Final Exam

What are the advantages of large firms?

Large firms could be more effective innovators due to their large size -They are able to obtain financing, spread costs of R&D over large volume, and take on large scale or risky projects -Likely to have better-developed complementary activities -Have greater economies of scale and learning effects -Have global reach to obtain information

An ambidextrous organization may align two types of business through all of following practices EXCEPT

stressing the importance of a company-wide organic structure and culture

Licensing In

*High speed *Average/medium costs *Low control *Sometimes has potential for leveraging existing competencies *Sometimes has potential for developing new competencies *Sometimes has potential for accessing other firms' competencies

Licensing Out

*High speed *Low costs *Average/medium control *Has potential for leveraging existing competencies *Does not have potential for developing new competencies *Sometimes has potential for accessing other firms' competencies

Solo Internal Development have

*Low speed *High costs *High control *Has potential for leveraging existing competencies *Has potential for developing new competencies *Does not have potential for accessing other firms' competencies

Joint Ventures

*Low speed *Shared costs *Shared control *Has potential for leveraging existing competencies *Has potential for developing new competencies *Has potential for accessing other firms' competencies

Collective Research Organizations

*Low speed *Varies costs *Varies control *Has potential for leveraging existing competencies *Has potential for developing new competencies *Has potential for accessing other firms' competencies

Outsourcing

*Medium/high speed *Average/medium costs *Average/medium control *Sometimes has potential for leveraging existing competencies *Does not have potential for developing new competencies *Has potential for accessing other firms' competencies

Strategic Alliances have

*Varies speed *Varies costs *Low control *Has potential for leveraging existing competencies *Has potential for developing new competencies *Sometimes has potential for accessing other firms' competencies

How to manage international R&D activities?

-Center-for-global -Locally leveraged -Globally linked -Local-for-local

Where do Innovative ideas come from?

Innovative ideas come from within teams, between teams and businesses within a company (idea market), and between companies or entities (crowdsourcing). -Innovation can result from creating, obtaining, and applying new knowledge

Which of the following is a disadvantage of using internal rate of return for assessing a project?

It discriminates heavily against long-term and risky projects.

Dynamix Developers Co. wants to develop its technology very fast, with low cost and low control. It would also like to leverage its existing competencies without developing new competencies, and may need to access the competencies of other firms. Which of the following is the best mode of development for Dynamix Developers to meet these criteria?

License Out

A decentralized organization has the following strengths EXCEPT:

Making bold changes

What are the limitations of Real Options?

Many innovation projects do not conform to the same capital market assumptions underlying option models. -May not be able to acquire an option at small price -Value of R&D investment is not independent, but shaped by the firm's capabilities, complementary assets, and strategies. *requires full investment before it is known whether the technology will be successful.

Pros at the stages of idea generation and implementation:

More ideas, perspectives, views; Expertise, and resources

Incumbent inertia

More strategic commitment to current technologies, suppliers, customers; you can not change.

Using screening questions to select a technology, you might assess the following areas EXCEPT:

Net present value

Types of Collaborative Arrangements: Collective Research Organizations

Organizations formed to facilitate collaboration among a group of firms.

Define the total R&D budget

Strategy should inform you about the overall investment in R&D. -Capital rationing: a company sets a fixed R&D budget and ranks the order of projects to support. -R&D budget is often a percentage of previous year's sales. -Percentage is typically determined through company strategy, historical benchmarking, and industry benchmarking.

Icarus Paradox

Success can engender overconfidence, carelessness, and unquestioning adherence to one's way of doing things. You do not want to change.

With respect to research and development, which of the following can be considered the exercise price?

The cost of future investment required to capitalize on the R&D program

Standardization

The degree to which activities are performed in a uniform manner. *Facilitates smooth and reliable outcomes *But can stifle innovation

Centralization

The degree to which decision-making authority is kept at top levels of the firm. *Ensures projects match firm-wide objectives, and may be better at making bold changes in overall direction. *But might not tap diverse skills and resources; not closely fit the needs of divisions or markets.

Decentralization

The degree to which decision-making authority is pushed down to lower levels of the firm be flexible and adaptive *Closely meet the need of a particular division and its customers; use local knowledge; motivate employees *But be redundant; lack economies of scale; loss control

Resource fit:

The degree to which potential partners have resources that can be effectively integrated into a strategy that creates value

Formalization

The degree to which the firm utilizes rules and procedures to structure the behavior of employees. *Can substitute for managerial oversight *But can make firm rigid

Internal Rate of Return (IRR)

The discount rate that makes the net present value of investment zero.

Commit to specific projects

- Compare project proposals within categories- not across *Platform ideas compete with other platforms *Derivative projects compete with other derivatives - Use different method and criteria across categories *Derivative: NPV or IRR *Platform: impact on future options in the market *Breakthrough: longer term capabilities/options - Senior management's job is to actively manage the process *Shape the menu of choices, not just passively selecting what is presented

What are advantages and disadvantages of small firms?

- Small firms are often considered more flexible and entrepreneurial *Unencumbered by multiple layers of administration *Simpler to monitor employees and reward them *More carefully choose projects *Small firms may lack recourses needed.

A company lacks a well-crafted innovation strategy and innovation process:

- The R&D allocation process doesn't face development capacity constraints. - Project selection is ad hoc, often reactive and political and does not explicitly link to strategy - Senior management only selects a couple projects among proposed ones - Focus on derivative projects at the expense of longer-term capability building projects.

Aggregate project plan and project portfolio

-Create discipline in the project selection & creation process -Help define the scope of what any individual project must achieve in terms of business objectives -Focus attention on long term expansion of critical technical and organizational capabilities

Create an aggregate project plan

-Given your total R&D budget, you can estimate the maximum number of projects with each category you can undertake -Need to have a handle on resources requirements for each type of project separately.

What are the disadvantages of large firms?

-Loss of managerial control -Lack of incentive structure -Incumbent inertia -Icarus Paradox

How to achieve the advantages of both large and small firms?

-Many big firms have found ways of "feeling small" *Break overall firm into several subunits *Can utilize different culture and controls in different units -Firm size vs. Structure *Large firms typically make greater use of formalization and standardization because of the challenges of oversight.

What are the weaknesses of DCF?

-Only as accurate as original estimates of cash flows *May be extremely difficult to anticipate the return *Heavily discriminate against long-term or risky projects -May fail to capture strategic importance of projects

Why do companies create a platform?

-Platform projects lay the groundwork for the future derivatives -Way to leverage resources Derivative projects are less costly -Fast/responsive development Derivative projects takes less time -Platforms are only platforms if they are designed to be leveraged.

What are the strengths of DCF?

-Provide concrete financial estimates; unambiguous -Explicitly consider timing of investment and returns, time value of money, and risk

Methods of choosing innovation projects

-Quantitative methods *Discounted cash flow methods *Real options -Qualitative methods *Screening questions *Q-sort *The aggregate project planning framework -Combining quantitative and qualitative methods *Conjoint analysis *Data Envelopment analysis

Screening Questions may be used to assess different dimensions of a project decision including:

-Role of customer (market, use, compatibility, ease of use, distribution, and pricing) -Role of capabilities (existing capabilities, future capabilities, competitors' capabilities,) -Project timing and cost (first mover advantages and disadvantages)

What are the steps in strategy development?

1. Clarify strategic goals & objectives 2. Define the total R&D budget 3. Classification of project types 4. Create an Aggregate project plan 5. Commit to specific projects

How to develop breakthrough innovation?

1. Forget: forgot the success formula of the existing business by building an autonomous team or spin-off organization 2. Borrow: Integrate with existing business thought top management OR integrate with firms through strategic alliances 3. Learn: Iterate or take a probe and learn approach

Advantages collaboration

1. Why does a firm want to collaborate? *Obtain needed skills or resources more quickly (fast cycle time) *Reduce asset commitment and increase flexibility *Learn from partners and acquire new knowledge *Build cooperation around a common standard *Share costs and risks

Advantages and disadvantages of going solo

1. Why does a firm want to going solo? *Protecting proprietary technologies *Controlling technology development and use *Building and renewing capabilities *Entry timing: Is fast cycle time important 2. Can a firm go solo? *Is the capabilities available? *Is there a potential partner available?

Types of Collaborative Arrangements: Joint Ventures

A particular type of strategic alliance that entails significant equity investment and often establishes a new separate legal entity

True or False? A firm's organizational structure and control systems have no influence on the generation of innovative ideas.

False

True or False? According to the net present value method of discounted cash flow analysis, the time required to break even on a project using discounted cash flows is known as the period of return.

False

True or False? Born sharing economy refers to a situation in which customers rent their idle resources to end users to use.

False

True or False? In a loosely-coupled organization, it is important to tightly integrate activities.

False

True or False? In globally linked strategies for innovation, R&D divisions are centralized.

False

True or False? In the fast-changing environment, it is always better to collaborate than go solo.

False

True or False? Loosely coupling helps organizations reap significant synergies by being tightly integrated.

False

True or False? Modular products become more valuable when all customers have similar demands.

False

True or False? Q-Sorting is a method for ranking projects on risk and return estimates.

False

True or False? To motivate employees' creativity, senior management should only select projects that are presented.

False

Types of Collaborative Arrangements: Strategic Alliances

Formal or informal agreements between two or more organizations to cooperate in some way *Access a critical capability that is not possessed in-house with lower cost and less risk, or more fully exploit their own capabilities *Enhance a firm's overall level of flexibility, important in rapidly changing markets *Acquire or develop new competencies

Gerden Price Co. and New Ware Systems formed an alliance to develop a new line of technologically advanced cooking stoves. What outcomes can they expect from this alliance than go soloing?

Getting the product to the market faster

Oxygenic is a company with major decentralized divisions in Germany, Russia, and the United States. The scientists in Russia develop cancer treatment methods. Treatment clinics are organized in Germany. The U.S. division gathers finance and markets the treatment methods. The activities of the different divisions are coordinated by the central office of the firm to meet companywide objectives. This is an example of a _____ strategy.

Globally linked

Mechanistic Structures

Have high formalization and standardization. *Good for operational efficiency, reliability. *Minimizes variation --> may stifle creativity

Organic structures

Have low formalization and standardization; described as "free flowing" *Encourages creativity and experimentation *May yield low consistency and reliability in manufacturing.

Which of these is NOT a benefit of collaboration?

Having complete control over technology

Derivative Projects:

Incremental improvements and variety in design features. -Derivative projects pay off the quickest, and help service the firm's short-term cash flow needs.

Which of the following a reason a firm should choose to go solo:

There are no available potential partners

BUGS Labs believed

There might be opportunities to serve "The Long Tail" for electronic devices by creating a modular electronic gadget system.

True or False? Calculating the internal rate of return of a project typically need be done by trial and error.

True

True or False? Firms can use strategic alliances to exploit their own capabilities by leveraging them in another firm's development efforts.

True

True or False? Project mix does not fit with strategic imperative of a company.

True

True or False? R&D intensity is often a percentage of previous year's sales but is determined by company strategy, historical benchmarking, and industry benchmarking.

True

True or False? R&D resources are over-committed by 200%-300%

True

True or False? Real options are valuable when there is uncertainty

True

True or False? Strategic fit of partners refers to the degree to which potential partners have resources that can be effectively integrated into a strategy that creates value.

True

True or False? Strategy is a plan that brings you from where you are to where you want to be.

True

True or False? To pursue a modular approach, a company must stick with a standard interface among components.

True

True or False? While the value of a stock is independent of the call holder's behavior, the value of an R&D investment is not independent of the investor's behavior.

True

True or False? Without a clear innovation strategy, innovation can become a moving target in a fast-changing industry

True

True or False? a company has to pursue two types of businesses at the same time, which requires ambidextrous leadership to align two types of business together through a systematic development of strategic intent, senior-team integration, incentives, and structure at the top to make them complementary each other.

True (an ambidextrous organization can make the organization both efficient and creative to create profits from existing business and grow the new business at the same time.)

True or False? Modularity refers to the degree to which a system's components can be separated and recombined.

True -Products may be modular at different levels -A standard interface enables components to be combined easily. -Modularity can enable many different configurations from a given set of components. -Modularity is not necessary when there is homogenous customer need

Disadvantages of collaboration

What are the collaboration costs or risks? *Relinquish some degree of control *Share the financial return *Communication or coordination costs *Expose to the possibility of malfeasance by partners

Types of Collaborative Arrangements: Outsourcing

When a firm produces services or products from another rather than producing them in-house *Contract manufacturer provides manufacturing capability, enables an outsourcer to focus on activities central to CA *But the outsourcer lose important learning opportunities and risk that a contractor will appropriate technology *Achieve economics of scale and fast response time, while keeping cost down

In which of the following situations should a firm chose to collaborate?

When they have limited resources and time

Types of Collaborative Arrangements: Licensing

a contractual arrangement that gives an organization the rights to use another's intellectual property, typically in exchange for royalties e.g. Tech transfer office *For the licensee, licensing is typically less expensive and less risky than in-house development *For the licensor, licensing enables penetration of a wider range of markets, allowing them to develop their own technologies, but they lose the technology as sustainable competitive advantages (CA)

Advanced R&D Projects:

develop cutting-edge technologies; often no immediate commercial application. Breakthrough Projects: incorporate revolutionary new technologies into a commercial application. -Advanced R&D projects take a long time to pay off (or may not pay off at all), but can position the firm to be a technological leader.

Local for local

each division does its own R&D for local market Accesses diverse resources, customizes products for local needs.

Locally leveraged

each division does its own R&D, but firm attempts to leverage most creative ideas across company. Accesses diverse resources, customizes products for local needs, improve diffusion of innovation throughout firm and markets.

Innovation strategy

is a function of business strategy, available resources and capabilities, and market needs. An innovation is a plan to align what you want to do (strategic intention or objectives), what you can do given your internal capabilities and external conditions, and what markets want.

Organizational creativity

is a function of creativity of individuals and organization's culture, structure, routines, incentives that shape the way individuals integrate and behave.

Individual creativity

is a function of personality, knowledge, thinking style, motivation, and environment. Personality of inventor, NPD team members, and of being creative

Technology

is a means to fulfill a human purpose: a device, method, or a process. i. Technologies or all technologies are combinations. Each component of technology is itself in miniature a technology. ii. A technology is a phenomenon captured and put to use

Creativity

is a useful and novel idea, resulting from combination of diversity

Disruptive Innovation

is an innovation that creates a new market and value network and eventually disrupts an existing market and value network, displacing established market-leading firms, products, and alliances.

Radical innovation

is an invention that destroys or supplants an existing business model. *radical innovation blows up the existing system or process and replaces it with something entirely new.

Opportunity

is the potential new means-ends relationship; entrepreneurial process is an iteration between technology push and market pull

Discounted payback period

is the time required to break-even on the project using discounted cash flows

Innovation

is to carry out new combination of existing factors

All of the following are considered best practices to develop a radical innovation EXCEPT

making a bold move in R&D investment

Platform Projects:

not revolutionary, but offer fundamental improvements over preceding generations of products.

Strategic fit:

the degree to which partners have compatible objectives and styles

Path dependency

when end results depend greatly on the events that took place leading up to the outcome; you can not change.

Real Options:

Applies stock option model to non financial resource investments with respect to R&D: -The initial costs of the R&D program: the price of a call option. -The commercialization costs of the R&D program: the exercise price. -The returns to the R&D investment: the value of a call option.

Classification of project types

Classification allows you to think about your project opportunities in a strategic manner.

According to our lecture, an ambidextrous organization can take the following forms EXCEPT:

Contextual ambidexterity

Cons at the stages of idea generation and implementation:

Coordination and communication costs

Globally linked

Decentralized R&D labs but each plays a different role in firm's strategy and are coordinated centrally. Accesses diverse resources, improves diffusion of innovation throughout firm and markets, may help develop core competencies.

Architectural Innovation

destroys the usefulness of a firm's architectural knowledge but preserves the usefulness of its knowledge about the product's components.

Large firms face all of these disadvantages when trying to innovation EXCEPT

Path dependence

Long tail

Refers to the strategy of selling a large number of unique items to penetrate market niches.

DEC Tech selected projects based on NPV calculations, which would most likely lead to:

Reject of platform projects

Partner Monitoring and Governance

Require clear yet flexible monitoring and governance mechanisms. -Alliance contracts -Equity ownership -Relational governance *May utilize legally binding contractual arrangements. -Helps ensure partners are aware of rights and obligations -Provides legal remedies for violations -Contracts often include: 1. What each partner is obligated to contribute 2. How much control each partner has 3. When and how collaboration will be implemented 4. Review and reporting requirements 5. Provisions for terminating relationship

Liam, an employee at Centaurs Inc., is part of a new product development team that operates in a completely different manner from its parent organization. The team has considerable decentralization of authority, limited bureaucracy, and a unique culture. Liam's team can be referred to as:

Skunk works

How does a firm generate creative ideas and innovate through integration of diversity?

a.How to innovate? (Extend the ideas) i. How to embrace diversity? People or teams need to be empowered with an independent and open mind. ii. How to integrate? People, teams, or firms need to be connected, open-minded, willing to take risk, and cannibalize the successful entities with an incentive. *Recombine the existing factors *Reaction to shifts in the relative costs and benefits of alternative uses for resources, occurring with political, regulatory, demographic, or environmental changes *Exploitation of market inefficiencies that result from information asymmetry, occurring across time and geography

Center for global

all R&D activities centralized at a single hub Tight coordination, economies of scale, avoids redundancy, develops core competencies, standardizes and implements innovations throughout firm.

Innovation strategy is a function of

business strategy, capabilities and resources, and market needs.