Innovation Exam Notes PDF

Lecture 1: fundamentals Schumpeterian view of innovation: Innovation as the driving force of economic progress and is the foundation of capitalist dynamism -​ His argument was that new products/Processes continuously reshape the economy -​ Makes old methods obsolete = leads to productivit...

Lecture 1: fundamentals Schumpeterian view of innovation: Innovation as the driving force of economic progress and is the foundation of capitalist dynamism -​ His argument was that new products/Processes continuously reshape the economy -​ Makes old methods obsolete = leads to productivity growth/improved standard of living Core concept of schumpeterian view = creative destruction Creative destruction: When a new innovation disrupts an existing market because it is a new superior alternative - example: digital photography making old film near obsolete innovation as a recombinatory process = don't have to make something entirely new just make something better in a novel way EXAMPLE: Smartphone = combined tech Another example is CRISPR = Using known science in a new way to have a use Entrepreneurship as a driving force for innovation: Entrepreneurship is how people introduce groundbreaking products/business models —----------------------------------------------------------------------------------------------------------------------- Why does innovation matter? -​ Innovation allows for firm competitive advantage -​ New products = differentiation = over time maybe monopoly -​ Other firms cannot copy you due to unknowns, IPR etc RBV: a framework of analysing your competitive advantage based on the resources and capabilities of a firm Physical capital: tangible assets like buildings, technology, machines etc - example: big pharma have massive advanced production facilities that give a competitive edge Human capital: intangible assets such as a skilled team, knowledge, R&D teams - example: the success of a pharma company lies greatly in its people, research scientists and clinical researchers are incredibly important capabilities without them it's all moot. Organisational capital: these are the internal processes within a pharma firm that allow it to function efficiently -​ Example: this could include the corporate organisations, the SBUs and different structural organisations surrounding them These need to be met to achieve sustained competitive advantage: 1. Valuable: something a company can use to give a competitive edge, can be something such an IP patents 2. Rare: Something that is unique and not widely available, can be a drug under patent that gives a rare source of dominance in an industry 3. Imperfectly imitable: A resource that isn't easy for a competitor to replicate due to certain complexities surrounding it. Maybe a trade secret or something like that, or a reputation 4. Non-substitutable: there is no equivalent alternatives for the resource which can provide a competitive advantage, for example a first in line treatment that has no other generics or biosimilars available giving market exclusivity This framework emphasises the importance of internal resources to achieve a competitive advantage Importance in pharma: patents provide exclusivity, R&D expertise is rare and valuable, high levels of manufacturing capabilities make it difficult to imitate TLDR: Innovation gives a firm its competitive advantage —------------------------------------------------------------------------------------------------------------------------ Invention Vs. Innovation Invention: creation of a novel idea, product, process or tech -​ The initial occurrence of a new concept -​ EXAMPLE: the discovery of CRISPR tech Innovation: The application and commercialisation of an invention -​ Transforming into a product, service or process that creates value -​ EXAMPLE: developing of CRISPR into a gene-editing therapy Basically TLDR: Invention is a new discovery & innovation is a new discovery with commercialisation possibilities —-------------------------------------------------------------------------------------------------------------------- Linear model of innovation: Framework that describes the sequential process of innovation Unidirectional model with a “Stage-gate foundation” Can have “feedback loops” between stages Input 1. Basic research: scientific inquiry to find new knowledge Output 1: Scientific discovery Input 2. Applied research to look for a practical use for the discovery Output 2: Invention Input 3. Development/testing: creating a viable product/service Output 3: Product for commercialisation (Innovation) Finally = go to market product Strengths ​ Simplicity: Offers a clear, straightforward understanding of how innovations progress. ​ Focus on Research: Highlights the importance of investing in basic and applied research as foundations for innovation. ​ Framework for Policy: Helps governments and institutions structure R&D funding and innovation systems. Weaknesses ​ Oversimplification: Real-world innovation is rarely linear; stages often overlap, and feedback from later stages influences earlier phases. ​ Ignores Market Dynamics: Downplays the role of market demand, user feedback, and iterative development. ​ Limited Applicability: Less suited for modern open or user-driven innovation systems. Example of it still used: the typical drug development pipeline —------------------------------------------------------------------------------------------------------------------------ Incremental vs Radical innovation: Incremental innovation: Small, gradual improvements/modification to existing products -​ Enhance/reinforce existing capabilities and market position -​ EXAMPLE: Improving smartphones each year iPhone 4 - iPhone X Radical Innovation: Breakthrough changes introducing a WHOLE NEW product -​ Often creating a new market and rendering old solutions obsolete -​ EXAMPLE: Old block phones transitioning to smart phones Example: Osteoporosis Treatments ​ Incremental Innovation: Bisphosphonates (e.g., Fosamax) – Builds on existing chemical treatments. ​ Radical Innovation: Monoclonal antibodies (e.g., Prolia) – A new biological treatment method based on breakthrough science. —----------------------------------------------------------------------------------------------------------------- Architectural vs. Modular Innovation Modular innovation: Changes to individual components of a system without changing overall design -​ Enhances functionality/performance of parts while keeping the overall design the same -​ EXAMPLE: Upgrading a bike by adding better breaks -​ Or upgrading an insulin pen to work better but keeping the overall design the same Architectural innovation: Changing the overall while leaving the individual components the same -​ Reconfigures the relationship between existing components to improve the system overall - changes the arrangement without changing the parts themselves -​ EXAMPLE: Changing the shape of a bike while keeping all the parts the same TLDR: Modular innovation improves the parts but keeps the system the same & Architectural innovation keeps the parts the same but improves the system —------------------------------------------------------------------------------------------------------------------------ Product Vs. Process Innovation Product Innovation: Involves creating a new/improved product/service -​ Delivers value to customers through new functions/features/benefits EXAMPLE: Google’s AlphaFold revolutionised drug discovery Process Innovation: Involves creating new methods of creating products -​ Enhances efficiency, Reducing costs, improving quality EXAMPLE: The concept of the “assembly line” first introduced by FORD Interdependencies: Process innovation enables product innovation Benefits of process innovation: Faster development cycles, cost saving, improved scalability —------------------------------------------------------------------------------------------------------------------------ Competence-Enhancing vs. Competence-Destroying Innovation Competence-Enhancing innovation: Builds on what firms already do well -​ Reinforces existing skills, knowledge and capabilities EXAMPLE: Canon improving its camera tech by increasing lens tech and image processing Competence-Destroying innovation: Making existing skills/tech obsolete -​ Requires firms to adapt and develop new capabilities to remain competitive EXAMPLE: Kodak failed to adapt to digital photography and made their film-based expertise less important/irrelevant —--------------------------------------------------------------------------------------------------------------------- Innovation: The Role of Serendipity Planned Innovation: result of deliberate efforts/R&D -​ Focused aim to create a product with a specific purpose -​ Organisations will invest in R&D with a specific end goal in mind BUT Happy Accidents occur Serendipitous Innovation: Unexpected result while pursuing an unrelated goal -​ Often comes from unexpected observation EXAMPLES: Penicillin was discovered by accident due to contaminated plates Viagra was being developed for cardiac-conditions and everyone's dicks started getting hard Serendipity plays a significant role in innovation and contributes groundbreaking discoveries —----------------------------------------------------------------------------------------------------------------------- Measuring Tech Innovation: 1. R&D Expenses/Accounting: Using financial data (income statement) to infer innovation -​ Input into innovation -​ Innovation also comes from non-R&D practices (process improvement) -​ Difficult to know what they are actually innovating but can indicate something in the pipeline 2. Patent Filings/grants: Tracking IPR Registrations to measure tech progress -​ Gives insight into tech origins and the impact of it -​ Not all patents have equal value -​ Patents reflect inventions but doesn't mean they will be innovations -​ Patent value distribution is skewed - a lot of them are useless 3. Scientific Publications: Tracking academic/research output to measure scientific progress -​ Easy to access and gives insight into upstream research activities -​ But! Often not directly linked to products/tech quality but is an indication of volume 4. Observational data on product launches: Watching new product releases/ trademarks etc TLDR: Tech innovations can be seen through R&D expenses, patents, publications and product launches —------------------------------------------------------------------------------------------------------------------------ Failures in Biopharma innovation 1.​ R&d Success rates = pretty low especially in cardiovascular (0.2%) 2.​ Lack of market adoption = some things are too expensive/complex and get rejected 3.​ Lack of efficacy post market = Some things get removed from market = dont work TLDR: The rate if a successful biopharma innovation is very low and there are a lot of fails —------------------------------------------------------------------------------------------------------------------- Challenges in innovation 1.​ Selecting the winning idea: Identifying which R&D idea is most likely to succeed -​ Choosing what area to research and what is most successful 2.​ Leveraging open innovation: capturing external ideas/tech -​ Using external sources (licensing, patterns, acquisitions) -​ Being able to balance internal and external innovation most efficiently 3.​ Balancing autonomy with accountability: encouraging innovation while keeping control -​ Creating an environment where people have creative autonomy but still keeping people accountable for actions 4.​ Utilising skills effectively: making sure the right skills are applied in the right context to drive innovation 5.​ Capturing/sustaining value: Extracting long term value from innovation is hard -​ Lipitorr was able to sustain value for years post launch -​ Developing the right strategies post launch to keep value —--------------------------------------------------------------------------------------------------------------- Lecture 2: Industry dynamics Tech paradigm/trajectories 1. Evolutionary patterns: tech evolves like a biological system, adapting/improving over time 2. Tech selection: certain tech dominates because it better aligns with needs, resources etc 3. Tech adaption: innovation is shaped by external pressure and internal advancement 4. Continuity/cumulativeness: Tech often builds on existing knowledge , with the occasional breakthrough new tech —----------------------------------------------------------------------------------------------------------------- Technology S-Curve Tech S-Curve: Represents the lifecycle of a technology’s development/adoption relative to the R&D efforts over time So Time or R&D efforts on the X axis Performance on the Y axis Stages of the S-Curve: 1. Slow initial progress: Tech is new & not well understood -​ Limited resources, not many enabling technologies -​ Enabling tech example: GPUs are needed for AI and at first there wasn’t enough to go around = slow progress 2. Acceleration of improvement: Understanding/legitimacy grows/R&D efforts increase -​ Collaboration/Spillover drives progress -> makes product better -​ Breakthroughs in battery tech helped speed up smartphone technology -​ ANOTHER EXAMPLE V.R: more people developing -> got better faster 3. Diminishing returns: Eventually a new technology reaches its natural limits -​ Improvements slow down -​ New S-Curve might emerge = new disruptive technology -​ EXAMPLE: CRT TVs transitioning to modern flat-screens Block phones transitioning to smartphones NOTES: Enabling technologies are critical to driving the progress of an S-Curve -​ Example: GPUs advancing AI and machine learning Technology discontinuities are when new tech displaces old tech -​ Fulfils similar needs in a different way -​ Example: CRT TVs becoming useless and replaced by flat-panel displays S-Curve progression example: Insulin Development Animal-Derived insulin 1920s -> replaced by synthetic analogues 1990s -> nanoparticle delivery -​ Demonstrates incremental improvements over time = enabled better efficacy and user experience —----------------------------------------------------------------------------------------------------------------  Adoption (diffusion) Curve: A model that illustrates how and when different types of users adopt your product 1. Innovators (2.5%): risk takers who are eager to try new ideas, high level of uncertainty and typically higher costs They want to be the social proof 2. Early adopters (13.5%): opinion leaders who embrace innovation after careful consideration - often have influence in the community (maybe online for example) -​ Their approval of the tech often influence their community 3. Early majority (34%): adopt the innovation once it has been tested by the early adopters and proven to be beneficial - they require more evidence and reassurance than the innovators and early adopters -​ Represents a large portion of the market and leads to the tip towards mainstream acceptance 4. Late majority (34%): the late majority are those who adopt to innovation later than the average person - they are sceptical of new ideas and unsure if it will be just a fad -​ They like to see how the majority of people react before embracing themselves 5. Laggards (16%): resistant to innovation and prefer traditional ways -​ Laggards often only adopt new tech or ideas when forced to -​ When older methods become obsolete they take on the new thing NOTE: Adoption begins slowly and accelerates with early/late majority EXAMPLE: VR tech Innovators - EARLY 2010s with the oculus rift - expensive and unrefined - RISK Early Adopters - As tech improved others began to get into the market - LESS RISK Early Majority - As it became more user friendly and improved more took it ok -​ PS VR comes out and the oculus quest making it easier - USER FRIENDLY Late Majority - VR gains more mainstream adaptation and new applications outside of gaming such as work and social aspects Laggards - Only adapting or have not adopted yet - people who are sceptical of the tech SO? How do the technology S-Curve and the Adoption Curve? 1.​ Learning curve: Early adoption and production scale lead to cost reduction as the diffusion of the tech accelerates -​ Basically when tech becomes ubiquitous are more prevalent manufacturing gets better also you have benefits from economies of scale and these decrease costs 2.​ Continuous Improvement: Ongoing R&D leads to improved function over time and this leads to more people adopting it EXAMPLE: Improvements in V.R 3.​ Reinvestment: Revenue from more adopters = funds for improved R&D TLDR: Adoption Curve shows how different groups adopt different tech at different rates & Tech improvement and market adoption go together and mutually reinforce each other -​ Early adopters = more money for improvement = more adopters —------------------------------------------------------------------------------------------------------------- Dominant Design: A Standard/Widely accepted configuration of an emerging technology category -​ Typically emerges after a phase of experimentation and competition between many design variations all being tried at the same time Phases of Dominant Design Emergence: 1.​ Fluid Phase: experimental with a lot of market entries -​ Radical innovation of products -​ Frequent changes Typically AFTER fluid phase the emergence of a dominant design occurs -​ Factors like performance, compatibility, cost and scalability are the driving forces 2.​ Specific Phase: focus shifts to process innovation (efficiency/cost management) -​ Decline in innovation rates -​ Learning curve effects/increased exits -​ Forms process standards like the assembly line EXAMPLE: original cars were relatively basic but the dominant design of combustion came to be - Internal combustion become the emergent dominant design -​ Over time new modern combustion, electric and hydrogen become the dominant design Another example: Over time Monoclonal antibodies have become the dominant design for targeted disease treatment leveraging new technology, cost efficiency and scalability What are the advantages of dominant design? 1.​ Simplifies industry standards, enables efficiency and scalability 2.​ Reduces uncertainty for consumers & producers - creates economies of scale 3.​ Encourages the production of complementary design - fuel or spare parts etc What are some factors behind the selection of a dominant design? 1.​ Increasing returns -​ Economies of scale brings down costs -​ Learning curve improves efficiency/reduces costs over time 2.​ Prior learning -​ Using a specific technology forms a large knowledge base about it -​ Makes any competitors trying to use a different design struggle to keep up 3.​ Network Externalities -​ Benefits of using a good increases the more people use it -​ Common in industries with physical networks -​ Good example: iPhone benefits from the fact so many people have them and gives people a reason to use them when certain features require other iPhone users FOR EXAMPLE Air Tags (complementary goods) Technology value in network externalities: what is the total perceived value tech stand alone value: includes core functions, aesthetic and user friendliness -​ Determines intrinsic utility of the technology Network externality value: Derived by the size of the installed base (amount of units in use) and the available complementary goods -​ Increases as more people use the technology example: apple find my network Competing tech? New tech will compete by emphasising its “stand alone” utility but they become a success when they can offer better compatibility and complements NOTE: Tech can coexist due to differences in user preference EXAMPLE: Apple and android But network effects will lead to one or two dominating standard (macOS and windows) TLDR: The total perceived value of a technology isn't just based on the “stand-alone attribute” but also on its network externalities Methods of a firm to promote their item being the standard? Ongoing innovation, complementary goods, backwards compatibility, first-mover, leveraging reputation, freemium model Side note: standard wars happen a lot for example the fight between blue-ray and HD-DVD 4.​ Government intervention -​ Policies help establish a standard through regulations/subsidies -​ Government might standardise a tech for consumer welfare and a simple ecosystem -​ Example: USB-C is now the dominant charging standard due to EU regulations —------------------------------------------------------------------------------------------ Standards and lock-ins: QWERTY keyboard became the standard keyboard for typewriters in 1874 Why? It prevented jamming of type bars by slowing down typing speed Lock-In? Despite there being more efficient layouts available QWERTY remains dominant due to its widespread adoption making people used to it TLDR: Standards gain dominance through early adoption, network effects and compatibility and result in it becoming locked in and so entrenched in ecosystems that it can't be changed —---------------------------------------------------------------------------------------------------------------------- Market entry timing First-Mover advantages: 1.​ Tech leader: establishing a tech lead allows to build brand loyalty 2.​ Pre-emption of assets: Securing resources BEFORE competition 3.​ Buyer switching costs: Locking in customers by making switching expensive 4.​ Increasing returns: benefiting from early adoption to allow for scaling 5.​ Getting good IPR, Trademark etc before others NOTE: EARLY MOVES HAVE WAY MORE RISK Late-Mover advantages: 1.​ Leveraging early movers investment: you don't need to do all the R&D just copy the others 2.​ Reduced uncertainty: Entering after tech and market preferences are well-defined limits risks involved 3.​ Enabling tech: Utilising advancements that were created by earlier players Factors influencing optimal entry timing 1.​ Consumer/Market factors -​ Knowing what the customer wants - will they even buy what you are selling -​ High barrier to entry/ competition -​ Getting good returns from early adoption 2.​ Tech factors -​ Are you actually improving over something prior (cost or features) -​ Are there enough enabling technologies -​ Can you leverage complementary goods? 3.​ Firm-level capabilities -​ Do you have a good existing reputation -​ Do you have the resources to enter a competitive market -​ Capacity to handle the early-stage loses -​ Enough capital to successfully enter the market Examples of entry timing in different contexts Social media: Myspace failed because it suffered due to tech issues/not meeting user needs Facebook was a success because it understood what its users wanted and had a better interface - benefited from network externalities = it got a lot of users Biotech examples: First mover: Ozempic success -​ Established a strong brand reputation -​ Nothing else on the market yet like it Late mover: Lipitor Success -​ Leverage the existing knowledge on statins -​ Offered a superior product to others available and at a manageable pricing level -​ Expanded very aggressively and obtained a strong market presence —------------------------------------------------------------------------------------------------------------------ Disruptive Innovation: key features 1. Initially inferior: Starts as inferior to existing tech but introduces a new value proposition that enables a rapid market entry 2. New features: Product has some new characteristic or improved performance, possibly a lower price 3. Growing pains (initial challenges): faces disadvantages like reduced performance in features that are already established = required further development 4. New markets: Opens opportunities for entrepreneurs because it can create a whole new underserved customer segment ‘Segment zero’ are low-end market users that are usually underserved or overlooked -​ Will accept lower quality if the product is cheaper or performs their basic needs -​ ‘Segment zero’ can’t afford high end products or solutions -​ Disruptive innovation targets ‘segment zero’ with a cheaper, simpler or more accessible product even if it initially has pretty low performance -​ Over time the tech gets better and then can move to higher end customers -​ Segment zero is confusing Sustained vs disruptive technology Sustained technology: Improves performance in line with existing customer preferences -​ Continuous incremental innovation Disruptive technology: Initially worse on mainstream metrics but creates a new customer segment and new market -​ Ultimately has the potential to replace the existing standard -​ Basically the disruptive tech ends up becoming its own market Examples of disruptive tech Voice over IP (Online calling like skype) , smartphones, streaming services Lecture 3: Corporate R&D & External innovation 1 Innovating organisation: this entity is actively searching for innovation related knowledge They are actively looking for “innovation-related knowledge” such as ideas, tech, new markets, resources etc They are also looking for “investing organisations” like venture capital or funding entities that are in turn searching for promising investment opportunities Forms a feedback loop of innovators looking for knowledge and investors while investors are looking for people with innovative ideas to invest in —---------------------------------------------------------------------------------------------------------------- Risks of searching for innovation locally: inside the company 1.​ over-reliance on current practices: If you only focus on your own practices you might miss out on adapting to emergent technologies example: ice dude didn’t make artificial ice - failure to diversify 2.​ Resistance to disruption: Incumbents try to prolong their decline by investing in incremental improvements but if they fail to embrace disruptive innovation they will get left behind - example is polaroids failure to move to digital 3.​ Inability to adapt: Ice dude failed to see the industry he was in was failing and didn’t act on the superior value proposition of artificial ice in time leading to their death TLDR: Focusing only on local optimisation and ignoring the broader market shifts is bad Instead you should also have “distant searching” outside of the company —---------------------------------------------------------------------------------------------------------------------- Search Depth: refers to how frequently a firm uses and reuses existing internal knowledge Advantages: -​ Reduces errors/facilitates routines -​ makes outcomes more reliable due to increased experience -​ Leads to a deeper understanding and identification of knowledge Disadvantages: -​ Over-reliance on existing knowledge can exhaust all your opportunities with that existing knowledge -​ Creates rigidities and limits the ability for the firm to explore beyond what it knows Outcome: optimal depth enhances innovation but eventually you’re beating a dead horse Search scope (Breath): Refers to the variety of sources from which knowledge is acquired -​ Often it extends past organisational boundaries Advantages: -​ Expands the knowledge pool with novel variations -​ Encourages in-house research (the “R” in R&D) -​ Promotes collaboration with other organisations/industry boundaries -​ Can give novel inputs from contextually different domains -​ Fosters creativity Disadvantages: excessive scoping can increase integration costs and decrease reliability of search efforts Outcome: Broad search scope can provide the most innovation insights but you need to balance the costs and the ability to integrate the knowledge Comparing search depth and scope: Search depth focuses on existing knowledge and involves refining, reusing and building on what the organisation already knows to reduce errors and get better and more efficient Search depth = Getting better at what you already know. Search scope focus on new knowledge and involves exploring outside the organisation's existing boundaries to discover new novel ideas, tech and inputs -​ Can lead to radical innovation Search scope = Exploring and incorporating what you don’t know. —------------------------------------------------------------------------------------------------------------------------ Insight into search scope (breadth) and its importance for innovation Analogue market effect: getting ideas from distant or analogue markets Example: Medical surgery/instruments market benefits from ideas taken from the semiconductor manufacturing due to similarities in precision/sterile environments -​ Ideas from distant or analog markets tend to be more novel/breakthrough compared to ideas from your own target market = thinking outside the box Effects of crossing boundaries: getting ideas from other markets -​ Higher number of possible solutions: exploring beyond your organization's boundaries can result in new and diverse solutions -​ More novel solutions: distrant domains have more ideas that are groundbreaking when applied to your industry -​ Shorter developing times/costs: collaboration and knowledge sharing reduces the possibility of duplication & inefficiency -​ Higher success potential: Crossing industry boundaries can help enhance the application on certain solutions Example of search scope in biotech: mRNA Development of mRNA took knowledge from multiple domains to work Computer science: optimising the mRNA sequencing with in silico Nanotech: Optimised nanoparticles for efficient delivery Physics/material science: insights into colloidal systems (dispersed particles in a medium) and some surfactant chemistry Outcome: Interdisciplinary research and broad search scope revolutionized vaccine technology. —----------------------------------------------------------------------------------------------------------------- Exploration vs. exploitation Exploitation aligns with search depth: ​ Both focus on refining and deepening existing knowledge, competencies, or processes. ​ They emphasize efficiency, incremental improvements, and building on what is already known. ​ Exploitation: Safer, short-term optimization to enhance current assets. Exploration corresponds to search scope: ​ Both involve distant searches for new ideas, knowledge, or opportunities. ​ They focus on experimenting, discovering novel solutions, and expanding into new areas. ​ Exploration: Risky, long-term innovation aimed at discovering new possibilities. In summary: ​ Scope/Depth = the action (how you're searching). ​ Exploration/Exploitation = the purpose (why you're searching). Corporate R&D Basic nature: Purpose: to discover new knowledge and technology that leads to novel/improved products or services Differentiation: New products allow firms to escape price competition and offer unique value Internal benefits: in-house R&D provides a foundation for innovation and helps leverage external knowledge also. Challenges: Uncertainty: outcomes, costs and timing of R&D is inherently unpredictable Appropriability: Capturing value from the R&D investments can be difficult due to competition and market dynamics Balancing scope: Finding the right mix between exploratory (scoping) and exploitive (depth) R&D is critical for innovation and sustainability —------------------------------------------------------------------------------------------------------------- Pasteur’s quadrant framework Basic research (Niels Bohr): focuses on advancing the fundamental understanding of science just for the sake of knowledge Applied research (Louis Pastuer): focuses on advancing science to apply the research to practical applications Development (Edison): Focuses mainly on development of a marketable product and not caring about the knowledge for knowledge's sake applied research = development —----------------------------------------------------------------------------------------------------------------------- Research Vs. Development Research (“R”): Focuses in discovering new knowledge and tech, enabling firms to create breakthrough innovations, uncovering novel principles/solutions -​ We can identify potential solutions and distant knowledge -​ When a firm does research it attracts science graduates who want to do research -​ Enhances the firms reputation in academic/scientific communities -​ Having this better scientific rep might get you access to public R&D funds Challenges of Research: -​ High levels of uncertainty regarding feasibility and commercial success -​ Low-term orientation: high upfront and no reward for a long time -​ Appropriability: not everything is easily patented or worth doing it Development (“D”): Applies existing knowledge to create practical and market-ready innovations -​ Focus on solving specific problems and refining products for commercial use -​ Practical with a clear focus on the application -​ Typically a shorter timeline than research = immediate economic impact Mental note: Research, Scoping (breadth) and exploration all are somewhat related -​ These are all forward-looking activities focused on expanding and acquiring new knowledge -​ Research: generating new ideas/knowledge (often without immediate application) -​ Scoping (Breadth): looking beyond current domains to find novel inputs -​ Exploration: Involves experimenting with alternatives, taking risks and focusing on new discovery Development, Depth, and exploitation all are somewhat related -​ These are execution-focused activities focused on refining and applying existing knowledge to tangible outputs -​ Development: creating practical applications and improving existing products -​ Depth: Leavering/building on internal knowledge for incremental improvement -​ Exploitations: Seeks to maximise efficiency, implement known solutions and optimising processes Research, Scoping, and Exploration focus on divergent thinking—generating new opportunities and knowledge. Development, Depth, and Exploitation focus on convergent thinking—honing and applying known capabilities for practical use. Small note: good science can expand the range of market applications for example novos semaglutide is proving to work in many applications from alzheimers to kidney diseases Also firms that engage in scientific research positively impact firm valuation metrics Other note: focusing too much on the R and not the D = Bad (bell labs) —----------------------------------------------------------------------------------------------------------- Open Vs. Closed Innovation Closed innovation: Firms rely entirely on internal R&D to create/commercialise innovation -​ The process is confined within the firm’s boundaries Open innovation: Firms integrate external knowledge and resources with their internal capabilities. Research projects can address multiple markets and leverage external ideas, technologies and collaborations Factors that influence if your firm uses open innovation 1.​ The firm characteristics: -​ Do you have in-house R&D available? -​ Is your firm looking for resources to support R&D -​ What resources do you have available 2.​ Tech/Industry conditions -​ New emerging tech opportunities -​ Level of innovation in the sector -​ Availability of talent -​ Appropriability regime (how well protected legally an innovation is/how hard it is to copy your innovation) - stronger the regime the more protective you are 3.​ Strategic factors -​ Entry timing -​ Transaction costs of external collaboration (can be expensive) -​ Having experience with open innovation practices -​ The level of control you have 4.​ The characteristics of the project -​ Nature (research focus vs. development focus) -​ Complexity/resources needed -​ Timelines of the project (you don't want 10 years of external) Challenges with open innovation Transaction costs: finding, establishing and managing external partnerships can be expensive Absorptive capacity: it can be difficult to internalise and use external knowledge effectively Resistance: “Not-Invented-Here syndrome” leads to internal pushback Not Invented Here Syndrome is a decision-making error where we tend to value our own ideas above those conceived by people outside of our group Manager preferences: its preferred to be in house = better control Appropriability concerns: risk with sharing IPR, Losing advantage, people might steal ideas Cost effectiveness: balancing risk with transaction/operating costs Absorptive Capacity: A firm's ability to recognise, assimilate and apply external knowledge to create innovations Key characteristics: Recognition: Identify valuable external information Assimilate: Understanding and processing the information Apply: Using the knowledge for commercial and innovative purposes What are some factors influencing absorptive capacity? -​ Prior R&D knowledge -​ Organisational structure and culture -​ Staff heterogeneity (everyone being on the same page) and autonomy -​ Available resources NOTES: Internal R&D is important to complement the external knowledge increasing absorptive capacity -​ Strong R&D internally might “crowd out” external ideas - lack of openness to novel external ideas = leads into “Not-Invented-Here (NIH) syndrom” Not-Invented-Here (NIH) Syndrome: A bias where internal R&D teams resist external -​ This can limit openness to these ideas and impedes the benefits on external —----------------------------------------------------------------------------------------------------------------------- What are some sources of innovation? -​ internal -​ Market (suppliers, competitors, customers) -​ Institutions (universities or government research) -​ Contract research organisations (CRO) -​ Specialized (health and safety standards and regulations, environmental etc) —----------------------------------------------------------------------------------------------------------------- Relationship between public science, firm innovation and academica/industry collab Channels linking public science to innovation: -​ Scientific literature: Peer-reviewed publications/conferences -​ University-Industry collab: Conducting research jointly between a firm/academic -​ University grads: Highly trained PhD grads will transfer knowledge to the industry -​ Contract Research: University provides specific research outputs based on a request -​ Tech transfer: Licensing agreements to help transition academic discoveries to innovations NOTE: there is an increased reliance on scientific literature in U.S patents over the decades University-Industry collab in detail: Proven to have a positive impact on innovation -​ Universities are the most impactful innovation partners -​ Internal R&D within firms complement external partnerships boosting absorptive cap. Motives for collaboration Industry: Access to expertise/talent, reduced R&D costs Motives for collaboration Academia: Additional funding, opportunities for education/research -​ Academia get access to cutting-edge industry tools and networks -​ Testing the commercial potential of their research Motives for the individual scientist: -​ Access to funding for their research -​ The opportunity to refine ideas for new research paths/projects -​ Access to cutting edge equipment —-------------------------------------------------------------------------------------------------------------- Academic vs. Industrial science Academic wants to do science for science's sake, but industry wants commercial applications -​ Academia focuses on openness and the spread of knowledge for all -​ Industry is shrouded in mystery and wants to keep things secret -​ Academia has freedom and industry has accountability -​ Academia is about reputation, industry is about commercialisation Technology Transfer Offices (TTOs) are usually created within a university in order to manage its intellectual property (IP) assets and the transfer of knowledge and technology to industry. —--------------------------------------------------------------------------------------------------------------------- Crowdsourcing: Firms with innovation challenges can use intermediaries (like online) to connect with crowds of problem solvers How it works? Firms will actively seek the best qualified solvers for the task -​ The challenge is self selected by the solvers because it works by open call Benefits: -​ Allows for tapping into a diverse level of expertise -​ Rewards for viable solutions -​ Applicable to problems that are well-articulated so the person knows what they are doing Challenges: -​ Problem needs to interesting to appeal to the solvers -​ Requires a reward structure -​ Not good for complex ideas needing collaboration -​ Can have issues around appropriability EXAMPLES: Bayers Grants4Apps and astraZeneca’s open innovation platform -​ Includes data mining, and drug discovery User Innovation: When a person has a specific need that needs to be met urgently so they innovate themselves Often involves specific knowledge only the consumer would identify through use -​ THEY INNOVATE TO SOLVE THEIR OWN NEEDS -​ They take a “we are not waiting” initiative —------------------------------------------------------------------------------------------------------------- Corporate R&D II Going solo vs. Collaborating Advantages of solo: -​ Full control over the innovation project’s direction -​ Ensures protection of any proprietary tech -​ Builds and renews internal capabilities -​ No need for coordination/transaction costs (partner search/monitoring) Advantages of collaboration: -​ Rapid access to complementary skills, resources and assets -​ Can learn new organisational skills from the collaborators -​ Facilitates costs/risk sharing -​ Can aid in forming a dominant design Demonstrates the level of control you have over your collaborators in open innovation and at what stage of the development process they are involved in High control/Late stage = M&A High control/Early stage = CRO Medium control/ mid stage = Strategic alliances Low control/early stage = Academia, crowdsourcing —----------------------------------------------------------------------------------------------------------- M&A (mergers & acquisitions): transaction in which the ownership of a company and their operating units including all ASSETS & LIABILITIES are transferred to another entity Rationale behind M&A -​ Scaling advantages: large mergers aim to create efficiencies by leveraging economies of scale -​ Competence Building: Smaller mergers focus on acquiring specialised -​ Strategic synergy: Strengthening R&D, new product pipelines and market positioning EXAMPLES: Large mergers from companies like pfizer, GSK, astrazeneca Notable example the merger of Christian hansen and novozyme into novonesis Novo Nordisk bought Forma therapeutics because they wanted to get there expertise in sickle cell treatments - strengthened their product pipeline Acquirers gain complete control over tangible/intangible assets COST: M&A often involves a LOT of premiums and addition costs in acquiring the new company - some of the assets acquired might need divestment if there is no fit for them —---------------------------------------------------------------------------------------------------------------------- Strategic R&D Alliances: Partnerships involving joint R&D efforts -​ Potential for learning through shared expertise -​ Can be tension between knowledge sharing/IP Protection -​ Alliances might be a joint venture (involves equity) or operating without equity -​ There needs to be a balance between control and flexibility -​ Alliances have less resource commitment compared to something like M&A Criteria for selecting an R&D partner: Resource fit: -​ The partners capabilities need to align with the projects resource needs -​ They ideally need to be located in close proximity for knowledge exchange Strategic fit: -​ Need to consider the risk of losing sensitive knowledge and alignment of corporate cultures -​ Evaluate the potential for learning and development Basically when trying to find a strategic partner your common goals, resources etc need to align with each other Dimensions of partner fit Tech proximity Low: Big potential for novel and original combination (better exploration) High: Good connection and better absorption (better exploitation) Geographic proximity Low: More difficult to communicate and also causes a level of district High: Supports interpersonal exchange, building trust and sharing equipment Product proximity Low: Reduces the competitive tension and allows for broader knowledge sharing High: can enhance shared goals but increases competitiveness and reduces novelty —-------------------------------------------------------------------------------------------------------------- Implications of Coopetition: (Collaboration among competitors) Dual logic: the simultaneous pursuit of two often contrasting objectives -​ You are both collaborating for mutual benefit -​ BUT at the same time you are trying to maintain your own self interests such as intellectual property, market share etc The “DUAL LOGIC” highlights the challenges/opportunities of a strategic alliance —-------------------------------------------------------------------------------------------------------------- Governance in R&D Alliances Role of contracts: defining the core parameters in R&D alliances -​ Outlines the resources each partner brings to the table (funding, equipment, IPR and human capital) -​ Specifies the degree of control, reporting, review processes etc -​ Determines how GAINS/RISKS are distributed -​ Addresses how to handle any violations of obligations Good faith provisions and partner similarity Good faith clauses: aims to maintain integrity and fairness in strategic alliances (often ambiguous and hard to enforce) Alliances work better when there is shared perspectives/organisational culture Joint ventures: Involves two companies creating a new legal entity -​ Share ownership, resources and governance -​ Equity investments align incentives - amount invested is directly proportional to the amount of profit they make ALSO the amount of loss -​ They can have organisational/geographic separation to protect resources -​ NOTE: when a strategic alliance becomes a Joint Venture then it is its own separate organisation separate from the parent company Joint venture vs strategic alliance Joint Venture: Sony and Ericsson created Sony Ericsson (now defunct) as a JV to produce mobile phones, combining their expertise in electronics and telecommunications. Strategic Alliance: Pfizer and BioNTech collaborated strategically to develop the COVID-19 vaccine without forming a new legal entity. Basically: Joint venture has a product attached to it and strategic partnership doesn't Trust in R&D alliances: -​ Personal contacts and the accumulation of “social capital”​ - Alliances often start with low-risk collaborations that build with confidence -​ Prolonged and repeated interaction builds trust Example of a Strategic alliance: sanofi and regeneron -​ Collaborated on a specific product -​ Leveraged sanofi’s global marketing/distribution and regeneron's innovative R&D -​ Likely involved a contractual terms of shared profit/risk divided between them -​ Allows for collaboration on a project-by-project basis -​ Sanofi and regeneron maintain their own separate decision-making processes If it was a joint venture they would have a new legal entity, if it was a joint venture their profits and risks would be managed through a new joint entity, they would have a deeper long term commitment/governance jointly together Things to consider with R&D alliances Inventors assignment: The allocation of investors in strategic R&D alliances is critical when considering the balance of knowledge exchange/protection -​ Typically Inventors whos technological knowledge is well protected by patents will be selected because it minimises the risk of relieving sensitive proprietary into -​ Basically they can reveal more information without the risk of something being stolen Basically they will pick employees (inventors/researchers) based on the likelihood of accidental sharing sensitive/proprietary information to the partners -​ They will pick people whose ideas and inventions are all covered by patents -​ This prevents KNOWLEDGE LEAKAGE (the risk of accidentally sharing sensitive info) —-------------------------------------------------------------------------------- Unintended consequences of R&D alliances Increasing collaborative R&D increases the mobility of employees can cause talent loss -​ Basically when you are collaborating with a company you might end up liking the other company better and moving to that company -​ TO STOP THIS: firms need methods to retain talent like fostering commitment and offering a competitive career development within the company —--------------------------------------------------------------------------------- Common causes of failure in strategic alliances 1.​ Strategic/Goal divergence: parternes may be misaligned objectively or have conflict 2.​ Power imbalances: partners can have problems if one party dominates the decision making process = a lack of trust 3.​ Cultural mismatch: common when there is collaborations in different countries 4.​ Operational challenges: geographical/logistic difficulties —-------------------------------------------------------------------------------------------------------------------- Licencing: A licensor provides a licensee the right to use its technology in exchange for payment -​ Upfront payment -​ Milestone payments -​ Royalties (percentage of profit) Instant access: A licencing agreement grants immediate access to existing technology -​ Allows for fast development/market entry Typically a transaction: Primarily establishes use of the product -​ Sometimes there might be a co-development agreement Requires complementary (enabling) assets: The licensee still needs R&D capabilities to fully develop the technology to get it commercially ready Control Limitations: Just because you licence the item you still don't actually own it and you don't necessarily have EXCLUSIVE rights NOTE: The licensee might potentially be able to gain some knowledge transfer BUT can be limited because they don’t understand the ins and outs of how it was developed (tacit knowledge) What kind of payments occur when licensing? 1.​ Upfront payments: Immediate cash paid upon signing a licensing agreement -​ Licensors secure early funding = aids in operational costs -​ Licensees have clarity on their agreement = locks in the agreement 2.​ Milestone payments: paid when specific developmental or sales targets are made -​ Reduces the financial risks for the licensees = spreads it out -​ Ensures payments align with the product success = if it dont work they don't pay 3.​ Royalties: A percentage of the sales paid to the licensor when the product is launched NOTE: Grant-Back Clause: Sometimes there is a provision that any follow-on tech the licensee develops must be licenced back to the licensor -​ Basically you use my tech to make new tech I own a part of that tech too —---------------------------------------------------------- What are the applications of licensing Technology generality: -​ Adimab’s antibody platform is licenced to multiple biotech companies -​ Battery tech applied in many industries including automotive and renewables Division of downstream markets: I can make a drug and sell it on the US/EU market -​ Then! I can also Licence out the drug to an asian company -​ This company then handles the production, marketing and sale in asia -​ They provide me with an upfront, milestone and royalty payment for it -​ Allows for limited the financial risk of that market while still getting profit from it Exclusive vs. Non-Exclusive licences Exclusive: Grants a monopoly to one licensee = more incentive for licensee -​ Higher incentives BUT also higher royalty fees and risk for licensor Non-Exclusive: Allows multiple licensees to use it, promotes tech diffusion -​ Lower royalty payments and risk for licensor —-------------------------------------------------------------------------------- Why is licensing good? - it enables better division of labor Specialized tech providers: Biotech firms can licence to a firm with better downstream processes such as clinical testing, regulatory master, manufacturing etc Licencing of intermediate-stage products: Allows biotech firms to make money from intermediate-stage tech (inventions that aren’t fully fleshed out yet) -​ They can license them out to larger companies that can then use their know how and expertise to fully develop the product into something commercially viable -​ Benefits the larger companies so they don’t need to start from scratch and it also benefits the smaller biotech by giving them the money they need to reinvest into further R&D projects TLDR: Tech licencing provides a flexible tool for innovation that enables resource sharing, market expansion and revenue generation while being able to balance risk and IP control —------------------------------------------------------------------------------------------------ Outsourcing: Contract Research Organisations CROs: External entities that specialise in specific R&D services across the drug development lifecycle. Preclinical, clinical trials etc A client will contact a CRO with a specific thing they need fulfilled or a research request -​ Client firm will have limited engagement with the research firm -​ Performance parameters and deliverable are well-defined (non-compliance will be penalised) -​ Cost-efficient: The process of outsourcing reduces costs for non-critical projects Research consortia: Structural genomics consortium (SGC) -​ A non profit global partnership base on understanding the 3D structure of all proteins -​ Have created over 1,500 high-resolution protein structures in a public domain -​ Allows for people to use them in their research -​ Funded by many global organisations TLDR: Research consortias are large public database of research that is freely available with the sole purpose of driving forward scientific discovery with no intent of profit Lecture 5: Appropriability strategies for innovation Appropriability: the extent to which a company can capture the economic benefits of its innovation or IP while preventing others from exploiting it without authorisation -​ Basically it is protecting and benefiting from innovation How do you protect innovation? Legal protection: Patents, copyrights, trademarks, trade secrets Contracts: Non-Disclosure agreements (NDAs), licensing agreements Regulatory protection: Market exclusivity granted for pharma etc NOTE: Some innovations like patented drugs are easier to protect because of the nature of them -​ Pharma has HIGH appropriability due to strong patent laws -​ Complementary assets (Manufacturing, distribution) etc increases appropriability as it controls how the innovation reaches the market (ALSO robust/complex assets are harder to copy) Why is Appropriability Important? Incentives for innovation: Firms are more likely to invest in R&D when they know they can capture the value of their innovation and that it is protected —---------------------------------------------------------------------------------------------------------- Imitation and spillover 1.​ Reverse engineering: Competitors disassemble and study a product to replicate 2.​ Employee mobility: Knowledge leaks when an employee joins a competitor 3.​ Reading codified information: Competitors learn from public research, patents and publications 4.​ Learning through supply chain/partnership: working close with suppliers can give access to knowledge 5.​ Competitors duplication: Competing firms develop similar tech independently and accidentally causing unintentional spillover Methods like licencing and patent disclosure is the most effective way firms learn about others new Processes and products —------------------------------------------------------------------------------------------------------- Who benefits from innovation? Distribution of innovation profits -​ Customers and suppliers typically get the most value from new innovations -​ Imitators benefits from spillovers NOTE: If the innovator doesn't have good appropriability mechanisms then they won't retain much of the value themselves —------------------------------------------------------------------------------------------------------------------------ The Teece model: A framework for understanding how firms capture value from innovation -​ Identifies factors that determine who benefits most from innovation Basically: the model explains why some firms profit from their innovations while others might struggle to profit even if they are the ones who invented it Key Components of the Teece Model 1.​ Appropriability regime: the strength of mechanisms to protect your innovations from imitation You can have one of the two possibilities: -​ Tight appropriability: Strong IP protection such as patents, trade secrets and copyrights make it hard for competitors to copy -​ Additional protections such market exclusivity granted by the FDA/EMA further strengthen the appropriability regime -​ Tacit Knowledge: Many biotech innovations are based on knowledge that is very hard to replicate making the appropriability even tighter -​ Loose appropriability: Weak protections that allow for competitors to imitate the innovation easily = diluting profits from the innovator -​ Innovation leaks through employee mobility can still be an issue 2.​ Complementary Assets: Resources or capabilities needed to commercialise an innovation successfully -​ Generic: General-purpose resources that are widely available and easy to access (Standard manufacturing facilities) -​ Specialised: Assets tailored to the innovation (proprietary production lines) -​ Co-Specialised: Mutual dependence between the innovation and the asset ( a unique marketing channel for a specific product) Pharma specific complementary assets: Regulatory expertise, Clinical trial infrastructure, strong manufacturing, marketing and distribution channels -​ These assets can be scarce so when controlled by 3.​ Dominant design: once a particular drug or therapy becomes the “gold standard” then competition shifts to process efficiency and leveraging your complementary assets TLDR: to capture value you need a tight as fuck appropriability regime, good control over complementary assets and a focus on the dominant design WHAT IS A PATENT? They are legal documents that concern rights and are defensible in court Defensible in court means that it is a claim that can be augmented to be legally justified and upheld during legal proceedings - enough evidence to validate -​ Give protection from someone using your invention typically up to 20 years 4 needs to patent: 1.​ Needs to be new/novel 2.​ Needs to be innovative - inventive step 3.​ Needs to have an industrial application 4.​ Needs to not be excluded from patenting - discoveries are excluded Notes: Patents are filed through the EPO and the PCT -​ First-to-file gets the rights -​ When filing with the EPO you can get patent unitary effect in 18-25 states -​ Patent families = patents that share the same filing date and are all related Trade Secrets: For technologies hard to reverse engineer. -​ Kept secret for as long as you can keep it a secret -​ NDA’s might be used to keep a trade secret -​ Also non-competes make it that employees that do know it cant use it to go into competition with you Patents give legal protection BUT! You need to disclose all the info about it in the patent disclosure so it will only be protected for 20 year -​ A trade secret doesn't have to be disclosed anywhere and thats why you can keep it a secret Trademark: last for 7 years but can be continuously renewed -​ Protect boot-up jingle, tone, and logo. -​ Trademark = the value of the company beyond their earthly possessions -​ Requires application and registration -​ Duration: Last as long as annual fees are paid. -​ To calculate the trademark value, you add together all tangible assets and subtract from the market value of the company = value beyond the physical Why are they important: builds brand recognition and loyalty -​ Trademarks in pharma have to make sure they cannot be confused with other drugs Data exclusivity: Grants the originator the right to their clinical trial data for set period of time -​ About 5-12 years Optimising a patent claim -​ Use independent claims with minimal combinations of features -​ AVOID overly broad claims -​ INTENTIONAL AMBIGUITY: keep it flexible to get a broad coverage Divisional filing: used to separate out distinct inventions on a single patent when there is a citation for a lack of unity Patent continuations: A tool used to refine or expand a patent scope over time -​ Used in industries like pharma where innovation often evolves over time -​ ONLY in the US patent system - can create a new patent based on the original discourse in a previously filed patent —------------------------------------------------------------------------------------ A patent thicket: A situation where there are so many overlapping patents related to a specific tech or product it becomes to difficult or costly for other companies to innovate in that sector or bring any products to market -​ Like a dense forest of patents - impossible to navigate without stepping on someone else's rights (infringing on a patent) How it happens: companies file multiple patents for small variations on their invention to strengthen their control over a technology Why it matters: For competitors: Makes it that they can’t enter the market or if they try it is really expensive For innovation: Slows down progress as companies spend a long time dealing with legal issues and licencing instead of making new products For consumers: It can lead to higher costs because of monopoly but also higher price for development getting passed to consumers EXAMPLE: Humira by AbbVie - they filed over 130 patents related to it covering every single aspect of it -​ Lead to the delay in any biosimilar competition in the U.S until 2023 even though its original patent expired in 2016 Why do companies create thickets? ​ To extend exclusivity: Filing secondary patents allows companies to delay generic or biosimilar competition. ​ To defend market share: Thickets make it costly and risky for competitors to challenge or navigate around existing patents. ​ To control licensing: A broad patent portfolio forces others to negotiate licenses rather than risk lawsuits. Timing of filing Filing as soon as possible: If there is competitor risk better to be ASAP Filing as soon as necessary: If development is slow you should file when only needed -​ Filing should align with how long it will take to develop the invention Issuance considerations Advantage of late issuance: keeping a patent pending obscures it from competitors -​ Divisional applications allow for adding related patents to strengthen -​ Improved claims because you had more development time -​ Late issuance can delay costs until needed Disadvantage of late issuance: -​ Weaker legal position: if infringements occur the pending patents might offer less protection -​ Somebody else can file the patent for a similar tech if you take too long NOTE: You can combine a patent + trademark + design for better protection Patents: signaling - patents enable firms to signal competences -​ Helps to find collaboration partners -​ Supply-chain partners -​ Attracting funding without having to give all your R&D away -​ High patent productivity is a good signal to get people to work for you -​ Can deter rivals —------------------------------------------------------------------------------------------------------- Lecture 7: Financial Markets and firm innovation The modigliani-miller theorem: In a perfect market (no tax, transaction or bankruptcy costs) the capital structure of a firm (debt and equity) does not affect the firm's overall value Basically: A company gets its value solely by its ability to generate cash flow -​ Under ideal conditions financing through either equity or debt does not matter Although the theorem holds up in idealised conditions, In the real world we have “frictions” that affect capital structure choices including: Frictions: Make Equity and Debt UNEQUAL Uncertainty: Innovation outcomes are unpredictable Asymmetric Information: Investors might lack critical info about the innovation and as such might value equity and debt differently based on an information gap -> creates a moral hazard (A party bearing the consequences might not know what actions are being taken to cause it) -​ EXAMPLE: A biotech company has a new promising drug but there isn't enough data published on it for the investors to fully understand the risks/benefits -​ BECAUSE of this they might preference equity over debt Agency costs: When the interests of the manager (agent) does not align with shareholders -​ Managers might misuse funds basically Nature of assets: Intangibles are harder to value compared to physical assets Skewness of outcome: Small percentage of innovations generate the most revenue Taxes: Debt has a tax shield due to being tax-deductible —---------------------------------------------------------------------------------------------------------------- Private Vs. Public ownership in innovation Going Public (IPO) Advantages: Increases external capital including equity and debt -​ Allows for decreased financial constraints Challenges: Public firms have more “short term pressure” from investors which can limit there long term innovations they are working on Remaining private Advantages: Avoids agency conflicts (misalignment between managers and shareholders) -​ Provides freedom from quarterly reporting pressures with IPO -​ Promotes a focus on long term investment Challenges:Increase in information asymmetry and a lack of public visibility makes raising funds much harder Impact of IPO on innovation Basically when a firm goes IPO there is a drop in the quality of innovation -​ KEY Inventors typically leave post-IPO leaving a worse off team -​ M&A is more common post IPO -​ Spin-Offs are also common - the formation of a new distinct splinter company -​ Having to provide quarterly reports and stuff can lead to too much focus on the short term and an inability to focus on the long term due to investor pressure NOTE: Dell went from IPO back to private to focus on the long term Becoming public makes managers more risk-averse as they fear for their job security -​ Quiet life hypothesis: private firms can focus on long term strategic goals without having to consider the public investor scrutiny Short-termism: focusing on immediate and short-term goals OFTEN at the expense of long-term strategic goals -​ Prioritises quick financial gains such as quarterly profits and stock increases -​ Neglects sustained growth, innovation and long term value creation -​ Short-termism is much more common in IPO companies due to public scrutiny EXAMPLE: A pharma company worried about their quarterly earnings might cut a clinical-trial for a high-risk and novel drug in favour of increasing sales on their existing drugs —------------------------------------------------------------------------------------------------------------- Institutional ownership: A large professional investor group such as pension funds, insurance companies and investment firms. -​ Pool funds from other investors and become “blockholders” where they hold a significant portion of shares within the company -​ Because they have so many shares they hold a lot of influence on the company They have fiduciary duties (management of funds) and have sophisticated financial knowledge Effects of institutional ownership both good and bad *for innovation Stifle innovation -​ Focuses on the short term, causes manager career concerns -​ Discourages long-term value creation -​ Managers may cut R&D spending to meet short-term earning goals Boost innovation -​ Helps identify what is causing failures (manager incompetence or external factors) -​ Reduces career risk for managers by enabling a focus on long-term projects (fix lazy) -​ They can help lower costs of capital by increasing demand for stocks -​ The "lazy manager" hypothesis: Institutional owners pressure managers to invest in profitable, innovative projects. -​ Greater institutional ownership is associated with higher levels of innovation -​ BUT high turnover (transient ownership) can lead to things like R&D cuts (myopic) Common Ownership and its implications Common ownership: A situation where the same institutional investors (vanguard, blackrock) hold significant shares in multiple competing firms in the same industry Issues: Information sharing: common owners may indirectly cause the sharing of strategic info across its portfolio -​ Reduces competition -​ Benefits the owners but not necessarily the industry or the firms NOTE: if there is competition between commonly owned firms there is a risk of underinvestment in innovation due to the fear of it being leaked to its rivals Potential benefits: tech spillover -​ When competition is low, common ownership might encourage knowledge spillover across its portfolio firms = more efficient innovation -​ Firms benefit from shared insight without reducing profit margins TLDR: Common ownership can promote collaboration in some instances and in others it can stifles the competitive dynamic between competing firms —-------------------------------------------------------------------------------------------------------- Debt Financing and corporate innovation Debt vs equity in financing innovation Equity financing: traditionally the primary method of funding innovations because the investor's share OWNERSHIP risk and reward Debt financing (loans): Repayment with interest but now ownership involved -​ Due to its fixed repayment terms it might not align well with long-term and high risk innovation projects Deregulation of banking in the US has lead to improving access to loans for businesses -​ Has lead to an increase in patent OUTPUT -​ Basically it is easier for firms to get large bank loans for their investments NOTE: Firms in the US will use patents as a form of collateral to secure loans Depending on the quality of the patent it influences how well it can be used as collateral TLDR: Debt financing is becoming a more significant contributor to innovation -​ Being able to use patents as collateral shows how valuable IP is -​ Policies such as the deregulation of the credit market has enabled more people to seek financial capital through loan debt NOTE: The use of the patent as collateral is often determined by its “generality” meaning a more general patent with broad applications are more valuable in financial agreements -​ Example Adimab’s yeast-based antibody platform Financial analysts: a person who assess the financial conditions of a business or financial asset to determine if it is a good investment or not -​ Creates earning forecasts (EPS) and writes recommendation reports -​ Scrutinize financial documents and interact with executives -​ Look at trends analysis and use it to guide investors They are the bene gesserit of the finance world They have a lot of industry knowledge and management communications -​ Good at determining forecasts Impact of analysts on innovation Positive: reduces info asymmetry (gets everyone on the same page) and boosts investor confidence -​ Facilitates easier financing for innovation projects (improved transparency) Negative: might push for short-term targets over long term innovation -​ Managers might avoid innovation projects that are more prone to causing forecast deviations NOTE: increased analyst attention can = better firm valuation -​ BUT! They can be stupid - example: Kodak financial analyst made them focus on film over digital - they missed a DISRUPTIVE TREND (digital cameras) Tech spillover: Analysts help spread tech insights across firms -​ This occurs because they talk with man CEO’s from many companies -​ Can learn trends and tech knowledge that is relevant to other firms -​ They get good info and share it with competition not on purpose Influencing the information environment Information Asymmetry: Investors often face challenges in observing if an innovation project is actually on track to yielding financial returns - might not understand it -​ Creates hesitation in providing financial resources -​ as such projects are perceived as V high risk -​ increasing cost of capital for firms (they expect more back from risky uncertainty) Managerial incentives: Managers aim to bridge information asymmetry -​ They do this by providing the investors with credible info about the R&D -​ Helps secure funding under better terms (lowers cost of capital) Voluntary disclosures: discloses info to increase transparency and attract investors -​ Allows to correct undervaluations BUT need to be careful not to give too much NOTE:Firms will disclose part of their R&D knowledge as a “signal” to attract external financing -​ Might use a 10-K filing for this: a comprehensive annual report of operations, risks, and performance = aids in transparency and decreases info asymmetry -​ OR else they can “signal” via patent release or scientific publication Basically with disclosures you need to be careful to signal the investors without giving away the entire farm The use of scientific publication as a disclosure is good as it is “non-curated” but is an indication of good things in the pipeline = attracts investors and improves stock liquidity Key point: All this disclosure of information basically causes a lowering of cost of capital and a better market evaluation because investors have more trust in you What are the trade offs? 1.​ Information spillover: Competitors can use patents and publications to figure out what direction your company is going in, even if the explicit secrets aren’t relieved it gives them the opportunity for reverse engineering 2.​ Balancing disclosure with secrecy: you need to be careful what to patent and publish to insure the benefits of “signaling” outweighs the potential risks of competition —----------------------------------------------------------------------------------------------------------------- Managerial incentives: the goal is to encourage innovation by: -​ Tolerating short term failures but rewarding long-term success -​ Long-term compensation like stock options (with long periods) -​ Also providing job security or else a golden parachute (LARGE payout in case of redundancy) CEO characteristics that influence innovation Their age, horizon (will they leave soon) -​ Their industry experience and scientific knowhow Role of a board -​ Link shareholders with executives -​ Incorporate external expertise -​ Oversee who gets to be the CEO and stuff -​ Set up committees for different areas like R&D etc -​ Mitigate takeover risks and employ takeover mitigation measures —------------------------------------------------------------------------------------------------------------------- HOSTILE TAKEOVER: when the acquiring company takes over against the current managers wishes -​ The acquiring company will go straight to the shareholders over the managers head -​ They will then attempt to replace the companies leadership to gain control -​ THINK: A forceful buy when the leadership dont want to sell Positive: makes people afraid and causes them to focus on high-value projects Negative:Undervaluation risks might lead to reduced investment in hard to understand innovations Anti-takeover defense -​ Golden parachute: give the executives big payouts if they lose their jobs in the takeover -​ Poison Pills: Allows current shareholders to buy more shares at a steep discount to make the takeover TOO EXPENSIVE to be acquired -​ Staggered Boards: setting up a board of directors in a way that not all members can be replaced at once - makes it harder for acquirers to take control quickly Lecture 8: Organisation for innovation Decentralised vs centralised R&D —----------------------------------------- Centralised: Decision making is all concentrated at the corporate headquarters Focus: Economies of scale, long-term projects & a synergy between all divisions Advantages: Lower costs of coordinating everything -​ Better efficiency for prioritising projects -​ Encourages a broader and more basic research initiative -​ Better focus on LONG-TERM projects Disadvantages: Bureaucratic process, longer decision-making time, micro management EXAMPLE: Novo Nordisk, Abbott —----------------------------------- Decentralised: Decision making is distributed to divisional R&D units with local autonomy Focus: More market-oriented innovation and specialisation -​ Maybe a different division based on different disease groups for instance Advantage: Encourages autonomy, ownership and faster market adaptation -​ Enhances focus on non-core areas are helps foster external knowledge sharing Disadvantages: Duplication, underutilisation of economies of scale, potential for fragmented innovation efforts EXAMPLE: Sanofi, Johnson & Johnson, Novartis, GSK —---------------------------------------------- The 3rd secret option!! BOTH - Hybrid structures Combine a balance of centralised and decentralised elements -​ Aims to balance efficiency (control) with flexibility EXAMPLE: A corporate HQ oversees overall strategy -​ The individual divisions handle the specialised projects —----------------------------------------------------------------------- Centers of Excellence In Drug Discovery (CEDD) -​ Specialised R&D facilities focused on one particular area -​ Leads to specific therapy innovations -​ Increases speed due to autonomy Problems: Duplication risks, Difficulty Coordinating across the CEDDs —--------------------------------------------------------------------------------------- Some Key findings on Centralised vs decentralised 1.​ Centralised R&D generates broader technology impacts due to less coordination costs 2.​ Centralised supports exploratory research and long-term-oriented projects 3.​ Centralised firms derive more value from internal R&D/patent productivity 1.​ Decentralised: firms engage in larger M&As and reply more on external knowledge 1.​ Mixed (hybrid): Leveraged the benefits of both systems allowed to mitigate their drawbacks also —---------------------------------------------------------------------------------------------------------- Internationalising R&D: -​ In 2014 foreign companies invested 56.9 billion in R&D in the U.S -​ EU countries contribute largest with 45 billion Spatial R&D organisation: Firms operate R&D across multiple geographic locations -​ Leverage local knowledge, talent and resources -​ Centralised R&D decisions with dispersed facilities is possible -​ Decentralised R&Ddecisons occurring locally or co-locally in multiple places 4 generic strategies for spatial R&D: 1. Center-For-Global:Central for spreading around the globe -​ A central hub that manages all global R&D -​ Focuses on core competencies, economies of scale and prevents duplication -​ Not as responsive to local market demands -​ Basically made local to be distributed globally 2 Globally linked strategy: Globally to be spread around the globe -​ Interconnected decentralised R&D across the globe -​ Centralised allocation of responsibilities = balance between local resources and global synergy -​ NOTE: Demands a significant coordination effort 3. Locally leveraged strategy: Locally to be spread around the globe -​ Localised R&D with an emphasis on exploiting the regions resources -​ Innovations are adapted and shared across divisions 4. Local-For-Local strategy: Locally to be kept locally -​ Independent R&D tailored to the local markets need -​ Highly autonomous BUT with risk of inefficiency due to redundancy and lack of global use The geography of innovation: 1.​ Knowledge spillover: -​ When you have clusters of innovation like silicon valley or the boston downtown area -​ Even the “medicon valley” here in copenhagen -​ you get agglomeration economies where lots of industry are in close proximity -​ Typically due to labor levels, funding, proximity to academia etc -​ This physical proximity increases the mobility of workers and informal collaboration -​ This leads to knowledge spillover NOTE: Knowledge spill goes both ways = you might also gain knowledge Local cost factors like taxation influence attractiveness of regions like silicon valley Intense competition also occurs - fighting over resources and talent —----------------------------------------------------------------------- R&D Concentration over time -​ Traditional R&D hubs are diversifying due to countries like india and china increasing their share of foreign R&D investments -​ Basically R&D is spreading out across the world as new nations become major players —------------------------------------------------------------- Geography of collaboration -​ Over time distance between collaborators has decreased -​ Due to the advent of communication technology Issues with Long-Distance collaborations -​ Collaboration across time zones has a negative impact in productivity compared to same timezone collaboration —---------------------------------------------------------------------- Organic vs. Mechanistic R&D Structures: Key Points Formalisation: the existence of formal rules, regulations, and policies in an organization that govern the behavior of employees Advantages: keeps everyone inline and needs less managerial oversight Disadvantage: rigid, stifles creativity Standardisation: Consistency in performing activities = uniformity Advantages: ensures smooth and predictable outcomes Disadvantages: stifles innovation and creativity —---------------------------------------------------------------- Organic structure: Low formalisation/standardisation -​ Encourages open communication -​ Supports creativity, experimentation and flexibility -​ Great for adaptive and changing environments 🙂 -​ Fosters cross-functional collaboration -​ Typically the environment of a start-up Strength: nurtures innovation and adaptable to dynamic environments Weakness: Lack of efficiency/predictability/accountability —-------------------------------------------------------------------------- Hierarchical (mechanistic) structure: High formalisation/standardisation -​ Predefined communication channels -​ Uniform and predictable outputs 🙁 -​ Emphasis on operational efficiency -​ Tight control over processes and employees Strength: Efficient and consistent, stable environment Weakness: Rigid unmotivating, depressing, limits creativity —----------------------------------------------------------------------------- Cross-functional Teams: Operate within existing structures but outside the management hierarchy. Encourage diverse input and innovation. Ambidextrous Organizations: Combine existing business operations with independent teams for emerging projects. Allows flexibility while maintaining efficiency. TLDR: Ambidextrous structures allow for managing ongoing business and innovation at the same time Managing R&D Personnel Necessity of incentives: R&D workers need external incentives to drive innovation -​ A balance between activities and outcomes for which incentives are given is critical TYPES: -​ Monetary such as bonuses and stocks -​ Non-Monetary: Autonomy, recognition and acknowledgment What drives R&D employees? -​ Intellectual challenge -​ Independence and autonomy -​ Salary and career advancement -​ Job security and societal contribution Another benefit for employees is the ability to publish their work to get external recognition —---------------------------------------------------------------------------------------------------------------------- Lecture 9: Managing the product development process New product development considerations Nature: Conceptualising what the product is, designing it, planning and commercialising Process perspective: Transforming an idea into a viable product Project Management: Decisions on promoting/terminating projects -​ Sequential and simultaneous process and how flexible they are Micro-Level organisation: Concerns team assembly and embedding them into the broader organisational framework - putting together a team for the job Objectives: Ensures alignment with customer requirements, development cycles and costs —---------------------------------------------------------------------------------------------------- Project mapping: look at how the process will change Look at how the product will change: -​ Will there be derivative products -​ Or is it a breakthrough innovation Categories: Derivative projects: small improvements Platform projects: Foundational project for which future derivative products can be based off Breakthrough products: High impact, disruptive innovations Advanced R&D projects: Exploratory initiatives with the potential for significant changes —------------------------------------------------------------ New product framework: Portfolio management approaches 1.​ Financial metrics for a project: a.​ Net present value (NPV) b.​ Risk-adjusted NPV (rNPV) c.​ Internal rate of return (IRR) Basically: These metrics are how an organisation should evaluate and prioritise new product development (NPD) projects -​ Metrics such as NPV allow for companies to quantify the financial benefits and risks of a NPD project —---------------------------------------------------------------------------------------------------- Sequential development: activities are carried out in a step-by-step manner (in a sequence) - Easier to manage but can take longer - Less flexible to changes in later stages because they might require revisiting earlier finished stages Partly parallel development: Overlapping activities that allow for multiple stages to occur simultaneously - Process design can start while product design is not complete - Can reduce cycle time/speed up market entry - Increased complexity/cost Considerations: Partly parallel -> decreases overall time, BUT! Requires more coordination Sequential development -> More cost effective, BUT! more resistance to late stage changes/slower —---------------------------------------------------------------------------------------------------------------- Stage-Gate Model: A tool in sequential new product development The stage gate model: A framework used in project management and product development that organises the process of beginning with an idea and bringing it all the way from conception to launch. Breaks processes into a series of “stages” separated by decision-making “gates” where progress is evaluated before moving forward. HOW DOES IT WORK? Stages: specific activities, deliverables, and objectives required to move a project forward -​ Typically consist of researching, analysis, testing, prototyping, refining, and developing -​ Resources can be allocated to tasks at each stage Gates: points of decision, reviewed by managers or executives -​ At each Gate projects are evaluated based on deliverables from last step -​ Costs, potential risks, failures, set backs, successes etc NOTE: at each GATE it will be decided to keep going with, kill, hold or recycle the project STAGE 0: Discovery: the identification of a new idea/opportunity -​ Brainstorming, trend analysis, customer research etc STAGE 1: Scoping: trying to figure out its feasibility/potential - initial concept -​ Making an initial concept STAGE 2: Business Case Development: Defining what the project is, performing market research, hashing out the technical feasibility and financials etc -​ A comprehensive business case is formed STAGE 3: Development: creating the product or service, prototyping and designing etc -​ A physical prototype or product STAGE 4: Testing and validation: Testing the product in real-world scenarios to ensure it meets all requirements -​ A validated product should be obtained STAGE 5: Launch: the product is commercialised with full scale production and marketing -​ A product will be on the market Advantages: - structured process: reduces uncertainty - Allows for risk management: regular checks - Keeps the project aligned/on track Disadvantages: - Time-consuming process - Rigid: difficult in rapidly changing industry - Over-Emphasis on evaluation: delays - complex & resource intensive ================================================================= Quality function development (QFD) framework Tool to help prioritise engineering efforts based on customer value Focus: Reducing production costs (high priority) and ensuring reliability - Helps identify areas where competitors perform better providing opportunities for improvement —-------------------------------------------------------------------------------------------------------------- Project champion: a senior figure with authority (executive etc) that supports a project by getting it the resources/facilitating the communication among teams -​ Don't work directly on the project but play a crucial role in enabling it -​ Basically they just keep everything on track Involving customers in a project: Involving customers directly enhances relevance/satisfaction -​ Beta testing: getting early feedback from customers -​ Lead users: focuses on specific user experience needs: getting the person who will actually use the product involved in its creation - neet needs more efficiently -​ Example: getting a surfer to help testing new surf boards —------------------------------------------------------------------------------------------------------------------- Agile development: Iterative/incremental process for developing new products -​ Breaks work into small, manageable steps called sprints How does it work? Customer-focused: A manager makes a list of needs (based on customer feedback) called the product backlog Sprints: Work done in short, focused cycles, each aiming to complete a small,usable feature -​ Small features are changes/created and then tested Self-organised teams: Small teams work independently without ridgid task assignment Feedback driven: After each sprint (loop) the team review results and adjusts for the next cycle Goal: Produce a minimum viable product (MVP) that evolves over time based on tests/feedback - Application in Biotech: Novozyme use agile methods to speed up innovation and allows for flexible response to a changing market/scientific demands Basically: Agile development focuses on small steps that can be adapted to challenges quickly which saves time and makes sure the drug is effective before investing a bunch of money in it and it ends up being a failure —------------------------------------------------------------------------------------------------------------ Design thinking: A creative problem-solving approach centred on understanding user needs Purpose: Design thinking ensures solutions are tailored to users, promoting innovation that directly addresses customer challenges -​ Design thinking tries to get you to understand who it is you are designing for -​ What are their problems, feelings, and needs? TLDR: Design thinking is about putting yourself in the shoes of the person you are designing for -​ You want to DEEPLY understand their experiences, challenge