L4

Lecture 4 - Crafting an Innovation Strategy (Chapter 6)

Innovation Strategy

• Directs innovation activities

• Future-oriented

But we are missing something? Schilling mentioned leverage because we cannot dismiss all the strategies that have some ground behind it, or otherwise you are the same as a start up. Existing portfolio matters.

• 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:

⇒ Articulating and ambitious strategy intent (future-oriented)

⇒ Appraising the firm’s environment (current situation)

⇒ Appraising the firm’s strengths, weaknesses, competitive advantages, and core competencies (current situation)

What we need to do is also research what we’ve been doing well. Brand awareness is also important.

Central Dilemma

• Realizing short-term and long-term ambitions over time

• Balancing activities over time

• “The basic problem confronting an organization is to engage in sufficient exploitation to ensure its current viability and, at the same time, devote enough energy to exploration to ensure its future viability”

On the way we will learn if we can realize that vision of the new technology or not, as strategy changes, so can the technology. Balancing exploration vs exploitation.

Mainstream Strategy Models

• External

⇒ Porter’s five forces

⇒ Stakeholder analysis

• Internal

⇒ Resource based view

⇒ Core competencies

⇒ Dynamic capabilities

Porter’s Five Forces

Porter’s five forces & stakeholder analysis

Stakeholder analysis

⇒ Outside-in approach

Threat of Potential Entrance. Example: Amazon would have relatively low threat, since amazon dominated ecommerance at that time in the US they had nothing to worry about.

Complementors are missing. Those are actors that depend on but not really control the product. Apple with appstore depend on apps, they do not control the app development. Kindle depends on ebooks, and etc.

Resource-based View

Resources

• Valuable Rare

• Imperfect imitable

  • Tacit

  • Causally ambiguous

  • Socially complex

• Non-substitutable

Resource = a tangible or intangible asset that a firm owns, controls, or has access to and that allows firm to develop and realize its strategic (Barney, 1991; Penrose, 1959).

Sustained

competitive advantage

(See also Schilling, p.130)

Examples of resources that provide a sustainable competitive advantage

⇒ String Intellectual Property (IP)

⇒ Economies of scale

⇒ Dominant brand

Does that really drive sustainable competition? Will they survive for long? History says that it doesn’t take much for company to get overthrown. Shareholders pressure companies to make profit now. As soon as those pressures come in, the innovation within the company halts.

Core Competencies

Harmonizing multiple abilities → specialized expertise

Roots that enable the tree to grow. Also allows different trees to grow from the same roots (start more businesses).

Critique to Resource-based View (RBV) & Competitive Forces

Largely static perspective

⇒ Emphasizes competition & resources at a point in time

⇒ Yet at any point in time, core competencies are evolving & survival depends on this development

⇒ Paradoxically, core competencies both enhance & inhibit development

⇒ Observations of resourceful firms with dominant positions that failed nevertheless

Example:

• Cutting edge digital technologies

• Sufficient investments in technology development

• Cognitive barriers

  • Belief in razor/blade business model

Why did it fail? They missed digital - half correct. The story is that Polaroid were on the cutting edge of building good digital cameras, so it’s not like they couldn’t see it happening. They kept believing into their business model - they made money of the printing. They thought users would always want to print their photos, that we now know is not the case. Digital cameras were also low price and printing was optional, so Polaroid kinda died.

RBV: Resources must be rare, valuable, durable, and inimitable ⇒ sustainable competitive advantage

BUT markets change increasingly rapid ⇒ cycle time of innovation are shortening, prevalence of disruptions.

How Fast Market Dynamics Can Change…

Smartphones appeared and blackberry died off even though they had very big market share.

(Re-)Deploying Existing Resources?

Smith-Corona, world-leading typewriter manufactures (2001 dead)

Tried to leverage existing resources for new innovations

• Failed to stretch its brand name and distributions channel resources to new innovations

  • 1990-1991: Acer alliance

• Managerial cognition may hamper identifying the ‘right’ resources that are fungibile

What are the limits of redeployment? Smith-Corona was very popular and self-aware. They wanted to stretch their brand to computers, but it didn’t work out…

Two More Recent Perspectives

• Organizational learning & Ambidexterity

• Dynamic capabilities

Organizational Learning

Organizational learning is theoretical framework to understand incremental and radical innovation.

Exploitation and exploration are two modes of organizational learning (March, 1991):

⇒ exploitation = using and developing existing competences and returns from exploitation are more short-term, more local, and more certain; more of same experiences.

⇒ exploration = pursuit of new knowledge returns from exploration are more long-term, more distant, and less certain; new and diverse experiences

What Does OL Theory Suggest?

When to be concerned about exploration?

• Where are you on the s-curve?

What is the rate of learning? Is it flattening? Do other technologies improve faster? Learning curves flatten over time: diminishing returns.

• This triggers competency traps ⇒ core competences become core rigidities

• Incremental innovation requires exploitative learning

Do not wait until the end of the s-curve with investing, because exploratory learning is long term, uncertain, and interdependent.

How? Switch to different mode of learning

• Increase variation and experimentation

• Consider separation (ambidexterity)

Very difficult to make transitions effectively (only Motorola managed and now I think it’s dead). New s-curve ⇒ new players ⇒ new competitors.

RCA: internal disputes about whether or not to cannibalize the tube business?

Transistor business = new! ⇒ profits are uncertain

RCA had to cannibalize their own tubes, obviously they didn’t want to. They thought they are going to go strong.

Mistakes

• Decided not to invest in the new transistor technology

• Invested in the wrong technology

• Inability to play two games simultaneously

Organizational Learning

Why so difficult?

Exploration and exploitation require different organizational structures

• Exploitation

  • Efficiency, control, certainty, and variance reduction

• Exploration

  • Search, discovery, autonomy, and innovation

Ambidexterity & Performance

Research really established that ambidexterity matters.

Ambidexterity has found to be associate with

⇒ Sales growth

⇒ Subjective ratings of performance

⇒ Innovation

⇒ Market valuation

⇒ Firm survival

Especially in situations characterized by market & technological uncertainty.

Organizing Ambidexterity

ARE FEATURE ON THE EXAM:

Sequential

• Alternative between exploration and exploitation (e.g., centralization, decentralization)

• During one phase, the organization focuses on exploration and innovation, and in the next phase, it shifts its focus to exploitation and efficiency.

• This approach is useful when an organization has limited resources and cannot simultaneously pursue both activities.

Simultaneously explore & exploit:

Structural

• Skunkworks, internal venturing units, spin-outs

• Emphasizes units

• This form involves creating separate structural units or divisions within the organization to handle exploration and exploitation activities independently.

• The exploratory unit focuses on innovation and new opportunities, while the exploitative unit maximizes efficiency and performance of existing operations.

• Common in large organizations with diverse business units or product lines.

Contextual

• 15% rule (slack in the system)

• Emphasizes individuals

• In this approach, organizations seek to foster ambidexterity by creating a supportive culture and context that allows both exploration and exploitation to coexist.

• It involves promoting a culture of innovation, risk-taking, and learning, while also emphasizing efficiency and process optimization.

• This approach is more flexible and can be adapted to various organizational sizes and structures.

Structural separation: separate people to participate in one part ⇒ can start drifting apart ⇒ the product that is developed on one part to be also profitable which is decided by the other part.

Contextual ambidexterity: do a bit of both, will not result in the completely new breakthrough.

Dynamic Capabilities

Competencies that are not specific to any set of technologies or products, but abilities to quickly reconfigure organizational structures and routines in response to new opportunities.

“The firm’s processes that use resources - specifically the processes to integrate, reconfigure, gain and release resources - to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die.”

Resources vs. Dynamic Capabilities

Resources: > 200 patents on electrical vehicle technology

Dynamic capability: multidisciplinary & agile collaboration practices

Tesla & Dynamic Capabilities

• Cycle times in automotive industry

• Not only able to develop high-end, highly competitive electrical engines but also cutting edfe infotainment and unique services

Tesla benefited for high speed iteration of silicon valleys, it made the adaption of the product more easily.

Cisco & Dynamic Capabilities

Alliance / acquisition process

• In 2014 Cisco acquired:

  • ThreatGRID (malware analysis)

  • Sourcefire, Inc. (cyber security)

  • WhipTail Technologies, Inc. (flash memory)

  • Cognitive Security (cyber security)

• Through effective acquisition practices, Cisco transforms its knowledge base

Cisco’s initial acquisition rule:

• Companies to be acquired must have no more than 75 employees, 75% of whom are engineers

“How can this rule help Cisco dealing with constantly changing market conditions?”

Simple rule (75): small and cheap knowledgeable companies get acquired. They were buying specialists basically.

Relation Between Market Dynamics and Capabilities

Detailed routines based on the different markets. Then you contrast them with very simple routines. So it’s stable tedious routine (current market) vs innovative simple routines (new market). Both are capabilities but they look different based on market.

Innovation Management Practices & Dynamic Capabilities

Contemporary examples of ‘best practices’ in innovation management

⇒ Iterative prototyping using simulation techniques

⇒ Value proposition house

⇒ Agile development, Lean ‘startup’ methodology

⇒ ‘Big data’ mining

What these practices have in common:

⇒ Real-time information

⇒ Intensive cross-functional collaboration

Real time information is a key resource right now (duh). They may be used in different ways.

So where are we heading?

Leverages & enhances current competitive position (or: leapfrogging & ‘competency destroying’).

Strategy is about having a clear sense of direction (where and how is the innovation helping the organization to move forward)

But:

• Ambiguity

• Uncertainty

• Novelty / surprise

No shortcuts for the big firms (or in general). Many important decisions. We always face ambiguity.