Strategic Management of Technological Innovation PDF

Strategic Management of Technological Innovation Seventh Edition Melissa A. Schilling New York University  Final PDF to printer STRATEGIC MANAGEMENT O...

Strategic Management of Technological Innovation Seventh Edition Melissa A. Schilling New York University  Final PDF to printer STRATEGIC MANAGEMENT OF TECHNOLOGICAL INNOVATION Published by McGraw Hill LLC, 1325 Avenue of the Americas, New York, NY 10019. Copyright  © 2023 by McGraw Hill LLC. All rights reserved. Printed in the United States of America. No part  of this publication may be reproduced or distributed in any form or by any means, or stored in a  database or retrieval system, without the prior written consent of McGraw Hill LLC, including, but  not limited to, in any network or other electronic storage or transmission, or broadcast for distance  learning. Some ancillaries, including electronic and print components, may not be available to customers  outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LCR 27 26 25 24 23 22 ISBN 978-1-265-07335-0 MHID 1-265-07335-X Cover Image: Shutterstock/LuckyStep All credits appearing on page or at the end of the book are considered to be an extension of the  copyright page. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a  website does not indicate an endorsement by the authors or McGraw Hill LLC, and McGraw Hill  LLC does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered sch7335x_fm_ISE.indd ii 09/16/21 02:31 PM About the Author Melissa A. Schilling, Ph.D. Melissa Schilling is the John Herzog family professor of management and ­organizations at New York University’s Stern School of Business. Professor Schilling teaches courses in strategic management, corporate strategy and technology, and innovation man- agement. Before joining NYU, she was an Assistant Professor at ­Boston ­University (1997–2001), and has also served as a Visiting Professor at INSEAD and the Bren School of Environmental Science & Management at the University of California at Santa Barbara. She has also taught strategy and innovation courses at Siemens ­Corporation, IBM, the Kauffman Foundation Entrepreneurship Fellows ­program, Sogang University in Korea, and the Alta Scuola Polytecnica, a joint institution of Politecnico di Milano and Politecnico di Torino. Professor Schilling’s research focuses on technological innovation and knowledge creation. She has studied how technology shocks influence collaboration activity and innovation outcomes, how firms fight technology standards battles, manage platform ecosystems, and utilize collaboration, protection, and timing of entry strategies. She also studies how product designs and organizational structures migrate toward or away from modularity. Her most recent work focuses on knowledge creation, includ- ing how breadth of knowledge and search influences insight and learning, and how the ­structure of knowledge networks influences their overall capacity for knowledge creation. Her research in innovation and strategy has appeared in the leading ­academic journals such as ­Academy of Management Journal, Academy of Management Review, Management Science, Organization Science, Strategic Management Journal, and ­Journal of ­Economics and Management Strategy and Research Policy. She also sits on the ­editorial review boards of Academy of Management Journal, Academy of Management ­Discoveries, ­Organization Science, Strategy Science, and Strategic Organization. She is the author of Quirky: The Remarkable Story of the Traits, Foibles, and Genius of ­Breakthrough Innovators Who Changed the World, and she is coauthor of ­Strategic ­Management: An Integrated Approach. Professor Schilling won the Organization ­Science and Manage- ment Science Best Paper prize in 2007, an NSF CAREER award in 2003, and Boston ­University’s Broderick Prize for research in 2000. iii Preface Innovation is a beautiful thing. It is a force with both aesthetic and pragmatic appeal: It unleashes our creative spirit, opening our minds to hitherto undreamed of possibili- ties, while accelerating economic growth and providing advances in such crucial human endeavors as medicine, agriculture, and education. For industrial organizations, the pri- mary engines of innovation in the Western world, innovation provides both exceptional opportunities and steep challenges. While innovation is a powerful means of competitive differentiation, enabling firms to penetrate new markets and achieve higher margins, it is also a competitive race that must be run with speed, skill, and precision. It is not enough for a firm to be innovative—to be successful it must innovate better than its competitors. As scholars and managers have raced to better understand innovation, a wide range of work on the topic has emerged and flourished in disciplines such as strategic management, organization theory, economics, marketing, engineering, and sociology. This work has generated many insights about how innovation affects the competitive dynamics of markets, how firms can strategically manage innovation, and how firms can implement their innovation strategies to maximize their likelihood of success. A great benefit of the dispersion of this literature across such diverse domains of study is that many innovation topics have been examined from different angles. However, this diversity also can pose integration challenges to both instructors and students. This book seeks to integrate this wide body of work into a single coherent strategic framework, attempting to provide coverage that is rigorous, inclusive, and accessible. Organization of the Book The subject of innovation management is approached here as a strategic process. The outline of the book is designed to mirror the strategic management process used in most strategy textbooks, progressing from assessing the competitive dynamics of the situation, to strategy formulation, and then to strategy implementation. The first part of the book covers the foundations and implications of the dynamics of innovation, helping managers and future managers better interpret their technological environ- ments and identify meaningful trends. The second part of the book begins the pro- cess of crafting the firm’s strategic direction and formulating its innovation strategy, including project selection, collaboration strategies, and strategies for protecting the firm’s property rights. The third part of the book covers the process of implementing innovation, including the implications of organization structure on innovation, the management of new product development processes, the construction and manage- ment of new product development teams, and crafting the firm’s deployment strategy. While the book emphasizes practical applications and examples, it also provides sys- tematic coverage of the existing research and footnotes to guide further reading. Complete Coverage for Both Business and Engineering Students This book is designed to be a primary text for courses in the strategic management of iv innovation and new product development. Such courses are frequently taught in both  Preface v business and engineering programs; thus, this book has been written with the needs of business and engineering students in mind. For example, Chapter Six (Defining the Organization’s Strategic Direction) provides basic strategic analysis tools with which business students may already be familiar, but which may be unfamiliar to engineering students. Similarly, some of the material in Chapter Eleven (Managing the New Prod- uct Development Process) on computer-aided design or quality function deployment may be review material for information system students or engineering students, while being new to management students. Though the chapters are designed to have an intui- tive order to them, they are also designed to be self-standing so instructors can pick and choose from them “buffet style” if they prefer. New for the Seventh Edition This seventh edition of the text has been comprehensively revised to ensure that the frameworks and tools are rigorous and comprehensive, the examples are fresh and exciting, and the figures and cases represent the most current information available. Some changes of particular note include: Six New Short Cases Netflix and the Battle of the Streaming Services. The new opening case for Chapter Four is about a battle unfolding for dominance in movie and television streaming. Though the case focuses on Netflix, it also details the moves made by competitors such as Amazon Prime Video, Disney, Hulu, and HBO. The case reveals the very interesting synergies Netflix has reaped in being both a content developer and a distributor, and it highlights the tradeoffs content developers make in choosing to have their content exclusive to a particular streaming service. Failure to Launch at Uber Elevate. The opening case for Chapter Five in the sixth edi- tion was about UberAIR, Uber’s plan for launching an air taxi service; the opening case for Chapter Five for the seventh edition is about Uber’s withdrawal of plans to launch its own air taxi service and the other companies that are still moving forward. This case highlights the range of challenges in launching something as new as air taxi service. While battery life and flight time are still considered areas that need improvement, the primary challenges to this market are now regulatory and infrastructure oriented: Where will the eVTOLs land? Who will regulate air traffic and how? Will the eVTOLs be too noisy? Will the eVTOLs be manned by pilots or autonomous? It is pretty easy to conclude from the case that Uber probably tried to enter this market too early, but it remains unclear whether the remaining players (who are almost all manufacturing startups dedicated wholly to producing eVTOLs) will fare better. Zeta Energy and The “Holy Grail” of Batteries. Chapter Eight now opens with a case about Zeta Energy, a young battery technology startup that is in the process of develop- ing a lithium metal sulfur battery. The technology is impressive and the potential markets are huge and diverse (e.g., electric vehicles, grid storage, consumer devices, and drones), but Zeta faces a dilemma of how to reach the stage of commercialization. Battery devel- opment is expensive and risky; Zeta has had problems raising enough funding to build the kind of facility it needs to produce the batteries at scale. The case highlights the vari- ous partnering strategies Zeta is considering, setting up a nice opportunity for students to analyze the pros and cons of types of collaboration agreements and types of partners. vi Preface The Patent Battle Over CRISPR Cas-9 Gene Editing. The new opening case for ­ hapter Nine is on what has been described as one of the most important patent battles C in the last 50 years. CRISPR Cas-9 is a breakthrough technology that enables live ani- mals (including humans) to be gene edited—potentially enabling us to eliminate and/ or treat a wide range of diseases. Even more exciting is the fact that the technology itself is relatively inexpensive and simple, prompting a flood of students, researchers, and manufacturers to enthusiastically begin using it. The ownership of the intellectual ­property rights, however, are contested between a group at Berkeley and a group at MIT. The way each group’s patents were filed, concomitant with the change of pat- ent law, collectively created one of the most interesting—and high-stakes—battles patent lawyers have seen in decades. How Apple Organizes for Innovation. Chapter Ten now opens with a case that describes how Apple is organized. The case tells the story of when Steve Jobs returned to Apple and dramatically reorganized the firm, yielding a big firm that has a structure that is much more commonly seen in small firms. The case provides detail on why Jobs felt the structure was appropriate, what its tradeoffs are, notably highlighting how much power the structure gives to its top leader. While this was probably a very desirable feature for Jobs, the case raises the question of whether or not the same structure makes sense for Apple under Tim Cook and whether it would make sense for different kinds of firms. Magna International’s Carbon Fiber “Lightweighting” Project. The opening case for Chapter Twelve describes in detail how Magna International, a Tier 1 automotive supplier, developed a scalable manufacturing method for carbon fiber auto parts in response to BMW’s announcement of its intentions to build cars with the new material. With details and quotes from Tom Pilette, the VP of Product and Process Development of Magna who led the project, we learn about how the team was assembled and man- aged, how the team culture evolved, how team members were compensated, and more. BMW ends up deciding to make carbon fiber composites in house rather than buying from a supplier, but Magna’s efforts transform it into an award-winning world leader in carbon fiber composite manufacturing. Cases, Data, and Examples from around the World Careful attention has been paid to ensure that the text is global in its scope. The opening cases and examples feature companies from China, India, Israel, Japan, The ­Netherlands, Kenya, the United States, and more. Wherever possible, statistics used in the text are based on worldwide data. More Comprehensive Coverage and Focus on Current Innovation Trends In response to reviewer suggestions, the new edition now provides an extensive dis- cussion of the use of “Big Data” in guiding innovation, the strengths and weaknesses of grand prizes (like the XPRIZE) in generating innovation, characteristics of break- through innovators, the role of organization culture in innovation, a detailed example of Failure Modes and Effects Analysis that helps students set up their own FMEA spreadsheet, and more. The suggested readings for each chapter have also been updated to identify some of the more recent publications that have gained widespread attention in the topic area of each chapter. Despite these additions, great effort has also been put into ensuring the book remains concise—a feature that has proven popular with both instructors and students.  Preface vii Supplements The teaching package for Strategic Management of Technological Innovation is available online from Connect at connect.mheducation.com and includes: An instructor’s manual with suggested class outlines, responses to discussion ques- tions, and more. Complete PowerPoint slides with lecture outlines and all major figures from the text. The slides can also be modified by the instructor to customize them to the instruc- tor’s needs. A testbank with true/false, multiple choice, and short answer/short essay questions. A suggested list of cases, videos, and readings to pair with chapters from the text. viii Preface Instructors: Student Success Starts with You Tools to enhance your unique voice Want to build your own course? No problem. Prefer to use an OLC-aligned, prebuilt course? Easy. Want to make changes throughout 65% Less Time the semester? Sure. And you’ll save time with Connect’s auto-grading too. Grading Study made personal Incorporate adaptive study resources like SmartBook® 2.0 into your course and help your students be better prepared in less time. Learn more about the powerful personalized learning experience available in SmartBook 2.0 at www.mheducation.com/highered/connect/smartbook Laptop: McGraw Hill; Woman/dog: George Doyle/Getty Images Affordable solutions, Solutions for added value your challenges Make technology work for you with A product isn’t a solution. Real LMS integration for single sign-on access, solutions are affordable, reliable, mobile access to the digital textbook, and come with training and and reports to quickly show you how ongoing support when you need each of your students is doing. And with it and how you want it. Visit www. our Inclusive Access program you can supportateverystep.com for videos provide all these tools at a discount to and resources both you and your your students. Ask your McGraw Hill students can use throughout the representative for more information. semester. Padlock: Jobalou/Getty Images Checkmark: Jobalou/Getty Images  Preface ix Students: Get Learning that Fits You Effective tools for efficient studying Connect is designed to help you be more productive with simple, flexible, intuitive tools that maximize your study time and meet your individual learning needs. Get learning that works for you with Connect. Study anytime, anywhere “I really liked this Download the free ReadAnywhere app and access app—it made it easy your online eBook, SmartBook 2.0, or Adaptive to study when you Learning Assignments when it’s convenient, even if you’re offline. 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Top: Jenner Images/Getty Images, Left: Hero Images/Getty Images, Right: Hero Images/Getty Images Acknowledgments This book arose out of my research and teaching on technological innovation and new product development over the last decade; however, it has been anything but a lone endeavor. I owe much of the original inspiration of the book to Charles Hill, who helped to ignite my initial interest in innovation, guided me in my research agenda, and ultimately encouraged me to write this book. I am also very grateful to colleagues and friends such as Rajshree Agarwal, Juan Alcacer, Rick Alden, William Baumol, Bruno Braga, Gino Cat- tanni, Tom Davis, Sinziana Dorobantu, Gary Dushnitsky, Douglas Fulop, Raghu Garud, Deepak Hegde, Hla Lifshitz, Tammy Madsen, Rodolfo ­Martinez, ­Goncalo Pacheco D’Almeida, Joost Rietveld, Paul Shapiro, Jaspal Singh, Deepak Somaya, Bill Starbuck, Christopher Tucci, and Andy Zynga for their suggestions, insights, and encouragement. I am grateful to director Mike Ablassmeir and marketing manager ­Hannah Kusper. I am also thankful to my editors, Laura Hurst Spell, Sarah Blasco, and Diana Murphy, who have been so supportive and made this book possible, and to the many reviewers whose suggestions have dramatically improved the book: Joan Adams Deborah Dougherty Baruch Business School Rutgers University (City University of New York) Cathy A. Enz Shahzad Ansari Cornell University Erasmus University Robert Finklestein Rajaram B. Baliga University of Maryland–University Wake Forest University College Sandy Becker Sandra Finklestein Rutgers Business School Clarkson University School of Business David Berkowitz Jeffrey L. Furman University of Alabama in Huntsville Boston University John Bers Cheryl Gaimon Vanderbilt University Georgia Institute of Technology Paul Bierly Elie Geisler James Madison University Illinois Institute of Technology Paul Cheney Sanjay Goel University of Central Florida University of Minnesota in Duluth Pete Dailey Martin Grossman Marshall University Bridgewater State University Robert DeFillippi Andrew Hargadon Suffolk University University of California, Davis x  Acknowledgments xi Steven Harper Steven C. Michael James Madison University University of Illinois Donald E. Hatfield Michael Mino Virginia Polytechnic Institute and State Clemson University University Robert Nash Glenn Hoetker Vanderbilt University University of Illinois Anthony Paoni Sanjay Jain Northwestern University University of Wisconsin–Madison Johannes M. Pennings Theodore Khoury University of Pennsylvania Oregon State University Raja Roy Rajiv Kohli Tulane University College of William and Mary Mukesh Srivastava Judith Lee University of Mary Washington Golden Gate University Linda F. Tegarden Aija Leiponen Virginia Tech Cornell University Oya Tukel Vince Lutheran Cleveland State University University of North Carolina— Anthony Warren Wilmington The Pennsylvania State University Steve Markham Yi Yang North Carolina State University University of Massachusetts—Lowell I am also very grateful to the many students of the Technological Innovation and New Product Development courses I have taught at New York University, INSEAD, Boston University, and University of California at Santa Barbara. Not only did these students read, challenge, and help improve many earlier drafts of the work, but they also contributed numerous examples that have made the text far richer than it would have otherwise been. I thank them wholeheartedly for their patience and generosity. Melissa A. Schilling Briefs Contents Preface iv 1 Introduction 1 PART ONE Industry Dynamics of Technological Innovation 13 2 Sources of Innovation 15 3 Types and Patterns of Innovation 45 4 Standards Battles, Modularity, and Platform Competition 69 5 Timing of Entry 97 PART TWO Formulating Technological Innovation Strategy 115 6 Defining the Organization’s Strategic Direction 117 7 Choosing Innovation Projects 147 8 Collaboration Strategies 173 9 Protecting Innovation 199 PART THREE Implementing Technological Innovation Strategy 223 10 Organizing for Innovation 225 11 Managing the New Product Development Process 255 12 Managing New Product Development Teams 285 13 Crafting a Deployment Strategy 305 INDEX 335 xii Contents Chapter 1 Firm Linkages with Customers, Suppliers, Introduction 1 Competitors, and Complementors 29 Universities and Government-Funded Research 30 The Importance of Technological Innovation 1 Private Nonprofit Organizations 32 The Impact of Technological Innovation  Innovation in Collaborative Networks 33 on Society 2 Technology Clusters 33 Innovation by Industry: The Importance of Research Brief: Do Grand Innovation Strategy 4 Prizes Work? 37 The Innovation Funnel 4 Technological Spillovers 38 Research Brief: How Long Does New Product Summary of Chapter 38 Development Take? 5 Discussion Questions 39 The Strategic Management of Technological Suggested Further Reading 39 Innovation 6 Endnotes 40 Summary of Chapter 9 Discussion Questions 10 Suggested Further Reading 10 Chapter 3 Endnotes 10 Types and Patterns of Innovation 45 Innovating in India: The chotuKool Project 45 PART ONE Overview 48 INDUSTRY DYNAMICS OF Types of Innovation 48 TECHNOLOGICAL INNOVATION 13 Product Innovation versus Process Innovation 48 Radical Innovation versus Incremental Chapter 2 Innovation 49 Sources of Innovation 15 Competence-Enhancing Innovation versus Competence-Destroying Innovation 50 The Rise of Cultured Meata 15 Architectural Innovation versus Component Overview 19 Innovation 51 Creativity 20 Using the Dimensions 52 Individual Creativity 20 Technology S-Curves 53 Organizational Creativity 23 Theory in Action: Inspiring Innovation at Google 24 S-Curves in Technological Translating Creativity Into Innovation 24 Improvement 53 Theory in Action: What Breakthrough Innovators S-Curves in Technology Diffusion 56 Have in Common 25 S-Curves as a Prescriptive Tool 57 The Inventor 26 Limitations of S-Curve Model as a Innovation by Users 27 Prescriptive Tool 58 Research and Development by Firms 28 Technology Cycles 58 xiii xiv Contents Research Brief: The Diffusion of Innovation and Exploiting Buyer Switching Costs 101 Adopter Categories 59 Reaping Increasing Returns Advantages 102 Theory in Action: Segment Zero”—A Serious First-Mover Disadvantages 103 Threat to Microsoft? 61 Research and Development Expenses 103 Summary of Chapter 64 Undeveloped Supply and Distribution Discussion Questions 65 Channels 104 Suggested Further Reading 66 Immature Enabling Technologies and Endnotes 66 Complements 104 Uncertainty of Customer Requirements 104 Factors Influencing Optimal Timing  Chapter 4 of Entry 105 Standards Battles, Modularity, Research Brief: Whether and When and Platform Competition 69 to Enter? 108 Strategies to Improve Timing Options 109 Netflix and the Battle of the Streaming Summary of Chapter 110 Services 69 Discussion Questions 111 Overview 72 Suggested Further Reading 111 Why Dominant Designs Are Selected 73 Endnotes 112 Learning Effects 73 Network Externalities 75 Government Regulation 76 Theory in Action: The Rise of Microsoft 77 PART TWO The Result: Winner-Take-All Markets 78 FORMULATING TECHNOLOGICAL Multiple Dimensions of Value 79 INNOVATION STRATEGY 115 A Technology’s Stand-Alone Value 79 Network Externality Value 81 Chapter 6 Competing for Design Dominance in Markets Defining the Organization’s with Network Externalities 84 Strategic Direction 117 Theory in Action: Are Winner-Take-All Markets Good for Consumers? 87 Tesla in 2021 117 Modularity and Platform Competition 88 Overview 126 Modularity 88 Assessing the Firm’s Current Position 127 Platform Ecosystems 90 External Analysis 127 Summary of Chapter 92 Internal Analysis 131 Discussion Questions 93 Research Brief: Using Big Data to Guide Suggested Further Reading 93 Innovation 134 Endnotes 94 Identifying Core Competencies and Dynamic Capabilities 136 Core Competencies 136 Chapter 5 The Risk of Core Rigidities 137 Dynamic Capabilities 138 Timing of Entry 97 Strategic Intent 138 Failure to Launch at Uber Elevate 97 Research Brief: Blue Ocean Strategy 139 Overview 100 Theory in Action: The Balanced Scorecard 141 First-Mover Advantages 101 Summary of Chapter 142 Brand Loyalty and Technological Discussion Questions 143 Leadership 101 Suggested Further Reading 144 Preemption of Scarce Assets 101 Endnotes 144  Contents xv Chapter 7 Outsourcing 184 Choosing Innovation Projects 147 Collective Research Organizations 185 Choosing a Mode of Collaboration 185 Where Should We Focus Our Innovation Efforts? Choosing and Monitoring Partners 188 An Exercise 147 Partner Selection 188 Overview 152 Research Brief: Strategic Positions in Collaborative The Development Budget 152 Networks 190 Theory in Action: Financing New Technology Partner Monitoring and Governance 192 Ventures 154 Summary of Chapter 193 Quantitative Methods for Choosing Projects 155 Discussion Questions 194 Discounted Cash Flow Methods 155 Suggested Further Reading 194 Real Options 158 Endnotes 195 Disadvantages of Quantitative Methods 160 Qualitative Methods for Choosing Projects 160 Chapter 9 Screening Questions 160 Protecting Innovation 199 The R&D Portfolio 163 Q-Sort 165 The Patent Battle Over CRISPR-Cas9 Gene Combining Quantitative and Qualitative Editing 199 Information 165 Overview 202 Conjoint Analysis 165 Appropriability 202 Theory in Action: Courtyard by Marriott 166 Patents, Trademarks, and Copyrights 203 Data Envelopment Analysis 167 Patents 203 Summary of Chapter 169 Trademarks and Service Marks 208 Discussion Questions 169 Copyright 209 Suggested Further Reading 170 Trade Secrets 210 Endnotes 170 The Effectiveness and Use of Protection Mechanisms 211 Wholly Proprietary Systems versus Wholly Chapter 8 Open Systems 212 Theory in Action: IBM and the Attack of the Clones 214 Collaboration Strategies 173 Advantages of Protection 214 Zeta Energy and “The Holy Grail” of Batteries 173 Advantages of Diffusion 215 Overview 176 Summary of Chapter 218 Reasons for Going Solo 176 Discussion Questions 219 1. Availability of Capabilities 177 Suggested Further Reading 220 2. Protecting Proprietary Technologies 177 Endnotes 220 3. Controlling Technology Development and Use 177 4. Building and Renewing Capabilities 178 PART THREE Advantages of Collaborating 178 IMPLEMENTING TECHNOLOGICAL 1.  cquiring Capabilities and Resources Quickly 178 A 2. Increasing Flexibility 177 INNOVATION STRATEGY 223 3. Learning from Partners 177 Chapter 10 4. Resource and Risk Pooling 179 5. Building a Coalition around a Shared Standard 179 Organizing for Innovation 225 Types of Collaborative Arrangements 179 How Apple Organizes for Innovation 225 Strategic Alliances 180 Overview 228 Joint Ventures 182 Size and Structural Dimensions of the Firm 229 Licensing 183 Size: Is Bigger Better? 229 xvi Contents Structural Dimensions of the Firm 231 Tools for Improving the New Product Centralization 231 Development Process 268 Formalization and Standardization 232 Stage-Gate Processes 268 Mechanistic versus Organic Structures 233 Quality Function Deployment (QFD)— Theory in Action: Shifting Structures at 3M 234 The House of Quality 271 Size versus Structure 235 Design for Manufacturing 273 The Ambidextrous Organization: The Best Failure Modes and Effects Analysis 273 of Both Worlds? 235 Computer-Aided Design/Computer-Aided Modularity and “Loosely Coupled” Engineering/Computer-Aided Manufacturing 276 Organizations 237 Theory in Action: Computer-Aided Design of an Modular Products 237 America’s Cup Yacht 277 Loosely Coupled Organizational Structures 238 Theory in Action: Postmortems at Theory in Action: The Loosely Coupled Production of Microsoft 278 Boeing’s 787 Dreamliner 240 Tools for Measuring New Product Development Using Culture and Norms to Foster Innovation 241 Performance 278 Managing Innovation Across Borders 244 New Product Development Process Metrics 279 Summary of Chapter 247 Overall Innovation Performance 279 Discussion Questions 248 Summary of Chapter 279 Suggested Further Reading 248 Discussion Questions 280 Endnotes 249 Suggested Further Reading 281 Endnotes 281 Chapter 11 Managing the New Product Development Chapter 12 Process 255 Managing New Product Development Scrums, Sprints, and Burnouts: Agile Development Teams 285 at Cisco Systems 255 Overview 258 Magna International’s Carbon Fiber Objectives of the New Product Development “Lightweighting” Project 285 Process 258 Overview 289 Maximizing Fit with Customer Requirements 258 Constructing New Product Development Minimizing Development Cycle Time 259 Teams 289 Controlling Development Costs 260 Team Size 289 Sequential Versus Partly Parallel Development Team Composition 289 Processes 260 Research Brief: Why Brainstorming Teams Kill Theory in Action: The Development of Zantac 262 Breakthrough Ideas 290 Project Champions 263 The Structure of New Product Development Risks of Championing 263 Teams 293 Research Brief: Five Myths about Product Functional Teams 293 Champions 264 Lightweight Teams 293 Involving Customers and Suppliers in the Heavyweight Teams 295 Development Process 265 Autonomous Teams 295 Involving Customers 265 The Management of New Product  Theory in Action: The Lead User Method of Product Development Teams 296 Concept Development 266 Team Leadership 296 Involving Suppliers 266 Team Administration 297 Crowdsourcing 266 Managing Virtual Teams 298  Contents xvii Research Brief: Virtual International Distribution 321 R&D Teams 299 Selling Direct versus Using Intermediaries 321 Summary of Chapter 300 Strategies for Accelerating Distribution 323 Discussion Questions 301 Marketing 325 Suggested Further Reading 301 Major Marketing Methods 325 Endnotes 302 Tailoring the Marketing Plan to Intended Adopters 327 Theory in Action: Generating Awareness for Chapter 13 Domosedan 328 Crafting a Deployment Strategy 305 Using Marketing to Shape Perceptions Deployment Tactics in the Global Video Game and Expectations 329 Industry 305 Research Brief: Creating an Information Epidemic 331 Overview 315 Summary of Chapter 332 Launch Timing 315 Discussion Questions 333 Strategic Launch Timing 315 Suggested Further Reading 333 Optimizing Cash Flow Versus Embracing Endnotes 334 Cannibalization 316 Licensing and Compatibility 317 Pricing 319 Index 335 Chapter One Introduction THE IMPORTANCE OF TECHNOLOGICAL INNOVATION technological In many industries, technological innovation is now the most important driver of innovation competitive success. Firms in a wide range of industries rely on products developed The act of within the past five years for almost one-third (or more) of their sales and profits. For ­introducing a new device, example, at Johnson & Johnson, products developed within the last five years account method, or for over 30 percent of sales, and sales from products developed within the past five years material for at 3M have hit as high as 45 percent in recent years. application to The increasing importance of innovation is due in part to the globalization of mar- commercial kets. Foreign competition has put pressure on firms to continuously innovate in order or practical objectives. to produce differentiated products and services. Introducing new products helps firms protect their margins, while investing in process innovation helps firms lower their costs. Advances in information technology also have played a role in speeding the pace of innovation. Computer-aided design and computer-aided manufacturing have made it easier and faster for firms to design and produce new products, while flex- ible manufacturing technologies have made shorter production runs economical and have reduced the importance of production economies of scale.1 These technologies help firms develop and produce more product variants that closely meet the needs of narrowly defined customer groups, thus achieving differentiation from competi- tors. For example, in 2021, Toyota offered dozens of different passenger vehicle lines under the Toyota brand (e.g., Camry, Prius, Highlander, Yaris, Land Cruiser, and Tundra). Within each of the vehicle lines, Toyota also offered several different models (e.g., Camry L, Camry LE, Camry SE, and Camry Hybrid SE) with different features and at different price points. In total, Toyota offered over 200 car models ranging in price from $16,605 (for the Yaris sedan) to $85,665 (for the Land Cruiser), and seating anywhere from three passengers (e.g., Tacoma Regular Cab truck) to eight passengers (Sienna Minivan). On top of this, Toyota also produced a range of lux- ury vehicles under its Lexus brand. Similarly, in 2021, Samsung produced more than 43 unique smartphones, from the Galaxy A01 priced at roughly $100 to the Galaxy Fold priced at roughly $2000. Companies can use broad portfolios of product mod- els to help ensure they can penetrate almost every conceivable market niche. While producing multiple product variations used to be expensive and time-consuming, 1 2 Chapter 1 Introduction flexible manufacturing technologies now enable firms to seamlessly transition from producing one product model to the next, adjusting production schedules with real- time information on demand. Firms further reduce production costs by using com- mon components in many of the models. As firms such as Toyota, Samsung, and others adopt these new technologies and increase their pace of innovation, they raise the bar for competitors, triggering an industry-wide shift to shortened development cycles and more rapid new prod- uct introductions. The net results are greater market segmentation and rapid product obsolescence.2 Product life cycles (the time between a product’s introduction and its withdrawal from the market or replacement by a next-generation product) have become as short as 4 to 12 months for software, 12 to 24 months for computer hard- ware and consumer electronics, and 18 to 36 months for large home appliances.3 This spurs firms to focus increasingly on innovation as a strategic imperative—a firm that does not innovate quickly finds its margins diminishing as its products become obsolete. THE IMPACT OF TECHNOLOGICAL INNOVATION ON SOCIETY If the push for innovation has raised the competitive bar for industries, arguably mak- ing success just that much more complicated for organizations, its net effect on society is more clearly positive. Innovation enables a wider range of goods and services to be delivered to people worldwide. It has made the production of food and other necessities more efficient, yielded medical treatments that improve health conditions, and enabled people to travel to and communicate with almost every part of the world. To get a real sense of the magnitude of the effect of technological innovation on society, look at Figure 1.1, which shows a timeline of some of the most important technological inno- vations developed over the last 200 years. Imagine how different life would be without these innovations! The aggregate impact of technological innovation can be observed by looking at gross gross domestic product (GDP). The gross domestic product of an economy is its ­domestic total annual output, measured by final purchase price. Figure 1.2 shows the average product (GDP) GDP per capita (i.e., GDP divided by the population) for the world from 1980 to The total annual 2019. The figures have been converted into U.S. dollars and adjusted for inflation. As output of an economy as shown in the figure, the average world GDP per capita has risen pretty steadily since measured by its 1980. In a series of studies of economic growth conducted at the National Bureau of final purchase Economic Research, economists showed that the historic rate of economic growth price. in GDP could not be accounted for entirely by growth in labor and capital inputs. Economist Robert Merton Solow argued that this unaccounted-for residual growth represented technological change: Technological innovation increased the amount of output achievable from a given quantity of labor and capital. This explanation was not immediately accepted; many researchers attempted to explain the residual away in terms of measurement error, inaccurate price deflation, or labor improvement.  Chapter 1 Introduction 3 FIGURE 1.1 But in each case the additional Timeline of 1800 - 1800—Electric battery variables were unable to eliminate - 1804—Steam locomotive Some of the this residual growth component. - 1807—Internal combustion engine Most Important - 1809—Telegraph A ­consensus gradually emerged Technological - 1817—Bicycle that the residual did in fact cap- Innovations 1820 - 1821—Dynamo ture technological change. Solow in the Last - 1824—Braille writing system 200 Years - 1828—Hot blast furnace received a Nobel Prize for his work - 1831—Electric generator in 1981, and the residual became - 1836—Five-shot revolver known as the Solow Residual.4 1840 - 1841—Bunsen battery (voltaic cell) While GDP has its shortcomings - 1842—Sulfuric ether-based anesthesia - 1846—Hydraulic crane as a measure of standard of living, - 1850—Petroleum refining it does relate very directly to the - 1856—Aniline dyes amount of goods consumers can 1860 - 1862—Gatling gun purchase. Thus, to the extent that - 1867—Typewriter goods improve quality of life, we - 1876—Telephone - 1877—Phonograph can ascribe some beneficial impact - 1878—Incandescent lightbulb of technological innovation. 1880 - 1885—Light steel skyscrapers Sometimes technological innova- externalities - 1886—Internal combustion automobile tion results in negative ­externalities.  Costs (or bene- - 1887—Pneumatic tire - 1892—Electric stove Production technologies may ­create fits) that are pollution that is harmful to the sur- - 1895—X-ray machine borne (or reaped) by individuals 1900 - 1902—Air conditioner (electric) rounding communities; agricultural - 1903—Wright biplane and fishing technologies can result other than those - 1906—Electric vacuum cleaner responsible for - 1910—Electric washing machine in erosion, elimination of natural creating them. - 1914—Rocket habitats, and depletion of ocean Thus, if a stocks; medical technologies can 1920 - 1921—Insulin (extracted) business emits - 1927—Television result in unanticipated consequences pollutants in a - 1928—Penicillin community, it - 1936—First programmable computer such as antibiotic-resistant strains of imposes a nega- - 1939—Atom fission bacteria or moral ­dilemmas regard- tive externality 1940 - 1942—Aqua lung ing the use of genetic modification. on the commun- - 1943—Nuclear reactor However, technology is, in its purest ity members; - 1947—Transistor if a business essence,­ knowledge—­knowledge to - 1957—Satellite builds a park in - 1958—Integrated circuit solve our problems and pursue our a community, it 1960 - 1967—Portable handheld calculator goals.5 Technological innovation creates a posi- - 1969—ARPANET (precursor to Internet) is thus the creation of new know- tive externality - 1971—Microprocessor ledge that is applied to practical for community - 1973—Mobile (portable cellular) phone members. - 1976—Supercomputer problems. Sometimes this know- 1980 - 1981—Space shuttle (reusable) ledge is applied to problems hast- - 1987—Disposable contact lenses ily, without full consideration of - 1989—High-definition television the consequences and alternatives, - 1990—World Wide Web protocol - 1996—Wireless Internet but overall it will probably serve 2000 - 2002—CRISPR Cas9 gene editing us better to have more knowledge - 2003—Map of human genome than less. - 2008—Blockchain - 2010—Synthetic life form - 2017—SpaceX reusable rocket 4 Chapter 1 Introduction FIGURE 1.2 World Gross 14,000 Domestic ­Product 12,000 per ­Capita, 1980–2019 10,000 (in real 2019 U.S. dollars) 8,000 Source: “World GDP  Per Capita 1960–2021,” Macrotrends, https:// 6,000 www.macrotrends.net/ countries/WLD/world/ gdp-per-capita. 4,000 2,000 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY As will be shown in Chapter Two, the majority of effort and money invested in techno- logical innovation comes from industrial firms. However, in the frenetic race to innovate, many firms charge headlong into new product development without clear strategies or ­well-developed processes for choosing and managing projects. Such firms often initiate more projects than they can effectively support, choose projects that are a poor fit with the firm’s resources and objectives, and suffer long development cycles and high project failure rates as a consequence (see the accompanying Research Brief for a recent study of the length of new product development cycles). While innovation is popularly depicted as a freewheeling process that is unconstrained by rules and plans, study after study has revealed that successful innovators have clearly defined innovation strategies and management processes.6 The Innovation Funnel Most innovative ideas do not become successful new products. Many studies suggest that only one out of several thousand ideas results in a successful new product: Many projects do not result in technically feasible products and, of those that do, many fail to earn a commercial return. According to a 2012 study by the Product Development and Management Association, only about one in nine projects that are initiated is success- ful, and of those that make it to the point of being launched to the market, only about half earn a profit.7 Furthermore, many ideas are sifted through and abandoned before a ­project is even formally initiated. According to one study that combined data from  Chapter 1 Introduction 5 Research Brief How Long Does New Product Development Take?a In a large-scale survey administered by the Product in at 57 weeks. The development of radical products Development and Management Association (PDMA), or technologies took the longest, averaging 82 weeks. in 2012, researchers examined the length of time it The study also found that on average, for more innov- took firms to develop a new product from initial con- ative and radical projects, firms reported significantly cept to market introduction. The study divided new shorter cycle times than those reported in the previ- product development projects into categories repre- ous PDMA surveys conducted in 1995 and 2004. senting their degree of innovativeness: “radical” pro- a jects, “more innovative” projects, and “incremental”  dapted from Stephen K. Markham and Hyunjung Lee, A “Product Development and Management Association’s projects. On average, incremental projects took only 2012 Comparative Performance Assessment Study,” 33 weeks from concept to market introduction. More Journal of Product ­Innovation Management 30, no. 3 innovative projects took significantly longer, clocking (2013): 408–29. prior studies of innovation success rates with data on patents, venture capital funding, and surveys, it takes about 3000 raw ideas to produce one significantly new and suc- cessful commercial product.8 The pharmaceutical industry demonstrates this well—only one out of every 5000 ­compounds makes it to the pharmacist’s shelf, and only one-third of those will be successful enough to recoup their R&D costs.9 Furthermore, most stud- ies indicate that it costs at least ­$1.4 billion and a decade of research to bring a new Food and Drug Administration ­(FDA)–approved pharmaceutical product to market!10 The innovation process is thus often conceived of as a funnel, with many potential new product ideas going in the wide end, but very few making it through the development process (see Figure 1.3). FIGURE 1.3 The New Product Develop- ment Funnel in Pharmaceuticals 5000 125 2–3 drugs tested 1 drug Compounds Leads Rx Discovery & Preclinical Clinical Trials Approval 3–6 years 6–7 years ½–2 years 6 Chapter 1 Introduction The Strategic Management of Technological Innovation Improving a firm’s innovation success rate requires a well-crafted strategy. A firm’s innovation projects should align with its resources and objectives, leveraging its core competencies and helping it achieve its strategic intent. A firm’s organizational struc- ture and control systems should encourage the generation of innovative ideas while also ensuring efficient implementation. A firm’s new product development process should maximize the likelihood of projects being both technically and commercially successful. To achieve these things, a firm needs (a) an in-depth understanding of the dynamics of innovation, (b) a well-crafted innovation strategy, and (c) well-designed processes for implementing the innovation strategy. We will cover each of these in turn (see Figure 1.4). In Part One, we will cover the foundations of technological innovation, gaining an in-depth understanding of how and why innovation occurs in an industry, and why some innovations rise to dominate others. First, we will look at the sources of innov- ation in Chapter Two. We will address questions such as: Where do great ideas come from? How can firms harness the power of individual creativity? What role do cus- tomers, government organizations, universities, and alliance networks play in creating innovation? In this chapter, we will first explore the role of creativity in the generation of novel and useful ideas. We then look at various sources of innovation, including the role of individual inventors, firms, publicly sponsored research, and collaborative networks. In Chapter Three, we will review models of types of innovation (such as ­radical ­versus incremental and architectural versus modular) and patterns of innovation (including s-curves of technology performance and diffusion, and technology cycles). We will address questions such as: Why are some innovations much harder to create and implement than others? Why do innovations often diffuse slowly even when they appear to offer a great advantage? What factors influence the rate at which a technol- ogy tends to improve over time? Familiarity with these types and patterns of innovation will help us distinguish how one project is different from another and the underlying factors that shape the project’s likelihood of technical or commercial success. In Chapter Four, we will turn to the particularly interesting dynamics that emerge in industries characterized by network externalities and other sources of increasing returns that can lead to standards battles and winner-take-all markets. We will address questions such as: Why do some industries choose a single dominant standard rather than enabling multiple standards to coexist? What makes one technological innova- tion rise to dominate all others, even when other seemingly superior technologies are offered? How can a firm avoid being locked out? Is there anything a firm can do to influence the likelihood of its technology becoming the dominant design? When are platform ecosystems likely to displace other forms of competition in an industry? In Chapter Five, we will discuss the impact of entry timing, including first-mover advantages, first-mover disadvantages, and the factors that will determine the firm’s optimal entry strategy. This chapter will address such questions as: What are the advan- tages and disadvantages of being first to market, early but not first, and late? What determines the optimal timing of entry for a new innovation? This chapter reveals a number of consistent patterns in how timing of entry impacts innovation success, and it  Chapter 1 Introduction 7 FIGURE 1.4 The Strategic Management of Technological Innovation Part 1: Industry Dynamics of Technological Innovation Chapter 2 Chapter 3 Chapter 4 Chapter 5 Sources of Types and Patterns Standards Battles, Timing of Entry Innovation of Innovation Modularity, and Platform Competition Part 2: Formulating Technological Innovation Strategy Chapter 6 Defining the Organization’s Strategic Direction Chapter 7 Chapter 8 Chapter 9 Choosing Innovation Collaboration Protecting Innovation Projects Strategies Part 3: Implementing Technological Innovation Strategy Chapter 10 Chapter 11 Chapter 12 Chapter 13 Organizing for Managing the New Managing New Crafting a Innovation Product Development Product Deployment Process Development Teams Strategy Feedback 8 Chapter 1 Introduction outlines what factors will influence a firm’s optimal timing of entry, thus beginning the transition from understanding the dynamics of technological innovation to formulating technology strategy. In Part Two, we will turn to formulating technological innovation strategy. ­Chapter Six reviews the basic strategic analysis tools managers can use to assess the firm’s current position and define its strategic direction for the future. This chapter will address such questions as: What are the firm’s sources of sustainable competitive advantage? Where in the firm’s value chain do its strengths and weaknesses lie? What are the firm’s core competencies, and how should it leverage and build upon them? What is the firm’s strategic intent—that is, where does the firm want to be 10 years from now? Only after the firm has thoroughly appraised where it is currently can it formulate a coherent technological innovation strategy for the future. In Chapter Seven, we will examine a variety of methods of choosing innovation pro- jects. These include quantitative methods such as discounted cash flow and options valuation techniques, qualitative methods such as screening questions and balancing the research and development portfolio, as well as methods that combine qualitative and quantitative approaches such as conjoint analysis and data envelopment analysis. Each of these methods has its advantages and disadvantages, leading many firms to use a multiple-method approach to choosing innovation projects. This chapter also includes some of the sources of funding an innovative startup might use to finance their projects. In Chapter Eight, we will examine collaboration strategies for innovation. This chap- ter addresses questions such as: Should the firm partner on a particular project or go solo? How does the firm decide which activities to do in-house and which to access through collaborative arrangements? If the firm chooses to work with a partner, how should the partnership be structured? How does the firm choose and monitor part- ners? We will begin by looking at the reasons a firm might choose to go solo versus ­working with a partner. We then will look at the pros and cons of various partnering ­methods, including joint ventures, alliances, licensing, outsourcing, and participating in ­collaborative research organizations. The chapter also reviews the factors that should influence partner selection and monitoring. In Chapter Nine, we will address the options the firm has for appropriating the returns to its innovation efforts. We will look at the mechanics of patents, copyright, trademarks, and trade secrets. We will also address such questions as: Are there ever times when it would benefit the firm to not protect its technological innovation so vigorously? How does a firm decide between a wholly proprietary, wholly open, or par- tially open strategy for protecting its innovation? When will open strategies have advan- tages over wholly proprietary strategies? This chapter examines the range of protection options available to the firm, and the complex series of trade-offs a firm must consider in its protection strategy. In Part Three, we will turn to implementing the technological innovation strategy. This begins in Chapter Ten with an examination of how the organization’s size and structure influence its overall rate of innovativeness. The chapter addresses such ques- tions as: Do bigger firms outperform smaller firms at innovation? How do formaliza- tion, standardization, and centralization impact the likelihood of generating innovative ideas and the organization’s ability to implement those ideas quickly and efficiently? Is it possible to achieve creativity and flexibility at the same time as efficiency and  Chapter 1 Introduction 9 reliability? How does the firm’s culture influence its innovation? How do multinational firms decide where to perform their development activities? How do multinational firms coordinate their development activities toward a common goal when the activities occur in multiple countries? This chapter examines how organizations can balance the benefits and trade-offs of flexibility, economies of scale, standardization, centralization, and tapping local market knowledge. In Chapter Eleven, we will review a series of “best practices” that have been identi- fied in managing the new product development process. This includes such questions as: Should new product development processes be performed sequentially or in paral- lel? What are the advantages and disadvantages of using project champions? What are the benefits and risks of involving customers and/or suppliers in the development pro- cess? What tools can the firm use to improve the effectiveness and efficiency of its new product development processes? How does the firm assess whether its new product development process is successful? This chapter provides an extensive review of meth- ods that have been developed to improve the management of new product development projects and to measure their performance. Chapter Twelve builds on the previous chapter by illuminating how team compos- ition and structure will influence project outcomes. This chapter addresses questions such as: How big should teams be? What are the advantages and disadvantages of choos- ing highly diverse team members? Do teams need to be colocated? When should teams be full time and/or permanent? What type of team leader and management practices should be used for the team? This chapter provides detailed guidelines for constructing new product development teams that are matched to the type of new product develop- ment project under way. Finally, in Chapter Thirteen, we will look at innovation deployment strategies. This chapter will address such questions as: How do we accelerate the adoption of the technological innovation? How do we decide whether to use licensing or OEM agreements? Does it make more sense to use penetration pricing or a market-skimming price? When should we sell direct versus using intermediaries? What strategies can the firm use to encourage distributors and complementary goods providers to support the innovation? What are the advantages and disadvantages of major marketing methods? This chapter complements traditional marketing, distribution, and pricing courses by looking at how a deployment strategy can be crafted that especially targets the needs of a new technological innovation. Summary 1. Technological innovation is now often the single most important competitive driver in many industries. Many firms receive more than one-third of their sales and prof- of its from products developed within the past five years. Chapter 2. The increasing importance of innovation has been driven largely by the globaliz- ation of markets and the advent of advanced technologies that enable more rapid product design and allow shorter production runs to be economically feasible. 3. Technological innovation has a number of important effects on society, includ- ing fostering increased GDP, enabling greater communication and mobility, and improving medical treatments. 10 Chapter 1 Introduction 4. Technological innovation may also pose some negative externalities, including pol- lution, resource depletion, and other unintended consequences of technological change. 5. While government plays a significant role in innovation, industry provides the majority of R&D funds that are ultimately applied to technological innovation. 6. Successful innovation requires an in-depth understanding of the dynamics of innov- ation, a well-crafted innovation strategy, and well-developed processes for imple- menting the innovation strategy. Discussion 1. Why is innovation so important for firms to compete in many industries? Questions 2. What are some advantages and disadvantages of technological innovation? 3. Why do you think so many innovation projects fail to generate an economic return? Suggested Classics Further Edwin Mansfield, “Contributions of R and D to Economic Growth in the United Reading States,” Science CLXXV (1972): 477–86. Joseph Schumpeter, The Theory of Economic Development (1911; English translation, Cambridge, MA: Harvard University Press, 1936). Kenneth J. Arrow, “Economic welfare and the allocation of resources for inventions,” in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. R. ­Nelson (Princeton, NJ: Princeton University Press, 1962), 609–25. William J. Baumol, The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (Princeton, NJ: Princeton University Press, 2002). Recent Work David Ahlstrom, “Innovation and Growth: How Business Contributes to Society,” ­Academy of Management Perspectives (August 2010): 10–23. Frank R. Lichtenberg, “Pharmaceutical Innovation and Longevity Growth in 30 Developing and High-Income Countries, 2000–2009,” Health Policy and ­Technology 3 (2014): 36–58. Melissa A. Schilling, “Towards Dynamic Efficiency: Innovation and Its Implications for Antitrust,” Antitrust Bulletin 60, no. 3 (2015): 191–207. “The 25 Best Inventions of 2017,” Time (December 1, 2017). Endnotes 1. James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World (New York: Rawson Associates, 1990). 2. William Qualls, Richard W. Olshavsky, and Ronald E. Michaels, “Shortening of the PLC—An Empirical Test,” Journal of Marketing 45 (1981): 76–80. 3. Melissa A. Schilling and Cassandra E. Vasco, “Product and Process Technological Change and the Adoption of Modular Organizational Forms,” in Winning Strategies in a Deconstructing World, eds. R. Bresser, M. Hitt, R. Nixon, and D. Heuskel (Sussex, England: John Wiley & Sons, 2000), 25–50.  Chapter 1 Introduction 11 4. Nicholas Crafts, “The First Industrial Revolution: A Guided Tour for Growth Economists,” The ­American Economic Review 86, no. 2 (1996): 197–202; Robert Solow, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics 39 (1957): ­312–20; and Nestor E. Terleckyj, “What Do R&D Numbers Tell Us about Technological Change?” ­American Economic Association 70, no. 2 (1980): 55–61. 5. Herbert A. Simon, “Technology and Environment,” Management Science 19 (1973), 1110–21. 6. Shona Brown and Kathleen Eisenhardt, “The Art of Continuous Change: Linking Complex- ity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 42 (1997): 1–35; K. Clark and T. Fujimoto, Product Development Perform- ance (­Boston: Harvard Business School Press, 1991); Robert Cooper, “Third Generation New Product ­Processes,” Journal of Product Innovation Management 11 (1994): 3–14; D. Doughery, “Reimagining the Differentiation and Integration of Work for Sustained Product Innovation,” ­Organization ­Science 12 (2001): 612–31; and Melissa A. Schilling and Charles William Leslie Hill, “­Managing the New Product Development Process: Strategic Imperatives,” Academy of Management ­Executive 12, no. 3 (1998): 67–81. 7. Stephen K. Markham and Hyunjung Lee, “Product Development and Management Association’s 2012 comparative performance assessment study,” Journal of Product Innovation Management 30, no. 3 (2013): 408–29. 8. Greg Stevens and James Burley, “3,000 Raw Ideas Equals 1 Commercial Success!” Research Technology Management 40, no. 3 (1997): 16–27. 9. Standard & Poor’s Industry Surveys, Pharmaceutical Industry, 2008. 10. Joseph A. DiMasi, Henry G. Grabowski, and Ronald W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics 47 (May 2016): 20–33.  Part One Industry Dynamics of Technological Innovation In this section, we will explore the industry dynamics of technological innovation, including: The sources from which innovation arises, including the roles of individuals, organizations, government institutions, and networks. The types of innovations and common industry patterns of technological evo- lution and diffusion. The factors that determine whether industries experience pressure to select a dominant design, and what drives which technologies to dominate others. The effects of timing of entry, and how firms can identify (and manage) their entry options. This section will lay the foundation that we will build upon in Part Two, Formulat- ing Technological Innovation Strategy. Industry Dynamics of Technological Innovation Part 1: Industry Dynamics of Technological Innovation Chapter 2 Chapter 3 Chapter 4 Chapter 5 Sources of Types and Patterns Standards Battles, Timing of Entry Innovation of Innovation Modularity, and Platform Competition Part 2: Formulating Technological Innovation Strategy Chapter 6 Defining the Organization’s Strategic Direction Chapter 7 Chapter 8 Chapter 9 Choosing Innovation Collaboration Protecting Innovation Projects Strategies Part 3: Implementing Technological Innovation Strategy Chapter 10 Chapter 11 Chapter 12 Chapter 13 Organizing for Managing the New Managing New Crafting a Innovation Product Development Product Deployment Process Development Teams Strategy Feedback Chapter Two Sources of Innovation The Rise of Cultured Meata In late 2017, Microsoft founder Bill Gates and a group of other high-powered investors—who comprise Breakthrough Energy Ventures, such as Amazon’s Jeff Bezos, Alibaba’s Jack Ma, and Virgin’s Richard Branson—announced their intention to fund a San Francisco–based start-up called Memphis Meats with an unusual business plan: It grew “clean” meat using stem cells, eliminating the need to breed or slaughter animals. The company had already produced beef, chicken, and duck, all grown from cells.b There were many potential advantages of growing meat without animals. First, growth in the demand for meat was skyrocketing due to both population growth and development. When developing countries become wealthier, they increase their meat consumption. While humanity’s population had doubled since 1960, consumption of animal products had risen fivefold and was still increasing. Many scientists and economists had begun to warn of an impending “meat crisis.” Even though plant protein substitutes like soy and pea protein had gained enthusias- tic followings, the rate of animal protein consumption had continued to rise. This suggested that meat shortages were inevitable unless radically more efficient methods of production were developed. Large-scale production of animals also had a massively negative effect on the environment. The worldwide production of cattle, for example, resulted in a larger emissions of greenhouse gases than the collective effect of the world’s automobiles. Animal production is also extremely water intensive: To produce each chicken sold in a supermarket, for example, requires more than 1000 gallons of water, and each egg requires 50 gallons. Each gallon of cow’s milk required 900 gallons of water. A study by Oxford University indicated that meat grown from cells would produce up to 96 percent lower greenhouse gas emissions, use 45 percent less energy, 99 percent less land, and 96 per- cent less water.c Scientists also agreed that producing animals for consumption was simply inefficient. Estimates suggested, for example, that it required roughly 23 calo- ries worth of inputs to produce one calorie of beef. Cultured meat promised to bring that ratio down to three calories of inputs to produce a calorie of beef— more than seven times greater efficiency. Cultured meat also would not contain 15 16 Part One Industry Dynamics of Technological Innovation antibiotics, steroids, or bacteria such as E. coli—it was literally “cleaner,” and that translated into both greater human health and lower perishability. The Development of Clean Meat In 2004, Jason Matheny, a 29-year-old recent graduate from the John Hopkins Public Health program decided to try to tackle the problems with production of animals for food. Though Matheny was a vegetarian himself, he realized that convincing enough people to adopt a plant-based diet to slow down the meat crisis was unlikely. As he noted, “You can spend your time trying to get people to turn their lights out more often, or you can invent a more efficient light bulb that uses far less energy even if you leave it on. What we need is an enormously more efficient way to get meat.”d Matheny founded a nonprofit organization called New Harvest that would be dedicated to promoting research into growing real meat without animals. He soon discovered that a Dutch scientist, Willem van Eelen was exploring how to culture meat from animal cells. Van Eelen had been awarded the first patent on a cultured meat production method in 1999. However, the eccentric scientist had not had much luck in attracting funding to his project, nor in scaling up his production. Matheny decided that with a little prodding, the Dutch government might be persuaded to make a serious investment in the development of meat- culturing methods. He managed to get a meeting with the Netherland’s minister of agriculture where he made his case. Matheny’s efforts paid off: The Dutch government agreed to invest two million euros in exploring methods of creating cultured meat at three different universities. By 2005, cultured meat was starting to gather attention. The journal Tissue Engineering published an article entitled “In Vitro-Cultured Meat Production,” and in the same year, the New York Times profiled cultured meat in its annual “Ideas of the Year.” However, while governments and universities were willing to invest in the basic science of creating methods of producing cultured meat, they did not have the capabilities and assets needed to bring it to commercial scale. Matheny knew that to make cultured meat a mainstream reality, he would need to attract the interest of large agribusiness firms. Matheny’s initial talks with agribusiness firms did not go well. Though meat producers were open to the idea conceptually, they worried that consumers would balk at cultured meat and perceive it as unnatural. Matheny found this criti- cism frustrating; after all, flying in airplanes, using air conditioning, or eating meat pumped full of steroids to accelerate its growth were also unnatural. Progress was slow. Matheny took a job at the Intelligence Advanced Research Projects Activity (IARPA) of the U.S. Federal Government while continuing to run New Harvest on the side. Fortunately, others were also starting to realize the urgency of developing alternative meat production methods. Enter Sergey Brin of Google In 2009, the foundation of Sergey Brin, cofounder of Google, contacted Matheny to learn more about cultured meat technologies. Matheny referred  Chapter 2 Sources of Innovation 17 Brin’s foundation to Dr. Mark Post at Maastricht University, one of the leading ­scientists funded by the Dutch government’s cultured meat investment. Post had succeeded in growing mouse muscles in vitro and was certain his pro- cess could be replicated with the muscles of cows, poultry, and more. As he stated, “It was so clear to me that we could do this. The science was there. All we needed was funding to actually prove it, and now here was a chance to get what was needed.”e It took more than a year to work out the details, but in 2011, Brin offered Post roughly three quarters of a million dollars to prove his pro- cess by making two ­cultured beef burgers, and Post’s team set about meeting the challenge. In early 2013, the moment of truth arrived: Post and his team had enough cul- tured beef to do a taste test. They fried up a small burger and split it into thirds to taste. It tasted like meat. Their burger was 100 percent skeletal muscle and they knew that for commercial production they would need to add fat and con- nective tissue to more closely replicate the texture of beef, but those would be easy problems to solve after passing this milestone. The press responded enthusiastically, and the Washington Post ran an article headlined, “Could a Test- Tube Burger Save the Planet?”f Going Commercial In 2015, Uma Valeti, a cardiologist at the Mayo Clinic founded his own cultured-­ meat research lab at the University of Minnesota. “I’d read about the ineffi- ciency of meat-eating compared to a vegetarian diet, but what bothered me more than the wastefulness was the sheer scale of suffering of the animals.”g As a heart doctor, Valeti also believed that getting people to eat less meat could improve human health: “I knew that poor diets and the unhealthy fats and refined carbs that my patients were eating were killing them, but so many seemed totally unwilling to eat less or no meat. Some actually told me they’d rather live a shorter life than stop eating the meats they loved.” Valeti began fantasizing about a best-of-both-worlds alternative—a healthier and kinder meat. As he noted, “The main difference I thought I’d want for this meat I was envisioning was that it’d have to be leaner and more protein-packed than a cut of supermarket meat, since there’s a large amount of saturated fat in that meat.... Why not have fats that are proven to be better for health and longev- ity, like omega-3s? We want to be not just like conventional meat but healthier than conventional meat.”h Valeti was nervous about leaving his successful position as a cardiologist— after all, he had a wife and two children to help support. However, when he sat down to discuss it with his wife (a pediatric eye surgeon), she said, “Look, Uma. We’ve been wanting to do this forever. I don’t ever want us to look back on why we didn’t have the courage to work on an idea that could make this world kinder and better for our children and their generation.”i And thus Valeti’s company, which would later be named Memphis Meats, was born. Building on Dr. Post’s achievement, Valeti’s team began experimenting with ways to get just the right texture and taste. After much trial and error, and a growing number of patents, they hosted their first tasting event in 18 Part One Industry Dynamics of Technological Innovation December 2015. On the menu: a meatball. This time the giant agribusiness firms took notice. At the end of 2016, Tyson Foods, the world’s largest meat producer, announced that it would invest $150 million in a venture capital fund that would develop alternative proteins, including meat grown from self-reproducing cells. In August of 2017, agribusiness giant Cargill announced it was investing in ­Memphis Meats, and a few months later in early 2018, Tyson Foods also pledged investment. That first meatball cost $1200; to make cultured meat a commercial reality required bringing costs down substantially. But analysts were quick to point out that the first iPhone had cost $2.6 billion in R&D—much more than the first cul- tured meats. Scale and learning curve efficiencies would drive that cost down. Valeti had faith that the company would soon make cultured meat not only ­competitive with traditional meat, but also more affordable. Growing meat rather than whole animals had, after all, inherent efficiency advantages. In December of 2020, cultured chicken made by Eat Just became the first cultured meat product in the world to be approved for commercial sale when it was approved by the Singapore Food Agency. The chicken was expected to go on sale in Singapor