CHAPTER VIII – INNOVATION STRATEGIES

PART 1

Research, technology and innovation

1. Research – An original and planned inquiry that aims to discover new knowledge and
achieve a greater understanding in the scientific and technological field.

2. Technology – The combination of knowledge, resources, and expertise that can be

systematically applied to design and manufacture a product or provide a service. It is
made up of three key elements:
 Knowledge – Based on scientific disciplines.
 Material resources – Machines, tools, and installations.
 Know-how – Practical experience and expertise.

3. Innovation –The application of technology in various aspects of business (such as

products, services, or processes), leading to a significant impact of novelty (Navas,
1994).

Technological innovation

The set of scientific, commercial, technological, financial activities which enable to:

 Introduce new or improved products on the domestic or foreign market. Examples:

drugs, equipment, medical devices, diagnostic tools, and producers.

 Introduce new or improved services. Examples: new surgical services, preventive care,
dental care.

 Implement new or improved production processes or procedures. Examples: medical-

surgical.

 Enter and validate new or improved management techniques and organizational

systems, which healthcare providers apply in factories.

Technological innovation includes new products and processes and significant changes, from a
technological point of view, in products and processes. It is the activity that results in a
technological breakthrough in the development of new products or production processes, or
substantial improvements of the existing ones.
Innovation categories

Classification of Innovations According to Impact or Degree of Influence

 Radical Innovation: Essential and revolutionary changes. These innovations open new
markets, industries, and fields of activity, such as in the cultural sphere, public
administration, or services.

 Incremental Innovation: Successive minor changes made to existing products or

processes.

o These involve improvements in existing technologies without altering their

fundamental characteristics.

o Frequently occur in production activities and are often the result of efforts by
production staff (e.g., "learning by doing" and "learning by using") rather than
planned Research & Development (R&D) activities.

Types of Innovation

Depending on the type of innovation

 Innovation in product or service: Introduced for the first time. Innovation is

considered applied when it is put on the market.

 Innovation in process: New methods or procedures never tested before. Innovation is

considered applied when it is used within a production process.

 Organizational innovation: Implementation of new organizational business methods,

such as knowledge management, training, evaluation, and development of human
resources, value chain management, business reengineering, or quality system
management, within work organization and external relations.

 Innovation in marketing or business models: Implementation of new marketing

methods and business models, including improvements in aesthetic design, product
packaging, pricing, distribution, promotion, and cost.
Life-cycles

Innovation life-cycle Technology life cycle – One of the most accepted

criteria for characterizing the technology is based on its
life cycle. The consulting firm McKinsey indicates that
the technologies, over time, evolve following a path
similar to the model of the life cycle of products

Evolution & maturity of some technologies

Maturation period of several technologies

Evolution of some technologies and innovations

Basic Knowledge—This serves as the foundation where core understanding and principles are
established.

Invention — The stage where new products and processes are created. This can happen
through developing original knowledge or by combining existing knowledge in innovative ways.

Innovation — The process of commercializing or practically applying an invention to make it

useful and valuable in a real-world context.

Diffusion —This is the phase where the innovation spreads across different users or markets. It
is explained from two viewpoints:

 Supply perspective — This leads to imitation, where others replicate the innovation.

 Demand perspective — This results in adoption, where users integrate the innovation
into their practices or lives.

Example: MP3, a software to compress audio files, was developed at the Fraunhofer
Institute in Germany in 1987; in the mid-nineties, it began the sharing MP3 music files at
American universities and in 1998 was launched the first MP3 player. Despite the closure of
the file-sharing service Napster in 2001, the proliferation of music piracy reduced by 25%
the sales of CDs in 2002 and 2003
Innovation process

Linear Process
Basic / Fundamental Study of a physical phenomenon without having "a priori" any use
R&D or application for the resulting knowledge.
Applied Research Studies focused on identifying possible concrete applications of the
generated knowledge.
Development Studies or tests to develop a model or prototype of a new product
to verify the practical utility of a new process.
Invention Result of the R&D. A new product or process that is technically
finished and ready for commercialization.
Innovation The moment in which the application of the new product or
process takes place.
Diffusion Buyers/users acquire the new product or process (demand side)
and competitors try to imitate it (supply side).
Non-linear Process
Traditionally, firms used to develop products for “passive” consumers.
Now, consumers play a much more active role in the development of new products and
processes. This phenomenon is called consumer-innovators or entrepreneurs, lead users.
Some industries in which this non-linear innovation process is frequent are the toy, clothing
and sports industries.

10 types of innovation

CONFIGURATION
Profit model Ad-supported - Auction - Bundled pricing - Cost leadership - Disaggregated pricing -
Financing - Flexible pricing - Freemium - Licensing – Membership - Microtransactions
- Premium - Risk sharing - Subscription
Network Alliances – Collaboration - Complementary partnering - Coopetition - Franchising -
Merge/acquisition - Open innovation - Secondary markets - Supply Chain Integration
Structure Asset Standardization - Competency center - Corporate university - Decentralized -
management - Incentive systems - IT integration - Knowledge management
Organizational design - Outsourcing
Process Crowdsourcing - Flexible manufacturing - Intellectual property - Lean production -
Localization - Logistics systems - On-demand production - Process automation -
Process efficiency - Process standardization - Strategic design - User-generated

OFFERING
Product Added functionality - Conservation Customization - Ease of use - Engaging
performanc functionality - Environmental sensitivity - Feature aggregation – Focus -
e Performance simplification - Safety - Styling - Superior product
 Product Complements - Extensions / Plug-ins - Integrated offering - Modular systems -
system Product bundling - Product / service platforms
EXPERIENCE
Service Added value – Guarantee - Lease or loan - Loyalty programs - Personalized service -
Self-service - Superior device - Supplementary service - Total experience
management - Try before you buy - User communities/ support system
Channel Context specific - Cross-selling – Diversification - Experience center - Flagship store -
Go direct - Indirect distribution - Multi-level marketing - Non-traditional channels -
On-demand - Pop-up presence
Brand Brand extension - Brand leverage - Certification - Co-branding - Component branding
- Private label - Transparency - Values alignment
Costumer Autonomy and Authority - Community and belonging - Experience automation -
engagement Experience enabling - Experience simplification - Mastery - Personalization –
Status and recognition - Whimsy and personality

Open and closed innovation

Open innovation – consumers innovators (Incorporating customer feedback into product and
marketing)

Open innovation by Henry Chesbrough

Open vs closed innovators

Closed Innovators Open Innovators

The smart people in the field work Not all the smart people in the field work for us. We
for us. need to work with smart people inside and outside
the company.
To profit from R&D, we must External R&D can create significant value; internal
discover it, develop it, and ship it R&D is needed to claim some portion of that value.
ourselves.
If we discover it ourselves, we will We don’t have to originate the research to profit
get it to the market first. from it.
The company that gets an innovation Building a better business model is better than
to the market first will win. getting to the market first.
If we create the most and best ideas If we make the best use of internal and external
in the industry, we will win. ideas, we will win.
We should control our IP, so that our We should profit from others’ use of our IP, and we
competitors don’t profit from our should buy others’ IP whenever it advances our
ideas. business model.

Open innovators yes… but why?

1. Greater costs of research and development

2. Shortening of the product lifecycle
3. Products with increasingly complexity
4. Changes in the social and economic behaviors (changes of greater and tendencies
labor mobility)
5. Greater specialization of the work because of the globalization
6. Improvement of the institutional frame to facilitate trade of technologies and ideas
(PATENTSCOPE of WIPO).
7. Increase in the dynamism of the market and technological development (substitutes,
complementary technologies, etc.)

Benefits of Open Innovation Disadvantages of Open Innovation

Obtain skills and resources in a faster way than Loss of control, as decisions are taken jointly
through internal development. with partners.

Guarantee access to ideas and external knowledge Too much externalization could generate a loss
to increase the company’s knowledge. of absorption capacity.

Access new knowledge and technologies that the Excessive externalization can negatively affect
company could never develop on its own. innovation performance.

Use resources more efficiently (shared), allowing Legal problems related to the copyright of
for lower investment and greater flexibility. shared inventions/innovations.

Focus on what the company dominates, delegating

the rest to external agents.
Share the risk and uncertainty of the innovation
process with other companies.

Implement internal ideas that would otherwise

remain unexplored.

Expand growth potential through alliances.

Mechanism for opening up

1. The purchase of technology 2. Strategic alliances
 It can be a short-time relationship.  Needed when companies need them
 Also, it can be a simple transaction. mutually.
 In all cases the technology must be  It requires a continued coordination
adapted to the culture, strategy, between the partners, what involves
aims of the time and money (months or years in
company and to establishing the alliance).
its technological
base. Problems
 It increases the organizational
complexity and reduce the
autonomy in the activities linked.
 Opportunist behavior by the
partner.
 Technological risk (appropriability
and escape of knowledge).
 Cultural risk & Competitive risk

3. Licenses 4. Joint Ventures

 The license goes further that a simple  The use of joint venture by generally
economic transaction and expects that has any of the following aims
the relations established between the o To go in in a new market
companies are continued. o Access to new technologies
 The license can be limited regarding his o Reduce risks
length or to the market. o Look for synergies with the
 The main motivation for the granting of local partner
licenses is the generation of income in o Learn of the local partner
short- or medium-term.
 Also, by lack of resources for internal When form a Joint Venture?... When you
commercialization cannot do it on your own or you would need
 Or to achieve a fast diffusion of the to many years to do it.
innovation (JVC with VHS).
PART 2

Technology-based industries

Technology diffusion – The process by which the use of technology expands over time in a
community of users. After the adoption of the technology, it is needed to be properly
transferred to the rest of consumers.

 From the demand side: by buying the product or service by customers.

 From the supply side: through imitation by competitors.

Two processes are distinguished

 Macrodiffusion (external diffusion). Dissemination of technology in society.

 Microdiffusion (internal diffusion). Dissemination of technology in a particular
organization.

Characteristics

Technical standards: Predetermined set of technical specifications to which the companies

could be attached for the manufacture of its own products or components of these products.

Majority adoption → Dominant design → Source of competitive advantage for the company
which develops it (usually by differentiation)

Agents that fix standards

 Public Administration: standard of general interest. Public access. There is not

competitive advantage.
 Group of companies: the enterprise puts first cooperation rather than competition in
order to establish common areas. Public Access. There is not competitive advantage.
 The market: when the demand selects what it considers with higher value. Private
access.

Network effects → indicates that the utility of a product increases with the number of
consumer users, i.e.: mobile phones, social networks (exceptions luxury products).

Strategic alternatives: Competitive strategies

Objectives

 Defining strategies to better compete in a technology-based industry.

 Achieve, maintain and /or appropriate a competitive advantage based on the use of
technology.

Alternatives

1. Technical control on the standard

2. Availability of additional resources
3. Protection of innovation
4. Competition in the time factor: the advantage of being pioneer
5. Achievement of technology
6. Exploiting Innovation
1. Controlling Technical Standard

If there are network effects, control of the standard is the basis of competitive advantage.
This often results in a “standard war”. (Risks and costs assumed in trying to set the initial)

How to set the Standard?

 Search allies before going to war (customers, suppliers, competitors, etc.)

 Advancing the market
 Managing the expectations of both investors and the market

Example; QWERTY system as a technical standard

Technical standard patented in 1932 regarding the position of key letters in typewriter s
and pc’s. It refers to the first six letters.

Consequences

 For customers: universal knowledge, ease of use.

 For manufacturers: compatible systems.
 Network effects appear
Company Product Category Standard

Microsoft Computer operating systems Windows

Intel Computer microprocessors X86 series

Sony / Phillips Compact discs CD-ROM format

Oracle Web programming language Java

Corporation

Qualcomm Digital cellular communication CDMA

Adobe Systems Document format PDF

Bosch Braking systems ABS / TCS

IMAX Corporation Film projection system IMAX

Apple Music download iTunes / iPod

Sony High-definition DVDs Blu-ray

2. Availability of additional resources

Another alternative is based on the potential of a company to exploit and commercialize

the innovation required to have additional resources as: an adequate system of
production, large financial capacity, namely to generate value to the customer, have a
bargaining power adequate access to distribution channels ...

Specific requirements for additional resources: If the innovator is not the owner of the
resources. → little grasp of the value of the innovation.
Generic resources: Innovator has more bargaining power → it will maintain more easily
the value generated.

3. Protecting Innovation

Legal protection of intellectual property → creation of the intellectual property (IP)

Legal protection creates barriers to imitation although they are not always effective

Alternative → Keep it secret (industrial secrecy) if legal protection isn’t viable

Imitation of the innovation

In the absence of effective legal protection, the imitation of innovation depends on:

 If technical knowledge is tacit or codified; codifiable when (you can put in

writing) is easy to copy if there is no protection (i.e. a financial product, or the
formula for Coca-Cola).
 The complexity of the innovation: if simple is easy to copy (ie clothing fashion).
 The tacit nature and complexity do not provide permanent barriers at the time
but offer temporary competitive advantage (innovative): innovation is a
competitive advantage that has temporary advantage (i.e. experience curve

4. Time Factor: the advantage of being pioneer

Being the first in the industry provides an advantage in the form of temporary monopoly
until followers imitate technology.

The enterprise could use this period to

 Create new resources and capabilities maintaining leadership.

 Developing new mechanisms to increase the cost of change.

Lead or follow?

The relative costs and advantages of being the first to enter depend on a large number of
variables, they can be classified into three groups:

Is the innovation adequately protected against imitation? o If so, the benefits to the
leader

Are Complementary Resources important?

o + important complementary req. resources → + attractive follower. Followers may not

have to invest in supplemental resources due to industry infrastructure improvement.

o Companies with complementary resources can afford to wait until uncertainty is

reduced.
Is the possession / control of the dominant standards important for the competitive
advantage of the sector? o If so, the benefits to the leader

Trade-off  Entering early may backfire if the wrong technology is chosen.

Leaders, followers and success in emerging sectors

Product Innovator Follower Winner

Commercial jet De Havilland (Comet) Boeing (707) Follower

LCD Pilkington Corning Leader

X-ray scanner EMI General Electric Follower

Personal computers Xerox IBM Follower

Videos Ampex / Sony Matsushita Follower

Diet cola R. C. Cola Coca-Cola Follower

Instant cameras Polaroid Kodak Leader

Pocket calculator Bowmar Texas Instruments Follower

Microwave oven Raytheon Samsung Follower

Photocopier Xerox Canon Unclear

Fiber optic cable Corning Many companies Leader

Video game Atari Nintendo / Sega Follower

Disposable diapers Procter & Gamble Kimberly-Clark Leader

5. Achieving Technology

Another alternative is to get technology through R&D itself or by buying technology in the
open market.

Possible ways of acquiring technology

 To incorporate free technology available on the market
 To buy direct technology through acquisitions of patents, trademarks, designs ...
 License agreements (most common)
 Contracts of cooperation between companies or research centers
 To purchase machinery or products containing themselves a high technological
content. To merger or purchase a company that develops technology.

Advantages of internal generation

 Knowledge is exclusive, since it is not shared with external agents
 Technological independence, as it does not follow third party terms
 Ability to commercialize technology
 Acquisition of experience developed during the process
The decision will depend on
 The innovative approach of the company (leader or follower) – text
 Degree of technological autonomy
 Degree of control over technology
 Period of time to use technology
 The financial resources
6. Exploiting Innovation

Alternatives
 Internal operation vs Sourcing External Technology for Innovation
 Transfer of technology (licenses)
 Alliances (strategic partenrships)

The choice of the alternative will depend on

 Availability of additional resources

 The importance of having barriers to imitation
 Degree of control over technology
 The number of competitors with sufficient capacity for imitation

There is no empirical evidence to support the superiority of one strategy versus another,
general speaking

Strategies of exploiting innovation

 Despite numerous research papers about it, there is no empirical evidence saying that
there are significant differences in terms of profitability among the strategies

Strategy based on Resources and Capabilities

Industry Technologies/Applications
Area

IT Resource management, payments management, ticketing systems,

traffic management systems, port surveillance systems, electronic
vote counting

Defence 3D radar, avionics, night vision, weapons guidance systems, missiles

Space Hispasat, Helios, Eutelsat, Meteosat, Artemis, Eumetsat

Simulation Aircraft, ships, trains, cranes

Blue Ocean Strategy

Blue Ocean Strategy was developed by W. Chan Kim and Renée Mauborgne in 1990. It is
important to the company to focus on leaving aside the competition between industries, and
to expand the market through innovation.

Red Ocean are all industries that exist today: the known market space where the industry
boundaries are defined, and all companies try to overcome its competition.
It is red because there is a fierce competition which turns the red ocean bloody.

The blue oceans denote the unknown market space: unexplored and untainted, not infected
by competition

From Head-to-Head Competition to Blue Ocean Creation

Value Innovation: The Cornerstone of Blue Ocean Strategy

The Six Principles of Blue Ocean Strategy

Formulation Principles Risk factors atten

Reconstruct market boundaries ↓ Search risk
Focus on the big picture, not the numbers ↓ Planning risk
Reach beyond existing demand ↓ Scale risk
Get the strategic sequence right ↓ Business model risk
Execution Principles Risk factors atten
Overcome key organizational hurdles ↓ Organizational risk
Build execution into strategy ↓ Management risk

The 4 Actions Framework

Canvas Strategy of the U.S. Wine Industry in Late 1990s

Example: Yellow tail

Red Ocean vs Blue Ocean Strategy

“Stop benchmarking the competition. The more you benchmark your competitors, the more
you tend to look like them” Kim and Mauborgne (INSEAD 2010)

Red Ocean Strategy Blue Ocean Strategy

We compete in markets that already exist. Objective – to create new spaces in markets
Objectives where there is no competition. And, to align
 To beat your competition. the value chain seeking simultaneously
 To exploit existing demand. differentiation and low cost.
 To choose between the trade-off  The competition is irrelevant.
strategy of differentiation and cost  Companies try to create and capture
leadership. new demand.
 To align value chain to its strategic  Industries break with the trade-off
choice of differentiation or low cost. strategy of differentiation and cost
leadership.

Example – Starbucks Coffee

It has created a clear space of blue ocean competition in the mature industry of coffee shops.
Starbucks sold a retailing concept: the coffee bar.

It offer relaxation and conversation, and drinks made with quality beans, frothy and flavored
milks, creams, syrups and ices.

While $3 for a cup of Starbucks coffee is outrageous compared with the cost of a cup of instant
coffee at home, consumers did not see it that way. They judged Starbucks as an indulgence, so
the steep price appeared good value for money.

Starbucks turned the coffee industry on its head by shifting its focus from commodity coffee
sales to the emotional atmosphere in which customers enjoy their coffee. With almost no
advertising, Starbucks became an international brand with margins roughly five times the
industry average.