Technology-based Industries &

the Management of Innovation

OUTLIN
E
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
 The Development of Technology: From
Knowledge Generation to Diffusion

IMITATION

Supply side

Basic
Invention Innovation Diffusion
Knowledge

Demand side

ADOPTION
 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 1960s 1981 1987 1988
controllers
MP3 players Early 1990s 1994 1997 1999
Appropriation of Value:- How are the
Benefits from Innovation Distributed?

Customers

Suppliers

Innovator

Imitators and
other
followers
 The Profitability of Innovation

Value of the Legal protection

Profits innovation
Complementary
from resources
Innovation Innovators
ability to Imitability of the
appropriate the technology
value of the Lead time
innovation
 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
employees can restrict the transfer of technology and know how.
Complementary Resources

Manufacturing Distribution

Finance Service
Core
technological
know-how
Complementary
Marketing technologies

Other Other

Bargaining power of owners of complementary

resources depends upon whether complementary
resources are generic or specialized.
 Lead Time

If rivals can imitatetime lag is the major

advantage of the innovator.
But maintaining lead-time advantage requires
continuous innovation
Lead time is reinforced by learning effects
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.
 Alternative Strategies for Exploiting Innovation

Outsourcing Strategic Joint Internal

Licensing certain Alliance Venture Commercialization
functions

Limits Benefits of Shares Biggest risks &

Small risk, but
investment, but flexibility; investment & benefits.
Risk & limited returns
dependence on risks of risk. Risk of Allows complete
Return also (unless
suppliers & informal partner control
patent position
very strong partners structure conflict &
culture clash

Few Allows outside Permits pooling of the

resources & resources/capabilities of Substantial
Competing
capabilities more than one firm resource
Resources
To be accessed requirements

Konica Pixars movies (e.g. Apple and Microsoft TIs

Examples licensing its Toy Story) Sharp build and NBC development of
digital marketed & the formed Digital Signal
camera to distributed by Newton MSNBC Processing
HP Disney. PDA Chips
 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//Sony Followers
Disposable Diapers Proctor & Gamble Kimberly-Clark Leader
Web browser Netscape Microsoft Follower
PDA Psion, Apple Palm Follower
MP3 music players Diamond Multimedia Apple, Sony (&others) Followers
 Leaders vs. Followers in Innovation

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/Sony Followers
Disposable Diapers Proctor & Gamble Kimberly-Clark Leader
Web browser Netscape Microsoft Follower
Cholesterol lowering Raisio Unilever Follower
margarine
MP3 players Diamond Multimedia Apple Follower
 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
Firm possessing complementary resources has the
luxury of waiting
Is owning/ controlling industry standard critical to competitive
advantage?
if so, advantage in being a leader.
 Uncertainty & Risk Management in Tech-based Industries

Selection process for standards and

Technological dominant designs emerge is complex
uncertainty and difficult to predict, e.g. future of 3G
Sources of
uncertainty Market Customer acceptance and adoption rates
uncertainty 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 Limiting risk exposure

managing risk
Flexibility
keep options open
use speed of response to adapt
quickly to new information
learn from mistakes
avoid major capital commitments
(e.g. lease dont buy)
outsource
alliances to access other firms
resources & capabilities
keep debt low
 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
 Sources of Network Externalities

User linkages, e.g.

Telephone systemsonly value of telephone is connection to
other users
Video game consolessame platform allows users to
exchange games and play interactively
On-line auctionvalue of auction depends on number of
buyers and sellers participating
Also, social identificationlistening 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 or Honda Accord than a Kia, Proton, or Lamborghini
Economizing on switching costs, e.g.
E.g. office software (Microsoft Office vs. Lotus SmartSuite)
 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
 Competing for Standards:
Value Appropriation vs. Market Acceptance

Maximize VHS Betamax Maximize

market value
acceptance appropriation

LOOSE TIGHT
IBM-PC Apple
Mac
 Fighting Standards Wars
1. Determine the potential for standards emergence
analyze network externalities
2. Building a bandwagonenlist partners (requires licensing
& sharing returns from the technology)
3. Pre-empting the marketBuild user base quickly: May
require sharing benefits with consumers (penetration
pricing)
4. Manage expectations (the Microsoft advantage)

What if youre a loser? (a) ensure compatibility (b) go for niche

How can the winner sustaining the standard?

--Dont fall behind on technology
--Ensure backward compatibility
--Meet threat of disruptive technology by offering
customers a migration path
--Reinforce standard with other resourcese.g. brand
 The Conditions for Creativity:
Operating and Innovating Organizations
Operating Organization
Structure Bureaucratic. Specialization and
division of labor. Hierarchical
control
Processes Operating units controlled and
coordinated by top management
which undertakes strategic
planning, capital allocation and
operational planning.
Reward Financial compensation, promotion
up the hierarchy, power and status
Systems symbols.
People Recruitment and selection based
upon the needs of the organization
structure for specific skills:
functional and staff specialists,
general managers, and operatives.
Innovating Organization
Flat organization without
hierarchical control. Task-oriented
project teams.
Processes directed toward
generation, selection, funding and
development of ideas. Strategic
planning flexible, financial and
operating controls loose.
Autonomy, recognition, equity
participation in new ventures
Key need is for idea generators
which combine required technical
knowledge with creative
personality traits. Managers must
act as sponsors and orchestrators.
 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 Xeroxs 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.