TUM: Strategic Management of Innovation

1. TUM: Strategic Management of Innovation Day 2: 9.00-16.00

2. Day 1 • Strategy as Internal and External perspective • Innovation as (creation of) knowledge platform fits better the Internal, Learning Perpsetive • Path dependency, Asset Legacy • Review of Watch Industry, GM and Seafax to highlight the dilemma of old vs new

3. Strategy and Innovation • Part I, Day 2 • Kodak, Polaroid • Industry, Sector Evolution and Inertia • Part II, Day 2 • Core Rigidities and Competencies • Firm Inertia • Gunfire at Sea • Part III, Day 2 • Ab und Aufbauen or Reinventing the Firm’s strategy

4. Inertia as a Industry-wide Innovation Challenge • Market, Industry • Value Chain • Ecology • …what is firm competitive arena

5. performance/cost time Technological Substitution Digital 35MM

6. From 35MM to Digital Cameras Digital with FLASH CARD 35MM with FILM

7. 35MM Digital Paradigm

8. Key Players, Value Chain • Players: • Kodak, Canon, Minolta, Fuji, Agfa-Gevaert, Sony, Zeiss Ikon, Polaroid (bankrupt in 2002), Casio • Value Chain: • (1) Housing, (2)Shutter mechanism, (3) Optics, (4) Flash and Power source, (5) Development, (6) Printing, (7) Wholesale and (8) Retail

9. Evolution in this “ecology” • !: 80-85….2: 86-90….3: 91-95….. 4: 96-03 • Photography Group • Adjacent Groups (Computer HW and SW) • Development Infrastructure

10. Evolution of Photography 86-90 91-95 96-2003 80-85 Polaroid Bankrupt Price-adjusted Quality full Match Digital sales Exceeds Conventional Sales PC Revolution Internet and Email limited to Universities Photo CD with CD Player 1. Complementary technologies And 2. Firms with NE Strategies, hugging Aging Paradigms 35MM Cameras And Early DI (Sony MAVICA No Substitution Paradigm and its Trajectory Very “Obvious” ‘Counter’ Innovations APS Convergence In Full Swing

11. 35MM : Complements are development, paper 50Mn plus pixels Limited duplication, transmission Analog Hard, Real Key Players Kodak, Agfa, Fuji, also Canon Companion Paradigms: Film and film reels, Movie Production, Projection Digital: Complements are PC, WWW, Email Number of pixels growing Duplication Digital Soft, Virtual Key Players Canon, Sony, Minolta, and perhaps Kodak Companion Paradigms: Editing, Visual arts, Movie Production Paradigm

12. Key photography elements of product/service/delivery Relative Value Digital Immediate Viewing Image Sharing Price Resolution Features

13. Photographic Process – Digital vs. Film Paradigm Traditional Film Image Lifecycle Slide Album Camera Slides Consumer Image Re - purchase Developing Prints Taken Cycle Film Negatives Photo Album Frequent re - purchases

14. Imaging / Photography Value Chain Imaging Equipment Imaging Media Imaging Transfer Imaging Storage Imaging Display Traditional Industry Players • Canon • Nikon • Kodak • Olympus • Minolta • Polaroid • Kodak film • Fuji film • Agfa film • Kodak Paper • Fuji Paper • Various Album Manufacturers • Kodak Chemicals Imaging Equipment Imaging Media Imaging Transfer Imaging Storage Imaging Display Digital Industry New Players • Microsoft Software • Adobe Software • Kodak Software • Dell Software • H-P Printers / Ink • Epson Printers / Ink • Lexmark Printers / Ink • Ofoto online • H-P paper • CVS.com • AH.com • CD-ROMs • SanDisk • Sony • Intel • Toshiba • PC Manufacturers • Mobile Phones • Palm Pilots / PDAs • Sony • H-P

15. Cameras • Old versus New Paradigm • “Razor Blade” • Polaroid Dead and Kodak out of the Dow (DJIA) • Movie Theaters and Hollywood next? • Film, Paper and Album replaced by Digital • …..and WWW and Email • What is Next ?

16. Kodak Options • Majority of Kodak’s revenues come from sales of films not 35MM cameras, and digital cameras do not use any film. How difficult for Kodak to give up its cash cow product. • The economics of traditional photography are much more attractive for 35MM producers than those of digital. A constraint on Kodak? • Finally, given that Kodak supports a vast organization on the basis of film sales, and that digital won’t yield profits for some time to come, how will this 35MM competency will be supported in lieu of film sales.

17. Patents, Strategic Alliances, Joint Ventures…..

18. Kodak’s Response to Digital Disruption • Approached digital photography as a threat to its core business • Saw cannibalization of existing film-based business • Focused on current consumer behavior vs. emergent technologies (Paradigm Hugging) • Focused on traditional film competitors (e.g. Fuji)

19. Kodak’s Response to Digital Disruption Before December 2001: • Kodak’s organization was organized by end-user market • The work of digital champions had to be divided among the various segments rather than as a unified strategy • Besides having the difficulty of charging one group with the responsibility to develop Kodak’s digital strategy, simple funding for R&D efforts would be divided among the existing segments • Given this structure, digital imaging was a threat to the established paradigm and its “owners”

20. Kodak’s Prospects • Kodak is not the leader it once was; its core competencies in paper and film have become core rigidities • The photography market is likely to be much more fragmented • As we will see on June 13, we need a dedicated integrated business unit for new paradigm to overcome core rigidities

21. From Industry Inertia to Firm Inertia • How do firms become trapped in their learning curve • Core competencies and core rigidities

22. So far… lessons: 1. Death of “Dominant Design” • Firm versus its environment • Innovations • Inertia and Paradigm Huggers 2. Unlocking the Firm or Industry from “Old” Paradigm Photography Industry

23. Strategy and Innovation • Part I, Day 2 • Kodak, Polaroid • Industry, Sector Evolution and Inertia • Part II, Day 2 • Core Rigidities and Competencies • Firm Inertia • Gunfire at Sea • Part III, Day 2 • Ab und Aufbauen or Reinventing the Firm’s strategy

24. Overcoming Inertia • Gunfire at sea: firm-specific obstacles for shedding the old S curve • Steps towards a new paradigm

25. Established firms and Innovation • Firms are locked into a dominant design • Its departments, career paths, customer base and suppliers share in the dominant design that has become the standard • Dilemma of being entrapped by tangible and intangible, mindsets and values, whose platform you need to move on.

26. Core Competencies • Knowledge • human capital • social capital • technical systems • Managerial systems • knowledge creation and recycling • Culture (norms and values)

27. Core Rigidities (as distinct from core competencies) • Competency Traps • NE Strategy • Disruptive Technology • Forgetting Difficulties • Old skills get in the way (Cobol vs C++) • Learning Mandarin while you speak already Cantonese • Competencies to create New Competencies • Dynamic capabilities

28. Strategy and Innovation • Part I, Day 2 • Kodak, Polaroid • Industry, Sector Evolution and Inertia • Part II, Day 2 • Core Rigidities and Competencies • Firm Inertia • Gunfire at Sea • Part III, Day 2 • Ab und Aufbauen or Reinventing the Firm’s strategy

29. U.S Navy and Continuous Firing

30. Gunfire at Sea • What is meant by “They are holding the horses”? Why gunnery as case study? • What is that gunnery innovation? • What was Sims’ motivation? How did this motivation differ from Scott’s • Why did the Navy resist Sims’ efforts? Identify some core rigidities. • What remedies?

31. Old Paradigm Close proximity Poor hit rate Risk of black eye New Paradigm Telescope mounted on sleeve such that it could move Gear ratio 3000% Improvement What is here the Innovation

32. Gunfire at Sea:take-away • Innovation not due to R&D but creative use of existing technology • Continuous aim gunfire due to a chance event and a driven person who was maverick, prepared to break rules • Tyranny of past success entraps the organization (core rigidities) • Resistance to change is “society”-wide • Role of leadership in unlocking system

33. Strategy and Innovation • Part I, Day 2 • Kodak, Polaroid • Industry, Sector Evolution and Inertia • Part II, Day 2 • Core Rigidities and Competencies • Firm Inertia • Gunfire at Sea • Part III, Day 2 • Ab und Aufbauen or Reinventing the Firm’s strategy

34. Basic “Templates of Organization Design • Templates, Structure, Governance, Form • Functional and Divisional

35. Two Templates Business Function

36. Functional (F-form) is attractive: ease of supervision maximum specialization in occupational skills But, has drawbacks: conflict prone free ridership performance responsibility difficult to define do not produce general manager Divisional (M-form) is attractive: simplifies coordination creates client responsiveness accountability of performance do-ers decide But has also drawbacks: duplication of effort creates superficial skills competition between business units Organization Structure Note Newer Types such as Matrix, Corrupted Divisional and Network

37. Functional Divisional CEO CEO NewCars Service UsedCars Sales Service Finance “Corrupted” Divisional Matrix CEO CEO Service Sales Service Finance NewCars Trucks UsedCars NewCars UsedCars Network or Spaghetti Trucks CEO

38. Cohesion: dyad communication with the primary group and its “closest confidants”, attraction social proximity due to physical proximity inducing similarity Sherif, Schachter, Festinger: reduction of ambiguity; Lazarsfeld :voting Structural Equivalence: social system competition and relative deprivation within a status-set with the “nearest rival” compare a “menage a trois,” the “laughing third” physical proximity providing alters for whose evaluation affection etc. ego competes similarity due to effort to eliminate relative deprivation Burt: adoption to avoid embarrassment, to acquire legitimacy: Network “Theory”: two schools of thought

40. Three Forms of Capitalan MGI Post-script • Financial Capital ($$$$) • Human Capital (skills, training, experience, looks) • Social Capital (networks, channels, alliances) • all three contribute to performance and innovation

41. 3 1 2 4 5 7 6 9 8 10 11 A Communications Network

42. Why Worry about Networks? • Access to know-how, contacts, resources • Unique combinations of network benefits yield opportunity • Network ideas operate within and across organizations • Expand size of radar screen and make you detect technological discontinuities, emergent markets, new designs.

43. Internal Circulation of Knowledge • Job Rotation • Boundary-Spanning Roles • Information Technology(email, intranet) • Social Networks

44. External Circulation of Knowledge • Strategic alliances • Equity JVs, licensing, minority participation, R&D partnerships, etc. • Consortia

45. You You You Network A’ Network B’ Network C’ Strategic Network Expansion

46. A The Social Structure of Competition Redundant contact Non-redundant contact D Structural Holes Filled by “You” YOU B C Structural Holes

47. Spider and its Net

48. Osama Bin Laden and his network?

49. Network of Countries linked by Footballers Movements

50. Complete Network