Innovation and technology

Definitions and concepts

Innovation

Short: A useful and novel match between problem and a solution

Long: Practical implementation of an idea into a new device or process

Significance of innovation

Drives competitive advantage

Challenge of renewal = innovation

innovation is crucial to survive

technology trajectory 

• evolve

• improve 

• diffuse 

Tech change is, what?

cumulative and evolutionary (based on prior generations)

Why there are dominant designs?

• efficiency

• standardisations for mass production

• outsourcing

• availability of complementary goods

• standardised consumer habits

Technology Cycle (Utterback & Abernathy)

1. Fluid Phase

2. Dominant Design

3. Specific Phase

What are the characteristics of Fluid Phase?

• uncertainty and experimentation 

• product/architectural innovation 

• more entry than exit 

• more product than process innovation

What are the characteristics of Dominant Design?

a dominant design emerges as standard

What are the characteristics of Specific Phase 

• process improvements 

• incremental and component innovations  

• more exit than entry 

• more process than product innovation - design already established 

What are the Stages of Technology S Curve ( R. Foster)?

1. Slow start → Knowledge (scarce) needs to be established  +experimentation

2. Rapid improvements → clearer architecture + narrow challenges

3. Approaching limitations → physical/ technical constraints (due to key architectural choices)

   1. Performance vs effort in R&D

   2. Technological discontinuities

   3. Managerial use

Technological discontinuity 

a discontinuous technology fulfils the similar market needs by means of entirely new knowledge base 

What is the diffusion S-curve used for?

It tracks adoption of technology over time (% of adoption)

New technology improves with time in what 2 regards?

1. Price

2. Technology

What are the explanations for diffusion?

1. Word of mouth

2. Diffusion in demand

3. Network effects

How does word of mouth work?

• Proximity has big impact

• Mass media reduced its impact

Why differences in demand?

• Due to different adaptors categories (Roger)

• Tolerance for poor performance

• Uncertainty and risk-attitude

• Knowledge, ability and skills

What are the different categories of adaptors?

• Innovators (2.5%) → adventurous, resourceful.

• Early adopters (13.5%) → opinion leaders, influencers.

• Early majority (34%) → pragmatic, slightly ahead of average.

• Late majority (34%) → sceptical, pressured by peers, resource constrained.

• Laggards (16%) → traditionalists, risk-averse, last to adopt.

What are the types of network effect?

• Direct → more users = more value (e.g., phones, social apps)

• Indirect → complements drive adoption (e.g., app stores)

What are the positive externalities of consumption?

• direct network effect

• indirect network effect

What is the direct network effect?

The utility derived from consumption of a network good is affected by the number of other people using the same or a compatible product

What is the indirect network effect?

System goods, where the utility derived from the consumption of a good depends on the availability of complementary goods, which in turn depends on the number of other users

What are two-sided (multi-sided) markets?

Markets in which a platform enables interactions between separate groups and actively tries to increase installed bases on all sides of the market.

What are the types of externalities in a two-sided market?

1. Cross-side externality

2. Same-side externality

What re cross-side externalities?

• Positive externality (indirect network effect): Users on one side of the market benefit from users on the other side of the market

• Negative externality: One side would prefer only few users on the other side of the market. (e.g. TV advertising)

What are same side externalities?

• Positive externality (i.e., direct network effect): Increasing the network on one side, makes it more valuable for other users on this side (e.g., game consoles that support online gaming)

• Negative externality: Users on the same side rival for the other side (e.g., career platforms)

Explain the food delivery example for two sided markets

Cross-side:

• More restaurants → better for customers (more choice, lower waiting time etc.)

• More customers → better for restaurants (greater reach, more orders)

Same-side:

• More consumers → more restaurants or longer delivery

• More restaurants → greater choice or fierce rivalry

Product with network effect

• start of almost worthless → the utility is barely above the standalone value (early adaptors almost gain nothing)

• more users → value accelerates

• once network becomes big → becomes almost unbeatable (once everyone is using one platform)

What happens if there is network effect in the market?

Markets tend to be dominated by one company → winner-take-all markets

Network effects are great until a company gets so big it becomes dangerous → keep it in check

Advantages of winer-take-all markets

Possibility of huge profits

Disadvanatges of winer-takes-all market

• difficult to predict → randomness play a crucial role

• difficult to reverse→ huge lock-in and switching costs

Is dominance of a single technology unavoidable? (network effect)

different standards may co-exist

What are the factors promoting multiple competitions in the market?

• Low multi-homing costs (consumers can subscribe to multiple platforms)

• Network effects are weak

• Consumer preferences are heterogenous (standalone value may be more important)

What is a standard?

A specification that allows for interoperability, i.e. a standard makes it possible for different components of a system to work together

How are standards created?

1. De jure standards (set by authorities)

2. De facto standards (set by the market)

   1. Sponsored standards: created and controlled by a firm (e.g., Sony’s CD format).

   2. Unsponsored standards: develop naturally due to mass adoption (like languages)

Strategies for winning the war in network market

• Move Fast (typically very small window of opportunity)

• Identify and court early adapters

• Necessary availability of complementary goods

• Role of expectations → can be manipulated

• Credibility + alliances → making the market believe it’s tech. is in a winning position

What is creativity?

It is the ability to produce something useful and novel

What are the drivers of creativity?

• Knowledge

• Intellectual abilities

• Style of thinking

• Personality

• Motivation

• Environment

Sources of Ideas

• Individual creativity

• Cross-disciplinary thinking

The four phases of the ideation process

1. Idea Generation → Inspiration and cognitive flexibility

2. Idea Elaboration → Support and feedback

3. Idea Championing → Influence and advocacy

4. Idea Implementation → Shared vision and execution

Factors influencing inventorship

• Socioeconomic class

• Ethnicity

• Gendre

• Access to exposure and resources

What are the challenges female investors face?

• Women inventors produce higher quality patents but earn less and hold fewer leadership roles.

• They face systemic barriers despite stronger performance in some areas.

What can be done to reduce the innovator gap?

• Raise awareness of unequal opportunities.

• Expand mentoring programs and exposure.

• Promote visibility and leadership of women in tech.

• Achieve a critical mass of women in top positions to change signals for future generations.

Basic research

increases unerstanding without commercial purpose

Applied research

targets solving specific need

Internal sources of innovation

• Formal R&D → labs: structured, large-scale research efforts

• Informal R&D: small, bottom-up projects aimed at problems employees encounter in daily work

Methods of encouraging organisational creativity

• Idea collection systems

• Creativity training programs

• Culture encouraging creativity

Demand Pull

innovation from unmet consumer need

Science Push

innovation starts with new scientific or technological solutions

Closed Innovations

firms generate and control ideas internally, owning the full Intellectual Property.

Open Innovation

firms combine internal and external ideas and use multiple paths to market

External sources of innovation

• Customers → best understand performance needs

• Suppliers

• Universities

• Governments -→ Conducts R&D and grants, tax breaks, subsidies

• Environments and clusters → ex. Software, internet in Silicon Valley

Richard Foster

Diffusion Curve

Eric von Hippel

User innovation

H.W. Chesborough

Open innovation

evolutionary process

1. variation

2. selection

3. retention

Type 1 error

• (false positive): choosing an idea that fails (apple newton)

• effect on firms: high costs, reputational damage, wasted time

• effect on individuals: being stuck with incremental work

Type 2 error

• (false negative): rejecting an idea that becomes successful (Harry Potter rejected 12 times)

• effect on firms: missing valuable opportunities

• effect on individuals: fewer opportunities, slower career development

Innovation funnel

Thousands of raw ideas narrow down through multiple stages until only one becomes a successful product

stage-gate process

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

What are the stages of “stage-gate process“

• Discovery (idea generation)

• Scoping → brief

• Building the business case → more detailed research

• Development

• Testing and validation

• Launch → selling, marketing production

• Post-launch review → evaluation

Stage process gates

• Idea screening

• Approval for further research

• Business case evaluation

• External testing approval

• Commercial launch approval

What is portfolio balancing

Firms must balance their projects based on:

• Degree of technological change (incremental/radical)

• Market impact (low/high)

Tools for Selecting Innovation Projects

• Qualitative Methods

• Quantitative Methods

Which Tools to Use?

• Research-stage projects → qualitative methods.

• Pre-development projects → option-based methods.

• Development-stage projects → financial/DCF methods.

Who captures the value form innovation?

• Innovator captures small proportion

• Consumers high proportion

Capturing value of innovation (Teece)

• Building Block 1 → Appropriability regimes - extent to which the idea is protected

• Building Block 2 → Dominant design - innovations are better protected in later stages of innovation

• Building block 3 → Complementary assets

  • Generic: early acquired → different application

  • Specific: developed jointly with the innovations -→ owners of these capture the biggest value

Strategic options of commercialising innovation

• Profiting form product market (going solo)

  • Benefits: control, chance of market leadership

  • Risks: No complementary resources, convincing consumers, uncertain and scarce resources

• Profiting form markets for ideas (collabaret)

  • Benefits: No sunk costs, Sharing costs and risks, Knowledge (partners), easy product competition

  • Risks: risk of expropriation, leakage, cost of contract

Ken’s paradox of disclosure

To sell an idea you must reveal it → once you reveal it the buyer might copy it → your idea is worth less -. patents help but not always

What are the positions of the matrix and their characteristics?

1. Atackers’s Advantage → enter, tech determines winner, real threat, incumbents must reinvent

2. Idea factory → contracting, safe market, start-ups fuel incumbents

3. Greenfield competition → enter or contract, constant tech advantage to stay on top, both must innovate constantly

4. Reputation based Ideas trading → contract, incumbents reputation is key, stable market position, start-ups only if incumbents let them

types of collaborations

• joint venture

• licensing

• Strategic alliances

• R&D contracting

What is licensing?

contractural agreement that lets an organisation use other’s IP

Reasoning behind licensing

• If already max capacity selling -→ completion won’t matter → additional cash flows form royalties

  • Revenues effect: net CF from royalties

  • Profit dissipation effect: increased competition → licneser’s profit reduces

Types of licenses

• Exclusive vs non-exclusive

• Output/price restrictions

• Payment conditions: fixed fee vs royalties

• Cross-licensing

Why royalties work best?

• Moral hazard - motivation for the licenser’s to help out the firm to improve profits

• Adverse selection - those who know their product is good will offer royalties

Why protect Innovation?

• R&D extremely → reproduction cheap

• Without protection → underinvestment in R&D → no motivation → imitator’s free ride

IP tools

• Patent - official registration of new tech → IP rights

• Copyright - automatic: protects expression of creative/artistic works (including software)

• Trade secret - protection through secretive measures

• Trademark - protect signs/logos/slogans distinguishing smth through use or registration

• Registered designs - protect the external appearance of a product through registration

What Patents?

Without no motivation to invent → market would under-produce

Patent

Government-granted right to exclude others form making, using or selling invention for 20 years

• Negative right: block rather then grant permission to produce

• In exchange for monopolistic right inventors must disclose how it works

• Can be sold, licensed or used in negotiation

What cannot be patented?

• Scientific discoveries without industrial application

• Aesthetic creations

• Only EU/UK

  • Software alone if not part of a tech innovation

  • Business model unless tech. novel

  • New Plants/Animals

Issues with patents?

• takes 2-4 years but the innovation becomes public in 18 months

• it works only in the country it was granted

• breach is impossible to detect

• competitions can easily create around the patent → better to publish defensively

  • Even nespresso’s 1,700 patents cannot stop imitation

Treaties trying to synchronise patents

• The Paris Convention - enables priority rights and equal treatment across member countries

• Patent cooperation treaty (PCT) - allows a single filing reserving rights in 100+ countries for up to 2½ years ( same application date)

Why patent?

• Prevent copying

• Block competitors

• Prevent lawsuits

• Used in negotiations

• Enhance reputation

• Revenue streams form licensing

• Measure R&D performance

Patent strategy

Build large portfolio to defend market position (dell with 42 patents or Amazon’s single click) → ENTRY BARRIERS

Patent trolls

Enforce patents without producing anything

Defences against patent trolls

• design around

• patent-watch

• clearance searches

• early settlement

• infringement insurance

Copyright

• Protect EXPRESSION against coming and distributing copies

• Work must be fixed in tangible form; © optional

• authors or +70 years and firms for 90 years

Trademarks

• Distinguishing firms gods'/services → form legitimate use though registration required to sue

• Includes logos, names, slogans, shapes, sounds, scents

• Protection lasts as long as it is used (lost after 5 years of no use)

• New product announcement hurts rivals profits

• New trademark improves improves everyones profits → investment into the category

Registred designs

• Protect appearance features such as lines, shapes, colour, texture.

• Must be new and with individual character

• Protection lasts up to 25 years with renewal every 5 years

Trade Secrets

Protect information not generally known that gives competitive advantage with reasonable secrecy measures → nuns and the stones

• Violations include breach of confidentiality, NDAs, and industrial espionage

• Weak enforceability → spillovers and mobility

Treaties simplifying application for trademarks

• Madrid Protocol

• Madrid Agreement Concerning the International Registration of Marks

Invention to be patented must be

• new to the world

• have a industrial application

• have an inventive step → can’t be obvious