MANAGING

JONATHAN LIEBENAU
MG 305
LSE, 20 OCT 2020
PART 1
AGENDA

• Shifting the focus to the firm

• Resources, capabilities, routines
• Organizational principles & practices (Nonaka)
• Skills, training & productivity (Brown & Duguid)
• ’Evolutionary’ economics for tech mgt (Nelson)
• Managing R&D
• Expenditure, models, contexts & trends
• Cooperation, ‘open’, outsourcing, etc.
• Strategy: innovation races
FOCUS ON THE FIRM

• What we ought to think about managing innovation

• Useful theory: resources, capabilities & routines
• ‘Institutions’ of technology within firms
TRUISMS, FALLACIES & ASSUMPTIONS
ABOUT MANAGING INNOVATION
MOHABIR SAWHNEY & ROBERT WOLCOTT
“SEVEN INNOVATION MYTHS” FINANCIAL TIMES; MASTERING INNOVATION SEPT 04

1. You need more ideas

• Innovation comes from generating a multitude of
suggestions
2. Innovation is a department
• Like R&D and other functional divisions of a firm,
innovation should be a part of the structure of the firm
3. Let people loose to innovate
• Creativity comes from freedom: no holds barred
4. Innovation is a radical departure from the past
• Only big changes and novelty count
5. Mistakes are costly
• Good management comes from reducing risky prospects
6. Avoid the detours
• Focus on core competencies
7. Innovation is about creating new things
• Services, procedures, structures should be product oriented
MYTH:
YOU NEED MORE IDEAS
Reality:
you need more homes for ideas

• Many ideas are generated by structured routines

• Innovators need resources and mechanisms
MYTH:
INNOVATION IS A DEPARTMENT

Reality:
innovation is a company-wide
competency

• Innovation is a set of routines

• Protect them with institutions
MYTH:
LET PEOPLE LOOSE TO INNOVATE
Reality:
enable people through structure and
process

• Ideas are often serendipitous

• Innovation is not
• People need structure to act
MYTH:
INNOVATION IS A RADICAL DEPARTURE
FROM THE PAST

Reality:
innovation often creatively combines
pieces of the past

• Edison invented the processes of innovation

• Building on precedent
MYTH:
MISTAKES ARE COSTLY

Reality:
early mistakes are profitable

• Produce means to cope with mistakes and stop projects early

• Tolerate ambiguity
MYTH:
AVOID THE DETOURS

Reality:
detours may be the destination

• Consider distractions for their potential alternative outcomes

• Balance core competences with competencies
MYTH:
INNOVATION IS ABOUT CREATING NEW
THINGS
Reality:
there are many paths to innovation

• Distinguish between invention and innovation

• Look for process, administrative, service innovation
EDWIN LAND, INVENTOR OF THE
POLAROID CAMERA, OBSERVED
THAT “CREATIVITY IS THE SUDDEN
CESSATION OF STUPIDITY”
PRELUDE TO RELEVANT MANAGEMENT
CONCEPTS: WHY FIRMS EXIST;
BOUNDARIES W/ MARKETS
• It is expensive to transact but mature markets offer competitive
prices & quality (Adam Smith)
• Firms can reduce transaction costs by performing activities that are
more expensive to buy (Williamson)
• Consider all costs: information seeking, contracting & enforcing, payment,
delivery, etc.
• A logic of vertical integration:
• where there are no mature markets
• where specialization requires rare, un-imitable knowledge & high marginal costs
• Significant innovations are de facto monopolies
• Intermediary markets for inputs (goods or special services) will be
inadequate for a while
• Only well-managed firms will be capable of efficiently producing necessary
inputs to compensate
USEFUL CONCEPTS BEHIND MANAGING INNOVATION (I):
‘DEPLOYING RESOURCES’

• ‘resources’ are, e.g.

• Money (including debt)
• Personnel
• Facilities, property, etc.
• Rights
• Reputation (incl. brand)
• to ‘deploy’ is to
• Spend/allocate/re-allocate, inc. budgeting & planning
J. Liebenau
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• Concentrate effort
USEFUL THEORY BEHIND MANAGING
INNOVATION (II): ‘CAPABILITIES’

• Firm can be reduced to sets of capabilities, procedures &

decision rules under a given set of conditions; capabilities
are a form of resource (Brown & Duguid)
• Skills, capacity
• Procedures, know-how
• Precedents, organisational trends known to be virtuous
 USEFUL THEORY BEHIND MANAGING
INNOVATION (3): ‘ROUTINES’

• The regular & predictable behavioral patterns of firms

• Routines & norms reduce transaction costs
• Especially valued in technology management
• Boundaries between formal & tacit knowledge can be managed
• This might form an element of strategy because formal knowledge is imitable

• Emerge & disappear as engineered

DYNAMICS

• Firms search for new ideas (i.e., technological innovations) to make

changes and some grow, while other decline
• R&D is generally directed to create something that did not exist before,
and modeled as a probability distribution for coming up with new
techniques
• This distribution is considered to be a function of time, R&D policy
(portfolio of investments) and local (near current solutions) versus all other
searches

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J. Liebenau
DYNAMICS (II)

• Imitation of other companies is possible in this model—primarily

“best practice” and investment, market entry and labor market
conditions are modeled
• Firms with innovative R&D tend to lose out competitively to firms with
“skillful and aggressive imitators,”

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J. Liebenau
INSTITUTIONS OF TECHNOLOGY
CONTRIBUTE TO STABILITY, FOSTER POWERFUL/INCUMBENT
INTERESTS, REDUCE TRANSACTION COSTS

• Legal institutions: property (incl. I.P.), contracts (incl. de facto), duties (e.g. ‘of
care’)
• Standards (incl. procedural & prescribed by communities such as industrial
associations), codes (e.g. ’of conduct’)
• Community-led practices (ex. ‘Internet Society.org’ & Domain Name Registry &
Internet Research Task Force)
• Self-regulatory practices associated with e.g. risk & safety, privacy & security,
misuse & abuse, etc.

• Innovation ‘models’ also become institutions

 MANAGING
JONATHAN LIEBENAU
MG 305
LSE, 20 OCT 2020
PART 2
MANAGING R&D

• expenditure
• characteristics: types, scale and scope
• models & trends
• competition
• open, outsourced, cooperation & alliances
• spillover effects & social welfare
R&D EXPENDITURES
APPROX. PROPORTION OF PROFITS

• Aerospace 23%

• Office machines & computers18%

• Electronics 10%

• Drug industry 9%

• Food < 1%

• Oil refining <1%

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CHARACTERISTICS OF R&D

• Types
• Process innovation
• Product innovation
• Scope
• Large
• The new monopoly price is lower than the previous competitive price;
• Small
• Innovator can only extract part of the monopoly rent.

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R&D MODELS

• Manufacturing vs. service sector

• Flexibility of manufacturing models (open, outsourced, sub-contracted, etc.)
• Greater integration within the firm at the service sector-level
• Infrastructure; how does the internet promote innovation?
• Modular approaches attractive because of v. numerous interconnections

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R&D IN PRIVATE FIRMS

• R&D is core to more & more businesses;

• R&D strategies typically balance:
• Small/short-run cost-cutting R&D; &
• Long-run, breakthrough product innovation-based R&D.
• Time-scale shrinking
• Firms update their R&D strategy within the yearly cycle;

• Budget planning
• Top-down for market & product-related objectives; but
• Bottom-up for projects.

• Patents
• Performance & strategic indicator;

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R&D TRENDS

• Cyclical changes in R&D with increases in the 1990s, decreases in the early 2000
• Increased inter-firm R&D
• Increased outsourcing
• Increased use of joint ventures and alliances; but
• Decreased in-house R&D
• Increased globalization of R&D
• External R&D support even at strategic levels &
• High returns on R&D decentralization
• Problems with cyclicality:
• Consider sources of cyclicality (patents, business cycles, contract periods & lock-in)
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• Typically, downturns are not managed as well as upturns.
R&D ALLIANCES &/OR OUTSOURCING

• Small and large innovation

• End-to-end R&D for new product development
• Concept definition
• Design
• Engineering
• Prototyping
• Laboratory testing
• Commercialization and marketing

• Forms
• Horizontal
• alliances with competitors
• “classical” outsourcing
• Vertical
• Customer &/or supplier
• innovation at the borderlands 30
R&D COOPERATION

In general:
• Cooperation in R&D often increases profits for all
• If large spillover effects, then firms will spend more through cooperative R&D
than otherwise
• Small spillover effects may result in lower R&D expenditures where firms
cooperate.

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BENEFITS FROM OPEN R&D STRATEGY

• Access to a greater pool of specialist talents

• Economies of scale & scope in R&D
• Risk sharing & leveraging comparative advantages
• Attracting talent & stimulating internal innovativeness
• Increasing speed
• Increasing overall technological innovation capabilities
• Minimizing costs through sharing; &
• Rapid access to new and/or proven technologies
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DISADVANTAGES OF OPEN R&D
STRATEGY

• Knowledge transfer
• Contracting & other transaction costs
• Low appropriability
• Low control over innovation process
• Incentives problems for quality & time-to-market
• Conflict resolution across stakeholders.

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FACTORS TO CONSIDER WHEN
PARTNERING &/OR OUTSOURCING

• Cost/benefit of external knowledge & technology acquisition

• Organization & management of co-operative arrangements
• Geographical & sectoral specificities
• Specificities with respect to the specific joint/outsourced activities
• Impact on the probability of success in implementing the innovation.

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BUSINESS-LEVEL MOTIVATING FACTORS

• Time-to-market
• Expanding technological opportunities
• Increased cost & risk of innovation (especially pharmaceuticals)
• Is the increase in R&D through alliances &/or outsourcing cyclical?
• How are R&D cutbacks managed?
• How do the costs of R&D vary across regions?
• Higher in the US;
• Higher fixed labor cost in Europe,…

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INNOVATION RACE

• R&D timing
• Early deployment provides a comparative advantage, especially when combined
with patents.
• Branding effect: early entrant is often perceived as a higher quality producer, i.e., it
may be able to charge more.
• Early entrant is likely to be a monopoly in the early period, i.e., it might be able to
charge a monopoly price.
• Firms compete through R&D
• Studied through game theory models, typically with 2 competing firms
• High entry barriers, standards & regulatory capture

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SOCIAL EFFICIENCY OF
THE INNOVATION RACE

• Timing of R&D
• The deployment of an R&D-based innovation may come, from a social perspective:
• Too fast
• Too slowly
• Competition may result in
• Too much R&D if firms are overly concerned by the innovation race; &
• Too little R&D if firms are able to collude
• Externalities
• One firm’s R&D benefits other firms

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