Strategic Management of Technological Innovation PDF

Strategic Management of Technological Innovation This page intentionally left blank Strategic Management of Technological Innovation Fourth Edition Melissa A. Schilling New York University STRATEGIC MANAGEMENT OF TECHNOLOGICAL INNOVATION, FOURTH EDITION Publish...

Strategic Management of Technological Innovation This page intentionally left blank Strategic Management of Technological Innovation Fourth Edition Melissa A. Schilling New York University STRATEGIC MANAGEMENT OF TECHNOLOGICAL INNOVATION, FOURTH EDITION Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Printed in the United States of America. Previous editions © 2010, 2008, and 2005. 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 The McGraw-Hill Companies, Inc., 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. 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Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Schilling, Melissa A. Strategic management of technological innovation/Melissa A. Schilling.—4th ed. p. cm. ISBN 978-0-07-802923-3 (alk. paper) 1. Technological innovations—Management. 2. New products—Management. 3. Strategic planning. I. Title. HD45.S3353 2013 658.5’75—dc23 2012026522 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, and McGraw-Hill does not guarantee the accuracy of the information presented at these sites. www.mhhe.com About the Author Melissa A. Schilling, Ph.D. Melissa Schilling is a 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 manage- ment. 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 Cor- poration, 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 firms fight technology standards battles, and how they 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, including 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 Organization Science and Strategic Organization. Professor Schilling won an NSF CAREER award in 2003, and Boston University’s Broderick Prize for research in 2000. v 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 possibilities, while simultaneously accelerating economic growth and providing advances in such crucial human endeavors as medicine, agriculture, and education. For industrial organizations, the primary 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 process 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 systematic 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 inno- vi vation and new product development. Such courses are frequently taught in both business  Preface vii 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 Stra- tegic 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 Product Development Process) on computer-aided design or quality function deployment may be review material for infor- mation system students or engineering students, while being new to management students. Though the chapters are designed to have an intuitive 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 Fourth Edition This fourth 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: Five New Short Cases Theory in Action: Inspiring Innovation at Google. Chapter 2 now includes a “Theory in Action” that describes some of the ways that Google motivates its employees to innovate. Google uses a wide array of mechanisms to foster employee innovation, including contests, awards, and allocating 20 percent of each employee’s time to pur- sue projects of their own choosing. Tata Nano: The World’s First Rs. 1 Lakh Car. The new opening case for Chapter 3 is about the Tata Nano. In 2002, Ratan Tata, head of Tata Group, one of India’s largest and most revered business holding groups, decided to create a car that the masses of India could afford—the Tata Nano. At Rs. 1 lakh (about $2,200), it would be least expensive car ever developed. To accomplish this feat, Tata had to completely reconceptualize, from the car’s frame, to its major power systems, to even its trim. Tata’s engineers and global supplier base responded enthusiastically to the challenge, and in 2009, the Nano was officialy launched. Theory in Action: “Segment Zero”—A Serious Threat to Microsoft? Chapter 3 now includes a Theory in Action short case that describes how smartphones may pose a “segment zero” threat to Microsoft. Microsoft has held a position of dominance in personal computer operating systems for more than thirty years. Despite attacks from numerous other operating systems (e.g., Unix, Geoworks, NeXTSTEP, Linux, and MacOS), its market share has held stable at roughly 85 percent. Now, however, Microsoft’s position was under greater threat than it ever had been. Smartphone operating systems were becoming increasingly sophisticated, and as they evolved to handle the increasingly complex activities performed on tablets, they became increas- ingly close substitutes for the Windows operating system. Furthermore, this was a market in which Microsoft was not even in the front pack: Apple’s iOS and Google’s Android collectively controlled about 60 percent of the market. In 2011 Microsoft had an impressive arsenal of capital, talent, and relationships in its armory—but for the first time, it was fighting the battle from a disadvantaged position. From SixDegrees.com to Facebook: The Rise of Social Networking Sites. This new opening case for Chapter 5 chronicles the rise of social networking sites, from pioneers viii Preface like SixDegrees.com and Friendster, through the growth of MySpace, and ultimately the dominance of Facebook. The case provides an apt context for considering the role of timing in an innovation’s success. The pioneers and early movers in social network- ing sites did not attain sustainable advantages, despite the strong network externalities that exist in this industry. This case highlights the roles that enabling technologies, legitimacy, and social networks play in the diffusion of an innovation. Dyesol: Partnering to harness the power of the sun. This new opening case for Chapter 8 describes the development of dye-sensitized solar cells, and the choices the company Dyesol has made, and must make, with respect to collaboration. Dye-sensitized solar cells were a new type of low-cost thin-film solar cell that could generate electricity from sun- light in much the same way as plants conduct photosynthesis. They could be engineered into tough, pliable sheets that were used to coat steel and glass, making them an attrac- tive option for incorporating solar technology into building materials. Dyesol, however, was small, and did not have the capital or manufacturing capabilities to bring such end products to market. Dyesol thus partnered with companies like Tata Steel and Pilkington in large-scale joint ventures. Some managers at Dyesol believed the company would be better off just licensing its technology to existing manufacturers. Students are encouraged to consider the advantages and disadvantages of Dyesol’s existing relationships, how such relationships should be governed, and the trade-offs of switching to a licensing strategy. 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 feature companies from Australia, India, Israel, Japan, France, the UK, and the United States, and many examples from other countries are embedded in the chapters themselves. 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 more extensive discussions of topics such as alliance portfolios, alliance governance, and outsourc- ing. Examples in the text also highlight current important innovation phenomena such as crowdsourcing, “freemium” pricing models, “patent cliffs” in pharmaceuticals, three-dimensional printing in manufacturing, viral marketing, and new resources for funding startups such as Kickstarter.com and AngelList. 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. Supplements The teaching package for Strategic Management of Technological Innovation is available online from the book’s Online Learning Center at www.mhhe.com/schilling4e 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 instructor’s needs. A testbank with true/false, multiple choice, and short answer/short essay questions. A suggested list of cases to pair with chapters from the text. 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 Cattanni, Tom Davis, Gary Dushnitsky, Douglas Fulop, Raghu Garud, Tammy Madsen, Rodolfo Martinez, Goncalo Pacheco D’Almeida, Jaspal Singh, Deepak Somaya, Bill Starbuck, and Christopher Tucci for their suggestions, insights, and encouragement. I am grateful to executive brand manager Mike Ablassmeir and marketing manager Elizabeth Trepkowski. I am also thankful to my editors, Laura Grif- fin and Robin C. Bonner, who have been so supportive and made this book possible, and to the many reviewers whose suggestions have dramatically improved the book: Joan Adams Cathy A. Enz Baruch Business School Cornell University (City University of New York) Robert Finklestein Shahzad Ansari University of Maryland–University Erasmus 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 Andrew Hargadon Marshall University University of California, Davis Robert DeFillippi Steven Harper Suffolk University James Madison University Deborah Dougherty Donald E. Hatfield Rutgers University Virginia Polytechnic Institute and State University ix x Acknowledgments Glenn Hoetker Robert Nash University of Illinois Vanderbilt University Sanjay Jain Anthony Paoni University of Wisconsin–Madison Northwestern University Theodore Khoury Johannes M. Pennings Oregon State University University of Pennsylvania Rajiv Kohli Raja Roy College of William and Mary Tulane University Vince Lutheran Oya Tukel University of North Cleveland State University Carolina—Wilmington Anthony Warren Steve Markham The Pennsylvania State University North Carolina State University Steven C. Michael University of Illinois 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 Brief Contents Preface vi 1 Introduction 1 PART ONE Industry Dynamics of Technological Innovation 13 2 Sources of Innovation 15 3 Types and Patterns of Innovation 43 4 Standards Battles and Design Dominance 65 5 Timing of Entry 85 PART TWO Formulating Technological Innovation Strategy 103 6 Defining the Organization’s Strategic Direction 105 7 Choosing Innovation Projects 127 8 Collaboration Strategies 151 9 Protecting Innovation 177 PART THREE Implementing Technological Innovation Strategy 203 10 Organizing for Innovation 205 11 Managing the New Product Development Process 229 12 Managing New Product Development Teams 257 13 Crafting a Deployment Strategy 277 INDEX 303 xi Contents Chapter 1 Research and Development by Firms 24 Introduction 1 Theory in Action: Birth of the Snowboarding Industry 25 The Importance of Technological Innovation 1 Firm Linkages with Customers, Suppliers, The Impact of Technological Innovation Competitors, and Complementors 27 on Society 2 Universities and Government-Funded Innovation by Industry: The Importance Research 29 of Strategy 4 Private Nonprofit Organizations 31 The Innovation Funnel 4 Innovation in Collaborative Networks 31 Research Brief: How Long Does New Product Technology Clusters 33 Development Take? 5 Research Brief: Knowledge Brokers 35 The Strategic Management of Technological Technological Spillovers 36 Innovation 5 Summary of Chapter 36 Summary of Chapter 9 Discussion Questions 37 Discussion Questions 10 Suggested Further Reading 38 Suggested Further Reading 10 Endnotes 38 Endnotes 10 Chapter 3 PART ONE Types and Patterns of Innovation 43 INDUSTRY DYNAMICS OF Tata Nano: The World’s First Rs. 1 Lakh TECHNOLOGICAL INNOVATION 13 Car 43 Overview 45 Chapter 2 Types of Innovation 46 Product Innovation versus Process Sources of Innovation 15 Innovation 46 Getting an Inside Look: Given Imaging’s Radical Innovation versus Incremental Camera Pill 15 Innovation 46 Overview 18 Competence-Enhancing Innovation versus Creativity 19 Competence-Destroying Innovation 47 Individual Creativity 19 Architectural Innovation versus Component Organizational Creativity 20 Innovation 48 Theory in Action: Inspiring Innovation Technology S-Curves 49 at Google 21 S-Curves in Technological Improvement 50 Translating Creativity into Innovation 21 S-Curves in Technology Diffusion 52 The Inventor 22 S-Curves as a Prescriptive Tool 54 Theory in Action: Dean Kamen 23 Limitations of S-Curve Model as a Prescriptive Innovation by Users 23 Tool 55 xii  Contents xiii Technology Cycles 55 First-Mover Disadvantages 91 Research Brief: The Diffusion of Innovation Research and Development Expenses 92 and Adopter Categories 56 Undeveloped Supply and Distribution Theory in Action: “Segment Zero”—A Serious Channels 92 Threat to Microsoft? 58 Immature Enabling Technologies Summary of Chapter 61 and Complements 92 Discussion Questions 62 Theory in Action: Obstacles to the Hydrogen Suggested Further Reading 62 Economy 93 Endnotes 63 Uncertainty of Customer Requirements 93 Factors Influencing Optimal Timing Chapter 4 of Entry 95 Standards Battles and Design Research Brief: Whether and Dominance 65 When to Enter? 97 Strategies to Improve Timing Options 99 Blu-ray versus HD-DVD: A Standards Battle in Summary of Chapter 99 High-Definition Video 65 Discussion Questions 100 Overview 66 Suggested Further Reading 100 Why Dominant Designs Are Selected 67 Endnotes 101 Learning Effects 67 Network Externalities 69 Theory in Action: The Rise of Microsoft 70 PART TWO Government Regulation 71 FORMULATING TECHNOLOGICAL The Result: Winner-Take-All Markets 72 INNOVATION STRATEGY 103 Multiple Dimensions of Value 73 A Technology’s Stand-Alone Value 73 Chapter 6 Network Externality Value 73 Defining the Organization’s Strategic Competing for Design Dominance in Markets with Direction 105 Network Externalities 78 Are Winner-Take-All Markets Good for Genzyme’s Focus on Orphan Drugs 105 Consumers? 80 Overview 109 Summary of Chapter 82 Assessing the Firm’s Current Position 110 Discussion Questions 82 External Analysis 110 Suggested Further Reading 83 Internal Analysis 114 Endnotes 83 Identifying Core Competencies and Capabilities 117 Chapter 5 Core Competencies 118 Timing of Entry 85 The Risk of Core Rigidities 120 Dynamic Capabilities 120 From SixDegrees.com to Facebook: The Rise Research Brief: Identifying the Firm’s of Social Networking Sites 85 Core Competencies 121 Overview 89 Strategic Intent 121 First-Mover Advantages 89 Theory in Action: The Balanced Scorecard 122 Brand Loyalty and Technological Leadership 89 Summary of Chapter 124 Preemption of Scarce Assets 90 Discussion Questions 124 Exploiting Buyer Switching Costs 90 Suggested Further Reading 125 Reaping Increasing Returns Advantages 91 Endnotes 125 xiv Contents Chapter 7 Discussion Questions 171 Choosing Innovation Projects 127 Suggested Further Reading 172 Endnotes 173 Bug Labs and the Long Tail 127 Overview 130 Chapter 9 The Development Budget 130 Protecting Innovation 177 Quantitative Methods for Choosing Projects 131 The Digital Music Distribution Revolution 177 Theory in Action: Financing New Technology Overview 181 Ventures 132 Appropriability 182 Discounted Cash Flow Methods 133 Patents, Trademarks, and Copyrights 182 Real Options 136 Patents 183 Qualitative Methods for Choosing Projects 138 Trademarks and Service Marks 187 Screening Questions 138 Copyright 188 The Aggregate Project Planning Framework 140 Trade Secrets 189 Q-Sort 142 The Effectiveness and Use of Protection Combining Quantitative and Qualitative Mechanisms 190 Information 143 Wholly Proprietary Systems versus Wholly Open Conjoint Analysis 143 Systems 191 Data Envelopment Analysis 143 Theory in Action: IBM and the Attack of the Theory in Action: Courtyard by Marriott 144 Clones 193 Summary of Chapter 146 Advantages of Protection 194 Discussion Questions 147 Advantages of Diffusion 195 Suggested Further Reading 147 Theory in Action: Sun Microsystems Endnotes 148 and Java 197 Summary of Chapter 199 Chapter 8 Discussion Questions 200 Collaboration Strategies 151 Suggested Further Reading 200 Endnotes 201 Dyesol: Partnering to Harness the Power of the Sun 151 Overview 153 PART THREE Reasons for Going Solo 154 IMPLEMENTING TECHNOLOGICAL Advantages of Collaborating 156 INNOVATION STRATEGY 203 Types of Collaborative Arrangements 157 Strategic Alliances 158 Chapter 10 Joint Ventures 160 Organizing for Innovation 205 Licensing 160 Outsourcing 161 Organizing for Innovation at Google 205 Collective Research Organizations 163 Overview 207 Choosing a Mode of Collaboration 163 Size and Structural Dimensions Choosing and Monitoring Partners 166 of the Firm 208 Partner Selection 166 Size: Is Bigger Better? 208 Partner Monitoring and Governance 167 Theory in Action: Xerox and the Icarus Research Brief: Strategic Positions in Paradox 209 Collaborative Networks 168 Structural Dimensions of the Firm 210 Summary of Chapter 170 Mechanistic versus Organic Structures 212  Contents xv Theory in Action: Shifting Structures at 3M 213 Design for Manufacturing 247 Size versus Structure 214 Failure Modes and Effects Analysis 248 The Ambidextrous Organization: The Best of Both Computer-Aided Design/Computer-Aided Worlds? 214 Manufacturing 248 Modularity and “Loosely Coupled” Theory in Action: Computer-Aided Design Organizations 216 of an America’s Cup Yacht 249 Modular Products 216 Tools for Measuring New Product Development Loosely Coupled Organizational Structures 218 Performance 249 Theory in Action: The Loosely Coupled Theory in Action: Postmortems at Microsoft 250 Production of Boeing’s 787 Dreamliner 219 New Product Development Process Metrics 251 Managing Innovation Across Borders 220 Overall Innovation Performance 251 Summary of Chapter 223 Summary of Chapter 251 Discussion Questions 224 Discussion Questions 252 Suggested Further Reading 224 Suggested Further Reading 252 Endnotes 225 Endnotes 253 Chapter 11 Managing the New Product Development Chapter 12 Process 229 Managing New Product Development Teams 257 frog 229 Overview 233 Skullcandy: Developing Extreme Objectives of the New Product Development Headphones 257 Process 233 Overview 262 Maximizing Fit with Customer Requirements 233 Constructing New Product Development Minimizing Development Cycle Time 234 Teams 262 Controlling Development Costs 235 Team Size 262 Sequential versus Partly Parallel Development Team Composition 262 Processes 235 Research Brief: Boundary-Spanning Activities Theory in Action: The Development of in New Product Development Teams 264 Zantac 237 The Structure of New Product Development Project Champions 238 Teams 265 Risks of Championing 238 Functional Teams 266 Research Brief: Five Myths about Product Lightweight Teams 266 Champions 239 Heavyweight Teams 266 Involving Customers and Suppliers in the Autonomous Teams 266 Development Process 240 The Management of New Product Development Involving Customers 240 Teams 268 Involving Suppliers 240 Team Leadership 268 Theory in Action: The Lead User Method of Team Administration 268 Product Concept Development 241 Managing Virtual Teams 269 Crowdsourcing 241 Research Brief: Virtual International R&D Tools for Improving the New Product Teams 270 Development Process 242 Summary of Chapter 272 Stage-Gate Processes 242 Discussion Questions 272 Quality Function Deployment (QFD)—The House Suggested Further Reading 273 of Quality 245 Endnotes 273 xvi Contents Chapter 13 Major Marketing Methods 294 Crafting a Deployment Strategy 277 Theory in Action: Generating Awareness for Domosedan 296 Deployment Tactics in the Global Video Game Tailoring the Marketing Plan to Intended Industry 277 Adopters 297 Overview 284 Using Marketing to Shape Perceptions Launch Timing 285 and Expectations 298 Strategic Launch Timing 285 Research Brief: Creating an Information Optimizing Cash Flow versus Embracing Epidemic 299 Cannibalization 286 Summary of Chapter 300 Licensing and Compatibility 286 Discussion Questions 301 Pricing 288 Suggested Further Reading 302 Distribution 290 Endnotes 302 Selling Direct versus Using Intermediaries 290 Strategies for Accelerating Distribution 292 Marketing 294 Index 303 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.1 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 material for years 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 commercial or markets. Foreign competition has put pressure on firms to continuously innovate practical objectives. in order 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 flexible manufacturing technologies have made shorter produc- tion runs economical and have reduced the importance of production economies of scale.2 These technologies help firms develop and produce more product variants that closely meet the needs of narrowly defined customer groups, thus achieving differentiation from competitors. For example, in 2012, Toyota offered 16 differ- ent passenger vehicle lines under the Toyota brand (e.g., Camry, Prius, Highlander, and Tundra). Within each of the vehicle lines, Toyota also offered several different models (e.g., Camry L, Camry LE, Camry SE) with different features and at dif- ferent price points. In total, Toyota offered 64 car models ranging in price from $14,115 (for the Yaris three-door liftback) to $77,995 (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 luxury vehicles under its Lexus brand. Similarly, Samsung offered over 100 models of cell phones, and Sony produced over 50 models of MP3 portable audio players. Both companies also offered a variety of color choices and accessories that could be pur- chased to further tailor the product to the consumer’s tastes. Samsung and Sony’s 1 2 Chapter 1 Introduction portfolios of product models enable them to penetrate almost every conceivable market niche. While producing multiple product variations used to be expensive and time-consuming, flexible manufacturing technologies now enable firms to seam- lessly 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 common components in many of the models. As firms such as Toyota, Samsung, and Sony adopt these new technologies and increase their pace of innovation, they raise the bar for competitors, triggering an industrywide shift to shortened development cycles and more rapid new product introductions. The net results are greater market segmentation and rapid product obso- lescence.3 Product life cycles (the time between a product’s introduction and its with- drawal 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 hardware and consumer electronics, and 18 to 36 months for large home appliances.4 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 neces- sities 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 technologi- cal innovations 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 gross at gross domestic product (GDP). The gross domestic product of an economy domestic is its total annual output, measured by final purchase price. Figure 1.2 shows the product (GDP) average GDP per capita (that is, GDP divided by the population) for the world, The total annual developed countries, and developing countries from 1969 to 2011. The figures output of an economy as have been converted into U.S. dollars and adjusted for inflation. As shown in measured by its the figure, the average world GDP per capita has risen steadily since 1971. In final purchase a series of studies of economic growth conducted at the National Bureau of price. Economic Research, economists showed that the historic rate of economic growth 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 explana- tion was not immediately accepted; many researchers attempted to explain the residual away in terms of measurement error, inaccurate price deflation, or labor improvement. But in each case the additional variables were unable to  Chapter 1 Introduction 3 FIGURE 1.1 eliminate this residual growth Timeline 1800 - 1800—Electric battery component. A consensus gradu- of Some of - 1804—Steam locomotive - 1807—Internal combustion engine ally emerged that the residual The Most did in fact capture technological - 1809—Telegraph Important - 1817—Bicycle change. Solow received a Nobel Technological 1820 - 1821—Dynamo Prize for his work in 1981, and Innovations In - 1824—Braille writing system The Last 200 the residual became known as the - 1828—Hot blast furnace Years Solow Residual.5 While GDP has - 1831—Electric generator - 1836—Five-shot revolver its shortcomings as a measure of 1840 - 1841—Bunsen battery (voltaic cell) standard of living, it does relate - 1842—Sulfuric ether-based anesthesia very directly to the amount of - 1846—Hydraulic crane goods consumers can purchase. - 1850—Petroleum refining Thus, to the extent that goods - 1856—Aniline dyes improve quality of life, we can 1860 - 1862—Gatling gun ascribe some beneficial impact of - 1867—Typewriter - 1876—Telephone technological innovation. - 1877—Phonograph Sometimes technological inno- - 1878—Incandescent lightbulb vation results in negative extern- 1880 - 1885—Light steel skyscrapers alities. Production technologies externalities - 1886—Internal combustion automobile may create pollution that is harm- Costs (or benefits) - 1887—Pneumatic tire ful to the surrounding commu- that are borne - 1892—Electric stove - 1895—X-ray machine nities; agricultural and fishing (or reaped) by individuals 1900 - 1902—Air conditioner (electric) technologies can result in erosion, other than those - 1903—Wright biplane elimination of natural habitats, and responsible for - 1906—Electric vacuum cleaner depletion of ocean stocks; medical creating them. - 1910—Electric washing machine technologies can result in unantici- Thus, if a - 1914—Rocket pated consequences such as antibi- business emits 1920 - 1921—Insulin (extracted) pollutants in a otic-resistant strains of bacteria or - 1927—Television community, it - 1928—Penicillin moral dilemmas regarding the use imposes a nega- - 1936—First programmable computer of genetic modification. However, tive externality - 1939—Atom fission technology is, in its purest essence, on the community 1940 - 1942—Aqua lung knowledge—knowledge to solve members; if a - 1943—Nuclear reactor business builds a our problems and pursue our - 1947—Transistor park in a commu- goals.6 Technological innovation is - 1957—Satellite nity, it creates a - 1958—Integrated circuit thus the creation of new knowledge positive external- that is applied to practical prob- ity for community 1960 - 1967—Portable handheld calculator - 1969—ARPANET (precursor to Internet) lems. Sometimes this knowledge members. - 1971—Microprocessor is applied to problems hastily, - 1973—Mobile (portable cellular) phone without full consideration of the - 1976—Supercomputer consequences and alternatives, but 1980 - 1981—Space shuttle (reusable) overall it will probably serve us - 1987—Disposable contact lenses - 1989—High-definition television better to have more knowledge - 1990—World Wide Web protocol than less. - 1996—Wireless Internet 2000 - 2003—Map of human genome 4 Chapter 1 Introduction FIGURE 1.2 Gross $45,000 Domestic Product $40,000 per Capita, 1969–2011 (in $35,000 Real 2005 $US Billions) $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 Developed world Developing world World INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY As will be shown in Chapter 2, the majority of effort and money invested in tech- nological 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 develop- ment cycles and high project failure rates as a consequence (see the accompany- ing 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.7 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 one study that combined data from prior studies of innovation success rates with data on patents, venture capital fund- ing, and surveys, it takes about 3,000 raw ideas to produce one significantly new and successful commercial product.8 The pharmaceutical industry demonstrates this  Chapter 1 Introduction 5 Research Brief How Long Does New Product Development Take?a In a large-scale survey administered by the Prod- projects took significantly longer, clocking in at just uct Development and Management Association over 14 months. The development of new-to-the- (PDMA), researchers examined the length of time world products or technologies took the longest, it took firms to develop a new product from initial averaging 24 months. The study also found that concept to market introduction. The study divided on average, firms reported shorter cycle times new product development projects into catego- (ranging from 12 to 40 percent shorter, depend- ries representing their degree of innovativeness: ing on project type) than those reported in the “new-to-the-world” projects, “more innovative” previous PDMA survey conducted in 1995. projects, and “incremental” projects. On average, a Adapted from A. Griffin, “Product Development Cy- incremental projects took only 6.5 months from cle Time for Business-to-Business Products,” Industrial concept to market introduction. More innovative Marketing Management 31, pp. 291–304. well—only one out of every 5,000 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, it takes approximately 15 years from discovery to market launch of a pharmaceutical, with a total cost of approximately $388 million!10 The innova- tion 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). 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 FIGURE 1.3 The Innovation Funnel 3,000 Raw 300 125 Small 4 Major 1 Successful Ideas Submitted Projects 2 Launches Developments New Product (Unwritten) Ideas 6 Chapter 1 Introduction 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 innova- tion 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 radi- cal versus incremental and architectural versus modular) and patterns of innova- tion (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 technology 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 increasing returns, where strong pressures to adopt a single dominant design can result in standards battles and winner-take-all markets. We will address questions such as: Why do some industries choose a single domi- nant standard rather than enabling multiple standards to coexist? What makes one technological innovation 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? 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 advantages 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 suc- cess, and it 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 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 and Design Dominance 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 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 weak- nesses 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 once 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 projects. 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 envel- opment analysis. Each of these methods has its advantages and disadvantages, leading many firms to use a multiple-method approach to choosing innovation projects. In Chapter Eight, we will examine collaboration strategies for innovation. This chapter 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 partners? 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 col- laborative 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 partially open strategy for protecting its innovation? When will open strategies have advantages 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 10 with an examination of how the organization’s size and structure influence its overall rate of innovativeness. The chapter addresses such questions as: Do bigger firms outperform smaller firms at innovation? How do for- malization, 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 reliability? 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  Chapter 1 Introduction 9 of flexibility, economies of scale, standardization, centralization, and tapping local market knowledge. In Chapter 11, we will review a series of “best practices” that have been identified in managing the new product development process. This includes such questions as: Should new product development processes be performed sequentially or in parallel? 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 process? 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 methods that have been developed to improve the management of new product development projects and to measure their performance. Chapter 12 builds on the previous chapter by illuminating how team composition and structure will influence project outcomes. This chapter addresses questions such as: How big should teams be? What are the advantages and disadvantages of choosing highly diverse team members? Do teams need to be collocated? 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 construct- ing new product development teams that are matched to the type of new product development project under way. Finally, in Chapter 13, 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? What strategies can the firm use to encourage distributors and complementary goods providers to support the innovation? This chapter comple- ments traditional marketing, distribution, and pricing courses by looking at how a deployment strategy can be crafted that especially targets the needs of a new tech- nological innovation. Summary 1. Technological innovation is now often the single most important competitive of driver in many industries. Many firms receive more than one-third of their sales and profits from products developed within the past five years. Chapter 2. The increasing importance of innovation has been driven largely by the global- ization 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. 4. Technological innovation may also pose some negative externalities, including pollution, resource depletion, and other unintended consequences of technological change. 10 Chapter 1 Introduction 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 in- novation, a well-crafted innovation strategy, and well-developed processes for implementing the innovation strategy. Discussion 1. Why is innovation so important for firms to compete in many industries? Questions 2. What are some advantages of technological innovation? Disadvantages? 3. Why do you think so many innovation projects fail to generate an economic return? Suggested Classics Further Arrow, K. J., “Economic welfare and the allocation of resources for inventions,” Reading in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. R. Nelson (Princeton, NJ: Princeton University Press, 1962), pp. 609–25. Mansfield, E., “Contributions of R and D to economic growth in the United States,” Science CLXXV (1972), pp. 477–86. Schumpeter, J. A., The Theory of Economic Development (1911; English translation, Cambridge, MA: Harvard University Press, 1936). Stalk, G. and Hout, T. M. Competing Against Time: How Time-Based Competition Is Reshaping Global Markets. (New York: Free Press, 1990). Recent Work Ahlstrom, D., “Innovation and growth: How business contributes to society,” Acad- emy of Management Perspectives, (2010) August, pp. 10–23. Baumol, W. J., The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (Princeton, NJ: Princeton University Press, 2002). Friedman, T. L., The World Is Flat: A Brief History of the Twenty-First Century (New York: Farrar, Straus and Giroux, 2006). Kim, W. C. and Mauborgne, R., “Blue Ocean Strategy. (Boston: Harvard Business School Press, 2005). Wallsten, S. J., “The effects of government-industry R&D programs on private R&D: The case of the Small Business Innovation Research program,” RAND Journal of Economics 31 (2000), pp. 82–100. Endnotes 1. Barczak, G., A. Griffin, and K. B. Kahn, “Trends and Drivers of Success in NPD Practices: Results of the 2003 PDMA Best Practices Study,” Journal of Product Innovation Management 26 (2009), pp. 3–23. 2. J. P. Womack, D. T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990). 3. W. Qualls, R. W. Olshavsky, and R. E. Michaels, “Shortening of the PLC—an Empirical Test,” Journal of Marketing 45 (1981), pp. 76–80.  Chapter 1 Introduction 11 4. M. A. Schilling and C. 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), pp. 25–50. 5. N. Crafts, “The First Industrial Revolution: A Guided Tour for Growth Economists,” The American Economic Review 86, no. 2 (1996), pp. 197–202; R. Solow, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics 39 (1957), pp. 312–20; and N. E. Terleckyj, “What Do R&D Numbers Tell Us about Technological Change?” American Economic Association 70, no. 2 (1980), pp. 55–61. 6. H. A. Simon, “Technology and Environment,” Management Science 19 (1973), pp. 1110–21. 7. S. Brown and K. Eisenhardt, “The Art of Continuous Change: Linking Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 42 (1997), pp. 1–35; K. Clark and T. Fujimoto, Product Development Performance (Boston: Harvard Business School Press, 1991); R. Cooper, “Third Generation New Product Processes,” Journal of Product Innovation Management 11 (1994), pp. 3–14; D. Doughery, “Reimagining the Differentiation and Integration of Work for Sustained Product Innovation,” Organization Science 12 (2001), pp. 612–31; and M. A. Schilling and C. W. L. Hill, “Managing the New Product Development Process: Strategic Imperatives,” Academy of Management Executive 12, no. 3 (1998), pp. 67–81. 8. G. Stevens and J. Burley, “3,000 Raw Ideas Equals 1 Commercial Success!” Research Technology Management 40, no. 3 (1997), pp. 16–27. 9. Standard & Poor’s Industry Surveys, Pharmaceutical Industry, 2008. 10. U.S. General Accounting Office, 2006. New Drug Development. Report to Congressional Requesters, November. This page intentionally left blank  Part One Industry Dynamics of Technological Innovation In this section, we will explore the industry dynamics of technological innova- tion, 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 evolution 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, Formulating 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 and Design Dominance 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 Getting an Inside Look: Given Imaging’s Camera Pilla Gavriel Iddan was an electro-optical engineer at Israel’s Rafael Armament Development Authority, the Israeli authority for development of weapons and military technology. One of Iddan’s projects was to develop the “eye” of a guided missile, which leads the missile to its target. In 1981, Iddan traveled to Boston on sabbatical to work for a company that produced X-ray tubes and ultrasonic probes. While there, he befriended a gastroenterologist (a physician who focuses on digestive diseases) named Eitan Scapa. During long conversations in which each would discuss his respective field, Scapa taught Iddan about the technologies used to view the interior lining of the digestive system. Scapa pointed out that the exist- ing technologies had a number of significant limitations, particularly with respect to viewing the small intestine.b The small intestine is the locale of a number of serious disorders. In the United States alone, approximately 19 million people suf- fer from disorders in the small intestine (including bleeding, Crohn’s disease, celiac disease, chronic diarrhea, irritable bowel syndrome, and small bowel cancer).c Furthermore, the nature of the small intestine makes it a difficult place to diag- nose and treat such disorders. The small intestine (or “small bowel”) is about 5 to 6 meters long in a typical person and is full of twists and turns. X-rays do not enable the physician to view the lining of the intestine, and endoscopes (small cameras attached to long, thin, flexible poles) can reach only the first third of the small intes- tine and can be quite uncomfortable for the patient. The remaining option, surgery, is very invasive and can be impractical if the physician does not know which part of the small intestine is affected. Scapa thus urged Iddan to try to come up with a bet- ter way to view the small intestine, but at that time Iddan had no idea how to do it. Ten years later, Iddan visited the United States again, and his old friend Scapa again inquired whether there was a technological solution that would provide a bet- ter solution for viewing the small intestine. By this time, very small image sensors— charge-coupled devices (CCDs)—had been developed in the quest to build small video cameras. Iddan wondered if perhaps it would be possible to create a very small missile-like device that could travel through the intestine without a lifeline leading to the outside of the body. Like the missiles Iddan developed at Rafael, this device would have a camera “eye.” If the device were designed well, the body’s natural peristaltic action would propel the camera through the length of the intestine. 15 16 Part One Industry Dynamics of Technological Innovation When Iddan returned to Israel he began working on a way to have a very small CCD camera introduced into the digestive system and transmit images wirelessly to a receiver outside of the body. Initially unsure whether images could be transmitted through the body wall, he conducted a very rudimentary experiment with a store-bought chicken: he placed a transmitting antenna inside the chicken and a receiving antenna outside the chicken. The results indicated that it was possible to transmit a clear video image. Encouraged by this, he set about overcoming the battery life problem: the small CCD sensors consumed so much energy that their batteries were often depleted within 10 minutes. Fortunately, advances in semiconductors promised to replace CCD imagers with a new generation of complementary metal oxide semiconductors (CMOS) that would consume a fraction of the power of CCD imagers. Iddan began developing a prototype based on CMOS technology and applied for an initial patent on the device in 1994. In 1995, he presented his product idea to Gavriel Meron, the CEO of Applitec Ltd., a company that made small endoscopic cameras. Meron thought the project was a fascinating idea, and founded Given Imaging (GI for gastrointestinal, V for video, and EN for endoscopy) to develop and market the technology.d Unbeknownst to Iddan or Meron, another team of scientists in the United Kingdom was also working on a method for wireless endoscopy. This team included a physician named C. Paul Swain, a bioengineer named Tim Mills, and a doctoral student named Feng Gong. Swain, Mills, and Gong were exploring applications of commercially available miniature video cameras and processors. They scouted out miniature camera technology at “spy shops” in London that supplied small video cameras and transmitters to private detectives and other users.e By 1994 they were developing crude devices to see if they could trans- mit moving images from within the gut using microwave frequencies. By 1996 they had succeeded in their first live animal trial. They surgically inserted their prototype device into a pig’s stomach, and demonstrated that they could see the pylorus valve of the stomach open and close. Their next hurdle was to develop a device that could be swallowed instead of surgically inserted. In the fall of 1997, Gavriel Meron met Dr. Swain at a conference in Birmingham, England, and they concluded that their progress would be much faster if they joined forces. Swain’s team had superior expertise in anatomy and the imaging needs of diagnosing small intestine disorders, while Iddan’s CMOS-based sensors enabled the production of a smaller device with lower power requirements. The teams thus had complementary knowledge that each knew would be crucial to producing a successful capsule endoscope. In 1999, the team got permission from the ethics committee at the Royal London Hospital to conduct their first human trial. Dr. Swain would be the patient, and Dr. Scapa (whose initial urgings had motivated Iddan to develop the wireless endoscope) would be the surgeon who would oversee the procedure. In October of 1999, in Scapa’s clinic near Tel Aviv, Israel, Dr. Swain swallowed the prototype capsule. The first images were of poor quality because of the team’s inexperience at holding the receiving antenna in an optimal position. The team was not sure how far the capsule had traveled, so they used a radiograph to find the position of the capsule. The radiograph revealed that the device had reached Swain’s colon, and  Chapter 2 Sources of Innovation 17 thus had successfully traversed the entire length of the small intestine. The team was thrilled at this victory, and urged Swain to swallow another capsule, which he did the next morning. Now that the team was more practiced at optimizing the receiving antennas, they achieved much better quality images. Swain remarked that he “enjoyed watching the lovely sea view” of his lower intestine. Though the first capsule had transmitted for only about 2 hours before its battery life was depleted, the second capsule transmitted for more than 6 hours, and the team knew they had obtained quality images of a substantial length of small intestine.f Over the next few months the team conducted several animal and human tri- als, and by April of 2000 they had used the device to find a small intestinal bleed- ing source in three patients with “obscure recurrent gastrointestinal bleeding” (a difficult problem to diagnose and treat). An article on the device was published that year in Nature (a prestigious scientific journal), with a header reading “The discomfort of internal endoscopy may soon be a thing of the past.”g By August of 2001 the device had received FDA clearance, and by October of 2001 Given Imaging had gone public, raising $60 million in its initial public offering. Given Imaging marketed its device as a system that included a workstation, proprietary software, wearable video recording packs, and the swallowable cap- sules (called “PillCams”). After swallowing the $450 PillCam, the patient goes about the day while the PillCam broadcasts images to a video recording pack the patient wears around the waist. When the patient returns the pack to the physi- cian, the physician uploads the images and can both view them directly and utilize Given’s computer software, which employs algorithms that examine the pixels in the images to identify possible locations of bleeding. The PillCam exits the patient naturally. By February of 2006, more than 300,000 patients had utilized the sys- tem worldwide, and many insurers provided coverage for the treatment.h Until 2005, Given enjoyed the benefits of offering a medical technology with tremendous advantages over existing alternatives, and having no competitors. However, in 2005, Japanese optics giant Olympus introduced its own camera pill—the “Endocapsule”—into the European market, and received FDA approval to market the drug in the United States in 2007. In 2008, Philips Research announced that it too had developed a camera pill called the iPill that incorporated a drug delivery system, permitting the pill to release medicine directly to multiple locations within the intestine. Additionally, several teams of scientists around the world were working on developing capsule endoscopes that would incorporate robotic func- tions such as small legs and clamps that would enable the capsule to move, attach to the wall of the intestine, or remove a small amount of tissue for a biopsy.i Given defended its position in the U.S. market by filing for a thicket of patents on the technology, and by trying to rapidly build its installed base of Given workstations in hospitals and clinics. The more Given workstations that were in use, and the more physicians trained in their use, the greater the switching costs would be for a hospital or clinic to adopt a competing technology. It also began work on versions of the camera pill that would target the esophagus and the colon, respectively. By 2011, Given had introduced several generations of PillCam technology, and had grown to $178 million in annual sales. Its products were marketed and sold in over 60 countries, and though it still faced formidable competitors such as Olympus, Given Imaging remained the world leader in capsule endoscopy devices. 18 Part One Industry Dynamics of Technological Innovation Discussion Questions 1. What factors do you think enabled Iddan, an engineer with no medical background, to pioneer the development of wireless endoscopy? 2. To what degree would you characterize Given’s development of the cam- era pill as “science-push” versus “demand-pull”? 3. What were the advantages and disadvantages of Iddan and Meron collabo- rating with Dr. Swain’s team? a This case was developed through a combination of publicly available materials and documents provided by Given Imaging. The author is grateful for the valuable assistance of Sharon Koninsky of Given Imaging. b G. J. Iddan and C. P. Swain, “History and Development of Capsule Endoscopy,” Gastrointestinal Endoscopy Clinics of North America 14 (2004), pp. 1–9. c Given Imaging Prospectus, 2004. d “Given Imaging,” 15th Annual Healthcare Special, Wall Street Transcript–Bear, Stearns & Co., September 2000, pp. 203–06. e Iddan and Swain, “History and Development of Capsule Endoscopy.” f Iddan and Swain, “History and Development of Capsule Endoscopy.” g G. Iddan, G. Meron, A. Glukhovsky, and P. Swain, “Wireless Capsule Endoscopy,” Nature 405 (2000), p. 417. h A. Romano, “A ‘Fantastic Voyage,’” Newsweek, February 2006; Given Imaging Personal Communication, April 2006. i Z. Merali, “Pill-sized Camera Gets to Grips with Your Gut,” NewScientist.com (2005); B. Spice, “Robot combined with swallowable camera could give docs a better look inside the small intestine,” Pittsburgh Post-Gazette, May 30, 2005. OVERVIEW innovation Innovation can arise from many different sources. It can originate with individuals, The practical as in the familiar image of the lone inventor or users who design solutions for their implementation own needs. Innovation can also come from the research efforts of universities, gov- of an idea into a new device or ernment laboratories and incubators, or private nonprofit organizations. One primary process. engine of innovation is firms. Firms are well suited to innovation activities because they typically have greater resources than individuals and a management system to marshal those resources toward a collective purpose. Firms also face strong incentives to develop differentiating new products and services, which may give them an advan- tage over nonprofit or government-funded entities. An even more important source of innovation, however, does not arise from any one of these sources, but rather the linkages between them. Networks of innovators that leverage knowledge and other resources from multiple sources are one of the most powerful agents of technological advance.1 We can thus think of sources of innova- tion as composing a complex system wherein any particular innovation may emerge primarily from one or more components of the system or the linkages between them (see Figure 2.1).  Chapter 2 Sources of Innovation 19 FIGURE 2.1 Sources of Innovation as Firms a System Individuals Universities Private Government- Nonprofits Funded Research In the sections that follow, we will first consider the role of creativity as the under- lying process for the generation of novel and useful ideas. We will then consider how creativity is transformed into innovative outcomes by the separate components of the innovation system (individuals, firms, etc.), and through the linkages between differ- ent components (firms’ relationships with their customers, technology transfer from universities to firms, etc.). CREATIVITY idea Innovation begins with the generation of new ideas. The ability to generate new and Something useful ideas is termed creativity. Creativity is defined as the ability to produce work imagined or that is useful and novel. Novel work must be different from work that has been previ- pictured in the mind. ously produced and surprising in that it is not simply the next logical step in a series of known solutions.2 The degree to which a product is novel is a function both of how creativity different it is from prior work (e.g., a minor deviation versus a major leap) and of the The ability to audience’s prior experiences.3 A product could be novel to the person who made it, produce novel but known to most everyone else. In this case, we would call it reinvention. A product and useful work. could be novel to its immediate audience, yet be well known somewhere else in the world. The most creative works are novel at the individual producer level, the local audience level, and the broader societal level.4 Individual Creativity An individual’s creative ability is a function of his or her intellectual abilities, knowl- edge, style of thinking, personality, motivation, and environment.5 The most impor- tant intellectual abilities for creative thinking include the ability to look at problems in unconventional ways, the ability to analyze which ideas are worth pursuing and which are not, and the ability to articulate those ideas to others and convince others that the ideas 20 Part One Industry Dynamics of Technological Innovation are worthwhile. The impact of knowledge on creativity is somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a field too well, that person can become trapped in the existing logic and paradigms, preventing him or her from coming up with solutions that require an alternative perspective. Thus, an individual with only a moderate degree of knowledge of a field might be able to produce more creative solutions than an individual with extensive knowledge of the field.6 This may explain in part why a military scientist such as Gavriel Iddan came up with a sig- nificant medical innovation (as described in the opening case), despite having no formal medical training. With respect to thinking styles, the most creative individuals prefer to think in novel ways of their own choosing, and can discriminate between important prob- lems and unimportant ones. The personality traits deemed most important for creativity include self-efficacy (a person’s confidence in his or her own capabilities), tolerance for ambiguity, and a willingness to overcome obstacles and take reasonable risks.7 Intrinsic motivation has also been shown to be very important for creativity.8 That is, individuals are more likely to be creative if they work on things they are genuinely interested in and enjoy. Finally, to fully unleash an individual’s creative potential often requires an envi- ronment that provides support and rewards for creative ideas. Organizational Creativity The creativity of the organization is a function of creativity of the individuals within the organization and a variety of social processes and contextual factors that shape the way those individuals interact and behave.9 An organization’s overall creativity level is thus not a simple aggregate of the creativity of the individuals it employs. The organiza- tion’s structure, routines, and incentives could thwart individual creativity or amplify it. The most familiar method of a company tapping the creativity of its individual employees is the suggestion box. In 1895, John Patterson, founder of Nationa