Strategic Management II

2. COMPETITIVE ADVANTAGE IN EMERGENT AND TECHNOLOGY-

BASED INDUSTRIES

1. Introduction.

2. Technology-based industries. Characteristics

2.1 Technology evolution

2.2
Costs reduction Advantage in technology-intensive industries
3. Competitive
3.1 The profitability of Innovation
2.3 Uncertainty
3.2 Legal protection
3.3 Complementary resources
3.4 The characteristics of Technology
3.5 Lead time
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4. Technology Strategic Management

4.1 Forecast
4.2 Time to enter: To lead or To follow?
4.3 Managing Risks
4.4 Exploitation of innovation: license or internal development

5. Implementing Technologies strategies

5.1 Conditions for creativity

5.2 From invention to innovation
5.3 Managing transition to maturity
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1. Introduction
Emerging industries: those in the INTRODUCTORY AND GROWTH stages in their
life cycle---> Main Feature --> TECHNOLOGY continues to be the major driving force
of competition
 The intensity of the technology -> IT IS NOT UNIQUE for emerging industries -->
importance of innovation in some mature industries (chemical, communications)
INNOVATION --> RESPONSIBLE for the EMERGENCE OF NEW INDUSTRIES
AND SOURCE OF COMPETITIVE ADVANTAGE, IN BOTH CASES, COSTS AND
DIFFERENTIATION.
 EMERGING INDUSTRIES CHARACTERISTICS:
 Technology evolution
 Costs reduction
 Uncertainty
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2. Technology-Intensive Industries characteristics

2.1 Technology Evolution IMITATION

SUPPLY side

BASIC
INVENTION INNOVATION DIFUSSION
KNOWLEDGE

Creating products and processes Initial commercialization of DEMAND side

by developing new knowledge or invention
combining existing knowledge
ADOPTION
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Delays between Skills Development and Marketing

FIRST
BASIC KNOWLEDGE PRODUCT LAUNCH IMITATION
PATENTS

Late XIX
and early XX 1940 1958 1974
Xerography
Xerox IBM and Kodak

1957 1959
Jet engine XVII 1930 Jet Comet Boeing 707
To early XX

Other examples: INVENTION INNOVATION

Helicopter 1904 1936

TVs 1923 1936
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Dominant design
 The outcome of competition between rival designs and technologies –> Dominant
design
 Dominant design is a product architecture accepted by the industry as a whole that
defines the look,- Cars:
functionality
Ford T and production method for a product. Examples:
Model
- Typewriter: Underwood model 5
- PC software: Windows (alternative designs: Mac OS/ MS-2)
 Standard is a technology important for compatibility
 Dominant design and standard produce positive network externalities: the benefit of
a product for users is derived from the number of customers that already exist.
E.g.: Spreadsheet (Excel vs. Lotus 1-2-3), Instant messaging (Blackberry vs WhatsApp),
Technology (Youtube, Facebook, Twitter) .
 Once dominant design is set, very difficult to remove: 2 reasons:

- Learning effects: continuous development of dominant design.

Combination of price/performance hard to beat. E.g.: 4 stroke engine
- Customer lock-in
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COMPANIES OWNING STANDARD

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2.2 Costs Reduction

New Products -> high costs--> high development costs + reduced series production
-> no economies of scales and experience
Emergence of a dominant design-> Increase demand + process innovation--->
appearance scale and experience economies---> costs reductions

Having the dominant design paradigm set, diffusion process tends to be faster:

i Learning economies
i Economies of Scale
Fast Cost Reduction
i Innovation process
i Increase in competitiveness
For example, pen in: 1945 1952
$12.50 $ 0.15

computer 1980 (Xerox Star) 1984 (486)

$ 3.950 $1.000
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2.3 Uncertainty

New and Technology-

intensive INDUSTRIES
TECHNOLOGICAL: Which design will be the
dominant one?
Forecasting- -> difficult
High Degree of
UNCERTAINTY
MARKET: Technical viability DOES NOT
ensure its commercial viability

RISK -> With High Investment --> Entry Barriers

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Uncertainty in Technology-intensive industries

Technological Selection process where design

Uncertainty developed is complicated and not
Sources of easy to predict
Uncertainty For example: Betamax versus VHS

Market
Uncertainty Difficulties in forecasting the market
potential or penetration ratio
For example: Microcomputer,
Xerox, Walkman, Concorde,
wearables.

Business risk associated with technological and market uncertainty is complicated because
of the high capital investments needed to develop new technologies and their long period
of development.
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3. Competitive Advantage in Technology-intensive Industries

3.1 The profitability of Innovation Attractive industries-
New and Technology- growth
New opportunities for
intensive INDUSTRIES
Profits Many options
to reach C.A.
INNOVATION

i Legal protection
Ownership of -- patents, Copyright
innovation
Capturing Benefits from i Additional resources
innovation i Technology Characteristics
Profitability of -- tacit / code
innovation? Maintaining the -- complexity
Competitive Advantage
Ability to protect innovation i Timeframe
against imitation
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Profit appropriation: distribution of innovation profits

Innovators (Mits, Tandy, Apple,

Xerox)
Suppliers (Intel, Microsoft)

Imitators/followers (IBM, Dell, Compaq

Acer)

Customers (through lower prices)

Complementors (Program developers,

HW manufacturers)
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Innovators (IBM and Nokia)

Imitators/followers (RIM, Samsung, Apple)
Suppliers (ARM)
Complementors (App developers)
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3.2 Property Rights in Innovation

 Patent: Exclusive rights to a new product, process, substance o design. Otherwise, it is

offered to public knowledge; So, it reports information that may be counterfeit although it
provides legal protection. E.g.: drugs vs. HIV.

 Copyright: Provide exclusive production, publication or sale rights to artistic or

intellectual works. E.g.: academic articles, pictures, drawings, books, music.

 Trademarks: are words, symbols or other marks used to distinguish the goods or
services supplied by a firm. E.g.: Coca-cola

 Trade Secrets: Protection of information relating to a business which has actual or

potential economic value, which other companies could get an economic benefit by.
E.g.: chemical formulas, recipes or industrial processes, assessing ,methods costs,
sales policy…: they can be a C.A.
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3.3 Complementary Resources

Exploitation of innovation--> it needs-> complementary Resources (production

and marketing).
E.g.: Cars-> roads and gas stations; Computers -->software; Console games

Return of an innovation -> DISTRIBUTES --> Innovator and Complementary

resource owner

Distribution depends on bargaining power and the nature

CO-SPECIALIZATION
of the complementary resources.
Innovation depends on
specialized assets, and the
depend on innovation. E.g.:
SPECIALIZED Generic electric cars
Have few companies
Widely Available. Example.
Example: Fuel cells
PDF
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Complementary resources needed to commercialize an innovation

Competitive
manufacturing Distribution

Finance Services
CoreTechnological
Know – How in
innovation Complementary
Marketing technologies

Other Other
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3.4 The Characteristics of the Technology and imitation

Potential imitation: depends on how easy is to TRANSFER the technology

 Two important characteristics of technology

i Tacit or Codifiable Knowledge

Tacit: Is not formally expressed. It is in the employees skills and the organizational
routines; innovation difficult to imitate (TQM, JIT).
Codifiable: Knowledge than can be recorded -> easy to copy: If it is not protected
by patents or copyrights, the innovation diffusion will be fast and the Competitive
Advantage WILL NOT be sustainable. Example: MBS and CDS.
i Complexity
Complex: Technology hard to understand and copy (Airbus 380, Inter core i9).
Simple: More patents needed (printers).
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3.5 Lead time

 Non-coding and complexity characteristics do no offer permanent barriers to

imitation, protection is temporary

 If competitors can imitate, the best advantage for the innovator is the time it
takes for imitation

 Maintaining advantage that lead time provides: required continuous

innovation. E.g.: Microsoft and Motorola

 Lead time is strengthened by learning efficiencies. E.g.: Intel's Costs

Advantage.
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4. Technology Strategic Management

• Enter or not: foresight

• When: time
New and technology- KEY STRATEGIC
intensive DECISIONS • Risk Management
INDUSTRIES • Exploitation: licensing
or internal development

The decision to enter or not in an emerging industry depends on the MARKET OR

PRODUCT future development VISION over time (market growth, design,
distribution channels, competitors)
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4.1 Forecast

Conventional methods of Environment Forecast, have limited applications because

they are based on historical data extrapolation (in technologies and new products no
data available). Examples: Netflix vs. TV cable providers; Apple and the iwatch. Most
useful techniques:
 Scenarios Construction: possible futures; consistent visions of how the future
could be.
 Delphi model: experts panel with agreed predictions on future development

TECHNOLOGICAL MYOPIA: Companies interest in current technologies

KEEP OFF objective evaluation of competing technologies
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4.2 Timing Innovation: To Lead or To Follow?

The costs and relative advantage of being the first to enter depends on the following
factors:
i Is the innovation properly protected by IP?
If so, advantages for the leader

i Are the complementary resources important?

+ important complementary resources -> + attractive follower
Followers may not have to invest in complementary resources due to
improved industry infrastructure. Ex: Bird´s eye and chain of cold;
Electric car both for battery development and infrastructure.
Specialists offering complementary resources will emerge (Ex:
Iberdrola, Repsol EV charging stations)
i Is important possession/control of key standards for the industry's Competitive
Advantage?
If so, advantages for the leader (Ex: Microsoft (MS-Dos) vs. IBM (OS2))
Dilemma-> Enter 1st, but can take the wrong technology or later without the
possibility to influence key technology
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Leaders, followers and success in emerging industries

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4.3 Managing Risks

A vital element for emerging industries survival and success is an effective risk
management. Three methods:
1. Cooperating with lead users
- Early “Warning system” for faster identification of customer needs (Example: Nike
uses athletes and hip hop artists).
- Assistance in the conception and development of new products and processes
- Early cash -flow source to contribute to further development expeditures
2. Limiting risk exposure
- Keep low fixed costs
- Rent, do not buy (leasing and outsourcing)
- Seek alliances
3. Flexibility
- Delay commitments to a technology until it is clear
- Learn from mistakes
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4.4 Exploitation of innovation: License or internal development

Invention /Innovation: creativity, imagination,
technical expertise and customer needs perception
Resources and K.S.F. People and small business
Strategies and forms of Commercialization: production, distribution,
organization marketing and financing capabilities
Big size organizations

Specialize developing technology (innovation)

-> transfer manufacturing, marketing and
commercialization to bigger companies
Management of
KEY LICENSE
technological
development Investing in additional resources to take
innovation to market
INTERNAL DEVELOPMENT
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LICENSE: Main innovations in XX century shows isolated inventors. Technology is

developed by a small company which LICENSE exploitation to a bigger company.
Basic condition for success of these agreements is the ability to appropriate the value
of innovation: rights, patents and copyrights. E.g.. Pharmaceutical industry

INTERNAL COMMERCIALIZATION: Allows a total appropriation of benefits from

innovation -> REQUIRED -> Collect all assets needed to innovation and its exploitation
FACILITATES -> CONTINUOUS INNOVATION PROCESS --> stream of incremental
innovations from initial innovation. E.g.: Motorola and Microsoft success
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5. Strategy Implementation
5.1 Innovation and creativity conditions
STRATEGY -> FOSTER INNOVATION--> HOW TO CREATE ORGANIZATIONAL
CONDITIONS THAT LEAD TO ORGANIZATIONAL INNOVATION?
Difficult to apply systematic analysis to “formulate innovation strategies”--> Pay
ATTENTION to “organizational process” where innovation emerges and is
commercialized
INVENTION-> CREATIVITY
DISTINGUISH
INNOVATION-> SEVERAL RESOURCES

CREATIVITY CONDITIONS
CREATIVITY: Single act that establishes a consistent relationship between concepts
or objects that have not been linked previously in this way, until the invention
occurs. New connection-> requires personal qualities (curious, imaginative,
adventurous, positive, fun, safe…)
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Creativity can be encouraged or facilitated by the organization--> factors:

1. Understanding incentives that motivate innovators: Autonomy, recognition,
personal and professional development, spontaneity, etc.
2. Facilitating interaction between the staff: communication networks (i.e.: Slack),
common areas, etc.
3. Creating an organizational structure and management systems that
encourage initiative and creativity: organic (flat) or adhocratic structures (project
specific) vs bureaucratic structure

VITAL-> CREATIVITY ORIENTED AND DIRECTED BY THE CUSTOMER

NEEDS--> CUSTOMERS: MORE FERTILE SOURCE OF INNOVATION
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Characteristics of Operational and Innovative Organizations

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5.2 From invention to innovation

Many types of resources

INVENTION INNOVATION

Product design Efficient Marketing Customer

product support
Distribution

Innovations development -> organization basic problem --> COORDINATION

AND INTEGRATION BETWEEN UNITS
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ISSUES TO CONSIDER
1. Risk of isolation from R&D departments: separation or isolation of customers
needs (internal and external customers) -> inventions failure for not conforming to
customer satisfaction. E.g.: P&G Vegetable flavored Potatoes
2. Product Development Team: Multifunctional/multidisciplinary teams to develop new
products. E.g.. Chrysler and Ford.
3. “Product manager” role: decisive role of “product manager”: a person with the
ability to integrate members of different functional areas -> provide leadership and
orientation. E.g.. 3M
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Implementation: from invention to innovation

i Invention depends primarily on creativity.

But innovation requires integrating new knowledge in various functional activities

i Linking the R+D with other functions

( the problem of the PARC center from Xerox ).

i New products development: importance of multifunctional teams as a means of

integration

i The product champions role: to integrate and counteract organizational inertia

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Industry Evolution
A) IMPACT OF ORGANIZATIONAL CHANGE
Introduction and growth phases -> Very different structures-> Change from one to
another: ORGANIZATION CHANGE
INTRODUCTION: organic and informal group of individuals who cooperate with each other,
technologist/entrepreneur environment -> No formal controls or organizational structure is
possible because of shared values and loyalty founder
GROWTH: more complex organization and management
• Increased pressure for cost-efficiency-> mass production
• Increased company's size + importance of production, marketing and distribution
functions --> functional structure-> but functional cooperation and lateral communication
• Changing priorities for R&D --> from novelty to safety, modification of design and cost
efficiency
• New direction requirements make necessary change management
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B) INNOVATION AND MATURITY

INNOVATION SEARCH
Evolution to
maturity TENSIONS
SEARCH FOR COST
EFFICIENCY

3M: DUALITY -> the company is oriented towards

the existing activities management, while
encouraging all employees to develop new ideas
SOLUTIONS

XEROX: SEPARATION between mature business

and those who are in the innovation or introduction
phase
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5.3 Managing the transition to maturity

i Join innovation with cost efficiency: the design importance to manufacture, efficient
scale, technological process

i Changes in organizational structure: increasing performance demand involves more

complex organizational structures, including greater formalization and differentiation

i R&D strategy, emphasis on: technological trajectory, dependence on low costs, and
indentifying customer needs.