Summary of the Book Strategic Management of Innovation, Dispense di Information Technology Management

Scarica Summary of the Book Strategic Management of Innovation e più Dispense in PDF di Information Technology Management solo su Docsity! Strategic Management of Technological Innovation Chapter 2: Sources of Innovation Ideas  Creativity  Innovation Creativity: ability to generate new (i.e. in terms of how the idea is different from previous work and audience’s prior experience) and useful ideas. It can either be individual or organizational. 1. Individual creativity: function of a person’s intellectual abilities, knowledge, style of thinking, personality, motivation and environment. 2. Organizational creativity = individual creativity + social processes and contextual factors that shape the way individuals within an organization interact and behave (therefore, organizational creativity is more than the mere sum of the individual creativity of people inside the organization).  The organization can implement processes to spur the creativity of its employees: - Suggestion boxes - Competition - Creativity training programs  Google is at the forefront of such programs: - 20% time: engineers are encouraged to spend 20% of their time working on innovative projects - Awards at both department and organizational level - Innovation Reviews: institutionalized moments in which new product ideas are pitched to the top management Innovation: implementation of new and useful ideas into a new device or process. It requires to combine creativity with the knowledge and resources that make possible to produce a useful device. Innovation can have many sources: 1. Inventor: a 10-year study on inventors have underlined that the most inventors are people who share some common traits, such as the transversal competences in several fields, the Summary – Sources of innovation: 1. Inventors 2. Users 3. Firms 4. Universities and governments curiosity and ability to think out of the box, the capacity to question the assumption and the understanding that all knowledge is unified. 2. Users: they are the most qualified to recognize their unmet needs and have most incentivized to take action to fill the gap. They usually have no initial intention to profit from the invention, their primary goal is to exploit the invention themselves. Examples of users’ invention are the Laser boat and the snowboard. 3. Firms: one of the most famous source of innovation is obviously the firm’s own Research and Development department which carries out a range of activities that extend from early exploration of a domain to specific commercial implementation. - Research: based on the objective, it can be categorized as: o Basic Research: effort directed to understanding a field without any specific commercial application in mind; o Applied Research: directed at increasing the understanding of a topic to meet a specific need - Development: activities that apply the knowledge acquired through research to produce useful devices or services. Research and development can be approached in two ways: - Science-push: basic research is the origin of innovation. Discoveries in scientific fields lead to the creation of commercially exploitable products and services; - Demand-pull: the needs of the market are the origin of innovation. Once a unmet need in the market is recognized, research is directed towards the satisfaction of such unmet demand.  Science-push and demand-pull shall be seen as the extremes of a continuum, innovation will more likely be characterized by a mix of these two approaches. It has actually been found that firms use a mix of sources of information and ideas in their innovation efforts: - Existing and potential customers; - External network of firms including competitors, complementor and suppliers; - External sources of information such as universities and governments 4. Universities and Government-funded research: - Universities are usually more engaged in basic research, even though there has been an increasing tendency to encourage faculty in engage in research that might lead to the development of products and services. 2. Funding is provided to a mix of university-based researchers, start-ups and established firms and industry consortia without making distinction between basic and applied research 3. Since the mandate of the agency is helping firms get products to market, the support of DARPA goes beyond simple funding and entails also providing other types of non-financial assistance to firms 4. The agency uses its oversight role to create linkages between ideas, resources and people in different research and development sites. Small Business Innovation Research Program: The Small Business Innovation Development Act was signed by Reagan in 1982, as a consortium between the Small Business Administration and different government agencies like the Department of Defense, Department of Energy and Environmental Protection Agency. The core of the program was for government agencies with large research budgets to designate a fraction of their research funding to support initiatives of small, independent, for-profit firms. As a result, the SBIR Program because one of the first places where entrepreneurs go to find funding for their innovative projects. The program, which provides more than $2 billion per year in direct support to high-tech firms, has fostered development of new enterprises, and has guided the commercialization of hundreds of new technologies from the laboratory to the market Orphan Drugs: To encourage the private sector to invest in the development of drugs for rare diseases (and, as such, small markets) a legislation was passed providing incentives to firms willing to develop “orphan drugs” through tax incentives, clinical as well as R&D subsidies, fast-track drug approval, along with strong intellectual and marketing rights for products developed for treating rare conditions. Pharmaceutical companies investing in such drugs had therefore the opportunity to earn great revenues even with small markets. As explained below, the US government played a crucial role in the development of the bio-tech industry through its legislation on orphan drugs, allowing firms to earn great revenues: “The US government still serves as an investor in knowledge creation, subsidizer of drug development, protector of drug markets, and, last but not least... purchaser of the drugs that the biopharmaceutical companies have to sell. The BP industry has become big business because of big government, and... remains highly dependent on big government to sustain its commercial success”. IMP: From this brief overview of these three examples — DARPA, SBIR and orphan drugs — a general point can be drawn: the USA has spent the last few decades using active interventionist policies to drive private sector innovation in pursuit of public policy goals. The National Nanotechnology Initiative The creation and subsequent development of the NNI has been neither a purely bottom-up nor top-down approach: it did not derive from a groundswell of private sector initiative, nor was it the result of strategic decisions by government officials. Rather it resulted from the vision and efforts of a small group of scientists and engineers at the National Science Foundation and the Clinton White House in the late 1990s. It seems clear that Washington selected nanotechnology as the leading front runner, initiated the policy, and invested in its development on a multibillion dollar scale  the US government was looking for a new breakthrough technology that could shape the economy of the future and it could not delegate the role of developing such technology to the private sector because of the time horizons (from 10 to 20 years) that such development would have had. Indeed, industry generally invests only in developing cost-competitive products in the 3 to 5 year time frame. It is difficult for industry management to justify to their shareholders the large investments in long-term, fundamental research needed to make nanotechnology-based products possible. Furthermore, the highly interdisciplinary nature of the needed research is incompatible with many current corporate structures. Clinton and Bush governments were convinced that nanotechnology was the “next big thing” and that the country that would have been ahead in the development of such technology would have had an advantage in the military and economic field. Therefore, the government not only selected nanotechnology as the sector to back most forcefully, but also proceeded to launch the NNI, review rules and regulations concerning nanotech by studying the various risks involved, and become the largest investor, even beyond what it has done for biotech and the life sciences. Menon: Making Innovation Happen In Organizations: Individual Creativity Mechanisms, Organizational Creativity Mechanisms Or Both The paper aims at testing the organization innovation hypothesis according to which innovation is a function of individual efforts and institutionalized systems to facilitate creativity (i.e. organizational creativity mechanisms: formal approaches and tools used by the company to encourage meaningful novel behaviors within the company). Individual creativity is based on intelligence, motivation to innovate and creative skills. Although the first factor is innate, literature emphasizes how the latter two factors can be influenced by external stimuli. Therefore, we can assume that individual creativity can be acquired and improved through instruction and practice and that companies can train and educate their employees for this purpose. On their side, employees must be willing to appear less consistent, comfortable, confident and competent in order to improvise and be innovative.  The first hypothesis in the paper is therefore that the greater the level of individual creativity mechanisms, the higher the innovation performance of the organization Furthermore, research suggests that organizations can put into place creativity processes and techniques to facilitate and enhance innovation. In particular, the firm can signal its desire for innovation by allocating funds specifically  The second hypothesis in the paper is therefore that the greater the level of organizational creativity mechanisms, the higher the innovation performance of the organization  If we put together the two previous hypotheses we obtain that the greater the level of individual and organizational creativity mechanisms, the higher the level of innovation performance After having applied an econometric model based on multivariate analysis on these hypotheses, researchers found out that: - Organizational creativity mechanisms and individual creativity mechanisms can lead to innovation in companies. This implies that management-instituted mechanisms for innovation differentiate between high and low performance organizations. This occurs because the efforts undertaken by the company to value creativity affect employees psychologically by signaling the importance of innovation. - Creativity can be acquired and improved through instruction and practice, therefore creativity training for individuals would help them to improve their problem-solving skills, leading to more innovative solutions to existing problems. Technology S-Curves: 1. S-CURVES IN TECHNOLOGICAL IMPROVEMENT: - What is plotted: technology performance against amount of effort and money invested in the technology. - Trend: o Slow initial improvement: in the early stages of a technology high amount of effort/money lead to small improvements due to a poor understanding of its fundamentals. Several paths of improvement are pursued and it is difficult to attract researchers; o Accelerated improvement: as scientists and firms gain a deeper understanding of the technology, improvements begin to accelerate as more developers are attracted by the technology. Furthermore, standards are developed, allowing researchers to focus on improvements that reap the highest returns. o Diminishing improvement: as the technology starts to reach its inherent limits, the cost of each marginal improvement increases and the s-curve flattens. o Technologies not always have the opportunity to reach their limits: they might be rendered obsolete by discontinuous technologies (i.e. a technology that serves a similar market need as the existing technology but is based on an entirely different knowledge base). In particular, a discontinuous technology might disrupt the existing technology by attracting firms’ attention and effort when:  Its s-curve reaches higher limits  Its s-curve is steeper  In such cases there are going to be times when the returns invested in the new technology reap greater benefits than those of the incumbent technology - NB: improvement can be plotted against time only if the effort put into the technology is constant over time as well. 2. S-CURVES FOR TECHNOLOGY DIFFUSION - What is plotted: cumulative number of adopters over time - Trend: o The trend is initially slow because users are unfamiliar with the technology o The trend accelerates as the technology becomes better understood and used by the mass market. Sometimes this can take some time because of:  The complexity of the knowledge required to use the technology might be tacit or complex from the point of the customer and is built up through experience.  Some technologies express their full potential only after complementary resources are developed for them. o The curve then flattens because the market eventually becomes saturated so the rate of new adoptions declines. - Adopter categories of a technology are: o Innovators: first individuals to adopt the innovation, they usually bring new ideas to the system and represent 2,5% of the adopters; o Early Adopters: people with a strong capacity to influence the system through their opinion leadership and as such to promote the use of the technology. Represent 13,5% of users. o Early Majority: majority of people who adopt the technology slightly before the average member of the social system. Represent 34% of users. o Late Majority: People who adopt the innovation only when they feel the pressure by their peers. They might be more reluctant to adopt the technology because of their scarce resources. Represent 34% of users. o Laggards: people who base their decisions mostly on past experiences rather than influences from their social network. Represent 16% of users. IMP: The two S-curves, for technological improvement and diffusion are deeply related as the latter is a function of the first. Indeed, as technologies become better developed, they become more certain and useful to customers, facilitating their adoption. Furthermore, technological improvements usually impact also the price of the technology, that can sensibly be reduced. S-curves can be used as a prescriptive tool: a guide for whether and when a firm should move to a more profitable technology, as they show when a technology is approaching its limits or other technologies can reap higher benefits. Nonetheless, there are some limitation in the prescriptive use of s-curves to this purpose: - It is rare that the inherent limits of a technology are known in advance - The shape of a s-curve can change over time because of unexpected changes in the market or in its components. Therefore, s-curves should not be the only factor taken into account by firms when deciding to move to a new technology. Indeed, the firms should also consider: - The advantages offered by the new technology - The fit of the new technology with firm’s capabilities - The existence of complementary resources for the new technology - The expected rate of diffusion of the new technology Technology Cycles: The s-curve model suggests that technological change is cyclical: technologies are created, increasingly adopted and then substituted by a technological discontinuity  creative destruction. Theories of technological cycles: 1. Utterback and Abernathy: I. Fluid phase: considerable uncertainty about the technology and the market because of its costs, unreliability or other factors. During this phase, firms experiment with the features of the technology to assess the market response.  This phase ends with the selection of the dominant design: a product design is adopted by the majority of the producers. II. Specific phase: the selection of a dominant design typically creates a stable architecture on which the industry focuses its effort. That is, the architecture of the technology is chosen and firms start focusing their attention on component innovation which becomes the center of firm’s competition.  This phase ends with the arrival of a technological discontinuity which restarts the cycle. Nonetheless, firms might experience barriers in recognizing the presence of a discontinuity, because they are focused on maximizing the efforts to compete in the incumbent dominant design. 2. Anderson and Tushman: similar as Utterback and Abernathy, but the fluid phase is called era of ferment and the specific phase is called era of incremental change. Similarly to Utterback and Abernathy, they also recognize the emergence of a dominant design. The organization may be tempted to modify the channels, filters, and strategies that already exist rather than to incur the significant fixed costs and considerable organizational friction required to build new sets from scratch. But it may be difficult to identify precisely which filters, channels, and problem-solving strategies need to be modified, and the attempt to build a new product with old (albeit modified) organizational tools can create significant problems.  That is, new entrants might have much more advantages in adapting to the new architectural innovation  Chapter 4: Standards Battles and Design Dominance Dominant designs are selected because many industries exhibit increasing returns to adoption. That is, a virtuous cycle starts in which the more a technology is adopted, the more valuable it becomes since it gets improved with the profits from adoption, and being improved in turn leads to higher adoption rates IMP: Creation of a self-reinforcing mechanism that increases the dominance of a technology regardless of its superiority or inferiority to competing technologies. Increasing returns have two sources: 1. Learning Effects: the more a technology is adopted, the more valuable it becomes because its proceedings are used to further refine and improve the technology. - This can be seen through Learning Curves which plot the impact of cumulative production on cost and productivity. They show that performance increases (or cost decreases) with the number of units produced, according to a decreasing rate. This occurs because as producers repeat a process, they manage to make it more efficient. Not all firms follow the same rates of performance improvement or cost decreases, as their rate of organizational learning will be impacted by their prior learning experiences and absorptive capacity. - Absorptive capacity refers to the firm’s ability to recognize, assimilate and utilize new knowledge. It is built by a firm’s investment in prior learning which can accelerate its rate of future learning. Indeed, the firm’s prior learning experiences can help the firm building its ability to recognize the value of new information and capitalize on it. This is due to the fact that past learning experiences help firms understand what path are unsuccessful, what materials work better than others, what interactions between components are best. This prior knowledge can then be feed into new projects. 2. Network Externalities: in a market characterized by network externalities, the benefit from using a good increases with the number of other users of the same good. This can be the case of markets using physical networks but also when compatibility is important. - When compatibility is important, then the value of the good will increase with its installed base (i.e. number of users of a particular technology). The size of the installed base defines the users’ capacity to exchange information (for example, exchange files) and their willingness to put effort into familiarizing with the technology. Dominant designs are selected in industries exhibiting increasing returns to adoption, which is due to: - From the point of view of firms: Learning effects o Learning curves o Absorptive capacity - From the point of view of customers: Network externalities o Installed base o Complementary product - Network externalities also arise when complementary goods are important. Indeed, many goods are functionable or desirable only when complementary goods are available for them (e.g. consoles and videogames, electric cars and recharging stations). The existence of complementary goods is circularly linked to the installed base: the larger the installed base, the more developers of complementary goods are attracted into the market. In turn, the more complementary goods are available in the market, the more attractive the product is and the larger the installed base. IMP: All these forces can encourage a market towards a natural monopoly, because the firm that is able to lock in the dominant design will then be able to reap huge rewards and have significant control over the future generations of the technology. Conversely, the firm whose design isn’t picked as the dominant one will have to forfeit the capital, learning and brand equity invested in the losing technology. Increasing returns to adoption also imply that such technologies will be characterized by path dependency (i.e. relatively small historical events may have a great impact on the final outcome). This is the case because factors that are unrelated to the technical quality of the technology can influence its success, such as its launch timing or its sponsorship. This demonstrates that superior technological products don’t always win and this is the case because of the multiple dimensions of value that shape design selection. Multiple dimensions of value 1. Stand-alone Value: it defines the value of a technology to a customer based on its performance, aesthetic quality and ease of use. The Buyer Utility Map helps understanding the weighting the six different utility levers for customers (purchase, delivery, use supplements, maintenance and disposal) and the six stages of the buyer experience cycle (customer productivity, simplicity, convenience, risk, fun and image and environmental friendliness). This map helps un understand in which dimensions the technology creates value to the customer.  This is the only dimension of value that is taken into account in industries characterized by increasing returns to adoption 2. Network Externality Value: in industries characterized by increasing returns to adoption, the value of network externalities is summed to the stand-alone value. This is why, even if a technology might have a superior technical quality, it might not become the dominant standard: its overall value needs be high than the value of the incumbent design. The network externality value is defined as the value created by its installed base and availability of complementary goods. If we plot the curve for value to customer against installed base, we see that also that also this graph follows a s-shaped trend. This is because at first the installed base is to small to reap significative benefits to customers and increase value, but beyond a certain threshold it start increasing significantly, until it plateaus because at very high levels of installed base additional users don’t increase much the value of the technology. By the time a company has successfully developed a new technology, its might have borne not only the expense of the technology, but also the expense of exploring technological paths that did not yield a commercially viable product. Such sunk costs does not need to be sustained by later entrants, because once the product is entered into the market competitors can understand how it is created. 2. Underdeveloped Supply and Distribution Channels: If the supply and distribution channels for the technology are not there, the company might have to be faced with the daunting task of building them itself or assisting suppliers and distributors in their development. 3. Immature Enabling Technologies and Complements: Similarly to the previous point, if enabling technologies (i.e. component technologies that are necessary for the performance or desirability of a given innovation) are not available for the new product, then the first mover has to take care of it itself. 4. Uncertainty About Customer Requirements: This is the uncertainty about what product features customers might require and how much they will be willing to pay for them. This could cause the need to adjust the first mover’s product, as customers start revealing their preferences. This uncertainty is not faced by later movers, that have already had the opportunity to witness the customer’s response to the first mover’s product. Factors influencing optimal timing of entry: Factor First mover Certainty about customer preferences Lower customer uncertainty:  the innovation is developed in response to a well understood customer need Degree of improvement over previous technologies The technology is a dramatic improvement over previous generations of technologies that serve a similar function  the innovation will gain customer acceptance more rapidly due to a lower ambiguity about the value of the technology Necessity of enabling technologies and their availability High levels of enabling technologies maturity incentivizes earlier entry Assessment on the threat of competitive entry If there are significant barriers to entry and just few competitors have the resources and capabilities to enter the market, then the firm might be able to wait until customers’ requirements become certain and the technology evolve. If this is not the case and the technology proves to be valuable, then there might be several competitors interested in entering the market and a competitive market is much more difficult to tackle than an emerging one Likeliness of increasing returns to adoption If the market is characterized by increasing returns to adoption, then providing competitors with a chance to have an head start and build an installed base and complementary products can be very risky. Furthermore, if there are pressures for the selection of a dominant design, then another company’s technology could be selected Possibility to withstand early losses When a firm is the first to launch a product in a market, it needs to account for an initial period of little profits related to limited sales and high costs (as explained in the previous section). The firm shall be the first mover if it has the possibility to find internally or externally the capital required to withstand potential early losses Possession of resources to accelerate market acceptance A firm with significant resources can invest them in accelerating market take-off by investing in market education, development of supply and distribution channels and development of complementary goods David: Clio and the Economics of QWERTY Main point: A superior design alone does not justify the adoption of a new technology. This is exemplified by the case of the QWERTY typewriter and the superior DSK design. The QWERTY keyboard was invented in the late 1800 century to solve the most important issue of old typewriters: the jamming of close letters when they were struck in rapid succession, which would have been discovered by the typewriter only when it would bother moving the paper carriage to check the letters. Therefore, the QWERTY keyboard was created with the goal in mind of placing far apart letters there were commonly used in rapid succession. This keyboard was then applied to the Sholes-Remington typewriter which became, after fierce competition among different designs, the dominant one in the 1890s. Back then, typewriters became an important part of the economic systems, with their increasing utilization in individual houses and in firms. This led to the proliferation of private and public organizations training people in their typewriting skills. More importantly, Remingtons’ QWERTY keyboard became locked in as the dominant one during the passage from single-finger typing to touch typing for three main reasons: 1. Technical interrelatedness between the skills of the typewriter, and specifically their memory regarding the position of the letters on the keyboards, and the keyboard configuration. The interrelatedness between these two elements led typewriters to value the compatibility of the software with their skills. Consequently, employers start buying typewriters that were compatible with the skills their employees were trained in, influencing also the decision of subsequent generations of aspiring typewriters regarding the keyboard configuration to learn. 2. Economies of scale: the more people were trained in the QWERTY keyboard, the more other people were attracted in learning to type using such keyboard configuration 3. Quasi-irreversibility of the investment: the investment consists of the training received by typewriters when learning the QWERTY keyboard, which was extremely difficult to sacrifice in favor of a different keyboard configuration, while switching the supplied side typewriter makers to the QWERTY keyboard was much easier. That is, the costs of software switching were increasing while new developments in the field were leading down the costs of hardware conversion. Therefore, typewriter manufacturers interested in gaining market share would be able to easily do so by moving to a the QWERTY configuration. Chapter 7: Choosing Innovation Projects Capital Rationing: the firm has a fixed budget for R&D and then uses a rank ordering of projects to define which ones will be funded. The budget is usually fixed based on industry benchmark or firm’s past performance. The rank ordering used in capital rationing can be based both on quantitative or qualitative methods. QUANTITATIVE METHODS: 1. Discounted Cash Flow Method: Given the risk associated to a project, the Discounted Cash Flow method aims at calculating the future economic benefits deriving from a project to assess them against the expenditures. The two most common tools to carry out a Discounted Cash Flow analysis are: - Net Present Value: it focuses on understanding what the project is worth at present. It considers the costs and the cash flows that the project will yield in the future and they are then discounted back to account for risk and time value of money. If the value so obtained is greater than 0, then the project will generate wealth. - Internal Rate of Return: it focuses on understanding what is the rate of return of the project, that is the discount rate that makes the net present value of the investment 0. This IRR can be then compared to the rate of return required by the managers to understand whether the project is worth investing in. The DCF method has some important shortcomings: - Their estimates are as accurate as the original estimates of expected profits from the technology, which are extremely difficult to calculate with precision. - It discriminates against projects that are long term or risky, because the cash flows are discounted based on the risk of the project and the time value of money - It undervalues the contribution of a development project to the firm in terms of learning opportunities or its strategic impact. 2. Real Options: the development project can resemble an option as it can create value for future opportunities for the firm that would have been unavailable otherwise. Indeed, an investor who makes an investment in basic R&D is like buying a real call option (i.e. an option with a non-financial underlying asset) to implement the technology later should it be proved commercially viable. The elements of the option in this similitude are:  Price of the call option: cost of the R&D program  Exercise price: cost of future investment to capitalize the research  Value of the stock option: returns on the R&D money invested by buying the option QUALITATIVE METHODS: 1. Screening Questions: list of questions that are used to structure the discussion on the potential benefits and costs of a technology. The questions revolve around: - The role of the customer - The role of the firm’s capabilities - The project’s timing and cost Each category can be weighted based on their importance for the specific project to be used in subsequent analysis. This method itself is not sufficient to decide whether to fund a project, nonetheless it can be useful to assess important qualitative aspects of the project that can inform the decision but are not captured using the quantitative methods. 2. Aggregate Project Planning Framework: many firms use this approach to map their R&D portfolios in terms of level of risk, resources committed and timing of cash flows. The outcome of this activity can then be compared to the desired portfolio managers want, in order to fill any gap. It is common that four types of projects appear in this map (by time projects can migrate from one category to another): - Advanced R&D: precursors of commercial projects and needed to develop cutting-edge strategic innovation. - Breakthrough Projects: products that have a revolutionary nature - Platform Projects: technologies that offer significant improvements in term of cost, quality and performance of a technology over previous generation. These improvements target core customers - Derivative Projects: incremental changes in product or processes. These improvements target niche customers This map gives a good overview of the R&D portfolio and provide information to the firm about the tradeoffs between short term cash needs and long-term strategic goals. For example, the map might show that the firm is investing heavily on platform project which have more immediate cash returns and investing not much in breakthrough projects that might come in handy once a new technological discontinuity comes. COMBINATION OF QUANTITATIVE AND QUALITATIVE INFORMATION: 1. Conjoint analysis: it’s a family of techniques used to understand the value placed by an individual on the relative attributes of a product. By providing weights to answers, the conjoint analysis allows for a statistical analysis of people’s choices. It is mostly used to assess the implications of different product configurations, by having individuals rank in a scale from 1 to 10 different models of a product. 2. Data Envelopment Analysis: method of assessing a project using multiple criteria with different weights. 3. Licensing: contractual arrangement whereby a firm (i.e. licensee) obtains the right to use the proprietary technology of another organization (i.e. licensor). The benefits of such agreements are: - For the licensor: o The technology would penetrate a larger market than it could by its own; o If there is a battle for design dominance, then licensing the technology might be a good idea to avoid competitors from developing their own technologies (even if this means forgiving monopoly rents) o Way to scale the penetration of the technology, getting earnings for almost free through royalties, while relinquishing some control on the technology, based on the licensing agreement o Nonetheless, the licensor does not earn anything in terms of new competencies from the licensing agreement - For the licensee: o Quick access to a technology in a more cost-effective way than developing it in house even if it entails having a low degree of control on the technology o A good way to obtain access to enabling technology which are not at the core of the company’s competitive advantage but are necessary for its products or services 4. Outsourcing: firms might not possess in-house the necessary capabilities to perform all the value chain activities needed for the new technology effectively or efficiently. A common form of outsourcing is contract manufacturing, which entails a firm hiring a manufacturer to take care of production. - The main advantages of outsourcing are: o The hiring firm to access great flexibility as it allows it to meet the scale of market demand without investing in long-term assets or increasing the labor force o It allows the hiring firm to focus on the activities that are central to its competitive advantage o It allows the hiring firm to access economies of scale and have a faster response time - Nonetheless, outsourcing also has several disadvantages: o By relying on outsourcing, the firm forfeits important learning opportunities o Outsourcing imposes significant transaction costs  When to choose outsourcing for collaboration: the firm is giving up a moderate amount of control to rapidly gain access to another firm’s expertise with a lower cost structure. That is, the outsourcing firm pays less than what it would have paid by performing that activity in house. Outsourcing shall be chosen when: o Firm activities that are not central to its competitive advantage o Activities that would cause the firm to give up crucial flexibility if performed in house o Activities in which the firm has a cost or quality disadvantage 5. Collective Research Organizations: trade associations, university-based centers or private research corporations usually formed through government or industry association initiatives. This type of collaboration is particularly useful in industries that have complex technologies and require considerable investments in basic science. Choosing and Monitoring Partners: 1. Partner Selection: to choose the best partner for the collaboration, two factors shall be taken into account a. Resource fit: degree to which potential partners have resources that can be effectively integrated into a strategy that creates value. Such resources can be pooled together in two ways: i. Complementary fit: the collaboration is based on the goal of accessing resources that the firm doesn’t possess ii. Supplementary fit: the collaboration is based on the goal of increasing the existing resources of a firm to achieve higher economies of scale or market power. b. Strategic fit: degree to which partners have compatible objectives and styles 2. Partner Monitoring and Governance: successful collaboration agreements usually entail a clear, yet flexible, monitoring and governance mechanisms. Nonetheless, the more resources are put at stake in the collaboration, the more rigid the governance structure becomes. There are three main types of governance mechanisms used to manage collaborative relationships: a. Alliance contracts: contractual agreements which cover partners’ rights and obligation and ensure that partners have legal remedies in case of violation of the agreement. They usually include: i. Each partners’ contribution to the relationship ii. The degree of control of each partner in the relationship iii. How the proceeds from the relationship will be distributed b. Equity Ownership: each partner contributes capital and owns a share of equity in the alliance. Such mechanism aligns the incentives of the parties and ensures commitment to the relationship c. Relational Governance: this is a more informal relationship where the interactions between the parties are based on reputation and trust Chesbrough: The Era of Open Innovation In the past, R&D was a valuable strategic asset and even a barrier to entry for many markets. Conversely, today many upstarters enter into the market conducting little to no basic research on their own and bringing innovative solutions to the market in a different way. This shows how R&D is not anymore the strategic asset that it used to be, this is due to the shift occurred in how companies generate new ideas and bring them to the market. In the past: Closed Innovation  companies believe that successful innovation requires control. That is, companies generate their own ideas in house and deploy them themselves. This model was based on firm’s strong belief in self-reliance: by hiring the brightest researchers and heavily investing in R&D, firms were able to bring first to the market new technologies, aggressively protected by IP. The high profits generated by these technologies were then reinvested in further R&D. Today: Open Innovation  the dramatic rise in the mobility of workers, which made it difficult for companies to control their proprietary ideas, and the development of venture capital eroded the underpinnings of closed innovation in the United States. This causes that If a company that funded a discovery doesn’t pursue it in a timely fashion, the people involved could pursue it on their own — in a startup financed by venture capital. However, these start-ups would not reinvest the profits from the innovation in further in-house R&D, but in another technology to commercialize. Therefore, in this new model of open innovation, firms commercialize external (as well as internal) ideas by deploying outside (as well as in-house) pathways to the market. According to the open innovation model, the boundary between a firm and its surrounding environment is more porous, since companies can commercialize internal ideas through channels outside of their current businesses in order to generate value for the organization. Conversely, ideas can also originate outside the firm’s own labs and be brought inside for commercialization. Many companies have defined new strategies for exploiting the principles of open innovation, focusing their activities in three primary areas: 1. Funding innovation: a. Innovation Investor: Venture capital, angel investors, corporate VC entities. Their capital helps moving ideas into the market usually through start-ups. In addition to funding, innovation investors can provide valuable advice and support to start-ups. b. Innovation Benefactors: provide new sources of research funding focusing on early stages of the research discovery, such as DARPA. This role is not only played by governments, but also private firms which through this activity can have a first look at ideas that could be possibly beneficial for their industry. 2. Generating innovation: a. Innovation explorers: specialized in performing the discovery research of promising ideas that was done previously done by in-house R&D. b. Innovation merchants: specialized in activities focused on a narrow set of technologies that are often then codified in intellectual property and aggressively - Patent strategies: o Most inventors prefer to disclose their patent application before the patent is granted. This is because it allows them to advertise their invention to potential investors or licensees. o Patent trolling: actions aiming at restricting competitors options to earn revenues through aggressive patent lawsuits with the goals of extorting money from other firms. 2. Trademark: protection of words or symbols - A trademark is a word, symbol or design that is used to distinguish the work of a person or a company - Trademark rights are used to prevent others from using a mark that is so similar to become confusing, but it cannot prevent others from using or producing the same goods and services (i.e. trademark rights apply to the symbol only, they have no effect on the underlying products or services) - The rights attached to the use of a trademark are not based on the registration of the symbol. Nonetheless, registration provides several advantages: o Public acknowledgement of the registrant’s claim of ownership of the trademark o Need for registration to bring a suit to court o Registration is needed to enjoy international rights over the trademark. This is the case when the registration country is member state of the Madrid Agreement which envisages that by registering in a member country the registration is valid in all other member state. o Registration is needed to protect the trademark against imported goods 3. Copyright: protection of artistic or literary work. Copyright protection is immediately acknowledged when an eligible work is created and fixed in a copy or phone record for the first time. As per trademarks, the registration of the copyright is not necessary to enjoy the relative rights, but it is needed to bring a claim to court. 4. Trade Secrets: information that belongs to a business and is generally unknown to others. An information is considered a trade secret if: - Offers a distinctive advantage to the company in the form of economic rents. Its economic importance, however, is contingent upon its secrecy - The information is not generally known or ascertainable through legitimate means - The firm exercises reasonable measures to keep the information private Effectiveness and use of Protection mechanisms: IMP: the method used to protect innovation and their effectiveness varies greatly within and across industries. If patents provide little protection because it is easy to invent around them  rely more on trade secrets. - However, a firm can rely on trade secrets only if it is able to sell the product without revealing its underlying technology; - In industries with increasing returns, it might be a better strategy to liberally diffuse the technology to increase the likelihood of it becoming the dominant design Based on the protection system chosen by the firm we can see: 1. Wholly Proprietary Systems: the firm vigorously protects the technology through any possible protection mechanism and by making it often incompatible with products offered by other manufacturers. The firm retains architectural control (i.e. the ability to determine the structure, operation, compatibility and development of a technology) over the technology, remaining the only one to have full control of future developments of the technology.  This choice allows for rent appropriation, but it might be less welcomed by customers because of the high costs and the incompatibility with other products 2. Wholly Open Systems: the firm does not protect the technology, openly diffusing it to other producers and developers of compatible products.  This choice entails little appropriability of rents, but its diffusion might occur more quickly. Indeed, the free diffusion among competitors might drive the price down, making it more attractive to customers. Many technologies are neither wholly proprietary or wholly open as they entail various degrees of control mechanisms for protection. For example, Windows retains full control on the software augmentation, but allows access to the source code for the development of complementors. Factors driving the choosing between protection and diffusion: 1. Production Capabilities, Market Capabilities and Capital: - If the firm is unable to produce the technology at a sufficient volume or quality levels  protecting the technology might hinder its adoption - If the complementary resources influence the value of the technology to users, then the firm must: o Be able to produce itself the necessary complements in sufficient range and quantity if it wants to fully protect the technology o Sponsor their production by other firms or encourage collective production of the complements through a more open technology strategy 2. Industry Opposition Against Sole-Source Technology: if the industry is able to pose significant opposition, the firm might need to consider a more open technology approach to improve the technology likelihood to be chosen as the dominant design 3. Resources For Internal Development: if the company does not have in-house the capabilities to offer an adequate initial level of quality and functionality of the technology, then a wholly proprietary approach is not the most suitable one, as the market will not find attractive the performance level of the technology. 4. Control over Fragmentation: for technologies in which standardization and compatibility is important, maintaining the integrity of the core product is essential and requires strong protection by the firm. 5. Incentives for Architectural Control: Architectural Control is always valuable for a firm, but it can be even more valuable if the firm also produces the complements for the technology. In such case, controlling the architecture of the technology means designing the technology in a way that can be only compatible with its own complementors. If the technology is then chosen as the dominant design, the firm will be also able to reap the benefits coming from the complementors, which are the only one compatible with the dominant design. IMP: large firms often apply a mechanistic structure which is characterized by formalization and standardization. Indeed, as the firm grows it becomes more difficult to exercise direct managerial oversight and firms try to find ways to ease coordination costs. Nonetheless, this comes at the expenses of innovation and to overcome partially this problem big firms often use a decentralization of authority, enabling division to work more like small companies. An alternative solution could be to adopt hybrid organizational approaches: 1. Ambidextrous organizations: ability of a firm to behave almost as two different ones. Some portions of the firm could use mechanistic structures, while others use an organic approach. For example, the R&D division can be separated by the rest of the firm and given an organic structure to foster innovation in the unit, while manufacturing and distribution divisions maintain high levels of formalization and standardization.  IMP: If a firm can adopt an ambidextrous approach, then much of the controversy about the impact of the size of a firm on innovation becomes futile as the same firm can have multiple procedures, cultures and structures inside it 2. Modularity and loosely coupled organizations: the firm adopts standardized manufacturing platforms or components that can then be mixed and matched in modular production systems. By adopting this approach, the firm ensures standardization and formalization at the component level, while achieving variety and flexibility at the end product level. - Modularity: degree to which a system’s components may be separated and recombined. When a firm adopts a modular approach in its components, the entire production is made modular. Indeed, less coordination is required at component level between the developers of different components, freeing them to pursue more flexible arrangements than the typical organizational hierarchy - Loosely Coupled Organization Structures: flexible arrangements achieved through modularity, in which development and production activities are not tightly integrated, but rather achieve coordination through the adherence to a shared standard. Managing Innovation Across Borders: Multinational firms are faced with the amplified issues regarding the discussion between centralization and decentralization. Indeed, foreign markets offer highly diverse sources of information that can be leveraged to tailor the firm’s products to the specific needs and tastes of such market. Nonetheless, such decentralized activities are not immune from the shortcomings that all firms face when it come to decentralization. Four primary strategies have been identified with regards to management of international innovation: Strategy Place Of R&D Activities When To Use (V) Or Not To Use (X) Center-for- global Centralized hub which manages all the activities that are then diffused across  Strong desire to control the evolution of the technology the company  Strong concerns about the protection of the technology  Need to respond quickly to technological changes and disperse efforts create inefficiencies × Interest in being responsive to the diverse demands of different markets Local-for- local Each national subsidiary uses its own resources to respond to the needs of the market  Interest in customizing innovation  Divisions are very autonomous and the market is highly differentiated × Concerns about the redundancy of the activities and the lack of scale × Concerns about the difficulties in diffusing valuable innovations across the firm Locally leveraged Decentralized activities at subsidiary level, but the most innovative developments are then deployed across the company  Interest in maintaining a decentralization based on different markets, while leveraging the most valuable projects across the firm. Globally linked System of decentralized R&D divisions which are connected to each other. Each division could be in charge of one innovation task that serves the whole company needs  Interest in tapping and integrating global resources × Concerns about the high degree of coordination and integration required by this configuration Chapter 11: Managing the New Product Development Process Objectives of the New Product Development Process: For the new product development to be successful, it must simultaneously achieve three sometimes conflicting goals: 1. Maximizing Fit with Customer Requirement: in order for a product to be competitive in the marketplace, it needs to have more compelling features, lower costs or greater quality than existing products. Although these elements are quite obvious, some firms fail at achieving these goals because of: - Uncertainty about what features customers value the most, resulting in the firm overinvesting in features that might not be too attractive to customers - Overestimation of customer’s willingness to pay for the particular features, creating products that are too expensive to gain market penetration - Difficulties with respect to heterogeneity of customers’ demands, making a product that is appealing to just a segment of the market  Therefore, sometimes it doesn’t matter if the technology has superior features with respect to existing ones if such features don’t meet customers’ requirements. 2. Minimizing Development Cycle Time: a firm that brings a product to the market too late might find out that customers are already committed to a different product and it can especially create damages to those companies working in market with increasing returns to adoption, as they will have a late start in growing their installed base and availability of complimentary products. Furthermore, long development cycle times entail significant risks and costs such as: - Many development costs are related to time, such as cost of capital and labor costs - The company might have difficulties in amortizing its fixed costs before another generation of the product comes to the market - The company will fall behind in fixing flaws or improving the product after the launch.  IMP: a firm with a short development cycle time can take advantage of both first and second mover advantages. 3. Controlling Development Costs: the firm will face serious difficulties in case the costs of developing the technology have ballooned so much that they overshadow the revenues from the technology. Indeed, managers should pay attention to making the development effort not only effective, but also efficient. Methods to achieve the objectives: e. The team defines the strength of the relationship between each engineering attribute and customer requirement and calculate how much each engineering attribute is important to achieve customers’ requirements f. The team evaluates the value of competing products per customer attribute g. Based on the calculations made on the relative importance of engineering attributes (point e) and the performance of competitive products (previous point), the team defines the desired level of engineering attributes h. Once the product has been created, the team assesses the degree to which each customer requirement is met 3. Designing for Manufacturing: it is a way of structuring a new product development process by following a series of design rules which aim at reducing costs and ensuring that product designs are easy to manufacture 4. Failure Modes and Effects Analysis: method by which firms identify potential failures in the system, classify them according to their severity, and put a plan into place to prevent the failures from happening. A ranking of risks is created based on their likelihood of occurrence and severity, so that the firm can prioritize its development efforts to target potential failure modes that pose the most composite risk. Chapter 12: Managing New Product Development Teams Two important aspects must be taken into account when considering the creation of a team for project development purposes: 1. Team size: the bigger the team is, the more skills are pooled together for the development project. Nonetheless, big teams often imply higher administrative costs and miscommunication problems, leading to delays. 2. Team composition: to avoid lack of communication between functions that could cause delays in the development cycle, firms tend to build cross-functional teams which include members drawn from more than one functional area such as engineering, manufacturing and marketing. The presence of members from different units implies a larger knowledge base and increased fertilization of ideas. 3. Team administration: usually heavyweight and autonomous teams have a project charter, which encapsulate the project mission and includes the goals for the project. Once the project charter is established, senior managers and core members define the contract book, which defines in detail the basic plan to achieve the goal laid out in the project charter and usually includes the resources required, the timeline and the desired results. Teams can be structured in a number of ways, the most common ones are the following configurations, from lower to stronger integration: Team Structure Time commitment Commitment Adequate for Functional Members remain in their functional department and report to their regular managers but they meet periodically to discuss the project. Their incentives are not linked to the success of the project and as such there is little commitment by team members No dedicated managers Temporary team Members spend less than 10% of their time working on the project Their incentives are not linked to the success of the project and as such there is little commitment by team members Derivative projects mostly impacting one single function of the firm Lightweight Members still reside in their functional departments Project manager (junior) and dedicated liaison personnel Temporary team Members spend less than 25% of their time working on the project Their incentives are not linked to the success of the project and as such there is little commitment by team members Derivative projects with lower levels of coordination and communication Heavyweight Members are removed from their functional teams and collocated with a project manager Project manager is usually a senior manager that outranks functional managers Full-time dedication to the project, but still temporary nature Significant commitment by team members Platform projects Autonomous Members are removed from their functional teams and collocated with a project very Full-time dedication to the project, often Project manager has exclusive authority over the Breakthrough projects and some platform projects - Market skimming: the firm launching a new technology sets price very high to signal that the technology is a significant innovation compared to existing products - Maximum market share: firms use penetration pricing which entails setting prices as low as possible to quickly attract customers, driving volumes up and costs down. IMP: penetration pricing is particularly used in industries with increasing returns because a quick rate of adoption can lead to the selection of the technology as the dominant design. - Sometimes firm price at a loss when they think that they can make better profits on the sale of complementary goods 4. Distribution: - Selling direct or using intermediaries: firms can sell directly their products or use intermediaries such as manufacture representatives, wholesalers and retailers. The first option allows firms to retain more control on pricing, selling and services. Nonetheless, it can at times be impracticable or overly expensive. Conversely, intermediaries provide a number of services that can make distribution for efficient. For example, intermediaries can break bulk meaning that they can buy in large quantities from manufacturers and sell in small quantities to customers. Particularly, to decide whether to use intermediaries and what intermediaries should be used, firms must consider the following factors: o If the company already has distribution channels that could fit the new product  direct sale o If the company serves geographically dispersed customers but they need limited education of the product  direct sale If the company serves geographically dispersed customers that need moderate education on the product  intermediaries that could provide training on-site If the company serves geographically concentrated customers that need extensive education on the product or the product need installation  direct sale o Existing distribution options for competing products, as they forge customers’ expectations on how the product will be purchased Furthermore, firms can deploy strategies to accelerate distribution, such as: - Alliances with distributors by giving to the distributor a stake in the success of the new technology - Bundling relationships: bundle the distribution of the product with another one that is already in wide use, allowing the new technology to piggyback on the successful one - Contracts and sponsorships: contractual arrangements with distributors, complementary goods providers and large end users to ensure that the technology is used in exchange for price discounts, advertising assistance etc.. - Guarantees and Consignment: if there is considerable market uncertainty about the new product or service, the firm can encourage distributors to carry the product by offering them guarantees (such as promises to take back unsold stock) or agreeing to sell the product on consignment 5. Marketing: firms usually undertake three major marketing methods - Advertising - Promotions - Public relations Marketing can be used to shape the expectations about the size of the installed base and availability of complementary goods. Furthermore, marketing can be tailored according to intended adopters: - Innovators and early adopters look for breakthrough products and are willing to pay high prices to purchase the technology. Therefore, they are likely more responsive to marketing campaigns underlining the technical contents of the product and the cutting-edge nature of the technology - The early majority of adopters will be more catered by marketing campaigns focused on the ease of use of the product and its consistency with the customers’ way of life. For this market segment it’s not important to communicate the technical information of the product, but to use legitimate and established advertising channels  IMP: firms may find difficult to make the transition from early adopters to early majority and this can cause a chasm in the technology’s diffusion curve. This is due to the fact that while early adopters are enthusiastic about the new technology, the early majority may find the product too complex for them. Therefore, the firm might witness a drop in sales correspondingly to the saturation of the early adopters’ market. - To target the late majority and the laggards, the company will focus its message on the quality, reliability and simplicity of the product. Magretta: Why Business Models Matter All business models tell a story that is a generic variation on the value chain underlying all businesses: - How the product or service is made (manufacturing, choice of materials etc..) - How the product or service is sold (finding the customer, realizing the transaction etc…) Based on the above footprint, the business model can propose something entirely new or provide an alternative to an existing product or service. Once the story is created, the business model must be tied to numbers. This was possible thanks to the inception of the spreadsheet, because it allowed a much more profound and granular analysis of the business plan components. In particular, this analysis made possible for business plans to link much more tightly market insights to economic results, making proforma P&L that could provide assessments on ideas before they would even be launched.  Narrative and numbers provide two critical tests to understand whether the business plan works. Once also all the numbers are in place, the business model can be used as a guidepost for feedback and adjustments: when managers have the whole business plan in front of them, they can make adjustments based on how the hypothesis they used to create the business plan turns out. Therefore, if the company turns profits, then the managers knows that the plan is working. A well-developed business plan allows the firm to have a good idea about how all the pieces fit into a whole. However, business models don’t have to be mistaken with strategy, as they don’t factor in the element of competition. Strategy is indeed what creates value in competitive markets by differentiating the company. That is, strategies need to provide the unique direction of the company in the market, while business models can be similar across firms. Nonetheless, the business model itself can provide a source of competitive advantage and become the reason for the success of a company in a competitive space.