Innovation Management and New Product Development

New Product Management

Innovation, Technology and Strategy

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Contents
1. Technology and Strategy (Part I - Intro) 2. Technology and Corporate Planning (Reading I-2) 3. Management Criteria for Effective Innovation (Reading I-4) 4. Core Competence (Reading I-3)

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Technology and Strategy

Porters 5-forces model

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Technology and Strategy

Porters generic strategies concept is a widely used framework for classifying competitive strategies. The generic strategies are: Industrywide differentiation Focused differentiation Industrywide cost leadership Focused cost leadership

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Technology and Strategy

Generic strategy Overall cost leadership Technological policies Product technological change Product development to reduce product cost by lowering materials content, facilitating ease of manufacture, simplifying logistical requirements, etc. Learning curve process improvement Process development to enhance economies of scale Product development to enhance product quality, features, deliverability, or switching costs Product development to design only enough performance for the segment's needs Product design to meet exactly the needs of the particular business segment application Overall differentiation Focus-segment cost leadership Focus-segment differentiation

Process technological change

Process development to support high tolerances, greater quality control, more reliable scheduling, faster response time to orders, and other dimensions that improve the ability to perform

Process development to tune production and delivery system to segment needs in order to lower cost

Process development to tune the production and delivery system to segment need in order to improve performance

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Technology and Strategy

Technology and Product-Market Strategy A firms strategy is expressed in the products and services it brings to market. One way to get at the integration of a firms technology and productmarket strategy is: Decompose each product or service into its constituting technologies and assess the relative strengththe degree of distinctive competence the firm has with respect to that technology

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Technology and Strategy

Technology Portfolio Harris, Shaw, and Somers suggest: Once various technologies have been identified, they can be classified in terms of their importance for competitive advantage Next, the firms position relative to its competitors can be assessed

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Technology and Strategy

High

Bet

Draw

Cash in

Fold

ec nat r op m i ygo l onhce T

Low High Low

Relative technology position

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Technology and Strategy

Technology & Business Portfolio Couples Technology portfolio with McKinsey (BCG) framework for business portfolio based on competitive position and attractiveness...

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Technology and Strategy

High

B A

High

ss e ne v it artt A

Low High Competitive position Low

ec nat r op m i ygo l onhce T

Low High Low

Relative technology position

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Technology and Strategy

Technology Forecasting It is the capacity to perform systematic technological forecasting. Some useful techniques for forecasting are: Technological progress functions (S-curves) Trend extrapolation The Delphi method Scenario development

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Technology and Corporate Planning

Executives generally have low technology experience
Black-box view on R&D Delays, success rates,...? Time horizon difference in planning

Elements in planning
Industry, competition, organizational resources... Technology can result from inside or outside Questions: How are technological issues recognized by management? How has technology been used to implement strategic objectives? How has technology been monitored? How are technology-related activities recognized and organized?
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Technology and Corporate Planning

Unit of analysis
Often product or specific techniques Should be generic technologies

Link to elements of product success

Functional performance Acquisition cost Ease-of-use Operating cost Reliability Serviceability Compatibility

Importance can differ for markets / segments

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Technology and Corporate Planning

Demand elasticity
How does demand change based on these characteristics (that are influenced by technology)? Importance can differ for markets / segments

Based on this analysis, compare your technology to competitors'

Competitive technological profile

Profile of technologies to products (Exhibit 2)

Common technologies? Emphasizing product and all its technologies? Technology-driven or driving technology?

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Technology and Corporate Planning

Strategic considerations
Technological strengths for use in several products? Matches strengths in production and marketing? Mergers etc. Analyse market needs at the same time...

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Management Innovation

Criteria

for

Effective

Assessing and directing technological innovation

Management criteria to discriminate profitable and unprofitable new technologies

Two sides
technological (new and good) and business (embodiment, operational consequences and market dynamics)

Technical potential
What fundamental technical constraints limiting prior art are lifted? What new technical constraints are inherent? How favourable is the trade-off?

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Management Innovation
Embodiment

Criteria

for

Effective

Is the end product enhanced by additional technology and components required to use innovation? Is the innovation enhand or diluted by embodiment? Does the embodiment offer potential for further inventive enhancement?

Operations
What operations are displaced or weakened? What new operations are needed? What is the tradeoff?

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Management Innovation
Market

Criteria

for

Effective

Does the product provide enhanced effectiveness serving the final user? Does the operation reduce cost of delivery? Does latent demand expansion or price elasticity expansion determine characteristics of new markets?

Example analyses
Transistors (Exhibit 1) Jet turbines (Exhibit 2)

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Core Competence of the Corporation

Rethinking the company based on its core competencies Example: NEC
Recognized convergence of computing and communications a s strategic intent Success would hinge on competencies, particulary semiconductors New strategic architecture, coordination groups etc. Three technological/market streams: mainframe to distributed, IC to VLSI, communications from mechanical to digital Semiconductors as core product Myriad strategic alliances
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Core Competence of the Corporation

Long run winner based on to build quickly and at low cost the competencies that spawn new products
Move from portfolio of business to portfolio of competencies Tree analogy: trunk are core products, branches are business units, leaves are end products, competencies are roots (Exhibit 1)

Core competence
Collective learning, coordinate production skills, bring together technologies, organization of work, delivery of value Sony: miniaturization, Philips: optical-media, 3M: sticky tape
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Core Competence of the Corporation

Must be nurtured and used, maintained Not necessarily outspending Shared costs between business units (components, factories etc.) most often post-hoc effort

Identifying core competencies

Provides access to a variety of markets Makes significant contribution to perceived customer benefit of end product Difficult to imitate

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Core Competence of the Corporation

Loosing core competencies
Looking at costs only risky - might lead to outsourcing of core competences (Chrysler vs. Honda) Leaving businesses (US companies - TV)

Core products link between competencies and end products

e.g. engines for Honda Components contributing to value Differentiate brand and manufacturing share (Canon)

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Core Competence of the Corporation

Concept of organization Business Unit vs. Competencies
Exhibit 2 Ownership of resources Bounded innovation Disintegrated IS, career paths, communication

Strategic architecture
Establish objectives for competence building How long could we stay in this business if we lose it? How central to customer value? Future opportunities foreclosed? Architecture provides logic for product and market diversification (Does it add to overall goal? Does it exploit/add to core competencies?)
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Core Competence of the Corporation

Business units and core competencies
They belong to company BU bid for them goes to one with highest payoff Transfer of people etc. Cooperation rewarded

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Technology and Innovation Strategy

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Contents
1. Technology Strategy (Part II - Intro) 2. Technological Innovation and the S-Curve (Reading II-1, II-2 and II-3) 3. Disruptive and Sustaining Innovations (Reading II-4 and II-5) 4. Organizational Adaptation (Reading II-13) 5. Strategic Dynamics (Reading II-16) Case: Infosys Consulting (Case II-11) Case: NTT DoCoMo (HBS) Case: Kindle (HBS) Case: Amazon Web Services (HBS) Case: Geox (HBS)
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Introduction Technology Strategy

Technology is a resource (like human, financial and information resources) and a potential source of distinctive (core) competence
To manage technology as a resource and distinctive competence, a technology strategy must be developed. The technology strategy must support the business strategy in developing a competitive advantage Goes beyond R&D strategy

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Introduction Technology Strategy

Strategy making as evolutionary organizational learning process

Technological capabilities

Technology strategy

Experience

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Introduction Technology Strategy

Internal Environment

Determinants of Technology Strategy

Strategic action

Organizational context Technology strategy

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Generative Mechanisms

Integrative Mechanisms

Technology evolution

Industry context

External Environment
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Introduction Technology Strategy

TECHNOLOGY EVOLUTION: Company affected by endogenous evolution S-curve trajectories Product-process interplays New technologies and trajectories Technological change
Competence enhancing Competence destroying

De-maturity (renewed innovation in wellestablished markets) Organizational determinants

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Introduction Technology Strategy

INDUSTRY CONTEXT: affect profitability distribution, choices etc. Industry structure (5-forces model) Appropriability regime Complementary assets Dominant designs Increasing returns to adoption Industry standards Social systems aspects of industry development Interplay of social systems and technological change
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Introduction Technology Strategy

STRATEGIC ACTION: captures organizational learning Induced by prevailing concept of strategy, can mean inertia, lock-in Autonomous strategic action aimed at new business, means renewal, often rooted in technology development efforts, explores boundariess of firm

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Introduction Technology Strategy

ORGANIZATIONAL CONTEXT: allows subsitituting internal for external (market) selection Internal selection environment
Opportunities within current strategy (induced) Opportunities outside (autonomous) Ability to balance those

Dominant culture
Reflects distinctive competence Science vs. engineering vs. manufacturing Reflects product architecture Can reflect founders

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Technological Innovation and S-Curve

Productive unit's capacity for and methods of innovation depend on stage of evolution from small, technology based to major high-volume producer Major innovations followed by many smaller ones
Often acccount for more than half of economic gain Typically result in specialized systems with economies of scale Generally reduce flexibility

Major innovations often based on emerging need or new way to meet demand
Entrepreneurial act, often based on superior performance
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Technological Innovation and S-Curve

Two types of innovation (incremental change to efficient production system vs. radical innovation)
Often evolution over time Product vs. process innovations e.g. microelectronics or Ford (5 models in 4 years based on flexible factory, then after Model T 15 years process innovations)

Implications for management of technology

3 stages: fluid, transitional and specific Exhibit 1

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Technological Innovation and S-Curve

S-curve - Overview
Theory of the potential for technological improvement Framework for describing substitution of new for old technologies at industry level Progress slow at beginning, then increases until maturity (approaches natural or physical limits) Plots time (or engineering effort) versus main product performance feature Leading firms often focus on mature technologiies, new entrants based on new technologies Component versus architectural technologies S-curves (all impact product performance) Industry-level versus individual firm
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Technological Innovation and S-Curve

S-curves for individual firms
Aid in planning sequence of component and architecture projects to gain performance Difficult for predictions on when to change (misjudge plateau, often riding S-curve better than being first to switch to new technology) Architectural innovations very important, often not recognized, and often high market innovation as well

Case disk drive industry component S-curve

Industry level: Exhibit 2 Result of a series of component and architectural improvements (Exhibit 3)

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Technological Innovation and S-Curve

Plateau often based on perception of maturity and research scale-back (Exhibit 4) Firm timing for introducing new technology and gain (Exhibit 5), most innnovators had been leaders but did not receive particular benefits, most did not jump out of reach of old technology Strategies: either frequent changes to new technologies (IBM) or longer incremental improvements (HP), stays quite consistent

Case disk drive industry architectural S-curve

Pronounced first-mover advantage exists First used in emerging markets New firms succeeded because they were better there (leading firms technologies comparable)
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Technological Innovation and S-Curve

Architectural innovations often are worse with regard to measures, but change measures Example: 5.25-inch changed from capacity and speed to capacity per inch and cost per unit, i.e. mainframe to desktop Due to improvements, often invades (very rapidly) home market and leader is dethroned (Exhibit 2)

Lessons
Difference component / architecture curves Architecture often closely coupled with market, new entrants often successful

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Disruptive and Sustaining Innovations

Link of situation to competition winner
Large vs. small companies or incremental versus breakthrough not sufficient Sustaining situations: race entails making better products to be sold for more money to attractive customers incumbents often win Disruptive situations: commercialize a simpler or more convenient product to be sold to at less money to new or unattractive customers newcomers often win

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Disruptive and Sustaining Innovations

Disruptive innovations
Rate of improvement that customers can absorb (e.g. traffic regulations or jams) Trajectory of improvement of innovating companies (steeper), will outgrow standard need to meet not satisfied customers Sustaining innovation targets demand, high-end customers, disruptive innovation redefine trajectory at less performance but other values (convenience, price) that appeal to new or less demanding customers Exhibit 1

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Disruptive and Sustaining Innovations

Innovators dilemma
Incumbents: Should we fight when attacked from below? Should we invest to protect the least attractive end of business, to retain least loyal, most price-sensitive customers? Or strengthen position with profitable customer who pay top prices for good products? Does not mean sustaining innovation is unimportant (get to top of pack) Even for start-up, but then probably sell out to a leader Continue to move up to higher-priced products (high profits), but seeds sow for own disruption (dilemma)

Disruptive is relative, can be sustaining for others

Internet sustaining for Dell (had used telephone before), disruptive for others
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Disruptive and Sustaining Innovations

Types of disruption
Low end or new market Exhibit 3 New market competes with non-consumption, market leader does not feel anything at first, then people switch (because of price or convenience), e.g. PC, BlackBerry, E-Bay, Wireless telephony,... Low end, e.g. Hyundai, amazon.com, supermarkets (department stores moved to high price fashion) Internet banking? Table 1.1

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Disruptive and Sustaining Innovations

Disruptive ideas conditions
New market: Large population without money or skill, so did without or hired somebody? Do users have to go to inconvenient or centralized location? Low end: Customers happy to purchase product with less performance at less cost? Can we create a business model to win the business of these overserved customers? Is the innovation disruptive to all incumbents?

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Disruptive and Sustaining Innovations

Viewpoint of incumbent Why do they fail?
Well-managed firms have lost over the ages to newcomers with regard to new technology and markets Listen too well to customers!!! This places stringent limits on strategies... Patterns of resource allocation in organizations fundamental in success (ideas get funded or not) Resource allocation often driven by market demand might lead to not funding projects based on emerging needs Resource dependence theory says that decisions depend on interests of external entities, important customers (and marketing) will argue for sustaining which influences resource allocation
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Organizational Adaptation
Evolutionary focus on strategy
How does it come about and evolve? From outside (environmental determinism) or inside (strategic choice)? Intraorganizational perspective: initiatives emerge and compete Variation selection - retention Internal and external selection

Induced strategic process

Retention: after successful founding, top management will base strategy on learning about basis for success, embodied in managers, statements about technical/economic/cultural factors
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Organizational Adaptation
Selection: knowledge about strategy often located at top, as firm becomes larger, communication difficult, so participants might perceive different strategies as best for them and firm (reason for variation), top management needs to establish internal selection mechanisms to maintain coherence (administrative rules, control systems, rewards, cultural rituals, norms), should be in line with external (market) selection pressures Variation: induced process targeted at preserving coupling of initiatives at operational level with strategy, might lead to reduction of variation, depends on growth opportunities in current domain

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Organizational Adaptation
Autonomous strategic process
Variation: some people willl try to get firm to engage in activities outside current strategy, derive from new combinations of skills, capabilities, competences, more often from lower level, reasons: self-image that risk is not greater, career prospects, start-up Selection: clear up importance in context of current strategy, usually outside normal selection process through champions and top management, may lead to change in strategy, difficult processes, often some alternate funding reserved for demonstrating viability Retention: autonomous strategic process allows firm to become aware of environmental variations, autonomous initiatives can lead to new companies or stretch resources too thin, but open up strategic options
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Organizational Adaptation
Organizational adaptation
Relative inertia: adaptation necessary (reliability, legitimation), but reduces apatability to changes, consistent with induced strategic process, strategy evolution slow, internal selection needs to be open, free championship and challenging of ideas, role of founders and rule of knowledge and facts over position Adjustment: leave overall strategy in place and changes peripheral features, deliberate, non-random, generally increases life chance of firm, consistent with induced process Reorientation: major changes, upsets induced process, generally by environmental selection (would reduce chance for survival)
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Organizational Adaptation
Strategic renewal: major changes through autonomous process if internal selection (strategic context determination) works well Exhibit 2

Success factors
Top management builds quality of induced and autonomous process Maintain top-driven strategic intent and bottom-up internal experimentation and selection processes Successful reorientation preceded by internal experimentation and selection processes

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Strategic Dynamics
Decision making and game theory
Game theory is concerned with other parties that have own strategies and goals, decision making generally only with the environment Game defined by players, available strategies, payoffs and rules (repeated games, memory, information) Prisoners' dilemma probably most famous example...

Proposal
Corporate longevity depends on matching cycles of autonomous and induced strategy with strategic dynamics Strategic leadership means balancing those cycles

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Strategic Dynamics
Corporate longevity
Fortune 100: from 1965, 19 remain in 2005 Most of the time, companies operate in stable environment, and strategy making process is geared towards linear strategic dynamics Sometimes (quite often newcomers) nonlinear dynamics change rules of game (normative rules laws, customs etc., economic rules, technological rules, cognitive rules industry recipe), outcomes difficult to predict

Strategic dynamics
Actions of company and environment (other players, suppliers, technological change, government,...) considered, can be rule-abiding or -changing
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Strategic Dynamics
Rule-abiding means additive, linear, fairly predictable change Rule-changing materially change strategic context for others, nonlinear, difficult to predict Exhibit 1 Strategic recognition important, seeing rule-changing implications quickly, reaction time, constant alertness Player-independent change: problematic, e.g. rebates against new manufacturing

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Strategic Dynamics
Link to induced and autonomous strategy process
Example Intel: Independent industry change (DRAM came, Intel slow to withdraw, but autonomous strategy had provided microprocessor option), controlled change (Centrino based on autonomous strategy), runaway industry (RISC vs. CISC, internal civil war) Resource accumulation: firms engage in quite a lot autonomous processes (exploration mode), often funded by middle management faced by problems using resources from mature business not absorbed by induced process Scaling up: experimentation and selection of autonomous processes, middle management tries, role of cash reserves (Exhibit 2)
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Strategic Dynamics
Balance
Limited change: continue induced, but manage autonomous (slight rebalancing) Independent change: autonomous process key Controlled change: induced process key Runaway industry change: management decides based on whether bet available Exhibit 3

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Case: Infosys Consulting

What is the strategic position, what are the distinctive competencies? How about culture? Why and how did Infosys move to consulting? Describe this segment. What were the rules of the game and how is Inofsys trying to change them? How about client relations and institutional knowledge in the industry and at Infosys? How are IBM and Accenture going to see this and respond? What are the challenges with managing growth and how can Infosys stay ahead of the game?
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Case: NTT DoCoMo

NTT DoCoMo (TM): Value Innovation at DoCoMo (HBS)

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Case: Kindle
eReading: Amazon's Kindle (HBS)

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Case: Amazon Web Services

Amazon Web Services (HBS)

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Case: Geox
Geox: Breathing Innovation into Shoes (HBS)

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R&D and New Product Development

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Contents
1. Developing Innovative Capabilities (Part III - Intro) 2. Corporate R&D (Reading III-2 & III-3) 3. Invention to Innovation and Research to Development (Reading II-4 & II-5) 4. Absorptive Capacity (Reading III-6) Case: NEC (Case III-1) 5. Corporate Venture Capital (Reading III-7) 6. Evaluating Innovation Investment (Reading III-10) 7. New Product Development 8. Communication in NPD (Reading IV-1) 9. Project Plans & Product Development Maps (Reading IV-5 & IV-6) Case: Apple (HBS)
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Developing Innovative Capabilities

Corporate research Role is to generate new technologies Long-range, high risk, exploratory 5-10% of sales for established high-technology companies for R&D, most for R&D for mainstream businesses, 10-15% for corporate research Strategic issues
Whether invested in areas with highest returns How tightly linked to business objectives in those areas

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Developing Innovative Capabilities

Functions of corporate research
New strategic directions Innovations by: Improving and strengthening understanding of technologies in use Discoveries and developing new technologies Diversifying to new applications and markets Diversifying to entirely new businesses Support of existing businesses Identifying product and process improvements Developing new processes for established products

Corporate service by:

Intelligence Human resources Technology transfer

Opening windows on new science and technology Recruiting new kinds of skills Identifying acquisition candidates with needed technological expertise

Assessing threats and opportunities Recruiting talented people with high potential Recruiting for all divisions, from corporate research to operations

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Developing Innovative Capabilities

Key interfaces: Induced process
Corporate researchDivisional R&D interface: differing orientations and expectations, divisional labs or product development see corporate research as a service links are important

Autonomous process
Corporate researchBusiness research interface: entrepreneurial task, needs market link, business researchers generally more ad-hoc, less structured, more external time pressure

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Developing Innovative Capabilities

Links between R&D units: Geographical Closed Personal Closed Open Closed Open Tight coupling No coupling
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Open Personal Closed Open

Administrative

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Developing Innovative Capabilities

Linking corporate research to corporate strategy

Clear charter (common understanding of what corporate research should do) defined Process for deciding what to develop Also makes assessment easier

Assessing opportunities
High uncertainty (usefulness unclear, depends on complementaries or total system, often new uses, ability to link to need) Questions (I): Are first-class researchers available? Is major investment going to return major result? How many years to useful results? How many failures/successes did others have in that area?
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Developing Innovative Capabilities

Questions (II): Can be obtained from vendors or acquisitions? Cost for displacing an existing program to implement new one? Enough hope to transfer downstream? Necessary capital available?

Different levels in corporate research

Technician / Bench scientist / Group leader / R&D manager / Director of corporate R&D Chief scientist or advisory board for top management Parallel ladder of career advancement Middle management important

Allocating resources to corporate R&D

Inertia, might depart from strategy, long-term
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Corporate R&D
Case study: Xerox Palo Alto Research Center (PARC)
Located in Silicon Valley near Stanford University Xerox spent hundreds of millions, but many ideas were turned into products by start-ups Still successful (copiers, CAD, laser printers) Especially computerized office systems (original reason) not cashed in on (business at Xerox makes loss) Problems: slow decision making due to size and being a one-product company, organizational flaws (weak ties to rest of company, generally no marketing channels for such products) Problems have also led to people leaving frustrated
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Corporate R&D
Founded in 1969 for Xerox to become architect of information in the office Top people attracted (blank check and 10 years no corporate interference) 50% computer science, 50% physical sciences Image of scientists / hackers basically from there (beards, T-shirts,...) PARC became leader in human-computer interaction Pioneered windows and mouse for interactions Hands-off management led to overstepping (developed Alto open - as PC product, other divison developed Star - closed) Text editor Bravo developed (outside charter), nobody saw market potential became MS Word
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Corporate R&D
Visitor Steve Jobs got some ideas for Apple from Smalltalk Ethernet developed at PARC Xerox strategy was complete office systems to increase lock on customers (open PC was not a good fit), and bigbank (build the best, not something better) Reorientation at PARC to increase transfer out and management attention / links PARC was transformed in 2002 into an independent, wholly owned subsidiary company dedicated to developing and maturing advances in science and business concepts with the support of commercial partners and client

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Corporate R&D
Cross-pollination
Idea of mixing things up to get creative results Cross- or interdisciplinary teams Value on average lower, but breakthroughs of unusually high value Depending on alignment of disciplines (e.g. economics and physics quite near, economics and psychology farther apart) Exhibit 1 Rules: pairings of well-established fields, deep expertise people

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Invention to Innovation
Innovation means welding marketplace opportunities with inventive technology and new technical knowledge
Complex decision making how to make a product out of break-through? Also involves consistency with firm corporate interest (fabric) Elements to be brought together: technical competency, market need and corporate interest How is this process of linking done? By whom?

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Invention to Innovation
Evolution and patterns
Corporate R&D established (scientists), market specialists seen as advisor to be brought in, then became a separate function in R&D: Should they take lead or work together? Technology push (scientists, based on technology), need pull (marketing, based on demand and markets) or cooperation

Technology push
Mostly based on scientists, aware of corporate interests Exhibit 1 Problems: tends to focus on easy applications, locked in to one technology, biased user selection, getting funding (bootleg research)
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Invention to Innovation
Need pull
Targeted research by specific market goals (not too broad and not too narrow - focusing) Exhibit 2 Problems: absence of true believer or champion, continues to change target (miss opportunity)

Both types of linking necessary: technical (problem with knowledge) and need (breakthrough to demand)
Also corporate interests needs to be accounted for Quite often group leaders as driving force (contact to technology, business and organizaitonal knowledge)

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Invention to Innovation
Successful conceptualization
Synthesizers, almost simultaneous linking of all three dimensions Steve Jobs and Smalltalk Exhibit 4 Better conceptualisations result from flexibility and modifications (do not get locked in)

Transfer of technology from research to development

e.g. IBM research (3 locations Yorktown Heights, San Jose and Zurich) is a separate division, product development in 27 product development divisions

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Invention to Innovation
Successful transfer: moved from research to development and resulted in product Unsuccessful transfer: left research but no product Nontransfer: intended for transfer but not accepted in development Primary success factors Technical understanding: main technical issues need to be understood before passing on Feasibility: demonstration necessary (agreement what that means), might imply user acceptance and therefore real users Advanced development overlap: research must deterime whether to maitain activity (support or defend), or to explore related and advanced technologies
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Invention to Innovation
Growth potential: too narrow aim without technical or market growth potential, new technology might become obsolete by old ones stretching in competition Existence of an advocate: someone in research selling it, looking after it Advanced technology activities at development lab: helpful and often necessary, sometimes provides hurdle (competitive, skeptical) but in the end beneficial as leads to thorough work and involvement External pressures: same technology at competitor lab or announcement Joint programs

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Invention to Innovation
Secondary success factors Timeliness Internal users: creates pressure and demand Government contracts High-level involvement: research sometimes turns to top management Individual corporate responsibility: corporate watchdog Proximity: no major factor generally, might be convenient and saves money, but transfer does not depend

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Absorptive Capacity
Outside sources often critical to innovation process
Ability to evaluate, recognize value, asssimilate and utilize outside knowledge important Factor of prior related knowledge (basic skills, shared language etc.), based on cognitive learning (associate learning by linking, learning is cumulative and based on richness of knowledge structure) Absorptive capacity Byproduct of doing research (sometimes manufacturing production experience) Can also be directly generated trainings etc.

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Absorptive Capacity
Organizational absorptive capacity
Based on members' absorptive capacities Not simply the sum, but also based on transfers on knowledge within Not only direct interface to outside, but also structure of communication within and distribution of expertise Interface can be diffused or centralized (people may act as gatekeepers or boundary spanners) depends on speed and uncertainty of change Internal communication based on languages, codes etc. - developing them can make this communication more efficient, but make outside-in more difficult (notinvented-here syndrom, tends to increase with group tenure)
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Absorptive Capacity
Knowledge structure: some overlap between individuals necessary for communication, diversity also important (tradeoff of specialization) Cross-function interfaces, job rotations etc.

External acquisition of absorptive capacity

Hiring people, consultants, acquisitions... Often not that efficient, as some elements are firmspecific and when integration with other activities necessary Time lag

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Absorptive Capacity
Path dependence
Set of decisions one faces for any given circumstance is limited by the decisions one has made in the past history matters Accumulating in one period will increase accumulation in the next Absorptive capacity allows to see trends, which will lead to build absorptive capacity (expectation formulation) Ceasing to invest in absorptive capacity can lead to lockout (NIH-syndrom too far away), confines firm to work in a particular domain based on early decisions Self-reinforcing cycle with high absorptive capacity: sees opportunities, aspires to them (proactive instead of reactive)
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Absorptive Capacity
Competence destroying technical change
Radical change can destroy competence, building new ones can be difficult due to accumulation effects, or may be blind to developments

Absorptive capacity and R&D spending

Absorptive capacity byproduct of R&D spending, but also influences it Makes possibilities known Increased or decreases costs Basic research valuable even in case of spillouts

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Case: NEC
What is your assessment of new technology strategy? What will it take to succeed? How can the new site best contribute? What is your assessment of performance to date? How should management ensure long-term survivial and growth of the center? What should Mr. Shinoda do next?

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Corporate Venture Capital

Invest in external start-ups
In 2000, reduced by 30% and 80% in volume (stronger than private VC) Whether to invest in certain start-up and when Investment of corporate funds directly in external startup companies Two characteristics: objective and degree of operations linking Objective either strategic (increase profits of own business and exploit synergies e.g. sell own products alongside) or financial (economic return on investment, could be helped by own brand) Linking loose or tight (loose could also insulate from interference): use of processes, assets etc.
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Corporate Venture Capital

Types of investments based on these dimensions
Driving (strategic/tight): advances strategy of current business (e.g. MS in .net start-ups which will help adoption, promoting a standard) Enabling (strategic/loose): complements strategy, primarily strategic, but tight coupling not necessary, e.g. increase demand for products, or work on streamlining Emergent (financial/tight): exploration of new businesses, option for when they become strategic (leveraging underutilized technologies, experimenting with new capabilities, developing backup technology, exploring whitespace) Passive (financial/loose): financial returns only

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Corporate Venture Capital

Economic climate
Bad economy: companies will probably leave passive and emergent investments Enabling and driving have more staying power, might be less for enabling due to generally higher costs

Evaluation not based on financial returns alone

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Evaluating Innovation Investment

Failure in successful innnovation often due to (wrong) use of financial investment analysis tools
Net present value and discounted cash flow: discounts future cash flows to current value, assumption is that not investing does not change health of company in the future (might not be true, difficult to predict), errors of estimation Fixed and sunk costs: argument is that past investments should not be considered, only future marginal cash outlays, assumes necessary capabilities stay the same, biases towards things that exploit current assets and capabilities (for newcomer, there is always full-cost), also use of usable lifetable for depreciation instead of competitive lifetime adds to this
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Evaluating Innovation Investment

Emphasis on earnings per share: focus on short-term stock performance, as principal-agent led to incentives, reputation depends on it, also buyout signal (today most principals also invest short-term or are agents themselves)

Process to support or sabotage innovation

Stage gate model: ideas pass through steps/phases, after each an evaluation/review takes place (financial), assumptions might be tweaked to ensure funding, illsuited to new growth businesses Discovery-driven planning: based on minimally acceptable figures, list of assumptions to fulfill those is generated, ordered by importance (deal killlers) and costs to test, in next stage, is used not as a plan to execute but to learn
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New Product Development

Development projects can provide benefits
Market success through new products or processes, leverage and enhance existing assets, provide organizational renewal and change, build confidence and momentum Process of bringing a new product or service to market, first stage in product life cycle, new to market or company Steps: idea generation, idea screening, concept development and testing, business analysis, beta and market testing, technical implementation, (commercialization)

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New Product Development

Many projects delayed or failed Firms must develop a host of skills and concepts that can differ significantly from the natural inclinations common in organizations Senior management's involvement in the development process is far more likely to be part of the problem than part of the solution Failed products sometimes necessary for learning and prerequisite for later success learning effect (learning by using market, by failing management and by doing manufacturing) on technology, market and organization

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New Product Development

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New Product Development

Three areas of management activity that constitutes development strategy for a business
Pre-project planning Project execution Post-project learning (e.g. project audits)

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New Product Development

Pre-project planning
Traditional role: select, screen and evaluate project ideas, decide which to pursue (assumes adequate coverage, enough information,...) Development strategy leadership approach: motivate and guides the organization to create the best set of projects by articulating the criteria for the correct set of projects

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New Product Development

Creating the aggregate set of projects Aggregate project matrix
Defines individual projects according to the degree of change in the product and manufacturing process they entail The greater degree of change along either dimension, the more resources that are likely to be needed in completing the project Sometimes based on market change / technology risk Appropriate mix necessary (depends on strategy)

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New Product Development

Research and advanced development

Process Changes
New core process Unique radical Next generation process Tuning Single and dept. upgrade incremental

Product Changes

New core product

Next generation of core product

Platform or next generation

Addition to Product family Add-ons and enhancements

Enhancements, hybrids, and derivatives Sustaining 98

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New Product Development

Chartering and bounding individual projects necessary (goals, boundaries,...) Providing and allocating resources to projects (hard choices often necessary to avoid overcommitment, simultaneous asssignments of people often problematic)

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New Product Development

Project organization and management
Integration necessary teams Functional team structure (passing of results, dependencies problematic, aligned with career paths and specialization, but overall success not tracked) Lightweight team structure (mostly junior project managers, little influence, but coordination improved) Heavyweight team structure (primary influence with project manager, motivation increased, loss of focus probable, conflicts with rest, more generalist) Autonomous team structure (tiger team, full project assignment, fast, focus and integration loss problem) Selection based on type of project, maturity, industry conditions,...
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New Product Development

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Communication in NPD
Extensive communication between engineering and production critical
Informal communication: beer busts, technical symposia, offsite, multiday discussion meetings etc. Formal communication also essential Tasks: introducing new products to manufacturing, providing optimum level of documentation on products, facilitating orderly and effective changes to products in production

Introduction of new products

Most taxing communication task Design engineers will maximixe performance, manufacturing engineers will minimize costs (should be together value engineering)
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Communication in NPD
Prototyping: first in engineering for testing (lab & field) using different materials etc., then pilot production with normal design joint responsibility Design freeze: done before full-scale production (in agreement), later changes only through notices and formally, can be sequential for parts Skunk works: multidisciplinary teams with own facilities (high prestige, resources, fast, but might be disruptive) Following engineers: some design engineers move to production for some time (job rotation) Multiple products: more difficult balance of maintenance engineering and development, standardization of components becomes issue

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Communication in NPD
Engineering documentation
Product and process documentation (designs, lists,...) Level of detail: costly to produce but important, more documentation necessary with high-volumes, unskilled labour, much automation

Engineering changes on existing products

Requests for changes on documentation (form engineering, service, marketing etc.) Can affect many parts of organization Procedure for handling change requests necessary Cost-benefit trade off (obsolence vs. efficiency gain) Batching changes or even new product (marketing bonus)?
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Project Plans & Product Development Maps

Reasons for problems in development projects
Overload & missing focus on critical projects

Planning needs to be improved and aggregated Project mapping

Based on process / product change R&D projects (outside), breakthrough, platform and derivative projects (all important) Separate maps for alliance and partnership projects Each project mapped according to resources and product line (Exhibit 3), reexamine and refocus (Exhibit 4)

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Project Plans & Product Development Maps

Sequencing of projects
Sequence over time (Exhibit 5) Steady stream approach: every second year new platform, followed by derivatives in intervals (teams mixed and people transferred) Secondary wave approach: longer platform lifetime, derivatives come later

Product development
Often fails because of misunderstanding of markets (lack of distinctiveness) or own technology, mismatches between functions Planning and mapping necessary

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Project Plans & Product Development Maps

Product development map
Shows evolution of product lines over time (versus functionality/value/price) Categories are core and leveraged (enhanced, customized, cost reduced, hybrid) products Exhibit 1 Case study: Coolidge cleaners (Exhibit 5) Submaps possible for distribution channels, customer, design engineering, manufacturing,... Discussions on what to put on maps beneficial

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Case: Apple
Design Thinking and Innovation at Apple (HBS)

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Entrepreneurship and New Ventures

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Contents
1. Profiting from Technological Innovation (Reading I-1)

Case: Elio Engineering Inc. (Case I-1) Case: Matrix Semiconductor Inc. (Case I-4) Case: StubHub (Case I-5) Case: Lumni (HBS) Case: EA in 1995 / 2002 / 2005 (Case I-6 / I-7 / I-8) Case: Case: Case: Case: Pitney Bowes (Case III-5) Donnelley & Sons (Case III-7) Intel: Hood River (Case III-8 plus add-on) HP (HBS)
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2. Minimum Winning Game (Reading I-5)

3. High Technology Management (Reading I-7)

4. Internal Corporate Venturing (Reading III-13 & III-14)

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Profiting from Technological Innovation

Innovating firm soften fail to obtain significant economic returns
Imitators, followers, customers benefit Strategy and imitation costs important Control of complementary assets often necessary Example: EMI (leader in records, movies,...) pioneered radar etc. - first developed CAT scanner, but lost market after 6-8 years Example: RC Cola Example: Xerox desktop computers (Apple) Example: IBM PC (not innovative)

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Profiting from Technological Innovation

Basic building blocks for profiting
Need to be put in place to profit

Regime for appropriability

Two dimensions: Nature of technology and efficacy of legal mechanisms of protection Patents / trade secrets Product / process innovation Tacit / explicit knowledge Results in tight or weak appropriability

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Profiting from Technological Innovation

Dominant design paradigm
Two stages of branch of science: preparadigmatic (without general accepted conceptual treatment) and paradigmatic (scientific maturity and standards) Paradigms can be overturned First design competition, then price/process innovations after dominant design (more capital investment) When imitation is easy, imitator might become dominant design

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Profiting from Technological Innovation

Complementary assets
Commercialization needs know-how plus capabilities / assets Services, other parts of a system,... (Exhibit 5) Can be generic, co-specialized (bilateral dependence) or specialized (unilateral dependence)

Profitability under tight appropriability

If possible, easy for some time Time to access complementary assets, or come up with dominant design Specialised R&D firms possible (e.g. petrochemicals)

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Profiting from Technological Innovation

Profitability under weak appropriability
In preparadigmatic phase, let design float, not choose to early, need to be intimately coupled to market and let users impact design, maybe parallel and sequential prototyping (but might be costly) In paradigmatic phase complementary assets become more important, firms with control over these might get profits

Access to complementary assets (control structures)

Contractual modes: contracts with suppliers, distributors, manufacturers, etc., reduces risks and capital requirements, good in tight appropriability and competitve supply, can bring added credibility, hazards in getting committment, imitation risk

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Profiting from Technological Innovation

Integration modes: ownership, can capture benefits on complementary assets, more control, timing and cash constraints important (Exhibit 9, 10, 11) Mixed modes: quite common, or during transitions

Case analyses
EMI CAT scanner: needed assets like training, servicing, should have found a partner like Siemens IBM PC: needed cospecialized assets like software, chose open system approach, induced even without contracts, help of name to reduce risks for others Nutrasweet: tight appropriability, but patents will run out, created brand and manufacturing in-house, let supplier contracts expire
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Profiting from Technological Innovation

Implications
Direct R&D towards tight appropriability or assets under control Small-large firm comparison Industry structure and appropriability: weak appropriability should direct towards integration New entry more difficult in mature industries, as assets under control of incumbents (but technological change can change this) Importance of manufacturing Trade and investment barriers can mean denying access to assets necessary and lead to local/government capturing majority of profits
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Case: Elio Engineering Inc.

Describe Elio Engineering, and its position in the industry. What is their vision? Describe the strategic options. What issues should be considered in evaluating them? Analyse based on the building blocks for profiting from innovation.

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Case: Matrix Semiconductors Inc.

What was Matrix's strategy? What was their core competence and competitive advantage? Was it sustainable? What would you recommend?

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Minimum Winning Game

New high-tech ventures
Generally no formalized strategy process Problem of knowing user needs with regard to new technology Often originate from technical competence of an entrepreneur, business strategy follows (Matrix Semiconductor case) Sometimes based on insight into market need (StubHub case)

Conceptualising business opportunity always needs linking between technical and need
Minimum winning game

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Minimum Winning Game

Minimum winning game
First major market opportunity that is limited enough for clear target for technology and product development short-mid term, and sufficiently large to provide foundation for long-term development Quite often maximum winning game defined (also for venture capital), which leads to having no clear goals and moving from one vague vision to another MWG is product/market position achievable in 12-18 months, depends on market (network externalities), competition, competencies, shapes identity Will provide foundation for next MWG and 2-3 years Then define next level MWG
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Minimum Winning Game

Pursuing MWG drivers of strategic action
Technology development, product development and business strategy Technology development as main driver: might be able to reach market first, attract top talent, maintain motivating atmosphere, but might move frome leading to bleeding edge (too slow, costly, difficult to measure) Product development as main driver: more customerfocused, learning from products, but maybe short-term oriented, too niche-focused, or can result in production problems due to technology

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Minimum Winning Game

Business strategy as main driver: provides clear directions, longer-term oriented, but difficult with unclear industry structure (customers, competitors, partners etc.) Maintaining balance important, change of focus over time

Strategic planning process

explicitly adressing MWG and drivers e.g. Intel has planning process every year for 3 years, based on that product line planning with market and product requirements documents Early circulation of drafts to key stakeholders, public commitment at end
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Case: StubHub
Describe the initial minimum winning game of StubHub and the strategic environment. Discuss the changes necessary to move to the next step.

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Case: Lumni
Felipe Vergara and Lumni: Launching an Innovation in a Developing Economy (HBS)

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High Technology Management

Continued management of high-technology companies
Study of large and small high-technology companies Paradox: patterns that promote disorder and informality, at the same time order, consistency and continuity Continued success needs constant shift between continuity and chaos

Themes of success
Business focus: tight focus on one field (Xerox, Kodak, IBM,...), closely related products / product lines, focused R&D (high amount ddue to size or proportion 8-15% of sales), consistent priorities and behaviour, also helps in close interaction with customers
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High Technology Management

Adaptability: balance of business focus with willingness to undertake major and rapid change if technology or markets change, requires organizational flexibility (realignment of people and responsibilities and powerful top management) Organizational cohesion: organizational cooperation necessary (young/old, different areas), most often less hierarchy and top management perks that signal distance, good communicaiton and access to executives (open door policy), dual career ladder, job rotation, integration via placement (R&D next to manufacturing) or multi-disciplinary teams, long-term employment

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High Technology Management

Entrepreneurial culture: small divisions to recreate small companies communications and no divisions, different funding channels (own dision, corporate R&D, new ventures division, or grants administered by some selected people), tolerance of failure, free time (e.g. 20% unprogrammed time to pursue interests, or fellowships) Sense of integrity: committed to individualism and entrepreneurship, at the same time to long-term relationships, see themselves as community, integrity is not to be sacrificed for short-term gain, trust especially important in areas of rapidd change and uncertainty, self-understanding of competence and limitations

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High Technology Management

Hands-on top management: active involvement and understanding of basics of technology, ability to ask questions and patience to understand

Overall paradoxon: stability versus change

Ambivalent management (getting rid of old products against resistance and developing new ones, but also incremental improvements) Alternating periods of relaxation and control (tension, action and excitment followed by reflection and evaluation) Different by unit or over time (Jefferson: A little revolution now and then is a good thing.)

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Case: EA in 1995 / 2002 / 2005

What are key characteristics of the video game industry (also compare to movie industry)? What are tradeoffs of developing hard- and software to software only? What are potentials and risks associated with cobranding? What were strategies and competitive advantages in the different periods? What about platform development decisions? How has the Internet affected the industry? How should EA deal with convergence with TV / Film / mobile / online?
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Internal Corporate Venturing

Managing autonomous strategic initiatives corporate entrepreneurship Creating new venture divisions
Internal entrepreneurs allowed to pursue ventures unencumbered by the constraints of the firms mainstream business management Problems NVDOperating division interface NVDCorporate management interface

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Internal Corporate Venturing

NVDoperating divisions interfaces Strategic interferences Domain protection issues Synergy considerations NVDcorporate management interfaces Lack of diversification strategy Limits to rate of strategic change that can be absorbed Effects on corporate image Circumvention of corporate rules and regulations Inadequate measurement and reward systems Resistance to institutionalization

Administrative/cultural frictions

Rigidities resulting from management system Personnel transfer issues

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Internal Corporate Venturing

Assessing internal entrepreneurial initiatives
Focuses on two key dimensions of strategic decision making concerning internal entrepreneurial proposals: The strategic importance for corporate development (How does it help company? What is risk? How to get out?) The operational relatedness of proposals (What is required? How to get that? How will this affect current capabilities? Other areas requiring innovation?)

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Internal Corporate Venturing

Dimensions: Strategic importance Degree of control

Implications: Administrative linkages (authority) Organizational design alternatives

Operational relatedness

Efficiency considerations

Operational linkages (networking)

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Design alternatives for corporate entrepreneurship
Determining administrative linkages High strategic importance Strong administrative linkages Low strategic importance Examine how the new business can best be spun off Unclear strategic importance Relax the structural context Determining operational Linkages High operational relatedness Tight coupling Low operational relatedness Complete decoupling Unclear operational relatedness Loose coupling
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Internal Corporate Venturing

Design alternatives 3 Special business units 2 New product department 1 Direct integration 6 Independent business units 5 New venture division 4 Micro new venture department Uncertai n 9 Complete spin-off 8 Contracting

Unrelated

Operational relatedness

Partly related

Strongly related

7 Nurturing and contracting Not important

Very important

Strategic importance

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Internal Corporate Venturing

Direct integration - High strategic importance and operational relatedness require strong administrative and operational linkages New product department - High strategic importance and partial operational relatedness require a combination of strong administrative and mediumstrong operational linkages Special business units - High strategic importance and low operational relatedness may require the creation of specially dedicated new business units Micro new ventures department - Uncertain strategic importance and high operational relatedness seem typical for the peripheral projects that are likely to emerge in the operating divisions on a rather continuous basis
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Internal Corporate Venturing

New venture division - Proposed for situations of maximum ambiguity in the assessment framework Independent business units - Uncertain strategic importance and negligible operational relatedness may make this arrangement appropriate Nurturing plus contracting An entrepreneurial proposal may be unimportant for the firms corporate development strategy yet be strongly related to its operational capabilities and skills Contracting - Possibilities for nurturing diminish. There may still be opportunities for profitable technology licensing arrangements and for learning about new or improved capabilities through operational linkages.

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Internal Corporate Venturing

Complete spin-off - If strategic importance and operational relatedness are both low, complete spin-off may be most appropriate.

Implementation issues
Tool for clarification between entrepreneur and corporate management Corporate management needs to develop measurement and reward system for different alternatives New information could alter perceived strategic importance and operational relatedness renegotitation of organization design

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Internal Corporate Venturing

Process model of ICV
Core processes of ICV: activities defining it and further growth/impetus (stage model) Overlaying processes: activities through which strategic and corporate contexts are determined Taking place at different levels of the organization Exhibit 1

Major problems
Top management has limited insight and time (due to importance), mid-level R&D management not used to business environment, venture manager still unclear Exhibit 2

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Internal Corporate Venturing

Vicious circles in definition
Feasibility: (technical) demonstration necessary for resources, but needs resources product championing (bootlegging, scavenging), even for customers or sales people

Problems in impetus
ICV becomes venture (often with champion as manager) Continued growth depends on manager strategic forcing Needs to demonstrate sales volume and profit quickly Generalists replaced by specialist, efficiency considerations growth versus organization Mid-level at the same time strategy building to fit venture in it (and coach)
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Internal Corporate Venturing

Top level authorizes, mostly on quantitative data (often high expectations) Focus on growth and inattention often leads to lag in new product development, probably demise of venture manager

Overlaying process
Objective often unclear, mid level management delineates boundaries of venture, strategic context often unclear (mid level management engages in organizational championship) Due to time lag and windows often small chance of establishing venture, as strategies and top management change Deducts time from mid-level, can not coach venture
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Internal Corporate Venturing

New ventures do not fit structural context (rewards, selection process, goals...), can also lead to conflicts with existing business Reactive change of structural context in case of growth Overlaying process overall more experimentation and selection than planning (somewhat anarchy)

Corporate development strategy

Should be established (long-term, with resource allocation, long-term funds), seeing ventures as source of strategic renewal, not insurance Top management should be better able to assess (e.g. include people with experience), less championship, less emphasis on numbers, more strategy
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Internal Corporate Venturing

Better management of NVD (not simply a dump), pursue other ways (external venturing), more integration with other business, acknowledging fact of different management needs in NVD Measurement and reward systems: sometimes corporate history writing, less emphasis on numbers for venture managers Important role of mid-managers: help in definition, facilitate integration technology and business, coaching (also leads to more important role in corporate strategy) Venture manager should be more focused on organization building than growth (more leeway and responsibilities)

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Internal Corporate Venturing

Cycles of ICV
Programs begin and end in cycles Wasteful, short-term and precludes learning Dimensions: prospects of mainstream business and uncommited financial resources Situations: ICV orphans (good/good), All-out ICV drive (bad/good), ICV irrelevance (good/bad), Desperately seeking ICV (bad/bad) Reasons: economy overall, planning cycles that put too much load on ICV, too much success that would make internal units look bad or become competition, reorganizations, strategy making as top management prerogative
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Internal Corporate Venturing

Long-term commitment necessary strategic leadership and balance necessary (too much top driven ICV bad as well), integrated and continous part of strategy making, ICV as a source of insights for strategic directions, shared responsibility of senior executives

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Case: Pitney Bowes

What was the original need identified? How ended this up as a product? What is the difference to Stamps.com? What were the main reasons for the problems, what can be done better in the future?

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Case: Donnelley & Sons

What are differences in critical success factors in traditional printing vs. on-demand? What were critical challenges faced by the Digital Division? Compare old to new Technology Development Process. Examine the roles and interplays between Schetter and Clarke. How can and should the Books Group be dealt with?

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Case: Intel: Hood River

What is the strategic situation? How do you think Siegel would evaluate the other managers, and they him? How should Siegel decide?

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Case: HP
Innovation at HP: The Role of the Innovation Program Office (IPO) (HBS)

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