INNOVATION STRATEGY

Innovation Strategy

•Limitations of the rational planning approach to strategy

•Positions - national systems & competitors

•Paths - competencies & opportunities

•Processes - specialization versus integration

•Identifying & sustaining capabilities

•Key Concepts

•Firm-specific knowledge is an essential feature of competitive success.

• Corporate strategy should therefore include an innovation strategy, the purpose of which is deliberately to accumulate and exploit such firm-specific knowledge.

• An innovation strategy must cope with:

•an external environment that is complex and ever-changing, with considerable uncertainties about present and future developments in technology and other dimensions of the business environment;

•internal structures and procedures that must continuously balance potentially conflicting requirements - (i) to identify and develop specialised knowledge within technological fields, business functions and product divisions, (ii) to exploit this knowledge through integration across technological fields, business functions and product divisions.

•Innovation Strategy

Four factors have a major influence on the ability of a firm to develop and create value through innovation:

1.The national system of innovation in which the firm is embedded, and which in part defines its range of choices in dealing with opportunities and threats.

2.Its power and market position within the international value chain, which in part defines the innovation-based opportunities and threats that it faces.

•Innovation Strategy

•The capability and processes of the firm, including research, design, development, production, marketing and distribution.

•Its ability to identify and exploit external sources of innovation, especially international networks.

•Rationalist Vs Incrementalist

•The “rationalist” approach to strategy: - appraise ⇒ determine ⇒act - is difficult and dangerous to apply in large and complex organizations embedded in a world of rapid and unpredictable technological change. With the benefit of hindsight, predictions and plans often turn out to be badly wrong.

•This is because, in a complex and ever-changing world, managers inevitably have only an imperfect view of both the strengths and weaknesses of their own organization, and of the opportunities and threats emerging in the surrounding environment.

•The “incremental” approach to strategy recognizes these limits, and employs a step-by -step, “trial and error” method, that allows for changing objectives and plans. It aims to learn from analysis and experience how to cope more effectively with complexity and change.

•Given change and uncertainty, managers should:

–Explore the implications of a range of possible future trends;

–Ensure broad participation, informal channels of communication, debate and scepticism;

–Keep assumptions and conclusions clear and simple;

–Expect to modify plans later.

When trying to learn from the experience of others, managers should

recognize that there are no simple recipes, and ask the following questions:

•is the information accurate?

•have the correct factors causing success (or failure) been identified?

•will the identified causes produce the same effects elsewhere?

•what are the limits and dangers of the proposed course of action?

Michael Porter’s pioneering framework for competitive analysis shows that innovation plays a central role in (i) rivalry amongst competing firms, (ii) the potential for new competitive entrants into the industry; (iii) the relative power of suppliers and their customers, and (iv) generating substitute products. But Porter’s “rationalist” framework both underestimates the power of technological change to upset established market and competitive conditions, and overestimates the influence that managers actually have over corporate choice of technology strategy.

Competitor Analysis

Example: Five 'forces' analysis of competitive environment:

•rivalry amongst existing competitors

•threat of new entrants

•threat of substitute products & services

•power of suppliers

•power of customers

•Competitor Analysis

But innovation affects all five forces:

•rivalry - basis of competition, industry boundaries

•new entrants - raise or lower entry barriers

•substitutes- relative price/performance, new products

•customers & suppliers - switching costs, relative power, vertical integration

•Innovation Strategy

Concept of Blue Ocean strategies, compared to traditional strategic thinking, or Red Ocean strategies:

•Create uncontested market space, rather than compete in existing market space

•Make the competition irrelevant, rather than beat competitors

•Create &capture new demand, rather than fight for existing markets and customers

•Break the traditional value/cost trade-off: Align the whole system of a company's activities in pursuit of both differentiation and low cost

Capabilities Approach

Key factors in innovation strategy:

A.position of the firm - technologies, processes & products compared to competitors

B.paths open to the firm, given its competencies & emerging opportunities

C.processes to integrate & exploit competencies within & between firms

A. Positions – key issues

The key issues are:

•R & D and other statistics shows that the home country of even global firms has a strong influence on the volume and composition of their innovative activities.

•The home influences can be grouped into three categories:

–competencies (workforce education, research), economic inducement

–mechanisms (local demand and input prices, competitive rivalry) and

–institutions (methods of funding, controlling and managing business firms).

•However, management still has ample influence over specific firms’ innovation strategies, and firms can benefit from foreign systems of innovation through a variety of market mechanisms.

•Firms can obtain information to position themselves compared to their competitors through an increasing range of sources (including so-called ‘benchmarking’).

The key issues are:

•However, information about what competitors are doing must be clearly distinguished from the competence to keep up with competitors, which requires a much greater corporate investment in R & D and reverse engineering activities.

•Firms maintain their innovative leads over their competitors through a variety of often complementary mechanisms, the relative importance of which varies from industry to industry.

•Small firms are particularly dependent on their local environments for research and production skills, and local suppliers and customers for new technology.

•However, management still has ample influence over specific firms’ innovation strategies, and firms can benefit from foreign systems of innovation through a variety of market mechanisms.

A. Positions - national factors

National factors influencing competencies:

•input prices

•natural resources

•local buyers tastes

•public & private investments

A. Positions - innovation clusters

Internationalization or globalization?

•Markets    > 70%

•Production    > 25 %

•Innovation   < 12 %

A. Positions – Emerging Economies

Firms in emerging economies may pursue different routes to upgrading through innovation: 

•Process upgrading – incremental process improvements to adapt to local inputs, reduce costs or to improve quality.

•Product upgrading – through adaptation, differentiation, design and product development.

•Capability upgrading – improving the range of functions undertaken, or changing the mix of functions, for example, production versus development or marketing.

•Inter-sectoral upgrading -  moving to different sectors, for example, to those with higher value-added.

A. Positions - competition

Assessing competencies of competitors:

•How do they compare in terms of size & composition?

•How efficiently are they exploited?

•How effectively do we learn from their knowledge & experience?

•How do we differentiate, develop & maintain our innovation advantages?

B. Paths – Key Issues

•Marked differences amongst sectors in technological opportunities and market demands are central to corporate choices about technological trajectories, firm-specific competencies and innovation strategies.

• We identify five broad technological trajectories (Table 4.7) that firms can follow, each of which has distinct implications for market positioning, technological paths, & organizational processes.

• We also identify three key technologies - electronics, materials and biotechnology - where rapid advances are leading to major shifts in technological trajectories, and where it is increasingly important to distinguish the ‘micro-electronics revolution’ (making and using electronic chips) from the ‘information revolution’ (making and using software).

B. Paths – Key Issues

•Gary Hamel have shown that the capacity to open up new product markets requires distinctive core competencies, and methods of corporate organization and evaluation that explicitly recognized the importance of these competencies.

•Whilst their approach is useful in industries with rapid rates of technical progress, it overestimates the importance of corporate visions, & underestimates the importance of competence & experimentation over an ever wider range of technologies.

•Like small large firms, small firms have distinctive technological trajectories. Greatest attention has been given to “superstars” (who grow into large firms through innovations), and “new technology based firms” (whose founders emerge mainly from the laboratories of large institutions), whilst most small firms depend heavily on their suppliers and customers for their innovative opportunities.

Technological trajectories

It is a major challenge to develop a framework for integrating changing technology into strategic analysis, that deals effectively with corporate and sectoral diversity. The challenges are due to:

•Size of innovation firm

•Type of product made

•Objectives of innovation

•Sources of innovation

•Locus of own innovation

B. Paths - time horizons

Level, time & focus of innovation strategy:

•Business unit - 2-3 years - improving cost & quality, new product & service development

•Group/division - 5 years - positioning & exploiting synergies across business units

•Corporate - 10 years - environmental scanning & competence-building

B. Paths & Processes - capabilities & innovation

B. Paths - capabilities & innovation

Innovation & strategic positioning:

•pioneering technology, processes, products

•accumulated tacit knowledge

•complexity

•complementary assets

•standards

•patents

B. Paths - capabilities & innovation

Sources of sustainable advantage:

•positional e.g. past investments, reputation

•business systems e.g. process capability

•organizational e.g. culture

•regulatory e.g. patents, trademarks

B. Paths - capabilities & innovation

Characteristics of competencies:

•firm-specific, idiosyncratic

•significant benefit or value to customers

•take time to develop

•sustainable as difficult to imitate or acquire

•unique configurations of resources

•strong tacit content & socially complex

C. Processes - Knowledge

Key organizational issue is how to balance conflicting requirements:

•to identify & develop specialized knowledge within technologies & markets

•to exploit this knowledge by integrating across technologies & markets

C. Processes - Innovation

Process of strategy formation:

•given uncertainty, explore implication of a range of possible futures

•encourage the use of multiple sources of information, debate & scepticism

•ensure broad participation & informal channels of communication

•plan to change strategy in the light of new & unexpected evidence

C. Processes - Resource Allocation

Resource allocation under uncertainty:

•encourage experimentation, risk-taking & incrementalism

•apply different criteria for different types of project

•use simple, transparent criteria

•make rules for termination explicit

•identify & plan for uncertainties

C. Innovation Process

Generic phases of the innovation process:

•Searching & scanning the internal & external environments

•Filtering & selecting potential opportunities

•acquiring the technical, financial & market resources

•implementing development & commercialisation

•reviewing & learning from experience

C. Innovation Process

Factors affecting the precise process:

•Sector - competitors, structure & constraints

•Markets - opportunities & rate of change

•Technology - maturity & costs

•Resources - firm & networks

•Location - regulation, policy & systems of innovation

Decision-making under Uncertainty

So, Innovation: Response or strategy?

•“. . . chance favours only the prepared mind”, L. Pasteur, 1854

•“...the more I practice, the luckier I get…”, Gary Player (champion golfer)

Innovation Strategy

Advantages of being first to  market:

•reputation as a pioneer

•capture market share

•early learning curve benefits

•definition of standards

•establish entry barriers eg patents

•dominate supply & distribution chains

•earn ‘monopoly’ profits

Innovation Strategy

Disadvantages of being first to market:

•pioneering costs, educating buyers, regulatory approval

•demand uncertainty

•changing buyer needs

•low-cost imitation

•followers ‘leapfrog’ technology

Appropriating the benefits     from innovation

Depends on:

•the firm’s capacity to translate its technological advantage into commercially viable products or process

•the firm’s capacity to defend its advantage against imitators.

•Secrecy

•Accumulated tacit knowledge

•Lead times and after-sales service

•The learning curve

•Complementary assets

•Product complexity

•Standards

•Pioneering radical new products

•Strength of patent protection

Developing firm-specific competencies

1.The sustainable competitive advantage of firms resides not in their products but in their core competencies. The real sources of advantage are to be found in management’s ability to consolidate corporate-wide technologies and production skills into competencies that empower individual businesses to adopt quickly to changing opportunities.

2.Core competencies feed into more than one core product, which in turn feed into more than one business unit.

3.The importance of associated organizational competencies is also recognized. Core competencies is communication, involvement, and a deep commitment to working across organizational boundaries.

Developing firm-specific competencies

4.Core competencies requires focus: Few companies are likely to build world leadership in more than 5-6 fundamental competencies.

5.As Table 4.9 shows, the notion of core competencies suggests that large and multidivisional firms should be viewed not only as a collection of strategic business units (SBUs), but also as bundles of competencies that do not necessarily fit in one business unit.

6.The identification and development of a firm’s core competencies depend on its strategic architecture.

Assessment of the core competencies

The greatest strength of the discussed core

competencies is that it places the cummulative

development of firm-specific technological

competencies at the centre of the agenda of

corporate strategy. But this has limitations and

leaves three questions unanswered

•Differing potentials for technology-based diversification?

•Multi—technology firms/

•Core rigidities?

Globalization of innovation

Types

•Specialization-based: the firm develops global centres of excellence in different fields, which are responsible globally for the development of a specific technology or product or process capability.

•Integration-based (or network structure): different units around the world each contribute to the development of technology projects.

Enabling strategy making

Developing Framework - key routines

•Strategic analysis – what, realistically, could we do?

•Strategic choice – what are we going to do (and in choosing to commit our resources to that, what will we leave out?)

•Strategic monitoring – over time reviewing to check is this still what we want to do?

Conclusions: 

Innovation Strategy

Conclusions and implications from observation and research:

•The elements national systems of innovation interact to influence the degree and direction of innovation in a country.

•The uneven global distribution of innovation demands global search strategies for the development & commercialization of innovation.

•The position of a firm in an international value chain will constrain the opportunities for innovation and entrepreneurship.

Conclusions: 

Innovation Strategy

Conclusions and implications from observation and research:

•National context influences, but does not determine the rate and direction of innovation at the firm level.

•Dynamic capabilities and firm-level processes contribute to the development and growth of firms.

Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd (2006) From Knowledge Management to Strategic Competence (Imperial College Press, 2nd edition); J. Tidd, & J. Bessant (2009) Managing Innovation: Integrating technological, market & organizational change (Wiley, 4th edition); S. Isaksen & J. Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation and Growth (Wiley).