BSM Quiz 2

Competence-Enhancing and Competence-Destroying Technological Change

"Competence destroying"—they render obsolete the resources and capabilities of established firms "Competence enhancing"—they preserve, even strengthen, the resources and capabilities of incumbent firms To determine the impact of a new technology on the competitive position of incumbent firms, it is necessary to look in detail at the implications of new technology for the individual resources and capabilities possessed by the established firms

appropriation of value: who gets benefits from innovation?

** chart in notes regime of appropriability: used to describe the conditions that influence the distribution of returns to innovation strong regime of appropriability — the innovator is able to capture a substantial share of the value created a weak regime of appropriability — other parties derive most of the value

strategies for limiting risk

1. Co-operating with lead users: Lead users provide a source of leading market indicators, can assist in developing new prod- ucts and processes, and can offer an early cash flow to fund development expenditures I.e, Nike has two sets of lead users: professional athletes who are trendsetters for athletic footwear and hip-hop artists who are at the leading edge of urban fashion trends 2. Limiting risk exposure: By avoiding debt and keeping fixed costs low, a firm can reduce the level by which it is financially and operationally leveraged Outsourcing and strategic alliance can also hold down capital investment and fixed cost 3. Flexibility: Achieving such flexibility means keeping options open and delaying commitment to a specific technology until its potential becomes clear Large, well-resourced companies have the luxury of pursuing multiple strategic option

Two Fundamental factors that drive industry evolution

1. Demand growth The characteristic profile is an S-shaped growth curve. Introduction stage: ales are small and the rate of market penetration is low because the industry's products or services are little known and customers are few Growth stage: characterized by accelerating market penetration as technical improvements and increased efficiency open up the mass market Maturity stage: caused by Increasing market saturation Once saturation is reached, demand is wholly for replacement Decline stage: the industry becomes challenged by new industries that produce technologically superior substitute products or services 2. The production and diffusion of knoweldge New knowledge in the form of product or service innovation is responsible for an industry's birth Introduction stage: product or service technology advances rapidly No dominant technology and rival technologies compete for attention Competition is primarily between alternative technologies and design configurations Potential consumers often know little about the product or service Sales are primarily focused on enthusiasts and pioneers Over the course of the life cycle: customers become increasingly informed about the product or service and the market expands customers become more knowledgeable about the performance attributes of the product or service, so they are better able to judge value for money and become more price sensitive Intro —> Growth: Reflected typically in the emergence of dominant designs and technical standards and in a change of focus away from product or service innovation toward process innovation

the innovation process

1. Invention: the creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge 2. Innovation: the initial commercialization of invention by producing and marketing a new good or service or by using a new method of production 3. Once introduced, innovation diffuses: on the demand side, through customers purchasing the good or service on the supply side, through imitation by competitors

sources of uncertainty

1. Technological uncertainty: Arises from the unpredictability of technological evolution and the complex dynamics through which technical standards and dominant designs are selected 2. Market uncertainty: Relates to the size and growth rates of the markets for new products Forecasting demand for new products is hazardous since all forecasting is based on some form of extrapolation or modelling based on past data Two approaches to forecasting: (1) use analogies; (2) draw on the combined insight and experience of a panel of experts

two considerations with tacitness of tech

1. is the knowledge codifiable? Codifiable knowledge: is that which can be written down — Therefore, if it is not effectively protected by patents or copyright, diffusion is likely to be rapid and the competitive advantage not sustainable i.e Coca-Cola's recipe is codifiable and, in the absence of trade secret protection, is easily copied tacit knowledge: Knowledge is tacit when it is difficult to convey to others and therefore hinders the ability of competitors to replicate a product or process developed principally using this kind of knowledge 2. complexity is it an easy to copy ideas — i.e Fashion

Architectural and Component Innovation

A key factor determining the success of established firms in adapting to technological change is whether the technological innovation occurs at the component or the architec- tural level An architectural innovation requires a major reconfiguration of a company's strategy and organizational structure I.e., the battery-powered electric motor - it requires redesign of the entire car and involves carmakers in creating systems for recharging

2nd tool: Establishing Stretch Targets

Another approach to weakening the powers of organizational inertia is to continually pressure the organizations by means of ambitious performance targets The idea is that performance targets that are achievable, but only with an extension of employee effort, can motivate creativity and initiative while attacking complacency Stretch targets are normally associated with short- and medium-term performance goals for individuals and organizational units

Coping with Technological Change

Any change in the external environment of an industry offers opportunities for newcomers to challenge incumbents → not just during the introductory phase

The Development of Technology

Basic Knowledge Invention Innovation Diffusion Supply side —> Imitation Demand Side —> Adoption

3rd tool: Reorganization and New Blood

By reorganizing the company structure, top management can create an opportunity for redistributing power, shuffling top management, and introducing new blood Periodic changes in organizational structure can stimulate decentralized search and local initiatives while encouraging more effective exploitation of the outcomes of such search Organizational change is also stimulated by recruiting new managers from outside the organization

Implications of the Life Cycle for Competition and Strategy- decline

Can be a result of technological substitution, changes in consumer preferences, demographic shifts, or foreign competition Shrinking market demand gives rise to acute strategic issues Key Features of declining industries Excess capacity Lack of technical change (reflected in a lack of new product or service introduction and stability of process technology); A declining number of competitors, but some entry as new firms acquire the assets of existing firms cheaply; High average age of both physical and human resources Aggressive price competition Research has uncovered declining industries where at least some participants earned surprisingly high profits (i.e vacuums); but, sometimes decline was accompanied by aggressive price competition, company failures, and instability What determines whether or not a declining industry becomes a competitive blood- bath? Two factors are critical: the balance between capacity and output and the nature of the demand for the product or service Achieving a balance between capacity and output is easier when the decline can be predicted and firms can plan (i.e decline in film cameras was expected) In industries where capacity exits in an orderly fashion, decline can occur without trauma

1st tool: Creating Perceptions of Crisis

Change initiatives frequently fail because they become overwhelmed by the forces of inertia The problem is that by the time the organization is engulfed in crisis, it already too late, hence the merits of the CEO creating the perception of impending crisis within the company so that necessary changes can be implemented well before the real crisis emerges

Implications of the Life Cycle for Competition and Strategy- maturity

Competitive advantage is increasingly a quest for efficiency, particularly in industries that tend toward commoditization. Key success factors: Cost efficiency through scale economies, low wages, and low overheads In this stage: the number of firms begins to fall as product or service standardization and excess capacity stimulate price competition Industries go through one or more "shakeout" phases during which the rate of firm failure increases sharply The intensity of the shakeout depends a great deal on the capacity/demand balance and the extent of international competition Once a shakeout has occurred, rates of entry and exit decline and the survival rate for incumbents increases substantially With maturity, the commoditization and de-skilling of production or service processes, and companies eventually shift their operations to developing countries where labour costs are lowest

Why is Change so Difficult? The Sources of Organizational Inertia

Different theories of organizational and industrial change emphasize different barriers to change: Organizational routines: - The more highly developed an organization's routines, the more difficult it is to develop new ones - Therefore, organizations get caught in competency traps where "core capabilities become core rigidities." Social and political structures: - As social systems, organizations develop patterns of interaction that make organizational change stressful and disruptive - As political systems, organizations develop stable distributions of power; change represents a threat to the power of those in positions of authority Conformity: - The process of institutional isomorphism locks organizations into common structures and strategies that make it difficult for them to adapt to change - Isomorphism also results from voluntary imitation; risk aversion encourages companies to adopt similar strategies and structures to their peers Limited search: Limited search is reinforced by: - Bounded rationality—human beings have limited information-processing capacity, which constrains the set of choices they can consider - Satisficng—the propensity for individuals (and organizations) to terminate the search for better solutions when they reach a satisfactory level of performance rather than to pursue optimal performance Complementarities between strategy, structure, and systems: - Organizations struggle to establish complex, idiosyncratic combinations of multiple characteristics during their early phase of development in order to match the conditions of their business environment - However, once established, this complex configuration becomes a barrier to change - The implication is that organizations tend to evolve through a process of punctuated equilibrium, involving long periods of stability during which the widening misalignment between the organization and its environment ultimately forces radical and comprehensive change on the company

Dominant design

Dominant design: product or service architecture that defines the look, functionality, and production method for the product or service and becomes accepted by the industry as a whole The overall configuration of a product, service, or system A dominant design may or may not embody a technical standard Dominant design does not normally own intellectual property in that design — not necessarily any profit advantage Also exist in services and processes I.e lat glass industry, there has been a succession of dominant process designs from glass cylinder blowing to continuous ribbon drawing to float glass

Dual Strategies and Organizational Ambidexterity

Dual strategies require dual planning systems: Short-term planning that focuses on stra- tegic fit and performance over a one- or two-year period Longer term planning to develop vision, reshape the corporate portfolio, redefine and reposition individual busi- nesses, develop new capabilities, and redesign organizational structures over periods of five years or more

Key Success Factors and Strategy

During the introductory stage, product or service innovation is the basis for initial entry and for subsequent success —> then other requirements for success emerge - In moving from the first generation of products or services to subsequent generations, investment requirements grow and financial resources become increasingly important - Capabilities in product and service development also need to be supported by capabilities in manufacturing, marketing, service, and distribution. Capabilities in product and service development also need to be supported by capabilities in manufacturing, marketing, service, and distribution - As the market expands, the firm needs to adapt its product or service design and its manufacturing or service capability to large-scale production - To utilize increased manufacturing or service capability, access to distribution becomes critical. With the maturity stage, competitive advantage is increasingly a quest for efficiency - Cost efficiency through scale economies, low wages, and low overheads become the key success factors. The transition to decline intensifies pressures for cost cutting Requires maintaining stability by encouraging the orderly exit of industry capacity and capturing residual market demand Product life cycles are becoming shorter Systematic disengagement from product or service markets that are entering their decline phase = increasing strategic importance It has been argued that businesses tend to focus on the introduction and growth phases of product or service life cycles; not disengagement processes —> To exit an industry gracefully, the organization needs people who are good at detecting early signs of decline and who are willing and able to make the often difficult decision to stop doing something

Dynamic Capabilities

Dynamic capabilities - firm's ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments Most researchers consider dynamic capabilities to be any capabilities that allow an organization to reconfigure its resources in order to adapt and change Others refer to it as a higher level process through which the firm modifies its operating routines - If dynamic capabilities are simply those that allow change to occur, they would include product development capability, acquisition capability, research capability, and HR recruitment capabilities - But if dynamic capability is restricted to higher-level capabilities that manage change in lower-level capabilities, this would refer to capabilities that are more strategic and embedded in top management practices

factors to determine if you can appropriate

Four factors are critical in determining the extent to which innovators are able to appropriate the value of their innovation: property rights the tacitness and complexity of the technology lead time complementary resources`

Other industries may experience a rejuvenation of their life cycle

I.e In the 1960s, the world motorcycle industry, in decline in the United States and Europe, re-entered its growth phase as Japanese manufacturers pioneered the recreational use of motorcycles The result of companies resisting the forces of maturity through break- through product innovations or developing new markets

lead time

Innovation creates a temporary competitive advantage that offers a window of opportunity for the innovator to build on the initial advantage lead time: the time it will take followers to catch up The challenge for the innovator is to use initial lead-time advantages to build the capabilities and market position to entrench industry leadership The challenge for the innovator is to use initial lead-time advantages to build the capabilities and market position to entrench industry leadership

active waiting

It has been argued that a successful follower strategy requires "active waiting": a company needs to monitor market developments and assemble resources and capabilities while it prepares for large-scale market entry

Scenario analysis is used to explore

Likely paths of industry evolution Examine developments in particular country markets Think about the impact of new technologies Analyze prospects for specific investment projects

Tools of Strategic Change Management

Most large companies exhibit periodic restructuring involving simultaneous changes in strategy, structure, management systems, and top management personnel Such restructuring typically follows declining performance caused either by a major external shock, or by a growing misalignment between the firm and its external environment

Disruptive Technologies

New technology can be incremental—it augments existing performance attributes—or disruptive—it incorporates different performance attributes than the existing technology Example: In the disk drive industry, some technological innovations—such as thin-film heads and more finely dispersed ferrous oxide disk coatings—have enhanced the dominant performance criterion: recording density

Managing Strategic Change

Organizational development comprises a set of methodologies through which an internal or external consultant acts as a catalyst for systemic change within a team or organizational unit

Competitive Advantage In Technology-Intensive Industry

Principal link between technology and competitive advantage = innovation It is the quest for competitive advantage that causes firms to invest in innovation it is innovation that is responsible for new industries coming into being it is innovation that is the main reason why some firms are able to dominate their industries

Industry Life Cycle

Product life cycle - Born, growth, maturity, decline, death Industry life cycle: supply-side equivalent of the product life cycle - Longer duration than single product or service

Scenario analysis

Scenario analysis is a systematic way of thinking about how the future might unfold that builds on what we know about cur- rent trends and signals Scenario analysis is not a forecasting technique, but a process for thinking and communicating about the future Quantitative scenario analysis models events and runs simulations to identify likely outcomes Qualitative scenarios typically take the form of narratives and can be particularly useful in engaging the insight and imagination of decision makers.

Technological standard

Technological Standard: a technology or specification that is important for compatibility Technical standards emerge where there are network effects Network effects: the need for users to connect in some way with one another Cause each customer to choose the same technology as everyone else to avoid being stranded

Timing Innovation: To Lead or to Follow?

The advantage of being an early mover depends on the following factors: 1. The extent to which innovation can be protected by property rights or lead-time advantages If an innovation is appropriate through a patent, copyright, or lead- time advantage, there is an advantage in being an early mover This is especially the case where patent protection is important, as in pharmaceuticals I.e., Alexander Graham Bell and Elisha Gray to patent the telephone 2. The importance of complementary resources The more important complementary resources are in exploiting an innovation, the greater the costs and risks of pioneering I.e., Nissan with a pure electric car The problem for the pioneer is that the development costs are huge 3. The potential to establish standard The greater importance of technical standards, the greater the advantages of being an early mover in order to influence those standards and gain the market momentum needed to establish leadership

factors that influence choice of strategy (1)

The characteristics of the innovation: Licensing is only viable where ownership in an innovation is clearly defined by patent or copyrights - I.e., Pharmaceutical companies have clear and defensible patents to licensing is a good way to go Steve Jobs and Steve Wozniak, developers of the Apple I and Apple II computers, had little option other than to go into business themselves: the absence of proprietary technology ruled out licensing Advantages of licensing: - It relieves the company of the need to develop the full range of complementary resources and capabilities needed for commercialization - It can allow the innovation to be commercialized quickly Problem: the innovation's success in the market totally depends on the commitment and effectiveness of the licensees

factors that influence choice of strategy (2)

The choice of how to exploit an innovation depends critically upon the resources and capabilities that the innovator brings to the party Start-ups: Don't have many resources to commercialize innovations Will turn to licensing or to accessing the resources of larger grims through outsourcing, alliances, or joint ventures Established corporations: Can draw on their wealth of resources and capabilities → better placed for internal commercialization As technologies evolve, converge, and splinter, even these companies have increasingly resorted to joint ventures, strategic alliances, and outsourcing arrangements to access technical capabilities outside their corporate boundaries Innovation increasingly requires coordinated responses by multiple companies I.e., the failed introduction of HDTV can be attributed to inade- quate coordination among TV manufacturers, production studios, and broadcasters

To what extent do industries conform to this life-cycle pattern?

The duration of the life cycle varies greatly from industry to industry The tendency over time has been for life cycles to become compressed I.e Commerce "Competing on Internet time" requires a radical rethink of strategies and management processes An industry is likely to be at different stages of its life cycle in different countries Car companies are markets in China, India, and Russia are in their growth phases

effectiveness of IP

The effectiveness of intellectual property law depends on the type of innovation being protected i.e For new chemical products (e.g., a drug or plastic), patents can pro- vide effective protection For products that involve new configurations of existing components or new manufacturing processes, patents may fail to prevent rivals from innovating around them

keys to managing risks

The keys to managing risk are alertness and responsiveness to emerging trends together with limiting vulnerability to mistakes through avoiding large-scale commitments

Implications of the Life Cycle for Competition and Strategy- introduction

The number of firms in an industry increases rapidly during the early stages of an industry's life cycle May originally be pioneered by a few firms As the industry gains legitimacy, failure rates decline and the rate of new-firm formation increases New entrants often have very different origins — startups vs. mature business diversifying from related industries Intro phase typically features a wide variety of product or service types that reflect the diversity of technologies and designs and the lack of consensus over customer requirements Success comes from winning the battle for technological leadership. During this phase gross margins can be high, but heavy investments in innovation and market development tend to depress return on capital. New industries often begin in advanced industrial countries because of the pres- ence of affluent consumers and the availability of technical and scientific resource + firms have built stable demand positions in their home markets before starting to internationalize Born global companies: firms that, from their inception, derive significant competitive advantage from the use of resources and the sale of output in multiple countries The internet — some start-ups that are "born global Companies operating in the virtual domain may be able to develop international operations quickly and cheaply

IP industry

The scope of the patent law has been extended to include life forms created by biotechnology, computer software, and business methods Business method patents have generated considerable controversy i.e Amazon's patent of "one-click-to-buy" Internet purchasing Disadvantage: They Make information public companies may prefer secrecy to patenting as a means of protecting innovations Recently, companies have devoted increased attention to protecting and exploiting the economic value of their intellectual property I.e Texas Instruments (TI) began exploiting its patent portfolio as a revenue source during the 1980s, the technology sector as a whole woke up to the value of its knowledge assets — TI's royalty income exceeded its operating income from other sources —> upsurge in patenting

From Product to Process Innovation

There is a shift from radical to incremental product innovation once the industry coalesces: Typically ushers in the industry growth phase because greater standardization reduces risks to customers that they will be left with "wrong technology" —> encourages firms to invest in manufacturing or standardized service offerings The shift in emphasis from design to manufacture also tends to involve increased attention being paid to process innovation as firms seek to reduce costs and increase service or product reliability through large- scale service or production methods The combination of process improvements, design modifications, and scale economies results in falling costs and greater availability —> rapidly increasing market penetration

The Profitability of Innovation

There is no consistent evidence that either R&D intensity or frequency of new product introductions are positively associated with profitability The profitability of an innovation to the innovator depends on the value created by the innovation and the share of that value that the innovator is able to appropriate.

complimentary resources

complementary resources: diverse resources and capabilities needed to finance, produce, and market the innovation When an innovation and the complementary resources that support it are supplied by different firms, the division of value between them depends on their relative power Where complementary resources are generic, the innovator is in a much stronger position to capture value i.e e Adobe Systems' Acrobat portable document format (PDF) works with files created in almost any software application —> well positioned to capture most of the value created by its innovative software product Advantage of co-specialized complementary resources: greater barriers to imitation

Implications of the Life Cycle for Competition and Strategy- growth

dominant design usually emerges as demand grows both in the domestic market and other countries Challenge = scaling up As the market expands, the firm needs to adapt its product or service design and its manufacturing or service capability to large-scale service or production In order to fully utilize capacity, access to distribution becomes critical Financial resources also become important as investment requirements grow Organizational growth creates the need for internal administrative and strategic skill Overseas demand may be serviced initially by exports or e-commerce, but for physical products the drive to reduce cost and associated changes in production processes reduce the need for sophisticated labour skills and makes production attractive in newly industrialized countries Production and assembly may shift away from the advanced countries and these countries may start to import

Property Rights In Innovation

first property rights (IP laws) + establishment of the basis of patent law.— 1623 Statute of Monopolies Since then, the law has been extended to several areas of IP 1. patents exclusive rights to a new and useful product, process, substance, or design Obtaining a patent requires that the invention is novel, useful, and not excessively obvious 2. copyrights exclusive production, publication, or sales rights to the creators of artistic, literary, dramatic, or musical works. 3. trademarks words, symbols, or other marks used to distinguish the goods or services supplied by a firm 4. trade secrets offer a modest degree of legal protection for recipes, formulae, industrial processes, customer lists, and other knowledge acquired in the course of business

Four phases of industry life cycle

introduction growth maturity decline

Strategic Window

periods in time when their resources and capabilities are aligned with the opportunities available in the market A small, technology-based firm may have no choice but to pioneer innovation: its oppor- tunity is to grab first-mover advantage and then develop the necessary complementary resources before more powerful rivals appear For the large, established firm with finan- cial resources and strong production, marketing, and distribution capabilities, the strategic window is likely to be both longer and later → riskier for large firms because they have a reputation to protect

Alternative Strategies to Exploit Innovation

strategies: 1. licensing 2. outsourcing certain functions 3. strategic alliance 4. joint venture 5. internal commercialization

Tacitness And Complexity Of The Technology

the extent to which an innovation can be imitated by a competitor depends on the ease with which the technology can be comprehended and replicated This depends, first, on the extent to which the technical knowledge is codifiable