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Technology and Innovation 1

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Technology and Innovation 1

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TECHNOLOGY AND INNOVATION

Innovation: A quick working definition • Innovation is the practical implementation of an idea into a new
device or process • Match between a need and a new solution

The impact of technological innovation on society Gross domestic product (GDP). The gross domestic
product of an economy is its total annual output, measured by final purchase price. the historic rate of
economic growth in GDP could not be accounted for entirely by growth in labor and capital inputs. The
residual growth component not explained capture technological change (Solow’s residual, 1981)_

Innovation: some definition • Innovation is the profitable implementation of ideas • The development of
new ideas and their economic application as new product or processes (UK Dept., Trade and Industry) •
Implementing new ideas that create value (innovation network, USA) • The intersection of invention and
insight, leading to the creation of social and economic value (US National Innovation Initiative

Challenge of renewal = Innovation Firms have to innovate to grow (and survive)

SOURCE OF INNOVATION. WHERE DO INNOVATIONS COME FROM

Source of innovation: Innovation can arise from many different sources

Innovation begins with new ideas


(Individual) creativity

• Creativity is the ability to produce ideas • Individual creativity is a function of: • Intellectual abilities •
Knowledge • Style of thinking • Personality (e.g. confidence in own capabilities) • Motivation (e.g. rely
on intrinsic motivation) • Environment (e.g. support and rewards for creative ideas)

Creative thinking style

• The most creative individuals prefer to think in novel ways of their own choosing, and can discriminate
between important problems and unimportant ones.

The personality traits include: • self-efficacy (a person’s confidence in his or her own capabilities), •
tolerance for ambiguity, • willingness to overcome obstacles • and take reasonable risks • Intrinsic
motivation

That is, individuals are more likely to be creative if they work on things they are genuinely • interested in
and enjoy

Cross disciplinary thinking: Robert W. Mann, an engineer and former rocket scientist who developed the
world's first biomedical prosthetic device.

The inventor

• One 10-year study of inventors concludes that the most successful inventors possess the following
traits:
• they have not specialized solely in the field in which they invent, permitting them to bring different
perspectives to each.

• they are curious and more interested in problems than solutions.

• they question the assumptions made in previous work in the field.

• they often have the sense that all knowledge is unified.

• they are generalists by nature.

• “I think there are dangers for a research man being too well trained in the field he is going to study”

Organizational creativity

• Organizational creativity is a function of: • Creativity of individuals within the organization • Social
processes and contextual factors that shape how those individuals interact and behave • Methods of
encouraging organizational creativity: • Idea collection systems • Creativity training programs • Culture
that encourages creativity

Organizational creativity at Google • An organizational structure that nurture creativity: • 20 percent


Time: All Google engineers are encouraged to spend 20 percent of their time working on their own
projects. • Recognition Awards: Managers were given discretion to award employees with “recognition
awards” to celebrate their innovative ideas. • Google Founders’ Awards: Teams doing outstanding work
could be awarded substantial stock grants. • Adsense Ideas Contest: Each quarter, the Adsense online
sales and operations teams reviewed 100 to 200 submissions from employees around the world, and
selected finalists to present their ideas at the quarterly contest. • Innovation Reviews: Formal meetings
where managers product ideas originated in their divisions directly to founders.

R&D by firms • Research refers to both basic and applied research.

• Basic research aims at increasing understanding of a topic or field without an immediate commercial
application in mind.

• Applied research aims at increasing understanding of a topic or field to meet a specific need.

• Development refers to activities that apply knowledge to produce useful devices, materials, or
processes. • Most companies focus on Development, but some also engage in Research.

Firm Linkages with external players

• Customers, Suppliers, Competitors, and Complementors

• Internal R&D helps to develop absorptive capacity, that enables companies to better exploit and
combine information obtained from external players.
• Absorptive capacity is “a firm's ability to recognize the value of new information, assimilate it, and
apply it to commercial ends” (Cohen and Levinthal, 1990)

• Universities: many universities have established technology transfer offices

• Government-Funded Research: Governments of many countries actively invest in research through


their own laboratories, the formation of science parks and incubators.

Example: Area Science Park Area Science Park is a public national research organization that promotes
the development of innovation processes. For 40 years, its mission has been to boost connections
between research and enterprise, public administration and the private sector, supporting national and
international initiatives and fostering territorial development.

Technology clusters

• «Regional clusters of firms that have a connection to a common technology, and may engage in buyer,
supplier, and complementor relationships, as well as research collaboration.» (Schilling)

• Proximity facilitates knowledge exchange.

• Cluster of firms can attract other firms to area.

• Supplier and distributor markets grow to service the cluster.

• Cluster of firms may make local labor pool more valuable by giving them experience.

• Cluster can lead to infrastructure improvements (e.g., better roads, utilities, schools, etc.)

Clusters favour agglomeration economies, i.e. the benefits firms reap by locating in close geographical
proximity to each other.

What to know • Innovation is the outcome of a complex process where a solution matches with a need
• Ideas come from inside the firm and from outside • Inside the firm - Organizational creativity is not
just the sum of individual creativity - Firms direct their resources toward different types of research
(R&D) • Outside the firm - Firms need to manage this complex process by investing in absorptive
capacity locating in fertile areas establishing channels to source external knowledge from users,
suppliers, universities and the government.

TYPES AND PATTERNS OF INNOVATION

How can we classify innovations? Why it is important?

Building a taxonomy of innovation • There are several dimensions according to which innovation may be
classified. • The most used categories are the following:

Object of the innovation Product innovation versus process innovation


Degree of novelty Radical innovation versus incremental innovation

Type of competence generated Competence-enhancing innovation versus competence destroying


innovation

«Focus» of the innovation Architectural innovation versus component innovation

Product vs process:

A product innovation is embodied in the output of an organization.

Process innovations are innovations in the way an organization produces or delivers goods or services.

Product innovation and Process innovation

• Product innovation: is the implementation of a good or service that is either new or an improved
version of previous goods or services.

• Process innovation: is the implementation of a new or improved business method (this includes
production, delivery, or marketing). It aims at increase the effectiveness or efficiency of an existing
process

• Why does that distinction matter?  Product innovations are usually more visible and based on more
codified knowledge  Implications for imitation and appropriability

Process innovation that allowed product innovation

Doing something that no one else has done is actually quite hard." Ruben Rausing

1943: Idea of tetrahedron-shaped carton was born A milk package that required a minimum of material
whilst providing maximum hygiene

• 1944: It’s the first time that a liquid is packed

• The most important food science advancement of the 20th Century” (Institute of Food Technologist
1989)

Radical innovation versus incremental innovation Radicalness of an innovation: is the degree to which
it is new and different from previously existing products and processes.

• Radical innovation (or breakthrough innovation): is an innovation that is much new and different from
prior products and processes. It is usually technology-pushed, based on future scenarios planning. It
takes usually more time to be developed (and higher investments) (i.e. Exoskeleton)

• Incremental innovation: is an innovation that makes a relatively minor change from existing products
and processes. Incremental innovation is the most dominant form of innovation today (lower
commercial, technical and financial risk).
Distruptive innovation: Digital cameras require different competencies, so called competence destroying
compared to traditional cameras

Competence-enhancing versus competence-destroying innovation

Competence-enhancing innovations build on the firm’s existing knowledge base. Competence


enhancing: innovation is the result of an improvement of the competences already known

Competence-destroying innovations renders a firm’s existing competencies obsolete. Competence


destroying, that makes existing competences obsolete

An innovation may be competence enhancing for a firm and competence-destroying for another.
Consider digital photography for Sony and Kodak. Pretty different impacts, right?

Types of innovation

architecrural, radical,
incremental,component. Impact

An architectural innovation entails changing the overall design of the system or the way components
interact. Most architectural innovations require changes in the underlying components also.

A component innovation (or modular innovation) entails changes to one or more components of a
product system without significantly affecting the overall design.

How do technologies evolve over time? Can it be predicted?

Technology trajectory
Technological trajectory: path of evolution followed by a technology through time. Improvements in
components or product design and/or in the cost and performance of products. What matters is not
“time”, but investments in improvement (i.e. R&D) Can it be predicted?

• Technology S-curve (Richard Foster)

• Diffusion S-curve (Everett M. Rogers, adoption rate)

• Technology cycle (Abernathy and Utterback)

S-Curves in Technology improvement (Richard Foster)

Both the rate of a technology’s improvement, and its rate of diffusion to the market typically follow an s-
shaped curve. Technology improves slowly at first because it is poorly understood. Then accelerates as
understanding increases. Then tapers off as approaches limits.

Breaking down the technology S curve

Technology S-Curves: Improvement and diffusion

• S-curves of diffusion are in part a function of s-curves in technology improvement. Learning curve
leads to price drops, which accelerate diffusion.
Diffusion of Innovation and Adopter Categories

Diffusion is the process by which individuals and firms in a society adopt a new technology S-Curves in
Technology Diffusion

• Adoption is initially slow because the technology is unfamiliar.

• It accelerates as technology becomes better understood.

• Eventually market is saturated and rate of new adoptions declines.

• Technology diffusion tends to take far longer than information diffusion.

• Technology may require acquiring complex knowledge or experience.

• Technology may require complementary resources to make it valuable (e.g., cameras not valuable
without film).

Diffusion of Innovation and Adopter Categorie Everett M. Rogers created a typology of adopters:

 Innovators are the first 2.5% of individuals to adopt an innovation. They are adventurous,
comfortable with a high degree of complexity and uncertainty, and typically have access to
substantial financial resources.
 Early Adopters are the next 13.5% to adopt the innovation. They are well integrated into their
social system, and have great potential for opinion leadership. Other potential adopters look to
early adopters for information and advice, thus early adopters make excellent "missionaries" for
new products or processes.
 Early Majority are the next 34%. They adopt innovations slightly before the average member of
a social system. They are typically not opinion leaders, but they interact frequently with their
peers.
 Late Majority are the next 34%. They approach innovation with a skeptical air, and may not
adopt the innovation until they feel pressure from their peers. They may have scarce resources.
 Laggards are the last 16%. They base their decisions primarily on past experience and possess
almost no opinion leadership. They are highly skeptical of innovations and innovators, and must
feel certain that a new innovation will not fail prior to adopting it.

Why does it take so long for a technology to get diffused across the economy?

 Poor performance
 Uncertainty
 Human skills
 Complementary innovations
S-Curves in Technology improvement: the effect of discontinuous technology.
Technologies do not always get to reach their limits, they may be displaced by new,
discontinuous technology.
A discontinuous technology fulfils a similar market need by means of an entirely new
knowledge base.
E.g., switch from carbon copying to photocopying, or vinyl records to compact discs.
Technological discontinuity may initially have lower performance than incumbent
technology.
E.g., first automobiles were much slower than horse-drawn carriages.
Firms may be reluctant to adopt new technology because performance improvement is
initially slow and costly, and they may have significant investment in incumbent technology.

Technology Cycles: Model of Abernathy and Utterback (1975)


Utterback and Abernathy characterized the technology cycle into two phases:
• The fluid phase (when there is considerable uncertainty about the technology and its
market; firms experiment with different product designs in this phase)
• After a dominant design emerges, the specific phase begins (when firms focus on
incremental improvements to the design and manufacturing efficiency).

Technologies improvement and market needs: the “segment zero”


“Segment Zero” Technologies often improve faster than customer requirements demand
This enables low-end technologies to eventually meet the needs of the mass market.

Technology Cycles (Anderson and Tushman)


• Anderson and Tushman also found that technological change proceeded cyclically.
• Each discontinuity inaugurates a period of turbulence and uncertainty (era of ferment)
until a dominant design is selected, ushering in an era of incremental change

era of ferment,
Era of incremental change, dominant design selected technological discontiniuy
Technology S-curves as a prescriptive tool
Managers can use data on investment and performance of their own technologies or data
on overall industry investment and technology performance to map s-curves.
• While mapping the technology’s s-curve is useful for gaining a deeper understanding of its
rate of improvement or limits, its use as a prescriptive tool is limited.
• Hard because: • Predicting the future, true limits of technology may be unknown and the
shape of scurve can be influenced by changes in the market, component technologies, or
complementary technologies. • Hard to get data • Requires expert knowledge (across
domains) • Blind spots when considering others’ technologies (disruptive?

STANDARDS, NETWORK EFFECTS, PLATFORMS


Dominant design: definition A single product or process architecture that dominates a
product category—usually 50 percent or more of the market. A dominant design is a “de
facto standard,” meaning that while it may not be officially enforced or acknowledged, it has
become a standard for the industry.
process innovation
product innovation
Why industries experience strong pressure to select a single technology design as
dominant?
Increasing returns to adoption: Learning effects, Network externalities

increasing returns to adoption and learning effects:


Learning Effects: the more a technology is used, the more it is developed and the more
effective and efficient it becomes
Absorptive capacity is the ability of an organization to recognize, assimilate, and utilize new
knowledge (internal or external). Increasing returns indicate that technology trajectories are
characterized by path dependency.

Network externalities Also termed positive consumption externalities, this is when the value
of a good to a user increases with the number of other users of the same or similar good.
Direct positive effect The utility derived from the consumption of a network good increases
DIRECTLY with the number of other people using the same or a compatible product.
Indirect network effects are found in so-called 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.

Dominant design and competition:

What is an abuse?

To be in a dominant position is not in itself illegal. A dominant company is entitled to compete on the
merits as any other company. However, a dominant company has a special responsibility to ensure that
its conduct does not distort competition. Examples of behaviour that may amount to an abuse include: •
requiring that buyers purchase all units of a particular product only from the dominant company
(exclusive purchasing); • setting prices at a loss-making level (predation); • refusing to supply input
indispensable for competition in an ancillary market; • charging excessive prices.
Technology value: multiple dimensions of value

In many increasing returns industries, the value of a technology is strongly influenced by both:

Technology’s Standalone Value • The functions the technology enables customers to perform • Its
aesthetic qualities • Its ease of use, etc. • A “Buyer Utility Map” that is useful for identifying elements of
a technology’s stand-alone value (see next slide)

Network Externality Value (direct an indirect) • The size of the technology’s installed base • The
availability of complementary goods

Overall Value: sum of different components

Value to users: multiple dimensions

Value to users: Perceptions and Expectation effects matters:

Subjective information (perceptions and expectations) can matter as much as objective information
(actual numbers) Value attributed to each dimension may be disproportional
From indirect network effects to two-sided (platform) markets

• Two-sided (or in general multi-sided) markets are markets in which a platform enables interactions
between separate groups and actively tries to increase installed bases on all sides of the market.

• They are system markets which display indirect network effects.

market platform

Two-sided markets

Types of externalities in two-sided markets:

Same-side network effect

• Positive externality: Users on one side of the market benefit from a large user base on the other side
of the market (e.g. credit cards)

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

Cross-side network effect

• Positive externality: 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)
Multi-side markets:

is dominance of a single technology unavoidable?

Not necessarily, different standards may co-exist.

standards

COLLABORATION STRATEGIES THE ROLE OF EXTERNAL PLAYERS IN THE INNOVATION PROCESS

Profiting from innovation:

TECHNOLOGY PLAN

For each technology that the company aims to develop it has to identify:

 Product innovation (or technology innovation)


 Lead time (time of introduction to the market)
 Mode of acquisition (development and introduction)

Key points • 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 f orms of collaboration are compared.
Reasons for Going Solo or collaborate

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?)

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

Context foresight

competitive and technological analysis

The context foresight is the result of the analysis of the:

• External context driven analysis

• Identify new potential markets, identify the evolution of existing markets, identify future customer
needs (identify the required technological skills to make the applications able to satisfy customer needs)
• Internal context driven analysis • Map existing (core) competences / technological skills and their
existing and possible applications

Types of Collaborative Arrangements

• There are numerous types of collaborative arrangements, each with its own advantag es or costs.
Strategic Alliances: formal or informal agreements between two or more organizatio ns (or other
entities) to cooperate in some way.

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

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.

Which are the reasons of an external collaboration? (Context foresight phase)

Context foresight

 Monitoring customer needs and market future trends


 Monitoring lead users and key customers (market knowledge acquisition)
 Monitoring suppliers
 Monitoring competitors
 Market opportunity analysis and new product ideas
 Technology scouting and monitoring of external technological resources (tech and
R&D labs)

Technology development

 increasing of the company’s technological innovation skills and its potential creativity
 Technological and scientific disciplines integration
 Increasing of the company’s R&D flexibility
 Improvement of the continuous innovation capability
 Reduction of the time to market
 Reduction (or at least sharing) of the new project technical risk

Technology introduction

 Accessing to existing distribution channels


 Accessing to complementary assets / competencies / products for the innovation to be
developed
 To easily commercialize the innovation in foreign countries of facilitate the introduction in new
markets
 Standard definition and setting (against other competitors)

Acquisition of technology from external sources for technology development

Make - Buy – Cooperate

• New technologies can be “acquired” through:

Internal development (make), Collaboration with external institutions (firms, labs, private, public,
universities,…) (collaborate), Pure acquisition (buy)

Acquisition” of technology from external sources for technology introduction

Make - Sell - Cooperate

• New technologies can be “introduced” through:

• The transfer of the technology to other companies (sell)

Internal resources use (MAKE) Collaboration with external institutions (firms, labs, private, public,
universities,…) (COLLABORATE) The transfer of the technology to other companies (SELL)

How to create innovation?

• Define which are your core competencies • Valuable • Rare • Imperfectly Imitable • Non
Substitutable

• …and how to access to complementary competencies…

Managerial and organizational implications of the forms of external technology acquisition

The different organizational forms of collaboration have different managerial and organizational
implications. The decision maker has to analysis their characteristics in terms of:

• Impact on the firm (organizational structures, assets or human resources involved)

• Time horizon

• Control over the process (activities, people, organization, information flow)

• Control over the outputs (results)

• Start up time and costs

• Level of risk

• Level of reversibility
Choosing a Mode of Collaboration

Sources of innovation: some evidences • R&D best practices tend to extensively use external
competencies (skills): • Procter & Gamble: Internal R&D resources / external R&D resources ratio have
to be 50/50 • Xerox uses Venture Capital companies in its spin offs • Intel partially fund start-ups • Cisco
uses M&A to complete its internal resources / skills • Possible performance measures: • % of
commercialized new products thanks to the contribution of external resources in the last 5 years • % of
external R&D costs / % of internal R&D costs

Key factor to choose the most appropriate acquisition mode:

Collaborative innovation: from dyadic relationships to networked collaborations

1. Product and  service  specification


2. Procurement,  Inventory and  Production  management
3. Marketing  and sales
4. Value delivery  (Distribution)
5. Customer service  management
Open innovation paradigm
“. . . the use of purposive inflows and outflows of knowledge to accelerate internal innovation, a
nd  expand the markets for external use of innovation, respectively” (Chesbrough et al., 2006).
Collaboration enablers

Compatible (or even common) goals and objectives; mutual trust
and absence of opportunistic behavior; high level of  communication, formal and informal sharing
of meaningful and timely information; positive commitment from partners and  
perception of equally sharing

Environmental  driving forces

Economic globalization  M&A activity Shifting channel power  Compressed technology cycles 


Emergence of a disruptive technology  Greater competitive intensity  More demanding customers
Loss of market share  Increased financial pressures  An information revolution 
Shift to supply chain business models

Effective  collaborative innovation  outcomes Better performance outcomes in terms 


of shorter time to market, shared risk,  reduced cost, higher innovation  productivity

Collaboration resistors
Physical and technical barriers; organizational and hierarchical barriers; relational barriers; knowledge b
arriers 
additional financial and time costs in managing the collaboration, loss of direct control over the product 
development process, danger that 
partners gain access to the knowledge and skills that the firm uses in other business areas, risk of leaking 
company information, frustration if  other parties become less committed.

Collaborative  innovation

enablers

Environmental driving forces, effective ollaborative innovation outcomes, collaboration resistors


Closed” and “open” innovation business models

CLOSED  BUSINESS  MODEL (BEFORE) CLOSED  BUSINESS MODEL  (AFTER)

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?

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.

May also use shared equity ownership (i.e., each partner contributes capital and owns a share of equity
in the alliance) • Helps to align incentives and provide sense of ownership
May rely on relational governance (self-enforcing governance based on the goodwill, trust, and
reputation of partners) • Built over time • Can facilitate more extensive cooperation, sharing, and
learning by partners

The four basic collaboration forms

The basic models of collaboration for the technology external acquisition can be identified in:

• Acquisition • Joint Venture - Merger, minority equity, consortium (with equity involvement) •
Outsourcing (Licensing in) • Collective Research Organizations (Alliance).

ACQUISITION Acquisition allows one partner (A) to incorporate competencies and assets of an another
firm (B), becoming the full owner of the tangible and intangible resources acquired.

Acquisition: main characteristics (1)

Impact on the firm resources HIGH impact. It usually requires a large amount of investment. In case of
integrated acquisition the impact is higher because of the need of organizational change and the
creation of a common company culture. Time horizon LONG-TERM (without a “deadline”, unless the
company decide to dismiss the acquired firm) Control over activities HIGH, because activities are
directly managed and controlled by the acquiring company Control over results HIGH, because the
results belongs to the acquiring company. Start up time and costs HIGH, due to the high investment
(financial and organizational). It usually uses Discounted Cash Flow techniques in order to carefully
evaluate the value of the external firm and to define its price. It requires a formal contractual definition
of the acquisition. Level of risk HIGH, since the level of resources required and the need to integrate
different processes and competencies. The integrated approach requires high cost of structuring and
managing and long time. Level of reversibility LOW

Organizational forms: JOINT VENTURE Two partners (A and B) allocates resources (financial,
technological, know-how, assets) for the creation of a third company with equity involvement. The
property of resources used for the collaboration and the final results belongs to the new corporation
created. It can involve also more than two partners. (A+B) Ownership and management of the
resources.

Different forms of Joint Ventures

Other forms of joint venture can be mergers (two partners allocate their whole company to create a
new company), minority equity, or equity consortia. From the managerial point of view it can classified
as: • Collectively managed joint venture: • Philips and Du Pont to develop a new process for mastering
CDs, creating a joint management team for the collaboration. • Consortia with equity involvement
(Eurochrysalide) to develop a totally innovative system for growing silk-worms “in vitro” • Single side
managed joint venture: • Usually in biotechnology industry, a big pharmaceutical company acquire a
minority equity in biotech companies, in order to access to their competencies without interfere with
their managerial activities.
Joint Venture: main characteristics (1)

Impact on the firm resources Generally HIGH, due to the high level of resources needed and the
creation of a new legal entity (new firm) Time horizon MID-LONG TERM Control over activities HIGH
and SHARED with the partner(s). LOWER in case of Single side managed joint venture by one of the (two
or more) partners. Control over results HIGH and SHARED with the partner(s). Start up time and costs
HIGH, like for the acquisition model, due to the high level of resources involved and the time of the
contractual formalization of the collaboration. Also joint venture often requires economic and financial
analysis (DCF techniques) in order to determin the contribution of each parner Level of risk MEDIUM –
HIGH, due to the contribution in terms of resources but however shared with the partner(s) Level of
reversibility LOW, because any change requires time and resources (change in partner, role, resources,
or abandonment of the joint venture)

Organizational forms: OUTSOURCING

Through outsourcing a company (A) acquire the results of the R&D activities done by an another subject
(B). The resources used for the R&D activities are owned by the outsourced company. The acquiring
company becomes owner of the results and has the right of their exploitation.

Different forms of Outsourcing

Other forms of outsourcing are the licensing in (acquisition of external licenses) and the research
contracts or research funding. Outsourcing can be autonomous or negotiated.

• Autonomous outsourcing: • A company funds a research to another external subject (university,


research center, institutions, company) in order to obtain the final results, without influencing the
research activities and processes

• Negotiated outsourcing: • It is the typical case of CRO, Contract Research Organizations in the
pharmaceutical industry. Activities done by the outsourcer are jointly defined with the customer (high
degree of codification of the research activity)

Outsourcing: main characteristics (1)

Impact on the firm resources LOW, because investments (financial resources) are focused on a specific
objective Time horizon SHORT-TERM, due also to the low financial investment. For long term
relationship usually companies establish new contracts and renew the collaboration Control over
activities LOW. The company that develop the research organize and manage their resources. In case of
negotiated outsourcing the control of the customer is higher. Control over results HIGH. The company
acquires the property and the right of exploitation of the results of the research (outsourced) Start up
time and costs LOWER than acquisitions and joint ventures. Usually transaction costs are related only to
the two parts involved in the outsourcing relationship Level of risk LOW, since the results of the
research can be contractually specified Level of reversibility VERY HIGH, thanks to the low investment of
financial resources and the lack of involvement of the acquiring company in the management and the
providing of the assets needed to conduct the research

Organizational forms: Collective Research Organizations

Two or more partners allocate their physical and technological know-how) resources and each partner
keeps the property of its own resources used for the collaboration activities. Each partner has the
property and the rights of exploiting the results obtained from the collaboration.

Different forms of Alliances in Collective Research Organizations

Other forms of alliances can be non equity consortia, partnership agreements, joint R&D projects.

They can be classified in:

• Collectively managed alliances Partners collectively manage the collaborations activities. For example
ST Microelectronics and Hewlett-Packard create a joint team to develop components for peripherals and
PCs.

• Individually managed alliances Each partner autonomously manages a definite set of activities and
fulfils specific tasks (usually used within EU programmes with non equity R&D consortia)

Collective Research Organizations : main characteristics (1)

Impact on the firm resources MODERATE, because the level of resources involved could be high Time
horizon SHORT-MID TERM, since there are not integrated resources in the collaboration Control over
activities MEDIUM, resources are owned and controlled by each partner, but the management can be
by common agreement, depending on the form of collaboration Control over results MODERATE and
shared with the other consortium partners. A further explicit contractual agreement on the property
and the exploitations rights of the results can be appropriate to increase the level of control. Start up
time and costs MODERATE, depending on the number of partners involved and the coordination costs
needed to (formally) structure and manage the collaboration Level of risk Usually LOW, shared with the
partner(s). Companies maintain the property and control over their resources and the risk associated to
their use is reduced compared to other form of collaboration (i.e. joint venture) Level of reversibility
MEDIUM, due to the involvement of the resources in the relationship but lower than in other integrated
form of collaboration. In this case alliance is more reversible than joint venture and acquisition

PROTECTING INNOVATION

Protect or not to protect? • 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.
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.

Which is the level of appropriability of these types of knowledge?

Tacit knowledge or socially complex Knowledge linked to the entrepreneurial talent or related to the
capabilities developed within a specific team of a company Organizational capabilities for interacting
and for knowledge sharing Value created vs value captured Appropriability is determined by how easily
or quickly competitors can copy the innovation. Some innovations are inherently difficult to copy (tacit,
complex, etc.): remember Teece (1994) Firms may also attempt to protect innovations through
intellectual property rights

Overview of intellectual property

legal right

IP protection:

Patents • 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.

How to obtain a patent

• One submits a patent application to a patent office


• The application • describes the technical invention: “The specification must include a written
description of the invention and is required to be in such full, clear, concise, and exact terms as to
enable any person skilled in the art or science to which the invention or discovery appertains to make
and use the same (USPTO rule 1.71)” • defines the desired area of protection

• The application is examined and approved (or rejected) by the patent office • Application contains
“claims”

• In any case, the application is made public after 18 months.

To be patentable, an invention must …

• NOVEL: be new to the world • NOT OBVIOUS: contain an ‘inventive step’ • USEFUL: be capable of
industrial application

Patent Laws Around the World:

Rapid growth in patent applications have helped fuel significant delays in the time between application
and granting. The patent process can take 2-5 years, with an average of 33 months in 2011 Countries
have their own laws regarding patent protection. Some treaties seek to harmonize these laws.

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.

Enforcement of patents 1. Infringement of patent 2. Preliminary injunctions: stop infringing activities 3.


Claim of infringement is verified by trial 4. Punitive charges (damages)

Patents across different countries • Patents are national exclusion rights, i.e. they only prevent others
from making, using, offering for sale, selling or importing infringing products in the country where the
patent was granted.

Cost of patenting: USPTO filing Source: www.ipwatchdog.com About $20,000 + maintainance.

Patent Strategies It is typical to assume that an inventor seeks a patent because he/she desires to make
and sell the invention itself However, inventors and firms may monetize patents in a range of different
ways, including
• licensing the technology to others,

• or selling the patent rights to another firm that can better utilize the technology.

Sometimes firms seek patents just to limit the options of competitors, or to earn revenues through
aggressive patent lawsuits. • These actions are sometimes referred to as "patent trolling."

Patent Trolls

• A patent troll is an individual or an organization that purchases and holds patents for unscrupulous
purposes such as stifling competition or launching patent infringement suits.

• Non-practicing entity: firm that holds a patent but is not involved in the design or manufacture of any
product or process associated with that patent. • Non-practicing entities include legitimate institutions
such as startups, technology transfer agencies, universities and research organizations. • In 2011,
Innovatio threatened to sue 8,000 hotels, stores and coffee shops in the United States, claiming that the
use of Wi-Fi infringed upon 17 of its patents. Many of the businesses paid settlement fees ranging from
$2,300 to $5,000.

Patent thickets

• Dense webs of “patent thickets” can make it hard for firms to compete, and stifle innovation.

• Firms sometimes buy bundles of patents just to create a “war chest” to defend themselves from
lawsuits by offering a credible threat of retaliation.

• For example, in 2011, the bankrupt Nortel auctioned off its massive patent portfolio. A consortium
called Rockstar Bidco that included Microsoft, Apple, RIM, Sony, and Ericsson, won the auction for $4.5
billion, beating out Google which bid $4.4 billion. Google subsequently bought 1,030 IBM patents that
covered a range of technologies. These patents were not necessary for Google's business directly; rather
they provided a retaliation threat to others that might attack them through patent suits.

Trademarks and Service Marks

• Trademarks and Service Marks: a word, phrase, symbol, design, or other indicator that is used to
distinguish the source of goods form 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

International Treaty for trademarks • 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 (85 members)

Trademark that have lost their value becoming common words:


• Cellophane • Aspirina • Nylon • Freon • Yo-yo • Ketchup • Thermos • Teflon • Dynamite

A copyright protects an original artistic or literary work. • In the United States, the authors of original
literary, dramatic, musical, artistic, and certain other intellectual works can obtain copyright protection.
Like trademarks, the rights of copyright protection are established by legitimate use of the work. This
protection is available whether or not the work is published and prevents others from producing or
distributing that work.

Trade secret (Know-how)

• Rather than disclose detailed information about a proprietary product or process in exchange for the
grant of a patent, inventors or firms often will choose to protect their intellectual property by holding it
as a trade secret. A trade secret is information that belongs to a business that is generally unknown to
others Information is typically considered to be a trade secret only if it ( a) offers a distinctive advantage
to the company in the form of economic rents, and ( b) remains valuable only as long as the information
remains private.

• For information to qualify as a trade secret under the Uniform Trade Secret Act, the information must
meet the following three criteria:

• The information must not be generally known or readily ascertainable through legitimate means.

• The information must have economic importance that is contingent upon its secrecy.

• The trade secret holder must exercise reasonable measures to protect the secrecy of the information.

Different Intellectual Property rights (IPR)

Wholly Proprietary Systems versus Wholly Open Systems

 Wholly proprietary systems are those based on technology that is company owned and
protected through patents, copyrights, secrecy, or other mechanisms.

• In wholly open systems, the technology used in a product or process is not protected by secrecy or
patents; it may be based on available standards or it may be new technology that is openly diffused to
other producers. Wholly open technologies may be freely accessed, augmented, and distributed by
anyone

Most technologies are offered somewhere between wholly open and wholly proprietary and are
protected by a range of control mechanisms. This range is exhibited by the control continuum.

To protect or not to protect?

Advantages of Protection

great rent appropriability, • greater incentives to invest in technological development, promotion and
distribution • to retain architectural control (i.e. ability to determine the structure and operation of the
technology and its compatibility with other goods and services)

Advantages of Diffusion

• encourages rapid adoption • resulting in a large installed base • stronger market for complementary
goods • additional development efforts of other parties without additional cost to the original developer

Whether and to what degree a firm should protect its innovation depends on:

• Production and marketing capabilities, and capital: if unable to produce or market the technology (and
complementary goods) at sufficient volume or quality, protecting the technology may hinder its
adoption.

• Industry opposition against sole source technology: other industry members may jointly be able to
exert enough pressure so that a firm will offer the technology with fewer restrictions.

• Resources for internal development: a firm lacking in sufficient resources to invest in the technology’s
functionality and ongoing improvements may not be able to compete in the market.

• Control over fragmentation: is important when standardization and compatibility are important.

• Incentives for architectural control: are especially high when the firm is a significant producer of
complementary products.

Technology strategy formulation:


The New Product Development process: The Stage – Gate process:

The new product development process consists in different phases that we can ideally separate.

Stage – Gate model: at the end of each phase, a control mechanism verifies if the project can continue
or it has to be stopped.

Gate
CHOOSING INNOVATION PROJECTS: R&D PROJECT EVALUATION AND SELECTION

R&D project evaluation techniques

• R&D project evaluation techniques can be grouped into three different categories:

1. Non financial techniques 2. Option-based techniques 3. Discounted Cash Flows (DCF) techniques
(Net Present Value, Profitability Index)

• Each tool can be used as:

 Acceptance criteria: that evaluate if an investment is economically viable for the company
 Ranking criteria: that indicate the relative suitability of an investment among other possible
alternatives.

Which evaluation technique?

Research projects: non-financial techniques

Pre-development projects: Option evaluation techniques

Development projects: financial techniques (DCF)

Non-financial evaluation methods


The three main categories of non-financial methods used to evaluate R&D projects are: • Profile chart •
Checklist • Scoring models.

Profile methods • Each project is assigned a qualitative judgment (for example high, medium, low)
which mirrors the project performance of the project against the set of criteria defined in advance. •
The criteria reflects the key factors determining the success or failure of a project.

Checklists: They are similar to the profile method. A set of criteria is fixed and projects are evaluated
against these criteria. The difference is that each project is assigned a yes / no evaluation according to
the fact that the project is satisfactory against the criterion or not (yes/no, 1/0)

Scoring models: The scoring models are based on the same principle of the previous two methods but
add some other information about the weight of each considered criterion. They provide a weighted
evaluation of each project, depending on the (strategic) importance of the criteria.

Qualitative methods: criteria to be considered

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 costs

 Timing
 Cost factors (now and future cost, learning curves,…

Role of Customer (example of screening questions)

Market • Who are the most likely customers of the new product? • How big is this market? Are there
other likely markets for the product? • What type of marketing will be required to create customer
awareness?

Use • How will customers use the product? • What new benefits will the product provide the customer?
• What other products are customers likely to consider as substitutes for this product?

Compatibility and Ease of Use • Will the product be compatible with the customer’s existing
complements? • Will the product require significant new learning on the part of the customer? • How
will the customer perceive the product’s ease of use? • Will the product require the customer to bear
other costs?

Distribution and Pricing • Where will the customer buy the product? • Will the product require
installation or assembly? • How much are customers likely to be willing to pay for the product?

Existing Capabilities • Does the new project leverage the firm’s core competencies or sources of
sustainable competitive advantage? • Will the project render some of the firm’s existing competencies
obsolete or cannibalize existing products? • Does the firm have the necessary manufacturing
capabilities? (or does the firm needs to outsource them?) • Will the firm need to hire employees with
new skills?

Competitors’ Capabilities • Do one or more competitors have better capabilities for developing this
project? • If the company does not develop this technology, are competitors likely to? • Will the
company be able to protect its intellectual property through patents, copyright, trademarks, or trade
secrets? • Should the firm seek to form a collaboration with a potential competitor?

Future Capabilities • Will the project help the firm build new capabilities that will allow it to achieve its
strategic intent? • What other products/markets will the new capabilities enable the firm to develop? •
Is this project a platform that will lead to a family of new products?

Timing • How long will the project take to complete? • Is the firm likely to be first to market? Is
pioneering the technology a desirable strategy? If the firm misses its target deadlines, what impact will
this have on the potential value of the project? • Is the market ready for the product? • Are there
already appropriate suppliers and distribution channels?
Cost Factors • How much will the project cost? What is the potential variability in these costs? • What
will the manufacturing costs be? At what rate are these costs expected to decline with experience? •
Will the firm need to bear other costs related to customer adoption?

Q-sort analysis

1. Each card represents a potential project 2. Selection criteria are declared 3. Individuals sort their
cards in rank order 4. Comparisons and debate 5. Consensus on the best projects

Option based techniques

• Many authors suggests that options pricing theory can be applied to the evaluation of R&D
investments, because they are analogous to an investment into a call option.

• A company can decide not to make the follow up investment necessary for an R&D program at a
certain date, if the investments results no more profitable.

• It can invest only in the first R&D expenses to obtain the possibility of choosing, at a certain future
date, to invest in the development phase of the project or reject it.

What is a Financial Option?

An option is a contract which gives its holder the right, but not the obligation, to buy (or sell) anasset at
some predetermined price within a specified period of time.

Call option: An option to buy a specified number of shares of a security within some future

period.

Put option: An option to sell a specified number of shares of a security within some future

period.

Exercise (or strike) price: The price stated in the option contract at which the security can

be bought or sold.
The value of a call option at expiration:

Call option: An option to buy a specified number of shares of a security within some future period

What is a Real Option?

• Real options exist when managers can influence the size and risk of a project’s cash flows by taking
different actions during the project’s life in response to changing market conditions.

• Alert managers always look for real options in projects.

• Smarter managers try to create real options.

• It does not obligate its owner to take any action. • It merely gives the owner the right to buy or sell an
asset.

Discounted Cash Flow techniques (review)

Discounted cash flow is the most common financial technique used for investment evaluation. The
variable calculated are stochastic, given that an R&D project involves risk (associating a probability of
occurrence to each variable). Net present value is estimate as:

Where: NCF = is the Net Cash Flow generated by the project in year t (associated to the occurrence
probability in order to consider the risk); i = is the risk free rate (discount rate)

Net cash flow (A review) The Net Cash Flow of year t is obtained as: [(Revenues – cash costs)*(1-t’) +
(Depreciation + Amortization) *t’] – Investment where t’ = the fiscal rate

NPV: Criterion (review)


 NPV > 0 the investment would add value to the firm the project may be accepted, with an
economic criterion
 NPV < 0 the investment would subtract value from the firm the project should be rejected
 NPV = 0 the investment would neither gain nor lose value for the firm We should be indifferent
in the decision whether to accept or reject the project, from a pure monetary point of view

Net Present Value drivers (review) • Incremental expected “other-than-financial cash-flows” (so called
“free cash-flows”, free of interests) • Incremental: only differences between investing / no investing
matter. Opportunity costs should be included • Expected: because future cash-flows cannot usually be
determined with certainty • Tax rate reduces both inflows and outflows • Discount rate has a major
impact in NPV • Sunk costs should not to be addressed when computing NPV

NPV remarks

Future cash flows distributions are usually subject to uncertainty. High variability can have a large
impact on estimated NPV.

Discount rates are typically quite difficult to calculate in practice.

Scenarios, together with sensitivity analysis may be useful to improve company’s decisions.

Most of the times, decisions have impacts which are quite difficult to quantify in monetary terms.

Combining qualitative and quantitative methods

Conjoint analysis

Conjoint analysis allows to estimate quantitatively (through multiple regressions) the value (or
importance) associated to each factor/attribute starting from the ranking of different product
configurations,

Data Envelopment Analysis (DEA)

DEA uses linear programming to combine different measures associated to the different characteristics
of a project (inputs and outputs) to create a ranking of the different projects analyzed

MANAGING THE R&D PORTFOLIO

How to find the best idea(s)? “The way to get good ideas is to get lots of ideas, and throw the bad ones
away.” Linus Pauling (chemist, biochemist, chemical engineer, peace activist, author, and educator,
1901, Portland, Oregon, United States - 1994, Big Sur, California, United States, Nobel Prize in Chemistry,
Nobel Peace Prize)
But what is the problem with having many ideas? Idea selection is as important as idea generation

Selection decisions are hard to make

Type 1 errors False positives Select an idea that does not succeed

Type 2 errors False negatives Do not select an idea that would have been successful

Selection decisions are hard to make: actual value

Decisions are hard to make: False positives


Decisions are hard to make: False negatives

We don’t like their sound, and guitar music is on the way out.” Decca Recording Co. rejecting the
Beatles, 1962 Beatles (1962)

Summarizing

One way to have good idea  have many ideas

One problem of having many ideas  how to select them

Selection is subject to mistakes  false positives and false negatives

Selection is costly and takes time

Objective of projects mapping

• To link the corporate strategy to the product plan, classifying the development projects depending on
the their degree of newness and their time to market in a unique tool. • To distribute the resources in
order to satisfy market requests • To have a tool to check the alignment between “what has to be done”
and “what is being doing”

The tools: • Projects’ roadmap (for the entire portfolio or for each product and its evolution in time) •
Project maps (Wheelwhright and Clark matrix, other matrices,…)

Projects roadmapping (of the entire portfolio of innovations)

Projects Road Map: A graphic representation of technology evolution or technology and products plans
mapped against time. It have great potential for supporting the development and implementation of
integrated strategic business, product and technology plans, providing companies have the information,
process and tools to produce them.

Company perspective: roadmaps allow technology developments to be integrated with business


planning, and the impact of new technologies and market developments to be assessed.
Project Roadmap (of a single category of product)

The project mapping: objective

• The classification of the development of projects per typology can help to decide which is the best mix
to launch new products.

• These categories are different in the degree of change (newness) of the product and process
technology, in the know how and in the requested information.

• The different clusters help management to understand how each class is characterized by dimensions
such as extension, number of people on the team, available budget, maximum duration, etc…

Project mapping: determinants


Project classification

• Basic R&D: advanced projects with scientific objective more than commercial return. They often
originate by collaboration programs with research institutes, universities and external partner.

• Breakthrough: radical changes in product technologies or production process technologies (eg.


compact disk). They normally create new products or new markets, for which customers cannot express
their opinion in advance. The duration of these projects is normally more than one year.

• Platform: they create a new generation of a product line. The new product will have new
functionalities or technologies, with great improvement also in their production process. The time to
market is generally a year or less.

• Derivatives: incremental improvement to existing product or related production processes. The focus
is on the customer (improving or adding a function) or on the reduction of cost. Resources involved are
often limited to some organizational function and the development time is short

Project classification

• Cost reduction/ Law compliance: these projects imply big changes (and risk) from the technical point
of view, mainly related to the process used to obtain a product similar to the one already existing on the
market. The key reasons for these projects are reducing the cost of production and/or be compliant with
new laws.

• Byproduct/ New markets: this category of projects aim at obtaining new products in new market with
marginal modification of the current production process or technology implied. Usually refers to the
export of existing /adapted product in new geographical markets or to new target customers

Project mapping: projects • All projects of new product development are represented in the matrix
Moving from the product
and process incremental improvement to product and process completely newness, projects increase
their degree of innovation, as their technical and commercial risk.

Key variables

Why do we care about the formal and informal organization?

“The importance of matching an organization’s strategy and structure is one of the fundamental insights
in the strategic management literature” (Yin & Zajac, 2004, p. 365)

• Value of “good” strategies per-se relatively low

• Strategies need to be implemented adequately to create value

• Organizational structure provides the framework within which strategies are used

• Not all strategies fit equally well with all kinds of organizational structures
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 (ambidexterity). • Some structural issues are even more significant for the multinational
firm (centralization vs decentralization structural choises).

Innovativeness of a firm compared to its size and structural dimensions:

Smaller is better High managerial control on R&D activities High monitoring and motivation of
employees Highest incentives to innovation (clear authorship of the individual inventor) Higher
propensity to risk (entrepreneur) Higher flexibility More efficient (R&D budget spent more carefully)

Bigger is better Scale and learning effects High investment in R&D Better developed complementary
activities (marketing or financial planning) Global reach (to obtain information) Better selection of
projects Possibility to take on large or risky innovation projects (aircrafts or pharmaceutical icompanies,
…)

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

Structural dimensions of a firm


Formalization level: the degree to which the firm utilizes rules, procedures and written documentation
to structure the behavior of individuals or groups within the organization.
Standardization: the degree to which activities in a firm are performed in a uniform manner with
predictable outcomes.
Centralization: the degree to which decision-making authority is kept at top levels of the firms. It can
also refers to the geographical location of activities (i.e. at the headquarters).

Formalization level & standardization:


Pro: • Facilitate the standardization of firm activities • Help to regulate employee behavior (clear
expectation of behavior) • Can substitute possible managerial oversight • It minimize variation
Cons: • It may limit the employees creativity and experimentation for innovative ideas • It can reduce
the motivation to introduce something new

Structural dimensions of the firm: Mechanistic versus organic structures

Mechanistic structures: • high formalization and standardization. • Good for operational efficiency,
reliability. • Minimizes variation  may stifle creativity
Organic structures • low formalization and standardization; described as “free flowing” • Encourages
creativity and experimentation • May yield low consistency and reliability in manufacturing

The Ambidextrous Organization: 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.

Ambidexterity (O’Really e Tushman, 2008)

Competencies -Exploration Exploitation

CURRENT MARKET Optimization of short term results Consolidate the value of the offering for the
current market Monitor the current market and maximizing the exploitation of existing competencies

FUTURE MARKET Management of future growth (and risks) Investing in new competencies or
developing new business models based on the analysis of future trends

Factors blocking innovation in large companies

• Technical inertia: not being able to change the core competencies in a dynamic way

• Cognitive inertia: «we’ve always have done in this way»; and «not invented here» (NIH) syndrome. Not
being able or intentionally resist to understand the new phenomena with different perspectives (Xerox
vs Canon)

• Economical inertia: focusing on short term innovation, less risky and reducing the possibility to
cannibalize existing products (short term results oriented public companies)

How to profit from the benefit of small firms in large organizations?

Break the overall firm into several smaller subunits, encouraging an entrepreneurial culture within these
subunits • Disaggregation (or «unbundling») into networks of smaller, specialized, autonomous divisions
or independent firms • Virtual organization, network organization, modular organization,….

Innovation at Google Inc. Mission: «to organize the world’s information and make it universally
accessible and useful» Rules for «creativity» in Google «Each manager is required to spend 70% of
his/her time on the core business, 20% on related-but-different projects, and 10% on entirely new
products.»

Modularity and “Loosely-Coupled” Organizations 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., customizable PC or laptop). See example of configurators:
https://www.configurator-database.com/
A standard interface enables components to be combined easily. Modularity can enable many different
configurations to be achieved from a given set of components. Modular products can enable (though do
not necessitate) the use of modular organizations – more typically termed “loosely coupled”
organizational forms. In a loosely-coupled organization, activities are not tightly integrated; they achieve
coordination through adherence to shared objectives and standards.

Modularity and “Loosely-Coupled” Organizations

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.

Boeing as an “integrator” of a collaborative risksharing partnership with first tier suppliers.

The Dreamlifter’s jurney High need for coordination (some activities have been in-sourced during the
project => toward a greater vertical integration)

Dreamliner Production Integration Center The large number of suppliers made coordination more
complex and lead to several delays. Boeing’s management was considering bringing more of the work
back in-house. The PIC was operating 24 hour/day, in order to coordinate all the activities in all
timezones of the world.

Structural dimensions of the firm

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.

Centralization vs decentralization

Centralization when… • … economies of scale are important • … need for communication between
research groups (and broader range of technological areas) • … long time scales are involved (e.g. basic
research). Centralized R&D firms conduct technological search outside of their organizational
boundaries more widely than decentralized R&D firms.

Decentralization when… • … need for functional integration • … need for specialist staff or equipment
(e.g. applied research)

• 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.

Strategies of multinational innovation (Bartlett and Ghoshal, )

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

Strategies of multinational innovation

Center-for-global all R&D activities centralized a single hub

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

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.

Local-for-local each division does own R&D for local market

Strategies of multinational innovation (Bartlett and Ghoshal, )

Transnational approach Resources and skills anywhere in firm can be leveraged to exploit opportunities
in any geographic market.

It requires: • Reciprocal interdependence among divisions • Strong integrating mechanisms such as


personnel rotation, division-spanning teams, etc. • Balance in organizational identity between national
brands and global image

Center-for-global,Local-for-local, Globally linked, Locally leveraged

Managing new product development teams

Team “A team is a small number of people with complementary skills who are committed to a common
purpose for which they hold themselves mutually accountable

Is there an optimal team size? • Larger teams are often required to combine the expertise of multiple
individuals • However, large teams can generate • higher coordination costs • communication problems
and • sometimes a lower commitment to the project How can you solve this? Every large team gets
broken into smaller teams of 3-5 people

Managing Teams for High Performance

• Social loafing • The human tendency to put forth less effort in a team than individually • When
rationally done  free-riding • Results in possibly lower team performance and failure to attain group
goals

Three Ways to Reduce Social Loafing

Team composition/diversity: Evidence from the comic book industry

Research questions • Variance enhancing vs mean performance increasing • Do innovations by teams


have different causes than those by individuals?

Team composition/diversity: Evidence from the comic book industry

Higher variance vs higher mean performance • Higher variance in performance: • Larger number of
members: A broader set of perspectives, and cross-fertilization of ideas results in more creative
outcomes • Knowledge diversity of members: More knowledge components but also higher potential
for team conflict • Higher mean performance: • More team experience: Teams are better able to
communicate Individual vs. team • The effect of increased knowledge diversity is stronger on extreme
outcomes for individual creators than for teams: Why? • Individuals do not have to compromise

Diversity and team performance

• Demographic changes in the workforce, employee mobility, and growing specialization are rendering
organizations more diverse (gender, nationality, background, education, age, etc.)

• What is the relationship between diversity and team performance?


• Too much diversity might make the team dysfunctional • TEAM NORMS: Shared guidelines or rules for
behavior that most team members follow • Managers should encourage members to develop norms
that contribute to team performance and the attainment of team goals

• In innovation, diversity is often seen as something good  source of ideas

Team size and composition

The team of a project can vary both in size and type of competencies that includes.

• Large teams can generate higher coordination costs, communication problems and sometimes a lower
commitment to the project (individuals perceive that they can not receive full credit – or blame – for
their contribution to the group effort)

• Cross-functional teams (typically constituted for new innovation projects) include people from
different department (and technical languages!) of the company. Diversity in terms of competencies,
gender, country of origin and background increases the creativity and the «lateral» thinking in problem
solving (heterogeneity), but usually increase also the need of coordination and the communication
costs.

Examples of possible organizational structures

Team members remain within their


own functional department, partially
works on the project and there’s a
coordination and integration role
thanks to the introduction of a formal
Project Manager (without hierarchical
authority!)

Team members work usually full time


on the project and report to the Project
Manager that has hierarchical authority
on the team (matrix organization). Very
costly for the organization (temporarily
for the project), but very effective for
the commitment to the goal of the
project

Team Dynamics

Conformity and Deviance

• Members conform to norms to obtain rewards, imitate respected members, and because they feel
the behavior is right. • When a member deviates, other members will try to make them conform, expel
the member, or change the team norms to accommodate them. • Deviance allows for new ideas in the
team. • Conformity and deviance must be balanced for high performance from the team.

Balancing Conformity and Deviance in Teams

Integrating knowledge in teams: Motivation

Teams must develop a systematic approach to integrate knowledge. Knowledge-integration capability


Very important with CROSS-FUNCTIONAL TEAMS However, many teams fail to do so. Research has
shown that teams with generalists and specialists perform better.

Summarizing Heterogeneous teams possess more information than homogeneous teams

Heterogeneity can increase the creativity and the potential to recombine information

However, to fully realize this potential performance advantage, heterogeneous teams may require long-
term contact incentives to foster communication and cooperation and Integration capabilities (jack of all
trades)

Important roles in innovation teams: The project manager


Important roles in innovation teams: The project champion

68% of North American firms, 58% of European firms, and 48% of Japanese firms report using senior
executives to champion their NPD projects.

Project champions are executives have the power and authority to support and fight for a project. They
can facilitate the allocation of human and capital resources to the development effort and stimulate
communication and cooperation between the different functional groups involved in the development
process.

Benefits of championing Senior executives 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.

Important roles in innovation teams: The anti-champion An “anti-champion” is a person who plays the
role of the “devil’s advocate.

Project Communication Plan

Building a Communication Plan includes the following phases: • Identify communication objectives: how
to achieve awareness and involvement • Define audiences and communication needs • Define per
audience: channels, key messages and frequency of communication • Identify feedback channels

Two Types of Communications Plans: • Regular or Ongoing Communication Plan • One-time or Event-
driven Communication Plan

A special type of team: Virtual teams

• Virtual teams are teams in which members may be geographically distributed, but are still able to
collaborate intensively via advanced information technologies (videoconferencing, groupware, e-mails
or internet chat programs)

• Reduction of travel expenses, but difficulties in facilitating communication and collaboration (also
informal interaction)
• Team members must be able to work independently and seek interaction (being comfortable with
technologies and having strong interpersonal skills).

Organizing the new product development process

The New Product Development process: The Stage – Gate process

The new product development process consists in different phases that we can ideally separate

Technical life cycle cost of a project

Technical life cycle cost of a project


Selection criteria: some examples (review)

The organizational approaches of the new product development process

Depending on the complexity/extent of each phase and the level of integration among the different
stages of the process, it is possibile to classify the new product development process in:

• sequential engineering, where each stage of the development process is carried out separately, and
the next stage cannot start until the previous stage is finished. The information flow is only in one
direction. The main goal of this model is to reduce the degree of uncertainty at every phase (i.e. in the
pharmaceutical industry);

• concurrent engineering, phase of the process can be overlapped, because the execution of one phase
does not imply that the previous one has to be completed. Each activity is managed by an cross
functional team that coordinate and control all the process, from the idea generation phase to the
production of the product.

The Sequential Engineering approach


Basic elements:  Strict definition of characteristics at the end of each phase  High specialization of
each phase  Sequential work on different phases of NPD process

The Concurrent Engineering approach

Basic elements:  Early involvement of participants  Team approach  Simultaneous work on different
phases of product development

ICT support in NPD process


New product development process evolution thanks ICT

Involving customers in NPD

Involving customers • Customers are often best able to identify the maximum performance capabilities
and minimum service requirements of new product. • Crowdsourcing, where people voluntarily
contribute their ideas or effort. • Customers may be involved in NPD team. • Firms may also use beta
testing to get customer input early in the development process.

Lead users • Customers who face the same general needs of marketplace but experience them earlier
than rest of market and benefit disproportionately from solutions. • Firms reported using lead user
method for 38% of the projects they undertook, on average.

Tools supporting the New Product Develpment process • Quality Function Deployment (QFD) • Failure
Mode and Effect Analysis (FMEA) • Design for Manufacturing and Assembly (DFMA)
The house of quality

Objective: translating the Voice of Customer into technical specification, leveraging the competencies of
the whole development team in a shared document, to take shared decisions

Understanding customer needs and planning product quality

The house of quality

QUALITY PLANNING PROCESS

Objective: planning the quality of the new product or services based on the Voice of Customer. WHAT
we have to develop to add VALUE (functional characteristics and their importance)
Objective: transforms the needs (WHATs) in Technical solutions (HOWs)
and prioritize them based on the Voice of Customer (thanks to the correlation matrix)

Overall importance of the functional characteristics identified through the Voice of the Customer

Importance: related to each attribute, it specifies the importance for the customer (scale 1-6, where
6=very important; 1=not important) Performance X, A, B: related to each functional characteristic
(attribute) measured on our product and the products of the competitors (A or B) depending on the
customer’s perceived quality (scale 1-6) GAP index or improvement index: it is the ratio between the
best performance of a specific functional characteristic and the value obtained for the same feature by
our product (maximum / our product) Overall (or composite) importance: it modifies the simple
importance expressed by the customer with the perceived distance from the competitors (Simple
importance * Gap Index).

Translating customer needs and product attributes into technical features

Weighted importance of the technical characteristics:

Overall (or composite) importance: it modifies the simple importance expressed by the customer with
the perceived distance from the competitors (Simple importance * Gap Index).

Correlation index (weak, medium, strong): it describes in a 1-3-9 points scale the intensity of the
correlation between WHATs and HOWs (needs and technical solutions)

Weighted importance: the sum of the product of the strength of the relationship times the related
composite importance of the attribute.

Relative importance: percentage on the total of the overall technical importance

Design for Manufacturing and Assembly (DFMA)

Design for manufacture (DFM) and design for assembly (DFA) developed from the recognition that the
cost of producing a product is largely determined by its design. It is often applied in a concurrent
engineering environment, that allows to consider all the development phase of a product since the
earlier design phases.

• DFMA can be structured into two different parts:

1. Design for Assembly (DFA), for identifying parts that can be eliminated or combined, and for
estimating assembly times and costs based on component characteristics.
2. Design for Manufacturing (DFM), focused on reducing the cost of product development, by
minimising manufacture cost and time (reducing the number of parts or usign different
materials) and by avoiding needless design iteration.
Design for Manufacturing and Assembly (DFMA)

Failure Mode and Effect Analysis (FMEA)

Failure modes and effects analysis (FMEA) is a method by which firms identify potential failures in a
system, classify them according to their severity, and put a plan into place to prevent the failures
from happening.

The severity of a risk is determined by:

Impact on the project (time, cost or quality) x likelihood of occurrence x inability of controls to
detect it

Risk identification and evaluation

risk level acceptance

Risk Analysis: qualitative approach

• Establish • Probability of occurrence

• Impact on: • Time • Cost • Quality


Risk Classification Matrix

New product development metrics

Time- • 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? • What
percentage of development projects undertaken within the past 5 years met all or most of the
deadlines set for the project?

Cost- • What percentage of development projects undertaken within the past 5 years stayed within
budget?

Quality- • What percentage of development projects undertaken within the past 5 years resulted in
a completed product?

Overall Innovation Performance

Firms also use a variety of methods to assess their overall performance at innovation: • What is the
firm’s return on innovation? • What percentage of projects achieve their sales goals? • What
percentage of revenues are generated by products developed within the past five years? • What is
the firm’s ratio of successful projects to its total project portfolio?

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