1 Innovation & Strategy Learning Objectives Chapter 12 To gain an overview of the functioning of the international monetary systemTo understand the nature of foreign exchange operationsTo appreciate the role of global capital marketsTo identify and assess corporate financing options, including their impacts on managers and stakeholdersTo assess changes in corporate control, including the roles of hedge funds and private equity groupsTo evaluate changes taking place in international accounting
2 Aims of the lectureTo identify the elements of innovation in the organizational contextTo account for national differences in capacity for innovation and technology developmentTo examine diverse approaches to innovation in terms of corporate strategy and organizationTo appreciate the potential of co-operative innovation strategiesTo become familiar with ways in which innovation is fostered and managed within the international company
3 Elements of innovation Innovation covers all activities which yield new or improved products or ways of doing things.Radical innovation is driven by technology – the systematic application of scientific knowledge to practical purposes.New products or processes = inventions, for which patent application can be made.Incremental innovation is associated with continuous improvement.Innovation is now seen as central to corporate culture, not just R&D departments.
5 Elements of innovation Elements of innovation R&D capabilities, including networksCorporate cultureFocus on the consumer needsPatentable inventions – products and processesCross-functional cooperationManage- ment of IP rightsIncremental improvements in products and processesElements of innovationR&D capabilities, including networksCorporate cultureFocus on the consumer needsPatentable inventions – products and processesCross-functional cooperationManage- ment of IP rightsIncremental improvements in products and processes
6 Innovation and competitive advantage Innovation is a core competency and source of competitive advantage.Catalysts of innovation (Porter):New technologyNew or shifting buyer needsNew industry segmentShifting input costs or availabilityChanges in government regulation
7 Innovation and economic development Capitalist economic development relies on radical changes which break with the past (Schumpeter’s “Creative destruction” model):New productsNew methods of productionNew marketsNew forms of industrial organizationEconomic development can be depicted in stages, from low innovation-intensive to high innovation- intensive, but...No two countries present exactly the same pattern.
8 Creative Destruction: from Nataraja Shiva to Joseph Schumpeter In Hinduism, the god Shiva is simultaneously the destroyer and the creator, portrayed as Shiva Nataraja (Lord of the Dance), which is proposed as the source of the Western notion of "creative destruction".In The Communist Manifesto, Karl Marx and Friedrich Engels described the tendency of capitalism to constantly reinvent itself.In western capitalism, "creative destruction" is most associated with Schumpeter, particularly in his 1942 book Capitalism, Socialism and Democracy. The most likely source of this can be found in the concept of Business Cycles, as in the long-wave cycle of Nikolai Kondratieff that, Schum- peter believed, were caused by innovations
10 Craft industries, few competencies Stage 1Early developmentReliance on natural resources or low-level, labor-intensive, manufactures for export.Craft industries, few competenciesInward investment limited to enclaves of economic activityStage 2Investment-based developmentIncreasing expenditure on transport, infra-structure, utilities, communications, education.Growth in capital-intensive sectors, e.g., chemicals and moderately knowledge-intensive consumer goods (e.g., electricals).Increase in FDIStage 3Innovation-ledgrowthGrowing consumer society.Greater expenditure on education and communicationPromotion of FDI in innovation-intensive sectors, facilitating spill-over effects and technology transferStage 4Services-led developmentFocus on direct services of goods with high level of service content.More cross-border, inter-firm linkages, aiming for global competitive roles for domestic firms.Increase in outward MNE activity.Aim to attract high-value FDI, e.g., R&D.
11 National innovation capacity Why have some countries forged ahead in technological innovation, and others have lagged behind?Huge gap in innovation capacity between the developed and developing countriesSome of the necessary conditions to boost innovation:Public spending on education, skills, infrastructureCultural values associated with entrepreneurial activityStrengths in science and technology
13 National innovation system Education & Training systemsR&D intensityInvestment in advanced telecmmuni- cations infrastructureInter-firm relationshipsIndustrial structureGovernment policies and the funding of researchInteractions between firms, univer- sities and research centersScience and techno-logy strengths and weaknessesCultural factors like attitudes to learning and entreprise.
14 Figure 12.4: Gross domestic expenditure on R&D as a percentage of GDP in selected countries Note: For 1975, Germany refers to Western Germany (the Federal Republic of Germany)Source: OECD (2007) Main Science and Technology Indicators,
15 Figure 12.5: The top seven countries in R&D: Breakdown in sector, 2006 Source: UK Department of Trade and Industry (2007) The R&D Scoreboard 2006,
16 Technology transferTechnology gap between developed and developing countries can be partially bridged by technology transfer.Technology consists of both...Codified knowledge (tangible elements, such as products, designs)Tacit knowledge (intangible elements, such as skills and know-how)The greater the extent of tacit knowledge, the more difficult it is for host developing countries to benefit.
18 Innovation in the organization Why are some firms and people innovative and others are not?Strategies vary according to the type of business:Born-global firm in knowledge-based sector – new products and global ambitions from the outset.Research-intensive MNE – usually with strong R&D department, and record of innovative products.MNE in consumer mass markets – broadly based strategy and incremental innovation, adapting to new markets.
19 Figure 12.6: Innovation in different types of international business
20 Inter-firm cooperation Technology licenses In-house R&DInter-firm cooperationTechnology licensesAcquisition of specialist firmsContinuous improvementCross-functional teamsPatentable inventions/software copyrightProduct or service improvementsCost-saving business process innovationsIncremental innovations in supply chainsBorn-global in knowledge-based sectorResearch-based MNEMNE in consumer products mass marketsInnovative outputsSources of InnovationBusiness type
21 Table 12.2: The world’s 20 largest companies by R&D spending, 2006 Source: UK Department of Trade and Industry (2007) The R&D Scoreboard 2006,
22 Co-operative innovation strategies Some reasons for growth of co-operative strategies:Need to reduce costs generally, and curb rising R&D costs in particularShorter product life cycles, and shorter technology life cyclesIncreasing complexity of some productsIncreasing integration of formerly independent sectorsCollaboration can be to seek complementarities, or to pool skills to speed up the research process
23 Figure 12.7: Potential benefits and risks of co-operative R&D agreements
24 Figure 12.8: Equity and non-equity R&D agreements
25 Managing innovation New ideas from within: what can the management do? Foster a culture of opennessBe willing to changeHire creative peopleWhat about external sources of new ideas?Co-operative R&D agreementsCustomer-focused innovationInnovation from any participant in the supply chain
26 Figure 12.9: Internal and external aspects of managing innovation
27 In-house IP management R&D strategy Managing innovationIn-house IP managementR&D strategyCorporate cultureParent-subsidiary interactionsHR policiesIP licensingCollaborative R&D agreementsNetworkingInteraction within supply chainsJoint venturesExternal aspectsInternal aspects
28 Managing IP rightsIntellectual property rights (IPR) – a source of ownership advantage.Every product represents a bundle of rights, which must be legally protected and defended, in differing national environments.The rise in outsourcing, licensing and collaboration in R&D leads to the need for greater attentiveness to who owns what IP rights.Where IP rights are managed to deliver maximum value to the firm, innovation is at the heart of corporate strategy.
29 Figure 12.10: The main intellectual property rights
30 Managing IP (intellectual property) New product or technological processBrand or logoMedia content, softwareAppearance, logos, packaging, graphicsPatentTrademarkCopyrightDesign rightLicense to useNeed arises automaticallyNeed to registerGrant permissionapplyLicense to produce
31 ConclusionsInnovation enhances competitive advantage through both radical and incremental improvements in products and processes.Reflecting levels of economic development, national environments differ in innovation capacity.Innovation within the firm is not just about R&D activities, but involves openness to new ideas throughout the organization.Co-operative innovation strategies complement and enhance the firm’s in-house innovation resources.Competitive success depends on managing IPR in both the legal and organizational contexts.
32 Case studies 12.1: Kodak (page 462) What were Kodak’s failings in innovation strategy which led to it being left behind?Kodak realized that it would have to adapt to the new digital age, but failed to anticipate how quickly digital cameras would replace traditional photography. Even when the price of digital cameras started to fall dramatically, Kodak was still manufacturing huge quantities of film. The new CEO who took over in 2005 immediately called for reduction in manufacturing capacity by two-thirds, but by then, the company was in crisis.
33 In what ways does its new strategy stem from its long-standing business strengths, and in what ways is it breaking with its past?Kodak had an active R&D department, which had been researching digital technology for years, acquiring IP rights along the way. It had long supplied X-ray laboratories and film studios. Its expertise in imaging is now a platform for further expansion. Kodak faced an uphill task in lower-end digital cameras, as it rivals were well established. The new CEO guided its evelopment of printing products, spotting a gap in the market. The digital printing business was thus central to its new strategy. The company is seeking further innovation in the sharing and display of images in different media, such as mobile phones and internet. A partnership with Motorola, the mobile phone company, has been formed to foster these developments. The new products, such as easy-to-use home printers, would be considered a break with its past, but Kodak as a brand has long been had a reputation for catering for family and holiday photo-taking. Its sound reputation, especially in the US, would transfer to the printer activities, which are largely targeted at this same market.
34 How would you assess Kodak’s core competencies as sources of competitive advantage in the future? Kodak’s experience and research in imaging can be a source of competitive advantage in the future. Much of these expertise is in specialist applications, and the company would also need to maintain its competitive position in mass-market products such as low-end cameras. The link with Motorola in technology for sharing images over different media can be a source of competitive advantage in the future.