Innovation & Strategy Learning Objectives Chapter 12 To gain an overview of the functioning of the international monetary system To understand the nature of foreign exchange operations To appreciate the role of global capital markets To identify and assess corporate financing options, including their impacts on managers and stakeholders To assess changes in corporate control, including the roles of hedge funds and private equity groups To evaluate changes taking place in international accounting

Aims of the lecture To identify the elements of innovation in the organizational context To account for national differences in capacity for innovation and technology development To examine diverse approaches to innovation in terms of corporate strategy and organization To appreciate the potential of co-operative innovation strategies To become familiar with ways in which innovation is fostered and managed within the international company

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.

Figure 12.1: Elements of innovation

Elements of innovation Elements of innovation R&D capabilities, including networks Corporate culture Focus on the consumer needs Patentable inventions – products and processes Cross-functional cooperation Manage- ment of IP rights Incremental improvements in products and processes Elements of innovation R&D capabilities, including networks Corporate culture Focus on the consumer needs Patentable inventions – products and processes Cross-functional cooperation Manage- ment of IP rights Incremental improvements in products and processes

Innovation and competitive advantage Innovation is a core competency and source of competitive advantage. Catalysts of innovation (Porter): New technology New or shifting buyer needs New industry segment Shifting input costs or availability Changes in government regulation

Innovation and economic development Capitalist economic development relies on radical changes which break with the past (Schumpeter’s “Creative destruction” model): New products New methods of production New markets New forms of industrial organization Economic development can be depicted in stages, from low innovation-intensive to high innovation- intensive, but... No two countries present exactly the same pattern.

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

Figure 12.2: Stages of development (change)

Craft industries, few competencies Stage 1 Early development Reliance on natural resources or low-level, labor-intensive, manufactures for export. Craft industries, few competencies Inward investment limited to enclaves of economic activity Stage 2 Investment-based development Increasing 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 FDI Stage 3 Innovation-led growth Growing consumer society. Greater expenditure on education and communication Promotion of FDI in innovation-intensive sectors, facilitating spill-over effects and technology transfer Stage 4 Services-led development Focus 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.

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 countries Some of the necessary conditions to boost innovation: Public spending on education, skills, infrastructure Cultural values associated with entrepreneurial activity Strengths in science and technology

Figure 12.3: The national innovation system

National innovation system Education & Training systems R&D intensity Investment in advanced telecmmuni- cations infrastructure Inter-firm relationships Industrial structure Government policies and the funding of research Interactions between firms, univer- sities and research centers Science and techno-logy strengths and weaknesses Cultural factors like attitudes to learning and entreprise.

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, www.oecd.org

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, www.innovation.gov.uk

Technology transfer Technology 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.

Table 12.1: Channels of technology transfer

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.

Figure 12.6: Innovation in different types of international business

Inter-firm cooperation Technology licenses In-house R&D Inter-firm cooperation Technology licenses Acquisition of specialist firms Continuous improvement Cross-functional teams Patentable inventions/software copyright Product or service improvements Cost-saving business process innovations Incremental innovations in supply chains Born-global in knowledge-based sector Research-based MNE MNE in consumer products mass markets Innovative outputs Sources of Innovation Business type

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, www.innovation.gov.uk

Co-operative innovation strategies Some reasons for growth of co-operative strategies: Need to reduce costs generally, and curb rising R&D costs in particular Shorter product life cycles, and shorter technology life cycles Increasing complexity of some products Increasing integration of formerly independent sectors Collaboration can be to seek complementarities, or to pool skills to speed up the research process

Figure 12.7: Potential benefits and risks of co-operative R&D agreements

Figure 12.8: Equity and non-equity R&D agreements

Managing innovation New ideas from within: what can the management do? Foster a culture of openness Be willing to change Hire creative people What about external sources of new ideas? Co-operative R&D agreements Customer-focused innovation Innovation from any participant in the supply chain

Figure 12.9: Internal and external aspects of managing innovation

In-house IP management R&D strategy Managing innovation In-house IP management R&D strategy Corporate culture Parent-subsidiary interactions HR policies IP licensing Collaborative R&D agreements Networking Interaction within supply chains Joint ventures External aspects Internal aspects

Managing IP rights Intellectual 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.

Figure 12.10: The main intellectual property rights

Managing IP (intellectual property) New product or technological process Brand or logo Media content, software Appearance, logos, packaging, graphics Patent Trademark Copyright Design right License to use Need arises automatically Need to register Grant permission apply License to produce

Conclusions Innovation 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.

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.

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.

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.