be: used for television stations, for the mass market. Time horizon In Japan, the management thinks really on long term issues it allows the consistency of the actions. (In contrary, in the USA, they think on more short term activities) Appropriability of technology Patents can protect the innovations. Standards development Role of government

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Supporting the development of the new technologies, in order to help new industries (Tax incentives, competitive protection, helps for new investments) In Japan, when new industries come, they really keep the competition internally in Japan to get the firms stronger and stronger, before going outside of the country Character of complementary (non-tech) assets In the case of VCR, RH and movies by themselves offer opportunities for deploying this innovation. (Amount of data that can be put on these tapes) Chicken and egg issue If you dont have enough movies, people will not adopt the technology. On the other hand, if the device is not ready, the movies will not be distributed. Same issues with 3D contents (movies & TV) Idem for tablets: iPAD, Kinddle, etc. (Difference of formats, that can affect their future success on the market) Another example: mobile phone is only good only of the other persons have one. Else this is totally useless Sources of innovation Where does this industry come from? In many cases, they come from one idea from another industry. Or two industries converges in one (Example: several years ago, we have telephony and computers now we have smartphones) State of industry evolution In the very innovative type of thing, sometime, the market is clearly not ready. Relationship between the design, the innovation, and how to bring it into the market ? (manufacturing, cost level, etc.) Consistent strategy Very good view of where to go: actions where consistent within that Learning perspective: they learn from what they did. trying by learning

Milgrom & Roberts (1990) Rent seeking: implies extraction of uncompensated value from others without making any productive contribution. Relationship between information availability & openness and potential for redistribution of rents. Paper gets at the management of technological resources. Notes the resource allocation problem: how does one assign resources to projects, the value of which may be better known by the assigned resources? Who is really pushing innovation ? Who is really giving incentives for innovation? How can equitable arrangements be made so that both the individual and the organization are not rent seeking? Movie: Glengary Glenross

a. Source and types and patterns of innovation

i. Sources Innovation in Your Industry Think about your industry When did it start? How did it start? What have been important innovations? Where do you see it going? Where does innovation come from? Beyond the individual innovator and supporting structures Suppliers Computer industry: disk drives supplier, miniaturization allows smaller power supply. Customers They have specific needs

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Customers also can use products in a very different manner than planned. Collaborative networks Technology clusters In Lyon: biomedical cluster. In New Jersey, Philadelphia area. The silicon valey (computers technology) Technology spillovers People move from one company to another : and they share their ideas / also between friends outside the company.

Sources of innovation

Reinganum, J. F. (1983), "Uncertain Innovation and the Persistence of Monopoly", American Economic Review, Vol. 73, pp. 741-48

Who innovates: incumbents or entrants? Reinganum (1983) Under conditions of uncertainty (e.g., radical innovations), entrants invest more. No steady state industry entrants. Under conditions of certainty (e.g. incremental innovation), incumbents invest more. Incumbents have a better view of the market: they want to invest more in order to keep the entrants out. Why? Both invest in different way, in different kind take new technologies put it to in another place or create a new organization with different management in order to bring new combinations, to develop new ideas. i. Types of Innovation Incremental vs. Radical Architectural vs. Component Product vs. Process Competence-enhancing vs. Competence-destroying Sustaining vs. Disruptive

Incremental Innovation: Refine/Improve current concept Minor changes, exploits potential of initial design Certain questions not revisited in context of the dominant design Radical Innovation: Introduce new concepts Requires Engineering design difference Based on different principles Opens up new markets and potential applications Changes both components & interaction between them Innovation Consequences Each type of innovation generates different consequences require different org. capabilities Organizational capabilities take time to develop and implement. Organizational capabilities are difficult to create and costly to adjust Its difficult for someone else to replicate, because of the inner complexity. Incremental innovation: reinforces existing capabilities Radical innovation: forces a new set of challenges new questions, new skills, and new problemsolving approaches Big effect of the organization: you cant count on the same information flows, the same processes, etc. This is why new firms are doing more easily radical innovations, because they are more flexible, and they dont have develop routines and capabilities to deeply so they are able to change them. Architectural vs. Component/Module Innovation Previous two types of innovation cant explain all different technological innovations in real world.

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Whole of parts is a system; architectural innovation is change to system without change in components Schumpeters Creative Destruction Destroys usefulness of design concept without destroying component knowledge Example of the cars: engines, seats, design, etc. the concept is the same, but the way to put it together is different. Concept of hybrid cars and batteries: we keep some of the components: wheels, etc. but a lot of other things will become useless. The power source is changing. Linkage between the same core concepts and the components:

Architectural Innovation impact on the Organization Communication channels: developed around critical interactions to conduct task relationships around which organization builds architectural knowledge Information filters: allow firm to identify immediately what is most crucial in its information stream achieve higher focus and efficiency of information Problem-solving strategies: store of knowledge about solutions already tested solution to routine problem Product vs. Process Innovation: Between Growth, Adaptation & Competition

In a mature industry, how can we make this product better and cheaper? Improve processes Example of airplanes: at the beginning, a lot of different type of product innovations. But it decreases when the industry became mature. But then, the process innovation started to grow faster development, improve manufacturing process, improve efficiency, decrease costs by improving the processes. Same things happened for financial services, creation of different packages, etc. Competence-enhancing vs. Competence destroying: Two classes of discontinuous innovations: Competence Destroying: Invention introduces benefit previously unobtainable; gives new entrants CA.

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Disrupts industry structure. Skills and knowledge base required to operate core technology shift. Competence Enhancing: Invention dramatically outperforms current invention; dramatically alters previously obtainable price/perform ratios. Invention builds on the industrys know how and relationships, which are strengthening as the incumbents consolidate leadership while the industry sees an increase in barriers to entry.

Disruptive vs. Sustaining Innovation Sustaining Perceived as less risky Steady rate of product improvement Listen to your customers! Can open entirely new market Disruptive Innovators Dilemma Innovators Solution Performance sacrificed Attributes not yet valued Financially unattractive

Performance can be price performance, technology performance: elements that drive the innovation to the market. Over the time, the sustaining innovation improves slightly, but at a certain time the disruptive technology can go at an upper level. Look at your suppliers, your components, products you are using detect if there will be a potential disruptive technologies? Who it will impact your own products or services? So Who Holds the Key? Senior Executives: who understand the market, the business Managers: manage the conversations, how to put things together, etc. Engineers: who understand the technology of your industry NOT Existing Customers: persons who apply your product and use it in another way 4 Steps to Spotting and Cultivating Disruptive Technologies: 1. Determine whether the technology is sustaining or disruptive. 2. Define the strategic significance of the disruptive technology: identify where is the opportunity for our company make our products obsolete, or could improve them. 3. Locate the initial market for the disruptive technology: where might you sold the new technology? 4. House the disruptive technology in an independent entity: relationship between innovation and new organization forms, new communication paths, no filters. Performance Trajectories The rate at which the performance of a product has improved, and is expected to improve, over time.

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How is it really affecting the way our business works? i. Patterns of innovation

Technology S-curves

Fluid state: Is the manufacturing process really optimized? The performance is going up: ideas are working better Maturity state: here, we can apply the process innovation : who do we improve the manufacturing process?

With new technologies, sometime, you have disruptions: the performance can be a bit lower, or the prices are more expensive. When the new curve is growing next generation of technology can have better performance than the previous mature technology.

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Technology S-Curve: Example of computers going quicker, quicker and quicker, smaller, smaller and smaller, and the prices are becoming more reasonable. Market has similar S-Curve: computers were firstly used by the military departments (e.g. GPS: came from military navigations applications), then industry, and then the end users. The same appears in telephony, computing, etc. Consumption S-curves

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Percentage of devices that USA end users have at home: Telephone Electricity Auto Stove Radio Refrigerator Clothe washer Clothe drier Color TV Air conditioner Dishwasher Microware Computer Cellphone Internet The time page is going faster to faster. This is due to the high improvement of the communication media (from letters to e-mail / blogs / due to internet (via radio, television, etc.)) People have more and more access to information, and are become more and more aware of innovations. Product lifecycles are shorter, and there is a faster turnover Lower prices generate higher access to the products higher competition For electricity, or Internet, there is a part of the deployment due to the infrastructure providers have to install these infrastructures. Government can support that. For the other devices, they also supported by infrastructure improvement (railways, roads, for a better logistics and distribution of them). E.g. for cellphones, the communication towers should have been build. Example of Facebook Today, we can print information of a product, in the future; we can have 3D printers which can build the product no need of express delivery.

Why does technology spread? R&D Spillovers and the Geography of Innovation and Production Audretsch & Feldman (1996) Why does technology spread? Knowledge effects may be geographic mediated. If knowledge spillovers play an important role and the distance from their source matters, we should see geographic concentration. i.e., the flow of tacit knowledge may be constrained by proximity and location Observations (Audretsch & Feldman, 1996)

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Innovative activities tend to cluster more in industries where knowledge spillovers play a decisive role. Resourcedependent industries (e.g., when skilled labor is relatively important) tend to be more geographically concentrated Clustered innovations do not induce clustered production

Case: In search of the perfect battery (See slides and the 2 articles) Major issues to solve is the weight, the time to recharge the battery, the security (stable product) For car battery, we are at the early stage of the S-Curve: the choice of the future technology is still under evaluation. Implications: ecology / type of energy which will be spent. Chicken and egg: between battery and electric cars. Batteries and cars: this is an architectural innovation it can lead to design changes.

a. Standards and design dominance

Standards and Competition in Technology-Intensive Industries Key factors in emergence of dominant design: increasing returns to adoption; path dependence; Government regulation. Relationship to First mover Advantage When should a firm jump into the market relative to the emergence of a dominant design? Why do standards come into being and why are they so important? Path dependence: What we do today is based on what has been done before, either by us or by others De facto vs. de jure What is the role of government? Of other standardssetting entities? Shape the corporation Will it be a low growth, single product firm, a coherent diversifier or a conglomerate? Story of QUERTY Qwerty keyboard came from avoidance to have Standards wars Various type of wars Rival technology Compatible Rival evolutions Revolution vs. evolution Incompatible Evolution vss revolution Rival Revolutions

Your technology

Compatible Incompatibl e

Strength in standards wars determined by: Control of installed base IPR Ability to innovate FMA Manufacturing abilities Complementary products Brand name & reputation Advises: Before you go to war, assemble allies Preemption is a critical tactic Managing customer expectations is crucial

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When youve won the war, dont rest easy If you fall behind, avoid survival pricing

First mover advantages: do first movers always win? Apples Newton: reposition success, discontinued in 1995 AT&T s EO Discontinued in 1994 FM Radio: radio entry delayed for 30 years! Color Television: delayed entry about 20 years Audio cassette: late 1970s. LP price increase drove consumers to cassettes Video cassette record: took 20 years, had good run until DVD Videodisc players: RCA withdrewin 1994 Compact disks: growth until MP3 Palm Pilot: fastest selling computer through 1998

a. Market entry timing b. Application of above

Working group (14h30) Get into groups of 3 or 4 Consider an industry When and how did it start? How did dominant design emerge? Where is it along the S curve? What standards battles exist(ed)? What major innovations shaped the industry? Who were leaders? Followers? Who is winning? What potential disruptive innovations are on the horizon?

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1. Case Study Corning Incorporated

Website: http://www.corning.com/index.aspx

Budget: 10% in RD&E (Research, Development and Engineering) during difficult period, they increased and formalized the amount of time, money and resources objective to double rate of innovation. Creation of an organization: Strategic Growth: collaboration with corporate research to identify and develop new, large and profitable business opportunities

a. Company background
Early history: 1851 acquirement of a glass company by Houghton Perception that glass is poorly understood and vastly underutilized The company went public in 1945 chief executives outside the Houghton family) keep familys commitment to innovation (46% dedicated to RD&E) Applications High quality glass with consistent color Bulbs for electric lights (1879) Creation of a corporate research center (1908) Heat resistant glass shatterproof lanterns for railroads (1912) Pyrex (1915) laboratory equipments + consumer cookware products Ribbon machine (1926) 2000 bulbs per minute Silicones (1930s) Electrical sealing (1938) (tanchit) Joint ventures (fiber glass, glass blocks, silicones producers) (1938 1943) Improvement in optical glassmaking (1940s) Cathode-ray tube for radar detection systems (1942) Television picture tubes (end 1940s) make TV affordable for mass market Electricity conducting coated glass, fused silica and color television tubes (1950s) New process for producing glass ceramic materials Ceramic heat-resistant reentry shields and glass windshields for the Apollo Moon program (1960s) Cellular ceramic structures key components of automobile catalytic converters (1970s) (new emission control requirements) First optical fiber telecommunications Glass substrate for liquid crystal used for high quality flat display panels (1980s) Cyclical slowdowns in the 70s and 80s Downturn in the 1970s Glass envelopes housing TV pictures tubers competition from Japan sales plunged Danger in 1974-1975: recession, reducing the workforce to 29000 employees 1980s companys growth uneven Consumer products sales (Pyrex, CorningWare and Corelle dinnerware) slip Light bulb production halted

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The Telecom Bubble Optical fiber: the deregulation of the U.S. phone industry boom (2000/2001) Ramping up in production capacity Revenue jumped from 4,7b$ 7b$ 75% of total sales 40000 employees 65% of RD&E focused on fiber optics. Less profitable businesses (house wares, medical testing, drug research, television, laboratory glass) sold off or closed down concentration on telecom July 2001: shambles victim of the telecom bubble, the fiber optic craze orders abruptly stopped. (Stock plunged) 2002: reorganization / painful cuts / slashing workforce Getting back on track Period of extreme introspection Soul searching Define clear company identity Technology company: 10% of sales dedicated to RD&E Take the long view / long term oriented Mitigate the downsize Stabilizing balance sheet Have a more careful approach to its financial management Change the companys approach to managing innovation Science & Technology organization (S&T) Changes within S&T Dr. Joseph Miller hired at Chief Technology Officer (from Dupont company): fresh eyes Science and research not led directly by Cornings Display technologies Environmental technologies Telecommunications Life sciences Development and Engineering (D&E): 60% of the budget Implementation of new innovations 40% remaining: funding for longer range and exploratory research managed by S&T Provide support for research project aligned with existing businesses Fund non directed exploratory research led by scientists Play a role in supporting new business development Centralizing corporate research to address business-aligned and exploratory research 2 Strong central labs (New-York and France) longest history and greatest culture of innovation Change of the leadership team. Cut more than 100 active projects Recreation of the project portfolio Create synergy among projects (avoid research silos) Cross-pollinate across areas (project management approach) Scientists motivation: spend 10% of their time on work they feel is important. Challenge: reestablishing linkages between corporate research and nontelecom businesses (before : 70% of the RD&E budget dedicated to telecom, and 30% for non-telecom) + credibility First: focus talents on relatively short-range problems: objective was to make major businesses back on their feet Next: working on business on major new products (extensions or renewal) get back on track with exploratory and business-aligned research project / better communication / greater interaction / more credibility New business development Two-sided assessment Technology side Market side: Inbound marketing function part of the research organization Help maintain diversification in the portfolio Ensure that corporate research is directly contributing to the companys growth

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Previous trials of marketing approach 1970s: love-hate relationship between established business and the business (resources, etc.) 1980s: Corporate marketing: people had to find applications and market for cool new technologies. Very hard job. Benchmarking (IBM, Johnson & Johnson): approach not to be done halfway, need an accountable person with strong commercial and technical credibility Creation of Strategic Growth Cornings innovation recipe Observations about competencies High competency on glass and optical physics Build Key stone component of systems (inside the displays, etc.) : the value chain doesnt work without Cornings products Combination of materials expertise and deep process know-how (e.g. type of glass for bulb and ribbon machine make light bulbs cost effective). Same for television industry Necessitated strategic positioning (they cant compete on price alone) They compete by creating a strategic position based on intellectual property (IP) and their ability to defend it Institutionalization of the recipe.

a. Build strategic growth

Mission In partnership with research, fuel the strategic renewal of Corning Incorporated by identifying and developing new, profitable, large ($0.5B) business opportunities Objectives Identify large, complex system problems that could be solved through the development of keystone components Evolve the opportunity into a business proposition, and where appropriate, ramp the business so that it can stand on its own. Organization chart

Additional points Focus on white space markets and technologies Innovation process as an organizing principle (5-stage innovation process based on marketing, technology and manufacturing requirements Stage 1: build knowledge Stage 2: determine feasibility

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Stage 3: test practicality creation of new business unit or division Stage 4: prove profitability Stage 5: manage lifecycle

Pre-stage 1 activities: early-stage opportunity identification Driven by technology and market-oriented resources Opportunities identified through workshops, other connections and activities : commercial, scientists and external experts are involved White papers : opportunity analysis done by a pair: one person with a technical background and one with a marketing focus Conferences / networking with academics, scientists, government agencies, potential customers gather more information about the opportunity (6-8 months) Build recommendation Go No Go to elaborate a research project Done in collaboration with corporate research resources (inputs, expertise, sponsorship) Reduce transition phase and a good way to find motivated collaborators Stage 1 activities : building knowledge Research projects are launched after early-stage opportunity analysis Perform experiments (build companys technical knowledge) Early-stage assessment : market analysis Corporate research resources formally assigned by the research directors (discussion and mutual decision based in skills requirements, preferences, needs) 4-5 people involved 10-12 persons The research organization saw that they were valued (crisis period) 1 3 years Steering committee formed Definition of expected deliverables (viability of the technology concept, number of samples to make, significant market pull, technology conductive for a feasible manufacturing process NB: strategy growth does not own scientists. Scientists work on 1 to 3 projects at a time. Stage 2 activities: determining feasibility Once stage 1 has achieved metrics recommendation Transition of the project to the new business development team Program manager is named Focus shifted: no longer driven only by science and technology, but dominated by customers and markets. Primary objectives: Test prototypes with customers Refine product concepts based on their feedback Validate all assumption in the marketplace Develop a business model Establish customer pull NB: most of the stage 1 projects transitioned to the stage 2 From 2 5 years Difficulty to balance efficiency / transparency. Conflicts / cultural differences change of the responsibility of the project from research directors to new business development team)

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Progress from science to development and customer interaction change of the mindset Tension is unavoidable : people have to compromise Stage 3 activities; testing practicality Begin the commercialization a new product Test practicality of the opportunity: focus shifted from research to development Customer driven transition: being increasingly dependent on customer input make decisions risky More resources from engineering become involved while some corporate research resources transition out. Complex to manage Evaluating and filtering projects: Cornings seven questions

Questions built around issues such as Is this thing an attractive commercial opportunity? Is it big? Is it connected to a megatrend? Is there a technical fit? Is Corning competent in this area? Is it something that can be protected through intellectual property or specialized manufacturing process? Is the timing right? Questions are tailored to reduce uncertainty questions are becoming more precise among the steps. Still judgments behind the answers. The Corning technology council (CTC) The decision to advance a project from one stage to another done by the CTC Monthly meetings open to a wider audience: keep member of the research organization informed Decision are made in advance of the CTC meeting : discussions done before the meeting Benefits of a structured process Rigor without precision: know what you can know well Standard of value analysis applied to most of the problems it allows rejections of irrelevant ideas Relationship between corporate research, Strategic Growth, and Development Process strategically aligned with the corporate direction: support of the board and the CEO (commitment thanks to education sessions) String belief on early-stage work : championship is strong Adequate visibility within the organization of these growth-oriented activities Helps corporate strategy Help to pace and allocate resources to these programs Organizational benefits Allocate resources to the right problems (avoid wasting precious resources and time) No distraction in regard of the existing business : focus on new opportunities identification Market based approach Need to be marketing-driven and not technology-driven Focus on problems that mattered (to the customers)

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a. Looking forward

Find potential new synergies

Still many issues to resolve, including challenges related to human resources and financial management, as well as measuring and sustaining the success of strategic growth Human resource management Problem : supply of scare resources (scientists): Evaluate the best allocation of companys scientists Supporting the business Working with strategic growth Conducting exploratory research Meeting each quarter to review the entire portfolio of research projects Balance between short-term vs. long-term solutions Need high level of communication Pb: Demand for scientists outstrip the available supply , particularly on earlier stages can generate a bottleneck To address this imbalance: Improve the project selection process Company cannot afford to commit scarce scientific resources with a high probability of success Perception of stopped project for collaborators who spend a lot of time on it: difficult Problem: redirecting resources after a project was closed down Specially for highly specialized skills not easily transferrable collaborators needs to have two plausible uses People are more willing to come in the early stages than in later stages because risks are high and management tension is high Two factors to solve the HR challenges Even if they failed, the company give them new opportunities to be successful (and they are the people who learned the most) Develop risk taking behavior Discontinued projects are put on the shelf and not completely abandoned the work can be reinvigorated when technological advancements, market conditions, or customer demand appear more promising. Financial management Problem: It takes years and years for opportunities to become profitable Need long exercises investments 17 years required for a business to achieve nominal profitability in a new field The more new business moved into the development pipeline, the more money the company will lose until the payback (eventual) Issue : the extent and the duration of the investment (with little or no payback) 10% of the sales dedicated to RD&E activities Concern: new opportunities may require more than these 10% in the next 10 years Measuring and Sustaining success Effective financial management is intricately linked to measure and to sustain the success of Strategic Growth. Difficulty linked to the real uncertainty of the activity One long term metric : Number of divisions formed within the company More difficult to set-up Accomplishment of the desired end results in light of the sizable investments required, competitive pressures, and other complicated factors