INTRODUCTION TO INNOVATION MANAGEMENT (INN001, 5 p.)

1. INTRODUCTION TO INNOVATION MANAGEMENT(INN001, 5 p.) Lecture 10 September 2007 Olof Ejermo olof.ejermo@circle.lu.se

2. From ”positions” to ”paths” • Two fundamental questions underlying innovation strategy: • Where are you today…? • … and where can you go tomorrow? • The first question is about ”positions” => see chapter 4 and last week’s theme • The second question is about paths and path-dependence => chapter 5

3. Where can you go tomorrow? • Cannot choose freely where to go = firms innovative activities are path-dependent! • Innovators are constrained by (at least) two factors: • Present and likely future state of technological knowledge (not everything is technologically possible!) • Limits of corporate competence (no firm has the competence to do everything!)

4. Learning is path-dependent • Innovation involves a lot of trial, error and learning • Learning tends to be incremental, since major step changes in too many parameters both increase uncertainty and reduce the capacity to learn • As a consequence, firms’ learning processes are path-dependent • Moving from one path of learning to another can be costly, even impossible… • … although success stories do exist

5. How to jump to a new path? • Hire new employees with the desired competencies? • => Difficult, because a FIRM’s competencies are rarely the same as those of an INDIVIDUAL! • => A firm’s competencies are deeply embedded into specialized, interdependent and coordinated groups, teams, divisions… • Acquire a firm that has the desired competencies? • => Difficult because of different practices, cognitive structures and corporate cultures • Interesting alternative: ”Corporate ventures” => see further chapter 10

6. Technological constraints depending on sector • Firms in different sectors follow different ”technological trajectories” • Some firms build up huge R&D laboratories and operate large-scale manufacturing plants, while others have merely 5-10 employees… • Some firms focus first and foremost on product innovation, while others focus more on process innovation • Some firms perform most of their innovative activities within the firm (”in-house”), while others rely heavily on external partners • For some firms the R&D lab is the central place for innovation, in other firms it is rather the ”design office” or the ”systems department”

7. Five Major Technological Trajectories- the Pavitt taxonomy • Scale-intensive (e.g. cars, steel) • Science-based (e.g. electronics, chemistry, pharmaceuticals) • Specialized suppliers (e.g. instruments, software) • Supplier-dominated firms (e.g. agriculture, traditional manufacture) • Information-intensive (e.g. finance, retailing, publishing, travelling)

8. Characteristics of innovation in the Pavitt taxonomy • Size of innovating firms – big in chemicals vehicles material, aircraft…, small in machinery, instr., software • Type of products – price sensitive in bulk goods, performance sensitive ethical drugs • Sources of innovation: suppliers in agriculture and traditional manufacture (e.g. textiles), customers in instrument machinery & software, in-house in chemicals & electronics…., basic research in ethical drugs • Locus of own innovation: R&D-labs in chemicals & electr., prod. eng. depts in automob. & bulk, design in machine building, systems depts in service industries

10. ’Revolutionary technologies’ and their impact on technological trajectories • Firm-specific technological trajectories change over time as improvements in the knowledge base open up new technological opportunities • Since the early 1980s: three fields pointed at as a source of new opportunities: • Biotechnology • Materials • Microelectronics and IT

11. The biotechnology revolution • 1970s: ’Recombinant DNA’ as a scientific breakthrough (inserting new DNA into organisms) • Vast technological opportunities created through gene therapy, antisense technology, automated gene sequencing, gene discovery, genome analysis • Greatest impact on firms have so far been on R&D programmes in pharmaceuticals, agriculture and food • Many specialist biotech companies formed in response to these trends • New applications expected in textiles, leather, paper & pulp, oil refining, metals and mining, printing, environmental services, speciality chemicals etc. • However, many disappointments (no radical short-cuts to profitability in pharmaceuticals) • Important interactions between scientists, biotech entrepreneurs and user industries

12. The materials revolution • Traditionally a wide separation between materials engineering and materials science • First step towards uniting the two was through chemicals R&D in 19th century… • … but it is only during the last half-century that the collaboration between engineering and science in materials has really started to thrive • Driven by powerful new scientific theories and improved instrumentation (microscopy, spectroscopy) • As a result, innovation in materials has become much more science-based • Examples: ceramics, polymers, optical fibres, semiconductors

13. The microelectronics and IT revolutions

14. The microelectronics and IT revolutions • The technological trajectories of firms and countries in software and hardware are becoming decoupled • Three features of the IT revolution that are increasingly important for innovation strategy: • Increasing systemic nature of economic and technological activities • Decreasing cost of product development • Disappearance of low/medium/hi-tech distinction

15. Pavitt taxonomy applied to service sectors (Miozzo & Soete) • Pavitt taxonomy – early 80s (yet still highly useful) • Services have developed enormously and today account for ~ 2/3 employment in modern economies

16. Supplier-dominated: • personal services (restaurants, hotels, barber etc) • publ. & social services (health, education, publ. adm) • Scale-intensive: • Physical networks: transport & travel, wholetrade & distribution • Information networks: finance, insurance, communications • Science-based and specialized suppliers : • Business services linked to: R&D, software, development and appl. of information technologies

18. The rise of services (esp. science-based and specialized suppliers) • Importance highly growing • e.g. development and use of data,communication, storage and transmission • Banking, insurance, cell phones, air reservations etc. • Why? • Digitalization of information -> data processing to information handling, e.g. information network services, logistics, route planning • Single distribution network for a growing number of services: -> telecommunications infrastructure (mobile phone networks, internet etc)

19. Trends in service industries Implications • Transportability • Increased storability & transmission of services: collapse of time & space • Traditionally services produced & consumed simultaneously • Higher demands on consumers knowledge • Tradability • New divisions of labor -> e.g. Indian software support • Linkage structures change: Factor endowments not as important, increased emphasis on linking up -> competitive advantages • Outsourcing of innovative activities • Much specialized activities are ’moved out’ of firms • Overall knowledge requirements & intensity rise

20. Developing Firm-specific Competencies • ‘Core competencies’, according to Hamel and Prahalad (1990): • Sources of competitive advantage is in competencies, not in products • Found in more than one product and in more than one division • Stress the importance of associated organizational competencies • Five or six core competencies • Multidivisional firms as bundles of core competencies • Importance of a strategic architecture

21. The weaknesses of thecore competencies approach • Overestimates the potential of technology-based diversification in all industries • Underestimates the importance of background competencies for coordination and benefit from outside linkages • Underestimates the importance of emerging competencies due to rapidly developing fields (ICT, new materials, biotechnology, etc.) • The problem of ‘core rigidities’ • Better concept: ’Distributed competencies’

22. Proposed alternative by Tidd et al. (2005)

24. Technological paths in small firms • Supplier-dominated firms • Specialized suppliers • ’Superstars’ • New Technology-Based Firms (NTBFs)

25. ’Superstars’ • Their existence and success is typically based on the exploitation of a major invention (e.g. Instant photography) or a rich technological trajectory (e.g. semiconductors, software) • They are often spin-offs from large firms or have tried to offer their inventions to large firms but were refused! • In some sectors entry barriers seem to be too high for superstars to emerge (chemistry, pharmaceuticals) • Main challenge is to manage the difficult transition from small to large, scale up production etc. while aggressively update its own and competitors’ original innovations • Examples: Polaroid, Xerox, Intel, Microsoft, Sony, Benetton, Lenovo

26. New Technology-Based Firms • They usually emerge from large firms or (corporate or academic) laboratories • Specialized in the supply of a key component, subsystem, service or technique to larger firms, who may often be their former employers • Question for the future is whether to aim to become a ’superstar’ or a ’specialized supplier’ • Many NTBF entrepreneurs are not interested in long-term growth of their small firms, but prefer to sell them within a few years

27. SUMMARY CHAPTER 5 • Firms’ innovative activities are path-dependent, they rarely jump to a completely new path • We may discern at least five types of ’technological trajectories’ • The emergence of revolutionary technologies open up new opportunities for a firm to change its paths • Concept of ’core competencies’ – use it carefully, the concept has weaknesses, especially for our understanding of how firms can learn new competencies • Small firms are more difficult to classify in terms of their technological paths