CH. 6 TECHNOLOGY-BASED INDUSTRIES AND THE MANAGEMENT OF INNOVATION ALLEN HICKS ANTHONY BROWN CHRISTIAN GRANDORF BRADEN WALKER

LEARNING OBJECTIVES Analyze how technology affects industry structure and competition Identify the factors that determine the returns to innovation and evaluate the potential for an innovation to establish competitive advantage

EBOOK READERS The initial introduction of eBook readers The competition heats up The arrival of the iPad The impact of e-readers on related industries

LEARNING OBJECTIVES Formulate strategies for exploiting innovation and managing technology, focusing in particular on: The relative advantages of being a leader or a follower in innovation Identifying and evaluating strategic options for exploiting innovation How to win standard battles How to manage risk Design the organizational conditions needed to implement such strategies successfully

COMPETITIVE ADVANTAGE The principal link between technology and competitive advantage is innovation. It is the quest for competitive advantage that leads firms to invest in innovation. Innovation is why new industries emerge Innovation is why some firms dominate their industries.

INNOVATION Definition: is the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge. Innovation is the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production. An innovation may be the result of a single invention.

INNOVATION Not all inventions progress into innovation.

THE PROFITABILITY OF INNOVATION

The profitability of an innovation to the inventor depends on the value created by the innovation and the share of that value that the innovator is able to appropriate. The regime of appropriability is used to describe the conditions that influence the distribution of returns to innovation. Strong regime = large share of value for innovator Weak regime = large share of value for other parties

FOUR FACTORS Property rights Tacitness and Complexity of the Technology Lead-time Complementary resources

PROPERTY RIGHTS IN INNOVATION Intellectual property: Patents Copyrights Trademarks Trade secrets The effectiveness of intellectual property law depends on the type of innovation being protected.

TACITNESS AND COMPLEXITY OF THE TECHNOLOGY The extent to which an innovation can be imitated by a competitor depends on the ease of which the technology can be comprehended and replicated. We need to know the extent of which the technical knowledge is codifiable. Ex: Coca-Cola’s recipe is codifiable and in the absence of trade secret protection can be easily copied.

LEAD-TIME Property rights and Tacitness and complexity don’t last forever, but they give the innovator one thing, time. Lead-time is the time it will take for competitors to catch up.

COMPLEMENTARY RESOURCES The resources and capabilities needed to finance, produce, and market the innovation.

INNOVATION Advantage: Relieves the company of the need to develop the full range of complementary resources and capabilities needed for commercialization and allow the innovation to be commercialized quickly Disadvantage: the success of the innovation in the market is totally dependent on the commitment and effectiveness of the licensees

RESOURCES AND CAPABILITIES Start-up firms posses few of the complementary resources and capabilities needed to commercialize their innovations Large established corporations, can draw on their wealth of resources and capabilities

ADVANTAGES OF EARLY MOVERS The extent to which innovation can be protected by property rights or lead- time advantages The importance of complementary resources. The potential to establish a standard

MANAGING RISKS Technological uncertainty Market uncertainty Cooperating with lead users Limiting risk exposure Flexibility

COMPETING FOR STANDARDS A standard is a format, an interface, or a system that allows interoperability. It is standards that allow us to search the Internet, ensure that our lightbulbs fit our lamps, and the speed limit are all examples. Standards can be public or private.

TYPES OF STANDARDS Public (or open) standards are those that are available to all either free or for a nominal charge. Set by public bodies and industry associations. Private (or proprietary) standards are those where the technologies and designs are owned by companies or individuals. Microsoft Windows

TYPES OF STANDARDS (CONT.) Mandatory standards are set by government and have the force of law behind them. De Facto standards emerge through voluntary adoption by producers and users

NETWORK EXTERNALITIES A network externality exists whenever the value of a product to an individual customer depends on the number of other users of that product. The classic example is the telephone.

NETWORK EXTERNALITIES Do not require everyone to use the same product or even use the same technology, but rather that the different products are compatible with one another through some form of a common interface.

WHERE DO THEY COME FROM? Economizing on switching costs. Microsoft Office is widely used across many levels. Products where users are linked to a network. Video games, software, telephone, etc. Availability of complementary products and services Few leading software firms are writing Mac-based applications.

WHAT DO THEY DO? Network externalities are intended to create positive feedback. Tipping is when a system has reached a certain threshold that cumulative force becomes unstoppable

WINNING STANDARDS WARS Before you go to war, assemble allies. Support of consumers, suppliers, even competitors. Pre-empt the market Enter early, fast cycle product development, key customers, adopt penetration pricing. Manage expectations Convince customer, suppliers, and the producers of complementary goods that you will emerge as the victor.

KEY RESOURCES Control over installed base of customers Owning intellectual property rights The ability to innovate First mover advantage Strength in complements Reputation and brand name

CREATING THE CONDITIONS FOR INNOVATION Innovation requires resources People Facilities Information Time Managing creativity requires a unique environment j8

FROM INVENTION TO INNOVATION Balancing creativity and commercial direction Creativity must be directed and harnessed There is often friction between innovators and those responsible for managing the company

ORGANIZATIONAL APPROACHES Cross functional development teams Product champions Buying innovation Open innovation Corporate incubators

SUMMARY