Introduction to Innovation Management Prepared by Wonjoon Kim

1. Introduction to Innovation Management Prepared by Wonjoon Kim GSI&TM

2. Last Week: Firm’s Strategic Innovation Management • Several dimensions to categorize strategic innovation management • Competitive Advantage • Generic Strategy • Five Forces • Value Chain • Resource-based View on Innovation • Absorptive Capacity • Timing of Entry • Network Effect • Compatibility and Standard • Strategic Collaboration • Disruptive Innovation • Open Innovation • User Innovation • Blue Ocean Strategy

3. Last Week: Firm’s Strategic Innovation Management • Several dimensions to categorize strategic innovation management • Competitive Advantage • Generic Strategy • Five Forces • Value Chain • Resource-based View on Innovation • Absorptive Capacity • Timing of Entry • Network Effect • Compatibility and Standard • Strategic Collaboration • Disruptive Innovation • Open Innovation • User Innovation • Blue Ocean Strategy

4. Success of leaders and followers Timing of Entry PRODUCT INNOVATOR FOLLOWER WINNER Jet Airliners De Havilland (Comet) Boeing (707) Follower Float glass Pilkington Corning Leader X-Ray Scanner EMI General Electric Follower Office P.C. Xerox IBM Follower VCRs 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 Plain Paper Copiers Xerox Canon Not clear Fiber Optic Cable Corning many companies Leader Video Games Players Atari Nintendo/Sega/Sony Followers Disposable Diapers Proctor & Gamble Kimberly-Clark Leader Web browser Netscape Microsoft Follower PDA Psion, Apple Palm Follower MP3 music players Diamond Multimedia Sony (&others) Followers

5. Timing of Entry • Timing of Entry • Why timing of entry is important? • Demand and technology uncertainty • First is always better? • First and Second mover advantages

6. Timing of Entry • Demand and technology uncertainty • Market/Demand uncertainty • Uncertainty regarding the size and growth rates of the markets for new products • Potential uses • Substitute products • Complementary products • Technological uncertainty • Uncertainty regarding the technological features of the product • Standards • Dominant design

7. time Invention Commercialization Firm Take-Off Sales Take-Off Timing of Entry • Demand and technology uncertainty Technological Uncertainty Resolved Demand Uncertainty Resolved

8. time Invention Commercialization Firm Take-Off Sales Take-Off ? ? ? Timing of Entry • Demand and technology uncertainty • When should firms enter?

9. Timing of Entry • First Mover Advantage • Scale economy or experience advantages • Scope economy and preemption of resources • Buyer switching costs and cognitive advantage • Asymmetric information about product quality and consumer risk-aversion as barriers for late movers in consumer cognitive perspectives • Reputational effects • Differences in marginal effects of advertising between first and later entrants

10. Timing of Entry • First Mover Advantage • Scale economy or experience advantages: • First moving firms can exploit experience/learning curve effects enable the first movers to have lower production cost than that of late movers, especially in manufacturing industry. This experience/learning curve is closely related with scale economy of first movers which enables them to sustain and survive price competition with late movers. • Spence, 1981; Gilbert and Newbery, 1982; Ghemawat, 1984; Robinson and Fornell, 1985; Robinson, 1988; Lieberman and Montgomery, 1988, 1998; Tufano, 1989; Lilien and Yoon, 1990; Scherer and Ross 1990; Kerin et al., 1992; Kalyanaram and Gurumurthy, 1998; Makadok, 1998; Frynas et al., 2006

11. Timing of Entry • First Mover Advantage • Scale economy or experience advantages: • Scope economy and preemption of resources: • preempting rivals from acquiring scarce resources such as technology with patent, input factors, distribution channels, and retail shelf space can be an obstacle to followers’ imitation securing first-mover advantages • Prescott and Visscher 1977, Schmalensee 1978, Ghemawat 1986, Robinson and Fornell 1985; Kerin, Varadarajan, and Peterson 1992; Lieberman and Montgomery 1998; Robinson and Min; 2002; Boulding and Christen; 2003 • In addition, first-movers have the opportunity to develop a broader product line – scope economy, while later entrants are often forced to enter a market niche with a narrow line • Porter 1974; Prescott and Visscher 1977; White 1983; Kalyanaram, Robinson, and Urban, 1995

12. Timing of Entry • First Mover Advantage • Scale economy or experience advantages: • Scope economy and preemption of resources • Buyer switching costs and cognitive advantage: • First movers can also create buyer awareness and switching costs that hinder followers’ imitation. • Bond and Lean, 1977; Wernerfelt, 1985; Klemperer, 1987; Carpenter and Nakamoto, 1989; Lee et al, 2000 • At the consumer level, experiments have shown that the order of entry can have a significant impact on customer preferences, memory, learning, and judgment • Carpenter and Nakamoto, 1989; Kardes and Kalyanaram, 1992; Zhang and Markman, 1998; Liberman and Montgomery, 1998; Zhang and Markman, 1998; Kalyanaram, Robinson, and Urban, 1995 • Therefore, key cognitive aspects of first-mover advantage is that the early entrant helps set the ideal combination of attribute values in markets for which consumers do not have established preferences • Carpenter and Nakamoto1989 • First-mover can secure a strong primacy effect in memory, in which their attributes are remembered much better than those of later entrants, suggesting that "me-too" strategies by later movers are likely to be ineffective • Carpenter and Nakamoto, 1989; Kardes and Kalyanaram, 1992; Bowman and Gatignon, 1996

13. Timing of Entry • First Mover Advantage • Scale economy or experience advantages: • Scope economy and preemption of resources • Buyer switching costs and cognitive advantage: • Asymmetric information about product quality and consumer risk-aversion as barriers for late movers in consumer cognitive perspectives • Schmalensee1982; Conrad 1983 • Reputational effects • Bain 1956; Krouse1984 • Differences in marginal effects of advertising between first and later entrants • Comanorand Wilson, 1979

14. Timing of Entry • First Mover Advantage?

15. Timing of Entry • First Mover Disadvantage ?

16. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • (2) Resolution of technological and market uncertainty • (3) Shifts in a technology or customer needs • (4) First-mover’s organization inertia • (5) Consumer cognitive advantages for late movers

17. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • when a late entrant can acquire the same technology and information at a lower cost, and more productive labor than the first-mover • Gauschand Weiss, 1980; Porter, 1985; Lieberman and Montgomery, 1988; Ferschtman, Mahajan and Muller,1990; Golder and Tellis, 1993; Kalyanaram, Robinson and Urban, 1995; Tellis and Golder, 1996; Narasimhan and Zhang; 2000 • (2) Resolution of technological and market uncertainty • (3) Shifts in a technology or customer needs • (4) First-mover’s organization inertia • (5) Consumer cognitive advantages for late movers

18. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • (2) Resolution of technological and market uncertainty • by first-mover’s risk taking immense investments which enable late movers to produce a better or cheaper product than the first-movers, on the one hand, and give long-term profit disadvantage for first-movers due to an high average cost, on the other hand • Yip, 1982; Lieberman and Montgomery, 1988; Golder and Tellis, 1993; Tellis and Golder, 1996; Song and Montoya Weiss, 1998; Narasimhan and Zhang, 2000; Boulding and Christen; 2003 • (3) Shifts in a technology or customer needs • (4) First-mover’s organization inertia • (5) Consumer cognitive advantages for late movers

19. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • (2) Resolution of technological and market uncertainty • (3) Shifts in a technology or customer needs • which provide opportunities for late movers to better positioned than first-movers • Yip, 1982; Lieberman and Montgomery, 1988; Golder and Tellis, 1993; Tellis and Golder, 1996; Greve, 1998 • (4) First-mover’s organization inertia • (5) Consumer cognitive advantages for late movers

20. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • (2) Resolution of technological and market uncertainty • (3) Shifts in a technology or customer needs • (4) First-mover’s organization inertia • Lieberman and Montgomery, 1988; Lilien and Yoon, 1990; Golder and Tellis, 1993; Tellis and Golder, 1996Kalyanaram and Gurumurthy, 1998; Porter, 1985; Shankar et al., 1998 • (5) Consumer cognitive advantages for late movers

21. Timing of Entry • First Mover Disadvantage • (1) Free-rider effects • (2) Resolution of technological and market uncertainty • (3) Shifts in a technology or customer needs • (4) First-mover’s organization inertia • (5) Consumer cognitive advantages for late movers • which describe the impact of greater memorability of alignable (e.g. attributes are comparable along some common aspect) over nonalignable differences is that later entrants whose attributes are superior to those of the first entrant can come to be preferred over the first entrant when the attributes are alignable differences but not when they are nonalignable differences • Zhang and Markman; 1998

22. Timing of Entry • But the findings are mixed… why?

23. Timing of Entry • Reason of Mixed Findings • First, the definition of first mover and the market boundaries are inconsistent across studies, • Second, firms and markets are heterogeneous in resource-based view • Third, market contingency and consumer behaviors play important roles.

24. Timing of Entry • Reason of Mixed Findings • First, the definition of first mover and the market boundaries are inconsistent across studies, • (1) the inconsistent definition and measure of first mover advantage across different studies (Golder and Tellis, 1993; Kerin, Varadarajan, and Peterson, 1992), • (2) the different market boundaries and product hierarchy across the literature (Kalyanaram, Robinson, and Urban, 1995; Kerin, Kalyanaram, and Howar, 1996). • Second, firms and markets are heterogeneous in resource-based view • Third, market contingency and consumer behaviors play important roles.

25. Timing of Entry • Reason of Mixed Findings • First, the definition of first mover and the market boundaries are inconsistent across studies, • Second, firms and markets are heterogeneous in resource-based view • (1) the specific combinations of resources and strategies determines the success of a firm, therefore, the heterogeneity in resources across firms and industries (e.g. heterogeneous advertising expenditures and R&D scale economics across industries) differentiate the entry strategies (Wernerfelt, 1984; Fornell, et al., 1985; Robinson and Fornell, 1985; Barney, 1986, 1991; Robinson, 1988; Robinson et al., 1992; Murthi et al. 1996; Song, et al., 1999; Boulding and Christen, 2003) • (2) survival risk associated with market and technological uncertainty offsets temporary monopoly over the early followers (Robinson and Min; 2002) • (3) firms’ resources and capabilities affect their choice of entry timing, therefore, entry order is an endogenous choice. • Third, market contingency and consumer behaviors play important roles.

26. Timing of Entry • Reason of Mixed Findings • First, the definition of first mover and the market boundaries are inconsistent across studies, • Second, firms and markets are heterogeneous in resource-based view • Third, market contingency and consumer behaviors play important roles. • (1) the presence of first mover advantage can be moderated by a variety of product market contingencies including first and later entrant marketing mix strategies. (Kerin, Varadarajan, and Peterson, 1992; KerinKalyanaram, and Howard, 1995; Szymanski, Troy and Bharadwaj, 1995; Bowman and Gatignon, 1996; Song, et al., 1999) • (2) in consumer behavioral perspective, first movers generate positive attitudes and purchase intentions, but retrieval and recall are not as favorable. Therefore, a later entrant can diminish the impact of the first movers’ distinctiveness and increase its own by moving away from the first mover and developing and establishing a more desirable position (Carpenter and Nakamoto, 1989; Kerin, Varadarajan and Peterson, 1992; Alpart and Kamins, 1995)

27. Timing of Entry • Timing of Entry • Demand and technology uncertainty • First and Second mover advantages

28. Firm’s Strategic Innovation Management • Several dimensions to categorize strategic innovation management • Timing of Entry • Network Effect • Compatibility and Standard • Strategic Collaboration

29. Firm’s Strategic Innovation Management • Several dimensions to categorize strategic innovation management • Timing of Entry • Network Effect => Platform • Compatibility and Standard • Strategic Collaboration

30. Conventional Platform Strategy • Product platform is the reused module across various products • Focused on exploiting the benefit of having a platform module?

31. Conventional Platform Strategy • Product platform is the reused module across various products • Focused on exploiting the benefit of having a platform module • Leveraging the component variations • Easier component innovations • Mixing and matching • Flexibility • Reusing the platform module • Economies of scale and scope • Developing components concurrently • Speed to market (Henderson and Clark, 1990; Garud and Kumaraswamy, 1995; Sanderson and Uzumeri, 1995; Meyer et al., 1997, 1998, 2001; Sanchez and Mahoney, 1996; Sanchez, 1995, 1999) • The network affects the platform’s success or failure

32. Standards Strategy • Types of standards • Compatibility standard vs. quality standard • Sponsored vs. unsponsored • De facto vs. de jure

33. Standards Strategy • Types of standards • Compatibility standard vs. quality standard • Sponsored vs. unsponsored • De facto vs. de jure

34. Standards Strategy • Types of standards • Compatibility standard vs. quality standard • Sponsored vs. unsponsored • De facto (사실상의 표준)vs. de jure (공식 표준)

35. Standards Strategy • Types of standards • Compatibility standard vs. quality standard • Sponsored vs. unsponsored • De facto vs. de jure • Almost all standards are networks • Theories of network economics • Major mechanisms for correcting “inefficiency”: communication, preannouncement, sponsorship, compatibility • Effective in changing the equilibrium but controversial in correcting the inefficiency – network effect

36. Basic Strategies in the Market of Network Effects • Be an architect • Standards competition • Benefit from providing the core module of a system • Seek the platform leadership in the system evolution (Baldwin & Clark, 1997, 2000; Gawer & Cusumano, 2002) • Be a designer of modules that conform to some design rules • The platform is treated as a controlled factor

37. Network Effects • Types of network effects • Characteristics of markets of network effects • Origins of network effects

38. Types of Network Effects 1. Direct network effects • Each user’s adoption payoff and her incentive to adopt increases directly because more others adopt the system • E.g. communications network, speakers of a language (Katz & Shapiro, 1985; Economides, 1996; Rochet and Tirole, 2001; Farrell and Klemperer, 2004)

39. Types of Network Effects cont. 2. Indirect network effects • Each user’s adoption payoff and her incentive to adopt increases as more complementary goods or services increase • Hardware-software paradigm • Multi-sided market • At least, sellers and buyers • Business models

40. Types of Network Effects cont. 2. Indirect network effects • Each user’s adoption payoff and her incentive to adopt increases as more complementary goods or services increase • Hardware-software paradigm Nair, Harikesh, Pradeep Chintagunta, and Jean-Pierre Dubé. "Empirical analysis of indirect network effects in the market for personal digital assistants."Quantitative Marketing and Economics 2.1 (2004): 23-58.

41. Characteristics of Markets with Network Effects • Information incompleteness • Adoptions are in the future, or • Adoptions are made simultaneously by others • If assuming adopters have perfect foresight…

42. Characteristics of Markets with Network Effects • Information incompleteness • Adoptions are in the future, or • Adoptions are made simultaneously by others • If assuming adopters have perfect foresight… • Tipping or stagnation • Self-fulfilling expectations, multiple equilibriums • Critical mass • Price

43. Characteristics of Markets with Network Effects • Information incompleteness • Adoptions are in the future, or • Adoptions are made simultaneously by others • If assuming adopters have perfect foresight… • Tipping or stagnation • Self-fulfilling expectations, multiple equilibriums • Critical mass • Price

44. Characteristics of Markets with Network Effects • Information incompleteness • Adoptions are in the future, or • Adoptions are made simultaneously by others • If assuming adopters have perfect foresight… • Tipping or stagnation • Self-fulfilling expectations, multiple equilibriums • Critical mass • Price • Asymmetric early power • Path-dependence • Lock-in • Coordination problem • Collective switching cost

45. Origins of Network Effects • Adopter’s utility from the product • Externalities: communication, interaction, transaction, conformism • Stand alone utility: quality, price, etc. • Complementarities • Cross-transaction complementarities • Product in hands of consumers are directly complementary • Complementarities are between 2 (or more) types of adopters • Economies of scope between different consumers’ purchases • Economies of scale (of the platform) passed through to the consumers

46. Impacts of Network Effects on Business Strategy • Shift toward Schumpeterian competition • Toward the early stage of system development • Competing for the installed base • Pricing • Expectation manipulation

47. Impacts of Network Effects on Business Strategy • Shift toward Schumpeterian competition • Toward the early stage of system development • Competing for the installed base • Pricing • Expectation manipulation • Competing for pivotal customers

48. Impacts of Network Effects on Business Strategy • Shift toward Schumpeterian competition • Toward the early stage of system development • Competing for the installed base • Pricing • Expectation manipulation • Competing for pivotal customers • Designing complementarity into products • Product development strategy

49. Impacts of Network Effects on Business Strategy • Shift toward Schumpeterian competition • Toward the early stage of system development • Competing for the installed base • Pricing • Expectation manipulation • Competing for pivotal customers • Designing complementarity into products • Product development strategy • Harvesting network effects • Business model, firm boundary Apple takes 30 percent of all revenue generated through apps, and 70 percent goes to the app's publisher

50. Impacts of Network Effects on Business Strategy • Shift toward Schumpeterian competition • Toward the early stage of system development • Competing for the installed base • Pricing • Expectation manipulation • Competing for pivotal customers • Designing complementarity into products • Product development strategy • Harvesting network effects • Business model, firm boundary • A reason in favor of monopoly market structure?