Chapter 4

Developing an innovation
strategy

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 CONTENTS
• Introduction
• Elements of corporate innovation strategy
• Conclusions

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1. INTRODUCTION

3
 1.1 Innovation Strategy
Session 4 outline:

• Limitations of the rational planning approach

to strategy
• Positions - national systems & competitors
• Paths - competencies & opportunities
• Processes - specialization versus integration
• Identifying & sustaining capabilities
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 1.1 Innovation Strategy
Four factors have a major influence on the ability of a
firm to develop and create value through
innovation:
• The national system of innovation in which the firm
is embedded, and which in part defines its range of
choices in dealing with opportunities and threats.
• Its power and market position within the
international value chain, which in part defines the
innovation-based opportunities and threats that it
faces.

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 Innovation Strategy
Four factors have a major influence on the
ability of a firm to develop and create value
through innovation:
• The capability and processes of the firm,
including research, design, development,
production, marketing and distribution.
• Its ability to identify and exploit external
sources of innovation, especially
international networks.

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 1.2 Choice of strategy

Choice of strategy (& luck) are more

important than industry:
• choice of industry 8.35%
• choice of strategy 46.4%
• parent company 0.8%
• unexplained (e.g. luck) 44.5%
% total profitability explained. Source: Richard Rumelt “How much does industry
matter?”, Strategic Management Journal, 1991, 12, 167-186

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 1.3 Demands of Innovation Strategy
Key demands of innovation strategy:
• to develop firm-specific knowledge &
capacity to exploit it
• to cope with environmental
complexity & uncertainty
• to create organizational structures &
processes to manage trade-offs
between specialized & broad
knowledge
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 1.4 Strategic Management
Two distinct models of strategy:
Rational/Planning Resource/Capabilities- based

top-down bottom-up
outside-in inside-out
choice variation & selection
ahistorical cumulative
static dynamic/learning

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 1.4.1 Limitations of rational
planning
Limitations of the rational planning:
• Focus on with competitors, not customers
• Difficult to identify internal strengths &
weaknesses e.g. oil firms & 'energy';
computer firms & 'information’
• Strategic objectives do not match internal
capabilities
• The environment is often complex &
uncertain e.g. multi-media industry
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 Strategic Management
Rational planning approach ignores constraints:

• Size & resources of the firm

• Existing product & technological base
• Technological opportunities for innovation
• Market opportunities for innovation

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 1.5 Competitor Analysis
Example: Five 'forces' analysis of competitive
environment:

• rivalry amongst existing competitors

• threat of new entrants
• threat of substitute products & services
• power of suppliers
• power of customers

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 Competitor Analysis
But innovation affects all five forces:
• rivalry - basis of competition, industry
boundaries
• new entrants - raise or lower entry barriers
• substitutes- relative price/performance,
new products
• customers & suppliers - switching costs,
relative power, vertical integration

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 1.6 Blue Ocean strategy
Concept of Blue Ocean strategies, compared to
traditional strategic thinking, or Red Ocean strategies:
• Create uncontested market space, rather than
compete in existing market space
• Make the competition irrelevant, rather than beat
competitors
• Create &capture new demand, rather than fight for
existing markets and customers
• Break the traditional value/cost trade-off: Align the
whole system of a company's activities in pursuit of
both differentiation and low cost

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2. ELEMENTS OF CORPORATE
INNOVATION STRATEGY

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 Key factors in innovation strategy:
• position of the firm - technologies, processes
& products compared to competitors
• paths open to the firm, given its
competencies & emerging opportunities
• processes to integrate & exploit
competencies within & between firms

Source: Teece & Pisano

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 2.1 Positions - national factors
National factors influencing competencies:

• input prices
• natural resources
• local buyers tastes
• public & private investments

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 2.1.1 Positions – Emerging Economies
Firms in emerging economies may pursue different routes to
upgrading through innovation: 
• Process upgrading – incremental process improvements
to adapt to local inputs, reduce costs or to improve
quality.
• Product upgrading – through adaptation, differentiation,
design and product development.
• Capability upgrading – improving the range of functions
undertaken, or changing the mix of functions, for
example, production versus development or marketing.
• Inter-sectoral upgrading - moving to different sectors, for
example, to those with higher value-added.
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 2.1.2 Positions - competition

Assessing competencies of competitors:

• How do they compare in terms of size &
composition?
• How efficiently are they exploited?
• How effectively do we learn from their
knowledge & experience?
• How do we differentiate, develop & maintain
our innovation advantages?

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 2.2 Paths - time horizons

Level, time & focus of innovation strategy:

• Business unit - 2-3 years - improving cost &
quality, new product & service development
• Group/division - 5 years - positioning &
exploiting synergies across business units
• Corporate - 10 years - environmental
scanning & competence-building

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 2.2.1 Paths & Processes - capabilities
& innovation
Products &
services

Processes

Capabilities

Competencies

Resources/assets

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 2.2.2 Paths - capabilities & innovation
Innovation & strategic positioning:

• pioneering technology, processes, products

• accumulated tacit knowledge
• complexity
• complementary assets
• standards
• patents
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 2.2.3 Paths - capabilities & innovation
Characteristics of competencies:
• firm-specific
• significant benefit or value to customers
• take time to develop
• sustainable as difficult to imitate or acquire
• unique configurations of resources
• strong tacit content & socially complex
Source: Hall (2000)

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 2.3 Processes - Knowledge

Key organizational issue is how to balance conflicting

requirements:

• to identify & develop specialized knowledge within

technologies & markets
• to exploit this knowledge by integrating across
technologies & markets

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 2.3.1 Processes - Innovation
Process of strategy formation:
• given uncertainty, explore implication of a
range of possible futures
• encourage the use of multiple sources of
information, debate & scepticism
• ensure broad participation & informal channels
of communication
• plan to change strategy in the light of new &
unexpected evidence

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 2.3.2 Processes - Resource Allocation

Resource allocation under uncertainty:

• encourage experimentation, risk-taking &
incrementalism
• apply different criteria for different types of
project
• use simple, transparent criteria
• make rules for termination explicit
• identify & plan for uncertainties

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 2.3.3 Innovation Process
Generic phases of the innovation process:
• Searching & scanning the internal & external
environments
• Filtering & selecting potential opportunities
• acquiring the technical, financial & market
resources
• implementing development &
commercialisation
• reviewing & learning from experience

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 2.3.4 Innovation Process
Factors affecting the precise process:
• Sector - competitors, structure & constraints
• Markets - opportunities & rate of change
• Technology - maturity & costs
• Resources - firm & networks
• Location - regulation, policy & systems of
innovation

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3. CONCLUSIONS

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 3.1 Decision-making under
Uncertainty
So, Innovation: Response or strategy?

• “. . . chance favours only the prepared

mind”, L. Pasteur, 1854

• “...the more I practice, the luckier I get…”,

Gary Player (champion golfer)

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 3.2 Being the first
Advantages of being first to market:
• reputation as a pioneer
• capture market share
• early learning curve benefits
• definition of standards
• establish entry barriers eg patents
• dominate supply & distribution chains
• earn ‘monopoly’ profits
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 Disadvantages of being first to market:
• pioneering costs, educating buyers,
regulatory approval
• demand uncertainty
• changing buyer needs
• low-cost imitation
• followers ‘leapfrog’ technology

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 3.3 Conclusions:
Innovation Strategy
Conclusions and implications from observation and
research:
• The elements national systems of innovation
interact to influence the degree and direction of
innovation in a country.
• The uneven global distribution of innovation
demands global search strategies for the
development & commercialization of innovation.
• The position of a firm in an international value chain
will constrain the opportunities for innovation and
entrepreneurship.
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 Conclusions:
Innovation Strategy
Conclusions and implications from observation and
research:
• National context influences, but does not determine
the rate and direction of innovation at the firm level.
• Dynamic capabilities and firm-level processes
contribute to the development and growth of firms.
Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd
(2006) From Knowledge Management to Strategic Competence (Imperial College
Press, 2nd edition); J. Tidd, & J. Bessant (2009) Managing Innovation: Integrating
technological, market & organizational change (Wiley, 4th edition); S. Isaksen & J.
Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation and
Growth (Wiley).

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