9 Corporate Strategy and Vertical Integration
faahaad2004
SEU_MGT510_Module09_PPT_Ch09.ppt*
CONTEMPORARY STRATEGY ANALYSIS
tenth edition
Robert M. Grant
John Wiley & Sons Ltd., 2019
Chapter 9
Technology-based Industries and the Management of Innovation
- Competitive Advantage in Technology-intensive Industries
- Strategies to Exploit Innovation: How and When to Enter
- Standards, Platforms, and Network Externalities
- Platform-based Markets
- Implementing Technology Strategies: Internal and External Sources of Innovation
- Implementing Technology Strategies: Creating the Conditions for Innovation
Technology-based Industries and the Management of Innovation
Copyright © 2019 John Wiley & Sons, Inc.
OUTLINE
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1
Basic Knowledge
Invention
Innovation
Diffusion
IMITATION
ADOPTION
Supply side
Demand side
The Development of Technology: from Knowledge Generation to Diffusion
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
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3
Compressing the Technology Cycle: Less
Lag between Invention and Commercialization
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
| BASIC KNOWLEDGE | FIRST PATENTS | PRODUCT LAUNCH | IMITATION | |
| Jet Engines | 17th century Newtonian physics | 1930 | 1957 | 1959 |
| Xerography | Late 19th, early 20th centuries | 1940 | 1958 | 1974 |
| Fuzzy logic controllers | 1960’s | 1981 | 1987 | 1988 |
| Automobile satellite navigation | Late 1950s | Early 1960s | 1998 | 2002 |
| MP3 players | Early 1990s | 1994 | 1997 | 1999 |
| Instant messaging | Late 1980s | 2002 | 2008 | 2009 |
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4
Customers
Suppliers
Imitators and other “followers”
Innovator
Appropriation of Value: How are the
Benefits from Innovation Distributed?
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
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8
Innovator
Innovator
Innovator
Followers
Followers
Followers
Suppliers
Suppliers
Suppliers
Complementors
Complementors
Customers
Customers
Customers
ASPARTAME
PERSONAL COMPUTERS
SMARTPHONES
Appropriating Value: Who Gets
the Benefits from Innovation?
© 2016 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
- Legal protection
- Complementary resources
- Imitability of the technology
- Lead time
Value of the innovation to users
Innovator’s ability to appropriate the value of the innovation
The Profitability of Innovation
6
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Profits
from
innovation
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7
- Patents — exclusive rights to a new product, process, substance or design.
- Copyrights — exclusive rights to artistic, dramatic,
and musical works.
- Trademarks — exclusive rights to words, symbols
or other marks to distinguish goods
and services; trademarks are
registered with the Patent Office.
- Trade Secrets — protection of chemical formulae,
recipes, and industrial processes.
Also: employment contracts may restrict employees’ freedom to
transfer technology and know how.
Legal Protection of Intellectual Property
© 2019 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
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9
Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized.
Manufacturing
Distribution
Service
Complementary
technologies
Other
Other
Marketing
Finance
Core
technological know-how
Complementary Resources
© 20106 Robert M. Grant, www.contemporarystrategyanalysis.com
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
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U.S. Managers’ Perception of the Effectiveness of Different Mechanisms for Protecting Innovation
Copyright © 2019 John Wiley & Sons, Inc.
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
| Secrecy (%) | Patents (%) | Lead-time (%) | Sales/service (%) | Manufacturing (%) | |
| Product innovations | |||||
| Food | 59 | 18 | 53 | 40 | 51 |
| Drugs | 54 | 50 | 50 | 33 | 49 |
| Electronic components | 34 | 21 | 46 | 50 | 51 |
| Telecom equipment | 47 | 26 | 66 | 42 | 41 |
| Medical equipment | 51 | 55 | 58 | 52 | 49 |
| All industries | 51 | 35 | 53 | 43 | 46 |
| Process innovations | |||||
| Food | 56 | 16 | 42 | 30 | 47 |
| Drugs | 68 | 36 | 36 | 25 | 44 |
| Electronic components | 47 | 15 | 43 | 42 | 56 |
| Telecom equipment | 35 | 15 | 43 | 34 | 41 |
| Medical equipment | 49 | 34 | 45 | 32 | 50 |
| All industries | 51 | 23 | 38 | 31 | 43 |
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Why Do Firms Patent?
(Responses by 674 US manufacturers)
COMPETITIVE ADVANTAGE IN TECHNOLOGY-INTENSIVE INDUSTRIES
Copyright © 2019 John Wiley & Sons, Inc.
Chart1
| To prevent copying | To prevent copying |
| For licensing revenue | For licensing revenue |
| To prevent lawsuits | To prevent lawsuits |
| To block others | To block others |
| For use in negotiations | For use in negotiations |
| To enhance reputation | To enhance reputation |
| To measure performance | To measure performance |
Sheet1
| Product innovations | Process innovations | |
| To prevent copying | 95 | 77 |
| For licensing revenue | 28 | 23 |
| To prevent lawsuits | 59 | 47 |
| To block others | 82 | 64 |
| For use in negotiations | 47 | 43 |
| To enhance reputation | 48 | 34 |
| To measure performance | 6 | 5 |
Risk & Return
Competing Resources
Examples
Licensing
Outsourcing certain functions
Strategic Alliance
Joint Venture
Internal Commercial-ization
Alternative Strategies for Exploiting Innovation
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
| Low risk, but limited returns (unless patent position very strong | Reduces investment, but means dependence on suppliers & partners | Benefits of flexibility and speed, but coordination risks | Reduces investment and risk, but partner disagreement likely | Biggest risks and benefits. Allows complete control |
| Few | Allows outside resources & capabilities To be accessed | Permits pooling of the resources/capabilities of more than one firm | Substantial resource requirements | |
| ARM licenses its micro-processor designs to several semi-conductor | Apple oursources manufacture to Foxconn | Apple and Nike collaborate to develop intelligent footwear | Tesla and Panasonic jointly build gigafactory for lithium ion batteries | Page and Brin establish Google Inc. to commercialize their search algorith |
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The Timing of Innovation: To Leader or to Follow?
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
| Product | Innovator | Follower | The winner |
| Jet airliner | De Havilland (Comet) | Boeing (707) | Follower |
| Float glass | Pilkington | Corning | Leader |
| X-ray scanner | EMI | General Electric | Follower |
| Office PC | Xerox | IBM | Follower |
| VCRs | Ampex/Sony | Matsushita | Follower |
| Instant camera | Polaroid | Kodak | Leader |
| Microwave oven | Raytheon | Samsung | Follower |
| Video games player | Atari | Nintendo/Sony | Followers |
| Disposable diaper | Procter & Gamble | Kimberley-Clark | Leader |
| Compact disk (CD) | Sony/Philips | Matsushita, Pioneer | Leader |
| Web browser | Netscape | Microsoft | Follower |
| Web search engine | Lycos | Follower | |
| MP3 music players | Diamond Multimedia | Apple (iPod) | Follower |
| Operating systems for mobile devices | Symbian, Palm OS | Apple, Google | Followers |
| Cryptocurrencies | Bitcoin | Etherium, Ripple | Leader |
| Flash memory | Toshiba | Samsung, Intel | Followers |
| E-book reader | Sony (Digital Reader) | Amazon (Kindle) | Follower |
| Social networking | SixDegrees.com | Follower |
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Is there potential to establish an industry standard ?
To Lead or to Follow? Some Key Considerations
Copyright © 2019 John Wiley & Sons, Inc.
Can the innovation be protected by intellectual property rights or lead-time advantages?
If so, advantages in leadership
If so, advantages in leadership
- Followers can avoid investing in complementary resources by using better-established industry infrastructure
- Firms possessing complementary resources have the luxury of waiting
How important are complementary resources?
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
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Sources of
uncertainty
Technological
uncertainty
Difficult to predict the evolution of
Technology or which standards and
designs will emerge is dominant
Customer adoption of innovations
notoriously difficult to predict
Market
uncertainty
Strategies for
managing risk
Cooperate with lead users
—early identification of customer needs
—assistance in new product development
Flexibility
—keep options open
—adapt quickly to new information
—learn from mistakes
Limit risk exposure
—avoid capital commitments
—outsource
—use alliances to access other firms’
resources & capabilities
—keep debt low
Uncertainty & Risk Management in Tech-based Industries
Copyright © 2019 John Wiley & Sons, Inc.
STRATEGIES TO EXPLOIT INNOVATION: HOW AND WHEN TO ENTER
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- Emergence of a dominant designs
- Model T in autos
- IBM 360 in mainframes
- Douglas DC3 in passenger aircraft
- Emergence of technical standards
- Emerge in industries where there are network extremities
- Entrenchment of dominant designs and technical standards
- Learning effects: incremental improvement of the dominant design
- Switching costs
- Need for coordinated action by multiple players
The Emergence of Standards
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
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- Users linked within a network e.g.:
- Telephone systems—only value of telephone is connection to other users
- On-line auction—value of auction depends on number of buyers and sellers participating
[Also, social identification—the desire to conform encourages imitative behavior]
- Availability of complementary products e.g.:
- Most smartphone apps written for iPhone and Android—Blackberry and Windows dying for lack of apps
- In autos, more available spares and repairs for a Ford Focus or Honda Accord than a Kia, Proton, or Lamborghini
- Economizing on switching costs e.g.:
- Office software (Microsoft Office vs. Lotus SmartSuite)
Sources of Network Externalities
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
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Companies that Own Technical Standards
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
| Company | Product category | Standard |
| Microsoft | PC operating systems | Windows |
| Intel | PC microprocessors | x86 series |
| Sony/Philips | Compact disks | CD-ROM format |
| ARM (Holdings) | Microprocessors for mobile devices | ARM architecture |
| Oracle Corporation | Programming language for web apps | Java |
| Rockwell and 3Com | 56K modems | V90 |
| Qualcomm | Digital cellular wireless communication | CDMA |
| Adobe Systems | Common file format for creating and viewing documents | Acrobat Portable Document Format |
| Adobe Systems | Web page animation | Adobe Flash |
| Adobe Systems | Page description language for document printing | Post Script |
| Bosch | Antilock braking systems | ABS and TCS (Traction Control System) |
| IMAX Corporation | Motion picture filming/projection system | IMAX |
| Apple | Music downloading system | iTunes/iPod |
| Sony | High definition DVD | Blu-ray |
| Nissan, Toyota, PSA | Electric vehicle charging | CHAdeMO |
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Maximize
value
appropriation
Maximize market acceptance
IBM-PC
Apple
Mac
Betamax
VHS
Competing for Standards:
Value Appropriation vs. Market Acceptance
Copyright © 2019 John Wiley & Sons, Inc.
Video Cassette Recorders
Personal Computers
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
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Determine the potential for standards emergence—analyze network externalities
Assemble allies—enlist partners (customers, complementors, competitors) to build a bandwagon
Pre-empt the market—build user base quickly: enter early, attract key customers, adopt penetration pricing
Manage expectations—use launch and pre-launch publicity and promotion to convince the market that you will be the winner
How can the winner sustaining the standard?
- Don’t fall behind on technology
- Ensure backward compatibility
- Meet threat of disruptive technology by offering customers a migration path
- Reinforce standard with other resources—e.g. brand
What if you’re a loser? (a) ensure compatibility (b) go for niche
Fighting Standards Wars
Copyright © 2019 John Wiley & Sons, Inc.
STANDARDS, PLATFORMS, AND NETWORK EXTERNALITIES
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The Conditions for Creativity:
“Operating” and “Innovating” Organizations
Copyright © 2019 John Wiley & Sons, Inc.
IMPLEMENTING TECHNOLOGY STRATEGIES:INTERNAL AND EXTERNAL
SOURCES OF INNOVATION
| Operating organization | Innovating organization | |
| Structure | Bureaucratic: Specialization and division of labor; hierarchical control. Defined organizational boundaries. | Flat organization with weak hierarchical control. Task-oriented project teams. Fuzzy organizational boundaries. |
| Processes | Emphasis on eliminating variation (e.g. six-sigma). Top-down control. Tight financial controls. | Emphasis on enhancing variation. Loose controls to foster idea generation. Flexible strategic planning and financial control. |
| Reward systems | Financial compensation, promotion up the hierarchy, power, and status symbols. | Autonomy, recognition, equity participation in new ventures |
| People | Recruitment and selection based on need for specific skills: functional and staff specialists, general managers, and operatives. | Seeking idea generators that combine required technical knowledge with creative personality traits. Managers as sponsors and orchestrators. |
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- Cross-functional new product development teams—highly effective in integrating with specialized functional knowledge
- Product champions—provide the direction and motivation needed to link invention with commercialization, drive integration, and counteract organizational inertia
- Buying innovation—if start-ups are best at initiating innovation and established companies are rich in complementary resources—innovation most effective where the latter acquire the former
- Open innovation—the sharing of ideas and technical know-how among firms
- Corporate incubators—specialized business development units within established firms
Organizational Initiatives to Stimulate Innovation
Copyright © 2019 John Wiley & Sons, Inc.
IMPLEMENTING TECHNOLOGY STRATEGIES:INTERNAL AND EXTERNAL
SOURCES OF INNOVATION
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Innovation Modes
IMPLEMENTING TECHNOLOGY STRATEGIES: ORGANIZING FOR INNOVATION
Copyright © 2019 John Wiley & Sons, Inc.
| Requires new business model | DISRUPTIVE e.g. Google’s Android is an open-source operating system, but draws upon Google’s expertise in sofgtware development | ARCHITECTURAL e.g. Kodak’s entry into digital imaging required new capabilities and a different business model |
| Leverages current business model | ROUTINE e.g. Intel’s new microprocessors deploy its existing design and fabrication cappabiklities and require no change in Intel’s business model | RADICAL e.g. The major pharmaceutical firms’ entry into biotechnology required new genetic capabilities, but no change in their existing business models |
| Uses existing technical capabilities | Requires new technical capabilities |
