Strategy Innovation

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					Chapter 12

Innovation & Strategy
  To gain an overview of the functioning
   of the international monetary system
  To understand the nature of foreign exchange operations
  To appreciate the role of global capital markets
  To identify and assess corporate financing options,
  including their impacts on managers and stakeholders
  To assess changes in corporate control, including the roles
  of hedge funds and private equity groups
                   To evaluate changes taking place in
                   international accounting
      Aims of the lecture
To identify the elements of innovation in the
organizational context
To account for national differences in capacity for
innovation and technology development
To examine diverse approaches to innovation in
terms of corporate strategy and organization
To appreciate the potential of co-operative
innovation strategies
                   To become familiar with ways
                   in which innovation is
                   fostered and managed within
                   the international company
   Elements of innovation
Innovation covers all activities which yield new
or improved products or ways of doing things.
Radical innovation is driven by technology – the
systematic application of scientific knowledge to
practical purposes.
New products or processes = inventions, for
which patent application can be made.
            Incremental innovation is associated
            with continuous improvement.
            Innovation is now seen as central to
            corporate culture, not just R&D
            departments.
     Figure 12.1:
Elements of innovation
            Cross-                  Focus on
            functional              the consumer
            cooperation             needs
R&D
capabilities,
including            Elements of             Corporate
                                             culture
networks
                     innovation
                      Cross-           Focus on
    Patentable        functional       the consumer
                                Incremental
    inventions –      cooperation      needs
                                improvements
    products and
        R&D                     in products and
    processes
        capabilities, Manage-   processes
        including          Elements of
                      ment of
                      IP rights
                                             Corporate
                                             culture
        networks
                               innovation
                Patentable                      Incremental
                inventions –                    improvements
                products and                    in products and
                processes        Manage-        processes
                                 ment of
                                 IP rights
     Innovation and
  competitive advantage
Innovation is a core competency and
source of competitive advantage.
Catalysts of innovation (Porter):
           New technology
           New or shifting buyer
            needs
           New industry segment
           Shifting input costs or
            availability
           Changes in government
            regulation
Innovation and economic development
 Capitalist economic development relies on radical
 changes which break with the past (Schumpeter’s
 “Creative destruction” model):
     New   products
     New   methods of production
     New   markets
     New   forms of industrial organization

 Economic development can be depicted in stages,
 from low innovation-intensive to high innovation-
 intensive, but...
                         No two countries
                         present exactly the
                         same pattern.
Creative Destruction: from Nataraja Shiva
to Joseph Schumpeter
  In Hinduism, the god Shiva is simultaneously the destroyer
  and the creator, portrayed as Shiva Nataraja (Lord of the
  Dance), which is proposed as the source of
  the Western notion of "creative
  destruction".
  In The Communist Manifesto, Karl Marx
  and Friedrich Engels described the
  tendency of capitalism to constantly
  reinvent itself.
  In western capitalism,
  "creative destruction" is most
  associated with Schumpeter,
  particularly in his 1942 book
  Capitalism, Socialism and
  Democracy. The most likely source
  of this can be found in the concept of
  Business Cycles, as in the long-wave
  cycle of Nikolai Kondratieff that, Schum-
  peter believed, were caused by innovations
•Figure
12.2:
Stages of
develop
ment
(change)
Stage 1                                     Stage 2
Early development                           Investment-based development
 Reliance on natural resources              Increasing expenditure on transport, infra-
  or low-level, labor-intensive,              structure, utilities, communications, education.
  manufactures for export.                   Growth in capital-intensive sectors, e.g., chemicals
 Craft industries, few                       and moderately knowledge-intensive consumer
  competencies                                goods (e.g., electricals).
 Inward investment limited to               Increase in FDI
  enclaves of economic activity

                                                                Stage 3
                                                                Innovation-led
Stage 4                                                         growth
Services-led development                                         Growing consumer society.
 Focus on direct services of goods with high level              Greater expenditure on
  of service content.                                             education and communication
 More cross-border, inter-firm linkages, aiming for             Promotion of FDI in
  global competitive roles for domestic firms.                    innovation-intensive sectors,
 Increase in outward MNE activity.                               facilitating spill-over effects
 Aim to attract high-value FDI, e.g., R&D.                       and technology transfer
National innovation capacity
 Why have some countries forged ahead in
 technological innovation, and others have lagged
 behind?
 Huge gap in innovation capacity between the
 developed and developing countries
 Some of the necessary conditions to boost
 innovation:

           Public spending on education, skills,
           infrastructure
           Cultural values associated with
           entrepreneurial activity
           Strengths in science and technology
        • Figure 12.3:
The national innovation system
            Education      R&D          Investment in
            & Training     intensity    advanced telecmmuni-
            systems                     cations infrastructure

      Inter-firm           National         Cultural factors like
      relationships       innovation        attitudes to learning
                            system          and entreprise.
Industrial structure                       Science and techno-
       Government                          logy strengths and
       policies and the                    weaknesses
                           Interactions
       funding of research between firms, univer-
                           sities and research centers
Figure 12.4: Gross
domestic
expenditure on
R&D as a
percentage of
GDP in selected
countries

Note: For 1975, Germany
refers to Western Germany
(the Federal Republic of
Germany)




•Source: OECD (2007)
Main Science and
Technology Indicators,
www.oecd.org
•Figure 12.5:
The top
seven
countries in
R&D:
Breakdown
in sector,
2006

Source: UK Department of Trade
and Industry (2007) The R&D
Scoreboard 2006,
www.innovation.gov.uk
     Technology transfer
Technology gap between developed and
developing countries can be partially bridged by
technology transfer.
Technology consists of both...

          Codified knowledge (tangible elements, such as
          products, designs)

          Tacit knowledge (intangible elements, such as
          skills and know-how)

          The greater the extent of tacit knowledge, the
          more difficult it is for host developing countries
          to benefit.
        • Table 12.1:
Channels of technology transfer
  Innovation in the organization
• Why are some firms and people innovative and others are not?
• Strategies vary according to the type of business:
      • Born-global firm in knowledge-based sector – new
        products and global ambitions from the outset.
      • Research-intensive MNE – usually with strong R&D
        department, and record of innovative products.
      • MNE in consumer mass markets – broadly based
        strategy and incremental innovation, adapting to new
        markets.
               • Figure 12.6:
Innovation in different types of international
                  business
    Business        Sources of          Innovative
      type          Innovation            outputs

  Born-global in     In-house R&D       Patentable
   knowledge-                           inventions/software
  based sector       Inter-firm         copyright
                     cooperation
                     Technology         Product or service
                     licenses           improvements
   Research-
   based MNE         Acquisition of     Cost-saving
                     specialist firms   business process
                                        innovations
                     Continuous
     MNE in          improvement
consumer products                       Incremental
  mass markets       Cross-functional   innovations in
                     teams              supply chains
•Table
12.2:
The
world’s
20
largest
compani
es by
R&D
spendin
g, 2006
          Source: UK Department of Trade and Industry (2007) The R&D Scoreboard 2006, www.innovation.gov.uk
 Co-operative innovation strategies
Some reasons for growth of co-operative strategies:
   • Need to reduce costs generally, and curb rising R&D costs
     in particular
   • Shorter product life cycles, and shorter technology life
     cycles
   • Increasing complexity of some products
   • Increasing integration of formerly independent sectors
   • Collaboration can be to seek complementarities, or to pool
     skills to speed up the research process
       • Figure 12.7:
Potential benefits and risks of
co-operative R&D agreements
•Figure
12.8:
Equity
and non-
equity
R&D
agreemen
ts
          Managing innovation
New ideas from within: what can the management do?
   • Foster a culture of openness
   • Be willing to change
   • Hire creative people

What about external sources of new ideas?
   • Co-operative R&D agreements
   • Customer-focused innovation
   • Innovation from any participant in the supply chain
         • Figure 12.9:
Internal and external aspects of
     managing innovation
External aspects
Internal aspects



               In-house IP
               management           R&D
                                    strategy


          HR            Managing
          policies     innovation
                                    Corporate
                                    culture

                   Parent-subsidiary
                     interactions
                     Interaction within
                       supply chains
    Managing IP rights
Intellectual property rights (IPR) – a source
of ownership advantage.
Every product represents a bundle of rights,
which must be legally protected and defended, in
differing national environments.
The rise in outsourcing, licensing and
collaboration in R&D leads to the need for
greater attentiveness to who owns what IP
rights.
                 Where IP rights are managed to
                 deliver maximum value to the
                 firm, innovation is at the heart of
                 corporate strategy.
            Figure 12.10:
The main intellectual property rights
         Managing IP (intellectual property)

 New product        Brand          Media          Appearance,
or technological       or         content,     logos, packaging,
     process         logo         software          graphics


     Patent        Trademark Copyright            Design right
 apply                  Need arises
                        automatically
              License   Need to register     License   Grant
                 to                             to     permission
                use                          produce
         Conclusions
Innovation enhances competitive advantage
through both radical and incremental
improvements in products and processes.
Reflecting levels of economic development,
national environments differ in innovation capacity.
Innovation within the firm is not just about R&D
activities, but involves openness to new ideas
throughout the organization.
Co-operative innovation strategies complement
and enhance the firm’s in-house innovation
resources.
                Competitive success depends on
                managing IPR in both the legal and
                organizational contexts.
Case studies 12.1: Kodak (page 462)

1. What were Kodak’s failings in innovation
   strategy which led to it being left behind?
 Kodak realized that it would have to adapt to the
   new digital age, but failed to anticipate how
   quickly digital cameras would replace
   traditional photography. Even when the price
   of digital cameras started to fall dramatically,
   Kodak was still manufacturing huge quantities
   of film. The new CEO who took over in 2005
   immediately called for reduction in
   manufacturing capacity by two-thirds, but by
   then, the company was in crisis.
2. In what ways does its new strategy stem
   from its long-standing business strengths,
   and in what ways is it breaking with its past?
 Kodak had an active R&D department, which had been
 researching digital technology for years, acquiring IP rights
 along the way. It had long supplied X-ray laboratories and film
 studios. Its expertise in imaging is now a platform for further
 expansion. Kodak faced an uphill task in lower-end digital
 cameras, as it rivals were well established. The new CEO
 guided its evelopment of printing products, spotting a gap in the
 market. The digital printing business was thus central to its new
 strategy. The company is seeking further innovation in the
 sharing and display of images in different media, such as mobile
 phones and internet. A partnership with Motorola, the mobile
 phone company, has been formed to foster these
 developments. The new products, such as easy-to-use home
 printers, would be considered a break with its past, but Kodak
 as a brand has long been had a reputation for catering for family
 and holiday photo-taking. Its sound reputation, especially in the
 US, would transfer to the printer activities, which are largely
 targeted at this same market.
3. How would you assess Kodak’s core
   competencies as sources of competitive
   advantage in the future?
  Kodak’s experience and research in imaging
  can be a source of competitive advantage in
  the future. Much of these expertise is in
  specialist applications, and the company
  would also need to maintain its competitive
  position in mass-market products such as low-
  end cameras. The link with Motorola in
  technology for sharing images over different
  media can be a source of competitive
  advantage in the future.

				
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