1. Assessing and Managing Capabilities Disruptive Innovation SMaL Case Study Paxil Case Study Forced Splits (Innovation Workout)

2. From Chapter 5 capabilities (assets + competences) constrain the space in which we can effectively compete radical, progressive, creative, and intermediating industry innovation trajectories acquiring capabilities can expand your opportunities for innovation, but are limited by the money and people at your disposal successful innovation requires the collaboration of Idea generators, boundary spanners, evangelists, coaches and project managers two sources of innovation: functional and circumstantial innovations are often are procured from a combination of competitors’ laboratories, universities, and government laboratories.

3. Sources of Innovations What kinds of sources exist? Where do you find innovations? What technological and competence based forces will influence an innovation

4. Innovation = Invention + Commercialization

5. Benefits of Innovation Functional  (functional relationship through which firms and individuals derive benefits from innovation) Internal; Competitors & related industries; University, government & private labs Circumstantial  (under what circumstances will they benefit) Planned firm activities Serendipity (fortunate accidents) Change (creative destruction)

6. Sources of Innovation Science & Technology

7. Science & Technology What are they? How are they related?

8. For Example: Consider the Electric Lighting Innovation

9. “Systems” provide Functional Benefits The lightbulb “system” Thomas Edison, Humphrey Davy, and Joseph Swan all helped invent a practical and longer-lasting electric lightbulb in the 19 th century This was Science

10. Edison’s System “all parts of the system must be constructed with reference to all other parts,, since in one sense, all the s form one machine part 1878 - Thomas Alva Edison, referring to an electrical grid in his article on the phonograph in the North American Review Edison and his team of engineers in Menlo Park, N.J., spent years building the entire electric system, from light sockets and safety fuses to generating facilities and the wiring network. This was Technology Edison beat all his predecessors at one crucial task: managing the whole process of innovation, from light-bulb moment to final product

11. Systems Warfare Edison’s Strategy Develop the working DC system  Protect it with patents  When George Westinghouse introduced a superior AC system He attacked with a smear campaign Westinghouse / Tesla won with superior technology  133 Hz (Westinghouse) to 60 Hz (Tesla) at 240 VAC  Edison eventually switched to AC at 110VAC / 60Hz

12. Microsoft’s O/S Innovation The most profitable innovation in history Linking & Leveraging Strategy  Get the business  Create the standard  Leverage the business  Crush the competition An Early Competitor

13. Case Study in MS-DOS MS purchased Seattle Computer Products' QDOS for Quick and Dirty Operating System (written by Tim Paterson) Written as a version of CP/M, with 4000 lines of assembler. IBM tested Gates’ cleaned up MSDOS 1.0, finding well over 300 bugs, and decided to rewrite the program  This is why PC-DOS is copyrighted by both IBM and Microsoft. Gates locked up the IBM deal with the help of his father’s law firm est. value of services $250,000

14. Case Study in DOS You could order one of three operating systems for your original IBM PC: $495 Digital Research's CP/M-86 for $495 several hundred dollars UCSD p-System for several hundred dollars this was a souped-up BASIC operating systems like that used by the Commodore 64 but portable like Java $39.95 DOS 1.0 for $39.95

15. Case Study in DOS Microsoft’s OEM brochure touted future enhancements to DOS: Unix-compatible pipes, process forks, and multitasking, as well as graphics and cursor positioning, kanji support, multi-user and hard disk support, and networking None of these was ever added This was neither Science nor Technology (Innovation = Invention + Commercialization)

16. Capabilities

17. What to do with your Opportunity Register Assuming you’ve been religiously adding to your Opportunity Register  You should by this time have a lot of different ideas for new and marketable products Then the question becomes:  Which projects should you take on; emphasize; continue? The answer depends on your competences

18. Two Realities Competitors simply cannot allow you to go unchallenged  and must try to erode your position  Understanding where to create a competitive position that cannot easily overcome is thus essential You are not only competing with other organizations in customer markets  You are also competing with them in the capital markets for critical funds that you need to build future competitive position

19. Competences You best (perhaps your only) opportunities to compete are  Where Product Market Needs  Cross with Competences

20. Creative Tension Innovation = Invention + Commercialization  Can be Technological, or Market related Capabilities = assets + competences  What you can do

21. Dell’s War on Inventory A Case Study in Technology Acceleration and Organizational Scaling

22. Dell’s War on Inventory In less than 20 years, Michael Dell moved from cluttered dorm-room operations to a $25 billion a year company, outperforming giants such as IBM, Hewlett- Packard and Compaq in the process.

23. Hyper-efficient supply chain Dell is relentless in negotiating the best prices from suppliers, and driving those savings through the supply- chain. To do that, Dell replaces inventory with information.

24. Materials costs account for about 74% of Dell’s revenues about $21 billion in 2000  Lowering materials costs by 0.1% can have a bigger impact than improving manufacturing productivity by 10%. Where other competitors carry one to three months of inventory,  Dell carries 5 days. Since materials costs in the computer industry fall by around 1% per weeks,  carrying 5 days versus one month of inventory is around 6% of materials cost.

25. Safety stocks are very expensive But they are very difficult to reduce.  Reduction requires complete and accurate information and forecasts about production and procurement. Dell has standardized worldwide on i2 Technologies ’ software,  with hourly updates of all information from customers to suppliers. five hours ’ worth of inventory on hand, including work in progress.  This increases cycle time at Dell’s factories and reduces warehouse space. The warehouse space is replaced with more manufacturing lines in a virtuous cycle  Dell has traded inventory for information.

26. Customers Dell’s online customer procurement Website puts Dell in contact with more than 10,000 customers daily  – giving them more than 10,000 opportunities to forecast demand and balance supply.  For example, Dell can alter supply constraints through promotions and substitutions. If inventory is low on Sony 17-inch monitors, Dell can offer a 19-inch model at the 17-inch price. This moves a lot of demand in real-time. Competitors selling through retail channels cannot do this!

27. The bottom-line Dell writes off less than 0.1% of total material costs in excess and obsolete inventory Their competitors write off 2% to 3%.

28. Tracking the Dynamics of the Core Competences

29. consequences of industrial change on the capabilities demanded of a competitive firm ‘Coreness’ and imitability of the firm’s capabilities determine the profitability of innovations dependent on those capabilities.

30. Why Incumbents Perform An innovation is incremental (regular) if it conserves the manufacturers/s existing technological and market capabilities; niche if it conserves technological capabilities but obsoletes market capabilities; radical (revolutionary) if it obsoletes technological capabilities, but enhances market capabilities; and architectural if both technological and market capabilities become obsolete. The point to note is that market knowledge is just as important as technological knowledge.

31. Difficulties Competing Innovations are invariably built up of components, and thus building them requires two kinds of technical knowledge  technology underlying individual components, and  architectural knowledge about how to link components together. If the innovation enhances both component and architectural knowledge, it is incremental; if it destroys both, it is radical; if only architectural is destroyed, then the innovation is architectural; where only component knowledge is destroyed (for one or more components) the innovation is modular.

32. Trajectories Industries evolve along four distinct trajectories radical, progressive, creative, and intermediating. Failure resultsfrom obsolescence of the firm’s products or services arising from two directions: (1) a threat to the industry's core competences; and (2) a threat to the industry's core assets—the resources, knowledge, and brand capital that have historically made differentiated the firm.

33. Trajectories in Practice

34. Markets and Competences Competences are knowledge assets By its very definition, you are very likely to know when you stumble across an innovation – the fact that what you have found is new to you, your customer or your employer makes it an 'innovation.'  But because of its newness, you are just as unlikely to know its value. Innovations, to be successful, must align with the competences and assets of the firm

35. Understanding Innovation Types of Knowledge Four kinds of knowledge underpin an innovation; two are  Technological  Market  Component  Architectural Incumbents Fail when they Fail to “Get” one or the other type of Knowledge

36. Science generates commercial technologies in three phases The first 'fluid' phase marks the prototyping of laboratory technologies The second 'transitional' phase begins standardizing components, and defining consumer-producer relationships

37. Successful innovation demands the firm be sensitive to ‘Windows of Opportunity’ The early part of the S-curve is a period of idiosyncratic development, before standards or deep understanding of the technology exist  Many competing theories and trajectories exist, promoted by strong and volatile egos, making any investments highly risky. As understanding evolves, standards are established, and technology advances incrementally,  generally through sober research, investment and hard work.

38. Physical limits of the S-curve The physical limits of the S-curve are constrained by the limits of scientific knowledge; often technology alone cannot push it back.

39. Understanding Innovation Life cycle  Fluid phase Mainly lab based or custom applications of technology  Transitional phase Standardization of components, and consumer-producer interaction lead to dominant design  Specific phase Products built around the dominant design proliferate; innovation is incremental

40. Cisco’s Innovation Strategy

41. Cisco Cisco Systems has a reputation for expanding its capabilities through acquisitions. Shortly after going public in 1990 went on a buying spree, acquiring 73 firms from 1993 to 2000. By late March 2000, at the height of the dot-com boom,  Cisco was the most valuable company in the world, with a market capitalization of more than $US 500 billion.

42. Early years This had not always been the case. During its first decade after it was founded in 1984 the company acquired no businesses at all, sticking to selling routers and only routers. Cisco went public in 1990.  three years later, a faster and cheaper piece of hardware – the switch – threatened its business. Cisco engineers scrambled to produce their own switch, but realized that they could not acquire the capabilities to produce one anytime soon.

43. Buying the ‘Switch’ In 1993 of Crescendo Communications for $95 million which got them into switches – fast.  Cisco's engineers grumbled that they could have produced their own switch in time. Most of Crescendo's executives stayed with the company, and switches became a core Cisco business. The switching unit today generates nearly $10 billion in annual revenues.

44. Acquisitions Since then, using acquisitions  where they are unable to develop internal capabilities quickly enough to be competitive, Acquisitions and partnering with other companies have enabled Cisco to retain its market dominance. Cisco has made inroads into many network equipment markets outside of routing, including Ethernet switching, remote access, branch office routers, ATM networking, security, IP telephony and others.

45. Acquisitions What began as a one-off response in an emergency soon evolved into a long-term strategy, an essential part of the Cisco culture. While most big tech companies rely heavily on R&D to create products and business lines, Cisco, after Crescendo, decided to strategically use acquisition to expand its capabilities:  In 1995, Cisco acquired its way into firewalls and cache engines.  In 1998, Internet telephony.  In 2003, with the acquisition of Linksys, a home-networking company,  In 2006 by acquiring Scientific Atlanta, a set-top-box manufacturer.

46. People The vast majority of Cisco’s acquisitions have been targeted technology buys: small start-ups with 50 or less engineers whose products link back to Cisco’s core competencies, routers and Cisco has come to realize that the acquisition of technology really isn't just about technology.

47. Cisco’s People "The people are the most strategic asset.“ Ned Hooper, vice president of business development, whose former company LightSpeed was acquired by Cisco in 1998. If, after the acquisition, Cisco loses the technologists and product managers who created, say, the Linksys router,  then it has lost the second and third generations of the product that existed only in those employees' heads. That, is where the billion-dollar markets lie. And that is where Cisco's acquisitions are aimed. "We need the expertise,"

48. Five sorts of People (Manpower Assets) Are needed for Innovation Idea Generators Can sift through large quantities of technological and market data to identify ‘innovations’ Gatekeepers & Boundary Spanners Conduits for knowledge from other firms and labs Champions (Entrepreneurs, Evangelists) Sell the innovation to the firm Sponsors (Coach, Mentor) Senior level manager who provides behind the scenes support, access to resources, and protection from political foes Project Managers Planners with discipline; one-stop decision making shop

49. Case Study in Disruptive Innovation: SMal Camera

50. SMaL’s Challenge in 2003  SMaL has experienced initial success by targeting a market where competition was sparse.  But now competitors like Casio are arising. What is SMaL’s main competitive challenge circa 2003  SMaL is suffering from ‘disruptive innovation’  Sometimes the best strategy can’t save you from progress and new technology

51. The Challenge

52. Innovation on the Demand Side It is important to get the differentiation large enough to make the investment in the technology worthwhile, yet small enough so it doesn’t take six years to develop a market  Charles Sodini, Chairman of SMaL Q: How do you develop successful new technology or innovations?

53. Forced Market Reconfiguration: Digital Cameras

55. Three potential market segments Digital Still Cameras Security-surveillance Automotive (cruise control, etc.)  Currently 10%-15% of US cars have this technology How do you “Sell” the product?  Hardware (CCD, CMOS, X3)?  Software (applications)?

56. Autobrite® How you manipulate demand with Software Images on the left, the inability of conventional cameras to adapt to varying lighting conditions creates a significant safety risk. Images on the right demonstrate how accurately SMaL's ACM100 with proprietary Autobrite technology capture what the eye sees.

57. Camera Imaging Technologies CCD (Sony, Kodak; industry standard) CMOS (Kodak, Canon, SMaL; used in phones, Canon in some EOS) X3 (Foveon; used in Sigma SD10)Foveon

58. Focus Having a screen between you and the consumer at this size company is important (you don’t want a large company at this stage) Manufacturing is a high fixed cost, low margin game Product definition is the key technological component that allows us to capture value  Sodini

59. Six Strategies for SMaL S#1: Move on up S#2: Focus on Security and Surveillance S#3: Focus on Automotive S#4: Focus on Phone Cameras S#5: Search for new markets that fit SMaL technology’s strengths (Making a left turn) S#X: Mix and match any two or three of the above five

60. Forced Splits Innovation Workout

61. Case Study: Paxil