Competitive Advantage in Technology-Intensive Industries

“It is the quest for competitive advantage that causes firms to invest in innovation”

(260).

Invention Innovation

The creation of new products/processes through the development of new knowledge or new combinations of existing knowledge.

The initial commercialization of invention by producing and marketing a new good by using a new method of production.

Invention vs. Innovation

The Innovation Process

Invention InnovationIntroduction Diffusion

Demand Side: Through customers Supply Side: Through imitation by competitors

*Note: Not all inventions progress to innovation, primarily because

patent owners can’t find a viable market.

The Innovation Process

Competitors

Customers

Adoption

The Profitability of Innovation

There is no evidence that either R&D intensity or frequency of new product introductions directly correlate with profitability.

Profitability = Value created by the innovation

Regime to Appropriability: The conditions that influence the distribution of returns to innovation

Strong Regime Weak Regime

Innovator is able to acquire a substantial share of the value created.

Other parties derive most of the value gained.

Regime to Appropriability

Four Factors in Determining Extent the Innovator is Able to Appropriate Value of Their Innovation

1. Property Rights

2. Tacitness and Complexity of the Technology

3. Lead-Time

4. Complementary Resources

Property Rights

The rights to Intellectual Property Patents: Rights to a new and useful product, process,

substance, or design. Copyrights: Exclusive production, publication, or sales

rights to literature, media, etc. Trademarks: Words, symbols, or other marks that

distinguish good/service. Trade Secrets: Legal protection for formulas, recipes,

processes, and other private knowledge.

Tacitness and Complexity

Extent to which an innovation can be imitated depends on how easy technology can be comprehended and replicated.

Two Factors: Codifiable Knowledge: Can the innovation be written

down on paper? Complexity: How difficult is it to replicate this

product/process?

Lead-Time

The time it will take followers to catch up to the innovation.

Purpose: For innovators to use this lead-time to build on their advantages. Microsoft

Complementary Resources

Diverse resources and capabilities needed to finance, produce and market the innovation.

Often times accessed through alliances with other firms.

The importance of property rights?

Patent

Copyright

Trademark

Trade Secret

How to Exploit Your Innovation

LicensingStrategic AllianceJoint VentureInternal

Commercialization

Resources and Capabilities

Outsourcing

Internal Commercialization

Lead or Follow?

Grab the prize!!

Eat the costs…

Weigh the advantages!!!

Managing Risks

Lead UsersLimit risk exposureFlexibility

Competing for Standards

The emergence of the digital, networked economy has made standards increasingly important and companies that own and influence industry standards are capable of earning returns that are unmatched by any other type of competitive advantage.

A standard is a format, an interface, or a system that allows interoperability

Types of Standards

Public or Open Standards Available to everyone

either for free or a nominal charge.

They don’t require privately owned IP

Set by public bodies and industry associations

Private or Proprietary Standards The technologies and

designs are owned by companies or individuals.

Classified by who sets them

Mandatory standards Set by the government

and have the force of law behind them

De facto Standards Emerge through

voluntary adoption by producers and users

Why Standards Appear: Network Externalities

Standards emerge in markets that are subject to network externalities.

Whenever the value of a product to an individual customer depends on the number of users of that product.

Negative Network externalitiesCompatibility

Network Externalities arise from:

Products where users are linked to a network Availability of complementary products or

servicesEconomizing on Switching Costs

Network Externalities create Positive Feedback

Once a technology or system gains market leadership, it attracts a growing proportion of new buyers.

Trying to avoid tipping (once a market leadership is lost , a downward spiral occurs) Once a certain threshold is reached, cumulative forces become unstoppable.

The markets subject to significant network externalities tend to be dominated by a single supplier.

Technological and Design Standards are Resilient

Learning Effects - cause the dominant technology and design to be continually improved and refined.

Collective Lock-Ins – Existing standard is inferior, switching to a superior technology may not occur

Winning Standard Wars

First key issue is to determine whether we are competing in a market that will converge around a single technical standard.

Second strategic issue is recognizing the role of positive feedback.

Controlling the positive feedback: Before you go to war, assemble allies Pre-empt the market Manage expectations

…continued

Create broad alliances to grow bandwagon and gain market leadership

Achieve compatibility with existing productsAdvantage goes to the competitor that adopts

an evolutionary strategy rather than one that adopts revolutionary strategy

Key Resources Needed to Win a Standards War:

Control over an installed base of customersOwning IP rights in the new technologyThe ability to innovate in order to extend and

adapt the initial technological advanceFirst mover advantageStrength in complements Reputation and Brand Name

Be aware of tipping points and launch strategic initiatives earlier to resolve standard wars quicker.

Creating the Conditions for Innovation

Strategic analysis can tell us a great deal about making money out of innovation, but if we cannot generate innovation there isn’t much use.

While invention depends on creativity, innovation requires collaboration and cross-functional integration

Managing Creativity

Invention is an act of creativity requiring knowledge and imagination.

Creativity is stimulated by human interaction.

Organizing For Creativity

Creativity requires management systems that are quite different from those appropriate for efficiency.

Creative abrasion is the term used for fostering innovation through the interaction of different personalities and perspectives.

Balancing Creativity and Commercial Direction

For creativity to create value-both for the company and for society-it must be directed and harnessed.

The critical linkage between creative flair and commercial success is market need.

Organizational Approaches to the Management of Innovation

Innovation upsets the established routines and threatens the status quo.

As innovation has become an increasing priority for established corporations, chief executives have sought to emulate the entrepreneurial spirit of technology-based start-ups.

Product Champions

These provide a means for incorporating individual creativity within organizational processes and for linking invention to subsequent commercialization.

The key to a product champion is to permit individuals who are sources of creative ideas to lead the teams.

Buying Innovation

Many large companies buy smaller start-ups.

Large companies buy these smaller start-ups because they have advantages in the early stages of the innovation process.

Open Innovation

Instead of companies developing their own technologies ‘in-house’.

Open innovation is more market-based system where companies buy in technology while also licensing out their own technologies.

Corporate Incubators

These are business developments established to fund and nurture new businesses.

This was more popular at the end of the 1990s during the IT boom.

Few companies have achieved sustained success from this.