Introduction to Innovation in High-Tech Sectors Leif Hommen CIRCLE leif.hommen @circle.lu.se

1. Introduction to Innovation in High-Tech SectorsLeif HommenCIRCLE leif.hommen@circle.lu.se

2. Overview • Change in High Tech Sectors • McGahan, A. 2004. “How Industries Change”. Harvard Business Review (October). 86 – 94. • Technological Discontinuities • Foster, R. 1986. “The S curve: A New Forecasting Tool.” Chapter 4 in R. Foster, Innovation, The Attacker’s Advantage. New York, NY: Summit Books, Simon and Schuster, pp. 88-111. • Disruptive Technologies • Bower, J.L. and C.M. Christensen.1995. “Disruptive Technologies: Catching the Wave”. Harvard Business Review (January). • Organizational Evolution • Tushman, M., and W. Smith. 2002. “Organizational Technology: Technological Change, Ambidextrous Organizations and Organizational Evolution.” In J. Baum. (ed.), Companion to Organizations. Cambridge, MA: Blackwell Publishers, 2002, pp. 386-414. ISBN: 0631216944.

3. Change in Hi-Tech Sectors (1) • High-tech sectors naturally have some common characteristics (e.g., large investments in R&D, strong interaction with scientific research, etc.) • But does that mean that all firms and industries within this category face the same strategic challenges? • For example, did Nokia and Kodak face the same problems or adopt the same strategies? • One way of answering this question is to consider the Nokia and Kodak cases in relation to McGahan’s Typology of Industrial Change.

4. Change in Hi-Tech Sectors (2) • McGahan’sTypologyof Industrial Change

5. Change in Hi-Tech Sectors (3) • McGhahan’s typology builds on two different kinds of ’threat’: • 1) to Core Activities • recurring actions that attract and retain suppliers and buyers • 2) to Core Assets • durable resources, including intangibles, that contribute to efficiency in core activities

6. Change in Hi-Tech Sectors (4) • In the case of Nokia • Core Assets (digital mobile telecommunications equipment) were not under threat, but Core Activities (delivering services) were under threat • Hence, Nokia would constitute a case of Intermediating Change • In the case of Kodak • Both Core Assets (film-based photography) and Core Activities (cameras, film and finishing materials & services) under threat • Hence, Kodak would constitute a case of Radical Change

7. Change in Hi-Tech Sectors (5) • McGahan’s Advice on Strategy • To firms (like Kodak) in industries experiencing radical change she offers a choice between two risk-filled alternatives: • 1) abandon established positions and move into emerging lines of business • or 2) reinvest in the established industry. • To firms (like Nokia) in industries undergoing intermediating change, she advises a course of ’find(ing) unconventional ways to extract value from their core resources’ by ’reconfiguring’ them, via either • entering a new business or even a new industry • or 2) selling off assets/services to former competitors

8. Technological Discontinuities (1) • Foster focuses on technological discontinuities • This phenomenon is well illustrated by the Kodak case (the replacement of film by digital imaging). • His point of departure is the well-known ’S-curve’ or ’learning curve’ in corporate technology development. • Foster’s key observation, though, is that ’S-curves almost always come in pairs’ (see figure). • That is, a new technology often comes to compete with an established technology just as the latter approaches the peak of refinement – as, e.g., in the case of solid state electronics vs. vacuum tubes.

9. Technological Discontinuities (2) • S-Curves almost always appear in pairs (= discontinuity) P e r f o r m ance Discontinuity Effort

10. Technological Discontinuities (3) • For Foster, then, technological discontinuity occurs when a new technology replaces an established one • In these situations, the key challenge for incumbent (or ’defending’) firms is management of discontinuity • a.k.a. ’Fourth Era’ technology management -- learning how to cross technological discontinuities • Most firms, however, have concentrated on trying to make the S-curve steeper by developing new products and processes more quickly than competitors • a.k.a. ’Third Era’ or so-called strategic technology management, using techniques such as • ’upstream’ design and engineering (Boeing 737) • shared development of technology and products (IBM PC) • elimination of administrative procedures (e.g., via ICTs) • strong investment in basic scientific and technical research

11. Technological Discontinuities (4) • In situations of technological discontinuity, ”The fundamental dilemma is that it always appears to be more economic to protect the old business than to feed the new one at least until competitors pursuing the new approach get the upper hand.” • In technological competition, moreover, advantage does not belong to the defender but to the attacker: • The defender ... ”may not know he (sic) is being attacked until the attack is well along”. • The attacker ... ”can hide in a niche. ... is often more powerful than he (sic) appears, and more motivated”.

12. Technological Discontinuities (5) • Foster’s Advice on Strategy for managing technological discontinuity: • Be prepared to • make ’painful’ decisions about resource allocation. • Venture into new areas and forsake the ’tried and true’ • Abandon a technology that has ... ’just entered the most productive phase of its S-curve’ • Engage in ’knowledge building, analysis and the calculation of limits’

13. Disruptive Technologies (1) • Bower and Christensen take up where Foster leaves off, more or less. • B&C also focus on technological discontinuities, but their main emphasis is on ’catching the wave’ – as in the case of Nokia and MIT’s Oxygen project. • Echoing Foster, B&C argue that established firms (or ’defenders’) often fail to master technological discontinuities because: • ”The processes and incentives that companies use to keep focused on their main customers work so well that they blind those companies to important new technologies in emerging markets.”

14. Disruptive Technologies (2) • Bower and Christensen put forward a two-pronged approach to dealing with disruptive technologies. • 1) Senior executives must be able to spot new technologies that fall into this category -- • i.e., ’different’ packages of performance attributes able to evolve rapidly to the point where they can successfully invade established markets. • 2) For these new technologies to be commercialized and established, they must be protected from processes and incentives geared to serving established customers -- • i.e., housed by organizations that are completely independent from the mainstream business.

15. Disruptive Technologies (3) • Ad 1: It is not enough to identify and track a new technology. Management should also: • Determine whether the technology is disruptive or sustaining. • Who supports it and who doesn’t? (Conflict of marketing and finance vs. key technical staff often indicates a disruptive technology that should be explored). • Identify its strategic significance. • Ask the right questions (about functionality & demand) to the right people – not current lead customers. • Locate initial markets for the disruptive technology. • Instead of market research, information on new markets should be generated through rapid, iterative, and low-cost experimentation with both products and markets.

16. Disruptive Technologies (4) • Ad 2: Placing responsibility for building a disruptive technology business in an independent organization (or ’skunk works’) should be done for the right reasons. • For example, one should not isolate a team of engineers in order to develop a sustaining technology, even though it may be a radically different one. • Creating a separate organization is only necessary when: • the disruptive technology has a lower profit margin than the mainstream business, and • serves the unique needs of a new set of customers. • Where these conditions are met, though, the disruptive organization should be kept independent. • Folding a commercially viable disruptive spin-off back into the mainstream organization can be diasastrous.

17. Disruptive Technologies (5) • Bower and Christensen state their strategic advice on ’prospering at points of disruptive change’ as follows: • The key principle is not simply to • Take more risks, • Invest for the long term • Fight bureaucracy • Rather, success depends on managing strategically important disruptive technologies in an organizational context where • Small orders create energy • Fast, low-cost forays into ill defined markets are possible, and • Overhead is low enough to permit profit, even in emerging markets

18. Organizational Evolution (1) • Tushman and Smith provide an overview of how technological innovation affects firms’ evolution – and, especially, their prospects for surviving technological discontinuities, • Survival depends on how firms develop their dynamic capabilities over time. • Dynamic capabilities enable firms to drive ’streams of innovation’ – and in the face of technological discon-tinuities this depends on ’ambidextreous organization’. • An ’ambidextrous’ firm can resolve the ’innovators dilemma’ between exploration and exploitation • The essential point of departure for this argument is a model of ’technology cyclesand dominant designs’

19. Organizational Evolution (2) • Technology cycles over time • Variation – Technological Discontinuity • Competence enhancing innovations • Competence destroying innovations • Era of Ferment • Substi-tution • Design compe-tition • Commu-nity dri- • ven tech- • nological • change Era of Incremental Change Elaboration of Dominant Design; Architectural Inno-vation; Market- based Innovation Variation – Techno- logical Discontinuity Era of Incremental Change Era of Ferment Selection Dominant Design Selection Dominant Design

20. Organizational Evolution (3) • Technology cycles are composed of technological discontinuities that trigger periods of technological and commercial ferment (variation) • Such discontinuities often emerge from scientific advance or ’re-combination’ of existing technologies • These cycles are punctuated by the emergence (selection & retention) of dominant designs, followed by periods of incremental and architectural innovation • Dominant designs are not simply determined by technical superiority or market competitiveness, but also by political processes and ’social construction’ • Eventually, a new substitute product representing another technological discontinuity appears and brings about the next wave of variation, selection and retention • For established firms, these new discontinuities may be either competence –enhancing, or competence-destroying.

21. Organizational Evolution (4) • Technology Cycles can be related to a typology of innovation streams and innovations (see figure below),where • types of innovation are based on distinctions among systems, subsystems & components, and between old and new markets • Incremental Innovations – push existing technological trajectories through improvement for established markets • Architectural Innovations – involve shifts in subsystems or linling components and often initially target to new markets • Discontinuous Innovations – occur in core systems, triggering change in other subsystems and linking mechanisms • Market Innovations -- are targeted to new markets or customer segments and are often technically simple • Finally, there are product platforms (sets of core subsystems) and product families (built from the same platforms)

22. Organizational Evolution (5) • Innovation Streams New Swatch (SSIH) Digital imaging (Polaroid) 8”disk drives Small copiers Small motor-cycles 12” disk drives Mech. movements (SSIH) BT Ear hearing aids Ciba/Tilt Bias ply tires Analog Imaging Quartz movement Ciba/seed Digital imaging Radial tires Photo-litho-graphytype-setting IT Ear hearing aids Existing Incremental Architectural Discontinuous

23. Organizational Evolution (6) • This typology points to ’fundamentally different innovation dynamics’ behind S-shaped product life-cycle curves • Eras of Ferment • – discontinuous product variants • Dominant Designs • – basic process innovation • Eras of Incremental Change • – product modularization, architectural, discontinuous, and market innovation • The technology cycle suggests that competitive advantage may depend on initiating multiple innovation types (streams) • ”But the external push for innovation streams runs counter to internal inertial forces. Incumbents, even when armed with technological capabilíties, are held hostages to their successful pasts”

24. Organizational Evolution (7) • For Tushman & Smith, firms need to be ’ambidextrous’ – i.e., to have organizational architectures that can support both incremental and discontinuous innovation • Incremental Innovation – requires large scale; formalized roles and linking mechanisms; centralized procedures and processes; efficiency-oriented cultures; and highly engineered work processes. • Discontinuous Innovation – requires small scale; loose decentralized product structures; experimental cultures; loose work processes; strong entrepreneurial and technical tendencies; and young and heterogenous human resources profiles. • The proposed solution, therefore, is for senior management to form an ambidextrous team that links ’entrepreneurial’ and ’efficiency-oriented’ organizational sub-units or components within the same business unit.

25. Organizational Evolution (8) • Ambidextrous Senior Team drives multiple strategies and innovation stream within business unit anchored by single vision Mgmt Team Exploration Ciba crop protection/ ge-netically engineered seeds Seiko/quartz Polaroid/digital imaging Tasks Individuals Sa l es Mgmt Team Culture Organizational Arrangements Mgmt Team Exploitation Ciba crop/tilt Seiko/mechanical Polaroid/analog imaging Tasks Indivi-duals Strategic reorientations Culture Organizational arrangements Time

26. Organizational Evolution (9) • Ambidextrous organizations develop the ability to ’drive innovation streams’ by: • Combining contrasting and inconsistent organizational architectures in a single business unit. • Balancing contrasting and inconsistent learning modes by simultaneous’exploration’ and ’exploitation’ • Building in cultural, structural and demographic contradictions – and regulating the resulting conflicts. • Ambidextrous senior management teams feature: • Clear, engaging vision and steady commitment • Heterogenous expertise and competence • Homogenous age profiles (preferably younger) • Effective internal processes for handling information, communication, debate, and decision-making

27. Organizational Evolution (10) • Discontinuous organizational change is dictated by the logic of shifts in technology cycles • Closing on a dominant design means a switch to major process innovation and incremental innovation • A product substitution event means a shift to major product, market, or architectural innovation • Due to strong inertial forces, these shifts can only be accomplished by discontinuous organizational change • This kind of ’frame-breaking’ change usually needs to be introduced by a ’transformed’ senior management team, and normally has to be ’sweeping’ in its scope

28. Organizational Evolution (11) • Tushman and Smith finally sum up their advice on strategy in terms of what managing innovation streams is about: • managing internal paradoxes – e.g., efficiency vs. innovation; incremental vs. discontinuous; today vs. tomorrow, etc • consistency and control – as well as variability, learning by doing, and cultivating luck • The key role of senior management is, therefore, to ”embrace contradiction” and ”take advantage of the tensions and synergies that emerge from juggling multiple competencies simultaneously”.