Sources and Transfer of Innovation

1. Sources and Transfer of Innovation E-Business Innovation Semester 2/2006

2. Outline • Closed and Open Innovation Paradigm • Sources of innovation • Functional sources • Circumstantial sources • Innovation transfer • Transfer across functional or organizational boundaries • Transfer across national boundaries • Overcoming the impediments to innovation transfer • Relationship between science and technology

3. Company A Company B The Knowledge Landscape in the Closed Innovation Paradigm Current Market Current Market

4. The Knowledge Landscape in the Open Innovation Paradigm New Market Company A Current Market New Market Company B Current Market

5. Sources of Innovation • Two types • Functional • Where do the innovations come from? • Within or outside a firm? • Where exactly within the firm? • Circumstantial • When or under what circumstance can one expect the innovations?

6. Functional sources of innovation • Five major sources • Internal value chain • Competitors and related industries • External value-added chain (suppliers, customers, and complementary innovators) • University, government, and private laboratories • Other nations or regions

7. Competitors Relatedindustries Suppliers R &D Manufacturing Marketing Customers Private and public laboratories Universities Functional sources of innovation Technological change Regulation/deregulation Customer expectation Globalization Social/demographic Political/legal Nation 2 Nation 3

8. Internal value chain • Ideas to be sources of innovation can come from • R & D (3M, Merck, Intel with high % of R&D budgeting) • Any functions of the firm’s value chain • Design • core concept for components • Manufacturing • process innovations (methods, techniques, materials, components, information flow mechanisms) • Marketing • advertising campaign, price, product position • Finance • lower cost of capital

9. Spillovers from competitors • Benefits from findings of another firm’s high cost R&D such as scientific knowledge, advertising ideas, etc • Create “Follower” strategies • Fast follower, follower, imitator, cloner • Diet and caffeine-free colas are not invented by Coca Cola • Protection of innovations or scientific knowledge from imitators (depends on quantity and tacitness of knowledge) • Why firms still perform R&D • Absorptive capacity • First-mover advantage

10. Example: Imitator’s win • In the late `60s, an Electrical Musical Industries (EMI) Ltd. senior researcher engineer, engaged in pattern recognition research which resulted in him displaying a scan of a pig's brain. Subsequent clinical work established that computerized axial tomography (CAT) was viable for generating cross-sectional view of the human body, the greatest advance in radiology since the discovery of x-rays in 1895.While EMI was initially successful with its CAT scanner, within six years of its introduction into the US in 1973, the company had lost market leadership, and by the eighth year had dropped out of the CAT scanner business. Other companies, though late entrants, dominate the market today.The scanner which EMI developed was of a technical sophistication much higher than would normally be found in a hospital, requiring a high level of training, support, and servicing. EMI had none of these capabilities, could not easily contract with them, and appears to have been slow to realize their importance. Two competitors, GE and Technicare, already possessed the complementary capabilities that the scanner required, and they were also technologically capable. Both were experienced marketers of medical equipment and had reputations for quality, reliability, and service. GE and Technicare were thus able to commit their R&D resources to developing a competitive scanner, borrowing ideas from EMI's scanner, which they undoubtedly had access to through cooperative hospitals, and improving on it where they could while they rushed to market.

11. Suppliers, customers, and complementary innovators • Suppliers • Invent new products that use their components as input • Alcoa and Reynolds Aluminum invented a new kind of aluminum can • Develop other products that are complementary to their components • A microprocessor maker develops software to increase demand of PC’s • Customers • Special features for a customer can be a new product • A customer can originate a radical innovation • Singer invented e-cash registers for its retail store • A Lead user fulfills its need before others in the market

12. Suppliers, customers, and complementary innovators (contd.) • Complementary innovators • A firm whose products are critical to the success of a manufacturer, but over whom the manufacturer has very little or no direct control • Microsoft is a complementary innovator for Compaq • Amazon is a complementary innovator for Target, Circuit City • Complementary products come from understanding of primary products and collaboration with the firms whose the manufacture primary products • Microsoft defined a microprocessor architecture to sell more operating systems • Microsoft supported network PC to sell its software • A software maker devises a memory management scheme for the operating system • A maker of car batteries redesigns the electronic control unit to increase the battery life

13. Example: Cardinal Health • Cardinal Health was primarily a pharmaceutical company in an industry in a downward trend in terms of profitability. • Cardinal Health initiated to help its customers manage the flow of Cardinal's products through hospital operations. Cardinal began to offer logistics management services for hospital pharmacies, applying its own superior systems to some of the hospitals' most burdensome tasks. • Soon, Cardinal was providing complete pharmacy management services, including the systems, staff and oversight needed to run a pharmacy. • Both the company and its customers were winners: Cardinal enjoyed new streams of revenue and profit, and the hospitals were relieved of the challenge of staffing and managing their own pharmacies. • Next, Cardinal created the "ATM of medicine dispensing" With this innovation, a nurse keys patient data into a Pyxis MedStation, and the machine accurately doles out pre-measured, bar-coded doses of medication, ready for use. Not surprisingly, hospitals love the system. Inventories, errors and costs are all lower, and the pharmacy can concentrate on work that is of higher value to patients and staff than basic dispensing.

14. Target agreed to use Amazon.com technology for order fulfillment and customer care services on its Target.com, MarshallFields.com, Mervyns.com, and GiftCatalog.com web sites Example: Target

15. How to become a complementary innovator start asking and answering a lot of questions about its customers and their capabilities: • What are the issues customers wrestle with every day? What are their biggest headaches? How do their lives really unfold, both on and off the job? How do they spend their time and resources? • What does the broader ownership or consumption process surrounding a company's product or service look like? • Are there opportunities for the company to work more closely with its customers, even taking over some of their own processes? • What are the flaws in the customers' economics? How can the company help to address them? • Are there one or more groups of customers with whom the company has significant authority? Can the company build a new business that leverages that authority while meeting those customers' next-generation needs? • Does the company have a process to codify special projects for large clients and transform them into services that can be offered to a larger array of customers? • Could the company's brand resonate with consumers on an emotional level? Could the brand serve as an affinity hub through which consumers can fulfill their need for belonging? • What unique assets can the company leverage: unique customer access, technical know-how, an installed base of equipment, a window on the market, a network of relationships, by-product information or a loyal user community? How can these assets be used to create competitive barriers? • Which information assets does the company own? Which ones will it develop during the next three years? Does the company generate by-product information in its core business that might have value for either current customers or a new set of customers?

16. University, government, and private laboratories • Scientific knowledge without commercialization purpose publicized through journal papers or conference presentations • Both basic and applied research • Basic : DNA, internet, nuclear science • Applied : computer, jet engine, nuclear power, the web • The firms may need • Related research • Absorptive capacity

17. Internet history • J.C.R. Licklider of MIT, first proposed a global network of computers in 1962, and moved over to the Defense Advanced Research Projects Agency (DARPA) in late 1962 • The Internet, then known as ARPANET, was brought online in 1969 under a contract let by the renamed Advanced Research Projects Agency (ARPA) which initially connected four major computers at universities in the southwestern US (UCLA, Stanford Research Institute, UCSB, and the University of Utah) • By June 1970, MIT, Harvard, BBN, and Systems Development Corp (SDC) in Santa Monica, Cal. were added. • By January 1971, Stanford, MIT's Lincoln Labs, Carnegie-Mellon, and Case-Western Reserve U were added. • In months to come, NASA/Ames, Mitre, Burroughs, RAND, and the U of Illinois plugged in

18. International • Some nations are better at certain kinds of innovations • United States: pharmaceuticals, biotechnology, software, movie, television entertainment • Japan and Korea: facsimile machine, electronic components, mobile phone • Germany: machine tools, chemicals • Italy: shoes, specialty leather

19. Sources and Timing • Different sources should be considered at the same time • Ability to integrate information from different sources is critical

20. Circumstantial sources of innovation • Planned firm activities • Most of the functional sources are planned • Unexpected occurrences • Failures • Change • Technological discontinuities • Regulation and deregulation • Changes in customer expectation • Macroeconomic, social, or demographic changes • Referred as “creative destruction”

21. Examples • Minoxidil was tested for efficacy in treating high blood pressure, but its side effect of hair growth created an opportunity to market Rogaine for baldness • IBM developed the first modern accounting machine earmarked for banks in the 1930s. But the bank did not buy it. IBM turned to the New York Public Library which had more money to spend on it

22. Innovation transfer • Effectiveness of innovation transfer to the firm’s value chain • Boundaries • Across functional and organizational boundaries • Across national boundaries

23. Transfer across functional and organizational boundaries • Nature of innovation • How tacit or explicit • How radical • Complexity Effectiveness of transfer Organizationalcultural differences • Timing • When • How long • Absorptive and delivery capacities • Experience

24. Absorptive and transmission capacities • Transmitter’s capabilities to delivery innovation and receiver’s capabilities to exploit innovation • Knowledge to absorb knowledge • Related knowledge to absorb the knowledge being transferred • Coordination between transmitter and receiver • Complementary assets • Tools, manufacturing plants, etc

25. Organizational culture differences • Organization’s culture [Uttal, B. and J. Fierman]“A system of shared values and beliefs that interact with the organization’s people, organizational structures, and systems to produce behavioral norms” • There can be subcultures within the firm such as R&D’s subculture, manufacturing’s subculture • Difference in cultures and subcultures make it difficult to transfer innovation • Not-invented-here (NIH) syndrome

26. Nature of innovation • Radical or incremental innovation • The more complex the innovation, the larger the quantity of knowledge to be transferred and the more difficult to transfer it • Tacit or explicit knowledge • The more tacit, the more personal interaction between transmitter and receiver is required • Knowledge based or bulk processing • The more knowledge based, the more absorptive and transmission capacities is needed

27. Timing • Time window of opportunity • The time window that the firm can optimize its design or process • Once the dominant design emerges, it is difficult to make substantial changes in components or features • Some factors affecting the time window • Network externalities • Customer lock in • Environmental change • Life cycle of innovation • Early of the life cycle, there is a lot of uncertainty which makes transfer of innovation less effective

28. Example: IBM • IBM ignored the opportunity to develop its own OS and microprocessor. Microsoft and Intel did • After its PC design emerged as the dominant standard, IBM tried develop its own OS and microprocessor. • The window was closed • Customers resisted to learn a new OS • Attention tended to focus on process and incremental innovation

29. Effectiveness of cross-national Innovation transfers • Nature of innovation • How tacit or explicit • How radical • Complexity Effectiveness of transfer Differences in national cultures • Timing • When • How long Absorptive and delivery capacities Co-opetitors

30. Differences in national cultures • Different national cultures can dampen the rate of transfer of technological knowledge • Managerial styles • Working environment • Office space • Policies • Office hours • No-smoking policies • NIH syndrome

31. Example: IBM, Toshiba, and Siemens • Working together on the development of 256M DRAM memory chip in Fishkill, NY. • American’s one person per one office vs. Japanese’s big room • American’s office with panes of glass on doors vs. German’s office with a window • German and Japanese hung coats over the glass • IBM’s strict no-smoking policy made German and Japanese went outside in the cold • IBM’s NIH syndrome for Siemens engineer’s pilot manufacturing system • “Hamburger style of management”

32. Absorptive and transmission capacities • National differences between transmitter’s and receiver’s capacities are resulted from differences in… • Educational institutions • The presence of research university means more opportunities to take the advantage of the existing research • Concentration of competitors and related industry • High concentration suggests spillovers and communication with local firms to obtain absorptive capacities

33. Timing • Countries stand ready to accept products at different times during the life cycle of a product when • The cost of the product has dropped • The countries have enough absorptive capacity to receive the innovation

34. Nature of innovation • An incremental innovation in a country can be a radical innovation in another country • One party may have the incentive and capability to invest in the transfer whereas the other may not

35. Co-opetitors • There can be differences between co-opetitors from one nation to the other • It is important to consider mismatch of transmitter’s and receiver’s co-opetitors • A firm may need to establish relationship with the local co-opetitors or build its own entity • Collaboration with competitors may be necessary to lend some creditability and to convince complementary innovators to invest in complementary product development • Examples • McDonald’s had to invest in the growing of potatoes and beef to enter Russia • Japanese automobile manufacturers had to build U.S. auto parts supplier networks

36. Complementaryinnovator Supplier Manufacturer Absorptiveand deliverycapacity Absorptiveand deliverycapacity Absorptiveand deliverycapacity Absorptiveand deliverycapacity Absorptiveand deliverycapacity Differencesin national cultures Differencesin national cultures Differencesin national cultures Differencesin national cultures Differencesin national cultures Competitors Customer Nature ofinnovation Nature ofinnovation Nature ofinnovation Nature ofinnovation Nature ofinnovation Timing Timing Timing Timing Timing Co-opetitors during international innovation transfer

37. Co-opetitors (contd.) • Co-opetitor’s importance depends on the complexity of the innovation • Complexity is a function of • The number of primary components and linkages between them • The innovation’s attributes perceived by its local environment • The number of interfaces between the innovation and peripheral innovations and their interrelatedness • The number of organizations in the innovation’s local environment • The more complex the innovation, the more likely it is that the co-opetitor will play a critical role in the receiving nation

38. Overcoming the impediments to innovation transfer • A firm needs an organizational structure, strategies, systems, and people that enable it to • Quickly spot ideas or innovations • Boost the absorptive and transmission capacities of receiving and transmitting entities • Reduce the impedance mismatch between transmitter and receiver created by physical, cultural, national, and knowledge gaps between the two entities • Three boundaries • Cross-functional • Cross-organizational • Cross-national

39. Cross-functional • Boundary spanners • Reduce gaps between their functions and other functions of the value chain • Understand their functions, take function-specific questions, and make it understandable for the other • Champions • Articulate a vision of innovation that receiving and transmitting functions can identify with • Sponsors • Use considerable influence to encourage cooperation

40. Cross-functional (contd.) • Suggestion • Locate people together to encourage communication and brainstorm • The functions to be involved jointly plan initiating the transfer • Move employees around from the transmitter function to receiver function • Performance and reward systems

41. Cross-organizational • Gatekeepers • Reduce gaps between their organizations and the outside (suppliers, competitors, customer, lab., etc.) • Understand their organizations and the outside, take internal questions, and make it understandable for the outside • Suggestion • Hire the person (from the outside) with ideas • Reverse-engineer inventions • Establish alliances with universities, competitors, or suppliers • Build its own absorptive capacities

42. Comcast & TiVo • New software developed by TiVo will be incorporated into Comcast's existing digital video recorders (DVR) network platforms. • The new service will be marketed with the TiVo brand, and is expected to be available on Comcast's DVR products in a majority of Comcast markets in mid-to-late 2006

43. Cross national • Suggestion • Send employees of the receiver to the transmitter’s country • Set up training sessions for employees from both transmitter and receiver to explore cultures • The receiving firms need gatekeepers to understand both cultures • Establish joint ventures, alliances, acquisitions • Hold continued workshops in the challenges of cultural differences

44. Some thoughts • Difficult transfer is not always bad • The more difficult to transfer, the more difficult to imitate

45. Relationship between science and technology • Unidirectional • Science yields discoveries which lead to invention and commercialization • Separate • Both science and technology have their own output • Scientists for each are different kinds of people with different purposes (education vs. professional) • Bidirectional • Technological discoveries may need science for better commercialization • E.g.. Computer science grew after the invention of the computer

46. Science and technology Science Verbally encodedinformation • Verbally encodedinformation • Publication • Patents Verbally encodedinformation Technology • Verbally encodedinformation • Product & Services • Patents • Documentations • Publications