Strategic Management of Technological Innovation - Schilling - 4th edition - Summary

Chapter 1: Introduction

Technological innovation is the act of introducing a new device, method, or material for application to commercial or practical objectives.

The increasing performance of innovation is due in part to the globalization of markets. Advances in information technology also have played a role in speeding the pace of innovation. Innovation enables a wider range of goods and services to be delivered to people worldwide.

The aggregate impact of technological innovation can be observed by looking at gross domestic product (GDP). The gross domestic product of an economy is its total annual output, measured by final purchase price.

While GDP has its shortcomings as a measure of standard of living, it does relate very directly to the amount of goods consumers can purchase.

Technological innovation increased the amount of output achievable from a given quantity of labor and capital.

Sometimes technological innovation results in negative externalities.

• Production technologies may create pollution that is harmful to the surrounding communities;

• Agricultural and fishing technologies can result in erosion, elimination of natural habitats, and depletion of ocean stocks;

• Medical technologies can result in unanticipated consequences such as antibiotic-resistant strains of bacteria or moral dilemmas regarding the use of genetic modification.

However, technology is, in its purest essence, knowledge – knowledge to solve our problems and pursue our goals. Technological innovation is thus the creation of new knowledge that is applied to practical problems.

Study after study has revealed that successful innovators have clearly defined innovation strategies and management processes.

It takes about 3,000 raw ideas to produce one significantly new and successful commercial product. The innovation process is thus often conceived of as a funnel, with many potential new product ideas going in the wide end, nut very few making it through the development process.

A firm’s organizational structure and control systems should encourage the generation of innovative ideas while also ensuring efficient implementation.

A firm’s new product development process should maximize the likelihood of projects being both technically and commercially successful. To achieve these things, a firm needs:

• An in-depth understanding of the dynamics of innovation;

• A well-crafted innovation strategy;

• Well-designed processes for implementing the innovation strategy.

Chapter 2: Sources of Innovation

Innovation can arise from many different sources:

• Individuals;

• Research efforts of universities, government laboratories and incubators, or private non-profit organizations;

• Firms;

• Networks of innovators.

Firms are well suited to innovation activities because they typically have greater resources than individuals and a management system to marshal those resources toward a collective purpose. Firms also face strong incentives to develop differentiating new products and services, which may give them an advantage over non-profit or government-funded entities.

Networks of innovators that leverage knowledge and other resources from multiple sources are one of the most powerful agents of technological advance. We can thus think of sources of innovation as composing a complex system wherein any particular innovation may emerge primarily from one or more components of the system of linkages between them.

Innovation begins with the generation of new ideas. An idea is something imagined or pictured in the mind. The ability to generate new and useful ideas is termed creativity.

Creativity is defined as the ability to produce work that is useful and novel.

Novel work must be different from work that has been previously produced and surprising in that it is not simply the next logical step in a series of known solutions. The degree to which a product is novel is a function both of how different it is from prior work and of the audience’s prior experiences. A product could be novel to the person who made it, but known to most everyone else. In this case, we would call it reinvention.

An individual’s creative ability is a function of his or her intellectual abilities, knowledge, style of thinking, personality, motivation, and environment.

The impact of knowledge on creativity is somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a field too well, that person can become trapped in the existing logic and paradigms, preventing him of her from coming up with solutions that require an alternative perspective.

The personality traits deemed most important for creativity include:

• Self-efficacy;

• Tolerance for ambiguity;

• Willingness to overcome obstacles and take reasonable risks;

• Intrinsic motivation.

Finally, to fully unleash an individual’s creative potential often requires an environment that provides support and rewards for creative ideas.

The creativity of the organization is a function of creativity of the individuals within the organization and a variety of social processes and contextual factors that shape the way those individuals interact and behave. The organization’s structure, routines, and incentives could thwart individual creativity or amplify it.

Intranet is a private network, accessible only to authorized individuals. There they can submit their ideas and actively interact and collaborate on the ideas of others. Through active exchange, the employees can evaluate and refine the ideas, improving their fit with the diverse needs of the organization’s stakeholders.

Idea collection systems are relatively easy and inexpensive to implement, but are only a first step in unleashing employee creativity.

Creativity training programs encourage managers to develop verbal and non-verbal cues that signal employees that their thinking and autonomy is respected.

Sometimes monetary rewards undermine creativity by encouraging employees to focus on extrinsic rather than intrinsic motivation.

Innovation required combining a creative idea with resources and expertise that make it possible to embody the creative idea in an useful form.

Analysis of personality traits of inventors suggest these individuals are likely to be interested in theoretical and abstract thinking, and have an unusual enthusiasm for problem solving. Their tendency toward introversion may cause them to be better at manipulating concepts than at interacting socially.

Most successful inventors possess the following traits:

• Mastered basics tools and operations of the field in which they invent (they have pursued two or three field simultaneously);

• Curious and more interested in problems than solutions;

• Question assumptions made in previous work in the field;

• Have the sense that all knowledge is unified. They seek global solutions rather than local solutions and are generalists by nature.

While manufacturers typically create new product innovations in order to profit from the sale of the innovation to customers, user innovators often have no initial intention to profit from the sale of their innovation – they create the innovation for their own use.

One of the most obvious sources of firm innovations is the firm’s own research and development efforts. Research can refer to both basic research and applied research.

• Basic research is effort directed at increasing understanding of a topic or field without a specific immediate commercial application in mind.

• Applied research is directed at increasing understanding of a topic to meet a specific need. In industry, this research typically has specific commercial objectives.

Development refers to activities that apply knowledge to produce useful devices, materials or processes.

A firm’s R&D intensity had a strong positive correlation with its sales growth rate, sales from new products, and profitability.

The science-push approach assumed that innovation proceeded linearly from scientific discovery, to invention, to engineering, then manufacturing activities, and finally marketing.

The demand-pull approach argued that innovation was driven by the perceived demand of potential users. Research staff would develop new products in efforts to respond to customer problems or suggestions. The view was criticized as being too simplistic.

Most current research suggests that firms that are successful innovators utilize multiple sources of information and ideas:

• In-house research and development;

• Linkages to customers or other potential users of innovations;

• Linkages to external network of firms;

• Linkages to other external resources of scientific/technical information.

Collaborators can pool resources such as knowledge and capital, and they can share the risk of a new product development project. The most frequent collaborations are between firms and their customers, suppliers, and local universities.

Firms also collaborate with competitors and complementers. Complementers are organizations (or individuals) that produce complementary goods, such as light bulbs for lamps or DVD movies for DVD players.

External sources of information are more likely to be complements rather than substitutes for in-house research and development. Doing in-house R&D helps to build the firm’s absorptive capacity, which refers to the firm’s ability to understand and use new information. To increase the degree to which university research leads to commercial innovation, many universities have established technology transfer offices.

Governments of many countries actively invest in research through their own laboratories, the formation of science parks and incubators.

Science parks often include institutions designed to nurture the development of new businesses that might otherwise lack access to adequate funding and technical advice. Such institutions are often termed incubators. Incubators help overcome the market failure that can result when a new technology has the potential for important societal benefits, but its potential for direct returns is highly uncertain.

Private non-profit organizations also contribute to innovation activity in a variety of complex ways.

Collaborative research is especially important in high-technology sectors, where it is unlikely that a single individual or organization will possess all of the resources and capabilities necessary to develop and implement a significant innovation.

Technology clusters may span a region as narrow as a city or as wide as a group of neighboring countries. Clusters often encompass an array of industries that are linked through relationships between suppliers, buyers, and producers of complements. One primary reason for the emergence of regional clusters is the benefit of proximity in knowledge exchange.

Knowledge that is complex or tacit may require frequent and close interaction to be meaningfully exchanged.

Closeness and frequency of interaction can influence a firm’s willingness to exchange knowledge. When firms interact frequently, they can develop trust and reciprocity norms.

A cluster of firms with high innovation productivity can lead to more new firms starting up in the immediate vicinity and can attract other firms to the area.
Successful firms also attract new labor to the area and help to make the existing labor pool more valuable by enabling individuals to gain experience working with the innovative firms.

The benefits firms reap by locating in close geographical proximity to each other are known collectively as agglomeration economies.

There are also downsides to geographical clustering:

• Proximity can lead to competition that reduces pricing power with buyers/suppliers;

• Proximity can increase likelihood that competitors gain access to a firm’s proprietary knowledge;

• Clustering can potentially lead to traffic congestion, inordinately high housing costs, and higher concentrations of pollution.

Knowledge brokers are individuals or organizations that transfer information from one domain to another in which it can be usefully applied.

The degree to which innovative activities are geographically clustered depends on things such as:

• The nature of the technology;

• Industry characteristics;

• Cultural context of the technology.

Technological spillovers occur when the benefits from the research activities of one firm spill over to other firms. Spillovers are thus a positive externality of research and development.

Chapter 3: Types and Patterns of Innovations

The path a technology follows through time is termed its technology trajectory. These are most often used to represent the technology’s rate of performance improvement or its rate of adoption in the marketplace.

Product innovations are embodied in the outputs of an organization. Process innovations are innovations in the way an organization conducts its business, such as in the techniques of producing or marketing goods or services. These are often oriented toward improving effectiveness or efficiency of production.

New product innovations and process innovations often occur in tandem.

• New processes may enable the production of new products;

• New products may enable the development of new processes;

• A product innovation for one firm may simultaneously be a process innovation for another.

Radical innovations are very new and different from prior solutions. The most radical innovation would be new to the world and exceptionally different from existing products and processes. Incremental innovations are a relatively minor change from existing practices. It might have been previously known to the firm or industry, and involve only a minor change from existing practices.

The radicalness of an innovation might be conceived as the combination of newness and the degree of differentness. It is sometimes also defined in terms of risk.

The radicalness is relative and may change over time or with respect to different observers. An innovation what was once considered radical may eventually be considered incremental as the knowledge base underlying the innovation becomes more common.

An innovation is considered to be competence enhancing if it builds on the firm’s existing knowledge base.
An innovation is considered to be competence destroying if the technology does not build on the firm’s existing competencies or renders them obsolete.

An innovation is considered a component innovation (or modular innovation) if it entails changes to one or more components, but does not significantly affect the overall configuration of the system.

An architectural innovation entails changing the overall design of the system or the way that components interact with each other. An innovation that is strictly architectural may reconfigure the way that components link together in the system, without changing the components themselves.

Architectural innovations are often considered more radical and more competence destroying than component innovations.

Both the rate of a technology’s performance improvement and the rate at which the technology is adopted in the marketplace repeatedly have been shown to conform to an
s-shape curve.

When a technology’s performance is plotted against the amount of effort and money invested in the technology, it typically shows slow initial improvement, then accelerated improvement, then diminishing improvement.

Performance improvement in the early stages of a technology is slow because the fundamentals of the technology are poorly understood. As scientists/firms gain a deeper understanding of the technology, improvement begins to accelerate. At some point, diminishing returns to effort begin to set in. As the technology begins to reach its inherent limits, the cost of each marginal improvement increases, and the s-curve flattens.

If effort is relatively constant over time, plotting performance against time will result in the same characteristic curve as plotting performance against effort.

A discontinuous technology is a technology that fulfills a similar market need by building on an entirely new knowledge base. For example, the switches from propeller-based planes to jets.

The technology diffusion is the spread of a technology through a population. S-curves in technology diffusion are obtained by plotting the cumulative number of adopters of the technology against time. This yields an s-shape curve because adoption is initially slow; it accelerates as the technology becomes better understood, and eventually the market is saturated and the rate of new adoptions declines.

Limitations of S-curve model as a prescriptive tool:

• It is rare that true limits of a technology are known in advance;

• The shape of a technology’s s-curve is not set in stone;

• Firms can influence the shape of the s-curve through their development activities.

Whether switching to a new technology will benefit a firm depends on a number of factors:

1. The advantages offered by the new technology;

2. The new technology’s fit with the firm’s current abilities;

3. The new technology’s fit with the firm’s position in complementary resources;

4. The expected rate of diffusion of the technology.

The s-curve model above suggests that technological change is cyclical. After diminishing returns, the technology will be displaced by a new technological discontinuity.

The emergence of a new technological discontinuity can overturn the existing competitive structure of an industry, creating new leaders and new losers. Schumpeter called this process creative destruction, and argued that it was the key driver of progress in a capitalist society.

Utterback and Abernathy observed that a technology passed through distinct phases.

• Fluid phase: Considerable uncertainty about both the technology and its market.

• Specific phase: Producers/consumers begin to arrive at some consensus about the desired product attributes, and a dominant design emerges. Innovations in products, materials, and manufacturing processes are all specific to the dominant design.

Anderson and Tushman found that each technological discontinuity inaugurated a period of turbulence and uncertainty (= era of ferment).

While the new technology displaces the old, there is considerable design competition as firms experiment with different forms of the technology (= substitution).

The dominant design was never in the same form as the original discontinuity, but it was also never on the leading edge of the technology. The dominant design tended to bundle together a combination of features that best fulfilled the demands of the majority of the market. The rise of a dominant design signals the transition from the era of ferment to the era of incremental change.

During the era of incremental change, many firms cease to invest in learning about alternative design architectures and instead invest in refining their competencies related to the dominant architecture. Most competition revolves around improving components rather than altering the architecture.

Chapter 4: Standards Battles and Design Dominance

Many industries exhibit increasing returns to adoption, meaning that the more a technology is adopted, the more valuable it becomes.

Absorptive capacity refers to the phenomenon whereby as firms accumulate knowledge, they also increase their future ability to assimilate information. The effects of absorptive capacity suggest that firms that develop new technologies ahead of others may have an advantage in staying ahead.

At the aggregate level, the more firms that are using a given technology and refining it, the more absorptive capacity that is being generated related to that technology, making development of that technology more effective and efficient.

In a market characterized by network externalities, the benefit from using a good increases with the number of other users of the same good.

The number of users of a particular technology is often referred to as its installed base.

If the user must invest considerable effort in learning to use a computer platform, the user will probably choose to invest this effort in learning the format he or she believes will be most widely used.

Network externalities also arise when complementary goods are important. Products that have a large installed base are likely to attract more developers of complementary goods.

Since the availability of complementary goods will influence users’ choice among competing platforms, the availability of complementary goods influences the size of the installed base. A self-reinforcing cycle ensues.

In some industries, the consumer welfare benefits of having compatibility among technologies have prompted government regulation, and thus a legally induced adherence to a dominant design.

Where government regulation imposes a single standard on an industry, the technology design embodied in that standard necessarily dominates the other technology options available to the industry.

When a firm’s technology is chosen as a dominant design, not only does the firm have the potential to earn near-monopoly rents in the short run, but the firm also is in a good position to shape the evolution of the industry, greatly influencing what future generations of products will look like.

A firm might find itself locked out of the market if it is unable to adopt the dominant technology.

Increasing returns to adoption also imply that technology trajectories are characterized by path dependency, meaning that relatively small historical events may have a great impact on the final outcome.

W. Chan Kim and Renee Aubergine developed a Buyer Utility Map. They argue that it is important to consider six different utility levers, as well as six stages of the buyer experience cycle, to understand a new technology’s utility to a buyer.

The stages they identify are:

1. Purchase

2. Delivery

3. Use

4. Supplements

5. Maintenance

6. Disposal

The six utility levers are:

1. Customer productivity

2. Simplicity

3. Convenience

4. Risk

5. Fun and image

6. Environmental friendliness

The map provides a guide for managers to consider multiple dimensions of technological value and multiple stages of the customer experience.

In industries characterized by network externalities, the value of a technological innovation to users will be a function not only of its stand-alone benefits and cost, but also of the value created by the size of its installed base and the availability of complementary goods.

It is not enough for a new technology’s stand-alone utility to exceed that of the incumbent standard. The new technology must be able to offer greater overall value. Utility must be so great that it eclipses the combined value of an existing technology’s stand-alone utility, its installed base, and its complementary goods.

In some cases, the new technology may be made compatible with the existing technology’s installed base and complementary goods. In this case, a new technology with only a moderate functionality advantage may offer greater overall value to users.

When users are comparing the value of a new technology to an existing technology, they are weighing a combination of objective information, subjective information and expectations for the future.

The perceived and anticipated value components map proportionally to their corresponding actual components. However, this need not be the case. For instance, perceived installed base may greatly exceed actual installed base.

Vapor ware are products that are not actually on the market and may not even exist but are advertised. By building the impression among customers that a product is ubiquitous, firms can prompt rapid adoption of the product when it is actually available. Vapor ware may also buy a firm valuable time in bringing its product to market.

Network externalities returns refers to the value customers reap as a larger portion of the market adopts the same good. These often exhibit the s-shape.

Monopoly costs refer to the costs users bear as a larger portion of the market adopts the same good. These are often considered to be exponentially increasing.

Chapter 5: Timing of Entry

Entrants are often divided into three categories:

• First movers (or pioneers): the first to sell in a new product or service category;

• Early followers (or early leaders): early to the market, but not first;

• Late entrants: entering the market when or after the product begins to penetrate the mass market.

Monopoly rents are the additional returns a firm can make from being a monopolist, such as the ability to set high prices, or the ability to lower costs through greater bargaining power over suppliers.

First mover advantages

1. Brand loyalty and technological leadership
   The company that introduces a new technology may earn a long-lasting reputation as a leader in that technology domain. Such a reputation can help sustain the company’s image, brand loyalty and market share even after competitors have introduced comparable products. The position as technology leader also enables the company to shape customer expectations about the technology’s form, features, pricing, and other characteristics.

2. Preemption of scarce assets
   Firms that enter the market early can preemptively capture scarce resources such as key locations, government permits, access to distribution channels and relationships with suppliers.

3. Exploiting buyer switching costs
   Once buyers have adopted a good, they often face costs to switch to another good. If buyers face these switching costs, the firm that captures customers early may be able to keep those customers even if technologies with a superior value proposition are introduced later.

4. Reaping increasing returns advantages
   In an industry with pressures encouraging adoption of a dominant design, the timing of a firm’s investment in new technology development may be particularly critical to its likelihood of success.

First-mover disadvantages

Market pioneers have a high failure rate (roughly 47 percent), and the mean market share of market pioneers is 10 percent. Early leaders averaged almost three times the market share of pioneers.

First movers earn greater revenues than other entrants, but they also face higher costs, causing them to earn significantly lower profits in the long run.

A later entrant often can capitalize on the R&D investment of the first mover, fine-tune the product and avoid mistakes made by the earlier entrant, and exploit incumbent inertia.

Incumbent inertia is the tendency for incumbents to be slow to respond to changes in the industry environment due to their large size, established routines, or prior strategic commitments to existing suppliers and customers.

1. Research and development expenses
   Developing a new technology often entails significant research and development expenses, and the first to develop and introduce a technology typically bears the brunt of this expense.

2. Undeveloped supply and distribution channels
   When a firm introduces a new-to-the-world technology, often no appropriate suppliers or distributors exist. The firm may develop and produce its own suppliers and distribution services, or assist in the development of supplier and developer markets.

3. Immature enabling technologies and complements
   When firms develop technologies, they often rely on other producers of enabling technologies. These are component technologies that are necessary for the performance or desirability of a given innovation.
   Many products also require complementary goods to be useful or valuable. When new technologies are introduced, important complements may not be (fully) developed, thus hindering adoption of the innovation.

4. Uncertainty of customer requirements
   A first mover may face considerable uncertainty about what product features customers will ultimately desire and how much they will be willing to pay for them. Customers may have little idea of the value of the technology or the role it would play in their lives. First movers may find that their early product offerings must be revised as the market begins to reveal customer preferences.

Factors influencing optimal timing of entry

1. How certain are customer preferences?
   Customers may have difficulty understanding the technology and its role in their life. Both producers and customers may cage considerable ambiguity about the importance of various features of the technology.
   Not all pioneers face customer uncertainty, some innovations are developed in response to well-understood customer needs. Customer requirements may have been long known even if the method of meeting them was not.

2. How much improvement does the innovation provide over previous solutions?
   The degree to which the technology represents an improvement increases a firm’s likelihood of successful early entry. When a technology makes a dramatic improvement, it will more rapidly gain customer acceptance. As a consequence, customer expectations should become known sooner and adoptions should be more rapid.

3. Does the innovation require enabling technologies, and are these technologies sufficiently mature?
   A developer must identify which enabling technologies will affect the performance of the innovation and assess the degree to which those technologies are mature enough to deliver the desired performance. Mature enabling technologies allow earlier entry.

4. Do complementary goods influence the value of the innovation, and are they sufficiently available?
   Not all innovations require complementary goods, and many innovations can utilize existing complementary goods. If the innovation requires development of new complementary goods, and the firm is unable to develop these, successful early entry is unlikely.

5. How high is the threat of competitive entry?
   If there are significant entry barriers or few potential competitors with the resources and capabilities to enter the market, the firm may be able to wait while customer requirements and the technology evolve. If the threat of competitive entry is high, the firm may need to enter earlier to establish brand image, capture market share, and secure relationships with suppliers and distributors.

6. Is the industry likely to experience increasing returns to adoption?
   In industries that have increasing returns to adoption due to strong learning curve effects or network externalities, allowing competitors to get a head start in building an installed base is very risky. If a competitor’s offering builds a installed base, the cycle of self-reinforcing advantages could make it difficult for the firm to ever catch up.

7. Can the firm withstand early losses?
   First movers often need significant amounts of capital that either is available internally or can be accessed externally. Furthermore, the first mover must be able to withstand a significant period with little sales revenue from the product

8. Does the firm have resources to accelerate market acceptance?
   A firm with significant capital resources can invest these in accelerating market take-off. The firm can invest aggressively in market education, supplier and distributor development, an development of complementary goods and services. Each of these strategies can accelerate the early adoption of the innovation, giving the firm much greater discretion over entering early.

9. Is the firm’s reputation likely to reduce the uncertainty of customers, suppliers, and distributors?
   A firm’s reputation and credibility can also influence its optimal timing of entry. A firm’s reputation can send a strong signal about its likelihood of success with a new technology. Such firms are also more likely to attract suppliers and distributors.

Firms that have fast-cycle development processes have more options when it comes to timing. Not only does a fast-cycle developer have an advantage in introducing innovations earlier, but it also can be its own fast follower by quickly introducing refined versions of its own technology.

Chapter 6 defining the organization’s strategic direction

Assessing the firm’s current position

External analysis:

There are 2 important models to analyse the environment from a company. These are Porter’s model and the stakeholder analysis model.

Porter’s five-force model:

This model analyse the attractiveness from an industry and the changes of a company. This will be done on the basis of five forces. Central in this model is the degree of existing rivalry, the other four forces influence this force. The other four forces are: bargaining power of buyers, threat of substitutes, threat of potentials entrants and bargaining power of suppliers.

Below they will be one for one explained:

Degree of existing rivalry. This depends on:

• The number and relative size of competitors

• The degree to which competitors are differentiated from each other

• The height of exit barriers

Threat of potential entrants. Depends on:

• The degree to which the industry is likely to attract new entrants

• The height of entry barriers.

Bargaining power of suppliers. The degree to which the firm relies on one or a few suppliers will influence its ability to negotiate good terms. Depends on:

• Differentiation of supplies

• Switching costs

• Vertical integration

Bargaining power of buyers. Depends on:

• The degree to which a company depends on their buyers

• The degree of differentiation of their products

• Switching costs for buyers

• Possibility of vertical integration

Threat of substitutes. Substitutes are products or services that are not considered competitors, but fulfil a strategically equivalent role for the customer. Complements= products or services that enhance the usefulness or desirability of another product.

Stake holder analysis

1. Identifying all the parties that will be affected by the behaviour of the firm

2. Identifying how much power the parties have

Strategic stakeholder analysis= emphasizes the stakeholder management issues that are likely to impact the firm’s financial performance. Normative stakeholder analysis= emphasizes the stakeholder management issues the firm ought to attend to due their ethical or moral implications.

Internal analysis

Michael Porter's model of a value chain. The activities are divided in primary and support activities. Primary activities are:

• Inbound logistics

• Operations

• Outbound logistics

• Marketing

• Service

Support activities are:

• Procurement

• Technology development

• Human resource management

• Firm infrastructure

When these activities will be analysed their have to be looked at strengths and weaknesses of the activity. When this is done the company can decide which activities will be a source for sustain competitive advantage. Strengths have to be rare, valuable, durable and inimitable. Strengths are not inimitable when:

• Tacit resources (cannot be readily codified in written form)

• Socially complex (arise through the complex interaction of multiple people)

• Causally ambiguous (unclear how the resource give rise to value)

Identifying core competencies and capabilities

Core competency = refer to a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace.

Capabilities= distinguishes more elemental skills that might contribute to a competency.

Questions which determine the core competency of a company

1. Is it a significant source of competitive differentiation?

2. Does is transcend a single business or a range of businesses?

3. Is it hard for competitors to imitate?

Dynamic capabilities = a set of abilities that make a firm more agile and responsive to change.

Resource and capability gap= The gap between the current position of a company and the desired future position.

Chapter 8 collaboration strategies

Reasons to stay alone

1. Availability of capabilities:

Whether a firm chooses to partner on a project is largely determined by the degree to which it possesses all of the necessary capabilities in-house and the degree to which one or more potential partners have necessary capabilities. Also when a company can’t find a suitable partner it isn’t wisely to collaborate

2. Protecting proprietary technologies:

Companies avoid collaboration, because they have fear of giving up proprietary technologies. These technologies need some protection.

3. Controlling technology department and use

Sometimes firms choose not to collaborate because they desire to have complete control over their development processes and the use of any resulting new technologies.

4. Building and renewing capabilities

Sometimes companies choose conscious to stay alone, because they believe that development efforts are key to building and renewing their capabilities. This challenges the firm to develop new skills, resources, and market knowledge

Advantages of collaboration

1. Collaboration can enable a firm to obtain necessary skills or resources more quickly than developing them in-house

2. Obtaining some of the necessary capabilities or resources from a partner rather than building them in-house can help a firm reduce its asset commitment and enhance its flexibility

3. Collaboration with partners can be an important source of learning for the firm.

4. With collaboration firms can share the costs and the risk of the project.

5. Firms may also collaborate on a development project when such collaboration would facilitate the creation of a shared standard

Types of collaborative arrangements

Licensing= a contractual arrangement whereby one organization or individual (the licensee) obtains the rights to use the proprietary technology (or trade mark or copyright etc.) of another organization or individual (the licensor).

Strategic alliances

Firms may use strategic alliances to access a critical capability that is not possessed in-house or to more fully exploit their own capabilities by leveraging them in another firm’s development efforts.

Alliances can enhance a firm’s overall level of flexibility. However, alliance relationships lack the shared language, routines, and coordination that facilitate the transfer of knowledge. This is why alliances require serious commitment of resources.

It is useful to categorize a firm’s alliance strategy along two dimensions:

• Capability complementation = the degree to which alliances practice

• Capability transfer = Whether the firm manages each alliance individually or manages a collective network of alliances.

A GE-SNECMA alliance = Are firms that forge an individual alliance to combine complementary technologies or skills needed for a project.

B corning glass alliance = Are firms that use a network of alliances to combine complementary skills and resources.

C Thomson-JVC alliance = Are firms that use individual alliances to transfer capabilities between them.

D Aspla = Are firms that use a network of alliances to exchange capabilities and jointly develop new capabilities.

If managers build an alliance portfolio they should think carefully about competitive effects, complementing effects, and net network structures .

The opportunities and flexibilities that can be gained through using alliances can come at cost. The potential for opportunism and self-interest exists for all parties of an alliance due to limited levels of mutual commitment. This can lead to failed alliances, because neither of the parties meet the goals, nor delivering the operational or strategic benefits for which they were intended.

Joint ventures

Joint ventures are a particular type of strategic alliance that entails significant structure and commitment. But a joint venture distinguish from an alliance because a joint venture involves a significant equity investment from each partner and often results in establishment of a new separate entity. Joint ventures are usually specified in carefully constructed contractual arrangements.

Licensing

Licensing is a contractual arrangement whereby one organization or individual (the licensee) obtains the rights to use the proprietary technology (or trade mark or copyright etc.) of another organization or individual (the licensor). Licensing enables a firm to rapidly acquire a technology it does not possess.

For the licensor, licensing can enable the firm’s technology to penetrate a wider range of markets than it could on its own.

Licensing a technology from another firm is typically much less expensive for a licensee than developing a new technology in-house.

Licensing agreements typically impose many restrictions on the licensee, enabling the licensor to retain control over how the technology is used. Sometimes firms license their technologies to pre-empt their competitors from developing their own competing technologies. Thus licensing enables a firm to opt for a steady stream of royalties rather than gambling on the big gain, or big loss, of having its technology compete against other for market dominance.

Outsourcing

Firms that develop new technological innovations do not always possess the competencies, facilitates, or scale to perform all the value chain activities for the new innovation effectively or efficiently. Such firms might outsource activities to other firms.

Contract manufacturing = when a firm hires another firm (often specialized manufacturer) to manufacture its products.

Collective research organizations

Collective research organizations may take a number of forms, including trade associations, university-based centers, or private research corporations.

Choosing and monitoring partners

Partner selection should be done on two dimensions: resource fit and strategic

Resource fit = refers to the degree to which potential partners have resources that can be effectively integrated into a strategy that creates value.

Strategic fit = refers to the degree to which partners have compatible objects and can be achieved without harming the alliance or the partners.

Firms can also evaluate potential partners using many of the same tools used to evaluate the firm’s own position and strategic direction.

Partner monitoring and governance

There are three main types of governance organizations use to manage their collaborative relationships:

1. Alliance contracts. Legally binding contractual arrangements to ensure that partners:

• Are fully aware of their rights and obligations in the collaboration

• Have legal remedies available if a partner should violate the agreement

2. Equity ownership. When each partner contributes capital and owns a specified right to percentage of the proceeds from the alliance

3. Relational governance. Self-enforcing norms based on goodwill, trust, and reputation of the partners. These typically emerge over time through repeated experiences of working together.

Chapter 9: Protecting Innovation

The degree to which a firm can capture the rents from its innovation is termed appropriability. In general, the appropriability of an innovation is determined by how easily or quickly competitors can imitate the innovation.

If the knowledge base of an organization is tacit or socially complex, competitors will typically find it very difficult to duplicate.

Tacit knowledge is knowledge that cannot be readily codified or transferred in written form.

Socially complex knowledge arises from the interaction of multiple individual.

A patent is a property right protecting a process, machine, manufactured item or variety of plant. It protects an invention.

A trademark is an indicator used to distinguish the source of a good. It protects words or symbols.

A copyright is a property right protecting works of authorships. It protects an original artistic or literary work.

Patents are often categorized into different types:

1. Utility patent: granted to an inventor who creates or discovers a new and useful process, machine, manufactured items or combination of materials;

2. Design patent: granted to the inventor of an original and ornamental design for a manufactured item;

3. Plant patent: granted to an inventor who invents or discovers and asexually reproduces any distinct and new variety of plant.

An invention must pass three tests to be patentable:

1. It must be useful
   It must produce a desirable result, solve a problem, improve on or propose a new use for an existing development or show potential of doing so.

2. It must be novel
   It must not already be patented or described in public literature, or be in public use for more than a year.

3. It must not be obvious
   A person with experience or skill in particular art of the patent would not be expected to achieve the same invention with a normal amount of effort.

The Patent Cooperation Treaty (PCT) is a treaty that facilitates the application for a patent in multiple countries. Filing a single PCT application offers numerous advantages:

• It buys the inventor the option to apply to multiple nations later without committing the inventor to the expense of those multiple applications.

• It helps make the results of patent applications more uniform.

A trademark is a word, phrase, symbol, design, or other indicator that is used to distinguish the source of goods from one party from the goods of others.

A service mark is basically the same as a trademark, but distinguishes the provider of a service rather than a product.

Trademarks and service marks can be embodied in any indicator that can be perceived through one of the five senses.

The rights to a trademark or service mark are established in the legitimate use of the mark and do not require registration. However, registration provides several advantages:

• Registering provides public notice of the registrant’s claim of ownership over the mark;

• Marks must be registered before a suit can be brought in federal court against an infringement of the mark;

• Registration an be used to establish international rights over the trademark.

Unlike patents and copyrights, trademark protection can last as long as the trademark is in use, but the registration requires periodic renewal.

A copyright is a form of protection granted to works of authorship. 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.

Copyright protection is secured automatically when an eligible work is created and fixed in a copy or phonorecord for the first time. No publication or registration with the Copyright Office is necessary to establish this copyright. However, registering the copyright is advantageous in that it establishes a public record of the copyright claim and is required before filing an infringement suit in court.

No international copyright law automatically protects an author’s work throughout the world. However, most countries do offer copyright protection to both domestic and foreign works, and there are international copyright treaties for simplifying the process of securing such protection.

A trade secret is information that belongs to a business that is generally unknown to others. Trade secrets need not meet many of the stringent requirements of patent law, enabling a broader class of assets and activities to be protectable.

Information is typically considered to be a trade secret only if

1. It offers a distinctive advantage to the company in the form of economic rents, and

2. It remains valuable only as long as the information remains private.

For information to qualify as a trade secret, the information must meet the following criteria:

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

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

3. The holder must exercise reasonable measures to protect the secrecy.

In industries characterized by increasing returns, firms sometimes choose to liberally diffuse their technologies to increase their likelihood of rising to the position of dominant design.

Open source software is software whose code is made freely available to others for use, augmentation and resale.

Trade-offs

1. It relinquishes the opportunity to capture monopoly rents when and if the technology emerges as a dominant design;

2. Once control of a technology is relinquished, it can be very hard to regain;

3. Liberal diffusion of the technology can result in the fragmentation of the technology platform.

To resolve these trade-offs, firms often adopt a strategy of partial protection for their innovations, falling somewhere on the continuum between wholly proprietary systems and wholly open systems.

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

These systems are often not compatible with the products offered by other manufacturers. Because their operation is based on protected technology, other manufacturers are often unable to develop components that may interact with the proprietary system.

In wholly open systems the technology used in a product or process is not protected. It may be based on available standards or it may be new technology that is openly diffused to other producers. These systems may be freely accessed, augmented and distributed by anyone. Such technologies are usually quickly commoditized and provide little appropriability of rents to their developers.

Advantages of protection

• If a single firm is the primary beneficiary of its technology’s success, it has much greater incentive to invest in further developing the technology.

• A firm may be willing to lose money in the short term to secure the technology’s position as the standard, because once the technology has emerged as a standard, the payoff can be substantial and enduring.

• Protecting the technology also gives the developing firm architectural control over the technology.

Architectural control refers to the firm’s ability to determine the structure and operation of the technology, and its compatibility with other goods and services. It also refers to the firm’s ability to direct the future development path of the technology. It can be very valuable, especially for technologies in which compatibility with other goods and services is important.

Advantages of diffusion

• Open technologies may accrue more rapid adoptions.

• Open technologies can also benefit from the collective development efforts of parties external to the sponsoring firm.

• Technologies reaped the advantages of having a much larger pool of talent/resources

However, external development efforts typically lack the coordination of internal development. External developers may have very diverse objectives for the technology; rather than work together toward some unified vision of what the technology could achieve in the future, they might work in different, possibly even conflicting directions.

• Production capabilities, marketing capabilities and capital

  If the firm is unable to produce the technology at sufficient volume or quality levels, then protecting the technology so that the firm is its sole provider may significantly hinder its adoption.

Similarly, if complementary goods influence the value of the technology to users, the firm must

1. Be able to produce the complements in sufficient range and quantity

2. Sponsor their production by other firms, or

3. Encourage collective production of the complements through a more open technology strategy.

• Industry opposition against sole-source technology
  Sometimes other industry members are able to exert strong pressure against the adoption of a technology. The degree of this opposition needs to be considered when the firm formulates its technology strategy. If the industry is able to pose significant opposition, the firm may need to consider a more open strategy to improve the technology’s likelihood of being chosen as a dominant design.

• Resources for internal development
  If a firm does not have significant resources to invest in the technology’s functionality, it may have difficulty producing a technology that has an initial performance level, and rate of improvement, that the market finds attractive. It can be valuable to tap the external development efforts of other firms through utilizing a more open technology strategy.

• Control over fragmentation for technologies which standardisation and compatibility are important, maintaining the integrity of the core product is absolutely essential, and external development can put it at risk. The developer should retain some degree of control over the technology.

• Incentives for architectural control
  It becomes particularly valuable if a firm is a significant producer of complements to the technology in question. A firm with architectural control can typically design the technology to be compatible with its own complements and incompatible with those of competitors. By making the technology selectively compatible with some competitors and not others, the firm can exert great influence over the competitive field.

Chapter 10: Organizing for Innovation

The structure of an organization and the degree to which it uses formalized and standardized procedures and controls an significantly influence its likelihood of innovating, the effectiveness of its innovation projects, and the speeds of its new product development processes.

Advantages of large firms:

1. Capital markets are imperfect, and large firms are better able to obtain financing for R&D projects;

2. Firms with larger sales volumes over which to spread fixed costs of R&D would experience higher returns than firms with lower sales volumes;

3. Larger firms are more likely to have better developed complementary activities such as marketing or financial planning that enable them to be more effective innovators, and they are also likely to have greater global reach to obtain information or other resources;

4. Large firms are also in a better position to take on large or risky innovation projects than smaller firms;

5. Another advantage of size may arise in scale and learning effects.

Disadvantages of large firms:

1. As a firm grows, its R&D efficiency might decrease because of a loss of managerial control;

2. Large firms may also be less innovative because their size can make them less nimble and responsive to change (being bureaucratic);

3. High numbers of customers, large fixed asset bases, and a large base of existing customers or supplier contract can also be sources of inertia, making it difficult for the firm to change courses quickly;

Icarus paradox means that a firm’s prior success in the market can hinder its ability to respond to new technological generations.

Firms are disaggregated (unbundled) when something is separated into its constituent parts, a method of reducing size. Networks of smaller, often more specialized, autonomous division or independent firms. Led to terms as virtual organization, network organization, and modular organization.

The structural dimensions of a firms that are most likely to influence both propensity to innovate and effectiveness at innovation include:

• Formalization; The degree to which a firm utilizes rules, procedures, and written documentation to structure behaviour of individuals or groups within the organization. However, it can also make a firm rigid. If a firm codifies all of its activities with detailed procedures, it may stifle employee creativity.

• Standardization; The degree to which activities are performed in a uniform matter. It can run activities smoothly and yield predictable outcomes, but if can also stifle innovation. By minimizing variation, standardization can limit creativity and experimentation that leads to innovative ideas.

• Centralization; The degree to which decision making authority is kept at top levels of the firm, while decentralization is the degree to which decision making authority is pushed down to levels of the firm. Highly centralized firms may be better able to make a bold change in its overall direction because its tight command-and-control structure enables it to impose such change on lower levels of the firm in a decisive manner. Decentralized firms may be better able to respond to some types of technological/environmental change since not all decisions need to be passed up the hierarchy to top management.

Mechanistic structures are characterized by a high degree of formalization and standardization, causing operations to be almost automatic or mechanical. It is often associated with greater organizational efficiency, particularly in large volume production settings. By establishing detailed rules, procedures, and standards, top management can push decision making authority to lower levels of the firm while still ensuring that decisions are consistent with top management objectives.

Organic structures are characterized by a low degree of formalization and standardization. Employees may not have well defined job responsibilities and operations may be characterized by a high degree of variation. Much innovation arises from experimentation and improvisation, and organic structures are often though to be better for innovation despite their possible detriment of efficiency.

Most firms must simultaneously manage their existing product lines with efficiency, consistency and incremental innovation, while still encouraging the development of new product lines and responding to technological change through more radical innovation.

Ambidextrous organization refers to the ability of an organization to behave almost as two different kinds of companies at once. Different divisions of the firm may have different structures and control systems, enabling them to have different cultures and patterns of operations.

Skunk works are new product development teams that operate nearly autonomously form the parent organization, with considerable decentralization of authority and little bureaucracy. It permits the teams to explore new alternatives, unfettered by the demands of the rest of the organization.

If big firms can have internal structures with the incentives and behaviour of small firms, then much of the logic of the impact of firm size on technological innovation rates becomes moot.

Quasiformal structures in the form of teams, task forces and dotted line relationships (relationships that were not formally indicated on the organizational chart): more problem focused and could change faster than the rest of the company. They also provided a forum for interaction across divisions and thus played an important boundary spanning role.

One advantage of quasiformal structures is that they fostered interactions based on interests rather than on hierarchy. This can foster more employee motivation and cross fertilization of ideas.

Some of the downsides to quasiformal structures were that they required time to manage, and they could be hard to kill. Not formal, so who has authority to disband?

Another method firms use to strike a balance between efficiency and flexibility is to adopt standardized manufacturing platforms or components that can then be mixed and matched in a modular production system. This enables standardization advantages (such as efficiency and reliability) at the component level, while achieving variety and flexibility at the end product level.

Modularity refers to the degree to which a system’s components may be separated and recombined. Making products modular can exponentially increase the number of possible configurations achievable from a given set of inputs. The customer does not always perceive the modularity.

Modularity is achieved in product design through the specification of standard interfaces.

Modular products become more valuable when customers have heterogeneous demands and there are diverse options for meeting them. When the products are made more modular, it enables the entire production system to be more modular. The standard interfaces reduce the amount of coordination that must take place between the developers of different components, freeing them to pursue more flexible arrangements than the typical organizational hierarchy. (Referred to as loosely coupled organizational structures.)

Within loosely coupled organizational structures, development and production activities are not tightly integrated but rather achieve coordination through their adherence to shared objectives and common standards (a standard interface, which provides ‘embedded coordination’ among the development and production participants).

Advances in information technology have also enabled loosely coupled organizational structures to become more common: access and process more information at a lower cost, vastly increasing the firm’s options for development configurations.

Also, less need for integration frees firms to pursue more flexible R&D and production configurations. (more specialization to core competencies, outsourcing others and therefore better price to value ratio).

Disadvantages:

1. Many activities reap significant synergies to be integrated;

2. Activities that require more frequent exchange of complex or tacit knowledge are likely to need closer integration than can be offered;

3. An integrated firm also has mechanisms for resolving conflict that may be more effective or less expense than those available in the market.

Divisions that are accustomed to developing their own innovations may be reluctant to share them with others for fear of giving away their proprietary knowledge. They may also be reluctant to adopt other divisions’ innovations because of the belief that innovations that are not developed locally, will not suit their local market needs (= not-invented-here syndrome)

Much of the value creation potential of a multinational is the opportunity to leverage technological innovation (and other core competencies) into multiple markets.

Center-for-global strategy
When all innovation activities are conducted at a central hub and innovations are then diffused throughout the company. This enables management to:

1. Tightly coordinate all R&D activities (across both functions and projects);

2. Achieve greater specialization and economies of scale in R&D activities while avoiding duplication of activities in multiple divisions;

3. Develop and protect core competencies;

4. Ensure that innovations are standardized and implemented through the company.

Managers are likely to choose this approach when they have a strong desire to control the evolution of a technology, when they have strong concerns about the protection of proprietary technologies, when development activities require close coordination, or when there is a need to respond quickly to technological change and dispersed efforts are likely to create inefficiencies.

However, innovations developed centrally may not closely fit the needs of foreign markets and may also not be deployed quickly or effectively.

Local-for-local strategy
When each division or subsidiary of the firm conducts its own R&D activities, tailored for the needs of the market. Managers are likely to choose one when division are very autonomous and when markets are highly differentiated. However, can result in significant redundancy, divisions that suffer form a lack of scale in R&D activities, and there is a risk that valuable innovations will not be diffused across the firm.

Local leveraged strategy

When each division or subsidiary of the firm conducts its own R&D activities, but the firm attempts to leverage resulting innovations throughout the company. One way this strategy is employed is to assign an individual the role of international brand custodian.

Globally linked strategy

Innovation activities are decentralized, but also centrally coordinated for the global needs of the corporation. It entails creating a system of decentralized R&D divisions that are connected to each other. Each geographically division might be charged wit a different innovation task that serves the global company’s need. Takes advantage of the diversity of resources and knowledge in foreign markets, while still linking each division through well defined roles in the company’s overall R&D strategy. The multinational’s objective is to make centralized innovation activities more effective (that is, better able to serve the various local markets) while making decentralized innovation activities more efficient (that is, eliminating redundancies and exploiting synergies across divisions).

Chapter 11: Managing the New Product Development Process

For new product development to be successful, it must simultaneously achieve three sometimes conflicting goals:

1. Maximizing the product’s fit with customer requirements;

2. Minimizing the development cycle time;

3. Controlling development costs.

For a new product to be successful in the marketplace, it must offer more compelling features, greater quality, or more attractive pricing than competing products.

Reasons to fail:

1. The firm may not have a clear sense of which features customers value the most, resulting in the firm’s overinvesting in some features at the expense of features the customer values more;

2. Firms may also overestimate the customer’s willingness to pay for particular features, leading them to produce feature packed products that are too expensive to gain significant market penetration;

3. Difficulty in resolving heterogeneity in customer demands (conflicting features).

Bringing a product to the market early can help a firm build brand loyalty, pre-emptively capture scarce assets, and build customer switching costs. Also a complementary goods advantage.

Development cycle time is the time elapsed from project initiation to product launch, usually measured in months or years.

• Many development costs are directly related to time.

• A company that is slow to market with a particular generation of technology is unlikely to be able to fully amortize the fixed costs of development before that generation becomes obsolete.

• A company with a short DCT can quickly revise or upgrade its offering as design flaws are revealed or technology advances. A firm with a short development cycle can take advantage of both first mover and second mover advantages.

A sequential process has no early warning system to indicate that planned features are not possible to manufacture. Consequently, cycle time can lengthen as the project iterates back and forth between the product design and process design states.

Partly parallel development process is a development process in which some (or all) of the development activities at least partly overlap. That is, if activity A would precede activity B, activity B might commence before activity A is completed. In order to shorten the development process and avoidance of time consuming and costly iterations between stages of the development cycle.

Product design is initiated before concept development is complete, and process design is begun long before product design is finalized, enabling much closer coordination between the different stages and minimizing the chance that R&D will design products that are difficult or costly to manufacture. However, not really applicable when variations in the product design require significant changes to the process design (rework).

Involving customers

The screening session should focus on the new product’s advantage and superiority to the customer, and the growth of its target market. The customer is often the one most able to identify the maximum performance capabilities and minimum service requirements of a new product.

Beta version is an early working prototype of a product released to users for testing and feedback. Beta versions also enable a firm to signal the market users about its product features before the product reaches the commercial production stage.

Lead users are customers who face the same general needs of the marketplace but are likely to experience them months or years earlier than the rest of the market and stand to benefit disproportionally from solutions to those needs.

Involving suppliers

By tapping into the knowledge base of suppliers, a firm expands its information resources. Suppliers may be actual members of the product team or consulted as an alliance partner. Product improvement or increased development efficiency. Additionally, by coordinating with suppliers, managers can help to ensure that inputs arrive on time and that necessary changes can be made quickly to minimize development time.

Crowdsourcing is a distributed problem-solving model whereby a design problem or production task is presented to a group of people who voluntarily contribute their ideas and effort in exchange for compensation, intrinsic rewards, or a combination thereof.

Tools for improving the new product development process

Stage-gate processes

With go/kill decision points, gates are established in the development process where managers must evaluate whether or not to kill the project or allow it to proceed (in order to avoid the negative consequences of escalating commitment).

At each stage, a cross-functional team of people (led by a project team leader) undertakes parallel activities designed to drive down the risk of a development project. Vital technical, market, and financial information are needed to make the decision to go or kill.

1. Stage 1: The team does a quick investigation and conceptualization of the project.

2. Stage 2: The team builds a business case that includes a defined product, its business justification, and a detailed plan of action for the next stages.

3. Stage 3: The team begins the actual design and development of the product, including mapping out the manufacturing process, the market launch, and operating plans. The team also defines the test plans utilized in the next stage.

4. Stage 4: The team conducts the verification and validation process for the proposed new product, and its marketing and production.

5. Stage 5: The product is ready for launch, and full commercial production and selling commence.

Gates act as the funnels that cull mediocre projects. Each gate has three components:

1. Deliverables: these are the results of the previous stage and are the inputs for the gate review.

2. Criteria: these are the questions or metrics used to make the go/kill decision 3.

3. Outputs: these are the results of the gate review process and may include a decision such as go, kill, hold, or recycle; outputs should also include an action plan for the dates and the deliverables of the next gate).

Quality Function Development (QFD) – The House of Quality
A process for improving the communication and coordination among engineering, marketing, and manufacturing personnel. It achieves this by taking managers through a problem-solving process in a very structured fashion.

The House of Quality is a matrix that maps customer requirements against product attributes. (See page 245/246).
The strength of the House of Quality is that it provides a common language and framework within which the members of a project team may interact.

• It makes relationship between product attributes and customer requirements clear;

• It focuses on design trade-offs;

• It highlights the competitive shortcomings of the company’s existing products;

• It helps identify what steps needs to be taken to improve them.

Design for manufacturing
Another method of facilitating integration between engineering and manufacturing, and of bringing issues of manufacturability into the design process as early as possible, is the use of DFM methods. The use of such design rules is typically to reduce costs and boost product quality by ensuring that product designs are easy to manufacture. The easier products are to manufacture, the fewer the assembly steps required, the higher labour productivity will be, resulting in lower unit costs.

Failure Modes and Effects Analysis (FMEA)

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.

1. Potential failure modes are identified.

2. Potential failure modes are evaluated on three criteria of the risk they pose: severity, likelihood of occurrence, and inability of controls to detect it, and then a composite risk priority number is created for each failure mode by multiplying the scores together.

3. Prioritizing development efforts to target potential failure modes that pose the most composite risk.

Computer Aided Design/Computer Aided Manufacturing

The use of computers to build and test product designs. It is the implementation of machine controlled processes in manufacturing. CAM is faster and more flexible than traditional manufacturing. Computer can automate the change between different product variations and allow for more variety an customization in the manufacturing process.

Three dimensional printing (additive manufacturing) is a method whereby a design developed in a computer aided design program is printed in three dimensions by laying down thin strips of material until the model is complete.

Tools for measuring new product development performance

Measures of the success of the new product development process helps management to:

1. Identify which projects met their goals and why;

2. Benchmark the organization’s performance compared to that of competitors or to the organization’s own prior performance.

3. Improve resource allocation and employee compensation.

4. Refine future innovation strategies.

NPD process metrics

For gauging the effectiveness and efficiency of the development process.

1. 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?

2. What percentage of development projects undertaken within the past five years met all or most of the deadlines set for the project?

3. What percentage of development projects undertaken within the past five years stayed within the budget?

4. What percentage of development projects undertaken within the past five years resulted in a completed product?

Overall innovation performance

Give an overall view of the bang for the buck the organization is achieving with its new product development process:

1. What is the firm’s return on innovation? (This measure assesses the ration of the firm’s total profits from new products to its total expenditures, including R&D costs, the costs of retooling and staffing production facilities, and initial commercialization and marketing costs).

2. What percentage of projects achieve their sales goals?

3. What percentage of revenues are generated by products developed within the past five years?

4. What is the firm’s ratio of successful projects to its total project portfolio?

Chapter 12: Managing New Product Development Teams

New product development teams may range from a few members to hundreds of members.

Bigger, however, is not always better:

• Large teams can create more administrative costs and communication problems, leading to costly delays;

• The larger the team, the harder it can be to foster a shared sense of identity among team members;

• As the size of the team increases, the potential for social loafing also increases.

Social loafing occurs when an individual in a team does not exert the expected amount of effort and relies instead on the work of other team members.

A lack of cross-functional communication can lead to a poor fit between product attributes and customer requirements. Firms can rectify this problem by building cross-functional product development teams.

Cross-functional teams include members drawn from more than one functional area, such as engineering, manufacturing, or marketing.

A greater variety of specialists provides a broader knowledge base and increases the cross-fertilization of ideas. Having specialists from different areas also allows the project to draw on a wider mix of information sources in the environment through scanning activities.

Teams that incorporate cultural diversity should show better problem solving by incorporating multiple viewpoints, and teams composed of members who are diverse in terms of gender or age will also ensure a variety of viewpoints are considered and external resources are tapped.

Studies have demonstrated that demographic diversity in teams can increase innovative outcomes and overall performance.

Diversity of team members, however, can also raise coordination and communication costs. Individuals tend to interact more frequently and intensively with other individuals whom they perceive as being similar to them on one or more dimensions (= homophily).

When individuals perceive others as being very different from them, they may be less willing to interact frequently or intensively, and it may be more difficult for them to develop a shared understanding.

The communication and coordination differences between heterogeneous or homogeneous teams diminish if the groups maintain long-term contact.

In functional teams, members remain in their functional departments and report to their regular functional manager. However, they may meet periodically to discuss the project. Such teams are usually temporary and individuals may spend less than 10 percent of their time working on team-related activities.
Functional teams are more likely to be appropriate for derivative projects that primarily affect only a single function of the firm.

In lightweight teams, members still reside in their functional departments, and functional supervisors retain authority over evaluation and rewards. However, lightweight teams have a project manager and dedicated liaison personnel who facilitate communication and coordination among functions. Lightweight teams offer a small improvement in team coordination and likelihood of success over functional teams. Such a team structure might be appropriate for derivative projects where high levels of coordination and communication are not required.

In heavyweight teams, members are removed from their functional departments so that they may be collocated with the project manager. The core group of team members is often dedicated full-time to the project. The team has strong cross-functional coordination and communication, and team members are significantly committed to the development project. This type of team structure offers a significant improvement in communication and coordination over functional teams, and it is typically considered appropriate for platform projects.

In autonomous teams, members are removed from their functional departments and dedicated full-time (and often permanently) to the development team. These teams often do not conform to the operating procedures of the rest of the organization. Instead, they are permitted to create their own policies, procedures, and reward systems. Autonomous teams are also held fully accountable for the success of the project. In many ways, these teams act like independent divisions of the firm. Autonomous teams are typically considered to be appropriate for breakthrough projects and some major platform projects.

The team leader is responsible for directing the firm’s activities, maintaining the team’s alignment with project foals, and serving as a communicator between the team and senior management.

Heavyweight and autonomous teams require senior managers with significant experience and organizational influence.

Project managers in heavyweight and autonomous teams must have high status within the organization, act as concept champion for the team within the organization, be good at conflict resolution, have multilingual skills and be able to exert influence upon the engineering, manufacturing, and marketing functions.

The project charter encapsulates the project’s mission and articulates exact and measurable goals for the project. It might include a vision statement for the project and a background statement for why this project is important for the organization.

Once the charter is established, core team members and senior managers must negotiate a contract book. This defines in detail the basic plan to achieve the goal laid out in the project charter. Typically, the contract book will estimate the resources required, the development time schedule, and the results that will be achieved.

More important, however, the contract book is an important mechanism for establishing team commitment to the project and a sense of ownership over the project. Team members who sign the contract book typically feel a greater sense of duty to work toward the project’s goals.

Virtual teams are teams in which members may be a great distance from each other, but are still able to collaborate intensively via advanced information technologies such as videoconferencing, groupware, and e-mail or Internet chat programs.

By meeting virtually, individuals can collaborate without incurring travel costs or disruption to their lives. This is especially valuable for a company whose operations are highly global. Virtual teams must often rely on communication channels that are much less rich than face-to-face contact and face significant hurdles in establishing norms and dialects.

Team members must be able to work independently and have a strong work ethic. It is important to choose individuals who tend to seek interactions.

Chapter 13: Crafting a Deployment Strategy

A large part of the value of an innovation is determined by the degree to which people can understand it, access it, and integrate it within their lives. Thus, deployment is a core part of the innovation process.

Deployment strategies can influence the receptivity of the customers, distributors, and complementary good providers. Effective deployment strategies can reduce uncertainty about the product, lower resistance to switching from competing or substitute products, and accelerate adoption.

Five elements of the deployment process:

1. Launch timing;

2. Licensing and compatibility;

3. Pricing;

4. Distribution;

5. Marketing.

Launch timing
Cannibalization occurs when a firm’s sales of one product (or at one location) diminish its sales of another of its products (or at another of its locations).

In industries driven by technological innovation, delaying the introduction of a next generation product can enable competitors to achieve a significant technological gap.

Sometimes it is good to embrace cannibalization, and thus keeping the customers.

Licensing and compatibility
In deploying a technological innovation, often a firm must decide how compatible to make its technology with that provided by other or with previous generations of its own technology. (making compatible with products of competitor’s complementary goods).

Backward compatibility occurs when products of a technological generation can work with products of a previous generation (software). Some firms use a particular powerful strategy that combines continuous innovation with backward integration. A firm that both innovates to prevent a competitor from creating a technological gap and utilizes backward compatibility so that its new platform or models are compatible with previous generations of complementary goods can leverage the existing value yielded by a large range of complementary goods to its new platforms.

Pricing
Pricing simultaneously influences the product’s positioning in the marketplace, its rate of adoption, and the firm’s cash flow. First, determine pricing strategy:

1. Survival: Cover variable costs and some fixed costs. (short-run strategy)

2. Maximize current profits: First estimate costs and demand and then set the price to maximize cash flow or rate of return on investment. Emphasizes current performance.

3. Maximum market skimming/maximum market share: For new technological innovations.

4. Penetration pricing: when the price of a good is set very low to maximize the good’s market share. High volume is important.

Firms in industries characterized by increasing returns (strong learning curve effects and/or network externalities) will often use the objective of maximizing market share and a penetration strategy. In such industries, there is a strong pressure for the industry to adopt a single dominant design.

Sometimes firms price below cost because the losses are expected to recouped through profits on complementary goods.

Freemium is a pricing model where a base product is offered for free, but a premium is charged for additional features or service.

Distribution
Manufacturer’s representatives are independent agents that promote and sell the product lines of one or a few manufacturers. They are often used when direct selling is appropriate but the manufacturer does not have sufficiently large direct sales force to reach all appropriate market segments.

Wholesalers are companies that buy manufacturer’s products in bulk, and then resell them (often in smaller and more diverse bundles) to other supply chain members such as retailers. Retailers are companies that sell goods to the public.

Selling directly gives the firm more control over the selling process, pricing and service. It also can enable the firm to capture more information about the customer and can facilitate the customization of products. However, selling directly is many situation impractically or overly expensive.

Intermediaries also provide a number of other services such as transporting goods, carrying inventory, providing selling services, and handling transactions with customers. Also location convenience. Original equipment manufacturer (OEM)/value added reseller is a company that buys products (or components of products) from other manufacturers and assembles them or customizes them into a product that is then sold under the OEMs own name. Disintermediation occurs when the number of intermediaries in a supply channel is reduced.

In order to determine whether to use intermediaries and what type, the firm should answer the following questions:

1. How does the new product fit with the distribution requirements of the firm’s existing product lines (can existing channels be used?);

2. How numerous and dispersed are customers, and how much product education or service will customers require? Is prepurchase trial necessary or desirable? Is installation or customization required?

3. How are competing products or substitutes sold?

Strategies or accelerating distribution:

• Alliances with distributors: Encourage them to promote the technological innovation. By providing the distributor a stake in the success of the new technology, the firm may be able to persuade the distributor to carry and promote the new technology aggressively.

• Bundling relationships: Bundling with a product which is already in wide use. The new product can then piggyback on the success of the other product that already has a large installed base.

• Contracts and sponsorship: Contractual arrangement with distributors, complementary goods providers, and even large end users to ensure that the technology is used in exchange for price discounts, special service contracts, advertising assistance, or other inducements.

• Guarantees and consignment: If there is considerable market uncertainty about the new product, the firm can encourage distributors to carry the product by offering them guarantees (such as promising to take back unsold stock) or agreeing to sell the product on consignment.

Marketing
Major marketing methods

• Advertising: To build public awareness. Achieve a balance between entertaining and memorable versus providing a significant quantity of informative content. The media used are generally chosen based on their match to the target audience, the richness of information or sensory detail they can convey, their reach, and their cost per exposure.

• Promotions: To stimulate purchase or trial, usually temporary selling tactics that might include:

  • Offering samples or free trial;

  • Offering cash rebates after purchase;

  • Including an additional product (a premium) with purchase;

  • Offering incentives for repeat purchase;

  • Offering sales bonuses to distributor or retailer sales representatives;

  • Using cross promotions between two or more noncompeting products to increase pulling power;

  • Using point of purchase displays to demonstrate the product’s features.

• Publicity and public relations: Viral marketing is sending (seeding) information directly to targeted individuals in effort to stimulate word of mouth advertising. Individuals are typically chosen on the basis of their position or role in particular social networks (hubs). Generate goodwill and awareness.