Innovation Innovation ManagementManagement

An effective innovation strategy An effective innovation strategy answers three key questions:answers three key questions:

How will we Create value?

How will weDeliver value?

How will weCapture value?

Step 1: Creating ValueStep 1: Creating Value

How will the technology evolve?How will the technology evolve? How will the market change? How will the market change? How will consumer preferences and behavior change? How will consumer preferences and behavior change? Where will innovations come from?Where will innovations come from? What is our value proposition?What is our value proposition?

Step 2: Capturing ValueStep 2: Capturing Value

How should we design the business model? How should we design the business model? Where should we compete in the value chain? Where should we compete in the value chain? How should we compete if standards are important? How should we compete if standards are important?

Step 3: Delivering ValueStep 3: Delivering Value

How do we manage the core business and growth How do we manage the core business and growth simultaneously? simultaneously?

How do we use our strategy to drive real resource How do we use our strategy to drive real resource allocation? allocation?

What organizational structure, processes, measurements, What organizational structure, processes, measurements, and incentive mechanisms do we use?and incentive mechanisms do we use?

Question:Question:

Can you think of an industry that Can you think of an industry that has gone through drastic changes in has gone through drastic changes in the past several decades in terms of the past several decades in terms of technology, business models, and technology, business models, and major players?major players?

ExamplesExamples

Personal computersPersonal computers RetailRetail PhotographyPhotography Video gamesVideo games

A harder question:A harder question:

Can you think of an industry that Can you think of an industry that has has notnot gone through drastic gone through drastic changes in the past several changes in the past several decades in terms of technology, decades in terms of technology, business models, and major business models, and major players?players?

ExamplesExamples

Soft drinksSoft drinks Ready-to-eat breakfast cerealsReady-to-eat breakfast cereals Rough diamondsRough diamonds Business education?Business education?

The Traditional Model of Industry Life CycleThe Traditional Model of Industry Life Cycle

Time

Sa

les

volu

me

Fermentation Shakeout Maturity Decline

An Alternate Model of Industry Life CycleAn Alternate Model of Industry Life Cycle

Time

Sa

les

volu

me

Emergence Convergence Coexistence Dominance

Established Industry

Emerging Industry

The Industry Life Cycle as an S curveThe Industry Life Cycle as an S curve

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Transitions often challenge existing Transitions often challenge existing organizations severelyorganizations severely

Cumulate share of sales of photolithographic alignment equipment, 1962-1986, by generation Contact Proximity Scanner S&R (1) S&R (2)

Cobilt 44 <1

Kasper 17 8 7

Canon 67 21 9

P-Elmer 78 10 <1

GCA 55 12

Nikon 70

Total 61 75 99+ 81 82+

But they also create major opportunityBut they also create major opportunity

Corning glassCorning glass– Cookware to optical fiberCookware to optical fiber

IBMIBM– Mainframes to PCs to ServicesMainframes to PCs to Services

NintendoNintendo– Playing cards to video gamesPlaying cards to video games

WhereWhere do innovations come from? do innovations come from?

Sources of innovation Sources of innovation according to Peter F. Druckeraccording to Peter F. Drucker

Industry and market changesIndustry and market changes Demographic changesDemographic changes New knowledgeNew knowledge Changes in perceptionChanges in perception Unexpected occurrencesUnexpected occurrences IncongruitiesIncongruities Process needsProcess needs

The second of three key questions...The second of three key questions...

How will we Create value?

How will weDeliver value?

How will weCapture value?

Or: Or: What Determines the Innovator’s Share?What Determines the Innovator’s Share?

Customers

Innovator

Suppliers

Imitators,followers

Sources of UniquenessSources of Uniqueness

Intellectual property protectionIntellectual property protection– PatentsPatents

• Finite lengthFinite length• The right to prohibit “producing”The right to prohibit “producing”

– CopyrightsCopyrights• The right to prohibit “copying”The right to prohibit “copying”

SecrecySecrecy– Trade secrets & non-compete clausesTrade secrets & non-compete clauses

– ““Tacit” knowledgeTacit” knowledge

– Causal ambiguityCausal ambiguity SpeedSpeed

Uniqueness is powerful but often Uniqueness is powerful but often difficult to maintaindifficult to maintain

Legal mechanisms can be costly to create, and then Legal mechanisms can be costly to create, and then even more costly to enforce: and sometimes they even more costly to enforce: and sometimes they require public disclosurerequire public disclosure

Secrecy may be difficult to maintainSecrecy may be difficult to maintain Speed is hard work, and sometimes imitableSpeed is hard work, and sometimes imitable

What are Complementary Assets?What are Complementary Assets?

Those assets that allow a firm to make money, even if Those assets that allow a firm to make money, even if the innovation is not unique.the innovation is not unique.

The answer to the question:The answer to the question:– If our innovations were instantly available to our If our innovations were instantly available to our

competitors, would we still make money? Why?competitors, would we still make money? Why?

In the best case, complementary assets In the best case, complementary assets should be should be tightly heldtightly held

Complementary assets that are tightly held are not Complementary assets that are tightly held are not easily available to entrants or to most competitorseasily available to entrants or to most competitors

Types of Complementary AssetsTypes of Complementary Assets

Things you can doThings you can do– Manufacturing capabilitiesManufacturing capabilities– Sales and service expertiseSales and service expertise– Strategic alliancesStrategic alliances

Things you ownThings you own– Brand nameBrand name– Distribution channelsDistribution channels– Customer relationshipsCustomer relationships

COMPETENCIES

RESOURCES

Exercise:Exercise:

Complementary assets are:

Available Tightly held

Position:Soft drinks Windows OfficeBook publishingTravel agenciesYour industry/firm

Easy to maintain

Hard tomaintain

Uniqueness is:

AB

DC

Uniqueness & Complementary Assets Uniqueness & Complementary Assets over the Life Cycle:over the Life Cycle:

Ferment

Takeoff

Maturity

UniquenessComplementary

Assets

Managing discontinuities means Managing discontinuities means managing complementary assets:managing complementary assets:

Performance

Time

Ferment

Takeoff

Maturity

Discontinuity

Which of my complementary assets is critical?

Complementary Assets/Uniqueness speak to Complementary Assets/Uniqueness speak to RivalryRivalry, the , the Threat of EntryThreat of Entry & & SubstitutesSubstitutes..

EntrantsEntrants

SubstitutesSubstitutes

SuppliersSuppliers BuyersBuyersRivalsRivals

Porter reminds us to think about the Porter reminds us to think about the structure of the value chain:structure of the value chain:

EntrantsEntrants

SubstitutesSubstitutes

SuppliersSuppliers BuyersBuyersRivalsRivals

The last of three key questions...The last of three key questions...

How will we Create value?

How will weDeliver value?

How will weCapture value?

Discontinuous InnovationDiscontinuous Innovationas a strategic problemas a strategic problem

Genuine uncertaintyGenuine uncertainty– It’s not going to happen – certainly not nowIt’s not going to happen – certainly not now

CannibalizationCannibalization– It will compete with our current productsIt will compete with our current products

Shifts in the customer baseShifts in the customer base– Our current customers don’t want itOur current customers don’t want it

Margin erosionMargin erosion– It will make less moneyIt will make less money

New S curves may be hard New S curves may be hard to spot in advanceto spot in advance

The new opportunity The new opportunity doesn’t meet our current doesn’t meet our current

customer’s needscustomer’s needs

The new opportunity The new opportunity doesn’t offer nearly the doesn’t offer nearly the

same margins and profit same margins and profit opportunityopportunity

Discontinuous Innovation Discontinuous Innovation as an as an

Organizational ProblemOrganizational Problem

My experience has been that creating My experience has been that creating a compelling new technology is so a compelling new technology is so much harder than you think it will be much harder than you think it will be that you're almost dead when you get that you're almost dead when you get to the other shore. to the other shore.

--Steve Jobs--Steve Jobs

Discontinuous InnovationDiscontinuous Innovationas an organizational problemas an organizational problem

Time horizons & IncentivesTime horizons & Incentives Fear of (individual) cannibalizationFear of (individual) cannibalization OverloadOverload Competency TrapsCompetency Traps

Case discussion: Kodak (A)Case discussion: Kodak (A)

1. Evaluate Kodak’s strategy in traditional photography. 1. Evaluate Kodak’s strategy in traditional photography. Why has the company been so successful throughout Why has the company been so successful throughout the history of the industry?the history of the industry?

2. Compare traditional photography to digital imaging. 2. Compare traditional photography to digital imaging. What are the main structural differences? Will digital What are the main structural differences? Will digital imaging replace traditional photography? How have imaging replace traditional photography? How have value creation and value appropriation changed in value creation and value appropriation changed in digital imaging relative to traditional photography?digital imaging relative to traditional photography?

3. How would you assess Fisher’s attempt to transform 3. How would you assess Fisher’s attempt to transform Kodak? Kodak?

4. What is Kodak’s current position in digital imaging? 4. What is Kodak’s current position in digital imaging? Evaluate Kodak’s strategies from the mid-1980s Evaluate Kodak’s strategies from the mid-1980s onward. onward.