Technology and Innovation Management

What is the OCCD?

Organization for Economic Co-operation and Development

What is creative destruction?

• term by Schumpeter

• competition that leads to a cost or quality advantage, which strikes not at the margins of the profits and outputs but at their foundations and their very lives

Why is innovation important?

• essential to economic growth

• under capitalism innovation is mandatory as it is a life-and-death matter for the firm

What is the turnover time of a patent?

• 20 years (+ 5 years for pharma due to long testing time)

• fees need to be paid yearly

Why was prozac so profitable?

• anti-depressant drug

• one of the biggest-selling drugs ever

• third of the total turnover of the company

• 13 years of patent after release on the market

Why did the Iridium phone lead to losses?

• satellite-based mobile phones

• phone connections anywhere at any time

• successful technology but extremely expensive

• wrong marketing → tried to sell it to the average public who did not need it, instead of businesses

What is innovation?

• new products or processes

• commercialized

• new to the adopting organization

• new combination of needs and technical solutions

What is innovation management?

Creation of processes that aim at creating and exploiting new things.

What are the steps of innovation (and invention)?

1. (Idea

2. Discovery

3. Research

4. Development

5. Invention)

6. Market launch

7. Exploitation

How are innovation strategies related to the newness of the market and the solution?

What are the three different types of innovation?

• product/service

  • generate/increase sales

  • must be sold on the market

• process

  • enable/improve production of goods/services

  • must be established inside the organization

• business model

  • new ways to generate revenues

  • define value propositions for customers, suppliers, and partners

• but it can be difficult to distinguish even without the business model complication

  • production and process innovation go together

  • production innovation for supplier can be process innovation for buyer

Why might low-tech solutions be better than high-tech?

• e.g. mouse trap - most inventions never made money

• most common design patented in 1899 and has remained unchanged since

• if a solution works effectively, it doesn’t need to be changed

What is basic research?

• experimental and theoretical work

• to acquire new knowledge underlying foundations of phenomena and observable facts

• without any particular application or use in view

What is applied research?

• to acquire new knowledge

• directed towards a specific practical aim

What is experimental development research?

• based on existing knowledge

• directed to producing, improving, and installing new materials, products, and services

Why does R&D matter?

• economic and societal importance

  • OECD countries spend over a trillion dollars annually

  • 3 million people work in R&D

  • products <5 years old account for 30% profits in high-performing firms, nearly half of all sales

• total R&D expenditures

  • 5-20% basic

    • funded by government

  • 15-25% applied

  • 65-85% experimental

    • funded by industry

    • concentrated in large firms

    • small firms → informal

What is the principal-agent problem?

• extrinsic motivation: boss

• intrinsic motivation: culture, interest

• assymetric motivation between principal and agent leads to conflict of interest

  • inefficiencies and agency costs

  • agents may prioritize their own self-interest

• solutions

  • performance-based compensation

  • monitoring & auditing

  • signaling & screening (agents provide proof of capability)

Why did the Vasa sink?

• two gun decks

• began to keel over as the center of mass was very high, making the ship unstable

• nobody was condemned as the ship builder died meanwhile

• nobody dared to voice concerns

What are the properties of technological change?

• cumulative (minor changes stacked together) & evolutionary (incremental changes)

  • cumulative: electric car

  • evolutionary: mobile phone

• discrete (single, standalone product) vs. complex (interconnected systems) technologies

  • discrete: pharmaceuticals

  • complex: penicillin → its invention lead to other antibiotics

• not a smooth, automatic process (fits, spurts, and jumps)

  • e.g. electric lighting, AI technology

• revolutionary → technological revolutions/ techno-economic paradigms (not all changes)

Why was the printing press a communication revolution?

• Johannes Gutenberg (1452)

• reading became accessible to common people

• first use: Bible

• consequences

  • mass education

  • loss of power of clergy

  • reformation

  • authorship

How did the spinning jenny lead to the industrial revolution?

• James Hargreave (1765)

• 10x productivity improvement

  • mass production

  • industrialization

  • social upheaval → fear of unemployment

  • emergence of factories → mass production

  • new social class → factory workers

  • emergence of the idea of capitalism and communism

What is a general purpose technology?

• a profound innovation so transformative that it disrupts and reshapes virtually every sector of the economy

• examples

  • steam ships, railways

  • Cross-Atlantic transportation

  • telegraph, telephone, radio

  • Haber-Bosch process (ammonia from H & N → fertilizer)

  • internet

    • defense, universities, research BUT social effects?

How are the innovation shifts of techno-economic paradigms described?

• Kondratiev long-waves (~50 years)

• accelerating waves

• capitalist development on technological change

What are the consequences of techno-economic paradigms?

• winners & losers: nations and firms

• changes

  • capital stock

  • industrial relations

  • regulations, standards

  • (support universities)

  • new skill profile in the labor force

• role of state: investment in strategic sectors (e.g. renewables) vs. profit

  • incentive using externalities or subsidies

  • goal: develop certain sectors to lay foundations for other innovations → spillover effect

• competitiveness is based on

  • knowledge, creativity, learning → people

  • innovation, R&D → firm

What does the S-curve describe?

• lifecycle of a new technology, product, or industry

• steps

1. emergence

2. rapid improvement

3. declining improvement → potential of technology

4. maturity

How does the development of two technologies relate to each other?

• as one reaches its limits, the new one emerges

• switch from the old technology to the new one as the old reaches the limits of its potential → requires monitoring

What are CVCs?

venture capitals from a firm with interests other than financial gains

What is the sailing ship phenomenon?

• sailing ships got replaced by steamships, but tea trader ships were still sailing ships known for their speed → last advantage for sailing ships

• they became useless after the Suez Canal opened as they couldn’t go through

• final spring: last attempt at improving a technology as a reaction to facing competition from a new technology

What are some typical problems of established companies?

• currently used technology is over-estimated

• R&D budgets are linked to revenues

• misinterpretation of market signals due to biased attitude

• lack of flexibility of historically grown organizational structures and cultures

How did the utilization of conveyor belts by Ford reshape the automobile industry?

• process innovation

• made it difficult for small firms to compete

• high fixed costs for Ford gave them motivation for mass production → consolidation in the industry → ultimately car manufacturers dropped only to 9 until the 1940s

• similar: space, large aircrafts, pharma

What are the three stages of the product life cycle?

What are the properties of the first stage of the PLC?

• fluid phase

• Innovation: major product changes

• Products: diverse design, often customized

• R&D: unspecified focus, uncertainty

• Plant: small, near users

• Costs of process change: low

• Basis for competition: product performance; more entries than exits

• Vulnerabilities: imitators, successful breakthrough

• Organizational control: informal, entrepreneurial

What are the properties of the second stage of the PLC?

• transitional phase

• Innovation: major process changes - rising demand

• Products: one product, in volume → efficiency = higher fixed costs

• R&D: focus on specific product features

• Plant: general purpose, specialized locations

• Costs of process change: medium

• Basis for competition: product variation; exits = entries

• Vulnerabilities: more efficient, higher-quality producers

• Organizational control: project and task groups

What are the properties of the third stage of the PLC?

• specific phase

• Innovation: product - incremental, improvements - cumulative

• Products: undifferentiated, standard

• R&D: focus on incremental product technologies

• Plant: large-scale, specific to product

• Costs of process change: high

• Basis for competition: price; more exists than entries

• Vulnerabilities: innovations - superior product substitutes

• Organizational control: structure, rules, goals

What are the 5 categories of Rogers’ Adopters?

What describes innovators?

• “venturesome”

• active information seekers

• cosmopolite (intercultural) social relationships

• able to cope with a high degree of uncertainty

• gatekeeping role in the flow of new ideas into a system

What describes early adopters?

• opinion leaders

• more integrated part of local social system than innovators

• sought by change agents as a “local missionary”

• decreases uncertainty about a new idea by adopting it (put “stamp of approval” on new idea)

What describes the early majority?

• frequent interaction with peers

• rarely hold positions of opinion leadership

• third of all members

What describes the late majority?

• adoption may be an economic necessity

• or increasing peer pressure

• system norms must favor the innovation

What describes the laggards?

• near isolates in social network

• the past is point of reference

• limited resources

• tend to be skeptical of innovations and change agents

What model describes diffusion of innovations?

adoption behavior: N as a function of time: N(t) → differential equation

Why is there an issue with digital sovereignty in Europe?

• very few companies from Europe

• trade deficit between EU & US

• US exploitation in ICT policy

  • Microsoft - Germany pays half a billion euros federally

What is sovereignty washing?

• where non-EU Big Tech companies advertise themselves with European data centers → European legal immunity

• companies headquartered in the US/China remain subject to foreign laws regardless of physical location

• false sense of security for European organizations

What is Eurostack?

• initiative for the EU to build its own sovereign digital infrastructure

• cloud computing, AI, digital platforms

• brings together tech, governance and funding

Why is the US and China in a better position for tech innovation?

• US: many innovators, large capital

• China: robotics

What halts the EU from technological innovation?

• many regulations, but no vision on building

• no hardware stack owned by Europe

Why are US solutions the standard?

• easier to use, better ecosystem → better use experience

• better financing systems → competitiveness in the global market

• more push through demand and funding

• “American by American” act

How can we incentivize the use of European solutions?

• tenders: drive demand, find sovereign products

• public good problem: enforce public institutions to buy local solutions → subsidies

What is the EU’s solution for a fragmented market?

• Europe is one market but setting up companies across the EU is difficult for small companies

• laws not aligned with entrepreneurial reality

• “helplessness culture” → the EU Commission is slow

• solution:

  • EU-INC → making one pan-European standard

  • state as anchor customer

What are the determinants of innovative activity?

• costs and benefits

• whoever stands to gain the most is more likely to innovate

• whoever has the lowest cost

How can innovative activity be measured?

• R&D expenses/ head count (pure imput)

• number of patents

• BUT: innovative success doesn’t equal activity

What does Schumpeter I describe?

• entrepreneurs and new firms drive innovation

• fragmented markets

What does Schumpeter II describe?

• large firms drive innovation

• markets with some monopoly power

Why are monopolies not beneficial for innovation?

• no challenge for innovation

• high prices exclude people from consumption

• restricted output for profit maximization

What is Arrow’s basic neoclassical model?

• competitive firms have a stronger incentive to innovate than monopolies

• replacement effect: monopolist risks cannibalizing its own existing profits → weakens drive to invent

• linear demand curve

• constant marginal cost (c)

• radical innovation reduces marginal cost to c₁

• only the innovator benefits (no spillover)

What happens in case of perfect competition (Arrow’s model)?

• ex-ante perfect competition → ex-post monopoly

• firms sell at marginal cost (c₀) → no firm makes any profit

• after innovation, the innovator has a lower marginal cost (c₁) → can charge price below c₀ → unrestricted monopoly

What happens in case of a monopoly (Arrow’s model)?

• ex-ante monopoly → ex-post monopoly

• monopolists reduce output for higher profits

• a monopolists gains less from innovation than a competitive firm as it already has profits ex-ante → cannibalization effect

What happens in the perspective of a social planner (Arrow’s model)?

• a social planner only cares about the welfare of a customer

• Pareto-efficient outcomes

• total welfare: only consumer surplus (including firm profits after innovation)

• a social planner has the most to gain from innovation (their gain is welfare, not profit)

What is the Digital Markets Act about?

• EU regulation that ensures fair and contestable (no competition but could be) digital markets

• prevents large platforms from abusing their market power - gatekeepers

• allows startups to compete fairly

• provides consumers with more choices

What is the Digital Services Act about?

• comprehensive regulation to make online platforms safer, more transparent, and more accountable

• rules against illegal content

• protect minors

• ad transparency

• content moderation → lower disinformation

• non-personalized feeds have to be allowed

• verified sellers

What is the efficiency effect?

• the innovation is only slightly better than the existing products → incremental innovation

• more attractive to remain a monopolist than to become a second player in a duopoly

What is the cannibalization effect?

• the innovation is radical or drastic

• by innovating, an existing firm would lose profits from an existing product

• dastric innovations often come from new entrants, not incumbents

What are the liabilities of newness?

• increased failure rates

• roles & tasks have to be assigned (time, inefficiencies, conflicts)

• lack of reputation and experience

• relationships have to be established

• rely on interactions among “strangers”

What are the advantages of new firms?

• no path-dependence → willing to pursue new approaches

• flexible company structure

• open & flexible culture

• can hire people that exactly match the tasks → no need for re-training

• more flexible employees (younger, more entrepreneurial)

What are the liabilities of smallness?

• larger failure rates

• limited resources (financial, personnel)

• low variety of skills in the firm → critical skills may be lacking

• no buffer to survive times of crisis

• disadvantage on the job market

• low market power

• little “organizational slack” for innovation/training

What are advantages of smallness?

• more flexible processes

• company structure easier to identify

• direct communication

• fast decision-making

• higher job satisfaction

What are the market challenges of incumbents?

• disruptive innovation by Clayton Christensen

• innovations technologically straightforward

• initially they do not satisfy customers in established markets → niche/new markets

• performance of both established and new technology grows faster than market needs → new technology supplants the old even in the established, main market → disruptive technology

What are the advantages of incumbents against disruptive innovations?

• complementary assets

  • distribution

  • complementary technologies

  • reputation, brand

What is a disruptive innovation?

• where a smaller company with fewer resources successfully challenges established incumbent businesses

• stem from structural gaps left by established incumbents

  • establishment from low-end or new-market footholds

• if an innovation is disruptive, it can only be found out afterward

• initially inferior products

What is strategy?

• determination of long-term goals

• allocation of resources to attain them

• goal: establish long-term competitive advantage

• taking reactions of competitors and other players into account

• change of a strategy is very costly & not possible in the short run

What is economies of scale?

Produce 2x but not with 2x costs (e.x. machine was not at full capacity)

How are corporate strategies developed?

• resource-based view (internal)

• market-based view (external)

What is the market-based view according to Porter?

• external perspective

  • firm success = function (environment)

  • strategic positioning to be developed based on the market environment

• competitive advantage can be achieved by…

  • cost leadership

  • quality leadership → differentiation

  • focus (combination of both)

What is the resource-based view?

• what properties the resources and capabilities have to have

  • competitive advantage

    • valuable

    • rare

  • sustainable competitive advantage

  • + inimitable (otherwise not long-lasting)

  • + non-substitutable (e.x. method of production)

• resources/capabilities are difficult to imitate when they are