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Technology-based Industries & the Management of Innovation Competitive advantage in technology-intensive Industries –Appropriating the returns to innovation.

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Presentation on theme: "Technology-based Industries & the Management of Innovation Competitive advantage in technology-intensive Industries –Appropriating the returns to innovation."— Presentation transcript:

1 Technology-based Industries & the Management of Innovation 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 OUTLIN E

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

3 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

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

5 The Profitability of Innovation Legal protection Complementary resources Imitability of the technology Lead time Profits from Innovation Value of the innovation Innovators ability to appropriate the value of the innovation

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.

7 Complementary Resources Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized. Manufacturing Distribution Service Complementary technologies Other Marketing Finance Core technological know-how

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

9 U.S. Managers Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation Processes Products Patents to prevent duplication3.524.33 Patents to secure royalty income3.313.75 Secrecy4.313.57 Lead time5.115.41 Moving quickly down the learning5.025.09 curve Sales or service efforts4.555.59 1 = not at all effective7 = very effective Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.

10 Risk & Return Competing Resources Examples Licensing Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization Small risk, but limited returns also (unless patent position very strong 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 Few Allows outside resources & capabilities To be accessed Permits pooling of the resources/capabilities of more than one firm Substantial resource requirements Konica licensing its digital camera to HP Pixars movies (e.g. Toy Story) marketed & distributed by Disney. Apple and Sharp build the Newton PDA Microsoft and NBC formed MSNBC TIs development of Digital Signal Processing Chips Alternative Strategies for Exploiting Innovation

11 The Comparative Success of Leaders and Followers PRODUCTINNOVATORFOLLOWERWINNER Jet AirlinersDe Havilland (Comet)Boeing (707)Follower Float glassPilkingtonCorningLeader X-Ray ScannerEMIGeneral ElectricFollower Office P.C.XeroxIBMFollower VCRsAmpex/SonyMatsushitaFollower Diet ColaR.C. ColaCoca ColaFollower Instant CamerasPolaroidKodakLeader Pocket CalculatorBowmarTexas InstrumentsFollower Microwave OvenRaytheonSamsungFollower Plain Paper CopiersXeroxCanonNot clear Fiber Optic CableCorningmany companiesLeader Video Games PlayersAtariNintendo/Sega/SonyFollowers Disposable DiapersProctor & GambleKimberly-ClarkLeader Web browserNetscapeMicrosoftFollower PDAPsion, ApplePalmFollower MP3 music playersDiamond MultimediaSony (&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 Alternative Strategies for Exploiting Innovation Risk & Return Competing Resources Examples Licensing Outsourcing certain functions Strategic Alliance Joint Venture Internal Commercialization 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 Few Permits accessing of outside resources and capabilities Permits pooling of the resources and capabilities of more than one firm Substantial requirements in terms of finance, production capability, marketing capability, distribution, etc. Konica licensing its digital camera to Hewlett Packard Pixars 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

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.

15 Uncertainty & Risk Management in Tech-based Industries Sources of uncertainty Technological uncertainty Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G Customer acceptance and adoption rates of innovations notoriously difficult to predict, e.g. PC, Xerox copier, Walkman Market uncertainty Strategies for managing risk Cooperating with lead users early identification of customer requirements –assistance in new product development Flexibilility 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 dont buy) outsource alliances to access other firms resources & capabilities keep debt low

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

17 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 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

18 Companies that Own Technical Standards COMPANYPRODUCT CATEGORYSTANDARD MicrosoftPC operating systemsWindows IntelPC microprocessors*86 series MatsushitaVideocassette recordersVHS system IomegaHigh capacity PC disk drivesZip drives IntuitSoftware for on-line financial transactionsQuicken AMRComputerized airline reservations systemSabre Rockwell/ 3Com56K modemsV90 QualcommDigital wireless telecom signalsCDMA Adobe SystemsCommon file format for creating and viewing documentsAcrobat

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

20 The Conditions for Creativity: Operating and Innovating Organizations

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 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.

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

23 EMI SCANNER: THE AFTERMATH EMI established 3 rd 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 1978-1980 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 evolutionchanges in industry structure, competition & key success factors Effective strategy implementation the need for structure

25 Issues Arising from Video Games Case Hardware-software complementarities: --Wheres 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 --1 st mover advantage (disadvantage?) --pre-emption --managing expectations --partnering Holding on to leadership --backward compatibility


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