Strategic Management/ Business Policy

Power Point Set #7:Technology Strategy

Innovation Funnel

The Development of Technology: From Knowledge Generation to Diffusion

The Development of Technology: From Knowledge Generation to Diffusion

Basic Knowledge

Invention Innovation Diffusion

IMITATION

ADOPTION

Supply side

Demand side

The Development of Technology: Lags Between Knowledge Generation and Commercialization

The Development of Technology: Lags Between Knowledge Generation and Commercialization

BASIC FIRST PRODUCT IMITATIONKNOWLEDGE PATENTS LAUNCH

Xerography late 19th and 1940 1958 1974

early 20th centuries

Jet Engines 17th-- early 1930 1957 1959

20th centuries

Fuzzy logic 1960’s 1981 1987 1988

controllers

Appropriation of Value:- How are the Benefits from Innovation Distributed?

Appropriation of Value:- How are the Benefits from Innovation Distributed?

Customers

Suppliers

Imitators and other

“followers”

Innovator

The Profitability of InnovationThe Profitability of Innovation

• Legal protection

• Complementary resources

• Imitability of the technology

•Lead time

Profits from

Innovation

Value of the innovation

Innovator’s ability to

appropriate the value of the innovation

Legal Protection of Intellectual PropertyLegal 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 areregistered with the Patent Office.

• Trade Secrets — protection of chemical formulae,

recipes, and industrial processes.

Also, private contracts between firms and between a firm and itsiemployees can restrict the transfer of technology and know how.

Complementary ResourcesComplementary Resources

Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.

Manufacturing Distribution

Service

Complementarytechnologies

OtherOther

Marketing

FinanceCore

technological know-how

U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation

U.S. Managers’ Perceptions of the Effectiveness of Different Mechanisms for Protecting Innovation

Processes Products

Patents to prevent duplication 3.52 4.33

Patents to secure royalty income 3.31 3.75

Secrecy 4.31 3.57Lead time 5.11 5.41

Moving quickly down the learning 5.02 5.09curve

Sales or service efforts 4.55 5.59

1 = not at all effective 7 = very effective

Source: Levin, Klevorick, Nelson & Winter. Brookings Papers on Economic Activity, 1987.

The Technology Transfer Process

Research Disclosure IP Decision

IP Protection

Commercialization Strategy Licensing

$29.5

billion

6,375 patent

applications

13,039

disclosures

4,362 licenses

454 new companies3,764 issued

patents

Source: AUTM

Licensing Survey:

FY 2000

Risk & Return

CompetingResources

Examples

LicensingOutsourcing

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 & capabilitiesTo be accessed

Permits pooling of the resources/capabilities of more than one firm

Substantial resource requirements

Konica licensing its digital camera to HP

Pixar’s movies (e.g. “Toy Story”) marketed & distributed by Disney.

Apple and Sharp build the “Newton” PDA

Microsoft and NBC formed MSNBC

TI’sdevelopment of Digital Signal Processing Chips

Alternative Strategies for Exploiting InnovationAlternative Strategies for Exploiting Innovation

The Comparative Success of Leaders and Followers

The Comparative Success of Leaders and Followers

PRODUCT INNOVATOR FOLLOWER WINNER

Jet Airliners De Havilland (Comet) Boeing (707) Follower

Float glass Pilkington Corning Leader

X-Ray Scanner EMI General Electric Follower

Office P.C. Xerox IBM Follower

VCRs Ampex/Sony Matsushita Follower

Diet Cola R.C. Cola Coca Cola Follower

Instant Cameras Polaroid Kodak Leader

Pocket Calculator Bowmar Texas Instruments Follower

Microwave Oven Raytheon Samsung Follower

Plain Paper Copiers Xerox Canon Not clear

Fiber Optic Cable Corning many companies Leader

Video Games Players Atari Nintendo/Sega/Sony Followers

Disposable Diapers Proctor & Gamble Kimberly-Clark Leader

Web browser Netscape Microsoft Follower

PDA Psion, Apple Palm Follower

MP3 music players Diamond Multimedia Sony (&others) Followers

Uncertainty & Risk Management in Tech-based IndustriesUncertainty & Risk Management in Tech-based Industries

Sources ofuncertainty

Technologicaluncertainty

Selection process for standards and dominant designs emerge is complex and diifficult to predict, e.g. future of 3G

Customer acceptance and adoption ratesof innovations notoriously difficult topredict, e.g. PC, Xerox copier, Walkman

Marketuncertainty

Strategies formanaging risk

Cooperating with lead usersearly 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 don’t buy)—outsource—alliances to access other firms’

resources & capabilities—keep debt low

The Emergence of StandardsThe 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

Sources of Network ExternalitiesSources of Network Externalities

• User linkages, e.g. – Telephone systems—only value of telephone is connection to

other users– Video game consoles—same platform allows users to

exchange games and play interactively– On-line auction—value of auction depends on number of

buyers and sellers participatingAlso, social identification—listening 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 SmartSuitewhen they move jobs

Companies that Own Technical StandardsCompanies that Own Technical Standards

COMPANY PRODUCT CATEGORY STANDARD

Microsoft PC operating systems Windows

Intel PC microprocessors *86 series

Matsushita Videocassette recorders VHS system

Iomega High capacity PC disk drives Zip drives

Intuit Software for on-line financial transactions Quicken

AMR Computerized airline reservations system Sabre

Rockwell/ 3Com 56K modems V90

Qualcomm Digital wireless telecom signals CDMA

Adobe Systems Common file format for creatingand viewing documents Acrobat

Competing for Standards:Value Appropriation vs. Market Acceptance

Competing for Standards:Value Appropriation vs. Market Acceptance

Maximize value

appropriation

Maximize market

acceptance

LOOSE TIGHT

VHS

IBM-PC Mac

Betamax

The Conditions for Creativity:“Operating” and “Innovating” Organizations

The Conditions for Creativity:“Operating” and “Innovating” Organizations

Operating Organization Innovating Organization

Structure Bureaucratic. Specialization and division of labor. Hierarchical control

Flat organization without hierarchical control. Task-oriented project teams.

Processes Operating units controlled and coordinated by top management which undertakes strategic planning, capital allocation and operational planning.

Processes directed toward generation, selection, funding and development of ideas. Strategic planning flexible, financial and operating controls loose.

Reward

Systems

Financial compensation, promotion up the hierarchy, power and status symbols.

Autonomy, recognition, equity participation in new ventures

People Recruitment and selection based upon the needs of the organization structure for specific skills: functional and staff specialists, general managers, and operatives.

Key need is for idea generators which combine required technical knowledge with creative personality traits. Managers must act as sponsors and orchestrators.

Strategy Implementation: Invention to Innovation

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 Xerox’s 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.

Radical Innovation

Architectural Innovation

Modular Innovation

Incremental Innovation

Reinforced OverturnedCore Concepts

Unchanged

Changed

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mp

onen

tsEXHIBIT 1 A Framework for Defining Innovation p. 450

Absorptive Capacity and a Firm’s Technical Knowledge

Absorptive capacity Technical knowledge

Spillovers of competitors’ knowledge,Extra-industry knowledge

Internal R&D

Adapted from: Cohen and Levinthal, 1990

OmahaTelemarketingHotel ReservationsCredit Card Processing

Wisconsin / Iowa / IllinoisAgricultural Equipment

DetroitAuto Equipmentand Parts

RochesterImaging Equipment

Western MassachusettsPolymers

BostonMutual FundsMedical DevicesMgmt. ConsultingBiotechnologySoftware and NetworkingVenture CapitalHartfordInsurance

ProvidenceJewelryMarine Equipment

New York CityFinancial ServicesAdvertisingPublishingMultimedia

Pennsylvania / New JerseyPharmaceuticals

North CarolinaHousehold FurnitureSynthetic FibersHosiery

Dalton, GeorgiaCarpets

South FloridaHealth Technology Computers

Nashville / LouisvilleHospital Management

Baton Rouge / New OrleansSpecialty Foods

Southeast Texas / LouisianaChemicals

DallasReal Estate Development

WichitaLight AircraftFarm Equipment

Los Angeles AreaDefense AerospaceEntertainment

Silicon ValleyMicroelectronicsBiotechnologyVenture Capital

Cleveland / LouisvillePaints & Coatings

PittsburghAdvanced MaterialsEnergy

West MichiganOffice and Institutional Furniture

MichiganClocks

San DiegoGolf EquipmentBiotech/Pharma

MinneapolisCardio-vascularEquipmentand Services

Warsaw, IndianaOrthopedic Devices

ColoradoComputer Integrated Systems / ProgrammingEngineering ServicesMining / Oil and Gas Exploration

Las VegasAmusement / CasinosSmall Airlines

OregonElectrical Measuring EquipmentWoodworking EquipmentLogging / Lumber Supplies

SeattleAircraft Equipment and DesignSoftwareCoffee Retailers

BoiseInformation TechFarm Machinery

Geographical Distribution of Clusters

Source: Adapted from Professor Michael E. Porter, Harvard Business School