Technology-based Industries the Management of Innovation OUTLINE

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

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

The Development of Technology: Lags Between Knowledge Generation and Commercialization BASIC KNOWLEDGE Xerography late 19 th and FIRST PATENTS PRODUCT LAUNCH IMITATION 1940 1958 1974 1930 1957 1959 1981 1987 1988 early 20 th centuries Jet Engines 17 th-- early 20 th centuries Fuzzy logic 1960’s controllers MP 3 players Early 1990 s 1994 1997 1999

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

The Profitability of Innovation Profits from Innovation Value of the innovation Innovator’s ability to appropriate the value of the innovation • Legal protection • Complementary resources • Imitability of the technology • Lead time

Legal Protection of Intellectual Property • Patents • Copyrights dramatic, • Trademarks symbols goods • Trade Secrets —exclusive rights to a new product, process, substance or design. —exclusive rights to artistic, and musical works. — exclusive rights to words, or other marks to distinguish and services; trademarks are registered with the Patent Office. — 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 Core technological know-how Marketing Other Service Complementary technologies Other Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.

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

U. S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation Processes Patents to prevent duplication 3. 52 Patents to secure royalty income 3. 31 Secrecy 4. 31 Lead time 5. 11 Moving quickly down the learning 5. 02 curve Sales or service efforts 4. 55 1 = not at all effective Products 4. 33 3. 75 3. 57 5. 41 5. 09 5. 59 7 = very effective Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.

Alternative Strategies for Exploiting Innovation Licensing Outsourcing certain functions Strategic Alliance Joint Venture Shares investment & risk. Risk of partner conflict & culture clash Limits investment, but dependence on suppliers & partners Benefits of flexibility; risks of informal structure Few Risk & Return Small risk, but limited returns also (unless patent position very strong Allows outside resources & capabilities To be accessed Permits pooling of the resources/capabilities of more than one firm Konica licensing its digital camera to HP Pixar’s movies (e. g. “Toy Story”) marketed & distributed by Disney. Competing Resources Examples Apple and Sharp build the “Newton” PDA Microsoft and NBC formed MSNBC Internal Commercialization Biggest risks & benefits. Allows complete control Substantial resource requirements TI’s development of Digital Signal Processing Chips

The Comparative Success of Leaders and Followers PRODUCT Jet Airliners Float glass X-Ray Scanner Office P. C. VCRs Diet Cola Instant Cameras Pocket Calculator Microwave Oven Plain Paper Copiers Fiber Optic Cable Video Games Players Disposable Diapers Web browser PDA MP 3 music players INNOVATOR De Havilland (Comet) Pilkington EMI Xerox Ampex/Sony R. C. Cola Polaroid Bowmar Raytheon Xerox Corning Atari Proctor & Gamble Netscape Psion, Apple Diamond Multimedia FOLLOWER Boeing (707) Corning General Electric IBM Matsushita Coca Cola Kodak Texas Instruments Samsung Canon many companies Nintendo//Sony Kimberly-Clark Microsoft Palm Apple, Sony (&others) WINNER Follower Leader Follower Not clear Leader Followers Leader 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 margarine Raisio Unilever Follower MP 3 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 betterestablished 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 Technological uncertainty Sources of uncertainty Market uncertainty Selection process for standards and dominant designs emerge is complex and difficult to predict, e. g. future of 3 G 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 Flexibility —keep options open —use speed of response to adapt quickly to new information —learn from mistakes Limiting risk exposure —avoid major capital commitments (e. g. lease don’t 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 DC 3 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 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 or Honda Accord than a Kia, Proton, or Lamborghini • Economizing on switching costs, e. g. – E. g. office software (Microsoft Office vs. Lotus Smart. Suite)

Companies that Own Technical Standards COMPANY Microsoft Intel Matsushita Iomega Intuit AMR Rockwell/ 3 Com Qualcomm Adobe Systems PRODUCT CATEGORY STANDARD PC operating systems Windows PC microprocessors *86 series Videocassette recorders VHS system High capacity PC disk drives Zip drives Software for on-line financial transactions Quicken Computerized airline reservations system Sabre 56 K modems V 90 Digital wireless telecom signals CDMA Common file format for creating and viewing documents Acrobat

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

Fighting Standards Wars 1. 2. 3. 4. Determine the potential for standards emergence— analyze network externalities Building a bandwagon—enlist partners (requires licensing & sharing returns from the technology) Pre-empting the market—Build user base quickly: May require sharing benefits with consumers (penetration pricing) Manage expectations (the Microsoft advantage) What if you’re a loser? (a) ensure compatibility (b) go for niche How can the winner sustaining the standard? --Don’t fall behind on technology --Ensure backward compatibility --Meet threat of disruptive technology by offering customers a migration path --Reinforce standard with other resources—e. g. brand

The Conditions for Creativity: “Operating” and “Innovating” Organizations

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.