Micro-economics of Innovation (Developing Innovative Capabilities)

1. Micro-economics of Innovation (Developing Innovative Capabilities) Strategic Management of Technology Burgelman, Christensen & Wheelwright

2. Innovation Challenges 1 • Exhibit 1 distinguishes between induced and autonomous strategic processes. • Induced action takes place in the light of the firm’s corporate strategy (CS) and in relation to its familiar external environments. • CS reflects firm’s beliefs about the basis of its past and current success. These beliefs determine what the firm views as its distinctive (core) competences and what the product-market domain is in which it can successfully compete. • The structural context (administrative & cultural mechanisms) serves to select strategic initiatives that fit with the CS and leverage the organizational learning on which CS is based.

3. Innovation Challenges 2 • Autonomous action is outside the scope of the current CS and opens up new environmental niches. • Successful autonomous initiatives lead to an amendment of the firm’s concept of strategy through the process of strategic context determination. • This involves middle-level managers in formulating a broader strategy for the initiatives of internal entrepreneurs and acting as organizational champions to convince top management to support these initiatives.

4. Innovation Challenges 3 • Technological innovations associated with the induced process are incremental or architectural. They emerge from firm’s R&D investments. • They are not necessarily small (e.g. Development of new air frame for aircraft). • Innovation in induced process is likely to shift from the ‘fluid’ to the ‘specific’ state (product to process innovations). • Adjusting to changing basis of competition is problematic for management. • In the short to medium term managing incremental or architectural innovations is the most significant innovation challenge facing established firms.

5. Innovation Challenges 4 • Autonomous process: • Innovations are typically radical and emerge unexpectedly from the firm’s R&D investments. • They are not necessarily large, at least initially (e.g. Electronic fuel injection was invented by Bendix Corporation by an individual engineer. It is now $100 million segment in the automotive supply industry). • Challenge is important for long term survival and development of the firm, because as firms grow large their opportunities to maintain growth in the mainstream areas of business diminishes. • Firms must balance the relative emphasis on these two challenges throughout their development.

6. Corporate Research 1 • Long-range time horizon, high risk and exploratory orientation (e.g. IBM in Zurich). About 10 to 15% of total R&D budget for corporate research. • Exhibit 2 Functions of Corporate Research. • Supporting Existing Businesses (induced process). • New Strategic Directions (autonomous process).

7. Corporate Research 2 • Managing key interfaces: • Corporate Research-Divisional R&D (induced process): Differences in orientations and expectations of the groups involved. Divisional labs commission experimental studies to CR and see them as service providers. CR people see themselves as working at the frontiers of technology and resist working on low-level technical problems.

8. Corporate Research 3 • Managing key interfaces: • Corporate Research-Business Research (autonomous process): Developing new areas of business based on CR is an entrepreneurial task. It necessitates linking new technological solutions to market needs and obtaining additional resources to create a commercially viable new business and thus requires inputs from CR and business research specialists. • See Exhibit 4 for differences between CR and BR.

9. Corporate Research 4 • Linking CR to Corporate Development Strategy: • Top management should establish an effective process for deciding which new businesses and competences the firm wants to develop. • High uncertainty involved in technological changes makes it extremely difficult to assess associated business opportunities even after technological feasibility has been established (e.g. Bell Labs lawyers were reluctant to apply for patent on the laser, as they did not see its potential application to telephone industry).

10. Corporate Research 5 • Assessing technological opportunity: Five dimensions of uncertainty (new technologies): • 1) Innovations come in primitive conditions with properties and characteristics whose usefulness cannot be immediately appreciated (e.g. The laser was not an obvious substitute for what existed); • 2) Impact of innovations often depends on improvements in complementary inventions (e.g. Laser became useful in telecom sector only with the availability of fiber optics); • 3) Major innovations often constitute entirely new technological systems, but it is difficult to conceptualize such systems (e.g. Telephone was conceived as a business instrument.

11. Corporate Research 6 • 4) Major innovations often had their origins in attempts to solve very specific problems and lead to unanticipated uses (e.g. Stem engine was invented as a device for pumping water out of flooded mines); • 5) The ultimate impact of innovations depends on the ability to effectively link them to specific categories of human needs (e.g. It was David Sarnoff, not Marconi, who linked the possibility of wireless communication to extended human needs).

12. Corporate Research 7 • Assessment (initial screening): • Are first-class researchers available to pursue them? • Is major investment likely to yield major advances? • How many years will it take before we see useful results? • How many failures and successes have others had in this area?

13. Corporate Research 8 • Assessment (after initial screening, before committing resources): • Can the expert technology be obtained from vendors or through acquisitions? • What cost would be incurred by displacing an existing research program to implement the new proposal? • Is there enough hope that successful result can be transferred downstream? • Will the necessary capital be available?

14. Corporate Entrepreneurship 1 • Technology-based internal entrepreneurial activity often emerges spontaneously (autonomous process). • Firms continuously bring in new talent that interacts with the firm’s existing resources, competencies, and capabilities in ways that cannot be fully anticipated (e.g. In 1996, calculators were mechanized. A young man working for a company brought a model of electronic calculator to HP, because his own company refused to take it up as they did not have electronic capability). • How should the corporate management deal with this kind of issues?

15. Corporate Entrepreneurship 2 • New Venture Divisions (NVD): • When faced with autonomous initiatives, one way that the top-management tried to do was to create a separate NVD. • The premise was that internal entrepreneurs should be allowed to pursue ventures unencumbered by the constraints of the mainstream business management. Having reached the critical mass, a new venture could then be transferred to an operating division as a new business unit or department or, if sufficiently large, as a freestanding division on its own.

16. Corporate Entrepreneurship 3 • Exhibit 5 NVD Interface Problems: • NVD-Operating Division: revolve around product-market domain and synergy issues. • NVD-Corporate Management: the lack of clear corporate diversification strategy.

17. Corporate Entrepreneurship 4 • Assessing Internal Entrepreneurship: • What if NVD does not work? Different ventures have different needs and not all ventures can be effectively treated in the same way. • Develop an analytical framework that be used to assess initiatives and develop a variety of organizational design alternatives to structure the relationship between entrepreneurial initiatives and the corporation. EXHIBIT 6

18. Corporate Entrepreneurship 5 • Assessing Strategic Importance: • How does this initiative maintain firm’s capacity to move in areas where major current or potential competitors might move? • How does this help the firm determine where not to go? • How does it help the firm create new defensible niches? • How does it help mobilize the organization? • To what extent could it put the firm at risk? • When should the firm get out of it if it does not seem to work? • What is missing in the analysis? • Strategic assessment may result in characterizing the proposal as ‘very or not at all’ important or ‘important for the time being’ or ‘may be important in the future’.

19. Corporate Entrepreneurship 5 • Assessing Operational Relatedness: • It concerns the degree to which the initiative requires competencies and capabilities that differ from the corporation’s core competencies. It may have the potential positive or negative synergies with existing competencies/capabilities. • What key capabilities are required to make this project successful? • Where, how, and when will the firm get them if it does not have them yet, and at what cost? • Who else might be able to do this, perhaps better?

20. Corporate Entrepreneurship 6 • Assessing Operational Relatedness: • How will these new capabilities affect the capacities currently employed the firm’s mainstream business? • What other areas may possibly require successful innovative efforts if the firm moves forward with this project? • What is missing in the analysis?

21. Corporate Entrepreneurship 7 • Designing Alternatives: • This involves various combinations of administrative and operational linkages. • Determining Administrative Linkages: • Degrees of control. If strategic importance is high, strong administrative linkages are in order. Low importance should lead to examining how the new business can best be spun off. In other cases relax the structural context and allow the new business some lee-way.

22. Corporate Entrepreneurship 8 • Designing Alternatives: • This involves various combinations of administrative and operational linkages. • Determining Operational Linkages: • Firms seek to organize their operations in such a way that synergies are maximized while the cost of transactions across internal organizational boundaries is minimized. • If the operational relatedness is high, tight coupling is necessary, if not complete decoupling is necessary.

23. Corporate Entrepreneurship 9 • Choosing Design Alternatives: • EXHIBIT 7 • Direct Integration • New Product Department • Special Business Units • Micro New Ventures Department • New Venture Division • Independent Business Units • Nurturing plus Contracting • Contracting • Complete Spin-off

24. Corporate Entrepreneurship 10 • Implementing Design Alternatives: • Three major issues and potential problems must be considered: • 1) Corporate management and the internal entrepreneur should view the assessment framework as a tool to clarify - at a particular moment - their community of interests and interdependencies and to structure a non-zero sum game; • 2) Corporate management must establish measurement and reward systems capable of accommodating the incentive requirements of different designs.

25. Corporate Entrepreneurship 11 • Implementing Design Alternatives: • Three major issues and potential problems must be considered: • 3) As the development process unfolds, new information may modify the perceived strategic importance and operational relatedness, which may require a renegotiation of the organization design. The organization design framework must be used dynamically, with ventures potentially moving from type of arrangement to another.