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In early 1970s, Rasna pioneered the Indian non-carbonated soft drink concentrate market, using a do-it-yourself model (to drink it, you had to mix the concentrate with sugar and water). At 50 paise (1 cent) a glass, Rasna was extremely affordable for the middle-class households. It was sold in small and easily portable packs, facilitating easy inroads into the small towns and cities, yielding an edge over the ready-made squashes and syrups that came in fragile glass bottles with a high-end positioning. Rasna gained a 95% share of the Indian non-carbonated soft drink concentrate market. Over the decade of 1990s, Rasna’s growth stalled, as the competitors offered fruit drinks in tetrapacks, whose market tripled to Rs. 6 billion ($ 1.2 billion) by 2000. Rasna’s attempt to launch an aerated fruit drink Oranjolt failed, because of its short shelf life and the need for keeping it refrigerated 24 hours—most retailers in India switch off their refrigerators at night to save electric costs (Pande, 2002).

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�� Business Policy and Strategic Management: Concepts and Applications

The opening case illustrates challenges of innovation in an emerging market. In the emerging market context, cost of labor tends to be quite low, so manufacturing gives only a limited competitive advantage. Similarly, only a few firms can afford to invest in building brands through lavish advertising. Therefore, more entrepreneurial and creative strategies are needed to be successful. Small portable packages with high shelf life can generate significant logistical agility, and allow the firms to offset the disadvantages of simple manufacturing and marketing methods.

In this chapter, we discuss a framework for strategic management of innovation and technologies—a key driver of the competitive advantage of firms and of the economic leadership of nations. Technology refers to both the process as well as the investment that enables a firm to transform inputs into value-added outputs. Innovation allows a firm to develop as well as apply technology for useful commercial ends. According to Schumpeter, one of the earliest scholars to recognize the value of entrepreneurship, innovation includes new combinations of productive resources, such as (1) Introduction of a new product or service, (2) Introduction of a new method of production, (3) Opening of a new market, (4) Conquest of a new source of supply, and (5) New organization of any industry (Schumpeter, 1934).

Strategic management of technology is complex because major firm-level innovations are generally inter-related with the broad cycles, waves, and networks of worldwide innovations. For instance, the first industrial revolution between 1785 and 1845 was led by innovations in the use of water for power, textiles, and iron. Growth during 1845 and 1900 was based on developments in steam, rail, and steel, and the use of electricity and chemicals underlay the third wave between 1900 and 1950. In the Post War era, auto and electronics were the growth drivers. More recently, innovations in fiber optics, digital networks, software, and web have driven value addition. Thus, for successful innovations, firms need to be aware of the broader national and international technological developments. Further, with liberalization and global competition, product life times have shortened, and it is increasingly difficult to differentiate among products. New products are becoming obsolete within 1–3 years, as opposed to the pre-globalization days when the product development cycle was 5–10 years in most industries.

Strategy for managing innovations and technologies is founded on five kinds of analyses:

(1) Platform analysis: how to create value using functional inputs and servicing criteria?

(2) Channel analysis: how to capture value using external and internal modes of entry?

(3) Sequencing analysis: how to develop value over time and space?

(4) Perpetuation analysis: how to avoid erosion of value on technology standards and other intellectual properties?

(5) Championing analysis: how to nurture entrepreneurial leadership through a culture of discovery and a prudent accounting system?

As shown in Figure 16.1, the five themes are inter-related and inter-linked. At the outset, a firm must identify the platform for value creation, and the channel for capturing value from innovation and technology. The strategic initiatives need to be properly sequenced, both over time as well as global landscape. The firm should be vigilant to the potential for the erosion of the value generated, by strategically managing technology standards and other intellectual properties. Innovation and technology management cannot be left just to chance, but should receive a focus, strategic priority, and championing for spearheading the whole organization and its network of partners.

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The five types of analyses are elaborated below.

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At the outset, a company must define a ‘technological platform’—i.e., a locus of initiatives—for the innovation and technology management activities. The technological platform comprises of two elements: functional, and servicing.

The functional platform refers to the activities in the value chain, such as R&D (Research and Development), purchasing, operations, and marketing. The servicing platform refers to the criteria for the assessment of the functional performance in terms of objectives such as productivity, cost, quality, variety, and agility.

Depending on the size and strategic intent of the organization, technological platforms may be differentiated in terms of product categories, market segments, geographical segments, and/ or core technologies. For instance, in the new product categories, innovation may be led by Research and Development (R&D) function; on the other hand, in the mature product categories, improvement in technologies may be driven more by the cost saving efforts of the vendors in the Supply Chain Management function.

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The traditional approach to managing functional platform is ‘sequential’, where the locus of innovation systematically moves from one functional activity to another in a linear sequence. Two major types of sequences are typically found: demand pull, and technology push.

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A more contemporary approach calls for ‘concurrent’ design teams, where walls between various functional areas are removed. Cross-functional development teams are established for assessing customer needs and technological options. The firms may involve their critical suppliers, multi-functional experts, and core customers as part of the ‘value-chain’ teams during the product development process. Value chain teams help in integrating not just customer needs and product design, but also vendor and process capabilities. They search the entire value chain for identifying ways to cut costs to reach the target price that the customer can afford, and to add more value to the product. The workings of the concurrent cross-functional teams may be illustrated using Figure 16.3.

Toyota Motors is a good real-life example of a firm using the concurrent approach.

Toyota Motors encourages the vendors to send key technical personnel as resident engineers to its factories. Resident vendor engineers are able to suggest improvements in the design and manufacturing specifications, based on their understanding of the vendor capabilities, and are able to communicate Toyota needs directly to the design and manufacturing people of the vendor. Consequently, the vendor does not need a sales department, and can develop and deliver parts that really add value for Toyota.

In the ‘demand pull’ sequence, product concept moves from the customers to marketing personnel, who translate customer requirements into performance specifications that the new product is expected to meet. The design engineers develop design specifications using known technologies, which are then used by the manufacturing experts to create production specifications based on the available resources and capabilities.

Alternatively, in the ‘technology push’ sequence, new technological breakthroughs drive the design specifications, which are translated into production specifications, and then into performance specifications that the customers must accept.

The companies focused on the ‘demand pull’ spend a lot of time and resources in conducting market research and advertising, and are common in the consumer goods sector. The companies focused on the ‘technology push’ rely on a formal, usually centralized, R&D lab, spend a lot of resources on R&D, and are common in the technology-intensive sectors. In either case, there typically exists some sort of a wall between various functional areas, with little communication and interaction, resulting in high costs and high risks of failure. For instance, technology-driven design is often too complex to produce, given the skills of the workers and the sophistication of the machinery. Therefore, the sequential approach is also referred to as ‘over the wall’ method, as shown in Figure 16.2.

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For effective innovations, firms need to go beyond simply putting together teams of different functional experts. Each functional group has its own perspective on the new product development process. R&D experts like to develop and apply the most complex technology for product design—which adds to the costs. In contrast, marketing experts prefer a lot of functionality for meeting different needs of their customers, some who may not be able to afford high costs. Therefore, it is important for the firms to also establish a servicing platform—the key objectives that provide coherence and integration to the efforts of the different functional groups.

Servicing platforms may be defined in terms of either single criteria or multiple criteria. The conventional approach is to select a clear emphasis for the business strategy, such as low cost, differentiation, or niche focus; the servicing platform then resolves into a single criteria. Thus, simplicity and standardization may be the servicing platform for the low cost strategy; popularity and variety for the differentiation strategy; and novelty and speed for the niche focus strategy.

However, with the rise in global competition, customers are demanding multiple perfor- mance goals from the companies. New approaches have emerged, that allow realizing multiple criteria such as cost-effectiveness, time responsiveness, as well as variety at the same time. These approaches are built around the concepts of Design for Manufacturing (DFM), and mass customization.

DFM takes into account the ease and economy of production while designing the product. It entails an in-depth appreciation of the resources and capabilities of the firm and the suppliers, so as to drastically cut ‘time to market’—i.e., time from the product idea conception to commercialization. DFM relies on the use of core platform technologies and standards for various parts and service modules. These modules are used as ‘black box’ (i.e., without change) in a wide

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variety of products, each using a different combination of modules. The cost of improving parts, or of developing core platform technologies, is spread over a successive stream of products, and need not be recovered from the product being developed just now. Thus, using standards makes technology improvement in resources more attractive, and also allows faster development of new products and of successive waves of new products, adding variety in functionality without extra cost. DFM approach is flexibly used in many service sectors, such as software. For instance, Microsoft uses a common Windows Operating System for developing its various application software, such as Word and Excel.

Mass customization refers to the capability to offer highly customized products and services to different customers depending on their needs and demands. It is an extension of DFM in that cost-effective, timely, and flexible mass customization strategy relies on ‘postponing’ the tasks of differentiating a product for a specific customer until the latest possible point in the value chain. Dell Computers uses mass customization to develop a standard computer, which can be customized on demand from the individual customers using a modular design. In modular design, the customers may select among different options of hard drive, audio-video cards, monitor, memory, and drives based on their preferences, and these can then be assembled just-in-time for each customer. As a result, the benefits of standardization and scale economies are combined with the benefits of responsiveness and service. Consider, for instance, how the leading paint companies operate:

Paint companies around the world use mass customization strategy to develop a generic paint and a variety of color pigments. The retail stores use a chromatograph to analyze a customer’s paint sample and determine the paint-and-pigment mixture that will match it. Such an approach substantially reduces the cost of inventories for the companies and for the stores, since the same generic paint inventory can be used with several color pigments. The customers can also get a better deal on purchasing larger volumes of generic paint, and then use different low-cost color pigments for getting different colors.

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In a competitive market, the innovation strategy requires firms to integrate different functional competencies, and to attain excellence on multiple servicing objectives. Appropriate organi- zational design is needed to manage these twin challenges. Japanese firms manage these challenges using ‘heavy-weight’ product champions (Clark and Fujimoto, 1991). The ‘heavy- weight’ product champion is a person who oversees the entire process from conception until commercialization. The champion ensures timely and effective integration of various functional members, and allows the different functional departments to work in an overlapping fashion. For instance, the manufacturing may work with the design, as soon as the idea moves from conception phase to prototype phase. The overlapping structure avoids gaps in communication. An example of the approach used in India is given below:

In 2001, Hindustan Lever Ltd (HLL) adopted a category structure, with each category comprising of a set of innovation and activation teams. The innovation team oversees product development and brand planning, while the activation team implements the marketing plan and ensures consumer connectivity. As a result, there has been a rapid growth in cost-effective, responsive, and innovative extensions of its major brand platforms, such as Fair & Lovely (Lakshman, 2002).

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Once a technological platform is defined, the firm needs to determine a channel strategy for the development of innovation. Channel strategy refers to selection of a mode of entry for originating and diffusing the innovation. The mode of entry may entail internal development, or external opportunities tapped through incubators, spin-offs, franchising, sub-contracting, licensing, strategic minority stakes, joint ventures, outright acquisitions, or non-equity technological, operations, and marketing alliances.

A combination of the entry modes is also possible. The firm may develop a technology internally, and then commercialize it through external modes. Alternatively, it may use an external mode to tap an outside innovation, and then commercialize it through internal development. More sophisticated business models can allow the firms to multiply the value captured from innovations. Cisco’s unique business model is an example.

Cisco Systems of the US is notable for its synthesis of outright purchase and acquisitions of new technological innovations, with strategic alliances for manufacturing technology. Cisco selects and acquires companies that hold rights to attractive technological innovations, and then manages them by outsourcing manufacturing. This business model is combined with a self- service solution, where easy-to-navigate online environment becomes the primary point of customer contact. Using its friendly and comprehensive self-service model, the customers may specify their own schedule for manufacturing, and can even receive multi-vendor solutions. Half of the products are then delivered directly by the vendors to the customers, drastically cutting down the channel costs. At the height of the New Economy boom in 2000, Cisco Systems had the highest stock market capitalization in the US.

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Several modes of entry for tapping external opportunities to capture the value of innovation may be used, including incubator, spin-off, franchising, sub-contracting, licensing, strategic minority stakes, joint ventures, outright acquisitions, or non-equity technological, operations, and marketing alliances. A brief explanation of these modes of entry is in Table 16.1.

TABLE 16.1 Major external modes of entry

1. Incubator A facility that assists businesses to overcome the difficulties associated with start-up and growth, using its network of contacts and management support. Example: Computer Associates of USA has a ‘software incubator’ in India to encourage development of software products by local companies.

2. Spin-off The sale of a part of a firm to new shareholders, or to an outside firm. Example: spin-off of the e-business initiative, Reflect.com, by Procter & Gamble for the consumer-oriented beauty products.

3. Franchising Granting of the right to use a firm’s name, reputation, and business skills at a particular place to outsiders who are contractually bound to abide by rules as to how they do business. Example: McDonald’s franchises, all with a similar look and feel, but not necessarily owned by the McDonald’s.

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4. Sub-contracting Assigning or subletting a contract or any part of a contract by a firm. Example: When Ford develops a new car, it subcontracts some of the part designs to its major suppliers.

5. Licensing Transfer of the rights to use a technology to another firm. Example: Several companies have licensed the Sun Microsystem’s JAVA platform.

6. Strategic minority stake Acquiring a non-controlling stake in another firm with a view to acquire new knowledge. Example: In 2002, the United Breweries, the number two beer company in India, offered a non-controlling 26% equity stake to the global brewery company, Scottish & Newcastle.

7. Joint venture A business relationship formed for the purpose of carrying out usually a specific short-term or continuing project. Example: Maruti Motors, the leading car maker in India, began as a joint venture between Suzuki Motors of Japan and the Government of India.

8. Outright acquisition Outright purchase of another firm or a part of the firm. Example: Coca Cola company acquired Parle in India, gaining control of innovative brands such as Thums Up and Limca, which had a 60% share of the Indian soft drink market in the 1990s.

9. Non-equity alliances Cooperative partnership and collaborative arrangements, such as for co-development of technology, or for assistance in manufacturing and/or marketing. Example: Several of India’s software firms have non-equity alliances with the US clients.

Successful innovation and technology management requires the firms to use these diverse modes of entry in an inter-related manner. The concepts of real options and technology gate- keeping are relevant towards this end.

The real options framework (Kogut and Kulatilaka, 1994) suggests that the firms face significant risks and uncertainties while making investments into new technology and innovation areas. They can limit the costs of failure by first making less costly strategic investments. For instance, they may acquire a strategic minority stake in one or more of other firms, which would be a springboard for learning about and gaining lead in a new technology or growth area. If any of these is successful, then they can exercise the option of making further investments ahead of the rivals.

The ‘technology gate-keeping’ (Single and Spurgeon, 1996) involves a systematic monitoring of the specific emerging technologies having high potential, and to leverage them for further development. The leading firms often appoint Chief Technology Officers with a mandate for such gate-keeping. Microsoft’s purchase of Web TV for $ 425 million, and of Hotmail for $ 400 million in 1990s resulted from such gate-keeping. Many Japanese and Korean companies, such as Matsushita and Samsung, pursue a strategy of licensing technologies from around the world, and then develop, fuse, and commercialize them on their own.

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Internal development is a widely used channel for originating and applying innovation, especially by firms that are seeking to capture full value on their technologies. However, Grant (1991) notes that the American firms with higher R&D intensity (as percentage of sales) often report lower return on investment, except for a select few that are able to translate R&D into high market

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share also. Further, the output of most R&D departments is never transformed into marketable, new products. Xerox Corporation is a classic example.

During the 1980s, the R&D center of Xerox Corporation made several breakthroughs in custom chips, computer-aided design, artificial intelligence, computer graphics, laser printing, and many features later used by Microsoft Windows, including the graphical interface, mouse, icons, and drop down menus. However, Xerox commercialized only a fraction of these innovations, because of a poor coordination with the operating divisions, and lack of product champions to take the rest to the market. The result was a flow of Xerox R&D engineers and innovations to Apple, Sun, Novell, Hewlett-Packard, and other Silicon Valley companies who took those innovations and made huge profits out of them.

To avoid losing ideas that they have spent money on, it some firms let their major new ideas develop in relatively independent settings, such as internal incubators. Thermo Electron, a leading American energy technology company, is a notable example.

Thermo Electron has been hailed for its ‘incubator model’ by Harvard Business School (Browning, 1999). Thermo Electron grew by 23% during the 1990s, investing 8% of revenue on R&D, compared to an industry average of less than 2%. It encourages its in-house engineers to devise new products, explore their marketability, and develop business plans. These internal technologies are spun-off into public companies, with Thermo Electron as a majority stakeholder, and the successful entrepreneur-engineers being granted generous stock options.

A frequent risk experienced by the large companies who create designated innovation islands is the emergence of ‘Not Invented Here’ syndrome within the rest of the organization. Other members of the organization may not be keen, for instance, on adopting new practices and techniques that have been developed in special innovation islands. The firms may overcome such resistance by encouraging those members to form task forces for examining additional changes needed for leveraging new know-how in different parts of the organization. By involving all members in the innovation process, the firms can ensure a collective sense of ownership in innovations developed in any part of the organization.

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In general, both external as well as internal channels are critical to an effective innovation strategy. Even when a technology is developed internally, the firms must secure additional ‘complementary’ resources for effective processing and marketing of their innovations (Teece, 1986). Complementary resources are the inputs, know-how, and skills that are critical for exploiting an innovation, such as a new e-software bought for running an online business. These resources may be generic, specialized, or co-specialized. A generic resource is one with multiple vendors, or owned by the firm; such resources are not costly, but they may not be most effective. A specialized resource is a proprietary or patented resource offered by another company; use of such resources may require a firm to share a large part of its value-added. Finally, a co-specialized resource is one customized by the other companies for use with the specific innovation of the company; while using such resources, both the parties share power and have equal incentives for making the final product successful.

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A common tendency for the companies is to internalize the development of co-specialized resources, so as to appropriate fullest value on each of the resource. For example, Polaroid gained leadership in instant photography through a package of co-specialized resources relating to the technology embodied in camera and the film, the brand name, the manufacturing facilities and know-how, and a strong position in distribution channels (Grant, 1995).

However, in a fast-paced environment, internal ownership of co-specialized assets can make the firms highly vulnerable to the technological shifts. The rise of digital photography, enabling instant uploading of the photographs to the computers for online storage and sharing, resulted in a rapid erosion of Polaroid’s market share and profitability, since it was unable to link any of its internally specialized resources with the emerging web of external technologies.

In the most influential and widely read business article of the 1990s, Prahalad and Hamel (1991) analyzed the leadership erosion faced by firms such as Polaroid. They chided American firms for their focus on a portfolio of products, while the Japanese firms sharpened their portfolio of competencies. By relying on external partners, Japanese firms were able to develop excellent core competencies—the capability to integrate and coordinate diverse know-how. The coordinated know-how was translated into a stream of ‘core products’—the modular platforms bundled into a high variety of final products, yielding short and economical product development cycles.

Regimes of appropriability influence the orientation of firms towards internal vs external channels. The regime of appropriability refers to the conditions that influence the ability of firms to capture full value on their innovations. When the appropriability is low, innovations are vulnerable to easy and fast imitation by other companies; which may discourage internal development, and encourage a greater reliance on the external channels and on developing a distinctive core competency. In contrast, when the appropriability is high, the returns on innovations are protected, and it is difficult and time-consuming for the other firms to copy or replicate the innovation cost-effectively. In such a case, internal channels can be leveraged more extensively for offering a broad portfolio of products.

The case of Hindustan Lever Ltd (HLL), the flagship arm of Unilever India, illustrates that competition can make it difficult to capture large value even when there is no change in the appropriability regime. The success then becomes continent on developing a new business model—the set of inter-related activities that help a firm deliver superior value to the customers, and make profits.

Until the 1980s, HLL focused on the upper and upper-middle classes with its products— primarily soaps, detergents, and cosmetics. In late 1980s, HLL lost substantial market share in its washing detergent powder brand Surf, when Nirma introduced a low-cost product at a third of Surf’s price. HLL realized that while it can develop a product similar to Nirma, the cost of operations would not be competitive. Therefore, HLL gave up its historical policy of making products for the classes (the higher income groups) using premium in-house resources, and farmed out production of the newly developed Wheel detergent powder to several small subcontractors. Wheel, together with Nirma, tremendously expanded the penetration of detergent powders among the lower and lower-middle income group masses. HLL enjoyed a 93% return on capital employed for Wheel compared to 22% from Surf, while earning 18% gross margins for Wheel compared to 25% of Surf (Sridharan, Dobhal and Ramnath, 2002). With this new discovery, HLL began focusing on the lower-priced versions of its other products (such as in the form of smaller single-use packs), and gained rapid penetration in the small towns and villages all over India.

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With a strong technological platform to create innovations, and a robust channel for capturing value, a firm is next faced with the challenge of preventing the erosion of its value, so that it can perpetuate its competitive position in the marketplace. Competing for the technology standards and developing intellectual property on the associated learning trajectory are two strategic challenges faced by the firm. If the firm fails to make its technology a popular standard in the market, or to develop the intellectual property on its learning trajectory, then the value of its innovation can rapidly erode.

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Technical superiority is an important aspect to successfully competing for the technology standards, but it may not be either a necessary or a sufficient condition. Agile competitors may adapt technical features introduced by other firms, and establish their own proprietary standards through other elements of technology, such as manufacturing, marketing, or trading. Consider the classic case of video cassette recorder (VCR), where the technical pioneers failed to sustain their early market leads, because of the superior tactics of the companies that excelled at cutting costs, and making products more widely available to the customers.

The earliest video recorder was invented by the Ampex Company of the USA in 1950s by adapting the audio tape recorder. The Ampex recorder was expensive, larger than a household refrigerator, and very complex. In the 1960s, several American and European companies squeezed designs into smaller packages using transistors, integrated circuits, and smaller mechanical components based on a new helican scan technology. In 1975, Sony of Japan adapted the helican scan technology into U-Matic Betamax technology, and developed a small, relatively inexpensive VCR.

However, battle was won not by technical lead, but by marketing and distribution strategy. Matsushita introduced its own Video Home System (VHS) along with its partner JVC, and signed up four Japanese VHS manufacturers, contributing to a wider availability of recorded tapes and lower prices. Though initially Sony’s Betamax had an edge in the market, Matsushita cemented an agreement with the American company RCA in 1977, whereby RCA would distribute VHS recorders. This undermined sales of RCA’s own competing videodisk format, and began to tip the balance in favor of the VHS format. By 1981, the RCA brand had captured 26% of the VCR market in the United States. Philips Company of America also decided to license the VHS standard, thereby pushing back the Philips’ own videotape cartridge system format. The final push for VHS came when the first Korean-made VCRs, some selling for under $ 300, appeared in the market in 1985. The battle was over by late 1987, when Sony’s market share dropped to about 5% (Morton, 1999).

The above case opens up an interesting point. Though Sony failed to lead the VCR market, Sony’s as well as Matsushita’s standards were based on several technical features originally developed by the Western firms such as Ampex. So, why did the Western firms not adopt Sony’s technical improvements, and instead persisted with alternative trajectories until shutting off those initiatives altogether? The answer lays in the distinction between ‘sustaining’ technologies, which

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deliver improved product performance, and rarely dislodge an industry insider; and ‘disruptive’ ones, which initially result in worse performance, and are typically launched by an industry outsider. While they may underperform established products in mainstream markets, disruptive innovations offer other features appreciated by some niche (and generally new, but who later become dominant) customers—like being cheaper, simpler, smaller, and easier to use. Disruptive technologies, such as the miniature formats of VCRs developed by the Japanese firms, made it difficult for the Western firms to come back. Developing a network of support of relevant players, such as suppliers, collaborators, and customers, can allow the emerging firms to disrupt the standards of the existing firms. The US disk drive industry offers a striking illustration of the disruptive technologies:

In the late 1970s, disk drives were sold to large mainframe computer makers, who demanded capacity upwards of 300 MB. These drives were of 14-inch, and the leading makers—such as IBM—invested heavily in R&D to improve capacity by 20% or more a year. Some start-ups began offering 8-inch drives with less than 50 MB capacity, by forging network relationships with the minicomputer start-ups. The leaders ignored the 8-inch format, which initially had low volumes and margins. As the 8-inch drive makers thrived on the minicomputer boom, all seventeen of 14-inch drive makers, even those who followed with their 8-inch models, went out of the market by late 1980s. Over the 1990s, these 8-inch makers lost the battle to the 5.25-inch disk drive makers; who in turn lost to the 3.5-inch disk drive makers, as the incum- bents persistently failed to learn from the experiences of their predecessors (Christensen, 1997).

More strategic approaches are now being used to avoid ‘creative destruction’, i.e., loss of competitive advantage to the upstarts. A case in point—US-based Seagate Technologies, which was the leader in disk drive market of the 1980s, and then had fallen behind (Anders, 2002). Seagate’s undoing was its over-excellence in servicing of the core customers—it gathered a majority of its market intelligence with the help of its market specialists from its top-20 corporate customers, which included most leaders in the personal computer or server markets. As a result, Seagate focused its internal R&D on adding high-performance features that attracted the big time leaders, which made it vulnerable to sudden shifts in their demand specifications. In late 1990s, new top management decided to broaden Seagate’s horizon. It created 2-person teams of engineers and marketing specialists for gathering market intelligence from the new users, such as college students, to learn about new opportunities like drives for video game consoles. By 2001, Seagate had re-established itself as a leader in the disk drive industry, with record profits and shipments.

The need to look beyond current customers for understanding radically new areas of innovation, however, should not be taken to preclude the benefits of closely working together with the lead users. Indeed, close relationships with the lead users offer a vital source of market data for developing new products that those users are willing to pay for, and the resulting cash flows can contribute to further development expenditures (von Hippel, 1988).

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Intellectual property is a term used to describe ‘works of mind’ that are distinct, and are owned or created by an entity. In the US, ownership of intellectual property is governed by copyright, patent, and trade secret laws. Copyright law protects authored works such as book, film, and

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music; while an idea is not copyright protected, expression of the idea is. Patent laws protect invention. Software programs could be treated as the expression of an idea (copyright) or a process for changing the internal structure of a computer (patent). When a patent is difficult to enforce, or when a firm is seeking long-term protection of its intellectual property (for instance, Coca Cola’s recipe), trade secret law can be used.

New investments are not the only way to develop the intellectual property portfolio of a firm. A great proportion of any firm’s intellectual property may remain tacit and unknown to the managers. Discovery and codification of such knowledge can substantially enhance the productivity of a firm. The firms should set up appropriate policies for encouraging and compensating workforce for helping in this process. A US company, for instance, found that a mechanist in its manufacturing plant could retool a machine in half the time that other workers were taking to do the same job. Instinctively, it tried to analyze and codify the best practice of the mechanist, but the mechanist would not let the company do so. First, he feared that the knowledge would take away his competitive edge over the other mechanists, raise the expected standards of performance for his job, and force him to work harder without much extra compensation. Second, he feared that the knowledge could be used to outsource the work to subcontractors with cheaper labor, putting him out of a job. In the US, the legal resolution of this problem is simple: the IPR (intellectual property right) on worker’s knowledge lies with the company, unless the worker can prove that the knowledge was acquired before joining the company—and then it may lay with his earlier company, or be identified as a common knowledge for which the worker does not deserve any extra compensation. In Japan, firms institutionalize the practice of job rotation, whereby the employees are expected to share their knowledge with others, and to learn from the knowledge of others, and therefore such problem is prevented from becoming visible.

In many cases, true right on the intellectual properties may lie not with any one company, but with a community. Recently, some entities have sought to patent the community knowledge as their own proprietary know-how, as indicated by the attempts by some firms to gain patents on turmeric, neem, and basmati rice. In March 2000, the Government of India set up an apex body, National Innovation Foundation, to build up a national register of grassroots technological innovations (Anonymous, 2002). Several non-government organizations are also setting up incubators to help develop and commercialize community-based intellectual properties, as illustrated below.

Tamil Nadu-based Rural Innovation Networks recently found a seed drill, developed by a farmer (Warrier, 2002). The seed drill could be attached to a bullock cart or a tractor, and sow the seeds while tilling the land, as opposed to the normal time-consuming practice of doing tilling and sowing sequentially. The farmer sold eight machines to his neighbors, but was barred by engineering and commercial issues from reaching out to the larger market. Rural Innovations Network hired an expert designer to help co-develop an improved prototype, and procured venture capital funding for scaling up the production, and marketing the seed drillers priced at just $ 400 (Rs. 20,000).

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By converting its intellectual property right into a broadly accepted technology standard, a firm

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can enjoy substantially high returns. A game company, such as Nintendo, can launch a hardware platform as a technology standard for the game industry, and encourage several other companies to write game software compatible with its technology standard. Sometimes, the companies are able to get royalties from other companies who use their technology standard, such as for writing games. They may also get fee from training and consulting about the use of this technology standard. However, the real test of the agility of a firm is its ability to withstand competition. When a competing technology standard is available (for instance, Sega in the game industry), the game software writers may adopt other standards. Consequently, the ability of the companies to charge royalties on their intellectual property rights may diminish, and instead they may have to offer incentives to encourage other companies to keep writing popular software for them. Though often not given much attention, acknowledging the intellectual properties of other firms is as strategically important as protecting one’s own intellectual property. Many Japanese companies, for instance, undermined the value of the intellectual properties of their partners in other nations; as a result, many companies have become quite wary of collaborating with the Japanese companies—a development that has severely hindered growth of the Japanese companies, and may be a key factor in the sustained recession in Japan since the late 1980s (Gupta, 2002).

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Sequencing refers to taking a comprehensive and strategic view of how the innovation and technology would develop over time and across space. The temporal element can be characterized in terms of the life cycle of innovation and technology. The spatial element can be characterized in terms of the geographical networks for developing and applying innovation and technology.

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Strategizing innovation should not be founded on a static, short-term view; it is important to consider the development of innovations over their entire life cycle, and also across successive series of life cycles.

The life cycle is usually defined using a product-concept, with sales volume and profits as the principal variables to design marketing mix strategies for different states of the life span of a product. In the introductory stage of a product’s life, sales are typically slow and profits negative. In the growth stage, both sales and profits rise at a rapid rate. During the maturity stage, sales volume may continue to rise at a declining rate, and profit may stay high. In the decline stage, both sales and profit decrease.

Below we present a strategic concept of the life cycle as follows: (i) formative, (ii) normative, and (iii) transformative (Gupta, 2004). This strategic concept is illustrated in Figure 16.4.

During the formative phase, there is a great deal of diversity in ideas, as several companies try to seize the opportunity to be an early mover. Perhaps the most strategic target during the formative phase is to put out a popular architectural technology as a dominant standard. The technological standards that underpin the way by which the entire information package is assembled, i.e., that are critical to a dominant design, are termed as ‘architectural’ technology. The firms that keep this architecture closed must develop components, processes, and products internally. In contrast, firms that keep it open can rely on the outside partners for co-development.

Chapter 16 Strategic Innovation and Technology Management � ��

Both these extremes may not be appropriate—Apple lost its early edge in personal computers in the US because of its closed architecture policy, while IBM lost its edge in personal computers because of its open architecture policy! It is important to select a focus—Microsoft chose operating system and core application software, while Intel chose microprocessor chips; both making most money out of the open architecture, as multitude of other software developers and component makers competed among them to lower the costs and expand the value offered by the entire personal computer package to the end customers.

Soon after the emergence of an overall dominant design, the life cycle begins entering the ‘normative phase’, where the dominant norms and designs for various components and processes also emerge. To turn one’s design into a winning dominant design requires the firm to involve a range of collaborators, including not only suppliers and customers, but also key competitors. Many firms share only those ideas that they want the outsiders to develop even more, so that the costs may be reduced and the value may be added through the outsiders’ complementary resources and services. However, when the costs of technology development are commercially unviable and/or when social urgency is paramount, it is often essential to involve other competing firms also for co-development of dominant designs. Thus, several auto firms worldwide have been collaborating in the development of electric vehicle, while several pharmaceutical firms have been collaborating in developing a drug for curing AIDS.

Once the standards are defined and diffuse among the participants, the life cycle matures, and is into the ‘transformative phase’. Here, the product/technology/standards may either die or, more likely, transform into the next generation, on the initiatives of the established firms, or of the new entrants that may lead to the erosion and evaporation of an incumbent’s market position. It is critical for the established firms to be always open to exploiting new emergent knowledge, such as by mentoring the potential new entrants, and helping new entrants co-develop or co-commercialize their technologies, as opposed to trying to just beat the new entrants until getting beaten one day in their own game.

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The geography plays an important role in supporting the clusters of innovative companies. A

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cluster comprises of a set of inter-related activities, such as software or information technology, that are performed within a national geography. With the formation of the World Trade Organization, the institutional base for innovations, such as the protection of intellectual property, tax-based incentives for innovation, and openness of the economy to trade and investment, is becoming similar across geographies. Yet, there exist substantial differences in the innovation clusters (Porter, 1990). For instance, the US has strong innovation clusters in pharmaceuticals, Sweden and Finland in wireless technology, Japan in consumer electronics, Taiwan in semi- conductor fabrication, and India in software.

Porter (1990) offers a four-factor Diamond framework to explain innovation clusters, which is illustrated in Figure 16.5. The four factors are: (i) the presence of high-quality and specialized factor endowments; (ii) a context that encourages investment together with intense local rivalry; (iii) pressure and insight gleaned from sophisticated local demand; and (iv) the local presence of related and supporting industries. The diamond framework also recognizes the role of fortune, and of the government.

Supported by a ‘fortuitous’ clustering of inter-related activities, the nations can become home to the primary global rivals, as well as to the core supplier networks and major customer channels. In addition, many governments seek to promote clusters of firms in inter-related areas of emerging technologies, through funding of R&D and tax incentives. Consequently, the firms from several nations may excel within a technology area, though each may offer a different value depending on their national conditions. For instance, the German companies may focus more on the ecological aspects of technology because of a stronger concern with because of smaller homes in an earthquake-prone terrain environment, while the Japanese companies may be oriented more towards the miniaturization technology.

By setting operations inside the technology clusters, a firm enjoys an ability to better perceive both the need as well as the opportunity for innovation, and also more rapidly source complementary resources such as new components, services, machinery, and know-how necessary to implement innovations from the participants that are nearby. In contrast, foreign firms frequently suffer from the disadvantages of physical distance when trying to learn from the

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Chapter 16 Strategic Innovation and Technology Management � ��

innovative cluster geography of the other nations. For instance, American firms found it very difficult to learn the innovative just-in-time and quality circle practices of the Japanese firms. It was commonly perceived that these practices are rooted in the unique culture of Japan, and cannot be replicated in the US. It was only when the Japanese firms set up a series of transplanted operations in the US during the 1980s that it became possible to learn how to implement innovative Japanese practices in other cultural contexts.

To offset the costs of foreignness in learning about the innovations in overseas clusters, the firms should try to strengthen their absorptive capacity (Cohen and Levinthal, 1990)—the ability to recognize the value of new external know-how, assimilate it, and apply it to commercial ends. For instance, they may appoint the nation that is home to an innovative cluster as their lead R&D center for the relevant product line or business unit. Otherwise, the firms may suffer from loss of their home base as an innovation cluster, or ‘de-clustering’ (Porter, 1990), as experienced for instance by the South India State of Kerala in several plantation industries as a result of low-cost competition from Sri Lanka.

Besides tracking the research in different nations and investing in those nations, firms can benefit from the deep-rooted know-how of various clusters by developing worldwide customer, partner, and supplier networks. For instance, several Indian software firms have gained knowledge about a multitude of standards and technologies by subcontracting to the software houses in the US, Europe, and Southeast Asia, and have used this knowledge to develop generic platforms adaptable to multiple end-users.

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While developing their life cycle strategies, the firms may leverage their geography networks and also support their geography networks. A key factor underpinning the success of firms in modern technologies is their ‘technological leverage’—the ability to leverage on extensive home capabilities in entering new industries, creating new business structures, accessing new markets; in electronics product development, pilot fabrication, transferring pilot operations to full mass production; and doing so with high speed and leanness of operations. Korean firms, for instance, have applied technological leverage to absorb the semiconductor-specific resources from around the world, and built on these resources rapidly to contest the semiconductor market from the Japanese firms (Mathews, 1999).

Technological leverage is often constrained by ‘cultural distance’ or the differences in cultural systems. Japanese Multinational Enterprise Study Group (JMNESG), headed by Tetsuo Abo, has conducted field study of more than 100 Japanese automobile electronics firms around the world. Their data show problems in applying Japanese methods and technologies to nations, such as the US, whose cultures differ from that of Japan. Japanese firms, with collectivist culture, rely on the broad-based jobs and training for work-site oriented operations. The employees need to have a strong sense of loyalty and dedication to the organization, in order for them to be fully involved in learning a variety of firm-specific jobs, and in willingly sharing their knowledge with other members. Japanese firms have therefore found it difficult to apply their work organization and administration methods to nations whose cultural institutions are individualistic (Abo, 1994).

Differences in culture, however, offer unique opportunities for the firms to adapt know-how of other cultures and to develop distinctive and leading core competencies, as opposed to being just lagging imitators. Similarly, Vernon (1966/1979) offered an interesting product cycle

�� Business Policy and Strategic Management: Concepts and Applications

framework for explaining competitive advantage, trade, and investments at the international level, as a result of the differences in incomes and factor endowments. The framework is illustrated as Figure 16.6. Innovations often occur first in the mass consumption countries, led by the US,

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because of a greater ability of the consumers to pay for the cost of technology. Trade is used as a channel to satisfy a limited international demand. As a dominant design takes shape, more firms may enter and seek to capture value by investing in Europe, where more specialized innovations such as those related to specific material resources available in each nation could occur. Finally, as the processes become standardized, the manufacturing may be shifted to emerging markets, as in Asia, where lower labor costs can help further expand the market.

Chapter 16 Strategic Innovation and Technology Management � ��

In a global environment, firms may modify the dynamics of the product cycle in creative ways. The handloom-based ‘Bleeding Madras’ fabric technology, near extinction in the Indian domestic markets, for instance, appeared at an emerging stage in the international markets when the fabric was launched as a fashion product for summerwear in the US. Further, with the growth of multinational enterprises, new technologies are often introduced simultaneously across different regions. Also, firms may use the concept of technological chains to deepen the life cycle of their innovation initiatives. Many Japanese multinational enterprises maintain design and prototype centers in Japan, develop tooling for the new products in Taiwan or Singapore, and ramp up production in Malaysia or Thailand. Once the product as well as the process is standardized, then the operations may shift to China to benefit from the lower labor cost, or to the nation of final marketing to avoid paying tariffs.

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The final element of effective innovation and technology management is to ensure that the cause is championed vigorously and dynamically. It requires an entrepreneurial leadership, and a facilitative appraisal methodology.

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Vipin Gupta, Ian Macmillan and Gita Surie (2003) emphasize that the high volatility, uncertainty, and complexity of discovery-oriented innovation approach is making traditional approaches to strategy ineffective. They underline the need for ‘entrepreneurial leadership’: leadership that creates visionary scenarios to assemble and mobilize a supporting cast of participants who become committed by the vision to the discovery and exploitation of strategic value creation. Entrepreneurial leaders focus on two challenges: (i) scenario enactment, and (ii) cast enactment. First, they envisage and create a scenario of possible opportunities that can be seized to revolutionize the current business model, given the resource constraints. Second, they create a cast of characters—both internally and externally—who have requisite resources and confidence to execute the transformation. Their study showed that India scored 5.99 on a scale of 1 to 7 on the effectiveness of entrepreneurial leadership, just below an average of 6.01 for a sample of 60 societies from around the world. The US, in contrast, had a much higher score of 6.21.

In the US, entrepreneurial leadership is actually a way of life in many companies, embedded in their organizational policies and management practices. Many US-based companies grant stock options to their employees who come up with new revenue generating ideas. The Japanese companies encourage their employees to focus more on quality improvement and cost-saving ideas—the leading ones generate 1 idea per employee per day, paying fully for the salaries. While in Japan, it is Sony that stands ahead in entrepreneurial culture, in the US, the 3M Corporation jumps out (Valery, 1999).

3M Corporation seeks to generate at least 25% of its revenue from products introduced within past 3 years. To make it happen on a continuous basis, 3M gives technical staff 15% of their time off ‘bootlegging’—working on the sides to actualize personal ideas at company’s expense, but for company’s benefit. A 3M employee, Fry, once developed a sticky, but removable, piece of colored paper, but initially no one saw any value for a glue that did not dry. Fry

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distributed them as little yellow reminder pads to the 3M secretaries, who used them for leaving reminder notes for their bosses. The result was an official launch of ‘Post-It’—one of the 3M’s biggest sellers.

A major challenge for the firms is how to scale up their promising entrepreneurial ideas. For this, it is important to design a flexible organizational structure that can accommodate complexity and diversity of ideas. As an illustration, consider Ashok Leyland, a commercial vehicles company in India.

When after a period of boom, Ashok Leyland experienced an unexpected economic recession during 1997–98, its leadership sought ‘Mining More Value’ out of its own resources—techno- logy, infrastructure, and people. The leadership strove to drive a spirit of entrepreneurship, so that people do not look at themselves as just service providers, but seek to make a business out of their services. A 360-degrees appraisal of the CEO indicated that support among the workforce network has been lacking because of poor communication. To touch the people, multiple leadership roles were created, so that breakthrough ideas could be championed, and difficult-to-reach goals realized. While in its 50-year track record of successful organization, Ashok Leyland had deemed 27–28% market share as great, now it has grabbed a 35% share in spite of more competition in the market (Kamath, 2002).

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The significance of the project evaluation and capital budgeting methods in the strategic management of technology and innovation management should not be underestimated. Several studies have shown that the erosion of American edge in technological innovations over the 1970s and 1980s in response to the Japanese competition can at least partly be attributed to the way in which the American firms appraised their technology and innovation projects. Specifically, the American firms were historically very slow in the use of new operations technologies, such as robotics and flexible automation systems, even though they had both the capability to use these technologies as well as the finance to invest into those technologies. The slowness of the American firms derived from their project evaluation methods, which showed very low returns on the investments in new technologies. The Japanese firms, on the other hand, were more aggressive in using operations technologies for supporting high variety and just-in-time deliveries, and thus achieved rapid reduction in their defect rates and inventory levels.

Several surveys show that while the capital budgeting techniques have become more sophisticated over the years in the US and the UK, there is a widespread misapplication of these techniques, resulting into an undervaluation of the benefits that accrue from technological innovations. Pike (1996) reported that the percentage of large firms in the UK using the Net Present Value approach has grown from 32% in 1975 to 74% in 1992, and those using the Internal Rate of Return approach has risen from 44% to 81%. While in 1975 most firms adopted one of two investment appraisal techniques (typically Payback, and Accounting Rate of Return), by 1992 the most common method was to use a combination of four different methods (Net Present Value, Internal Rate of Return, Payback, and Accounting Rate of Return).

Another survey of small and large firms in the UK by Drury and Tayles (1997) showed that the larger firms tend to prefer Internal Rate of Return, followed by Payback period and intuitive

Chapter 16 Strategic Innovation and Technology Management � ��

judgment. In contrast, the smaller firms prefer Payback period, followed by intuitive judgment and Internal Rate of Return. The larger organizations rely more on a formal process, wherein a detailed financial feasibility report is submitted to an approval committee. However, both small and large firms are inclined to incorrectly use sophisticated techniques. 49% of the firms understated Net Present Values by an estimated average of 22% because of the incorrect treatment of inflation in the financial appraisal. In addition, most firms used excessively high discount rates to appraise investments, thereby rejecting several profitable projects. 50% of the firms used discount rates that exceeded the average estimate of the high-risk cost of capital, and the vast majority deployed discount rates that significantly exceeded the average estimate of the normal cost of capital. Though the Corporate Headquarters often built a cushion to prevent overinvestment due to exaggerated managerial claims about projected cash flows on their favored projects, most managers reported using conservative cash flows to provide a cushion against uncertain outcomes.

Additional discrepancies often emerge because of the managerial tendency to focus only on single projects, rather than adopting a portfolio approach and assessing the effects of the project on other projects being pursued by the firm. Moreover, several qualitative benefits, such as quality improvements, manufacturing flexibility, higher levels of customer service and delivery, shorter lead times, and greater product innovation, are not quantified and not included in the appraisal analysis.

Recently, some of the leading firms have begun using a reverse approach. Instead of selecting only the projects that meet the discounted cash flow standards, firms seek to estimate how large the synergies and qualitative benefits ought to be for making the technological investments worthwhile. For example, to attain a required return of, say, 20%, the firm may estimate a need for additional cash flows of $ 1 million a year on a given project. Then, it can investigate the managerial options that would allow the project to yield these extra benefits, such as through improved customer servicing, and entrust the responsibility for realizing these extra benefits to the project champion. The project champion may be compensated based on the improvements in various qualitative benefits, and realization of the desired synergies.

Such alternate approaches for making technology and innovation investments are particularly relevant in the emerging markets, where the inflation rates and environment turbulence tend to be quite high. The managers in the emerging markets are more inclined to use conservative estimates, and the Corporate Headquarters are also more likely to build cushions to guard against the possibility of optimistic projections at the managerial level. Consequently, improper use of sophisticated methods for appraising technology and innovation investments, as well as other investments critical for exploiting these technological investments, can be a big hindrance to competing at the international level. Similarly, relying upon the intuitive approaches alone is also not an appropriate option for the firms that wish to compete at a global level, because of the problems of control and coordination.

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Development and calibration of an effective methodology to appraise intellectual properties can be very costly. The firms in emerging markets may accordingly be inclined to rely on the rules of thumb and personal judgment while deciding on the worth of an innovative idea. However, a more entrepreneurial approach can allow the firms to recognize the value of a systematic

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appraisal methodology. Sound appraisal systems can help in better management of risks, and ease the mobilization of resources for the high potential innovative ideas. In addition, they can also help create a register of all innovative insights, which could be useful while trying to resolve unanticipated future problems. With declining returns on the manufacturing and labor-intensive services, the firms could offer complex solutions, and consulting and training services to other firms by leveraging their innovative knowledge bases. There may even be market for the appraisal and incubator methodology developed by a firm, as other firms also try to learn from the success of the pioneers!

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Strategic management of innovation and technology is fundamentally critical to the survival and competitive advantage of any company. The strategic innovators recognize that innovation can come from anywhere and anyone, and they keep all the channels open for discovering, developing, and applying creative insights. They also appreciate that some of these insights, if ignored, could become disruptive to their survival, and change the industry and competitive dynamics in fundamental ways. For creating, capturing, and sustaining value from innovations and technologies, the leading firms:

� promote cross-functional integration of the product development efforts. � simplify and standardize their operations systems for better adaptability to deliver

customized products, quickly and efficiently, as per the specific client demands. � develop capabilities to evaluate, coordinate, and integrate external innovations and

resources with their internal resources. � use incubators to uncover and develop innovations for growth and competitive

advantage. � establish connections with not only core, but also peripheral and emerging customer

groups. � set-up linkages with the geographies prominent for innovative competitors, customers,

and suppliers, and also with the geographies where fresh innovations are emerging. � seek excellence over the entire product life cycle, as well as over successive generations

of life cycles, through collaborative development and transformation of dominant designs.

� appreciate the value of their own intellectual properties, and of how their creative efforts are critical to technological growth of their as well as others’ innovations.

� are dedicated to recovering, discovering, and developing creative know-how and innovative products embedded in their corporate, local, national, and international cultural fabric.

� craft an entrepreneurial culture that stimulates workforce to develop and actualize innovative ideas

� Always take this perspective: ‘If opportunity doesn’t knock, build a door.’—Milton Berle, Legendary 20th century US Comedian and Television’s First Superstar.

� Never take this perspective: ‘Everything that can be invented has been invented’.— Charles H. Duell, Director of US Patent Office, 1899.

The leading firms are, most importantly, aware that the innovative and creative

Chapter 16 Strategic Innovation and Technology Management � ��

opportunities are abundant, and are an integral part of the nature’s dynamic spirit, and work towards removing the impediments to the discovery and actualization of these opportunities.

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Absorptive capacity is the ability to recognize the value of new external know-how, assimilate it, and apply it to commercial ends.

Appropriability is the ability to capture value of innovation by preventing imitation.

Architectural technology comprises technological standards that underpin the way by which the entire information package is assembled, i.e., that are critical to a dominant design.

Complementary resources are the resources needed for capturing value from a specific innovation.

Concurrent design team is a system whereby product is developed by cross-functional teams, breaking down the walls between different functions.

Co-specialized resources are the resources that are customized to be used only with a specific innovation.

Creative destruction refers to the loss of competitive advantage to the upstarts.

Cultural distance is the degree of difference between two cultural systems.

Design for Manufacturing (DFM) is a system that takes into account ease and economy of production while designing the product.

Disruptive technologies are technologies that initially result in worse performance, and are typically launched by an industry outsider.

Dominant design includes technologies or business models that are the industry standard or norm.

Mass customization is the capability to offer highly customized products and services to different customers, depending on their needs and demands.

Modular design is a product design system where different stand-alone components can be assembled into a variety of products.

Real options are small investments in new areas that have a high potential to grow, with a view to obtain an edge in scaling up the investments if and when the growth potential materializes.

Sustaining technologies are technologies that deliver improved product performance, and rarely dislodge an industry insider.

Technological leverage is the ability to leverage existing technological base for new applications.

� ��

1. What is innovation? What is technology? What is entrepreneurial leadership? Describe the concepts clearly with the help of examples.

2. Discuss the role of both functional inputs as well as servicing criteria as a platform for new product development.

�� Business Policy and Strategic Management: Concepts and Applications

3. How effective are the internal channels for developing innovations? What external modes of entry are available to an organization?

4. Distinguish between disruptive and sustaining technologies. Using illustrations, explain why this distinction is strategically important.

5. What are the three phases of innovation process, and what are their strategic implications?

6. What role can geography play in strategizing about innovation and technology?

7. What are the major impediments to innovative efforts? How should a firm address them?

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1. With India’s entry into the World Trade Organization, domestic pharmaceutical companies are facing a lot of pressure about IPRs. The American firms claim that the Indian firms are infringing on their IPR by producing drugs whose product patents have not yet expired in the US. The Indian firms claim that their process is different and more economical, and it is important for them to make those drugs for saving lives of people in India who cannot afford drugs priced at the American rates. Does there exist a possible strategic approach for more collaboration, and less confrontation, between the two parties?

2. Evaluation of Innovation and Technology Strategy

Evaluate the innovation and technology strategy of a domestic enterprise, and compare it with the strategy of a foreign competitor that has the strongest competitive position in the overseas market. Use the following factors in your evaluation (you may rate both the firms on a scale of 1 to 5, and then average the score to assess the competitive edge of the domestic enterprise):

Platform Strategy Evaluation

� Were development initiatives cross-functionally integrated? � Were operations systems standardized and simplified for ease of manufacturing? � Were variety of products offered to the customers, depending on their differing

demands and their differing willingness and ability to pay?

Channel Strategy Evaluation

� Were innovations by other firms in the domestic market accessed and integrated with the internal initiatives of the corporation?

� Were strategic connections developed with the core customer groups? � Were strategic connections developed with the peripheral customer groups?

Sequencing Strategy Evaluation

� Did the company invest in developing new technologies and new methods of operations?

� Did the company strive to recover the costs of its innovations by moving fast on launching its new products?

� Did the company recognize and exploit the differences in the technological advantage of various regions within nation and outside?

Chapter 16 Strategic Innovation and Technology Management � ��

Perpetuation Strategy Evaluation

� Did the company demonstrate an ability to establish dominant standards in the industry? � Did the company recognized its unique intellectual properties? � Were the process innovations converted into marketable product services for increasing

returns?

Championing Strategy Evaluation

� Was entrepreneurial leadership offered to the workforce for developing their ideas for product innovations?

� Was the organizational culture conducive for workforce to use its creativity for quality improvement and cost-saving initiatives?

� Were project evaluation and capital budgeting techniques conducive to innovations?

Comment on the performance of the domestic enterprise based on the above analysis.

3. Business Plan

The first step in developing and transforming a creative idea into a commercial innovation is to obtain venture funding and supporting resources for your project. For this purpose, you must write an effective business plan, which communicates your vision and your strategy in a manner that is convincing and clear. Several business plan templates are available on the Internet. Look for a free sample of a business plan at www.bplans.com. Then, answer the following questions:

1. How convincing was the business plan you read?

2. What factors came out as the clear strengths of the proposed business plan?

3. Did you have any concerns about the way market potential was presented?

4. What problems you anticipate from the competitor front?

5. How will you modify the business plan for making it a winner in the real marketplace?

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Kwang Ro Kim, Managing Director of LG Electronics India, is turning the conventional wisdom on industry boundaries upside down. He is recasting the business model of consumer durables in India. The Korean major LG has adopted the model from the Fast Moving Consumer Goods (FMCG) sector for managing its consumer durables business; and is set to create a mass market for a product portfolio that has a premium positioning. Though LG entered the market only in 1998, it raced to become the single largest brand of consumer durables in India by 2001, with over Rs. 22 billion (~$ 500 million) in sales. Kim clarifies, ‘The catch phrase at LG is innovation, and we try to build that into our marketing as well’. In 2002, LG’s sales approached Rs. 30 billion (~$ 600 million), as it became a market leader in color televisions, air-conditioners, microwaves, and frost-free refrigerators, and gained second spot in semi-automatic washing machines, well ahead of the target.

Unlike FMCGs, durables sold by LG are a one-time purchase. To expand its penetration, LG has been targeting existing customers to cross-sell its other products since 2001. The

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households that already own at least one LG product account for more than a third of its sales. LG has been selling nearly 300,000 units each month, reaching out to around 1.5 million individuals, using an average of five members per household. Unlike its rivals, LG avoided investing a lot in the back-end, and instead prioritized its resources to build share of mind upfront. It’s advertising budget, at 5–6% of sales, mirrored that of the top FMCG companies. Despite being virtually unknown to the Indian consumers, it carved a premium position by emphasizing superior technology in its early promotional and marketing material. However, instead of targeting just the upper-middle class, LG then reached out to the mass market by shifting its communication to benefits of technology since 2001. Its thrust has moved from rational (demonstrating the credentials) to establishing emotional connect with consumers, and appealing to their hearts. LG now enjoys a unique ‘premium imagery with mass relateability’. LG’s biggest rivals are Sony of Japan, and India’s BPL. Sony has continued to be exclusively a super-premium brand, and just a niche business in the limited purchasing power Indian consumer market. BPL, on the other hand, has taken a mass position without image leadership after the advent of global competition.

Since its entry, LG has kept a unique communication platform for individual products, and still kept the communication fresh by introducing and relating newly introduced features to that platform; again a tactic adopted from the FMCG model. The platform is ‘preserve nutrition’ for refrigerator, less strain on eyes for televisions, healthy ambience and air quality for air- conditioners, fabric care for washing machines, and healthy cooking for its microwaves. In another innovation taken from the FMCG model, LG is convincing its dealers to focus on ‘low margins, and quicker rotation of stocks’. Moreover, LG has been offering model-specific point-of- purchase materials and incentives, something earlier seen only in the FMCG sector, to support the dealers. While traditionally, durables offered consumer promotions only in the Fall festival season, LG has made these promotions an all-round affair. The MD Kim is personally leading the charge of expanding LG’s geographical coverage into far-flung towns, and semi-urban markets. He regularly makes field visits to meet the dealers personally.

Many attribute LG’s success to its advertising agency Lowe (earlier Lintas—the prime ad agency for Hindustan Lever Ltd—the super successful subsidiary of Unilever, India). During the early years, Lintas was given virtually full charge of the marketing business model, while LG India focused on mainly the sales function. The insiders even suggested that the ‘L’ in LG stood for Lintas.

(Adapted from ‘LG’s turning into a fast moving durable brand’, by Bhanu Pande, June 11, 2002, The Economic Times).

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1. Would you characterize LG as an innovative company? Is it a technology-driven company? Is it a fertile place for entrepreneurial leadership?

2. What platform is being used by LG for creating value through innovation and technology?

3. Explain the innovation cycle being used by LG in India. 4. What intellectual properties might lie at the heart of LG’s success in India? 5. Was it prudent for LG to give almost total control of its marketing to Lowe in early

years?

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Abo, T. (Ed.) (1994), Hybrid Factory: The Japanese Production System in The United States, NY: Oxford University Press.

Anders, G. (2002), The Innovator’s Solution, Fast Company, 59: 132–134.

Anonymous (2002), Commonwealth asks India to help set up Innovation Foundation, Aug. 6, Press Trust of India Limited.

Browning, J. (1999), Future is Undervalued: The Wired Index, Wired Magazine, June, 7(6).

Christensen, C. (1997), The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston: Harvard Business School Press.

Clark, K. and Fujimoto, T. (1991), Product Development Performance, Cambridge, MA: Harvard Business Press.

Cohen, W. and Levinthal, D. (1990), Absorptive Capacity: A New Perspective on Learning and Innovation, Administrative Science Quarterly, 35: 128–152.

Drury, C. and Tayles, M. (1997), The misapplication of capital investment appraisal techniques, Management Decision, 35(1/2): 86–93.

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Gupta, V. (2002), A dynamic model of organizational performing: investigating the impediments to Japanese rejuvenation, pp. 537–550, In B. Pattanayak and V. Gupta (Eds.), Creating Performing Organizations: International perspectives for Indian management, New Delhi: Sage Publications.

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