Summary Management of Innovation, Sintesi del corso di Management Theory

Scarica Summary Management of Innovation e più Sintesi del corso in PDF di Management Theory solo su Docsity! PART 1: INDUSTRY DYNAMICS OF TECHNOLOGICAL INNOVATION CHAPTER 1 – INTRODUCTION – INNOVATION COMPLEXITY THE IMPORTANCE OF TECHNOLOGICAL INNOVATION In many industries technological innovation (=the act of introducing a new device, method, or material for application to commercial or practical objectives) is now the most important driver of competitive success. The increasing importance of innovation is due in part to the globalization of markets. Foreign competition has put pressure on firms to continuously innovate in order to produce differentiated products and services. Introducing new products helps firms protect their margins, while investing in process innovation helps firms lower their costs. Advances in information technology also have played a role in speeding the pace of innovation. Companies can use broad portfolios of product models to help ensure they can penetrate almost every conceivable market niche. INNOVATION IS A COMPLEX PROCESS  The importance of the time to market has (respecting the strategic window of opportunity): financial issue (balancing investments and expected returns in a strategic timeline).  The difficulty to intercept the «right» problem: the industry issue (different levels of communication with the market) and the demand issue (different evolution of tastes, needs, segments, …).  The convergence issue: boundaries among industries are blurred and solutions (product, services, processes, business models,….) imply multiple competencies.  Information are easier to find, information asymmetry between companies and customers are reduced, solutions can be often comparable in an accessible way: the competitive issue. THE IMPACT OF TECHNOLOGICAL INNOVATION ON SOCIETY Innovation enables a wider range of goods and services to be delivered to people worldwide. The aggregate impact of technological innovation can be observed by looking at gross domestic product (GDP) (=the total annual output of an economy as measured by its final purchase price). The historic rate of economic growth in GDP could not be accounted for entirely by growth in labour and capital inputs. Economist Robert Merton Solow argued that this unaccounted-for residual growth represented technological change. Technological innovation increased the amount of output achievable from a given quantity of labour and capital. While GDP has its limits as a measure of standard of living, it does relate very directly to the number of goods consumers can purchase. Therefore, to the extent that goods improve quality of life, we can ascribe some beneficial impact of technological innovation. Sometimes technological innovation results in negative externalities. Production technologies may create pollution that is harmful to the surrounding communities. Externalities = costs (or benefits) that are borne (or reaped) by individuals other than those responsible for creating them (a consequence of an industrial or commercial activity which affects other parties without this being reflected in market prices). Thus, if a business emits pollutants in a community, it imposes a negative externality on the community members; if a business builds a park in a community, it creates a positive externality for community members. INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY In the frenetic race to innovate, many firms start working into new product development without clear strategies or well-developed processes for choosing and managing projects. This to highlight how it is important the strategy into a business. 1 The Innovation Funnel Many studies suggest that only one out of several thousand ideas result in a successful new product. Many projects do not result in technically feasible products and, of those that do, many fails to earn a commercial return. The innovation process is often conceived of as a funnel, with many potential new product ideas going in the wide end, but very few making it through the development process. The Strategic Management of Technological Innovation Improving a firm’s innovation success rate requires a well-crafted strategy. A firm’s innovation projects should align with its resources and objectives, leveraging its core competencies and helping it achieve its strategic intent. A firm’s new product development process should maximize the likelihood of projects being both technically and commercially successful. To achieve these things, a firm needs (a) an in-depth understanding of the dynamics of innovation, (b) a well-crafted innovation strategy, and (c) well-designed processes for implementing the innovation strategy. CHAPTER 2 - SOURCES OF INNOVATION Innovation, the practical implementation of an idea into a new device or process, can arise from many different sources. It can originate with individuals or from the research efforts of universities, government laboratories and incubators, or private non-profit organizations. One primary engine of innovation is firms. Firms are well suited to innovation activities because they typically have greater resources than individuals and a management system to put in order those resources toward a collective purpose. An even more important source of innovation, however, does not arise from any one of these sources, but rather the linkages between them. Networks of innovators that leverage knowledge and other resources from multiple sources are one of the most powerful agents of technological advance. We can think of sources of innovation as composing a complex system where any innovation may emerge primarily from one or more components of the system or the linkages between them. CREATIVITY Innovation begins with the generation of new ideas (=something imagined or pictured in the mind). The ability to generate new and useful ideas is termed creativity. Creativity is defined as the ability to produce work that is useful and novel. Individual Creativity An individual’s creative ability is a function of his or her intellectual abilities, knowledge, style of thinking, personality, motivation, and environment. The most important intellectual abilities for creative thinking include the ability to look at problems in unconventional ways, the ability to analyze which ideas are worth pursuing and which are not, and the ability to articulate those ideas to others and convince others that the ideas are worthwhile. The impact of knowledge on creativity is somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a field too well, that person can become trapped in the existing logic and paradigms, preventing him or her from coming up with solutions that require an alternative perspective. The personality traits include: • self-efficacy (a person’s confidence in his or her own capabilities), • tolerance for ambiguity, • willingness to overcome obstacles • and take reasonable risks • Intrinsic motivation. Individuals are more likely to be creative if they work on things they are genuinely interested in 2 Private Non-profit Organizations Many non-profit organizations perform their own research and development activities, some fund the research and development activities of other organizations but do not do it themselves, and some non- profit organizations do both in-house research and development and fund the development efforts of others. INNOVATION IN COLLABORATIVE NETWORKS Collaborative research is especially important in high-technology sectors, where it is unlikely that a single individual or organization will possess all the resources and capabilities necessary to develop and implement a significant innovation. As firms do collaborative relationships, they weave a network of paths between them that can act as conduits for information and other resources. Interfirm networks are an important engine of innovation. Technology Clusters For firms, understanding the drivers and benefits of clustering is useful for developing a strategy that ensures the firm is well positioned to benefit from clustering. Technology clusters may span a region as narrow as a city or as wide as a group of neighbouring countries. Clusters often encompass an array of industries that are linked through relationships between suppliers, buyers, and producers of complements. One primary reason for the emergence of regional clusters is the benefit of proximity in knowledge exchange. Though advances in information technology have made it easier, faster, and cheaper to transmit information through great distances. Proximity and interaction can directly influence firms’ ability and willingness to exchange knowledge. First, knowledge that is complex (=knowledge that has many underlying components, or many interdependencies between those components, or both) or tacit (= knowledge that cannot be readily codified (documented in written form) may require frequent and close interaction to be meaningfully exchanged. Firms may need to interact frequently to develop common ways of understanding and articulating the knowledge before they are able to transfer it. When firms interact frequently, they can develop trust and reciprocity norms. Firms that interact over time develop greater knowledge of each other. A cluster of firms with high innovation productivity can lead to more new firms starting up in the immediate vicinity and can attract other firms to the area. The benefits firms reap by locating in close geographical proximity to each other are known collectively as agglomeration economies. There are also some disadvantages to geographical clustering: 1. First, the proximity of many competitors serving a local market can lead to competition that reduces their pricing power in their relationships with both buyers and suppliers. 2. Second, close proximity of firms may increase the likelihood of a firm’s competitors gaining access to the firm’s proprietary knowledge. 3. Third, clustering can potentially lead to traffic congestion, high housing costs, and higher concentrations of pollution. Knowledge Brokers Knowledge brokers are individuals or firms that transfer information from one domain to another in which it can be usefully applied. The knowledge broker puts existing information to use in new and profitable ways. In a network of firms, a knowledge broker may be a firm that connects clusters of firms that would otherwise share no connection. Thus, the knowledge broker’s key expertise may lie not in a particular domain of science, but instead in the ability to recognize and capture potential solutions that may be matched to problems in an unexpected way. Technological Spillovers 5 A positive externality from R&D resulting from the spread of knowledge across organizational or regional boundaries is known as technological spillovers. Technological spillovers occur when the benefits from the research activities of one firm (or nation or other entity) spill over to other firms (or nations or other entities). Spillovers are a positive externality of R&D efforts. Evidence suggests that technology spillovers are a significant influence on innovative activity. CHAPTER 3 - TYPES AND PATTERNS OF INNOVATION The path a technology follows through time is termed its technology trajectory. Technology trajectories are most often used to represent the technology’s rate of performance improvement or its rate of adoption in the marketplace. TYPES OF INNOVATION Different types of innovation require different kinds of underlying knowledge and have different impacts on the industry’s competitors and customers. Four of the dimensions most used to categorize innovations are: product versus process innovation, radical versus incremental, competence enhancing versus competence destroying, and architectural versus component. Product Innovation versus Process Innovation Product innovations are embodied in the outputs of an organization—its goods or services. Process innovations are innovations in the way an organization conducts its business, such as in the techniques of producing or marketing goods or services. Process innovations are often oriented toward improving the effectiveness or efficiency of production. Product innovation is the implementation of a good or service that is either new or an improved version of previous goods or services. New product innovations and process innovations often occur together: 1) First, new processes may enable the production of new products. 2) Second, new products may enable the development of new processes. 3) Finally, a product innovation for one firm may simultaneously be a process innovation for another. Though product innovations are often more visible than process innovations, both are extremely important to an organization’s ability to compete. Radical Innovation versus Incremental Innovation One of the primary dimensions used to distinguish types of innovation is the continuum between radical versus incremental innovation. A radical innovation is an innovation that is very new and different from prior solutions. Incremental innovation is an innovation that makes a relatively minor change from (or adjustment to) existing practices. The radicalness of innovation is also sometimes defined in terms of risk. Since radical innovations often embody new knowledge, producers and customers will vary in their experience and familiarity with the innovation, and in their judgment of its usefulness or reliability. The radicalness of an innovation is relative and may change over time or with respect to different observers. An innovation that was once considered radical may eventually be considered incremental as the knowledge base underlying the innovation becomes more common. Furthermore, an innovation that is radical to one firm may seem incremental to another. Competence-Enhancing Innovation versus Competence-Destroying Innovation An innovation is considered to be competence enhancing from the perspective of a particular firm if it builds on the firm’s existing knowledge base. An innovation is considered to be competence destroying 6 from the perspective of a particular firm if the technology does not build on the firm’s existing competencies or renders them obsolete. An innovation may be competence-enhancing for a firm and competence-destroying for another. Architectural Innovation versus Component Innovation An innovation may entail a change to individual components, to the overall architecture within which those components operate, or both. An innovation is considered a component innovation (or modular innovation) if it entails changes to one or more components but does not significantly affect the overall configuration of the system. In contrast, an architectural innovation entails changing the overall design of the system or the way that components interact with each other. For a firm to initiate or adopt a component innovation may require that the firm have knowledge only about that component. However, for a firm to initiate or adopt an architectural innovation typically requires that the firm have architectural knowledge about the way components link and integrate to form the whole system. Firms must be able to understand how the attributes of components interact, and how changes in some system features might trigger the need for changes in many other design features of the overall system or the individual components. TECHNOLOGY S-CURVES Both the rate of a technology’s performance improvement and the rate at which the technology is adopted in the marketplace repeatedly have been shown to conform to an s-shape curve. S-Curves in Technological Improvement (Richard Foster) Many technologies exhibit an s-curve in their performance improvement over their lifetimes. Performance improvement in the early stages of a technology is slow because the fundamentals of the technology are poorly understood. Great effort may be spent exploring different paths of improvement or different drivers of the technology’s improvement. As scientists or firms gain a deeper understanding of the technology, improvement begins to accelerate. As the technology begins to reach its limits, the cost of each marginal improvement increases, and the s-curve flattens. Technologies do not always get the opportunity to reach their limits; they may be rendered obsolete by new, discontinuous technologies. A new innovation is discontinuous when it fulfils a similar market need but does so by building on an entirely new knowledge base. In early stages, effort invested in a new technology may reap lower returns than effort invested in the current technology, and firms are often reluctant to switch. However, if the disruptive technology has a steeper s-curve (see Figure 3.4a) or an s-curve that increases to a higher performance limit (see Figure 3.4b), there may come a time when the returns to effort invested in the new technology are much higher than effort invested in the incumbent technology. 7 because innovations in products, materials, and manufacturing processes are all specific to the dominant design. Like Utterback and Abernathy, Anderson and Tushman found that each technological discontinuity inaugurated a period of turbulence and uncertainty (which they termed the era of ferment) (see Figure 3.10). Just as in the Utterback and Abernathy model, Anderson and Tushman found that a dominant design always arose to command the majority of the market share unless the next discontinuity arrived too soon and disrupted the cycle. The rise of a dominant design signals the transition from the era of ferment to the era of incremental change. In this era, firms focus on efficiency and market penetration. Firms may attempt to achieve greater market segmentation by offering different models and price points. They may also attempt to lower production costs by simplifying the design or improving the production process. This period of accumulating small improvements may account for the bulk of the technological progress in an industry, and it continues until the next technological discontinuity. During the era of incremental change, many firms cease to invest in learning about alternative design architectures and instead invest in refining their competencies related to the dominant architecture. SEGMENT ZERO “Segment Zero”  The portion of the market that is usually neglected by market players. It is made up of the most traditionalist consumers, who fail to adapt to the most innovative and sophisticated technologies or do not fully understand them. Technologies often improve faster than customer requirements demand. This enables low-end technologies to eventually meet the needs of the mass market. If the low-end market is neglected, it can become a breeding ground for powerful competitors. CHAPTER 4 - STANDARDS BATTLES AND DESIGN DOMINANCE As Anderson and Tushman pointed out, the technology cycle almost invariably exhibits a stage in which the industry selects a dominant design (=a single product or process architecture that dominates a product 10 category). A dominant design is a “de facto standard”, meaning that while it may not be officially enforced or acknowledged, it has become a standard for the industry. Once this design is selected, producers and customers focus their efforts on improving their efficiency in manufacturing, delivering, marketing, or deploying this dominant design, rather than continue to develop and consider alternative designs. WHY DOMINANT DESIGNS ARE SELECTED Why do many markets merge in a single dominant design rather than support a variety of technological options? 1) One primary reason is that the more a technology is adopted, the more valuable it becomes. A technology that is adopted usually generates revenue that can be used to further develop and refine the technology. 2) Furthermore, as the technology is used, greater knowledge and understanding of the technology accrue, which may then enable improvements both in the technology itself and in its applications. 3) Finally, as a technology becomes more widely adopted, complementary assets are often developed that are specialized to operate with the technology. These effects can result in a self- reinforcing mechanism that increases the dominance of a technology regardless of its superiority or inferiority to competing technologies. Two of the primary sources of increasing returns are (1) learning effects and (2) network externalities. Learning Effects As a technology is adopted, it generates sales revenues that can be reinvested in further developing and refining the technology. Furthermore, as firms accumulate experience with the technology, they find ways to use the technology more productively, including developing an organizational context that improves the implementation of the technology. Thus, the more a technology is adopted, the better it should become. The learning effect is the process by which education increases productivity and results in higher wages. As individuals and producers repeat a process, they learn to make it more efficient, often producing new technological solutions that may enable them to reduce input costs or waste rates. The standard form of the learning curve is formulated as y= ax^-b, where y is the number of direct labour hours required to produce the xth unit, a is the number of direct labour hours required to produce the first unit, x is the cumulative number of units produced, and b is the learning rate. Prior Learning and Absorptive Capacity A firm’s investment in prior learning can accelerate its rate of future learning by building the firm’s absorptive capacity. Absorptive capacity refers to the ability of an organization to recognize, assimilate, and utilize new knowledge. A firm’s prior related experience shapes its ability to recognize the value of new information, and to utilize that information effectively. The effects of absorptive capacity suggest that firms that develop new technologies ahead of others may have an advantage in staying ahead. The more firms that are using a given technology and refining it, the more absorptive capacity that is being generated related to that technology, making development of that technology (and related technologies) more effective and efficient. Furthermore, as firms develop complementary technologies to improve the productivity or ease of utilization of the core technology, the technology becomes more attractive to other firms. Network Externalities 11 Network externality describes how the demand for a product is dependent on the demand of others buying that product. In other words, the buying patterns of consumers are influenced by others purchasing a product. Network externalities can have direct positive effect when the utility derived from the consumption of a network good increases DIRECTLY with the number of other people using the same or a compatible productor or indirect network effects that are found in so-called system goods, where the utility derived from the consumption of a good depends on the availability of complementary goods, which in turn depends on the number of other users. The number of users of a particular technology is often referred to as its installed base. For instance, the installed base of a particular video game console refers to the number of those consoles that are installed in homes worldwide. An example is the one about Microsoft: Once the Windows operating system had the largest installed base, most producers of complementary software applications chose to design their products to be optimized to work with Windows. Firms can also attempt to influence the selection of a dominant design by building coalitions around a preferred technology. Occasionally a dominant design is put in place through government regulation. The Result: Winner-Take-All Markets While some alternative platforms may survive by focusing on niche markets, the majority of the market may be dominated by a single (or few) design(s). A firm that is able to lock in its technology as the dominant design of a market usually earns huge rewards and may dominate the product category through several product generations. When a firm’s technology is chosen as a dominant design, not only does the firm have the potential to earn near-monopoly rents in the short run, but the firm also is in a good position to shape the evolution of the industry, greatly influencing what future generations of products will look like (these are so called winner takes all markets). Such standards battles are high-stakes games—resulting in big winners and big losers. The influence of a dominant design can also extend beyond its own technology cycle. As the dominant design is adopted and refined, it influences the knowledge that is accumulated by producers and customers, and it shapes the problem-solving techniques used in the industry. MULTIPLE DIMENSIONS OF VALUE In many increasing returns industries, the value of a technology is strongly influenced by technology’s Standalone Value and Network Externality Value (direct and indirect). A Technology’s Stand-Alone Value The value a new technology offers to customers can be driven by many different things, such as the functions it enables the customer to perform, its aesthetic qualities, and its ease of use. To help managers identify the different aspects of utility a new technology offers to customers there is the “Buyer Utility Map.” It’s important to consider six different utility levers, as well as six stages of the buyer experience cycle, to understand a new technology’s utility to a buyer. The stages are purchase, delivery, use, supplements, maintenance, and disposal. The six utility levers are customer productivity, simplicity, convenience, risk, fun and image, and environmental friendliness. Creating a grid with stages and levers yields a 36-cell utility. Each cell provides an opportunity to offer a new value proposition to a customer. The map provides a guide for managers to consider multiple dimensions of technological value and multiple stages of the customer experience. Network Externality Value In industries characterized by network externalities, the value of a technological innovation to users will be a function not only of its stand-alone benefits and cost, but also of the value created by the size of its installed base and the availability of complementary goods. It is not enough for a new technology’s stand- alone utility to exceed that of the incumbent standard. The new technology must be able to offer greater 12 From indirect network effects to two-sided (platform) markets Two-sided (or in general multi-sided) markets are markets in which a platform enables interactions between separate groups and actively tries to increase installed bases on all sides of the market. They are system markets which display indirect network effects. Types of externalities in two-sided markets Cross-side network effect: - Positive externality: Users on one side of the market benefit from a large user base on the other side of the market (e.g. credit cards). - Negative externality: One side would prefer only few users on the other side of the market. (e.g. TV advertising) Same-side network effect: - Positive externality: Increasing the network on one side makes it more valuable for other users on this side (e.g. game consoles that support online gaming). - Negative externality: Users on the same side rival for the other side (e.g. career platforms) CHAPTER 5 - TIMING OF ENTRY The more a technology is adopted, the more valuable it becomes. In such industries, timing can be crucial— a technology that is adopted earlier than others may reap advantages such as greater funds to invest in improving the technology, greater availability of complementary goods, and less customer uncertainty. On the other hand, the same factors that cause increasing returns to adoption may make very early technologies unattractive: If there are few users of the technology or availability of complementary goods is poor, the technology may fail to attract customers. Entrants are often divided into three categories : first 15 movers (or pioneers), which are the first to sell in a new product or service category; early followers (also called early leaders), which are early to the market but not first; and late entrants, which enter the market when or after the product begins to penetrate the mass market. Some studies that contrast early entrants with late entrants find that early entrants have higher returns and survival rates. However, other research has suggested the first firm to market is often the first to fail, causing early followers to outperform first movers. Still other research contends the higher returns of being a first mover typically offset the survival risk. The financial issue: the value of speed Companies strategically decide a specific moment (window of opportunity) to launch their products (it can be based on seasonality, specific international event/exhibition fair, specific moment during the year in which it makes more sense to launch new product/services). If this window of opportunity is not respected profits can be lower and postponed. FIRST-MOVER ADVANTAGES Brand Loyalty and Technological Leadership The company that introduces a new technology may earn a long-lasting reputation as a leader in that technology domain. Such a reputation can help sustain the company’s image, brand loyalty, and market share even after competitors have introduced comparable products. The organization’s position as technology leader also enables it to shape customer expectations about the technology’s form, features, pricing, and other characteristics. By the time later entrants come to market, customer requirements may be well established. If aspects that customers have come to expect in a technology are difficult for competitors to imitate (e.g., if they are protected by patent or copyright, or arise from the first mover’s unique capabilities), being the technology leader can yield sustained monopoly rents (= the additional returns a firm can make from being a monopolist, such as the ability to set high prices, or the ability to lower costs through greater bargaining power over suppliers). For example, Coca-Cola First producer of Cola (since 1886) with a strong brand and customer brand loyalty or Amazon with its first online bookshop (followed by others). Preemption of Scarce Assets Firms that enter the market early can capture resources such as key locations, government permits, patents, access to distribution channels, and relationships with suppliers. For subsequent entrants it may therefore be very difficult or impossible to compete. Exploiting Buyer Switching Costs Once buyers have adopted a good, they often face costs to switch to another good. Costs include monetary (sunk) cost, cost to learn and get used to the new product. If there are substantial buyer switching costs advantages of first entrants is self-evident. For example, the initial cost of the good is itself a switching cost, as is the cost of complements purchased for the good. Additionally, if a product is complex, buyers must spend time becoming familiar with its operation; this time investment becomes a switching cost that deters the buyer from switching to a different product. If buyers face switching costs, the firm that captures customers early may be able to keep those customers even if technologies with a superior value proposition are introduced later. Reaping Increasing Returns Advantages 16 In an industry with pressures encouraging adoption of a dominant design, the timing of a firm’s investment in new technology development may be particularly critical to its likelihood of success. First movers can really: capitalize on learning effects, reinvesting revenues on further improving technology; capitalize on network effects, building an installed base (and so is for complementary goods developed for dominant design). FIRST-MOVER DISADVANTAGES First movers earn greater revenues than other entrants, but that they also face higher costs, causing them to earn significantly lower profits in the long run. First movers typically bear the bulk of R&D expenses for their product or service technologies, and they must also often pay to develop suppliers and distribution channels, plus consumer awareness. A later entrant often can capitalize on the R&D investment of the first mover, fine-tune the product to customer needs as the market becomes more certain, avoid any mistakes made by the earlier entrant, and exploit incumbent inertia (=the tendency for incumbents to be slow to respond to changes in the industry environment due to their large size, established routines, or prior strategic commitments to existing suppliers and customers). Later entrants can also adopt newer and more efficient production processes while early movers are either stuck with earlier technologies or must pay to rebuild their production systems. Research and Development Expenses Developing a new technology often means significant R&D expenses. By the time a firm has successfully developed a new technology, it may have carried not only the expense of that technology but also the expense of exploring technological paths that did not yield a commercially viable product. Being the first to develop and introduce an unproven new technology is expensive and risky. By contrast, later entrants often do not have to invest in exploratory research. Once a product has been introduced to the market, competitors can often ascertain how the product was created. The later entrant can also observe the market’s response to particular features of the technology and decide how to focus its development efforts. This means that later entrants can both save development expense and produce a product that achieves a closer fit with market preferences. Undeveloped Supply and Distribution Channels First movers may find lacks in the supply and distributions channels. They either need to develop in-house supplies and invest in new own distribution services or help develop external ones. Later entrant can leverage already existing supply chain (upstream and downstream). Immature Enabling Technologies and Complements When firms develop technologies, they often rely on other producers of enabling technologies (= component technologies that are necessary for the performance or desirability of a given innovation). When new technologies are introduced to a market, important complements may not yet be fully developed. Later entrants may find such enabling and complementary technologies ready when they enter the market. Uncertainty of Customer Requirements A first mover to the market may face considerable uncertainty about what product features customers will ultimately desire and how much they will be willing to pay for them. Early entrants can just proceed by trials and errors. Later entrants can see what happened before and act consequently (exploiting already have existing information on customers' preferences). For a very new product technology, market research may be of little help. Customers may have little idea of the value of the technology or the role it would play in their lives. As a consequence, first movers may find that their early product offerings must be revised as 17 technology’s market acceptance. The later entrant may be able to enter at a lower cost because it can capitalize on the R&D of the early firm and use knowledge of the market gained from observing the early entrant’s experience. The timing of entry is a matter of choice for the firm. The firm must possess the core capabilities required to produce the technology to consumer expectations or be able to develop them quickly. If a firm has very fast cycle development processes, the firm not only has a better chance at being an early entrant, but it can also use experience gained through customers’ reactions to its technology to quickly introduce a refined version of its technology that achieves a closer fit with customer requirements. A firm with very fast development deployment processes should be able to take advantage of both first- and second-mover advantages. The research on new product development cycle time indicates that development time can be greatly shortened by using strategic alliances, cross-functional new product development teams, and parallel development processes (=when multiple stages of the new product development process occur simultaneously). PART 2: FORMULATING TECHNOLOGICAL INNOVATION STRATEGY CHAPTER 6 - DEFINING THE ORGANIZATION’S STRATEGIC DIRECTION The formulation of a technological innovation strategy The first step in formulating a company’s technological innovation strategy is to assess its current position and define its strategic direction for the future. A coherent technological innovation strategy both leverages and enhances the firm’s existing competitive position, and it provides direction for the future development of the firm. Formulating a technological innovation strategy first requires an accurate estimation of where the firm currently is. It then requires articulating an ambitious strategic intent—one that creates a gap between a company’s existing resources and capabilities and those required to achieve its intent. The ability of the firm to cohesively leverage all its resources around a unified vision can enable it to create a competitive advantage that is very difficult for competitors to imitate. A strategic intent can be defined as a long-term goal with the purpose to create value, built upon the firm’s core competencies. Typically, it looks 10 to 20 years ahead and establishes clear milestones to target (it depends on the industries and the competitive dynamics). These targets can be measured with a multidimensional performance measurement system (such as for example the balanced scorecard, that includes a financial perspective, a customer perspective, an internal perspective, and innovation & learning perspective). ASSESSING THE FIRM’S CURRENT POSITION To assess the firm’s current position in the marketplace, it is useful to begin with some standard tools of strategic analysis for analyzing the external and internal environment of the firm. External Analysis The two most commonly used tools for analyzing the external environment of the firm include Porter’s five-force model and stakeholder analysis. 20  Porter’s Five-Force Model In this model, the attractiveness of an industry and a firm’s opportunities and threats are identified by analyzing five forces (see Figure 6.1 below). While the five-force model was originally developed to assess industry attractiveness, in practice the model is often used to assess a specific firm’s external environment. The difference between these two approaches is subtle but important. In the former approach, the analysis focuses on the industry level, treating all competitors as roughly the same, and its objective is to ascertain whether the industry as a whole will tend to be profitable. In the latter approach, the analysis may take the perspective of a particular firm, often identifying ways in which the external forces differentially affect the firm from its competitors, and its objective is to identify threats and opportunities for the firm. The five forces are: 1. The degree of existing rivalry. An industry’s degree of rivalry is influenced by a number of factors. First, the number and relative size of competitors will shape the nature of rivalry. In general, the more firms competing that are of comparable size, the more competitive the industry will be. There are, however, exceptions to this generality. For example, oligopolistic industries (those that have a few large competitors) can be fiercely competitive if firms choose to engage in price wars. On the other hand, oligopolistic industries can have a low degree of rivalry if the competitors choose to avoid competing head-to-head in the same market segments, or if they engage in tacit price collusion. Rivalry is also influenced by the degree to which competitors are differentiated from each other. For example, if competitors are highly differentiated, they will experience less direct rivalry because their products are likely to appeal to different market segments. Demand conditions also influence degree of rivalry. When demand is increasing, there are more revenues to go around and firms will experience less competitive pressure. On the other hand, when demand is declining, firms have to compete for a shrinking pool of revenues, and competition can become very aggressive. In declining industries, high exit barriers (fixed capital investments, emotional attachment to the industry, etc.) can also intensify rivalry by making firms reluctant to abandon the industry. 21 2. Threat of potential entrants. The threat of potential entrants is influenced by both the degree to which the industry is likely to attract new entrants and the height of entry barriers (=conditions that make it difficult or expensive for new firms to enter an industry (government regulation, large start-up costs, etc.). While profitability and growth may attract new entrants, entry barriers will deter them. Example of high entry barrier: regulated market (or controlled market), is a market where the government controls the forces of supply and demand, such as who is allowed to enter the market or what prices may be charged (telecommunications, water, gas or electricity supply). 3. Bargaining power of suppliers. The degree to which the firm relies on one or a few suppliers (number of suppliers) will influence its ability to negotiate good terms. If there are few suppliers or suppliers are highly differentiated, the firm may have little choice in its buying decision, and thus have little leverage over the supplier to negotiate prices, delivery schedules, or other terms. On the other hand, if suppliers are very abundant and/or are not highly differentiated, the firm may be able to force the suppliers to bid against one another for the sale. The amount the firm purchases from the supplier is also relevant. If the firm’s purchases constitute the bulk of a supplier’s sales, the supplier will be heavily reliant upon the firm and the supplier will have little bargaining power. Likewise, if the supplier’s sales constitute a large portion of the firm’s purchases, the firm will be heavily reliant upon the supplier and the supplier will have more bargaining power. If the firm faces switching costs that make it difficult or expensive to change suppliers, this will also increase the supplier’s bargaining power. Finally, if the firm can backward vertically integrate (i.e., produce its 22 This generic model can be adapted to better fit a particular firm’s needs. Each activity can then be considered from the point of view of how it contributes to the overall value produced by the firm, and what the firm’s strengths and weaknesses are in that activity. Once the key strengths and weaknesses are identified, the firm can assess which strengths have the potential to be a source of sustainable competitive advantage. To be a potential source of sustainable competitive advantage, resources must be rare, valuable, durable, and inimitable. Resources that are rare and valuable may yield a competitive advantage, but that advantage will not be sustainable if the firm is incapable of keeping the resources, or if other firms are capable of imitating them. For example, a positive brand image can be a rare and valuable resource, but it requires ongoing investment to sustain. If a firm lacks the capital to reinvest in its brand image, it will erode. Furthermore, many valuable resources are quickly imitated by other firms. Some resources, however, are not readily imitable. For example, if valuable resources are tacit (i.e., they cannot be readily codified in written form), path dependent (i.e., they are dependent on a particular historical sequence of events), socially complex (i.e., they arise through the complex interaction of multiple people), or causally ambiguous (i.e., it is unclear how the resource gives rise to value), they will be extremely difficult to imitate. For example, a first-mover advantage is a path-dependent advantage that cannot be copied—once a firm has become the first mover in a category, other firms no longer have the opportunity to be first. Once the firm has established a baseline internal analysis, it can move on to identifying its core competencies and formulate its strategic intent. IDENTIFYING CORE COMPETENCIES AND DYNAMIC CAPABILITIES Core Competencies A company’s core competencies are typically considered to be those that differentiate it strategically. A core competency is more than just a core technology. A core competency arises from a firm’s ability to combine and harmonize multiple primary abilities in which the firm excels into a few key building blocks of specialized expertise. Competencies often combine different kinds of abilities, such as abilities in managing the market interface (e.g., advertising, distribution), building and managing an effective infrastructure (e.g., information systems, logistics management), and technological abilities (e.g., applied science, process design). This combination of multiple abilities makes core competencies difficult to imitate. A firm’s core competencies also depend on building high-quality relationships across different functions and business units. 25 Several core competencies may underlie an individual business unit, and several business units may draw upon the same core competency. This indicates the organization’s structure and incentives must encourage cooperation and exchange of resources across strategic business unit boundaries. The core competences are identified if they respond to the VRIO acronym:  Valuable = A resource or capability is said to be valuable if it allows the firm to exploit opportunities or negate threats in the environment. Does it make a significant contribution to the value a customer perceived in the end product?  Rare = A resource is rare simply if it is not widely possessed by other competitors. Is a resource currently controlled by only a small number of competing firms?  Inimitable = A resource is inimitable and non-substitutable if it is difficult for another firm to acquire it or to substitute something else in its place. It is hard for competitors to imitate?  Organized = The firm must likewise have the organizational capability to exploit the resources. Does it transcend a single business? Does it cover a range of businesses, both current and new? The Risk of Core Rigidities Sometimes the very things that a firm excels at can enslave it, making the firm rigid and overly committed to inappropriate skills and resources. The organizational culture may reward employees who are most closely connected to core competencies with higher status and better access to other organizational resources. While these systems and norms can prove beneficial in reinforcing and leveraging the firm’s existing core competencies, they can also inhibit the development of new core competencies. Dynamic Capabilities In fast-changing markets, it can be extremely useful for a firm to develop a core competency in responding to change. Dynamic capabilities enable firms to quickly adapt to emerging markets or major technological discontinuities. STRATEGIC INTENT A firm’s purpose is to create value. This entails more than just improving operations or cutting costs; it means leveraging corporate resources to create more performance for customers, more well-being for employees, and more returns for shareholders. This is accomplished through developing new businesses and markets, and leveraging corporate resources, all guided by the firm’s strategic intent. A company’s strategic intent is a long-term goal that is ambitious, builds upon and stretches the firm’s existing core competencies, and draws from all levels of the organization. 26 Once the strategic intent has been articulated, the company should be able to identify the resources and capabilities required to close the gap between the strategic intent and the current position. Articulating the company’s strategic intent enables the company to focus its development efforts and choose the investments necessary to develop strategic technologies and incorporate them into the company’s new products. Blue Ocean Strategy = Blue oceans refer to untapped market space that firms create by redefining the dimensions of competition. They are uncharted, and there are no (or few) competitors. Blue ocean strategies are fundamentally about differentiation through innovation. Mauborgne and Chan suggest that firms can identify “blue ocean” strategies by first using a visualization tool, the “strategy canvas,” to help them understand how different players are competing in an industry, and how they might choose to compete differently. The balanced scorecard is a multidimensional measurement and accountability framework for strategy execution. The balanced scorecard allows managers to measure forward-looking indicators that link intangible assets. The power of a balanced scorecard lies in the power of measurement. If used effectively, a balanced scorecard allows managers to articulate a clear theory of value creation to ensure that employees, processes, and business functions are aligned with company goals. Balanced scorecard can make improvements in product, process, customer, and market development. It emphasizes four perspectives the firm should take in formulating goals:  Financial perspective: achieving financial results. Goals might include such things as “meet shareholder’s expectations” or “double our corporate value in seven years.” Measures might include return on capital, net cash flow, and earnings growth.  Customer perspective defines how a business’s products and services are seen by customers in its target market. Goals might be to “improve customer loyalty,” “offer best-in-class customer service,” or “increase customer satisfaction.” Measures might include market share, percentage of repeat purchases, customer satisfaction surveys, and so on.  Internal perspective identifies critical functional practices related to innovation, operations, marketing and sales, and engineering, that create value to customers and lead to strong financial results. Goals might include such things as “reduce internal safety incidents,” “build best-in-class franchise teams,” or “improve inventory management.” Measures might include the number of safety incidents per month, franchise quality ratings, stockout rates, and inventory costs.  Innovation and learning perspective details how intangible human capital and infrastructure resources can be utilized to meet the company goals. This perspective considers three different categories: human capital, information capital, and organization capital. Goals might include such things as “accelerate and improve new product development” or “improve employee skills.” Measures might include the percentage of sales from products developed within the past five years, average length of the new product development cycle, or employee training targets. CHAPTER 7 - CHOOSING INNOVATION PROJECTS Developing innovative new products and services is expensive and time-consuming. It is also extremely risky—most studies have indicated that most development projects fail. Firms have to make difficult choices about which projects are worth the investment, and then they have to make sure those projects are pursued with a rigorous development process. THE DEVELOPMENT BUDGET Many firms use a form of capital rationing in formulating their new product development plans. Under capital rationing, the firm sets a fixed R&D budget (often some percentage of the previous year’s sales), and then uses a rank ordering of possible projects to determine which will be funded. Firms might establish this 27 model upon which they are based—stock options. A call option on a stock enables an investor to purchase the right to buy the stock at a specified price (the “exercise price”) in the future. If, in the future, the stock is worth more than the exercise price, the holder of the option will typically exercise the option by buying the stock. If the stock is worth more than the exercise price plus the price paid for the original option, the option holder makes money on the deal. If the stock is worth less than the exercise price, the option holder will typically choose not to exercise the option, allowing it to expire. In “real options,” the assets underlying the value of the option are nonfinancial resources. DISADVANTAGES OF QUANTITATIVE METHODS Quantitative methods for analyzing potential innovation projects can provide concrete financial estimates that facilitate strategic planning and trade-off decisions. They can explicitly consider the timing of investment and cash flows and the time value of money and risk. They can make the returns of the project seem unambiguous, and managers may find them very reassuring. However, discounted cash flow estimates are only as accurate as the original estimates of the profits from the technology, and in many situations, it is extremely difficult to anticipate the returns of the technology. As noted by Professor Freek Vermeulen, author of Business Exposed, one of the most common mistakes managers make in their innovation strategy is to insist on “seeing the numbers”—for truly innovative products, it is impossible to reliably produce any numbers. It is very difficult to compute the size of a market that does not yet exist. QUALITATIVE METHODS FOR CHOOSING PROJECTS Most new product development projects require the evaluation of a significant amount of qualitative information. Many factors in the choice of development projects are extremely difficult to quantify, or quantification could lead to misleading results. Almost all firms utilize some form of qualitative assessment of potential projects, ranging from informal discussions to highly structured approaches. Screening Questions As a starting point, a management team is likely to discuss the potential costs and benefits of a project, and the team may create a list of screening questions that are used to structure this discussion. These questions might be organized into categories such as the role of the customer, the role of the firm’s capabilities, and the project’s timing and cost. Role of Customer Market Who are the most likely customers of the new product? How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there other likely markets for the product? What type of marketing will be required to create customer ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there awareness? Use How will customers use the product? What new benefits will the product provide the customer? ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there What other products are customers likely to consider as substitutes for this product? 30 Compatibility and Ease of Use Will the product be compatible with the customer’s existing ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there complements? Will the product require significant new learning on the part of the customer? How will ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there the customer perceive the product’s ease of use? Distribution and Pricing Where will the customer buy the product? Will the product require installation∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there or assembly? How much are customers likely to be willing to pay for the product?∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there Role of Capabilities Existing Capabilities Does the new project leverage the firm’s core competencies or sources of ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there sustainable competitive advantage? Will the project render some of the firm’s existing competencies ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there obsolete or cannibalize existing products? If so, does the firm have a transition strategy to handle possible cash-flow implications? Competitors’ Capabilities Do one or more competitors have better capabilities for developing this ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there project? If the company does not develop this technology, are competitors likely to?∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there Future Capabilities Will the project help the firm build new capabilities that will allow it to achieve its ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there strategic intent? What other products/markets will the new capabilities enable the firm to develop? Is ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there this project a platform that will lead to a family of new products? Project Timing and Cost Timing How long will the project take to complete? Is the firm likely to be first to market? Is pioneering ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there the technology a desirable strategy? Cost Factors How much will the project cost? What is the potential variability in these costs? What will ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there ∙ Who are the most likely customers of the new product? ∙ How big is this market? Are there the manufacturing costs be? At what rate are these costs expected to decline with experience? After creating a list of questions, managers can use the questions to structure debate about a project, or they can create a scoring mechanism. The Aggregate Project Planning Framework Many companies find it valuable to map their R&D portfolio according to levels of risk, resource commitment, and timing of cash flows. Managers can use this map to compare their desired balance of projects with their actual balance of projects. It can also help them to identify capacity constraints and better allocate resources. Companies may use a project map to aid this process. Four types of development projects commonly appear on this map—advanced R&D, breakthrough, platform, and derivative projects. Over time, a particular technology may migrate through these different types of projects. Advanced R&D projects are the precursor to commercial development projects and are necessary to develop cutting-edge strategic technologies. Platform projects typically offer fundamental improvements in the cost, quality, and performance of a technology over preceding generations. Derivative projects involve incremental changes in products and/or processes. A platform project is designed to serve a core group of consumers, whereas derivative projects represent modifications of the basic platform design to appeal to different niches within that core group. Companies that use the project map categorize all their existing projects and projects under consideration by the resources they require (e.g., engineers, time, capital, etc.) and by how they contribute to the company’s product line. The company can then map the project types and identify gaps in the development strategy. Q-Sort 31 Q-sort is a simple method for ranking objects or ideas on a number of different dimensions. The Q-sort method has been used for purposes as diverse as identifying personality disorders to establishing scales of customer preferences. Individuals in a group are each given a stack of cards with an object or idea on each card. In the case of new product development, each card could identify a potential project. Then a series of project selection criteria are presented (e.g., technical feasibility, market impact, fit with strategic intent), and for each criterion, the individuals sort their cards in rank order (e.g., best fit with strategic intent) or in categories (e.g., technically feasible versus infeasible) according to that criterion. Individuals then compare their rank orderings and use these comparisons to structure a debate about the projects. After several rounds of sorting and debating, the group is expected to arrive at a consensus about the best projects. Profile methods Each project is assigned a qualitative judgment (for example high, medium, low) which mirrors the project performance of the project against the set of criteria defined in advance. The criteria reflect the key factors determining the success or failure of a project. Checklists They are similar to the profile method. A set of criteria is fixed, and projects are evaluated against these criteria. The difference is that each project is assigned a yes / no evaluation according to the fact that the project is satisfactory against the criterion or not (yes/no, 1/0). Scoring models The scoring models are based on the same principle of the previous two methods but add some other information about the weight of each considered criterion. They provide a weighted evaluation of each project, depending on the (strategic) importance of the criteria. 32 To apply for a patent, the inventor must explain how to make and use the invention and make claims about what it does that makes it a new invention. Drawings of the new invention are also often required. In the United States, this application is reviewed by a patent examiner who may modify the scope of the claims made by the patent. The patent is then published for a time in which other inventors can challenge the patent grant (if, for example, they believe that the patent infringes on previously granted patents). If the standards for patentability are met, the patent is then granted. The entire process from application to granting of the patent can take between two and five years, with an average time of 33 months. A number of costs are also involved in filing and maintaining a patent. The U.S. Patent and Trademark Office has two fee schedules—one for “small entities” (independent inventors and companies with less than 500 employees) and one for larger entities. The entire patenting process in the United States typically costs a small entity around $1,500 in filing fees and $5,000–$10,000 in attorney fees. Utility patents are typically granted more protection than other types of patents. Patent Law around the World Almost every country has its own laws governing patent protection. A patent granted in one country does not provide protection in other countries. People or firms seeking patent protection in multiple countries must apply in each of the countries in accordance with those countries’ requirements. Significant differences exist in national patent laws, and U.S. patent law is one of the more unusual. Several international treaties seek to harmonize the patent laws around the world. Two of the most significant are the Paris Convention for the Protection of Industrial Property and the Patent Cooperation Treaty: 1) The Paris Convention for the Protection of Industrial Property (also known as the Paris Convention Priority) is an international intellectual property treaty adhered to by 176 countries in August 2015. Under the Paris Convention, a citizen of any member country may patent an invention in any of the member countries and enjoy the same benefits of patent protection as if the inventor were a citizen of those countries. Furthermore, the treaty also provides the right of “priority” for patents and trademarks. Once an inventor has applied for patent protection in one of the member countries, the inventor may (within a certain time period) apply for protection in all the other member countries. The time period is 12 months for utility patents and 6 months for design patents and trademarks. Most important, the applications to these later countries will be treated as if they were made on the same date as the first application. This enables the inventor to establish priority over any other patents applied for in those countries after the inventor made the first application. 2) Another very significant international patent treaty is the Patent Cooperation Treaty, or PCT. This treaty facilitates the application for a patent in multiple countries. An inventor can apply for a patent to a single PCT governmental receiving office, and that application reserves the inventor’s right to file for patent protection in more than 100 countries for up to two-and-half years. Filing a single PCT application offers numerous advantages. First, applying for the PCT patent buys the inventor the option to apply to multiple nations later without committing the inventor to the expense of those multiple applications. With a PCT application, the inventor can establish a date of application in multiple countries (protecting the inventor’s priority over later claims), while paying only the single PCT application fee rather than the numerous national application fees. Another advantage of the PCT process is that it helps make the results of patent applications more uniform. Patent Strategies 35 It is typical to assume that an inventor seeks a patent because they desire to make and sell the invention themselves. However, inventors and firms may monetize patents in a range of different ways, including licensing the technology to others or selling the patent rights to another firm that can better utilize the technology. Both large and small inventors, across all major technology fields exhibited this preference for early disclosure, presumably because it allows them to publicize their invention’s quality and scope to competitors, external investors, and potential licensees. Disclosure via patent application also establishes the date from which patentees can enjoy provisional patent rights. Firms may also seek patents just to limit the options of competitors or to earn revenues through aggressive patent lawsuits. These actions are sometimes referred to as “patent trolling.” A patent troll’s primary purpose in owning patents is to extort money from other firms. In industries with complex technologies such as computers, software, and telecommunications, a dense web of overlapping patents known as “patent thickets” can make it very difficult for firms to compete without falling prey to patent suits by other firms in that technology domain. Trademarks and Service Marks A trademark is a word, phrase, symbol, design, or other indicator that is used to distinguish the source of goods. A service mark is basically the same as a trademark but distinguishes the provider of a service rather than a product. Trademarks and service marks can be embodied in any indicator that can be perceived through one of the five senses. Most marks are embodied in visual indicators, such as words, pictures, and slogans. Trademark rights may be used to prevent others from using a mark that is similar enough to be confusing, but they may not be used to prevent others from producing or selling the same goods or services under a clearly different mark. The rights to a trademark or service mark are established in the legitimate use of the mark and do not require registration; however, registration provides several advantages. 1) First, registering the mark provides public notice of the registrant’s claim of ownership over the mark. 2) Second, marks must be registered before a suit can be brought in federal court against an infringement of the mark. 3) Third, registration can be used to establish international rights over the trademark. It normally takes from 10 to 16 months to receive certification from the U.S. Patent and Trademark Office, but the protection offered by the registration of the trademark begins from the date of filing. Unlike patents and copyrights, trademark protection can last as long as the trademark is in use, but the registration requires periodic renewal. Trademark Protection around the World Nearly all countries offer some form of trademark registration and protection. National or regional offices maintain a “Register of Trademarks” that contains information on all trademark registrations and renewals. To eliminate the need to register separately in each country (or region), the World Intellectual Property Organization administers a “System of International Registration of Marks” governed by two treaties: the Madrid Agreement Concerning the International Registration of Marks and the Madrid Protocol. Countries that adhere to either (or both) the Madrid Agreement or Madrid Protocol are part of the Madrid Union. Any individual that lives in, is a citizen of, or maintains an establishment in a Madrid Union country can register with the trademark office of that country and obtain an international registration that provides protection in as many other Madrid Union countries as the applicant chooses. Copyright 36 Copyright is a form of protection granted to works of authorship. Like trademarks, the rights of copyright protection are established by legitimate use of the work. This protection is available whether or not the work is published and prevents others from producing or distributing that work. The owner of the copyright has the exclusive right to do (or authorize others to do) the following:  Reproduce the work in copies or phonorecords.  Prepare derivative works based upon the work.  Distribute copies or phonorecords of the work to the public by sale or other transfer of ownership, or by rental, lease, or lending. Perform the work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and motion pictures and other audio-visual works.  Display the copyrighted work publicly, in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audio-visual work.  Perform the work publicly by means of a digital audio transmission (in the case of sound recordings). There are, however, limitations to these rights. In particular, the doctrine of fair use stipulates that in most circumstances it is not a violation of copyright for others to use copyrighted material for purposes such as criticism, comment, news reporting, teaching, scholarship, or research. Furthermore, some types of work cannot be protected by copyright. For example, work that has not been fixed in a tangible form of expression (for example, a choreographed dance or improvisational speech that was not notated or recorded) is not eligible for copyright protection. Titles, names, short phrases, slogans, familiar symbols, and lists of ingredients also cannot be copyrighted. Unlike patent protection, copyright protection is secured automatically when an eligible work is created and fixed in a copy or phonorecord for the first time. Copyright Protection around the World As with patents and trademarks, no international copyright law automatically protects an author’s work throughout the world. Copyright protection varies from country to country. However, most countries do offer copyright protection to both domestic and foreign works, and there are international copyright treaties for simplifying the process of securing such protection. One of the most significant is the Berne Union for the Protection of Literary and Artistic Property (known as the Berne Convention). TRADE SECRETS A trade secret is information that belongs to a business that is generally unknown to others. Information is typically considered to be a trade secret only if it (a) offers a distinctive advantage to the company in the form of economic rents, and (b) remains valuable only as long as the information remains private. Examples of trade secrets might include information about a firm’s customers, its marketing strategies, or its manufacturing processes. Trade secret law protects such information from being wrongfully taken by another party. The act states that no individual or group can copy, use, or otherwise benefit from a trade secret without the owner’s authorization if they meet any of the following conditions: 1. They are bound by a duty of confidentiality (e.g., employees, lawyers). 2. They have signed a nondisclosure agreement. 3. They acquire the secret through improper means such as theft or bribery. 4. They acquire the information from someone who did not have the right to disclose it. 5. They learn about the secret by mistake but have reason to know that the information was a protected trade secret. 37 Size: Is Bigger Better? Disaggregation (or «unbundling») into networks of smaller, specialized, autonomous divisions or independent firms. Virtual organization, network organization, modular organization. STRUCTURAL DIMENSIONS OF THE FIRM Firms vary on a number of structural dimensions that can influence the amount, type, and effectiveness of their Innovation. Key structural dimensions include centralization, formalization, and standardization. Centralization, Formalization and Standardization 40 Pro: Facilitate the standardization of firm activities Help to regulate employee behavior (clear expectation of behavior) Can substitute possible managerial oversight It minimize variation Mechanistic versus Organic Structures Cons: It may limit the employees creativity and experimentation for innovative ideas It can reduce the motivation to introduce something new Mechanistic structures: high formalization and standardization. Good for operational efficiency, reliability. Minimizes variation > may stifle creativity Organic structures low formalization and standardization; described as “free flowing” Encourages creativity and experimentation May yield low consistency and reliability in manufacturing mechanistic. The Ambidextrous Organization: Some divisions (e.g., R&D, new product lines) may be small and organic. Other divisions (e.g., manufacturing, mature product lines) may be larger and more Can also alternate through different structures over time. The Ambidextrous Organization: competencies 41 Size versus Structure Large firms often make greater use of formalization and standardization because as the firm grows it becomes more difficult to exercise direct managerial oversight. Formalization and standardization ease coordination costs, at the expense of making the firm more mechanistic. Many large firms attempt to overcome some of this rigidity and inertia by decentralizing authority, enabling divisions of the firm to behave more like small companies. MODULARITY AND “LOOSELY COUPLED” ORGANIZATIONS Another method firm use to have a balance between efficiency and flexibility is to adopt standardized manufacturing platforms or components that can then be mixed and matched in a modular production system. Modular Products Modularity refers to the degree to which a system’s components may be separated and recombined. Making products modular can exponentially increase the number of possible configurations achievable from a given set of inputs. By standardizing a number of common components and using flexible manufacturing technologies that can quickly shift from one assembly configuration to another, companies can produce a wide variety of product models just by changing which components are combined, while still achieving economies of scale and efficiency in the individual components. When products are made more modular, it enables the entire production system to be made more modular. The standard interfaces reduce the amount of coordination that must take place between the developers of different components, freeing them to pursue more flexible arrangements than the typical organizational hierarchy. Such flexible arrangements are referred to as “loosely coupled organizational structures”. Loosely Coupled Organizational Structures Organizations can also be made modular through the adoption of structures that enable “loose coupling.” In a loosely coupled structure, development and production activities are not tightly integrated but rather achieve coordination through shared objectives and common standards. Advances in information technology have also enabled loosely coupled organizational structures to become more common. Information technology can enable a firm to access and process more information at a lower cost. There are, however, disadvantages of loose coupling. Many activities reap significant synergies by being integrated. Activities that require the frequent exchange of complex or tacit knowledge are likely to need closer integration than a loosely coupled development configuration can offer. An integrated firm also has 42 Minimizing Development Cycle Time Even products that achieve a very close fit with customer requirements can fail if they take too long to bring to market. Bringing a product to market early can help a firm build brand loyalty, capture scarce assets, and build customer switching costs. A firm that brings a new product to market late may find that customers are already committed to other products. Also, a company that is able to bring its product to market early has more time to develop complementary goods that enhance the value and attractiveness of the product. Another important consideration regarding development cycle time relates to the cost of development and the decreasing length of product life cycles. First, many development costs are directly related to time. Both the expense of paying employees involved in development and the firm’s cost of capital increase as the development cycle lengthens. Second, a company that is slow to market with a generation of technology is unlikely to be able to fully amortize the fixed costs of development before that generation becomes obsolete. Finally, a company with a short development cycle can quickly revise or upgrade its offering as design flaws are revealed or technology advances. A firm with a short development cycle can take advantage of both first mover and second-mover advantages. Controlling Development Costs Sometimes a firm engages in an intense effort to develop a product that exceeds customer expectations and brings it to market early, only to find that its development costs have grown so much that it is impossible to recoup the development expenses even if the product is enthusiastically received by the market. This highlights the fact that development efforts must be not only effective, but also efficient. THE ORGANIZATIONAL APPROACHES OF THE NEW PRODUCT DEVELOPMENT PROCESS Depending on the complexity/extent of each phase and the level of integration among the different stages of the process, it is possible to classify the new product development process in:  sequential engineering, where each stage of the development process is carried out separately, and the next stage cannot start until the previous stage is finished. The information flow is only in one direction. The main goal of this model is to reduce the degree of uncertainty at every phase (i.e. in the pharmaceutical industry);  concurrent engineering, phase of the process can be overlapped, because the execution of one phase does not imply that the previous one has to be completed. Each activity is managed by a cross functional team that coordinate and control all the process, from the idea generation phase to the production of the product. The Sequential Engineering Approach 45 The Concurrent Engineering Approach PROJECT CHAMPIONS Several studies on new product development have suggested that firms should assign (or encourage) a senior member of the company to champion/support a new product development project. Senior executives have the power and authority to support and fight for a project. They can facilitate the allocation of human and capital resources to the development effort, ensuring that cycle time is not extended by resource constraints. A senior project champion also can stimulate communication and cooperation between the different functional groups involved in the development process. The use of executive sponsors can improve the effectiveness of the development process. Risks of Championing A project championing, however, also has its risks. A manager’s role as champion may create judgment about the true value of the project. Though the champion’s seniority is an asset in gaining access to resources and facilitating coordination, this same seniority may also make others in the firm unwilling to challenge the project champion even if it has become apparent that the project’s expected value has turned negative. Firms should also encourage a corporate culture open to the expression of dissenting opinion, and champions should be encouraged to justify their projects based on objective criteria, without resorting to force of personality. 46 INVOLVING CUSTOMERS AND SUPPLIERS IN THE DEVELOPMENT PROCESS Many products fail to produce an economic return because they do not fulfil customer requirements for performance and price, or because they take too long to bring to market. Both of these problems can be reduced by involving customers and suppliers in the development process. Involving Customers The customer is often the one most able to identify the maximum performance capabilities and minimum service requirements of a new product. Including the customer in the actual development team or designing initial product versions and encouraging user extensions can help the firm focus its development efforts on projects that better fit customer needs. Many firms use beta testing to get customer input early in the development process. A “beta version” of a product is an early working prototype of a product released to users for testing and feedback. Beta versions also enable a firm to signal the market about its product features before the product reaches the commercial production stage. Other firms involve customers in the new product development process in even more extensive ways, such as enabling customers to “cocreate” the end product. Some studies suggest that firms should focus on the input of lead users in their development efforts rather than a large sample of customers. Lead users are those who face the same needs of the general marketplace but face them months or years earlier than the bulk of the market and expect to benefit significantly from a solution to those needs. Involving Suppliers Much of the same logic behind involving customers in the new product development process also applies to involving suppliers. By tapping into the knowledge base of its suppliers, a firm expands its information resources. Suppliers may be actual members of the product team or consulted as an alliance partner. In either case, they can contribute ideas for product improvement or increased development efficiency. For instance, a supplier may be able to suggest an alternative input (or configuration of inputs) that would achieve the same functionality but at a lower cost. Additionally, by coordinating with suppliers, managers can help to ensure that inputs arrive on time and that necessary changes can be made quickly to minimize development time. Crowdsourcing Firms can also open up an innovation task to the public through crowdsourcing. Many crowdsourcing programs offer some sort of prize to successful participants. 47 Five Myths about Product Champions Markham and Aiman-Smith identified five popular myths:  Myth 1: Projects with champions are more likely to be successful in the market Markham and Aiman-Smith point out that while champions may improve the likelihood of a project being completed, the factors determining its market success are often beyond the champion’s control.  Myth 2: Champions get involved because they are excited about the project, rather than from self-interest.  Myth 3: Champions are more likely to be involved with radical innovation projects.  Myth 4: Champions are more likely to be from high (or low) levels in the organization.  Myth 5: Champions are more likely to be from marketing. the likelihood of making mistakes in the assembly process, resulting in higher product quality. The benefits of adopting DFM rules can be many: 1) It can shorten development cycle time. 2) lower costs 3) increasing product quality 4) increase the product’s fit with customer requirements. Failure Modes and Effects Analysis (FMEA) Failure modes and effects analysis (FMEA) is a method by which firms identify potential failures in a system, classify them according to their severity, and put a plan into place to prevent the failures from happening. First, potential failure modes are identified then they are evaluated on three criteria of the risk they pose: severity, likelihood of occurrence, and inability of controls to detect it. Each criterion is given a score (e.g., one for lowest risk, five for highest risk), and then a composite risk priority number is created for each failure mode by multiplying its scores together (i.e., risk priority number 5 severity 3 likelihood of occurrence 3 inability of controls to detect). Computer-Aided Design and Computer-Aided Engineering/ Computer-Aided Manufacturing Computer-aided design (CAD) and computer-aided engineering (CAE) is the use of computers to build and test product designs. Rapid advances in computer technology have enabled the development of low-priced and high-powered graphics-based workstations. CAD enables the creation of a three-dimensional model; CAE makes it possible to virtually test the characteristics (e.g., strength, fatigue, and reliability) of this model. Engineers can quickly adjust prototype attributes by manipulating the three-dimensional model, allowing them to compare the characteristics of different product designs. Eliminating the need to build physical prototypes can reduce cycle time and lower costs. Computer-aided manufacturing (CAM) is the implementation of machine-controlled processes in manufacturing. CAM is faster and more flexible than traditional manufacturing. Computers can automate the change between different product variations and allow for more variety and customization in the manufacturing process. A recent computer-aided manufacturing is three-dimensional printing. Three- dimensional printing can generate a model in a few hours. Overall Innovation Performance Firms also use a variety of methods to assess their overall performance at innovation. Such measures include: 1. What is the firm’s return on innovation? (This measure assesses the ratio of the firm’s total profits from new products to its total expenditures, including R&D costs, the costs of retooling and staffing production facilities, and initial commercialization and marketing costs.) 2. What percentage of projects achieve their sales goals? 3. What percentage of revenues are generated by products developed within the past five years? 4. What is the firm’s ratio of successful projects to its total project portfolio? CHAPTER 12 - MANAGING NEW PRODUCT DEVELOPMENT TEAMS New product development often requires activities that are responsibility of different departments within the organization. To facilitate coordination and cooperation across division boundaries, many organizations create cross-functional new product development teams to lead and manage the development process for the project. A team is a small number of people with complementary skills who are committed to a common purpose for which they hold themselves mutually accountable. CONSTRUCTING NEW PRODUCT DEVELOPMENT TEAMS 50 In constructing new product development teams, the organization must consider how the team’s size and composition will affect its mix of skills, its access to resources, and its effectiveness in providing communication and coordination across the divisions. Team Size New product development teams may range from a few members to hundreds of members. By combining the efforts and expertise of multiple individuals, groups can often outperform individuals on many problem-solving tasks, implying that the size of the development team might be related to its potential for success. Bigger, however, is not always better. Large teams can create more administrative costs and communication problems, leading to costly delays. Additionally, the larger the team, the harder it can be to foster a shared sense of identity among team members. Further, as the size of the team increases, the potential for social loafing also increases. Social loafing occurs when, as the size of the team increases, individuals perceive that they will not receive full credit (or blame) for their contribution to the group effort and so their effort and commitment decrease. Three Ways to Reduce Social Loafing Team Composition A lack of communication among marketing, R&D, and manufacturing functions of a company can be extremely detrimental to new product development. A lack of cross-functional communication can lead to a poor fit between product attributes and customer requirements. One of the ways that firms address this problem is by building cross-functional product development teams. Cross-functional teams include members drawn from more than one functional area, such as engineering, manufacturing, or marketing. Teams that are composed of people from diverse backgrounds have several advantages over teams that are drawn from only one or a few functional areas. Individuals tend to interact more frequently and more intensely with other individuals whom they perceive as being like them on one or more dimensions. This phenomenon is known as homophily. Research on homophily suggests that individuals prefer to communicate with others they perceive as similar to them because it is easier and more comfortable to communicate with those who have similar dialects, mental models, and belief systems. Heterogeneous teams often have greater difficulty integrating objectives and views, leading to conflict and lower group cohesion. 51 In sum, heterogeneous teams should possess more information, on average, than homogeneous groups. The heterogeneity of a team can also increase the creativity and variance in decision making, leading to more innovative outcomes and higher overall performance. However, to realize this potential performance advantage, heterogeneous teams may require long-term contact and incentives to foster communication and cooperation. The ability of team members to communicate and cooperate effectively is also a function of the personalities of the individuals on the team. A study by Susan Kichuk and Willi Wiesner explored whether five personality factors (conscientiousness, extroversion, neuroticism, agreeableness, and openness to experience) influenced the likelihood of success in new product development teams. Kichuk and Wiesner found that the personality characteristics that enhanced the success of a new product development team were high extroversion, high agreeableness, and low neuroticism. THE STRUCTURE OF NEW PRODUCT DEVELOPMENT TEAMS Teams can be structured in several ways. One well-known typology classifies teams into four types: functional, lightweight, heavyweight, and autonomous: 1) Functional Teams: 52 Boundary-Spanning Activities in New Product Development Teams To be successful, new product development teams must be able to manage relationships with groups that are beyond the team’s boundaries. Teams need to be able to collect information and resources both within and outside of their organizations. Teams are engaged in three primary types of boundary-spanning activity:  Ambassador activities—These activities were directed at representing the team to others and protecting the team from interference.  Task coordination activities—These activities emphasized coordinating and negotiating the team’s activities with other groups.  Scouting activities—These activities were directed at scanning for ideas and information that might be useful to the team, enhancing its knowledge base. Scouting and ambassador activities are more beneficial if conducted early in the development project cycle, while task coordination activities are beneficial throughout the life of the team.