chapter 6 defining the organization s strategic...

CHAPTER 6DEFINING THE ORGANIZATION’S

STRATEGIC DIRECTION

----Assessing the firm’s position and defining its strategic direction

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Overview

A coherent technological innovation strategy leverages the firm’s existing competitive position and provides direction for future development of the firm.Formulating this strategy requires:– Appraising the firm’s environment,– Appraising the firm’s strengths, weaknesses, competitive

advantages, and core competencies, – Articulating an ambitious strategic intent.

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Assessing the Firm’s Current Position

External Analysis– Two common methods are Porter’s Five-Force Model

and Stakeholder Analysis.– Porter’s Five-Force Model

1. Degree of existing rivalry. Determined by number of firms, relative size, degree of differentiation between firms, demand conditions, exit barriers.

2. Threat of potential entrants. Determined by attractiveness of industry, height of entry barriers (e.g., start-up costs, brand loyalty, regulation, etc.)

3. Bargaining power of suppliers. Determined by number of suppliers and their degree of differentiation, the portion of a firm’s inputs obtained from a particular supplier, the portion of a supplier’s sales sold to a particular firm, switching costs, and potential for vertical integration.

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4. Bargaining power of buyers. Determined by number of buyers, the firm’s degree of differentiation, the portion of a firm’s inputs sold to a particular buyer, the portion of a buyer’s purchases bought from a particular firm, switching costs, and potential for vertical integration.

5. Threat of substitutes. Determined by number of potential substitutes, their closeness in function and relative price.

Recently Porter has acknowledged the role of complements. Must consider:

a) whether complements are differentially available for the products of various rivals (impacting the attractiveness of their goods), and

b) how important complements are in the industry, c) who captures the value offered by the complements.

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Five-Force Model

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Stakeholder Analysis1. Who are the

stakeholders.2. What does each

stakeholder want.3. What resources

do they contribute to the organization.

4. What claims are they likely to make on the organization.

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Internal Analysis1. Identify the firm’s strengths and weaknesses. Helpful to

consider each element of value chain.

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2. Assess which strengths have potential to besustainable competitive advantage• Rare• Valuable• Durable• Inimitable

–Resources are difficult (or impossible) to imitate when they are:

– Tacit– Path dependent– Socially complex– Causally ambiguous


Competitive Advantage Sustainable

Competitive Advantage

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Identifying Core Competencies

Core Competencies: A set of integrated and harmonized abilities that distinguish the firm in the marketplace.

• Competencies typically combine multiple kinds of abilities.

• Several core competencies may underlie a business unit.• Several business units may draw from same

competency.• Core competencies should:

– Be a significant source of competitive differentiation– Cover a range of businesses– Be hard for competitors to imitate

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Identifying Core Competencies

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Identifying the Firm’s Core Competencies– Gallon, Stillman and Coates offer a step-by-step

program for identifying core competencies. • Module 1 -- Assemble a steering committee, appoint a program

manager, and communicate the overall goals of the project to allmembers of the firm.

• Module 2 -- Constructing an inventory of capabilities categorized by type. Assess their strength, importance, and criticality.

• Module 3 – Organize capabilities by both their criticality and the current level of expertise within the firm for each.

• Module 4 – Distill competencies into possible candidates for the firm to focus on. No options should be thrown out yet.

• Module 5 -- Testing the candidate core competencies against Prahalad and Hamel's original criteria.

• Module 6 -- Evaluate the firm’s position in the core competency.

Research Brief

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Risk of Core Rigidities

When firms excel at an activity, they can become over committed to it and rigid.–Incentives and culture may reward current

competencies while thwarting development of new competencies.

–Dynamic capabilities are competencies that enable the firm to quickly respond to change. • E.g., firm may develop a set of abilities that enable

it to rapidly deploy new product development teams for a new opportunity; firm may develop competency in working with alliance partners to gain needed resources quickly.

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Strategic Intent

Strategic Intent– A long-term goal that is ambitious, builds upon and stretches firm’s

core competencies, and draws from all levels of the organization. • Typically looks 10-20 years ahead, establishes clear milestones• Firm should identify resources and capabilities needed to close gap between

strategic intent and current position.

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Theory In Action

The Balanced Scorecard

Kaplan and Norton argue that effective performance measurement should incorporate:– Financial perspective– Customer perspective– Internal perspective

– Innovation and learning

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Discussion Questions

1. What is the difference between a strength, a competitive advantage, and a sustainable competitive advantage?

2. What makes an ability (or set of abilities) a core competency? 3. Why is it necessary to perform an external and internal analysis

before the firm can identify its true core competencies? 4. Pick a company you are familiar with. Can you identify some of its

core competencies?5. How is the idea of “strategic intent” different from models of strategy

that emphasize achieving a fit between the firm’s strategies and its current strengths, weaknesses, opportunities and threats (SWOT)?

6. Can a strategic intent be too ambitious?

CHAPTER 7CHOOSING INNOVATION

PROJECTS

-----Choosing innovation projects in which to invest, including both quantitative and

qualitative valuation techniques

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Overview

Methods of choosing innovation projects range from informal to highly structured, and from entirely qualitative to strictly quantitative.

Often firms use a combination of method to more completely evaluate the potential (and risk) of an innovation project.

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The Development Budget

Most firms face serious constraints in capital and other resources they can invest in projects.Firms thus often use capital rationing: they set a fixed R&D budget and rank order projects to support.– R&D budget is often a percentage of previous year’s sales. – Percentage is typically determined through industry benchmarking,

or historical benchmarking of firm’s performance.

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R&D Intensity varies considerably across and within industries.

R&D as a Percent of SalesIndustry12.7%Software & Internet11.2Health7.6Computing & Electronics4.3Technology4.1Aerospace & Defense4.1Automotive2.3Industrials2.1Consumer Products1.9Telecom1.5Chemicals & Energy

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Top 20 Global R&D Spenders, 2004

18%

17%

15%

6%

5%

13%

7%

4%

14%

14%

R&D as percent of

sales

4.0

4.1

4.2

4.3

4.4

4.6

4.7

4.7

4.8

5.2

R&D Expenditures

($billions)

Merck

Roche Holding

Novartis

Samsung Electronics

Honda

Nokia

Sony

Volkswagen

Intel

GlzxoSmithKline

Company

11%5.2Johnson & Johnson

6%5.7IBM

7%5.7Matsushita Electric

7%6.2Siemens

3%6.5General Motors

4%7.0Toyota

4%7.0DaimlerChrysler

4%7.4Ford

15%7.7Pfizer

21%$7.8Microsoft

R&D as percent of

sales

R&D Expenditures

($billions)

Company

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Financing New Technology Ventures– Large firms can fund innovation internally; new start-

ups must often obtain external financing. – In first stages of start-up and growth, entrepreneurs may

have to rely on family, friends, and credit cards.– Start-ups might be able to obtain some funding from

government grants and loans. – If idea and management are especially promising,

entrepreneur may secure funds from “angel investors”(typically seed stage and <$1 million) or venture capitalists (multiple early stages, >$1 million).

Theory In Action

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Quantitative Methods for Choosing Projects

Commonly used quantitative methods include discounted cash flow methods and real options.– Discounted Cash Flow (DCF)

• Net Present Value (NPV): Expected cash inflows are discounted and compared to outlays.

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Quantitative Methods for Choosing Projects• Internal Rate of Return (IRR): The discount rate that

makes the net present value of investment zero.– Calculators and computers perform by trial and error.– Potential for multiple IRR if cash flows vary

–Strengths and Weaknesses of DCF Methods:• Strengths

– Provide concrete financial estimates– Explicitly consider timing of investment and time value of

money

• Weaknesses– May be deceptive; only as accurate as original estimates of

cash flows.– May fail to capture strategic importance of project

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Qualitative Methods of Choosing Projects

Many factors in the choice of development projects are extremely difficult (or misleading) to quantify.Almost all firms thus use some qualitative methods.– Screening Questions may be used to assess different

dimensions of the project decision including:• Role of customer (market, use, compatibility and ease of use,

distribution and pricing)• Role of capabilities (existing capabilities, competitors’

capabilities, future capabilities)• Project timing and cost

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– The Aggregate Project Planning Framework• Managers map their R&D projects according to levels of risk, resource

commitment and timing of cash flows

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• Advanced R&D Projects: develop cutting-edge technologies; often no immediate commercial application.

• Breakthrough Projects: incorporate revolutionary new technologies into a commercial application.

• Platform Projects: not revolutionary, but offer fundamental improvements over preceding generations of products.

• Derivative Projects: incremental improvements and variety in design features.

• Derivative projects pay off the quickest, and help service the firm’s short-term cash flow needs. Advanced R&D projectstake a long time to pay off (or may not pay off at all), but canposition the firm to be a technological leader.

– Managers then compare actual balance of projects with desired balance of projects.

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–Q-Sort is a simple method for ranking ideas on different dimensions. • Ideas are put on cards.• For each dimension being considered, the cards are

stacked in order of their performance on that dimension.

• Several rounds of sorting and debate are used to achieve consensus about the projects.

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Combining Quantitative and Qualitative Information

Managers may use multiple methods in combination.May also use methods that convert qualitative information into quantitative form (though this has similar risks as discussed with quantitative methods)– Conjoint Analysis estimates the relative value individuals

place on attributes of a choice.• Individuals given a card with products (or projects) with different

features and prices.• Individuals rate each in terms of desirability or rank them.• Multiple regression then used to assess the degree to which an

attribute influences rating. These weights quantify the trade-offs involved in providing different features.

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Courtyard by Marriot– Marriot used conjoint analysis to help it develop a midprice hotel

line.– First used focus groups to identify customer segments and attributes

they cared about in a hotel. – Then created potential hotel profiles that varied on these features

and asked participants to rate the profiles.– Regression identified which features were valued most.– Based on the results, Marriott developed Courtyard concept:

relatively small hotels with limited amenities, small restaurants and meeting rooms, courtyards, high security, and rates of $40-$60 a night.

Theory In Action

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Combining Quantitative and Qualitative Information

–Data Envelopment Analysis (DEA) uses linear programming to combine measures of projects based on different units (e.g., rank vs. dollars) into an efficiency frontier.• Projects can be ranked by assessing their distance

from efficiency frontier. • As with other quantitative methods, DEA results only

as good as the data utilized; managers must be careful in their choice of measures and their accuracy.

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1. What are the advantages and disadvantages of discounted cash flow methods such as NPV and IRR?

2. What are some of the reasons that a firm might use both qualitative and quantitative assessments of a project?

3. Will different methods of evaluating a project typically yield the same conclusions about whether to fund its development? Why or why not?

Chapter 8

COLLABORATION STRATEGIES

-----Deciding whether and how the firm will collaborate on development activities, choosing a collaboration mode, and choosing and monitoring partners

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Abgenix spent seven years and $40 million to produce a genetically-engineered mouse that could produce antibodies that would treat human illnesses.One antibody, ABX-EGF showed great promise for treating several types of cancer. Abgenix had to decide whether to:– License ABX-EGF to a pharmaceutical company which

would do all further testing and commercialization (bear little risk and receive license royalties)

– Use a joint venture with a biotechnology company to complete the testing and commercialization (bear moderate risk and split profits)

– Pursue the ABX-EGF project as a solo venture (bear all risks and keep all profits)

The XenoMouse

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Discussion Questions:1. What are the pros and cons of Abgenix collaborating with

a partner on ABX-EGF?

2. If Abgenix chooses collaboration, would it be better off licensing ABX-EGF to the pharmaceutical company, or forming a joint venture with the biotech company?

3. How does Abgenix’s decision about collaborating for ABX-EGF impact its prospects for its other drug development projects?

The XenoMouse

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Overview

Firms must often choose between performing innovation activities alone or in collaboration.

Collaboration can enable firms to achieve more, at a faster rate, and at less cost and risk.

However, collaboration also entails sharing control and rewards, and may risk partner malfeasance.

The advantages of going solo are compared with those of collaborating, and then different forms of collaboration are compared.

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Reasons for Going Solo

Whether a firm chooses to engage in solo development or collaboration will be influence by:– Availability of capabilities (does firm have needed capabilities in

house? Does a potential partner?)– Protecting proprietary technologies (how important is it to keep

exclusive control of the technology?)– Controlling technology development and use (how important is it

for firm to direct development process and applications?)– Building and renewing capabilities (is the project key to renewing

or developing the firm’s capabilities?)

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Advantages of Collaborating

Collaborating can offer the following advantages:• Obtaining needed skills or resources more quickly• Reducing asset commitment and increase flexibility• Learning from partner• Sharing costs and risks• Can build cooperation around a common standard

Worldwide formation of strategic technology alliances is rising.

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Types of Collaborative Arrangements

There are numerous types of collaborative arrangements, each with its own advantages or costs.– Strategic Alliances: formal or informal agreements between two

or more organizations (or other entities) to cooperate in some way.

Doz and Hamel note that a firm’s alliance strategy might emphasize combiningcomplementary capabilitiesor transferring capabilities. It might also emphasize individual alliances or a network of alliances.

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Types of Collaborative Arrangements

– Joint Ventures: A particular type of strategic alliance that entails significant equity investment and often establishes a new separate legal entity.

– Licensing: a contractual arrangement that gives an organization (or individual) the rights to use another’s intellectual property, typically in exchange for royalties.

– Outsourcing: When an organization (or individual) procures services or products from another rather than producing them in-house.

– Collective Research Organizations: Organizations formed to facilitate collaboration among a group of firms.

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Using Alliances and Licensing to Establish a Standard

Charles Hill describes a range of strategies designed to help a firm’s technology become dominant.

Research Brief

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Choosing a Mode of Collaboration

Firms should match the trade-offs of a collaboration mode to their needs.

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Choosing and Monitoring Partners

Partner Selection– Resource fit: How well does the potential partner fit the

resource needs of the project? Are resources complementary or supplementary?

– Strategic fit: Does the potential partner have compatible objectives and styles?

– Impact on Opportunities and Threats: How would collaboration impact bargaining power of customers and suppliers, degree of rivalry, threat of entry or substitutes?

– Impact on Internal Strengths and Weaknesses: Would collaboration enhance firm’s strengths? Overcome its weaknesses? Create a competitive advantage?

– Impact on Strategic Direction: Would the collaboration help the firm achieve its strategic intent?

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Choosing and Monitoring Partners

Partner Monitoring and Governance–Successful collaborations require clear yet flexible

monitoring and governance mechanisms.• May utilize legally binding contractual arrangements.

– Helps ensure partners are aware of rights and obligations.– Provides legal remedies for violations.

• Contracts often include:– 1. What each partner is obligated to contribute.– 2. How much control each partner has in arrangement. – 3. When and how proceeds of collaboration will be distributed.– 4. Review and reporting requirements.– 5. Provisions for terminating relationship.

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1. What are some of the advantages and disadvantages of collaborating on a development project?

2. How does the mode of collaborating (e.g., strategic alliance, joint venture, licensing, outsourcing, collective research organization) influence the success of a collaboration?

3. Identify an example of collaboration between two or more organizations. What were the advantages and disadvantages of collaboration versus solo development? What collaboration mode did the partners choose? What were the advantages and disadvantages of the collaboration mode?

Chapter 9

PROTECTING INNOVATION---Crafting a strategy for protecting or diffusing

a technological innovation through such methods as patents, trademarks, copyrights, and trade secrets.

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In 1991, Fraunhofer IIS of Germany invents the MP3 format; by late 1990’s the format is wildly popular.In 1999, Shawn Fanning releases Napster, a free software program that allows users to easily share MP3 files (“peer-to-peer”) The RIAA starts to worry about illegal trade of copyrighted music. In 2001 it gets a court ruling against Napster, taking it offline.However, new peer-to-peer music services began to sprout up to meet the demand of the large population of “music pirates.”In 2003, Apple opens its iTunes Music Store – a one-stop-shop for music files from the five major record labels. Now record industry is earning significant revenues from MP3s. In 2006, France pushes Apple to loosen its restrictions on iTunes music and iPods. Should Apple use a more “open” model?Meanwhile, new models of digital distribution were emerging: Creative Commons (license agreements to make files public, legal, and free), and “Podcasting” (whereby whole “shows” could be downloaded).

The Digital Music Distribution Revolution

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Discussion Questions:1. What industry conditions lead to the revolution in audio distribution?

Which stakeholders stand to benefit most (or least) from this revolution? 2. Why did the music stores created by the record labels fail to attract many

subscribers? What, if anything, should the record labels have done differently?

3. What will determine how long the success of the iPod and iTunes endures? Should Apple allow its iPods to play non-iTunes songs? Should Apple allow iTunes songs to play on non-iPod MP3 players?

4. Why would musicians sign away their copyright privileges to their songs through “Creative Commons”?

5. How is podcasting likely to impact the appropriability of recorded music, radio broadcasting, or other types of audio transmissions?

The Digital Music Distribution Revolution

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Overview

Firms must decide whether and how to protect their technological innovations.

Protecting innovation helps a firm retain control over it and appropriate the rents from it.

However, sometimes not protecting a technology is to the firm’s advantage – it may encourage others to support the technology and increase its likelihood of becoming dominant.

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Appropriability

Appropriability: The degree to which a firm is able to capture the rents from its innovation.– Appropriability is determined by how easily or quickly

competitors can copy the innovation. • Some innovations are inherently difficult to copy (tacit, socially

complex, etc.)• Firms may also attempt to protect innovations through patents,

trademarks, copyrights or trade secrets.

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Patents, Trademarks and Copyrights

Patents, trademarks and copyrights each protect different things. – Patents: rights granted by the government that excludes

others from producing, using, or selling an invention. – Must be useful, novel, and not be obvious.

• Utility patents protect new and useful processes, machines, manufactured items or combination of materials.

• Design patents protect original and ornamental designs for manufactured items.

• Plant patents protect distinct new varieties of plants.

– In 1998, many software algorithms became eligible for patent protection.

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The patent process can take 2-5 years, and involves a number of costs.

Fee Types ($US) Regular Fee Small Entity FeePatent Filing Fees

Basic patent filing fee—utility 1000 500Design patent filing fee 430 215Plant patent filing fee 660 330

Patent Issuance Fees (paid after Patent Office approves patent)Utility patent issue fee 1,400 700Design patent issue fee 800 400Plant patent issue fee 1100 550Publication fee 300 300

Patent Maintenance Fees (to keep patent in force)Due at 3.5 years after issuance of patent 900 450Due at 7.5 years after issuance of patent 2,300 1,150Due at 11.5 years after issuance of patent 3,800 1,900

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Patent Laws Around the World– Countries have their own laws regarding patent

protection. Some treaties seek to harmonize these laws.• Paris Convention for the Protection of Industrial Property

– Foreign nationals can apply for the same patent rights in each member country as that country’s own citizens.

– Provides right of “priority” – once inventor has applied for protection in one member country, they can (within certain time period) apply for protection in others and be treated as if they had applied on same date as first application.

• Patent Cooperation Treaty (PCT)– Inventor can apply for patent in a single PCT receiving office and

reserve right to apply in more than 100 countries for up to 2 ½ years. Establishes date of application in all member countries simultaneously. Also makes results of patent process more uniform.

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– Trademarks and Service Marks: a word, phrase, symbol, design, or other indicator that is used to distinguish the source of goods from one party from goods of another (e.g., Nike “swoosh” symbol)• Rights to trademark are established in legitimate use of mark;

do not require registration.• However, marks must be registered before suit can be brought

over use of the mark. • Registration can also be used to establish international rights

over trademark.

– Two treaties simplify registration of trademarks in multiple countries: Madrid Agreement Concerning the International Registration of Marks, and the Madrid Protocol. Countries that adhere to either or both are in Madrid Union (77 members)

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– Copyright: a form of protection granted to works of authorship.• Copyright prohibits others from:

– Reproducing the work in copies or phonorecords– Preparing derivative works based on the work– Distributing copies or phonorecords for sale, rental, or lease– Performing the work publicly– Displaying the work publicly

• Work that is not fixed in tangible form is not eligible.• Copyright is established in first legitimate use.• However, “doctrine of fair use” stipulates that others can typically

use copyrighted material for purposes such as criticism, new reporting, teaching research, etc.

• Copyright for works created after 1978 have protection for author’s life plus 70 years.

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Copyright Protection Around the World– Copyright law varies from country to country.

– However, the Berne Union for the Protection of Literary and Artistic Property (“Berne Convention”) specifies a minimum level of protection for member countries.

– Berne convention also eliminates differential rights to citizens versus foreign nationals.

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Trade Secrets

Trade Secret: information that belongs to a business that is generally unknown to others. – Firm can protect proprietary product or process as trade

secret without disclosing detailed information that would be required in patent.

– Enables broad class of assets and activities to be protectable.

– To qualify:• Information must not be generally known or ascertainable.• Information must offer a distinctive advantage to the firm that is

contingent upon its secrecy.• Trade secret holder must exercise reasonable measures to protect

its secrecy.

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The Effectiveness and Use of Protection Mechanisms

In some industries, legal protection mechanisms are more effective than others– E.g., in pharmaceutical patents are powerful; in

electronics they might be easily invented around.It is notoriously difficult to protect manufacturing processes and techniques.In some situations, diffusing a technology may be more valuable than protecting it. However, once control is relinquished it is difficult to reclaim.

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IBM and the Attack of the ClonesIn 1980, IBM was in a hurry to introduce a personal computer (PC). It used off-the-shelf components such as Intel microprocessors an operating system from Microsoft, MS DOS.It believed that its proprietary basic input/output system (BIOS) would protect the computer from being copied.However, Compaq reverse engineered the BIOS in a matter of months without violating the copyright, and quickly introduced a computer that behaved like an IBM computer in every way. Compaq sold a record-breaking 47,000 IBM-compatible computers its first year, and other clones were quick to follow.

Theory In Action

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Wholly Proprietary Systems vs. Wholly Open Systems– Wholly proprietary systems may be legally produced or augmented only by their

developers.– Wholly open system may be freely accessed, augmented and distributed by

anyone.

– Many technologies lie somewhere between these extremes.

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–Advantages of Protection• Proprietary systems offer greater rent appropriability.• Rents can be used to invest in further development, promotion,

and distribution.• Give the firm control over the evolution of the technology and

complements

–Advantages of Diffusion• May accrue more rapid adoptions if produced and promoted by

multiple firms• Technology might be improved by other firms (though external

development poses its own risks).

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Theory in Action

Sun Microsystems and JavaIn 1995, Sun developed a software programming language called Java that enabled programs to be run on any operating system (e.g., Windows, Macintosh). This would lessen pressure for one operating system to be dominant. Members of the software community felt that Sun should make Javacompletely “open” – they argued that “Java is bigger than any one company.”However, Sun was afraid that if Java were completely open, companies would begin to customize it in ways that would fragment it as a standard.Sun decided to distribute Java under a “community source” program: no license fees, but all modifications to Java required compatibility tests performed by Java’s own standards body.

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Production Capabilities, Marketing Capabilities, and Capital

– Factors influencing benefits of protection vs. diffusion 1. Can firm produce the technology at sufficient volume or quality

levels? 2. Are complements important? Are they available in sufficient range

and quality? Can the firm afford to develop and produce them itself?3. Is there industry opposition against sole source technology?4. Can the firm improve the technology well enough and fast enough

to compete with others?5. How important is it to prevent the technology from being altered in

ways that fragment it as a standard?6. How valuable is architectural control to the firm? Does it have a

major stake in complements for the technology?

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1. What are the differences between patents, copyrights, and trademarks? 2. Consider a firm that is considering marketing its innovation in

multiple countries. What factors should this firm consider in formulating its protection strategy?

3. When will trade secrets be more useful than patents, copyrights or trademarks?

4. What factors do you believe influenced the choice of protection strategy used for the innovation identified above? Do you think the strategy was a good choice?

Chapter 10

ORGANIZING FOR INNOVATION

66

In 2003 Procter & Gamble was the world’s largest household and personal products company, with $43.4 billion in net revenues. It had almost 7,500 scientists working in 20 technical centers on four continents. In 1999, P&G’s CEO Durk Jager had initiated a major reorganization, “Organization 2005,” intended to accelerate innovation.– New product development would be more decentralized, conducted

in both U.S. and foreign markets.– Products would be tested in U.S. and foreign markets

simultaneously.– Regional business units were replaced with global business units

based on product lines.– Business services would be centralized.

By 2000, stockholders had become impatient for results, and Jager was pressured to step down.

Procter & Gamble’s “Organization 2005”

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Discussion Questions:1. What are some of the advantages and disadvantages of replacing

P&G’s regional divisions with with global product divisions? What impact was this likely to have on P&G’s innovation processes?

2. What are some of the advantages and disadvantages of centralizing P&G’s business services?

3. What are some of the challenges of changing the culture of a company as big as P&G?

4. Was Organization 2005 a good idea? Should P&G’s board of directors have given Jager more time?

Procter & Gamble’s “Organization 2005”

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Overview

A firm’s size and structure will impact its rate and likelihood of innovation.

Some structures may foster creativity and experimentation; others may enhance efficiency and coherence across the firm’s development activities.

There may also be structures that enable both simultaneously.

Some structural issues are even more significant for the multinational firm.

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Size and Structural Dimensions of the Firm

Size: Is Bigger Better?–In 1940s, Schumpeter argued that large firms

would be more effective innovators• Better able to obtain financing• Better able to spread costs of R&D over large

volume

–Large size may also enable…• Greater economies of scale and learning effects• Taking on large scale or risky projects

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– However, large firms might also be disadvantaged at innovation because…• R&D efficiency might decrease due to loss of managerial

control• Large firms have more bureaucratic inertia• More strategic commitments tie firm to current technologies

– Small firms often considered more flexible and entrepreneurial

– Many big firms have found ways of “feeling small”• Break overall firm into several subunits• Can utilize different culture and controls in different units

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Xerox and the Icarus ParadoxIn Greek mythology, Icarus was so enthralled with his exceptional wax wings that he flew close to the sun, melting his wings and crashing to his death.Icarus Paradox: That which you excel at can be your undoing.

Similarly, in 1960s and 70s, Xerox had such a stranglehold on the photocopier market, it did not pay attention to new Japanese competitors making inexpensive copiers.By the mid-1970s, Xerox was losing market share to the Japanese at an alarming rate and had to engage in a major restructuring and turnaround.

Theory In Action

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Structural Dimensions of the Firm–Formalization: The degree to which the firm

utilizes rules and procedures to structure the behavior of employees.• Can substitute for managerial oversight, but can also make

firm rigid.

–Standardization: The degree to which activities are performed in a uniform manner.• Facilitates smooth and reliable outcomes, but can stifle

innovation.

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–Centralization: The degree to which decision-making authority is kept at top levels of the firm OR the degree to which activities are performed at a central location.• Centralized authority ensures projects match firm-wide

objectives, and may be better at making bold changes in overall direction.

• Centralized activities avoid redundancy, maximize economies of scale, and facilitate firm-wide deployment of innovations.

• But, centralized authority and activities might not tap diverse skills and resources, and projects may not closely fit needs of divisions or markets.

– Some firms have both centralized and decentralized R&D activities.

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Centralized and Decentralized R&D Activities

75

Shifting Structures at 3MUnder McKnight 3M had both a central research laboratory and decentralized R&D labs. His “grow and divide” philosophy encouraged divisions to be split into small, independent and entrepreneurial businesses.Lou Lehr consolidated the 42 divisions and 10 groups into 4 business sectors. He also established a three-tiered R&D system: central research laboratories for basic research, sector labs for core technologies, and division labs for projects with immediate applications.Jake Jacobsen encouraged more disciplined project selection and shifted focus from individual entrepreneurs to teams.“Desi” Desimone eased company back toward a looser, more entrepreneurial focus with less centralization.

Theory In Action

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Mechanistic versus Organic Structures–Mechanistic Structures have high formalization

and standardization. • Good for operational efficiency, reliability.• Minimizes variation may stifle creativity

–Organic structures have low formalization and standardization;described as “free flowing”• Encourages creativity and experimentation• May yield low consistency and reliability in

manufacturing.

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Size versus Structure– Many advantages and disadvantages of firm size are actually

due to structural dimensions of formalization, standardization, and centralization.• Large firms typically make greater use of formalization and

standardization because of challenges of oversight.

The Ambidextrous Organization: The Best of Both Worlds?– Some divisions (e.g., R&D, new product lines) may be small

and organic.– Other divisions (e.g., manufacturing, mature product lines)

may be larger and more mechanistic.– Can also alternate through different structures over time.

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Modularity and “Loosely-Coupled”Organizations

Modular Products– Modularity refers to the degree to which a system’s

components can be separated and recombined.– Products may be modular at user level (e.g., Ikea

shelving systems), manufacturing level (e.g., Sony’s Walkman), or other levels.

– A standard interface enables components to be combined easily.

– Modularity can enable many different configurations to be achieved from a given set of components.

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Modularity and “Loosely-Coupled”Organizations

Loosely-Coupled Organizational Structures– In a loosely-coupled organization, activities not tightly

integrated; achieve coordination through adherence to shared objectives and standards.

– Shared standards and information technology reduce need for integration.

– Less need for integration enables firms to pursue more flexible configurations; may specialize in a few activities and outsource others.

– Results in a network of loosely connected firms or divisions of firms.

– May not be good when very close coordination is needed, or when there is high potential for conflict.

80

Managing Innovation Across Borders

Centralization versus decentralization is a particularly important issue for multinational firms.– Foreign markets offer diverse resources, and have

diverse needs.– Innovation tailored to local markets might not be

leveraged into other markets.• Customization might make them poor fit for other markets.• Divisions may be reluctant to share their innovations.• Other divisions may have “not invented here” syndrome.

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Bartlett and Ghoshal identify four strategies of multinational innovation– Center-for-global: all R&D activities centralized a single hub

• Tight coordination, economies of scale, avoids redundancy, develops core competencies, standardizes and implements innovations throughout firm.

– Local-for-local: each division does own R&D for local market• Accesses diverse resources, customizes products for local needs.

– Locally leveraged: each division does own R&D, but firm attempts to leverage most creative ideas across company.• Accesses diverse resources, customizes products for local needs,

improve diffusion of innovation throughout firm and markets.

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– Globally linked: Decentralized R&D labs but each plays a different role in firm’s strategy and are coordinated centrally.• Accesses diverse resources, improve diffusion of innovation

throughout firm and markets, may help develop core competencies.

Bartlett and Ghoshal encourage transnational approach: resources and skills anywhere in firm can be leveraged to exploit opportunities in any geographic market. Requires:

1. Reciprocal interdependence among divisions2. Strong integrating mechanisms such as personnel rotation, division-

spanning teams, etc.3. Balance in organizational identity between national brands and

global image

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1. Are there particular types of innovation activities for which large firms are likely to outperform small firms? Are there types for which small firms are likely to outperform large firms?

2. What are some of the advantages and disadvantages of having formalized procedures for improving the effectiveness or efficiency of innovation?

3. What factors should a firm take into account when deciding how centralized its R&D activities should be? Should firms employ both centralized and decentralized R&D activities?

4. Why is the tension between centralization and decentralization of R&D activities likely to be even greater for multinational firmsthan firms that compete in one national market?

5. What are some of the advantages and disadvantages of the transnational approach advocated by Bartlett and Ghoshal?

Chapter 11

MANAGING THE NEW PRODUCT

DEVELOPMENT PROCESS

Product Development at Ideo

86

(http://www.ideo.com/)

129

Overview

Despite the intense attention paid to innovation, failure rates are still very high.

More than 95% of new product development projects fail to earn an economic return.

This chapter summarizes research on how to make new product development more effective and efficient.

130

Sequential versus Party Parallel Development Processes

Before mid-1990s, most US companies used sequential NPD process; now many use partly parallel process.

Partly parallel process shortens overall development time, and enables closer coordination between stages.

In some situations, however, a parallel development process can increase risks.

131

Project Champions

As of 2001, 68% of North American firms, 58% of European firms, and 48% of Japanese firms reported using senior executives to champion their NPD projects.Benefits of Championing– Senior execs have power to fight for project– They can gain access to resources– They can communicate with multiple areas of firm

Risks of Championing– Role as champion may cloud judgment about project– May suffer from escalating commitment– Others may fear challenging senior executive

May benefit firm to develop “antichampions” and encourage expression of dissenting opinion.

132

Involving Customers and Suppliers in the Development Process

Involving Customers– Customer is often best able to identify the maximum

performance capabilities and minimum service requirements of new product.

– Customers may be involved on NPD team.– Firms may also use beta testing to get customer input

early in the development process.– Some studies suggest that it is more valuable to use “lead

users” than a random sample of customers.• Lead users: Customers who face the same general needs of

marketplace but experience them earlier than rest of market and benefit disproportionately from solutions.

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The Lead User Method of Product Concept DevelopmentHilti AG used the lead user method to develop a new pipe hanger.First customers with lead user characteristics were identified through phone interviews. Lead users participated in a three-day product concept generation workshop. At end of workshop, a single design was selected as best.Hilti then presented this design to 12 long-term customers; 10 of the 12 preferred the new design and 9 of the 10 were willing to pay a 20% price premium for it. The lead user method reduced the cost and time of the project by almost half.

Research Brief

134

Involving Customers and Suppliers in the Development Process

Involving Suppliers–Involving suppliers on NPD team or consulting

as an alliance partner can improve product design and development efficiency.

–Suppliers can suggest alternative inputs that reduce cost or improve functionality.

135

Tools for Improving the New Product Development Process

Stage-Gate Processes– Utilize tough go/kill decision points in the development process

help filter out bad projects.

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The time and cost of projects escalates with each stage, thus stage-gate processes only permit a project to proceed if all assessments indicate success.

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The stage-gate process can be modified to better fit a firm’s particular development needs.– E.g., Exxon Research and Engineering’s stage-gate system

– 68% of U.S. firms, 56% of European firms and 59% of Japanese firms use some type of stage-gate process to manage their NPD process.

139

Quality Function Deployment –The House of Quality

QFD improves communication and coordination between engineering,marketing, and manufacturing.

140

Quality Function Deployment –The House of Quality

Steps for QFD1. Team identifies customer requirements.2. Team weights requirements in terms of relative importance.3. Team identifies engineering attributes that drive performance.4. Team enters correlations between different engineering attributes.5. Team indicates relationship between engineering attributes and

customer requirements.6. Team multiplies customer importance rating by relationship to

engineering attribute and then sums for each attribute.7. Team evaluates competition.8. Using relative importance ratings for engineering attributes and scores

for competing products, team determines design targets.9. Team evaluates the new design based on the design targets.

141

Design for Manufacturing

Design for Manufacturing often involves a set of design rules that reduce cost and development time, while boosting quality.

142

Computer-Aided Design/Computer-Aided Manufacturing

Computer-Aided Design (CAD) is the use of computers to build and test designs.–Enables rapid and inexpensive prototyping.

Computer-Aided Manufacturing (CAM) is the use of machine-controlled processes in manufacturing.–Increases flexibility by enabling faster changes

in production set ups. More product variations can be offered at a reasonable cost.

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Computer-Aided Design of an America’s Cup Yacht

Normally designing America’s Cup yachts required several months to develop smaller-scale models at a cost of $50,000 per prototype.Using computer-aided design, Team New Zealand was able to consider many design specifications in a matter of hours at little cost, enabling more insight into design trade-offs.Computer-aided design also avoided inaccurate results from using scaled-down prototypes.

Theory In Action

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Tools for Measuring New Product Development Performance

Measuring performance of NPD process can help company improve its innovation strategy and process.–Measures of NPD performance can help

management:• identify which projects met their goals and why, • benchmark the organization’s performance compared to that of

competitors, or to the organization’s own prior performance,• improve resource allocation and employee compensation, and• refine future innovation strategies

– Important to use multiple measures to provide fair representation

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New Product Development Process Metrics include:1. What was the average cycle time (time-to-market) for

development projects? How did this cycle time vary for projects characterized as breakthrough, platform, or derivative projects?

2. What percentage of development projects undertaken within the last five years met all or most of the deadlines set for the project?

3. What percentage of development projects undertaken within the last five years stayed within budget?

4. What percentage of development projects undertaken within the last five years resulted in a completed product?

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Overall Innovation Performance measures include:1. What is the firm’s return on innovation? (This measure assesses the

ratio of the firm’s total profits from new products to its total expeditures, including research and development costs, the costs of retooling and staffing production facilities, and initial commercialization and marketing costs.)

2. What is the percentage of projects that achieve their sales goals?3. What percentage of revenues are generated by products developed

within the last five years?4. What is the firm’s ratio of successful projects to its total project

portfolio?

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– Globally linked: Decentralized R&D labs but each plays a different role in firm’s strategy and are coordinated centrally.• Accesses diverse resources, improve diffusion of innovation

throughout firm and markets, may help develop core competencies.

Bartlett and Ghoshal encourage transnational approach: resources and skills anywhere in firm can be leveraged to exploit opportunities in any geographic market. Requires:

1. Reciprocal interdependence among divisions2. Strong integrating mechanisms such as personnel rotation, division-

spanning teams, etc.3. Balance in organizational identity between national brands and

global image

148


1. Are there particular types of innovation activities for which large firms are likely to outperform small firms? Are there types for which small firms are likely to outperform large firms?

2. What are some of the advantages and disadvantages of having formalized procedures for improving the effectiveness or efficiency of innovation?

3. What factors should a firm take into account when deciding how centralized its R&D activities should be? Should firms employ both centralized and decentralized R&D activities?

4. Why is the tension between centralization and decentralization of R&D activities likely to be even greater for multinational firms than firms that compete in one national market?

Chapter 12

MANAGING NEW PRODUCTDEVELOPMENT TEAMS

150

In 1993 Dell began developing a new notebook computer. Its firstline of notebook computers (introduced in 1992)had technical problems that resulted in recalling 17,000 units.Dell had traditionally used a small R&D budget, autonomous teams consisting mostly of developers, and an informal process. It was often successful, but outcomes were inconsistent.For the new notebook, Dell decided to use cross-functional teams with project leaders. Teams would be dedicated to project from start to finish. Teams would direct (and be held accountable for) each phase.

New Product Development at Dell Computer

151

Discussion Questions:1. What are some of the advantages of Dell's adoption of a

more structured new product development process? Are their risks of abandoning its previous informal approach?

2. How does including engineers from different functions impact Dell's development process?

3. What are the benefits and costs of keeping the same team members on the development project for its complete duration?

4. If you were a senior manager at Dell, are their any recommendations you would make for further improving the development process?

New Product Development at Dell Computer

152

Overview

Many organizations now use cross-functional teams to lead and manage the NPD process.There is considerable variation in how these teams are formed and managed.The chapter will look at size, composition, structure, administration, and leadership of teams.

153

Constructing New Product Development Teams

Team Size– May range from a few members to hundreds.– Bigger is not always better; large teams create more

administrative costs and communication problems– Large teams have higher potential for social loafing.

Team Composition– Including members from multiple functions of firm

ensures greater coordination between functions.– In 2000, 77% of U.S. firms, 67% of European firms,

and 54% of Japanese firms used cross-functional teams.

154

Constructing New Product Development Teams

– Diversity in functional backgrounds increases breadth of knowledge base of team.

– Other types of diversity (e.g., organizational tenure, cultural, gender, age, etc.) can be beneficial as well.• Provides broader base of contacts within and beyond firm.• Ensures multiple perspectives are considered.

– However, diversity can also raise coordination costs.• Individuals prefer to interact with those they perceive as similar

(“homophily”)• May be more difficult to reach shared understanding.• May be lower group cohesion.

– Extended contact can overcome some of these challenges.

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Boundary-Spanning Activities in NPD Teams– Ancona and Caldwell studied 45 NPD teams to

identify the roles team members engage in to collect information and resources within and beyond the firm. Found three primary types:• Ambassador activities: representing team to others and

protecting from interference.• Task coordination activities: coordinating team’s activities with

other groups.• Scouting activities: scanning for ideas and information that

might be useful to the team. – Scouting and ambassador activities more beneficial

early in development cycle; task coordination activities beneficial throughout life of team.

Research Brief

156

Structure of New Product Development Teams

Four types:– Functional– Lightweight– Heavyweight– Autonomous

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–Functional Teams• Members report to functional manager• Temporary, and members may spend less than 10% of their

time on project.• Typically no project manager or dedicated liaison personnel.• Little opportunity for cross-functional integration.• Likely to be appropriate for derivative projects.

–Lightweight Teams• Members still report to functional manager.• Temporary, and member may spend less than 25% of their

time on project.

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• Typically have a project manager and dedicated liaison personnel.

• Manager is typically junior or middle management.• Likely to be appropriate for derivative projects.

–Heavyweight Teams• Members are collocated with project manager. • Manager is typically senior and has significant authority to

command resources and evaluate members.• Often still temporary, but core team members often

dedicated full-time to project.• Likely to be appropriate for platform projects.

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–Autonomous Teams• Members collocated and dedicated full-time (and often

permanently) to team. • Project manager is typically very senior manager.• Project manager is given full control over resources

contributed from functional departments and has exclusive authority over evaluation and reward of members.

• Autonomous teams may have own policies, procedures and reward systems that may be different from rest of firm.

• Likely to be appropriate for breakthrough and major platform projects.

• Can be difficult to fold back into the organization.

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“Platform Teams” at Chrysler– From 1988 to 1996, Chrysler reduced its development cycle from

60 months to 24 months, and kept its development costs remarkably low.

– The primary mechanism it used to accomplish this was the formation of cross-functional autonomous development teams (called “platform teams”).

– Members were collocated, and given considerable autonomy to achieve target prices.

– Close contact kept teams fast, efficient, and flexible. By 1998 Chrysler’s vehicle lineup was considered one of the most innovative in industry.

Theory In Action

162

The Management of New Product Development Teams

Team Leadership– Team leader is responsible for directing team’s activities,

maintaining alignment with project goals, and communicating with senior management.

– Team leaders impact team performance more directly than senior management or champions.

– Different team types need different leader types:• Lightweight teams need junior or middle manager.• Heavyweight and autonomous teams need senior manager with

high status, who are good at conflict resolution, and capable ofinfluencing engineering, manufacturing, and marketing functions.

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Team Administration–Many organizations now have heavyweight and

autonomous teams develop a project charter and contract book.• Project charter encapsulates the project’s mission and

provides measurable goals. May also describe:– Who is on team– Length of time members will be on team– Percentage of time members spend on team– Team budget– Reporting timeline– Key success criteria

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• Contract book defines in detail the basic plan to achieve goals laid out in charter. It provides a tool for monitoring and evaluating the team’s performance. Typically provides:– Estimates of resources required– Development time schedule– Results that will be achieved

• Team members sign contract book; helps to establish commitment and sense of ownership over project.

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Managing Virtual Teams– In virtual teams, members may be a great distance from

each other, but are still able to collaborate intensely via videoconferencing, groupware, email, and internet chat programs. • Enables people with special skills to be combined without

disruption to their personal lives.• However, may be losses of communication due to lack of

proximity and direct, frequent contact. • Requires members who are comfortable with technology, have

strong interpersonal skills and work ethic, and can work independently.

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Research Brief

Virtual International R&D Teams– Gassman and von Zedtwitz studied 34 technology-intensive multinationals

and identified four patterns of virtual international R&D teams:

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1. Why are the tradeoffs in choosing a team's size and level of diversity?

2. Can you identify an example of a development project, and what type of team you believed they used? Do you think this was the appropriate type of team given the nature of the project?

3. Are there some types of projects for which “virtual teams”are inappropriate?

chapter 6 defining the organization s strategic...

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