Schilling strategic management of technological innovation pdf

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Strategic Management of Technological Innovation

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Strategic Management of Technological Innovation Fifth Edition

Melissa A. Schilling New York University

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About the Author Melissa A. Schilling, Ph.D. Melissa Schilling is a professor of management and organizations at New York Uni- versity’s Stern School of Business. Professor Schilling teaches courses in strategic management, corporate strategy and technology, and innovation management. Before joining NYU, she was an Assistant Professor at Boston University (1997–2001), and has also served as a Visiting Professor at INSEAD and the Bren School of Environmental Science & Management at the University of California at Santa Barbara. She has also taught strategy and innovation courses at Siemens Corpora- tion, IBM, the Kauffman Foundation Entrepreneurship Fellows program, Sogang University in Korea, and the Alta Scuola Polytecnica, a joint institution of Politecnico di Milano and Politecnico di Torino.

Professor Schilling’s research focuses on technological innovation and knowledge creation. She has studied how technology shocks influence collaboration activ- ity and innovation outcomes, how firms fight technology standards battles, and how firms utilize collaboration, protection, and timing of entry strategies. She also studies how product designs and organizational structures migrate toward or away from modularity. Her most recent work focuses on knowledge creation, including how breadth of knowledge and search influences insight and learning, and how the structure of knowledge networks influences their overall capacity for knowledge creation. Her research in innovation and strategy has appeared in the leading aca- demic journals such as Academy of Management Journal, Academy of Management Review, Management Science, Organization Science, Strategic Management Journal, and Journal of Economics and Management Strategy and Research Policy. She also sits on the editorial review boards of Academy of Management Journal, Academy of Management Discoveries, Organization Science, Strategy Science, and Strategic Organization. Professor Schilling won an NSF CAREER award in 2003, and Boston University’s Broderick Prize for research in 2000.

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vi

Preface Innovation is a beautiful thing. It is a force with both aesthetic and pragmatic appeal: It unleashes our creative spirit, opening our minds to hitherto undreamed of possibilities, while simultaneously accelerating economic growth and providing advances in such crucial human endeavors as medicine, agriculture, and education. For industrial organizations, the primary engines of innovation in the Western world, innovation provides both exceptional opportunities and steep challenges. While innovation is a powerful means of competitive differentiation, enabling firms to penetrate new markets and achieve higher margins, it is also a competitive race that must be run with speed, skill, and precision. It is not enough for a firm to be innovative—to be successful it must innovate better than its competitors.

As scholars and managers have raced to better understand innovation, a wide range of work on the topic has emerged and flourished in disciplines such as strategic management, organization theory, economics, marketing, engineering, and sociology. This work has generated many insights about how innovation affects the competitive dynamics of markets, how firms can strategically manage innovation, and how firms can implement their innovation strategies to maximize their likelihood of success. A great benefit of the dispersion of this literature across such diverse domains of study is that many innovation topics have been examined from different angles. However, this diversity also can pose integration challenges to both instructors and students. This book seeks to integrate this wide body of work into a single coherent strategic framework, attempting to provide coverage that is rigorous, inclusive, and accessible.

Organization of the Book The subject of innovation management is approached here as a strategic process. The outline of the book is designed to mirror the strategic management process used in most strategy textbooks, progressing from assessing the competitive dynamics of the situation, to strategy formulation, and then to strategy implementation. The first part of the book covers the foundations and implications of the dynamics of innovation, helping managers and future managers better interpret their technological environ- ments and identify meaningful trends. The second part of the book begins the pro- cess of crafting the firm’s strategic direction and formulating its innovation strategy, including project selection, collaboration strategies, and strategies for protecting the firm’s property rights. The third part of the book covers the process of implementing innovation, including the implications of organization structure on innovation, the management of new product development processes, the construction and manage- ment of new product development teams, and crafting the firm’s deployment strategy. While the book emphasizes practical applications and examples, it also provides systematic coverage of the existing research and footnotes to guide further reading.

Complete Coverage for Both Business and Engineering Students This book is designed to be a primary text for courses in the strategic management of inno- vation and new product development. Such courses are frequently taught in both business and engineering programs; thus, this book has been written with the needs of business and

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engineering students in mind. For example, Chapter Six (Defining the Organization’s Stra- tegic Direction) provides basic strategic analysis tools with which business students may already be familiar, but which may be unfamiliar to engineering students. Similarly, some of the material in Chapter Eleven (Managing the New Product Development Process) on computer-aided design or quality function deployment may be review material for infor- mation system students or engineering students, while being new to management students. Though the chapters are designed to have an intuitive order to them, they are also designed to be self-standing so instructors can pick and choose from them “buffet style” if they prefer.

New for the Fifth Edition This fifth edition of the text has been comprehensively revised to ensure that the frameworks and tools are rigorous and comprehensive, the examples are fresh and exciting, and the figures and cases represent the most current information available. Some changes of particular note include: Six New Short Cases Tesla Motors. The new opening case for Chapter Three is about Tesla Motors. In 2015, Tesla Motors was a $3.2 billion company on track to set history. It had cre- ated two cars that most people agreed were remarkable. Consumer reports had rated Tesla’s Model S the best car it had ever reviewed. Though it was not yet posting prof- its (see Exhibits 1 and 2), sales were growing rapidly and analysts were hopeful that profits would soon follow. It had repaid its government loans ahead of the major auto conglomerates. Most importantly, it looked like it might survive. Perhaps even thrive. This was astonishing as there had been no other successful auto manufacturing start up in the United States since the 1920s. However, getting the general public to adopt fully electric vehicles still required surmounting several major hurdles. A Battle Emerging in Mobile Payments. Chapter Four now opens with a case describ- ing the mobile payment systems that are emerging and competing around the world. In the developing world, mobile payment systems promise to help bring the unbanked and underbanked access to fast and efficient funds transfer and better opportunities for saving. In the developed world, competing mobile payment standards were battling to achieve dominance, and threatening to obviate the role of the major credit card companies—putting billions of dollars of transaction fees at stake. Reinventing Hotels: citizen M. Chapter Six opens with a case about how Michael Levie, Rattan Chadha, and Robin Chadha set out to create a fundamentally different kind of hotel. Levie and the Chadhas dramatically reduced or eliminated key features typically assumed to be standard at upscale hotels such as large rooms, in-house res- taurants, and a reception desk, while increasing the use of technology at the hotel and maintaining a modern and fresh aesthetic. This enabled them to create a stylish hotel that was significantly less expensive than typical upscale hotels. This case pairs very well with the new Research Brief in Chapter Six on Blue Ocean Strategy. The Mahindra Shaan: Gambling on a Radical Innovation. Chapter Seven opens with a case about the decision of Mahindra & Mahindra to make a very unusual tractor. Mahindra & Mahindra had long made traditional tractors and focused on incremental innovation. However, in the late 1990s, Mahindra’s management decided to try to find the way to meet the needs of smaller farmers, who could not afford a regular tractor. They ended

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up creating the Shaan, a tractor/transporter hybrid that could serve for farming, per- sonal transportation, and for transporting goods (a job small farmers performed in the off season to earn additional income). Developing the tractor was a major break with their traditional innovation choices, and this case details how they were able to get this unusual project approved, and nurture it through the new product development process. Ending HIV? Sangamo Biosciences and Gene Editing. Chapter Eight opens with a case ripped straight from the headlines—the development of ways to alter a living person’s genes to address critical ailments. Sangamo Biosciences has developed a way to edit a person’s genes with Zinc Finger Nucleases (ZFNs). This innovation has the potential to eliminate monogenic diseases such as hemophilia or Huntington’s disease. Even more intriguingly, Sangamo was exploring a way to use ZFNs to cure HIV by giving people a mutation that renders people naturally immune to the disease. In the case, Sangamo must decide how to address this huge—but incredibly risky— opportunity. It already has partnerships with major pharma companies for some of its other projects, but it is unclear whether the pharma companies would want to partici- pate in the HIV project, and whether Sangamo would want to go this route. Managing Innovation Teams at Disney. Chapter Twelve now opens with a case about how Disney creates and manages the teams that develop animated films. Disney, and Pixar (from whom it acquired several of its current innovation practices) are world renown for their ability to develop magically innovative animated films. This opening case highlights the roles of having a small team size, being collocated, and instilling a culture of brutally honest peer feedback. Cases, Data, and Examples from Around the World Careful attention has been paid to ensure that the text is global in its scope. The open- ing cases feature companies from India, Israel, Japan, The Netherlands, Kenya, and the United States, and many examples from other countries are embedded in the chapters themselves. Wherever possible, statistics used in the text are based on worldwide data. More Comprehensive Coverage and Focus on Current Innovation Trends In response to reviewer suggestions, the new edition now provides more extensive discussions of topics such as crowdsourcing and customer co-creation, patenting strategies, patent trolls, Blue-Ocean Strategy, and more. The suggested readings for each chapter have also been updated to identify some of the more recent publications that have gained widespread attention in the topic area of each chapter. Despite these additions, great effort has also been put into ensuring the book remains concise—a feature that has proven popular with both instructors and students. Supplements The teaching package for Strategic Management of Technological Innovation is available online from the book’s Online Learning Center at www.mhhe.com/schilling5e and includes: ∙ An instructor’s manual with suggested class outlines, responses to discussion ques-

tions, and more. ∙ Complete PowerPoint slides with lecture outlines and all major figures from the text. The

slides can also be modified by the instructor to customize them to the instructor’s needs. ∙ A testbank with true/false, multiple choice, and short answer/short essay questions. ∙ A suggested list of cases to pair with chapters from the text.

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Acknowledgments This book arose out of my research and teaching on technological innovation and new product development over the last decade; however, it has been anything but a lone endeavor. I owe much of the original inspiration of the book to Charles Hill, who helped to ignite my initial interest in innovation, guided me in my research agenda, and ultimately encouraged me to write this book. I am also very grateful to colleagues and friends such as Rajshree Agarwal, Juan Alcacer, Rick Alden, William Baumol, Bruno Braga, Gino Cattanni, Tom Davis, Sinziana Dorobantu, Gary Dushnitsky, Douglas Fulop, Raghu Garud, Deepak Hegde, Hla Lifshitz, Tammy Madsen, Rodolfo Martinez, Goncalo Pacheco D’Almeida, Jaspal Singh, Deepak Somaya, Bill Starbuck, and Christopher Tucci for their suggestions, insights, and encouragement. I am grateful to executive brand manager Mike Ablassmeir and marketing manager Casey Keske. I am also thankful to my editors, Laura Hurst Spell and Diana Murphy, who have been so supportive and made this book possible, and to the many reviewers whose sugges- tions have dramatically improved the book:

Joan Adams Baruch Business School (City University of New York)

Shahzad Ansari Erasmus University

B. Rajaram Baliga Wake Forest University

Sandy Becker Rutgers Business School

David Berkowitz University of Alabama in Huntsville

John Bers Vanderbilt University

Paul Bierly James Madison University

Paul Cheney University of Central Florida

Pete Dailey Marshall University

Robert DeFillippi Suffolk University

Deborah Dougherty Rutgers University

Cathy A. Enz Cornell University

Robert Finklestein University of Maryland–University College

Sandra Finklestein Clarkson University School of Business

Jeffrey L. Furman Boston University

Cheryl Gaimon Georgia Institute of Technology

Elie Geisler Illinois Institute of Technology

Sanjay Goel University of Minnesota in Duluth

Andrew Hargadon University of California, Davis

Steven Harper James Madison University

Donald E. Hatfield Virginia Polytechnic Institute and State University

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I am also very grateful to the many students of the Technological Innovation and New Product Development courses I have taught at New York University, INSEAD, Boston University, and University of California at Santa Barbara. Not only did these students read, challenge, and help improve many earlier drafts of the work, but they also contributed numerous examples that have made the text far richer than it would have otherwise been. I thank them wholeheartedly for their patience and generosity.

Melissa A. Schilling

Glenn Hoetker University of Illinois

Sanjay Jain University of Wisconsin–Madison

Theodore Khoury Oregon State University

Rajiv Kohli College of William and Mary

Vince Lutheran University of North Carolina—Wilmington

Steve Markham North Carolina State University

Steven C. Michael University of Illinois

Robert Nash Vanderbilt University

Anthony Paoni Northwestern University

Johannes M. Pennings University of Pennsylvania

Raja Roy Tulane University

Linda F. Tegarden Virginia Tech

Oya Tukel Cleveland State University

Anthony Warren The Pennsylvania State University

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Preface vi 1 Introduction 1

PART ONE Industry Dynamics of Technological Innovation 13 2 Sources of Innovation 15 3 Types and Patterns of Innovation 43 4 Standards Battles and Design Dominance 67 5 Timing of Entry 89

PART TWO Formulating Technological Innovation Strategy 107 6 Defining the Organization’s Strategic Direction 109 7 Choosing Innovation Projects 129 8 Collaboration Strategies 153 9 Protecting Innovation 183

PART THREE Implementing Technological Innovation Strategy 209 10 Organizing for Innovation 211 11 Managing the New Product Development Process 235 12 Managing New Product Development Teams 265 13 Crafting a Deployment Strategy 283

INDEX 311

Brief Contents

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Chapter 1 Introduction 1 The Importance of Technological Innovation 1 The Impact of Technological Innovation on Society 2 Innovation by Industry: The Importance of Strategy 4

The Innovation Funnel 4 The Strategic Management of Technological Innovation 6

Summary of Chapter 9 Discussion Questions 10 Suggested Further Reading 10 Endnotes 10

PART ONE INDUSTRY DYNAMICS OF TECHNOLOGICAL INNOVATION 13

Chapter 2 Sources of Innovation 15 Getting an Inside Look: Given Imaging’s Camera Pill 15 Overview 19 Creativity 20

Individual Creativity 20 Organizational Creativity 20

Translating Creativity Into Innovation 22 The Inventor 22 Innovation by Users 24 Research and Development by Firms 26 Firm Linkages with Customers, Suppliers, Competitors, and Complementors 27

Universities and Government-Funded Research 28 Private Nonprofit Organizations 32

Innovation in Collaborative Networks 32 Technology Clusters 34 Technological Spillovers 37

Summary of Chapter 37 Discussion Questions 38 Suggested Further Reading 39 Endnotes 39

Chapter 3 Types and Patterns of Innovation 43 Tesla Motors 43 History of Tesla 43 The Roadster 44 The Model S 45 The Future of Tesla 46 Overview 47 Types of Innovation 48

Product Innovation versus Process Innovation 48 Radical Innovation versus Incremental Innovation 48 Competence-Enhancing Innovation versus Competence-Destroying Innovation 49 Architectural Innovation versus Component Innovation 50 Using the Dimensions 51

Technology S-Curves 51 S-Curves in Technological Improvement 52 S-Curves in Technology Diffusion 54 S-Curves as a Prescriptive Tool 56 Limitations of S-Curve Model as a Prescriptive Tool 57

Technology Cycles 57 Summary of Chapter 63

Contents

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Discussion Questions 64 Suggested Further Reading 64 Endnotes 65

Chapter 4 Standards Battles and Design Dominance 67 A Battle Emerging in Mobile Payments 67 Overview 70 Why Dominant Designs are Selected 71

Learning Effects 71 Network Externalities 73 Government Regulation 75 The Result: Winner-Take-All Markets 76

Multiple Dimensions of Value 77 A Technology’s Stand-Alone Value 77 Network Externality Value 77 Competing for Design Dominance in Markets with Network Externalities 82 Are Winner-Take-All Markets Good for Consumers? 84

Summary of Chapter 86 Discussion Questions 86 Suggested Further Reading 87 Endnotes 87

Chapter 5 Timing of Entry 89 From SixDegrees.com to Facebook: The Rise of Social Networking Sites 89 Overview 93 First-Mover Advantages 93

Brand Loyalty and Technological Leadership 93 Preemption of Scarce Assets 94 Exploiting Buyer Switching Costs 94 Reaping Increasing Returns Advantages 95

First-Mover Disadvantages 95 Research and Development Expenses 96 Undeveloped Supply and Distribution Channels 96 Immature Enabling Technologies and Complements 96 Uncertainty of Customer Requirements 97

Factors Influencing Optimal Timing of Entry 99 Strategies to Improve Timing Options 103 Summary of Chapter 103 Discussion Questions 104 Suggested Further Reading 104 Endnotes 105

PART TWO FORMULATING TECHNOLOGICAL INNOVATION STRATEGY 107

Chapter 6 Defining the Organization’s Strategic Direction 109 Reinventing Hotels: citizenM 109 Overview 111 Assessing The Firm’s Current Position 111

External Analysis 111 Internal Analysis 115

Identifying Core Competencies and Dynamic Capabilities 119

Core Competencies 119 The Risk of Core Rigidities 120 Dynamic Capabilities 121

Strategic Intent 121 Summary of Chapter 126 Discussion Questions 126 Suggested Further Reading 127 Endnotes 127

Chapter 7 Choosing Innovation Projects 129 The Mahindra Shaan: Gambling on a Radical Innovation 129 Overview 131 The Development Budget 131 Quantitative Methods for Choosing Projects 133

Discounted Cash Flow Methods 133 Real Options 138

Disadvantages of Quantitative Methods 140 Qualitative Methods for Choosing Projects 140

Screening Questions 141 The Aggregate Project Planning Framework 143 Q-Sort 145

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Combining Quantitative and Qualitative Information 145

Conjoint Analysis 145 Data Envelopment Analysis 147

Summary of Chapter 149 Discussion Questions 149 Suggested Further Reading 150 Endnotes 150

Chapter 8 Collaboration Strategies 153 Ending HIV? Sangamo Biosciences and Gene Editing 153 Correcting Monogenic Diseases 153 Drug Development and Clinical Trials 155 Competing Technologies 156 Sangamo’s Partnerships 157 A World-Changing Opportunity: Creating Immunity to HIV 158 The Future . . . 159 Overview 160 Reasons for Going Solo 161

1. Availability of Capabilities 161 2. Protecting Proprietary Technologies 161 3. Controlling Technology Development

and Use 162 4. Building and Renewing Capabilities 162

Advantages of Collaborating 163 Types of Collaborative Arrangements 164

Strategic Alliances 165 Joint Ventures 167 Licensing 167 Outsourcing 168 Collective Research Organizations 170

Choosing a Mode of Collaboration 170 Choosing and Monitoring Partners 173

Partner Selection 173 Partner Monitoring and Governance 174

Summary of Chapter 177 Discussion Questions 178 Suggested Further Reading 179 Endnotes 179

Chapter 9 Protecting Innovation 183 The Digital Music Distribution Revolution 183 Fraunhofer and MP3 183 Napster Takes the Lead 184 iTunes Just in Time 185 Overview 187 Appropriability 188 Patents, trademarks, and copyrights 188

Patents 189 Trademarks and Service Marks 194 Copyright 195

Trade Secrets 196 The Effectiveness and Use of Protection Mechanisms 197

Wholly Proprietary Systems versus Wholly Open Systems 198

Advantages of Protection 200 Advantages of Diffusion 201

Summary of Chapter 204 Discussion Questions 205 Suggested Further Reading 205 Endnotes 206

PART THREE IMPLEMENTING TECHNOLOGICAL INNOVATION STRATEGY 209

Chapter 10 Organizing for Innovation 211 Organizing for Innovation at Google 211 Overview 213 Size and Structural Dimensions of the Firm 214

Size: Is Bigger Better? 214 Structural Dimensions of the Firm 216

Centralization 216 Formalization and Standardization 217 Mechanistic versus Organic Structures 218 Size versus Structure 218

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The Ambidextrous Organization: The Best of Both Worlds? 220

Modularity and “Loosely Coupled” Organizations 222

Modular Products 222 Loosely Coupled Organizational Structures 223

Managing Innovation Across Borders 226 Summary of Chapter 229 Discussion Questions 230 Suggested Further Reading 230 Endnotes 231

Chapter 11 Managing the New Product Development Process 235 Skullcandy: Developing Extreme Headphones 235 The Idea 235 Building an Action Sports Brand 236 Developing the Ultimate DJ Headphone 236 Overview 240 Objectives of the New Product Development Process 241

Maximizing Fit with Customer Requirements 241 Minimizing Development Cycle Time 242 Controlling Development Costs 242

Sequential Versus Partly Parallel Development Processes 243 Project Champions 245

Risks of Championing 245 Involving Customers and Suppliers in the Development Process 247

Involving Customers 247 Involving Suppliers 248 Crowdsourcing 248

Tools for Improving the New Product Development Process 249

Stage-Gate Processes 250 Quality Function Deployment (QFD)—The House of Quality 252 Design for Manufacturing 254 Failure Modes and Effects Analysis 255

Computer-Aided Design Computer- Aided Engineering/Computer-Aided Manufacturing 256

Tools for Measuring New Product Development Performance 257

New Product Development Process Metrics 259 Overall Innovation Performance 259

Summary of Chapter 259 Discussion Questions 260 Suggested Further Reading 260 Endnotes 261

Chapter 12 Managing New Product Development Teams 265 Innovation Teams at the Walt Disney Company 265 The Making of an Animated Film 265 Workspace and Collocation 266 Team Communication 266 Creating a Creative Culture 266 Overview 267 Constructing New Product Development Teams 267

Team Size 268 Team Composition 268

The Structure of New Product Development Teams 271

Functional Teams 271 Lightweight Teams 272 Heavyweight Teams 272 Autonomous Teams 272

The Management of New Product Development Teams 274

Team Leadership 274 Team Administration 274 Managing Virtual Teams 275

Summary of Chapter 278 Discussion Questions 278 Suggested Further Reading 279 Endnotes 279

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Chapter 13 Crafting a Deployment Strategy 283 Deployment Tactics in the Global Video Game Industry 283 Pong: The Beginning of an Era 283 The Emergence of 8-Bit Systems 284 The 16-Bit Video Game Systems 284 32/64-Bit Systems 285 128-Bit Systems 286 The Seventh Generation: A Second Round of Competition in 128-bit Systems 288 The Eighth Generation: Increasing Competition from Mobile Devices 289 Overview 291 Launch Timing 292

Strategic Launch Timing 292 Optimizing Cash Flow versus Embracing Cannibalization 293

Licensing and Compatibility 294 Pricing 295 Distribution 297

Selling Direct versus Using Intermediaries 297 Strategies for Accelerating Distribution 299

Marketing 301 Major Marketing Methods 301 Tailoring the Marketing Plan to Intended Adopters 303 Using Marketing to Shape Perceptions and Expectations 305

Summary of Chapter 308 Discussion Questions 309 Suggested Further Reading 309 Endnotes 310

Index 311

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1

Chapter One

Introduction

THE IMPORTANCE OF TECHNOLOGICAL INNOVATION

In many industries technological innovation is now the most important driver of competitive success. Firms in a wide range of industries rely on products developed within the past five years for almost one-third (or more) of their sales and profits. For example, at Johnson & Johnson, products developed within the last five years account for over 30 percent of sales, and sales from products developed within the past five years at 3M have hit as high as 45 percent in recent years.

The increasing importance of innovation is due in part to the globalization of mar- kets. Foreign competition has put pressure on firms to continuously innovate in order to produce differentiated products and services. Introducing new products helps firms protect their margins, while investing in process innovation helps firms lower their costs. Advances in information technology also have played a role in speeding the pace of innovation. Computer-aided design and computer-aided manufacturing have made it easier and faster for firms to design and produce new products, while flex- ible manufacturing technologies have made shorter production runs economical and have reduced the importance of production economies of scale.1 These technologies help firms develop and produce more product variants that closely meet the needs of narrowly defined customer groups, thus achieving differentiation from competi- tors. For example, in 2015, Toyota offered 21 different passenger vehicle lines under the Toyota brand (e.g., Camry, Prius, Highlander, and Tundra). Within each of the vehicle lines, Toyota also offered several different models (e.g., Camry L, Camry LE, and Camry SE) with different features and at different price points. In total, Toyota offered 167 car models ranging in price from $14,845 (for the Yaris three-door lift- back) to $80,115 (for the Land Cruiser), and seating anywhere from three passengers (e.g., Tacoma Regular Cab truck) to eight passengers (Sienna Minivan). On top of this, Toyota also produced a range of luxury vehicles under its Lexus brand. Similarly, Samsung introduced 52 unique smartphones in 2014 alone. Companies can use broad portfolios of product models to help ensure they can penetrate almost every conceiv- able market niche. While producing multiple product variations used to be expensive

technological innovation The act of introducing a new device, method, or material for application to commercial or practical objectives.

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2 Chapter 1 Introduction

and time-consuming, flexible manufacturing technologies now enable firms to seam- lessly transition from producing one product model to the next, adjusting production schedules with real-time information on demand. Firms further reduce production costs by using common components in many of the models.

As firms such as Toyota, Samsung, and others adopt these new technologies and increase their pace of innovation, they raise the bar for competitors, triggering an industrywide shift to shortened development cycles and more rapid new product introductions. The net results are greater market segmentation and rapid product obso- lescence.2 Product life cycles (the time between a product’s introduction and its with- drawal from the market or replacement by a next-generation product) have become as short as 4 to 12 months for software, 12 to 24 months for computer hardware and consumer electronics, and 18 to 36 months for large home appliances.3 This spurs firms to focus increasingly on innovation as a strategic imperative—a firm that does not innovate quickly finds its margins diminishing as its products become obsolete.

THE IMPACT OF TECHNOLOGICAL INNOVATION ON SOCIETY

If the push for innovation has raised the competitive bar for industries, arguably mak- ing success just that much more complicated for organizations, its net effect on society is more clearly positive. Innovation enables a wider range of goods and services to be delivered to people worldwide. It has made the production of food and other neces- sities more efficient, yielded medical treatments that improve health conditions, and enabled people to travel to and communicate with almost every part of the world. To get a real sense of the magnitude of the effect of technological innovation on society, look at Figure 1.1, which shows a timeline of some of the most important technologi- cal innovations developed over the last 200 years. Imagine how different life would be without these innovations!

The aggregate impact of technological innovation can be observed by looking at gross domestic product (GDP). The gross domestic product of an economy is its total annual output, measured by final purchase price. Figure 1.2 shows the average GDP per capita (that is, GDP divided by the population) for the world, developed countries, and developing countries from 1969 to 2014. The figures have been con- verted into U.S. dollars and adjusted for inflation. As shown in the figure, the average world GDP per capita has risen steadily since 1969. In a series of studies of economic growth conducted at the National Bureau of Economic Research, economists showed that the historic rate of economic growth in GDP could not be accounted for entirely by growth in labor and capital inputs. Economist Robert Merton Solow argued that this unaccounted-for residual growth represented technological change: Technologi- cal innovation increased the amount of output achievable from a given quantity of labor and capital. This explanation was not immediately accepted; many researchers attempted to explain the residual away in terms of measurement error, inaccurate price deflation, or labor improvement. But in each case the additional variables were unable to eliminate this residual growth component. A consensus gradually emerged that the

gross domestic product (GDP) The total annual output of an economy as measured by its final purchase price.

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Chapter 1 Introduction 3

FIGURE 1.1 Timeline of Some of The Most Important Technological Innovations In The Last 200 Years

1800 - 1800—Electric battery - 1804—Steam locomotive - 1807—Internal combustion engine - 1809—Telegraph - 1817—Bicycle 1820 - 1821—Dynamo - 1824—Braille writing system - 1828—Hot blast furnace - 1831—Electric generator - 1836—Five-shot revolver 1840 - 1841—Bunsen battery (voltaic cell) - 1842—Sulfuric ether-based anesthesia - 1846—Hydraulic crane - 1850—Petroleum refining - 1856—Aniline dyes 1860 - 1862—Gatling gun - 1867—Typewriter - 1876—Telephone - 1877—Phonograph - 1878—Incandescent lightbulb 1880 - 1885—Light steel skyscrapers - 1886—Internal combustion automobile - 1887—Pneumatic tire - 1892—Electric stove - 1895—X-ray machine 1900 - 1902—Air conditioner (electric) - 1903—Wright biplane - 1906—Electric vacuum cleaner - 1910—Electric washing machine - 1914—Rocket 1920 - 1921—Insulin (extracted) - 1927—Television - 1928—Penicillin - 1936—First programmable computer - 1939—Atom fission 1940 - 1942—Aqua lung - 1943—Nuclear reactor - 1947—Transistor - 1957—Satellite - 1958—Integrated circuit 1960 - 1967—Portable handheld calculator - 1969—ARPANET (precursor to Internet) - 1971—Microprocessor - 1973—Mobile (portable cellular) phone - 1976—Supercomputer 1980 - 1981—Space shuttle (reusable) - 1987—Disposable contact lenses - 1989—High-definition television - 1990—World Wide Web protocol - 1996—Wireless Internet 2000 - 2003—Map of human genome

residual did in fact capture techno- logical change. Solow received a Nobel Prize for his work in 1981, and the residual became known as the Solow Residual.4 While GDP has its shortcomings as a measure of standard of living, it does relate very directly to the amount of goods consumers can purchase. Thus, to the extent that goods improve quality of life, we can ascribe some beneficial impact of technological innovation.

Sometimes technological inno- vation results in negative extern- alities. Production technologies may create pollution that is harmful to the surrounding communities; agri- cultural and fishing technologies can result in erosion, elimination of natural habitats, and depletion of ocean stocks; medical technolo- gies can result in unanticipated consequences such as antibiotic- resistant strains of bacteria or moral dilemmas regarding the use of genetic modification. However, technology is, in its purest essence, knowledge—knowledge to solve our problems and pursue our goals.5 Technological innovation is thus the creation of new knowledge that is applied to practical prob- lems. Sometimes this knowledge is applied to problems hastily, without full consideration of the consequences and alternatives, but overall it will probably serve us better to have more knowledge than less.

externalities Costs (or benefits) that are borne (or reaped) by individuals other than those responsible for creating them. Thus, if a business emits pollutants in a community, it imposes a nega- tive externality on the community members; if a business builds a park in a commu- nity, it creates a positive external- ity for community members.

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4 Chapter 1 Introduction

INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY

As will be shown in Chapter Two, the majority of effort and money invested in tech- nological innovation comes from industrial firms. However, in the frenetic race to innovate, many firms charge headlong into new product development without clear strategies or well-developed processes for choosing and managing projects. Such firms often initiate more projects than they can effectively support, choose projects that are a poor fit with the firm’s resources and objectives, and suffer long development cycles and high project failure rates as a consequence (see the accompanying Research Brief for a recent study of the length of new product development cycles). While innova- tion is popularly depicted as a freewheeling process that is unconstrained by rules and plans, study after study has revealed that successful innovators have clearly defined innovation strategies and management processes.6

The Innovation Funnel Most innovative ideas do not become successful new products. Many studies suggest that only one out of several thousand ideas results in a successful new product: Many projects do not result in technically feasible products and, of those that do, many fail to earn a commercial return. According a 2012 study by the Product Development and Management Association, only about one in nine projects that are initiated are success- ful, and of those that make it to the point of being launched to the market, only about half earn a profit.7 Furthermore, many ideas are sifted through and abandoned before

FIGURE 1.2 Gross Domestic Product per Capita, 1969– 2014 (in Real 2010 $US Billions)

Source: USDA Economic Research Service, International Macroeconomic Dataset (http://www. ers.usda.gov, accessed August 17, 2015)

19 69

19 71

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Chapter 1 Introduction 5

Research Brief How Long Does New Product Development Take?a

In a large-scale survey administered by the Prod- uct Development and Management Association (PDMA), researchers examined the length of time it took firms to develop a new product from initial concept to market introduction. The study divided new product development projects into catego- ries representing their degree of innovativeness: “radical” projects, “more innovative” projects, and “incremental” projects. On average, incremental projects took only 33 weeks from concept to mar- ket introduction. More innovative projects took

significantly longer, clocking in at 57 weeks. The development of radical products or technologies took the longest, averaging 82 weeks. The study also found that on average, for more innovative and radical projects, firms reported significantly shorter cycle times than those reported in the pre- vious PDMA surveys conducted in 1995 and 2004. a Adapted from Markham, SK, and Lee, H. “ Product Development and Management Association’s 2012 comparative performance assessment study,” Journal of Product Innovation Management 30 (2013), issue 3: 408–429.

a project is even formally initiated. According to one study that combined data from prior studies of innovation success rates with data on patents, venture capital fund- ing, and surveys, it takes about 3,000 raw ideas to produce one significantly new and successful commercial product.8 The pharmaceutical industry demonstrates this well—only one out of every 5,000 compounds makes it to the pharmacist’s shelf, and only one-third of those will be successful enough to recoup their R&D costs.9 Further- more, most studies indicate that it costs at least $1.5 billion and a decade of research to bring a new Food and Drug Administration (FDA)-approved pharmaceutical product to market! 10 The innovation process is thus often conceived of as a funnel, with many potential new product ideas going in the wide end, but very few making it through the development process (see Figure 1.3).

FIGURE 1.3 The New Prod- uct Develop- ment Funnel in Pharmaceuticals

125 Leads 2-3 drugs tested 1 drug Rx

5,000 Compounds

Discovery & Preclinical 3–6 years

Clinical Trials 6–7 years

Approval ½–2 years

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6 Chapter 1 Introduction

The Strategic Management of Technological Innovation Improving a firm’s innovation success rate requires a well-crafted strategy. A firm’s innovation projects should align with its resources and objectives, leveraging its core competencies and helping it achieve its strategic intent. A firm’s organizational struc- ture and control systems should encourage the generation of innovative ideas while also ensuring efficient implementation. A firm’s new product development process should maximize the likelihood of projects being both technically and commercially successful. To achieve these things, a firm needs (a) an in-depth understanding of the dynamics of innovation, (b) a well-crafted innovation strategy, and (c) well-designed processes for implementing the innovation strategy. We will cover each of these in turn (see Figure 1.4).

In Part One, we will cover the foundations of technological innovation, gaining an in-depth understanding of how and why innovation occurs in an industry, and why some innovations rise to dominate others. First, we will look at the sources of innova- tion in Chapter Two. We will address questions such as: Where do great ideas come from? How can firms harness the power of individual creativity? What role do cus- tomers, government organizations, universities, and alliance networks play in creating innovation? In this chapter we will first explore the role of creativity in the generation of novel and useful ideas. We then look at various sources of innovation, including the role of individual inventors, firms, publicly sponsored research, and collaborative networks.

In Chapter Three, we will review models of types of innovation (such as radical ver- sus incremental and architectural versus modular) and patterns of innovation (including s-curves of technology performance and diffusion, and technology cycles). We will address questions such as: Why are some innovations much harder to create and imple- ment than others? Why do innovations often diffuse slowly even when they appear to offer a great advantage? What factors influence the rate at which a technology tends to improve over time? Familiarity with these types and patterns of innovation will help us distinguish how one project is different from another and the underlying factors that shape the project’s likelihood of technical or commercial success.

In Chapter Four, we will turn to the particularly interesting dynamics that emerge in industries characterized by increasing returns, where strong pressures to adopt a single dominant design can result in standards battles and winner-take-all markets. We will address questions such as: Why do some industries choose a single dominant standard rather than enabling multiple standards to coexist? What makes one technological innovation rise to dominate all others, even when other seemingly superior technolo- gies are offered? How can a firm avoid being locked out? Is there anything a firm can do to influence the likelihood of its technology becoming the dominant design?

In Chapter Five, we will discuss the impact of entry timing, including first-mover advantages, first-mover disadvantages, and the factors that will determine the firm’s optimal entry strategy. This chapter will address such questions as: What are the advantages and disadvantages of being first to market, early but not first, and late? What determines the optimal timing of entry for a new innovation? This chapter reveals a number of consistent patterns in how timing of entry impacts innovation suc- cess, and it outlines what factors will influence a firm’s optimal timing of entry, thus beginning the transition from understanding the dynamics of technological innovation to formulating technology strategy.

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Chapter 1 Introduction 7

FIGURE 1.4 The Strategic Management of Technological Innovation

Part 3: Implementing Technological Innovation Strategy

Part 1: Industry Dynamics of Technological Innovation

Part 2: Formulating Technological Innovation Strategy

Chapter 4 Standards Battles

and Design Dominance

Chapter 2 Sources of Innovation

Chapter 5 Timing of Entry

Chapter 3 Types and Patterns

of Innovation

Chapter 6 Defining the Organization’s

Strategic Direction

Chapter 9 Protecting Innovation

Chapter 8 Collaboration

Strategies

Chapter 7 Choosing Innovation

Projects

Chapter 10 Organizing for

Innovation

Chapter 13 Crafting a

Deployment Strategy

Chapter 12 Managing New

Product Development Teams

Chapter 11 Managing the New

Product Development Process

Feedback

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8 Chapter 1 Introduction

In Part Two, we will turn to formulating technological innovation strategy. Chapter Six reviews the basic strategic analysis tools managers can use to assess the firm’s current position and define its strategic direction for the future. This chapter will address such questions as: What are the firm’s sources of sustainable competitive advantage? Where in the firm’s value chain do its strengths and weaknesses lie? What are the firm’s core competencies, and how should it leverage and build upon them? What is the firm’s strategic intent—that is, where does the firm want to be 10 years from now? Only once the firm has thoroughly appraised where it is currently can it formulate a coherent technological innovation strategy for the future.

In Chapter Seven, we will examine a variety of methods of choosing innovation projects. These include quantitative methods such as discounted cash flow and options valuation techniques, qualitative methods such as screening questions and balancing the research and development portfolio, as well as methods that combine qualitative and quantitative approaches such as conjoint analysis and data envelopment analysis. Each of these methods has its advantages and disadvantages, leading many firms to use a multiple-method approach to choosing innovation projects.

In Chapter Eight, we will examine collaboration strategies for innovation. This chapter addresses questions such as: Should the firm partner on a particular project or go solo? How does the firm decide which activities to do in-house and which to access through collaborative arrangements? If the firm chooses to work with a partner, how should the partnership be structured? How does the firm choose and monitor partners? We will begin by looking at the reasons a firm might choose to go solo versus working with a partner. We then will look at the pros and cons of various partnering methods, including joint ventures, alliances, licensing, outsourcing, and participating in col- laborative research organizations. The chapter also reviews the factors that should influence partner selection and monitoring.

In Chapter Nine, we will address the options the firm has for appropriating the returns to its innovation efforts. We will look at the mechanics of patents, copyright, trademarks, and trade secrets. We will also address such questions as: Are there ever times when it would benefit the firm to not protect its technological innovation so vigorously? How does a firm decide between a wholly proprietary, wholly open, or partially open strategy for protecting its innovation? When will open strategies have advantages over wholly proprietary strategies? This chapter examines the range of protection options available to the firm, and the complex series of trade-offs a firm must consider in its protection strategy.

In Part Three, we will turn to implementing the technological innovation strategy. This begins in Chapter Ten with an examination of how the organization’s size and structure influence its overall rate of innovativeness. The chapter addresses such ques- tions as: Do bigger firms outperform smaller firms at innovation? How do formaliza- tion, standardization, and centralization impact the likelihood of generating innovative ideas and the organization’s ability to implement those ideas quickly and efficiently? Is it possible to achieve creativity and flexibility at the same time as efficiency and reliability? How do multinational firms decide where to perform their development activities? How do multinational firms coordinate their development activities toward a common goal when the activities occur in multiple countries? This chapter examines how organizations can balance the benefits and trade-offs of flexibility, economies of scale, standardization, centralization, and tapping local market knowledge.

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Chapter 1 Introduction 9

In Chapter Eleven, we will review a series of “best practices” that have been identi- fied in managing the new product development process. This includes such questions as: Should new product development processes be performed sequentially or in parallel? What are the advantages and disadvantages of using project champions? What are the benefits and risks of involving customers and/or suppliers in the development process? What tools can the firm use to improve the effectiveness and efficiency of its new product development processes? How does the firm assess whether its new product development process is successful? This chapter provides an extensive review of methods that have been developed to improve the management of new product development projects and to measure their performance.

Chapter Twelve builds on the previous chapter by illuminating how team composi- tion and structure will influence project outcomes. This chapter addresses questions such as: How big should teams be? What are the advantages and disadvantages of choosing highly diverse team members? Do teams need to be collocated? When should teams be full-time and/or permanent? What type of team leader and manage- ment practices should be used for the team? This chapter provides detailed guidelines for constructing new product development teams that are matched to the type of new product development project under way.

Finally, in Chapter Thirteen, we will look at innovation deployment strategies. This chapter will address such questions as: How do we accelerate the adoption of the technological innovation? How do we decide whether to use licensing or OEM agree- ments? Does it make more sense to use penetration pricing or a market-skimming price? When should we sell direct versus using intermediaries? What strategies can the firm use to encourage distributors and complementary goods providers to sup- port the innovation? What are the advantages and disadvantages of major marketing methods? This chapter complements traditional marketing, distribution, and pricing courses by looking at how a deployment strategy can be crafted that especially targets the needs of a new technological innovation.

Summary of Chapter

1. Technological innovation is now often the single most important competitive driver in many industries. Many firms receive more than one-third of their sales and profits from products developed within the past five years.

2. The increasing importance of innovation has been driven largely by the global- ization of markets and the advent of advanced technologies that enable more rapid product design and allow shorter production runs to be economically feasible.

3. Technological innovation has a number of important effects on society, includ- ing fostering increased GDP, enabling greater communication and mobility, and improving medical treatments.

4. Technological innovation may also pose some negative externalities, including pollution, resource depletion, and other unintended consequences of technological change.

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10 Chapter 1 Introduction

5. While government plays a significant role in innovation, industry provides the majority of R&D funds that are ultimately applied to technological innovation.

6. Successful innovation requires an in-depth understanding of the dynamics of innovation, a well-crafted innovation strategy, and well-developed processes for implementing the innovation strategy.

Discussion Questions 1. Why is innovation so important for firms to compete in many industries? 2. What are some advantages of technological innovation? Disadvantages? 3. Why do you think so many innovation projects fail to generate an economic return?

Suggested Further Reading

Classics Arrow, K. J., “Economic welfare and the allocation of resources for inventions,”

in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. R. Nelson (Princeton, NJ: Princeton University Press, 1962), pp. 609–25.

Mansfield, E., “Contributions of R and D to economic growth in the United States,” Science CLXXV (1972), pp. 477–86.

Schumpeter, J. A., The Theory of Economic Development (1911; English translation, Cambridge, MA: Harvard University Press, 1936).

Stalk,G. and Hout, T.M., “Competing Against Time: How Time-Based Competition Is Reshaping Global Markets” (New York: Free Press, 1990).

Recent Work Ahlstrom, D., “Innovation and growth: How business contributes to society,” Acad-

emy of Management Perspectives, (2010) August, pp. 10–23. Baumol, W. J., The Free Market Innovation Machine: Analyzing the Growth Miracle

of Capitalism (Princeton, NJ: Princeton University Press, 2002). Editors, “The top 25 innovations of the last 25 years,” Popular Science (2012),

November 15th. (www.popsci.com) Friedman, T. L., The World Is Flat: A Brief History of the Twenty-First Century (New

York: Farrar, Straus and Giroux, 2006). Schilling, M.A. 2015. Towards dynamic efficiency: Innovation and its implications for

antitrust. Forthcoming in Antitrust Bulletin.

1. J. P. Womack, D. T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990).

2. W. Qualls, R. W. Olshavsky, and R. E. Michaels, “Shortening of the PLC—an Empirical Test,” Journal of Marketing 45 (1981), pp. 76–80.

3. M. A. Schilling and C. E. Vasco, “Product and Process Technological Change and the Adoption of Modular Organizational Forms,” in Winning Strategies in a Deconstructing World, eds. R. Bresser, M. Hitt, R. Nixon, and D. Heuskel (Sussex, England: John Wiley & Sons, 2000), pp. 25–50.

Endnotes

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Chapter 1 Introduction 11

4. N. Crafts, “The First Industrial Revolution: A Guided Tour for Growth Economists,” The American Economic Review 86, no. 2 (1996), pp. 197–202; R. Solow, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics 39 (1957), pp. 312–20; and N. E. Terleckyj, “What Do R&D Numbers Tell Us about Technological Change?” American Economic Association 70, no. 2 (1980), pp. 55–61.

5. H. A. Simon, “Technology and Environment,” Management Science 19 (1973), pp. 1110–21. 6. S. Brown and K. Eisenhardt, “The Art of Continuous Change: Linking Complexity Theory

and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 42 (1997), pp. 1–35; K. Clark and T. Fujimoto, Product Development Performance (Boston: Harvard Business School Press, 1991); R. Cooper, “Third Generation New Product Processes,” Journal of Product Innovation Management 11 (1994), pp. 3–14; D. Doughery, “Reimagining the Differentiation and Integration of Work for Sustained Product Innovation,” Organization Science 12 (2001), pp. 612–31; and M. A. Schilling and C. W. L. Hill, “Manag- ing the New Product Development Process: Strategic Imperatives,” Academy of Management Executive 12, no. 3 (1998), pp. 67–81.

7. Markham, SK, and Lee, H. “Product Development and Management Association’s 2012 comparative performance assessment study,” Journal of Product Innovation Management 30 (2013), issue 3:408–429.

8. G. Stevens and J. Burley, “3,000 Raw Ideas Equals 1 Commercial Success!” Research Technol- ogy Management 40, no. 3 (1997), pp. 16–27.

9. Standard & Poor’s Industry Surveys, Pharmaceutical Industry, 2008. 10. See Joseph A. DiMasi & Henry G. Grabowski, The Costs of Biopharmaceutical R&D: Is Bio-

tech Different? 28 Managerial & Decision Econ. 469-179. (2007).

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Part One

Industry Dynamics of Technological Innovation

In this section, we will explore the industry dynamics of technological innova- tion, including:

organizations, government institutions, and networks.

evolution and diffusion.

dominant design, and what drives which technologies to dominate others.

entry options.

-

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Part 1: Industry Dynamics of Technological Innovation

Chapter 2 Sources of Innovation

Chapter 5 Timing of Entry

Chapter 4 Standards Battles

and Design Dominance

Chapter 3 Types and Patterns

of Innovation

Part 2: Formulating Technological Innovation Strategy

Chapter 6 Defining the Organization’s

Strategic Direction

Chapter 9 Protecting Innovation

Chapter 8 Collaboration

Strategies

Chapter 7 Choosing Innovation

Projects

Part 3: Implementing Technological Innovation Strategy

Chapter 10 Organizing for

Innovation

Chapter 13 Crafting a

Deployment Strategy

Chapter 11 Managing the New

Product Development Process

Chapter 12 Managing New

Product Development Teams

Feedback

Industry Dynamics of Technological Innovation

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15

Chapter Two

Sources of Innovation Getting an Inside Look: Given Imaging’s Camera Pilla

Gavriel Iddan was an electro-optical engineer at Israel’s Rafael Armament Devel- opment Authority, the Israeli authority for development of weapons and military technology. One of Iddan’s projects was to develop the “eye” of a guided missile,

-

viewing the small intestine.b

c

-

-

-

- ter solution for viewing the small intestine. By this time, very small image sensors— charge-coupled devices

missile-like device that could travel through the intestine without a lifeline leading

peristaltic action would propel the camera through the length of the intestine.

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16 Part One Industry Dynamics of Technological Innovation

imagers with a new generation of complementary metal oxide semiconductors

GI for gastrointestinal, V for video, and EN and market the technology.d

supplied small video cameras and transmitters to private detectives and other users.e By 1994 they were developing crude devices to see if they could trans-

prototype device into a pig’s stomach, and demonstrated that they could see the

-

-

-

-

how far the capsule had traveled, so they used a radiograph to find the position

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Chapter 2 Sources of Innovation 17

colon, and thus had successfully traversed the entire length of the small intes-

capsule, which he did the next morning. Now that the team was more practiced

length of small intestine.f

Over the next few months the team conducted several animal and human tri- -

that year in Nature g By August

Given Imaging marketed its device as a system that included a workstation, -

utilize Given’s computer software, which employs algorithms that examine the

the patient naturally.

- -

h

auto-immune disorder in which the digestive tract attacks itself, leading to pain,

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18 Part One Industry Dynamics of Technological Innovation

A View to the Future . . .

that even more people would undergo screening if screening were more com-

incomplete colonoscopies,” citing some results that indicated that the pictures

industry, however, suspected that the camera pill would eventually supplant all traditional colonoscopy.

i

j Given

approved for more applications and in more countries, it was positioned to trans- form the market for gastrointestinal endoscopy.

Discussion Questions

-

-

a

b Gastrointestinal Endos- copy Clinics of North America

c

d Wall Street Transcript

e

f

g Nature p. 417.

h Medical Marketing & Media, i Wall Street Journal,

j CNN Money,

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Chapter 2 Sources of Innovation 19

OVERVIEW

Innovation can arise from many different sources. It can originate with individuals, as in the familiar image of the lone inventor or users who design solutions for their own needs. Innovation can also come from the research efforts of universities, gov- ernment laboratories and incubators, or private nonprofit organizations. One primary engine of innovation is firms. Firms are well suited to innovation activities because they typically have greater resources than individuals and a management system to marshal those resources toward a collective purpose. Firms also face strong incentives to develop differentiating new products and services, which may give them an advan- tage over nonprofit or government-funded entities.

An even more important source of innovation, however, does not arise from any one of these sources, but rather the linkages between them. Networks of innovators that leverage knowledge and other resources from multiple sources are one of the most powerful agents of technological advance.1 We can thus think of sources of innova- tion as composing a complex system wherein any particular innovation may emerge primarily from one or more components of the system or the linkages between them (see Figure 2.1).

In the sections that follow, we will first consider the role of creativity as the under- lying process for the generation of novel and useful ideas. We will then consider how creativity is transformed into innovative outcomes by the separate components of the innovation system (individuals, firms, etc.), and through the linkages between differ- ent components (firms’ relationships with their customers, technology transfer from universities to firms, etc.).

innovation The practical implementation of an idea into a new device or process.

Private Nonprofits

Government- Funded Research

UniversitiesIndividuals

Firms

FIGURE 2.1 Sources of Innovation as a System

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20 Part One Industry Dynamics of Technological Innovation

CREATIVITY

Innovation begins with the generation of new ideas. The ability to generate new and useful ideas is termed creativity. Creativity is defined as the ability to produce work that is useful and novel. Novel work must be different from work that has been previ- ously produced and surprising in that it is not simply the next logical step in a series of known solutions.2 The degree to which a product is novel is a function both of how different it is from prior work (e.g., a minor deviation versus a major leap) and of the audience’s prior experiences.3 A product could be novel to the person who made it, but known to most everyone else. In this case, we would call it reinvention. A product could be novel to its immediate audience, yet be well known somewhere else in the world. The most creative works are novel at the individual producer level, the local audience level, and the broader societal level.4

Individual Creativity An individual’s creative ability is a function of his or her intellectual abilities, knowl- edge, style of thinking, personality, motivation, and environment.5 The most impor- tant intellectual abilities for creative thinking include the ability to look at problems in unconventional ways, the ability to analyze which ideas are worth pursuing and which are not, and the ability to articulate those ideas to others and convince others that the ideas are worthwhile. The impact of knowledge on creativity is somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a field too well, that person can become trapped in the existing logic and paradigms, pre- venting him or her from coming up with solutions that require an alternative perspective. Thus, an individual with only a moderate degree of knowledge of a field might be able to produce more creative solutions than an individual with extensive knowledge of the field.6 This may explain in part why a military scientist such as Gavriel Iddan came up with a significant medical innovation (as described in the opening case), despite having no formal medical training. With respect to thinking styles, the most creative individu- als prefer to think in novel ways of their own choosing, and can discriminate between important problems and unimportant ones. The personality traits deemed most important for creativity include self-efficacy (a person’s confidence in his or her own capabilities), tolerance for ambiguity, and a willingness to overcome obstacles and take reasonable risks.7 Intrinsic motivation has also been shown to be very important for creativity.8 That is, individuals are more likely to be creative if they work on things they are genuinely interested in and enjoy. Finally, to fully unleash an individual’s creative potential often requires an environment that provides support and rewards for creative ideas.

Organizational Creativity The creativity of the organization is a function of creativity of the individuals within the organization and a variety of social processes and contextual factors that shape the way those individuals interact and behave.9 An organization’s overall creativity level is thus not a simple aggregate of the creativity of the individuals it employs. The organiza- tion’s structure, routines, and incentives could thwart individual creativity or amplify it.

idea Something imagined or pictured in the mind.

creativity The ability to produce novel and useful work.

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Chapter 2 Sources of Innovation 21

The most familiar method of a company tapping the creativity of its individual employees is the suggestion box. In 1895, John Patterson, founder of National Cash Register (NCR), created the first sanctioned suggestion box program to tap the ideas of the hourly worker.10 The program was considered revolutionary in its time. The originators of adopted ideas were awarded $1. In 1904, employees submitted 7,000 ideas, of which one-third were adopted. Other firms have created more elaborate sys- tems that not only capture employee ideas, but incorporate mechanisms for selecting and implementing those ideas. Google, for example, utilizes an idea management system whereby employees e-mail their ideas for new products and processes to a company-wide database where every employee can view the idea, comment on it, and rate it (for more on how Google encourages innovation, see the Theory in Action on Inspiring Innovation at Google, later in this section). Honda of America utilizes an employee-driven idea system (EDIS) whereby employees submit their ideas, and if approved, the employee who submits the idea is responsible for following through on the suggestion, overseeing its progress from concept to implementation. Honda of America reports that more than 75 percent of all ideas are implemented.11 Bank One, one of the largest holding banks in the United States, has created an employee idea program called “One Great Idea.” Employees access the company’s idea repository through the company’s intranet. There they can submit their ideas and actively interact and collaborate on the ideas of others.12 Through active exchange, the employees can evaluate and refine the ideas, improving their fit with the diverse needs of the organization’s stakeholders.

At Bank of New York Mellon they go a step further—the company holds enterprise- wide innovation competitions where employees form their own teams and compete in coming up with innovative ideas. These ideas are first screened by judges at both the regional and business-line level. Then, the best ideas are pitched to senior manage- ment in a “Shark Tank” style competition that is webcast around the world. If a senior executive sees an idea they like, they step forward and say they will fund it and run with it. The competition both helps the company come up with great ideas and sends a strong signal to employees about the importance of innovation.13

Idea collection systems (such as suggestion boxes) are relatively easy and inex- pensive to implement, but are only a first step in unleashing employee creativity. Today companies such as Intel, Motorola, 3M, and Hewlett-Packard go to much greater lengths to tap the creative potential embedded in employees, including investing in creativity training programs. Such programs encourage managers to develop verbal and nonverbal cues that signal employees that their thinking and autonomy are respected. These cues shape the culture of the firm and are often more effective than monetary rewards—in fact, sometimes monetary rewards undermine creativity by encouraging employees to focus on extrinsic rather than intrinsic moti- vation.14 The programs also often incorporate exercises that encourage employees to use creative mechanisms such as developing alternative scenarios, using analo- gies to compare the problem with another problem that shares similar features or structure, and restating the problem in a new way. One product design firm, IDEO, even encourages employees to develop mock prototypes of potential new products out of inexpensive materials such as cardboard or styrofoam and pretend to use the product, exploring potential design features in a tangible and playful manner.

intranet A private net- work, accessible only to author- ized individuals. It is like the Internet but operates only within (“intra”) the organization.

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22

TRANSLATING CREATIVITY INTO INNOVATION

Innovation is more than the generation of creative ideas; it is the implementation of those ideas into some new device or process. Innovation requires combining a creative idea with resources and expertise that make it possible to embody the creative idea in a useful form. We will first consider the role of individuals as innovators, including innovation by inventors who specialize in creating new products and processes, and innovation by end users. We then will look at innovation activity that is organized by firms, universities, and government institutions.

The Inventor The familiar image of the inventor as an eccentric and doggedly persistent scien- tist may have some basis in cognitive psychology. Analysis of personality traits of inventors suggests these individuals are likely to be interested in theoretical and abstract thinking, and have an unusual enthusiasm for problem solving. Their ten- dency toward introversion may cause them to be better at manipulating concepts than at interacting socially.15 Such personality traits appear to suggest that the capacity to be an inventor is an innate ability of an individual. Others, however, disagree with this conclusion and argue that inventors are made, not born.16 One 10-year study of inventors concludes that the most successful inventors possess the following traits:

1. They have mastered the basic tools and operations of the field in which they invent, but they have not specialized solely in that field; instead they have pursued two or three fields simultaneously, permitting them to bring different perspectives to each.

2. They are curious and more interested in problems than solutions.

Google is always working on a surprising array of projects, ranging from the completely unexpected (such as autonomous self-driving cars and solar energy) to the more mundane (such as e-mail and cloud services).a In pursuit of continuous innovation at every level of the company, Google uses a range of formal and informal mechanisms to encourage its employees to innovate:b

20 percent Time: All Google engineers are encouraged to spend 20 percent of their time working on their own projects. This was the source of some of Google’s most famous products (e.g., Google Mail, Google News).

Recognition Awards: Managers were given discre- tion to award employees with “recognition awards” to celebrate their innovative ideas.

Google Founders’ Awards: Teams doing outstand- ing work could be awarded substantial stock grants.

Some employees had become millionaires from these awards alone.

Adsense Ideas Contest: Each quarter, the Adsense online sales and operations teams reviewed 100 to 200 submissions from employees around the world, and selected finalists to present their ideas at the quarterly contest.

Innovation Reviews: Formal meetings where manag- ers product ideas originated in their divisions directly to founders Larry Page and Sergey Brin, as well as to CEO Eric Schmidt.c

a Bradbury, D. 2011. Google’s rise and rise. Backbone, Oct:24–27.

b Groysberg, B., Thomas, D.A. & Wagonfeld, A.B. 2011. Keeping Google “Googley.” Harvard Business School Case 9-409-039.

c Kirby, J. 2009. How Google really does it. Canadian Business, 82(18):54–58.

Theory in Action Inspiring Innovation at Google

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In January 2001, an Internet news story leaked that iconoclastic inventor Dean Kamen had devised a fan- tastic new invention—a device that could affect the way cities were built, and even change the world. Shrouded in secrecy, the mysterious device, code- named “Ginger” and “IT,” became the talk of the technological world and the general public, as specu- lation about the technology grew wilder and wilder. In December of that year, Kamen finally unveiled his invention, the Segway Human Transporter.a Based on an elaborate combination of motors, gyroscopes, and a motion control algorithm, the Segway HT was a self-balancing, two-wheeled scooter. Though to many it looked like a toy, the Segway represented a significant advance in technology. John Doerr, the venture capitalist behind Amazon.com and Netscape, predicted it would be bigger than the Internet. Though the Segway did not turn out to be a mass market success, its technological achieve- ments were significant. In 2009, General Motors and Segway announced that they were developing a two-wheeled, two-seat electric vehicle based on the Segway that would be fast, safe, inexpensive, and clean. The car would run on a lithium-ion battery and achieve speeds of 35 miles-per-hour.

The Segway was the brainchild of Dean Kamen, an inventor with more than 150 U.S. and foreign patents, whose career began in his teenage days of devising mechanical gadgets in his parents’ basement.b Kamen never graduated from college, though he has since received numerous honorary degrees. He is described as tireless and eclectic, an entrepreneur with a seemingly boundless enthusi- asm for science and technology. Kamen has received numerous awards for his inventions, including the Kilby award, the Hoover Medal, and the National Medal of Technology. Most of his inventions have

been directed at advancing health care technol- ogy. In 1988, he invented the first self-service dialy- sis machine for people with kidney failure. Kamen had rejected the original proposal for the machine brought to him by Baxter, one of the world’s largest medical equipment manufacturers. To Kamen, the solution was not to come up with a new answer to a known problem, but to instead reformulate the problem: “What if you can find the technology that not only fixes the valves but also makes the whole thing as simple as plugging a cassette into a VCR? Why do patients have to continue to go to these centers? Can we make a machine that can go in the home, give the patients back their dignity, reduce the cost, reduce the trauma?”c The result was the HomeChoice dialysis machine, which won Design News’ 1993 Medical Product of the Year award.

In 1999, Kamen’s company, DEKA Research, introduced the IBOT Mobility System, an extremely advanced wheelchair incorporating a sophisticated balancing system that enabled users to climb stairs and negotiate sand, rocks, and curbs. According to Kamen, the IBOT “allowed a disabled person, a per- son who cannot walk, to basically do all the ordi- nary things that you take for granted that they can’t do even in a wheelchair, like go up a curb.”d It was the IBOT’s combination of balance and mobility that gave rise to the idea of the Segway.

a J. Bender, D. Condon, S. Gadkari, G. Shuster, I. Shuster, and M. A. Schilling, “Designing a New Form of Mobility: Segway Human Transporter,” New York University teach- ing case, 2003.

b E. I. Schwartz, “The Inventor’s Play-Ground,” Technology Review 105, no. 8 (2002), pp. 68–73.

c Ibid. d The Great Inventor. Retrieved November 19, 2002, from

www.cbsnews.com.

Theory in Action Dean Kamen

3. They question the assumptions made in previous work in the field. 4. They often have the sense that all knowledge is unified. They seek global solu-

tions rather than local solutions, and are generalists by nature.17

These traits are demonstrated by Dean Kamen, inventor of the Segway Human Transporter and the IBOT Mobility System (a technologically advanced wheelchair), profiled in the Theory in Action section on Dean Kamen. They are also illustrated in the following quotes by Nobel laureates. Sir MacFarlane Burnet, Nobel Prize–winning

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24 Part One Industry Dynamics of Technological Innovation

immunologist, noted, “I think there are dangers for a research man being too well trained in the field he is going to study,”18 and Peter Debye, Nobel Prize–winning chemist, noted, “At the beginning of the Second World War, R. R. Williams of Bell Labs came to Cornell to try to interest me in the polymer field. I said to him, ‘I don’t know anything about polymers. I never thought about them.’ And his answer was, ‘That is why we want you.’ ”19 The global search for global solutions is aptly illus- trated by Thomas Edison, who did not set out to invent just a lightbulb: “The problem then that I undertook to solve was . . . the production of the multifarious apparatus, methods, and devices, each adapted for use with every other, and all forming a com- prehensive system.”20

Such individuals may spend a lifetime developing numerous creative new devices or processes, though they may patent or commercialize few. The qualities that make people inventive do not necessarily make them entrepreneurial; many inventors do not actively seek to patent or commercialize their work. Many of the most well-known inventors (e.g., Alexander Graham Bell, Thomas Alva Edison, Albert Einstein, and Benjamin Franklin), however, had both inventive and entrepreneurial traits.21

Innovation by Users Innovation often originates with those who create solutions for their own needs. Users often have both a deep understanding of their unmet needs and the incentive to find ways to fulfill them.22 While manufacturers typically create new product innova- tions in order to profit from the sale of the innovation to customers, user innovators often have no initial intention to profit from the sale of their innovation––they create the innovation for their own use.23 Users may alter the features of existing products, approach existing manufacturers with product design suggestions, or develop new products themselves. For example, the extremely popular small sailboat, the Laser, was designed without any formal market research or concept testing. Instead it was the creative inspiration of three former Olympic sailors, Ian Bruce, Bruce Kirby, and Hans Vogt. They based the boat design on their own preferences: simplicity, maximum performance, transportability, durability, and low cost. The resulting sailboat became hugely successful; during the 1970s and ’80s, 24 Laser sailboats were produced daily.24

Another dramatic example is the development of Indermil, a tissue adhesive based on Super Glue. Super Glue is a powerful instant adhesive, and while its strength and speed of action were a great asset in most product applications, these features also caused a key product concern—its tendency to bond skin. Managers at Loctite, the company that developed Super Glue, wondered if this tendency could be exploited to develop an alternative to sutures for surgical applications. In the 1970s, the company experimented with developing a version of the adhesive that could be packaged and sterilized, but the project failed and funding for it was canceled. In 1980 the project was resurrected when Loctite was approached by a pharmaceutical company that wanted to collaborate on developing a wound closure product. The two companies spent three years attempting to develop special Super Glues that would degrade quickly in the body, but ultimately shelved the project again. By this point most managers in the company no longer wanted to be involved in developing an alternative to sutures—it was considered far too risky. However, in 1988, Bernie Bolger of Loctite was contacted by Professor Alan Roberts, a worldwide figure in reconstructive surgery. Roberts proceeded to give the

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25

The first snowboards were not developed by major sports equipment manufacturers seeking to leverage their capabilities by developing a new sport. Instead, they were developed by individuals who sought new ways of fulfilling their own desires for gliding over snow.

Snowboarding traces its history to the early 1960s, when a number of individuals developed an assort- ment of snowboard precursors, whose designs would ultimately give rise to the modern snowboard.a Some of the most notable of these individuals included Tom Sims, Sherman Poppen, Jake Burton Carpenter, Dimitrije Milovich, Mike Olson, and Chuck Barfoot. In 1963, Tom Sims, an avid skier and skateboarder, made his first “ski board” in wood shop class. Sims and Bob Weber would go on to design snowboards and found the company known as Sims. Another very early developer was Sherman Poppen. In 1965, to make a toy for his daughter, Poppen attached two skis together into what he called a “snurfer.” The toy turned out to be so popular that Poppen began organizing informal competitions for snurfer enthusiasts. Jake Burton Carpenter was one such enthusiast, and he began developing a version of the snurfer with rubber straps to act as bindings, giv- ing the user greater control. This led to the found- ing of his Vermont-based company, Burton, which rose to become a dominant force in snowboarding. It is notable that the primary motive for most of these innovators was to develop a product for their own use; however, over time they received so many requests for their innovations from other would-be users that they subsequently founded firms.b

By the early 1970s, several other individuals were developing snowboards, often driven by a desire to more closely replicate the action and feel of skate- boarding or surfing rather than skiing. In 1975, Dimitrije Milovich set up one of the earliest snow- board companies, Winterstick, to sell his swallow- tailed snowboards based on a surfboard design. He gained considerable exposure when Newsweek cov- ered him in March of that same year, and Powder

magazine gave him a two-page photo spread.c About the same time, Mike Olson and Chuck Barfoot were also developing their own snowboard proto types, which would evolve to become the snow- board lines of Gnu and Barfoot.

By the mid-1980s, snowboarding was beginning to be allowed in major ski resorts, and ski manu- facturers such as K2 and Rossignol were eyeing this growing market. The skiing industry had peaked in the 1970s and had since seen slumping demand. Snowboarding offered a way to revitalize the indus- try because it promised to tap a new market (largely skateboarders and surfers) rather than cannibalizing existing ski sales. By the late 1980s, K2 had a success- ful line of snowboards, and Rossignol was working the kinks out of its snowboarding line (early Ros- signols received a lackluster response due to their more skilike feel). Even Mistral, a Swiss windsurfing company, began designing and selling snowboards.

The 1990s witnessed the rapid proliferation of new competitors in the snowboard industry. By 1995 there were approximately 300 snowboard compa- nies. In 1998 snowboarding made its debut as an offi- cial Olympic event in Nagana, Japan, officially sealing its position in the mainstream. By 2014, there were approximately 7.3 million snowboarding participants in the United States alone and the U.S. market for snowboarding equipment was roughly $256 million.d What had begun as the creation of a few renegade sportsmen had developed into a significant industry.

a M. A. Schilling, A. Eng, and M. Velasquez, “Madd Snow- boards,” in Strategic Management: Competitiveness and Globalization, eds. M. Hitt, D. Ireland, and B. Hoskisson, 4th ed. (St. Paul, MN: West Publishing, 2000).

b S. K. Shah and M. Tripsas, “The Accidental Entrepreneur: The Emergent and Collective Process of User Entrepreneurship,” Strategic Entrepreneurship Journal 1 (2007), pp. 123–40.

c Transworld Snowboarding, Snowboard History Timeline, www.twsnow.com.