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Chapter 4 Developing an innovation strategy

Chapter 4 Developing an innovation strategy. © 2009 John Wiley & Sons Ltd. www.managing-innovation.com. CONTENTS. Introduction Elements of corporate innovation strategy Conclusions. 1. INTRODUCTION. 1.1 Innovation Strategy. Session 4 outline:

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Chapter 4 Developing an innovation strategy

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  1. Chapter 4 Developing an innovation strategy © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  2. CONTENTS • Introduction • Elements of corporate innovation strategy • Conclusions

  3. 1. INTRODUCTION

  4. 1.1 Innovation Strategy Session 4 outline: • Limitations of the rational planning approach to strategy • Positions - national systems & competitors • Paths - competencies & opportunities • Processes - specialization versus integration • Identifying & sustaining capabilities © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  5. 1.1 Innovation Strategy Four factors have a major influence on the ability of a firm to develop and create value through innovation: • The national system of innovation in which the firm is embedded, and which in part defines its range of choices in dealing with opportunities and threats. • Its power and market position within the international value chain, which in part defines the innovation-based opportunities and threats that it faces. © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  6. Innovation Strategy Four factors have a major influence on the ability of a firm to develop and create value through innovation: • The capability and processes of the firm, including research, design, development, production, marketing and distribution. • Its ability to identify and exploit external sources of innovation, especially international networks. © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  7. 1.2 Choice of strategy Choice of strategy (& luck) are more important than industry: • choice of industry 8.35% • choice of strategy 46.4% • parent company 0.8% • unexplained (e.g. luck) 44.5% % total profitability explained. Source: Richard Rumelt “How much does industry matter?”, Strategic Management Journal, 1991, 12, 167-186 © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  8. 1.3 Demands of Innovation Strategy Key demands of innovation strategy: • to develop firm-specific knowledge & capacity to exploit it • to cope with environmental complexity & uncertainty • to create organizational structures & processes to manage trade-offs between specialized & broad knowledge © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  9. 1.4 Strategic Management Two distinct models of strategy: Rational/Planning Resource/Capabilities- based top-down bottom-up outside-in inside-out choice variation & selection ahistorical cumulative static dynamic/learning © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  10. 1.4.1 Limitations of rational planning Limitations of the rational planning: • Focus on with competitors, not customers • Difficult to identify internal strengths & weaknesses e.g. oil firms & 'energy'; computer firms & 'information’ • Strategic objectives do not match internal capabilities • The environment is often complex & uncertain e.g. multi-media industry © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  11. Strategic Management Rational planning approach ignores constraints: • Size & resources of the firm • Existing product & technological base • Technological opportunities for innovation • Market opportunities for innovation © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  12. 1.5 Competitor Analysis Example: Five 'forces' analysis of competitive environment: • rivalry amongst existing competitors • threat of new entrants • threat of substitute products & services • power of suppliers • power of customers © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  13. Competitor Analysis But innovation affects all five forces: • rivalry - basis of competition, industry boundaries • new entrants - raise or lower entry barriers • substitutes- relative price/performance, new products • customers & suppliers - switching costs, relative power, vertical integration © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  14. 1.6 Blue Ocean strategy Concept of Blue Ocean strategies, compared to traditional strategic thinking, or Red Ocean strategies: • Create uncontested market space, rather than compete in existing market space • Make the competition irrelevant, rather than beat competitors • Create &capture new demand, rather than fight for existing markets and customers • Break the traditional value/cost trade-off: Align the whole system of a company's activities in pursuit of both differentiation and low cost © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  15. 2. ELEMENTS OF CORPORATE INNOVATION STRATEGY

  16. Key factors in innovation strategy: • position of the firm - technologies, processes & products compared to competitors • paths open to the firm, given its competencies & emerging opportunities • processes to integrate & exploit competencies within & between firms Source: Teece & Pisano © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  17. 2.1 Positions - national factors National factors influencing competencies: • input prices • natural resources • local buyers tastes • public & private investments © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  18. 2.1.1 Positions – Emerging Economies Firms in emerging economies may pursue different routes to upgrading through innovation:  • Process upgrading – incremental process improvements to adapt to local inputs, reduce costs or to improve quality. • Product upgrading – through adaptation, differentiation, design and product development. • Capability upgrading – improving the range of functions undertaken, or changing the mix of functions, for example, production versus development or marketing. • Inter-sectoral upgrading - moving to different sectors, for example, to those with higher value-added. © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  19. 2.1.2 Positions - competition Assessing competencies of competitors: • How do they compare in terms of size & composition? • How efficiently are they exploited? • How effectively do we learn from their knowledge & experience? • How do we differentiate, develop & maintain our innovation advantages? © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  20. 2.2 Paths - time horizons Level, time & focus of innovation strategy: • Business unit - 2-3 years - improving cost & quality, new product & service development • Group/division - 5 years - positioning & exploiting synergies across business units • Corporate - 10 years - environmental scanning & competence-building © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  21. 2.2.1 Paths & Processes - capabilities & innovation Products & services Processes Capabilities Competencies Resources/assets © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  22. 2.2.2 Paths - capabilities & innovation Innovation & strategic positioning: • pioneering technology, processes, products • accumulated tacit knowledge • complexity • complementary assets • standards • patents © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  23. 2.2.3 Paths - capabilities & innovation Characteristics of competencies: • firm-specific • significant benefit or value to customers • take time to develop • sustainable as difficult to imitate or acquire • unique configurations of resources • strong tacit content & socially complex Source: Hall (2000) © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  24. 2.3 Processes - Knowledge Key organizational issue is how to balance conflicting requirements: • to identify & develop specialized knowledge within technologies & markets • to exploit this knowledge by integrating across technologies & markets © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  25. 2.3.1 Processes - Innovation Process of strategy formation: • given uncertainty, explore implication of a range of possible futures • encourage the use of multiple sources of information, debate & scepticism • ensure broad participation & informal channels of communication • plan to change strategy in the light of new & unexpected evidence © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  26. 2.3.2 Processes - Resource Allocation Resource allocation under uncertainty: • encourage experimentation, risk-taking & incrementalism • apply different criteria for different types of project • use simple, transparent criteria • make rules for termination explicit • identify & plan for uncertainties © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  27. 2.3.3 Innovation Process Generic phases of the innovation process: • Searching & scanning the internal & external environments • Filtering & selecting potential opportunities • acquiring the technical, financial & market resources • implementing development & commercialisation • reviewing & learning from experience © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  28. 2.3.4 Innovation Process Factors affecting the precise process: • Sector - competitors, structure & constraints • Markets - opportunities & rate of change • Technology - maturity & costs • Resources - firm & networks • Location - regulation, policy & systems of innovation © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  29. 3. CONCLUSIONS

  30. 3.1 Decision-making under Uncertainty So, Innovation: Response or strategy? • “. . . chance favours only the prepared mind”, L. Pasteur, 1854 • “...the more I practice, the luckier I get…”, Gary Player (champion golfer) © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  31. 3.2 Being the first Advantages of being first to market: • reputation as a pioneer • capture market share • early learning curve benefits • definition of standards • establish entry barriers eg patents • dominate supply & distribution chains • earn ‘monopoly’ profits © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  32. Disadvantages of being first to market: • pioneering costs, educating buyers, regulatory approval • demand uncertainty • changing buyer needs • low-cost imitation • followers ‘leapfrog’ technology © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  33. 3.3 Conclusions: Innovation Strategy Conclusions and implications from observation and research: • The elements national systems of innovation interact to influence the degree and direction of innovation in a country. • The uneven global distribution of innovation demands global search strategies for the development & commercialization of innovation. • The position of a firm in an international value chain will constrain the opportunities for innovation and entrepreneurship. © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

  34. Conclusions: Innovation Strategy Conclusions and implications from observation and research: • National context influences, but does not determine the rate and direction of innovation at the firm level. • Dynamic capabilities and firm-level processes contribute to the development and growth of firms. Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd (2006) From Knowledge Management to Strategic Competence (Imperial College Press, 2nd edition); J. Tidd, & J. Bessant (2009) Managing Innovation: Integrating technological, market & organizational change (Wiley, 4th edition); S. Isaksen & J. Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation and Growth (Wiley). © 2009 John Wiley & Sons Ltd. www.managing-innovation.com

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