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A great deal of business su.ccess depends on generating new krrvw!"dgc and on having the capabitities to
react quickly and intetHgently to this new hnowledge . '. . I believe that strategi( thinhing is a necessary
but overrated element oj business success. IJ you hnow how to design great motorcycle engines, I can
teach you all you need to know about strategy in a Jew days. IJ you have a Ph.D. in strategy, years oj
labor qre unlihely to give you the ability to design great new motorcycle engines.
. ' (Richard Rumelt (1996) California Management Review, 38. 110, on the continuing
debate about the causes of Honda's SUCC"SS in the US motorcycle market)
The abbve quotation from a distinguished professor of strateg;' appears on the surface not to be a strong
endorsement of his particular trade. In fact, it offers indirect suppOrt for the central propositions of this
chapter:
L Firm-specific knowledge - including the capacity to exploit it - is an essential [eature of competitive
success.
2. An essential feature of corporate strategy should therefore be an innovation matero; the purpose of
which is deliberately to accumulate such firm-specific knowledge.
3. An innovation strategy must cope with an external environment that is complex and ever-changing,
with considerable' uncertainties about present and future developments in technology, competitive
threats and !'narket (and non-market) demands.
4. Interna! structures and processes must continuously baiance potentially conflictillg requirements:
(a) to identify and develop specialized knowledge within technological fields , business functions
and product divisions;
(b) to exploit this knowledge through integration across.technological fields. business functions and
product divisions.
. . .
GiVen 'co",plexity, continuous change and consequenomcertainty, W" believe. that;the.so-calledra-. .
to inno,...uon strategy. still dominant in pr.actice and in the. teachingatmanj
schl)ols, i? J.essIikelytobe effective .than an incrementalapproach.that stresSes continuo1!S acljus.rmen;t .
" '"arlit of and learning. We also. argue that the aFPJ;Gach
. " ; identifies the nalure of the competitive (hreat;; md o,pportUtiities.I\!aLtmergdiQrr, .r.-
ill '. ("chn"JrJID>: ,and rightly stres,sesthe importance
. firmstc -positio,! .But;t
. \he >,: .. *s of .me .competitive game '",::
'in ttnS, is: 'wo;i{
'Nm . ,lqv,ct. The mOlt: specml., topIC' of str-ategy 15" e!Cpi-etect -trl 6lMl!t
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bound.,!ies. dc,.'ck'pmg :1ev.: products :ihilT.ing barriers LO entry. It jlso Qverestim<lle5 (he capacity of
lO identify ma predict the imponanc changes o).llside the firm. and to implement
radic;ll ..:! wnges in wmpetencies :md organizational practices 'Within the firm.
In this chapter, we develop what we think is the most useful frame'\\-"ork for defining ;lnd implement-
mg inno,,:nion strategy. We propose that such a framework is one de\doped by David Teece and
Gary Pisuno. It gives ..:entral importance to [he dynamiC capabilities of firms, :md distinguishes three e1-
of corporate innovation strategy: competitive and national posltions; (ii) technological paths;
(iii) org=.niz.ationai and managerial processes. We begin by summarizing the fundamental debate in cor-
strategy between 'rationalist' and 'incrementalist' approaches, and argue that the latter approach
is more re:J.listic, given the inevitable complt.'(ities and uncertainties in the innovation process.
4.1 'Rationalist' or 'incrementalist' strategies
for innovation? -
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The long-Standing debate ' rational' and 'incremental' strategies is of central imponanc'e to the mo- ,"
bilio::ati0n of technology \lnd to the purposes of corporate stratr.gy. We begin by reviewing the' main terms \ .
of the debate, and conclude that the supposedly clear distinction between strategies based on 'choice' or . . . :-
on 'implementation' hrea.ks dov:n when finns al'e-maKing"dectsidtls In complex ana . ., '\ ': t
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itive environments. Under such circumstances, fonnal strategies must be seen as pan of a wider process of ;i
L'OntinuQU5 iearning from and from others [0 cope \'.'ith comple.'<il)' and change. '
Notions of corporate strategy first emerged tn the 1960s. A lively debate has continued"since then
amongst the various 'schools' or theqries. Here we discuss the two most influentiaL the 'rationalist' and
the 'incrementalist' , The main proragoni.:HS are Ansoff! of the rationalist school and Mintzberg
2
amongst the incrementalists. A face-tO-face debate betv,een the two in the 19905 can be found in (he
Stralf,gtc l'v[anagemenl Journal and an excellent summary of tfie tenns of the debate can be found in
Whittington.
3
Rationalist strategy
'Rationalist' strategy has been heavily inlluenced by military experience, where strategy (in principle)
consists of the following steps: (i) desCribe, understand and a:'J.alyze the environment; (ii) determine a
course of action iF}, the light of the analysis; (iii) carry out the decided course of action. This is a 'linear
model' of rational action: appraise, determine and act. The corporate equivalent is SWOT: the analysis
of corporate strengh'ls and weaknesses in the Ught of external opponunities and threats. This approach
is intended to help the firm to:
Be conscious of trends in the competitive environment.
i
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_____ -lP"'t'ecpapardornhliIigiii!i' fUture.
Ensure that sufficient attention is focUSt.d on the longtr te.rm, given me pressures lO concentrate. on
. the day to day.
Ensure coherence: in objectives and actions in large, functionally specialized and geographically
dispersed organizatiOns.
www.managing.nnovalion.com
j,

A great deal of depends on gt!nerating new knowledge and on having the capabilities to
rt!act quickly and intelHgendy to this new knowledge . .. I believe that strategic thinking is a necessary
but overrated of business success. If you know how to design great motorcycle engines, I can
teach you all you need to knowaboU( strategy in a Jew days: If you have a Ph.D. in strategy, yeaTS of
labor UTe unlikely to give you the ability to design great new motorcycle engines.
(Richard Rumelt (1996) California iAanagement Review, 38, 110, on the continuing
debate about the causes of Hondas success in the US motorcycle: market)
-
The abov::: quotation from a distinguished professor of strategy appears on the surface not to be a strong
endorsement of his particular trade. In fact. it offers indirect suppon for the central propositions of this
chapter:
1. Finn-specific knowledge - including to featlue of corrrpetiriVe--
success.
2. An essential feature of corporate strategy should therefore. be innovation strategy, the purpose of
which is deliberately to accumulate such firm-specific knowlecl.ge.
3. An innovation strategy must cope with an e.xternal environment that is complex and ever-changing,
with consideraMe uncertainties about present and future developments in technology, competitive
threats and market (and non-market) demands.
4. Internal structures and processes must continuously balance potentially conflicting requirements:
(a) to identify and cievelop specialized knowledge within tecMological fields, business functions
and product divisions;
(b) to exploit this knowledge through integration across technological fields, business functions and
product divisions.
Given comple..-aty, continuous change and consequent uncertaimy, \ve believe that the so-caned ra-
tional approach to innovation strategy, still dominant in practice and in the teaching at many business
schools, is less likely to be effective than an incremental approach that stresses continuous adjustinent
in the light of new knowledge and learning. We also argue that the approach pioneered by Michael
Porter correctly identifies the nature of the competitive threats and opportunities that emerge from ad-
vances in technology, and rightly str..::sses the importance of developing and protecting firm-specific
technology in order to enable firms to pOSition themselves against the competition. But it underesti-
mates the power tec:hnology to change the rules of the competitive game by modifying industry
The approach we .:dopt in this chapter is based upon the pioneering work of our former colleague: friend and
co-amhor, the late Keith Pavitt. The more specific topic of technology strategy is explored in greater detail in
earlier editions of this book, in panicular the first (1997) and second (2001).
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1:&.6 D EVE LOP I N G A N f NNO V A T f 0 N STR ATTG Y
However, as John Kay t1as pOinted DOt, the mIlitary metaphor can be misleading. of Corporate objec-
live:s are differem from mnirary ones: namely, (0 o!Stablish a distinctive competence enabling [hem to
s3tisfy CUSfomers better than (he ..::ompelilion - and not to mobilize. sufficient resources to destroy the
enemy (with perhaps (he exception of some Internet compa.nies). Excessive concentration on [he
(i.e. corponne competitors) can resuh in strategies emphasizing large commiunems of resources
for the establishment of monopoly power, at {be 'xpcnse of profitable niche markers and of a commit
me.n{ [Q satisfying customer needs (see Research Note),
More important, professional experts, including managers, have difficulties in appraising accu-
rately their real situatlOn, e:sxntlally for two reasons. First, their external environment is b,?th compl.ex,
Innovation strategy in the real world
Since 2005 me imemacional management consultants Booz Allen Hamilton have conducted a sur-
vey of the spending on and performa.nce of innovation in the world's 1000 largest firms. The mos[
recem survey found that there remain Significant difTerences between spending on illnOVtltion
across differen, seClOrs and regions. For example, ,he ,&D. intensity (R&D spending divided by
sales, expressed as a %) was an average of 13% in the software and healthcOire industries, 7% in
electroniCS, bur only 1-2% in more mature sectors. Of the 1000 companies studied, representing
annual R&D of US $447 billion, 95% of 'his spending was in 'he USA, Europe and
Japan. . .. . ......... .... . ..... _... .-...... - - .. - .
However, like most studies of innovation and performance (see Chapter 11 for a review),
they find no correlation between R&D spending, growlh and financial or market performance.
They argue that it is how the R&D is managed and rnmslated into sUEcessful new processes,
productS and services which counts more. Overall they icientify twq are cornrrv:m ro
' those companies which consistently leverage their R&D spending: StIong alignment between
innovation and corporate strategies; and close attention [0 customer and needs. TIlis is
not to suggest that there is any single optimum strategy for innovation, and instead they argue
that distinct clusters of good practIce aTe observabie:
Tech1lOiogy drivers, which focus on scouting and developing new technologies and matching
these to unmet needs, with strong project and risk management capabilities.
Need seektrs, which aim to be first to market, by identifying t::lIJ.erging customer needs, wilh
strong design and product development
Markel readers. which aiI? (0 be fast followers, and conduct detaiJe9 competiwfS analysis, with
strong process innovation.
They conclude 'Is there a best innovation strategy? No . .. Is there a best innovation
strategy for any given company? Yes, .. the key [0 innov3rion success has nothing to do with
how much money you spend. It is directly related to the effort expended to align innovation
,
. . your-cusmmers, and -to manage the entire with discipline and
transparency' (p. 16).
B. and K. Dehoff (2008) 80m Allen Hamilton Annual Innovation Surve}t Strougy lind Bustncn, Issue: 49.
www.managinginnovatlon.com
.. . .".,."

4 1 ' RJlTlONAl!ST OR INCREMENTALI,ST'
invL'lvinti competitors, cuslomers, ['egulators and so on; imd jasl-dlanging, including technical, eco-
nomic, social and political ch<1nge. It is lherefore difficult enough to understand the essential features
or the. present, let alone to predict the ruture (see Box ..:j'.l). Second. managers in large firms disagree
nIl their firms' strengths and weaknesses in part because their knowledge of what goes on inside the
lirm is imperfect.
'Strategizing in the real world'
'The war in Vietnam is going well rlnd wi!1 succeed.'
'I thinh there is a world market jf}'- about Jiw: compUters. '
'Gaiety is the most outstanaingje!lure oj the Soviet Uniolt . .
...
'Prr.diction is velY difficult, especially about the future ..
'] cannot COl1ceit'e of any vital disaster happrnillg 10 this '
(R, MacNamara, 1963)
(1. Watson. 1948)
0, Stalin, 1935)
(Cnptain of Titallie, 1912)
The above quotes are from a paper by William
5
in which he criticizts formal strategic
planning:
First, Jonnalization undercuts contributions. Second, nearly all managers hold very in-
accurate beliefs about their firms and marhel environments. Third, no-one can forecQ5( accurately
over the long tern1 ... Howevel; planners can mahe strategic planning more realistic and can use
it to build healthier, more alert and reSp01tSlVe firms. They can make sensible forecasts and Use them
to foster alertness; exploit distinctive compttencies, ent'1 baniers and proprittary information;
broad," managers' horizons and help them develop more realistic beliefs; and plan in ways that
make it easier to change strategy later (p. 77).
As a consequence, internal corporate strengths and weaknesses are often difficult to identify before
the benefit of practical experience, especially in new and fast-changing technological fields, For
example:
In the. 19605, the oil company Gulf defined its distinctive competencies as producing energy. and
____ +_ .. nuclear energy firm. The venture was unsuccessful, in part because the
strengths of an oil company in finding, extracting, refining and distlibuling oil-based products, i.e.
geology and chemical-processing technologies, logistics, consumer marketing, were largely irrele-
vant to the design, construction and sale of nuclear reactors, where the key skills are in electro-
mechanical technologies and in selling to relatively few, but often politicized, electrical ,utilities.
6
(
www.managlng-lnnovatloll.com
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n EV fL 0 PIN G A N IN N.D VAT IO N S TR A TEG Y
In [he 19605 and 1970s, many firms In [he c:lecrrical mduslry bt:t hl.:avily un the fUllIre of
nuclt:;lr technology JS rc:voluLion:uy breakthrough thai would virlll<Jlly
..:ncrgy, Nudt::u c::nergy frliled to fullll its promise, Jnd lirms onl}' rct;ognized huer (hilt [he:
Olmn revoli.HionafY \)PPl)r\Ullltics ilnd threats ror (hem Ciline the vinually l.:ostles.5
swrage anci manipuh.Hion of inform;ltion provided by improvemems in semiconductor Jnd
relnted tLclmologies.
1
In the 1980s, ilnillysrs ,md praclILioners predicled that the 'wnvergence' of
munk.ul0l15 technclogk::dhrough digitalization would lower the barriers to entry or mainframe
(;ompmer firms into lc:lecommunic:Hions equipment, and vice versa. Many firms tried to 9iver-
.'lily into the lnher market. Dften through :'lcquisitions or 'llliances, e.g. IBM bought Rohm, AT&T
bOllght NCR. Mnsl . pt"Oved lI11suc.:co!ssfuJ, in part because the sortware requirementS in the
and office markets were so differenr,"
The 19905 similarly S.1W .;omllliunents in fast-moving fields of leT (information and
niClllon inilial1!xpecnuions about opportunities and complememarities have
been For lhe mvestments of major media companies in the lntemt![ in
lhe 19(,)05 tooi< more than J. decade to prove prolitable: problems remain in delivering prod-
ucts to ..:;nnSlimers Jnd in gelling paid. for them, and advemsing remains ineffective.
9
There: have
been disappoinlmt:l1lS.50 far in developorcm of 'e-entenainmem' . 10
The Internet bubble, which began in the late 19905 but had burst by 2000, placed wildly opti-
mistic.: :lnd unrealistic valuations an new ventures utilizing e-commerce. In panicular, mose of {he
new buslI11!sses selling to consumers which floated on the US and UK srock ex-
changes bC1V!een 1998 imeJ 2000 :subsequently lOST around 90% of their value, or wer:e made
bankrupL period include Boo.coJtI.ln . .!De UK. which attempU:.d J.C.Stll ..
spon:s clothing via [he Imernet, and PeLS,com in the USA, which anempled to sell pet food and
accessories,
Incrementalist strategy
Given the conditions of uncl!l1ainry. 'incrementa.ljsts argue rhat the complete understanding of com-
plexity and change is impossible: our ability both to comprehend the present and to predict the future
is [herefore inevuably limited. As a consequence. successful practitioners - engineers, doctors and
politicians, as well as business maflagers - do not, in general . roHow strategies advocated by the ratio-
nalists, but incremental strategies which explicitly recognize [hat the firm has only very imperfect
knowledge of its environment, of its own strengths and weaknesses, and of the likely raleS and directions of
change in the ruture. It must therefore be to adapt its strategy in the light of new infonnation and
understanding, which it conSCiously seek to obtain. In such circumstances t};Ie most efficient
procedure is to:
1. Make deliberate steps (or changes) towords the stated objective.
2. Measure and evaluate the effects of the steps (changes).
3, Adjust (If the .. and decide on the next step (change).
This sequence of behaviour goes by many names, such as incrementalism, trial and errQr, 'suck it
and see', muddling through and learning. When undenaken deliberately, and based on strong back- .
ground knowledge, i[ has a more respectable veneer, such as:
www.managlng-innovation.com
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dealing willl
Dl"'$l gn --; ,kn.: ILl!"J lI1L"nI ......., leSt.....:,. :ltljusl --4 \for mnking pn)t.bn
:l11(1 pn)cc:-;s H11ltl,,;uiolls).
:-;tl\l[t:glCS t hal til) n!)t I he lll" t !)Tl!SLI"II, and 1 he UI1CerLo.IinLics ilS-
wuh ..- hange and the IULUrc. wlil he ligu.!. wiJl pwo<1bly be wI"ong, .md will poten-
li.llIy ilL' di5..ISIWUS ir !lu.:)' arc full), II npll'll1CllLCd lCJSC :Hlldy 4- .1), BUl this i::. not .\ I I!.lS0n fill" reje..:t1ng
,mi.llysis and l'ali11l1:llit)' In inlllwJlh")n On the under ": l)[H.lili,)l\S 01" l:omp!e:xlty
:lIld l:tJl1\inllOllS t.:bangL" it Cilll hI! fh;\I in ..... n.' l1lentalisl' are more riiliunaluhnl is , more
than sn:llcgics. Nor is ir i1 J"t!.lS<ln for all Ilmilms t)f planning.
lh\.' lUiglfWI llf rhe c.lt i,)I"Iali:its' It)!" 5Ir;ucgic. plannll1g - \lUl i1b..Wi! - renmlll v:Jlid.
and t.'.sp':l"1ally hig 1111t:5, ,:tithout <lll)' srr;llegics .vill I"k:' iII-l'qllipPl:' d 10 dC':11 wil h (".merg-
ing ;md Lluc:lIs: ns P",steur nbserved.. t:hance r.1V11UfS only the prepared mind'.11
The limits of rational strategizing
jonathan S,lpsed's th!lUght-prnvoking analysis tlr corplJr<lLf: slrmegies of entry inlt) new digital
. !11 Lmcr)l.ing indusl.!:ies is
Ikcausc or ihe intrinsic.: uncerfOlinfY in such oUl area, il LO foree;l.sl .md
diet on which rJ.tlonalisl strmcgy. e.g. as n:cnmmc::ndt::d by Puner, will be
Sapscd's bonk indudes qst: sludies or companil's lll.H haw. fnllowed the Tfllio'1aJ
approach ,md subsequently round theirstmtegi"es frusrrated;
An c.--:ample is Pearson, llie largt! media conglomerate, which c.ond'qcted il S\VOr arlalysis ih .
resp011se [0 in digitJI nu'di:1. The su.ucgizi;lg the groups slmng assets in
print publishing and brocl.dcllSllng, bur lJl;:n.:ei\'ed weaknesses in III!W media. Hitving t..'Slablbhed itS
'gaps' in cilpability Pearson Lh(;11 sCOlrched for iln aLtractive multimedia firm Lo filllhe gap. It cxpen
sivdy at.:.quirt'd Mlndscape; smilJl Californian litm: The strategy l"niled with Mindsc:ape being '
ror a loss 212 1"J?i1Hon four years later, :104 Pel1rson announcing from eme.r.glng
of q}l)sumer mullimec.liCi.
The slrategy failed for re,lSons: First, llnramiliarilY with tJlt! rfchnology.lUlt.1 marL<et'; ..
a misjudged of P()silion; and third, a lack or awarem:ss of the m.ul- ..
timediaaCli\!iqes illrcadywirhin groUp .. n .Ie I .. milal strii).teb'Y I!xercises thal precedeu
prone. 1.11 and miSinformaLjDt:l. l11e- rrllll1 nperaLillns
by infol1Tltllion The of rUlionnl S[tdttg)' i,
not on as..sesshlg Jrising from operations, but plnccs great credence in logi:
calthoughL.
Sapsed argues thal whilsr formal is limilcdin whnr it can .Ichieve. it may be viewed
under It C.3n o::nable disciplined thought
: . ,.: . . on linking to m.lrkeLS, a!1o direci auention to new infom13l.lon <lnd leltrning. It
, .. : ..
.,.. minds on f;nillll:llIl HQws and options in [he e.vent p Gri.si.s qr
growth. RaLher [han delermining future action, il can prepare lht: firm for unfoTtseen
:.- ..
www.managing-innovation.com
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rillS dl.+;Il;,.' In; I\'I.'{' <;t'IS (If llllplicHIIlI1:-:: !11:m:lgr1'.<:: TIlt' !ir:-:I !il: j'Ut'! In' ,_'I SJr:ucg),
."Iud) ; hl)uhJ ;\5 :1 fmm III /(,/lnm,l!. 111 '/11 , Uldh',:5 "Jhi 1.\",Ti,nl: '. Ihl\\' III .111"1: 1II111i'
l'/{n.!h'!'i\' WI,/, 1:IJI!1I'/c.,il.\I II.flll Thl" implicllions for lhl! ' .. If :>LI:.Ht:gy em': the
["()/ Ill\\'; n g:
unL'fl"rail1ly, e.:;plnrt: implh:;llinns Ilf;t Ill" future trends.
i:nslIre hrCliU1 participalion <Iml inrllrl11al cim(1nds Df
Eno)uragc lilt: liSt' Il[ multiple .5011n.:CS llr infIHmulion. deb:lle ,lUti Si.:cplidsm.
EXPl't:t to strategies In dlt: lighl \lr llt:W t.:md Orl('ll unexpt:,:lt:d) c\'idl.'llce.
second lmpliGtlion is fhat slIc:assjul mluwgclIU.'1H rl'tJdilr is Ilc\'CI"./illl-" 1", :pmJudbl.:. ( Olllpit:<
wnr!tl, ,wither Ihe most slTuplllnU5 pnu:lisil1g l11nnnger Ill.lr lhl' most. managemel1t Lan
he "I' ltic!llilying - lel :llolle evaluilling -:.111 the neccsstll')' ingn:dients ill 1'1.::.11 l'xumples or 511<.:<.:ess
' ul managellu.:nt pmclil:e. Tn adJilion, the c:ondilions of any irnpt'rfect ) repmclu(tion Llr
m;tn,l,ge:merll praclice \o\lill dUrer from lilt., original. Whlthcr in lerms "f 111111, country. s(:nor,
sHUt' of rechnic.li knowledge. ()r nrg.mtz;1tiOmll ski lls rtnd cultural lllrtns.
Thus. in cOlldhions "r complexity ;mu (hange - in olht'r wt)rds, Ihe I:onuhions for inntl-
- lht'l'c o.lre nll l'llSily applicHble recipes for su<':ct'ssfuiman::ge.mt;",llt pranke, This i:ci one or I Itt' rc::a
wh:.' Lherc arc in management fa:cihion
:lnti ;u)aiysis Ill" lllhers necessarily rct.luires the rollowing:
I. A .:rWclIl mIt/ill,!.! c:viJt'IIt:i: tllldaiyfng daims rd huv(' /Itt' {/SSOdIUt'J with I1WI1-
.'iU(Ci'SS. Ctlmpart.. for e:--;.tmplr, the I:xphm .. tions ror ::;uct.:ess llf Hl)rida in lXnctmring
US mOlOl'cydt' marke.1 in 19605, given (j) by {he emsulting liroup: exploitation Ilf cost
tbrough m:l1lufacluring ilwestmenr :lhd pro<iuclitJll Ifumi ng in dt'libn;llt:ly t!'lrgf'Ied :md
spcdlic ID:lrkel segule.nts: I J <'nd til) by Richanl Pascale: ne:,<ibilily in pruuuL:l.-market slrategy in
to unplanned market signals, high-quality product design, investment ill n:-
spol1se to market Sll(.'l:':S.Ii,14 T.hc dcbule has recently been revived, although not resolvt'u, in rhe
Ctll!fornid Review. 15
2. A careful t?f Ow ([)nLf:...'CL oj prac[ice, Will1 t,he col1text oj tltt..flrm. inJus-
r,y. te:d17W/O,V"y lInll ((lunIIY il1 whh:h ''It' prae/iel! mighf (J(:' reused, For c.'<ornpic, nne rnbusl conclusion
[rom managemenl n:se<lTch and experience is thm 11l:'l.lor ingredients in Ihe successful implrmen.
tmion l.,f innUV;lliOI1 :ue cnective ltl1kagts amongst functions V'nlhin thl' firm, nnd with outside
sources [Jr rclcwnt sC'ientHic and marketing knowledge. AILhough very useful to managemem, this
has its limits. Conclusions from a cirug finn thai the key linkages llre between ulliver
sily research and product devdopment are profoundl)' misleading for an automobile firm, where
the key linlmgcs are amongst product development, manufacturing and the supply chuin. And
even wilhi_n c.u.:h uf these industries, linkages may change over time. In the drug lndus-
---------:,=ryc-,: include [ILOre biology And in
compuling and .1ssodaled skills have hec.:ome Important for the de,'elopment uf
'virtual pmtorypes', and for link:lges between product deve1opment, manttfaclunng and Ihe supply
ch<lin.
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" ", Swings in management fashion
Ul>sizing. After a decade of companies to shnnll. management theorists have starred to sing
the praises of corporalt growth.'
(feature title from The EcOl1omist, 10 February 1996, p. 81)
'Fire and forget? Having spent the 1990s in the throes of tlstructuling. reenginuring and doWIl-
siting, American companies are wonying about corporate amnesia. I
(Feature title from The Economist, 20 April 1996, pp. 69-70)
Above are two not untypical examples of swings in management fashion and practice that reflect the
inaBility of any recipe for good management to reflect the complexities of the real thing, and to put
succt.SSfui experiences in the past in the context of (hot function, finn, country, technology, etc. More
recently, a survey of 475 global firms by Bain and OJ. showed that the proponion of companies
using management tools associated with business proass 1"Ctnginetnng. cort compctcnoes and total
quality management has been declining since the mid-1990s. But they still remain higher than the
more recently developed tools associated with knowledge management, which have. bee.n less success-
ful, especially outside North America (Management fashion': fading rads. The Economist, 22 Aplil
2000, pp. 72-3).
The management tools and techniques desclibed in this book represent only very imperfectly the
complexities and changes of the real world. As such, they can be no more than aids to systematic think-
ing, and to collective learning based on analysiS and experience. Especially in of complexity
and change, tacit knowledge of individuals and groups (I.e. knoW:MW is bisep. on apd
that cannot easily be codified and reproduced) is of central importance, whether in the design of auto-
mobiles and drugs, or in stf".iLe:gic management of innovation.
Blue Ocean innovation strategies
For the past decade INSEAD professors w. Chan Kim and Rente Mauborgne have researched in_
novation strategies, including work on new market spaces and value innovation. Their most re-
cent contribution is the idea of Blue Ocean Strategies.
By definition, Blue Ocean represents all potential markets which currently do not exist and
must be created. In a few cases whole new industries are created, such as those spawned by the
Internet, but in most coo they all: created by challenging the boundaries of existing industlies
and markets. Therefore bOLh incumbents and new entrants' can playa role.
They distinguish Blue Ocean' strategies by compaling them to traditional strategiC thinking,
which they refer to as Red Ocean strategies:
1. Create uncontested market space, rather lhan .compete in existing market space.
1. Make the competid,on irrelevant, rather than beat compenlors.
3. Creace and capture new rather than fight (or existing markets and customers.
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4. Break the traditional value/cost trade-off: Align the \7hole system of a companys activities in
pursuit of both differentiation and low cost.
In many cases a Blue Ocean is created where a company creates mlue by simultaneously reducing
costs and offering something new or different. In their study of 108 strategies they found
that only 14% of innovations created new markets, whereas 86% were incremental line t:..'<:tensiorlS.
However, the 14% of Blue Ocean innovalfons accounted fOT 38% of revenues <lnd 61 % of profits.
The key to creating successful Blue Oceans is (0 identify and serve uncontested markets, and
therefore benchmarking or iInitating competitors is counler-productive. It of len involves a
radically different business model, offering a different value proposition <:t lower cost. It may be
facilitated by technological or other radical innovations, but in most cases this is not the driver.
Sotnus: W. Chan 10m and R. from thtoty to pnclk:e. CaflJomitt Manoganent RlYitw.
-H (3): Ocean SLtult;:y: How to Crratt Madttt Spau and MrJht tI" Compttitioll Indcvont,
Harvard Busines:; School, Boston, MAo: (2004) Ocean SlT'9le5)'; Har.ard Business 81 00). 0ctw.r, 76-84.
Innovation 'leadership' versus 'followershlp'
Finally, according to Porter, firlT's must also decide between two market strategies: L
J. Innovation whe<a.fir.ms-aim .. being first to market, based on technoJogicalleaduship.
This requires a strong corpor.1te commitment tt;i creativity. artd risk taking, with close linkages both
to major sources Of iele\rant new knowiedge, 'and to the needs and responses of customers.
2. Innovation 'followership' - ,::here firms aim 'at being to market, based on imil1lling (learning)
from the experience of tech:tological leaders. Tlilii reqllires .. a strong-eommitluent-to-cornpentm ...... --4.;:,
analy!is and to I'!.ve.n:e engineering (i.e. testing, evaluating and taking to pieces competi-
tors' products, in order to ulderstand how they work. how they are made and why they appeal to
customers), and to cost cutlir.g and learning in manufacturing.
However, in practice the distinction between 'innovator' and 'follower' is much less ciear. For exam-
ple, a study of the product strategies of 2273 finns found that market pioneers continue to have high
expenditures on R&D, but that this subsequent R&D is most Kktly to be aimed at minor, incrr.mental
innovations. A pattern emerges where pioneer firms do not maintain their historical strategy of innova-
tion leadership, but instead focus on leveraging their competencies in minor incremental innovations.
Conversely, late enlrant firms aprear to pursue one of two very dlllerr.nt strategies. The- first isbased on
competencies other than R&D and new product development - for exarllple, superior distribution or
greater promotion or support. The second, more interesting strategy. is to focus on major new product
development projects in an effort to compete with the. pioneer finn.ls
However, this example also reveals the eSsential weaknesses of Porter's framework. for analysis and
action. As Martin Fransman has painted out, technical persormel in firms like IBM in the 1970s were
"'41{ ;SURf! sf tIettds iII selldtondUctor teChnology. and illeirpossible on the competitive position
of mainfrnme producers. t"IBM in fact made at least one major contribution to developments in the rr.v
... Q.l"4.tionary !lew technology: RIse Yet, in of lhis none of the estab-
lished firms proved capable over the next 20 rears of achieving the primary objtctive of strategy, as
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defined by Paner: . to find a position, .. where a company can best defend itself against these com-
petitive forces or can influence them in its favour',
Uke many mainstream indysliial economics, framework underestimates the power of tech-
nological change LO transfonn industrial srruclUres, and overestimates the power of managers to dedde.
and implement innovation strategies. Or, to put it another way, it underestimates [he imporLance of [ech-
nological trajectories, and of the finn-speCific u:chnological and organizational competencies to exploit them.
Large firms in mainframe computers could not the trajectory. Although they had
the necessary technological competendes" their organizational competencies were geared to selling
expensive products in a market, rather than a proliferaring range of cheap products in
increasing range of (as yet) unfocused markets.
Thtse shortcomings of Porrer's framework in its treatment of corporate technC?logy and organization
_., on individual firms in choosing their innovation strar.egies. In
particular:
Firm slle influences the choice between 'broad front' and 'focused' technological strategies. large
fiims typically have 'broad front' strategies whilst small firms are 'focused'.
The firms established product base and related technol9gical competencies will influence the range of
technological fields and industrial sect(jrs in which it can hope to compete in future, Chemica1-based
firms do nm diversify iilto making electronic products, and vice versa. It is very difficult (but not im-
possible, see, for example, the case of Nokia in Box 9.2) for a firm manufacturing traditional textiles
to and make computers,20
The nature oj tts products and <ustomm will strongly influence its degree of choice between qUality and
cost. Compare food products, where-thernnnypically a wide range of qualities and prices, with eth-
ical drugs and passenger aeroplanes where product quality (Le. safety) is rigidly regulated by govern-
ment legislation (e.g. FAR, JAR) or agencies (e.g. FAA, C'\A). Food firms therefore have a, relatively
wide range of potential innovation strategies to be choStn- fiom'amorl&<,Cil16Si'described oy-porier.
The innovation strategies of drug and aircraft finns, on the other hand, ineVitably require lorge-scale
expenditures on product development and rigorous testing. .
in addition, technological opportunities are always emerging from advances in knowledge, so that:
Firms and do not fit tidily into pn;ordained and static indUstrial structures, In particu-
ilr, firms in the chemical and electrical-electronic industries are typically active in a numb<.r of
product markets, and also crute new ones. like personal computers. ReaUy new innovations (as dis-
tinct from radical or incremental), which involve some discontj,nuity in the technolOgical or marke.t-
ing base of a finn art: actually very common, and often evolve into new businesses and producdines,
such as the Sony Walkman or Canon laserjet printers.
21
.
Technological advances can increase opponunities for profitable innovation in S<H:alle4 mature
sectors. See, lor example, the opportunities generated over the past 15 years by applications of [T in
distribution and coordination in such firms as Benetton and Hotpoint. 22 Se. also the in-
in traditiolUll service activities UU banking,
following massive investments in IT equipment and related software competencies.
23
Finns do not become stuck In the middle as Porter predicted, John Kay has shown that -finns with
medium costs and medium quality compared to the competition achieve higher
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24
Furthermore, some firms achieve a combi_
nation of high quality and low cost compared to competitors and this reaps high financial returns.
These and related issues of product strategy will be discussed in.,.Ch?pter 9.
There is also little place in Porters framework for the problems of impltmentfng a strategy:
w.hich are large and specialized must be capable of learning and changing in response
to new and often unforeseen opportunities and threats. This does not hapPell automatically, but must
. be consciously managec,i. In particular, the continuous transfer of knowledge and illfonnation across
functional and divisional boundaries is essential for successful innovation. Studies confirm that the
explicit management of competencies across different business divisions can help to create radical
interactions attention to leadership roles, team composition and
informal networks.
Elements of Porters framework have been c.ontradicted as a result of organizational and related tech-
nological changes. The benefits of non-adversarial relations with both suppliers and customers have
become apparent. Instead of bargaining in what appears to be a zero-sum game; cooperative links
with customers and suppliers can increase competitiveness, by improving both the value of innova-
tions to and the with which they are supplied.
26
According to a survey of innovation strategies in Europe'!; largest firms, just over 3j% replied that
the technical kilowledge they obtain rrom their suppliers and customers is very important for their own
innovative aC:tivitles.
27
_._.. -
Christensen ;Ind Raynor provide a recent andbalanced summary of the relative merit:; or the rational
versus incremental approaches to strategy:
. core competence, as used by many managers., is a dangerously il1Wllrd=ltrolting nlm1l!C
CompetitiveTless Lc; far more about doing what customerS value, than doing what you think
you're good :at ... the problem with the core competence/not your core competence categoriza-
tion is that Yl-hat might seem to be a non-core activity today might become an absolutely critical
competence to have mastered in a proprietary way in the future, and vice versa ... emergent
processes should dominate in circumstances ill which the future is hard to read and it is not
dear what the right strategy should be .. , the deliberate strategy process should dominate once
a winning strategy has become clear
l
because in those circumstances effective execution often
spells the difference between success and railure.
28
4.2 The dynamic capabilities of firms
Teece and Pisano
29
integrate the various dimensions of innovation strategy identified above into what
the ' which underlines the importance of
dynamiC change and corporate learning:
This source of competitive advantage, dynamic capabilities, emphasizes two aspects. First, it refers to
the shifting chamcter of the environment; second, it emphasizes the key role of strat.egic management
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in appropriately adapting, integrating and re-configuring internal and external organizational skills,
resources and functional competencies ,towards a changing environment (p. 537).
To be suaregic, a capability must be honed to a user need (so that there are customers), unique
(so that the products/services can be priced withom too much regard for the competition), and dif-
ficultto replicate (so that profits will not be competed away) (p, 539),
We advance me argument (hat the strategic dimensions of the finn are its managerial Jnd orga-
nizational processes, its present poSition, and the paths available to it. By manageru.l processes we refer
to the way things are done in the finn, or what might be referred to as its 'routines', or pauems of
l'Urrtnt practice and learning, By poSition, we refer to its current endowment of technology and
intellectual propeny. os well as its customer base and upstream relations with suppliers, By paths we
refer to the stra'tegic alternatives available [0 the firm, and the attractiveness (!If the opponunities
;"hich lie ahead -(pp, I, OUT ilalics),
Institutions: finance. managemeni and corporate governance
Firms' innovative behaviours are strongly influenced by the competencies of their managers and the
ways in which their performance is judged and rewarded (and punished), Methods of judgement and
reward vary considerably amongst countries, according to their national systems of corporaLe gover-
nance: in other words, the sysrems fot exercising and changing corporate ownership and control. In
broad terms, we can distinguish rwo systems: one practised in the USA and UK; and the other in japan,
'-Germany and us neighoourS, su'ch as Sweden and Switzerland, In his book Capitalism agamst Capiealism,
Michel Alben callsth. firsuhe andehe second the 'Nippon-Rhineland' variety,JO A lively
debate conrinues about the essent{al characteristics and perfonnance of the twO systems, in terms of
innovation and other performance variables. Table 4.1 is based on a variety of sources, and tries to iden-
[ify the main differences that affect innovative perfonnance; ... ..... . - -------,---"- .
In the UK and lhe USA, corporate ownership (shareholders) is separated from corporate control
(managers), and the two are mediated through an active stock market. Investors can be persuaded to
hold shares only if there is an ""p<Clation of increasing profits and share values, They can shift their
investments rel1tively easily. On the other hand, ip. COUntries with governance Structures like those of
Germany or japati, banks, supplier$ and customers are more heavily locked into the firms in which they
invest. Until the 1990s, countries strongly influenced by German and Japanese traditions persisted in
invesring heavily in R&D in eseoblished firms and technologies, whilst the US system has since been
more effective in generating rtsources to exploit radically new opporrunities in IT and biotechnology.
During the 1980s, the Nippon-Rhineland model seemed to be perfonrung beuer, Aggregate R&D ex-
penditures were on a healthy upward trend, and so were indicato," of aggtegare economic performance,
Sine< then, thFre have been growing doubts, The technological ancl economic indicators have
been perfonning less welL japanese finns have proved unable to repeat in telecommunications, software,
rrrl.croprocessars and cemputing their technological and competilive successes in consumer electronics.)1
German firms have been slow to explOit radically new possibilities in IT and biotechnology.32 and there
___ in corporate strategy. Iil!.e the entry of Daimler-
Benz into aerospace, n At the same time, US finns appear to have learned important lessons, especially from
the japanese in manufacturing teclmology, and to have ieassened their eminence in IT and biotechnology.
Ibe 19905 also saw sustained increases in productivity in US industry. According to The Economls( in 1995,
in a report entitled 'Back on lopl', one professor at the Harvard Business School believed that people wilt
look back at this period as 'a golden age 'of entrepreneurial management in the USA:, J+
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oftechnlcal knowledge (% firms judging source as
being 'very important')
Home country Other Europe North America Japan
Affiliated firms 48.9 42.9 48.2 33.6
..................................................................................................................................................................................................... , .. , ..
Joint ve.ntures 36.6 35.0 39.7 29.4
, ....................... , ....................................... , ............ , ................................................................................... , ........................................ ..
. Independent suppliers 45.7 40.3 30.8 24.1
............... " ...................... _ .................... , ....................... .................................................................................... , ............................... ..
Indepe.ndent customers 51.2 42.2 34.8 27.5
............. , .... , ..... , ........... ........................................................ _ ... _ ..................... -. __ ."' ............................................ -.......... , .......... ..
Public research 51.1 26.3 28.3 12.9
Reverse engineering 45.3 '15.9 40.0 40.0
Source: Arundel, .-\" G. van der Palil and L Soete (199') Innovation Stratt'glts of Largest lndwtriai F!rm.s, PACE Rport,
MERJT, University oi Umboorg, MIlBStricht, Rtprodutu1 by permlssion of Anthony Arundel.
\;. . .. . . . . . . ./
have at least three reasons for monitoring and leaming from the development of technological, produc-
tion and organizational competencies of national systems of innovation, and especially from those that
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:
1. They will be the sources of firms with a strong capacity to through innovation. For exam-
ple, beyond Japan, other East Asian counuies are developing strong innovation systems. In particu-
, .
lar, business finns in South Korea and Taiwan now spend more than 2% of GOP on R&D, which puts
tbem up with the advanced OECD countries. By the early 19905, Taiwan was granted more patents
in the USA than Sweden, and together with South Korea, is catching up faSt wit4 Italy. the Neiherlands
and Switzerland. Other Asian COl.\ntries like Malaysia are also developjng strong technological cOTl)pe-
tendes. FollOwing the collapse of the Russian Empire, we can also anticipate the re-emergence of
strong systems of innovanon in. the Czech Republtc and Hungary.
They are also potential sources of improvement in the corponie management of innovation, andlri
national systems, of iimovation. However, as we shall see below, interpreting and
learning general lessons from foreign sy><ems of innovatiOn is a difficult task. Effectiveness in inno-
varian has become bound up with wider and ideological interests, which makes it more dif-
ficult to separate fact from belief. Both the business press and business education are dominated by
exampIe.: very litdo is available in English on the manage_
. mem of innovation.in Germany; and much 'of the information about the m,anagemen( of innovati.on
in japan has heen via interpretations of researchers from Nonh America.
3. Finally, firms can benefit more speCifically from the technology generated in foreign systems of itmova-
tion. A high proportion of large European firms attach great importance to foreign sourceS of technical
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knowledge, whether obtained through affiliated Finns n.e. direct foreign investment) and joint ven-
tures, links with suppliers and customers, or reverse engineering. In general. they find it is more diffi-
cult to learn from Japan than from North America and elsewhere in Europe, probably because of greater
distances - physical, linguistic :,nd cultural. Perhaps more surprising, European fimls find it most dif-
ficult to learn from foreign publicly funded research. This is because eJlective learning involves more
subtle linkages than straightforward market transactions: for example, the membership of infonnal pro-
fessional networks. This public knowledge is often seen as a source of potential world ilUlOvative
advanrage, and we shall see that finns are increasingly active in trying to access foreign sources. In con-
trast, knowledge obtained through market transactions and reverse engineering enables firms to catch
up, and keep up, with competitors. East Asian finns have been ,'ery effective over the past 25 years in
making these channels an essential feature of their rapid technplogicallearning (see Case study 4.2).
The slow but significant internationalization of R&D is also a means by which firms can iealTI from
foreign systems of innovation. There are many reasons why multinational companies choose to locate
R&D outside their home country, including regulatory regime and incentives, lower cost or more
specialist human resources, proximity to lead suppliers or customers, but in many cast-.5 a significant
motive is to gain access to national or regional innovation networks. Overall, [he proportion of R&D
expenditure made outside the home nation has grown from less than 15% in 1995, to more than 25%
by 2009. However, some countries pre more advanced in internationalizing their R&D than others
(Figure 4.1). In this respect European firms are the most internationalized, and the Japanese the least.
35 liI JAPAN
1!1 USA
30
EEUROPE
25
20
15
10
5
0
2001
FIGURE 4.1: Intemationalization of R&D by region (% R&D expenditure outside
o m ~ region)
SOUrtt:: Derived fromj. Edler, F. Meyer-Krahmer and G. Reger (2002). Changes in the strategic llUl1lllgement of
technolo!?': results of a global benchmarking study, R ($.l.V Management 32 (2): 149-164.
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Technology strategies of latecomer firms in East Asia
The muUCTniZalklO OVl!f the pil!il 25 j'cars (}f the bSI ,-\sian "dragon' coumrjes -
Hnl1g Ktlllg, South Kt)rea. Singapore ilnd T"liwan - 11:\5 led w li\'..;ly debm..: ,1boUl iLs causes.
Michael Hnlx!..ly has pl'Ovidc:d illipurLanl ne\V insighls Into how business firms these
I ries in I""Jpid learning anu ledmologiol c:llch up, in spilt: 01' unden11!\eloped do-
s),slems of scicm:c and technology, imd J. lack lechnulogicall)' sophisticJlcd domesric
cusWI11t:rs.
Go"e:rnmcnr policies pro\'il1cu the f.tvomablc ge.neral ..:lil1llre: !!Xport orkmatjon;
b,Jsic and with slnmg emphusis 1m induslrial u.nel a scable economy.
wilh k)w inflation !lnd h1gh savings, However, of l11tljor nnpDnam;(.' were the sti"i\[cgies ..md policies
df business firms for the erreclive assimilation of foreign technt)lo!:,,)'.
The main L'utching LIp' was the same in dectmnks, sewing
machines and ;.l,uromobiles, namely the 'OEM' (uriginill equipment manu!"ac1lI:re) sys(e.m, OEM is.
a speci6.; form of subcomracling, whl!Te limls in catching-up 1,:ountrics pnxluce guods lO the ex-
act' of u foreign tmns-n;l[ion:ll COl11pan}' (TNC) nDnnally !Xt!.:t,U in a ncher and mch-
nok'gically mon: advam:t:d countl:Y. For the TNC, lhc pLlrpose is ro CIlSI:i, and 10 this t:nd it
offers assistance 10 the latecomer firms in 4ualilY COIlUlll, oi equipmcl1l. and engineering
and ... _"" __ ... ____ .. '"_________ .
OEM began in thc 19605, and more !\Ophislit.:alt:'d in the 19705. The nexl St;.lge in the
mid-19BOs was nOM (own design ;.Inti \lJhcrt" the firms learned to
pn.)(]UCtS fIJI" the buyer, The last swgc WOlS OBM (l)Wn brand manufacture) where latecomer finn::;
In<ll-}.;(;[ lhcir l1wn produc(s unde.r rheir t)wn brand n,IIDc (c.g. S<ltnsung, 1\I...er) :m.d (ompcte
un with lhc
For each of up, the compilll)'5 technology ptl51rinTI mUSl be mmchcd with u''"'
corrcsponding posilion, <IS shown lxlow; '
Stage
L AS!>'l11bly skills
prpdUCliol1
Mature produc[s .
lncremcnUlt pmcess change
Reverse
.3. Full prouuction skills
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Product design
R&D
ProducL innovation
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posiUon
Passive imponer pull
Cheap.lalXlllr
Dislribulion b)i bu)'crs
Active to r!?reign buyer
Quality und costbased
Advanced production sales
jnJCTnllljonul
Markcts own dt!Sign
ProdUCl markcling push
Own-brand PtQdud range sales
Market position
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Advan(:ed innO\":J lion
learning and imitating
Own-bnmd push
In-house mnri(CL research
Independent dislribution
Vih ilsl inform:ll i.,tl lXI (o1l1peli ll'fS' innovations is rr.-I:ltively Cht!.lJ1 ilnd r:.:1Sy 10 Llbt:lin, L'erporare t!xpt:-
shl.)WS 111:11 knlm'ledgl': L,r how 1.0 n:plki\le l:lml pel.ilO[S' product llnd process is mUL'h
L'OS! Iy :111d lIme 1;11'151.1I11ill,1]; 10 acqUire. SLH.:h imilation typically costs between 60 ami 7f)% Ill'
llriginal. and tYPIGllly l:lkes three years to ;u.:hif've.
CQIll:luslnllS :: re illu51rated by the or Japanc5e :md KI11"e,\J1 finns, where very t:ITel'livt
imittllil1l1 has been br nml tirrn-spedtk inVl'slnlL'IlIS in educ.: ::ltion, IrJi nillg ami R&D,.!\)
;m: confirmed hy a hlrgcsctlt: survey ,.r R&D 1n;\l1agt.'rs in US finn..,; in the 19805. ,\$ T:lble 4.1
"hows, nlill1ag\."f!' feIJt:rte.d lh.:ll thc inmpl1aot .me.LlltxJS-')[' .. I"arning.' aa"HH

/'
TABLE 4.3
'\
Effectiveness of methods of learning about competitors
Method of learning
Independcnl R[rD
Rt:verse engineeri ng
Licensing
Hiring employees rrom innovating fiml
..... .......................... ........................ ........................................... ' .....
Publi C:Hlons or open lechnical meelings
Patenl disclosures
Consultalions with empll1yt.'es of the innovaling firm
Overall sample mea"s'
Processes
:6
4.07
4.58
4.02
4.07
3.88
3.64
Products
JOO
4.83
4.62
4.08
t.lli
4.0\
3.64
__ +-_ .. __ .. : .. : .............. _ ...... .
lbngr.: I ... nUl al all dln'tiV( . 7 Vi:ty dYttUVi:
s.IUfTl': I.e.vin. R., A. R.o Nelson and S. ( 19A7) Apprtlpttlting thl! ,elunl$, ho m intJusuial research ;Iud dt
1m F.C11I1VIl1K: !\Clilit,y, 3, 7!U-820. Rfpnxlllt:ed by of The Bmokings 111S1ilUlion. ../
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innovations were independent R&D, reverse engineering and licenSing, all of which are expensive com-
pared to reading publications and the patent literature. Useful and usable knowledge does nOl come
cheap. A similar and more recent survey of innovaLion strategy in more than 500 large European finns
also found mat nearly half reponed the great imporlance, for [heir own innovative activities, of the tech-
nical knowledge they accumulated through the rev..;rse engineering of competitors' products.
27
For
Bookpages. a UK Internet business, was developed in response to the success of Amazon in
the USA, and based upon the founders previous experience of the book trade in the UK and deep
knowledge of IT systems. However, in order to raise sufficient resources La continue to grow, rhe business
was later sold to Amazon.
More [ormal approaches to technology intelligence gathering are less widespread, and the use of
different approaches varies by company and sector (Figure 4,2). For example, in the pharmaceutical
.sectar, where much. of the knowledge is highly codified in publications and patents, these sources of
information are scanned routinely, and the proximity to [he science base is reflected in the widespread
use of expert panels. In electronics, product technology roadmaps art commot:lly used, along with the
lead users Csee the 3M video for a discussion of lead tisers). Surprisingly (according to this study of 26
large firms). long-established and proven methods such as Delphi studies, S-curve analysis and patent
cirations are not in wiqespread use.
4.3 Appropriating the benefits from innovation
Technological leadership in firms does not necessarily translate itself into economic benefits
10
Teece
argues that the capaCity of the firm to appropriate the benefits of its investment in technology depends
on two factors: (0 the .firms capacity to translate its technological.advantage inro commercially viable
products or processes; Cii)the firms capacity to defend its'.dvantage-against imitatolS. Thus;-efrective
patent protection enabled Pilkington to defend its technolOgical brotkthrough in glass maklng, and
stopped Kodak imitating instant photography. Lack of commitment of complementary assets
in production and marketing resulted in the failure of EMl and Xerox to reap commercial benefits from
their breakthroughs in medical scanning and personal computing De Havillands pioneer-
ing Comet Jet. passenger aircraft paid the price of revealing the effects of metal fatigue on high-altitude
flight, the details of which were immediately available to ai1 competitors, In video recordelS, Matsushita
succeeded against the more innovative Sony in imposing its standard, in part because of a more liberal
licensing policy towards competitors.
Some of the factors that enable a firm to benefit commercially from its own technolOgical lead can
be strongly shaped' by its management: for example, the provision of complementary asseLo; to exploit
the lead. Other factors can be influenced only slightly by the Ii""s management, and pepend much
more on the general nature of the technology, the product market and the regime of intellectual prop-
erty rights: for example, the strength of patent protection. We identify below nine factors which influ-
ence the capacity to benefit commercially from its technology:
1. Secrecy
2. Accumulated tacit knowledge
3. Lead times and after-sales service
4. The learning curve
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.... _ .. __ .. ' .. .
--.-;;"-:-" .... "':':"':'-". :-- .. -..
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,
... ...
.. -
Publlcal/on
Frequency
PUblical/on
Patent frequency
Patent citation
Benchmarking
" "
Expert panels
Product technology
roadmaps
Experience curves
Scenario analysis
lead user analysis
QUality function
deployment
" . ....
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,"
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. "
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d . :.-';, _ ..
1.0 1.5 2.5
Frequency of use (3=often, D=never)
PHARMACEUTICALS
FIGURE Use oftechnology intelUgence methods by sectoT
Soora:: Dtt1yed from E. tlchtf!nthallr (200'1-). Tedmo!.ogy InteDlgtnct in Jtadlng Europem and Nonh
American multinational!. R 1St D Mal1t1,tmmt. 3"'(2): 121-134,
www.managing-innolillion.com
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, ._ . J., , ____ ._
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5. Complementary assets
6: Product complexitY
7. Standards
B. Pioneering radical new products
9. Strength of patent protection
We begin with those over which management has some degree of discretion for action, and move on
to those where range of choices is more limited.
1. St:rncy is considered an effective form of protection by managers, especially for process in-
novations. However, it is unlikely to provide absolute protection, because some process charactetis-
. __ .tics .. .. an. analysis of the final product, and because process engineers are a pro-
fessional community, who talk to each ocher and move from one firm to another. so that infonnation
and knowledge inevitably leak out. il Moreover. there is evidence that, in some sectors, firms that
sbare their knowledge with their national system of innOVlltion outperform those tbat do not, and
that those that interact mOSt with global innovation systems bave the highest innovative perform-
ance." Specifically, firms that regularly have their researcb (pubucations and patents) cited by for-
eign competitors are rated more innovative than others, after controlling for the level of R&D. In
some cases this is because sharing knowledge the global system: of innavation may influence
standards and dominant designs (see below), and can help attract and maintain research staff, al-
liance panners and other critical resources.
;;-an difficult to imitate, especially when it is closely inte-
grated in specific firmsand regions. Examples indude product design skills, ranging from those of.
Benmon and similar Italian firms in clothing design, to those of Rolls-Royce in aircraft engines.
3. uad times and after-sales are considered by practitioners as major sources oLprotection
against imitation, 'for product innovations. Taken togemer wiui""a strong commitment '
to product development, they can establish brand loyalty and credibility, accelerate the feedback
from customer usc to product improvement, generate learning-curve cost advantages (see below)
and therefore increase the costs of entry for imitators. Based on the. survey of European
firms , Table 4.4 shows that there are considerable differences amongst sectors in product devel-
opment lead rimes, reiJeeting differences both in the strength of patent protection and in product
complexity.
4. The learning cum in production generateS both lower COStS and a particular and powerful form of
accumulated and largely tacit knowledge that is well recognized by practitioners. In certain industries
and technologies(e.g. semiconductors, continuous processts), the first-mmer acivantages :are poten-
tially large, given the major possibilities for reducing unit costs with increasing cumulative production.
However, such 'experience curves' are not automatic, and require continuous invesonent in traiDing.
and learning.
5. Complementary assets. The effective commercialization of an innovation very often depends on assets
(or competencies) in prodUction, marketing'and after-sales to complement those in technology. For
t:: _____ .a=pI.:.-E1Il...djd..>_ ........ I-i>.-II,. .... in electronie scanning. On the other
hand, Teece argues that strong complementary assets enabled IBM to catch up in the personal computer
market. 40
6. Product complexity. However, Teece was wrtting in the mid-1980s, and IBM, performance in personal
computers has been less than impressive since then. Previously, IBM could rely on the siZe and
'" _'n. '" . . ..... .... .. ...:.."' .. .
.. 0: '. : .. . -. ." : r
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Inter-industry differences in product development
lead time
Industry % of firms noting> 5 years lor dewlopment and
marketing of alternative to a significant product
innovation
All 11.0
Pharmaceuticals 57.5
Aerospace 26.3
Chemicals 17.2
Petroleum products
Instruments
Automobiles
Machin<ry
Eloctricai equipment
Basic metals
Utilities
Glass, cement and ceramics
Plastics and rubber
Food
Computers
Fabricat<dmetals
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13.6
10.0
7.3
5.7
5.3
3.7
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comple..'\ity of ilS mainframe computers as an effective barrier against imitation, given the long lead
times required to design and build copy productS. 'iVirh t..he advent of [he microprocessor 'and
dOO software, these technolOgical barriers to imitation disappeared and IBM was faced in dIe late
1980s with strong competition from IBM 'clones', made in the USA and in East Asia. Boeing and
Airbus have faced no such threat to their positions in large civilian aircraft, since the cOSts and lead
times for'imitation re...'D.ain very high.. Product complexity is recognized by managers as an effective
barrier to imitation.
7. Standards. . The widespread acceptance of a company's product standard widens its own market
and raises barriers against competitors. Carl Shapiro and Hal Varian have written the standard (so
iar) text on the competitive dynamics of the Internet economy .... 3 where st8..Tldards compatibility
is an essenrial feature of market growth, and 'standards wars' an essential featUre of the competi-
- - - . live Froc",, (seeBox 4.3). Hewever,"they point out that such wars have been fought in the adoption
Standards and 'winner takes all' industries
Charles Hill has gone SO far as to argue that standards competition creates 'winner takes all' indus-
tries .... This results from so-called 'increasing returns to adoption', where the incentive for cus- .
. torners to adopt .a standard increases with the number of user.; who have already adopted it, because
of the greater aV2ilability of complementary and compatible goods and services (e.g. content pro-
grammes for Video record""; and computer application programs for operating systems) . While the "
experiences of Microsoft and lntel in personal computers gin. credence to this conclusion, it does
not' always hold. The complete Victory of the VH5 standard has not stopped the loser (Sony) from
developing a successful business in the video market, based on its rivol, standard." Similarly, IBM
has not benefited massively (some would say at all), compared.taJIs competitors, from thesua:ess
oUts own personal computer standanl:
16
In both cases, rivol"]llOducers have been.able to copy the
standard and to prevent 'winner takes all' , because the costs to producers of changing to other stan-
dards have been relatively small. This can happen when the technology of a standard is licensed to
rtvols, in order to encourage adoption. It can also happen when teclmical differences between rival
standards are relatively small. When this is the case (e.g. in TV and mobile phones) the same firms
will often be active in many standards.
A re.cent reView by Femando Suare2 of the literature on 'itSndards criticized much of the re-
search as being 'ex-post', and therefore offering few Insights intolru. 'ex-ante' dynamics of standards
formation most reJeVllIlt to managers
7
It identifies that both fum-level and environmental factors
influence standards setting:
Firm-ltvdj",,,,rs: technological superiority, complemenwy installed base, credibility, strate-
gic manoeuvering, including enoy timing, Ikensing, alliances, managing marl<l:t expectations.
Ellvironmrntal jaclDrs: regulation, network effects, switching costs, appropriability regitne, num-
ber of actors and level of competition versus cooperation. The appropriability regitne.refers to the
legal and technological features of the environment which allow the owner of a technology
makes it more difficult for arivol firm to
Imitate or acquire the technology.
www.managinginnovation.com
31 r....
.. .. . -_ .
.... .
.,
...
of each new generation of radically new technology: for eXJ.IIlple. , over the width of T'".dlway
gauges in the nineteenth century, the provision of electricity through direct or aite:nating current
earl; in the. twentieth. and rival technical systems for colour television more recently. Amongst
other things they c:>nclude that the market leader :lormally has the advantage in a standards war.
but this can be overturned through radical technolOgical change, or a superior response to cus-
tomers' needs. Competing firms can adopt either 'evolutionary' strategies minimizing switching
costs for customers (e.g. backward compatibility with earlier generations of the product), or'rev-
olutionary' strategies based on greatly superior performance-price characteristics, such that
customers are willing to accept higher switching costs. Standards wars are made less bitter and.
dramatic when the COStS to the losers of adapting to the winning standard are relatively smal1
(see Box 4.5).
Diffe",nt factors will iuM an influence at different phases of the standards proc"". In the early
feasibility, faCtors such as the technological supenont)',
complementary assets and credibility of the fum are most important, combined with the number and
nature of other finns and appropnability regi=. In the next phase, creating a market, strategic ma-
noeuvering and regulation are most imponant. In the decisive phase, the most significant factors a",
the installed base, complementary assets, =dibility and influence of switcl1ing COSts and network
effects. Howrver, in practice it is not always easy to trace such ex-ante faCtors to ex-pOSt success in
successfully establishing a standatd crable '1.5). This is one rtaSO!l that increasingly collaboration is
occurring earlier in the standards process, rather than the mo", histoncal 'winner takes all' standards
battles in the later stages.
48
Research in the teleco=unications and other compl"; technological en-
virorunriitS-wnere compiiffiilltj iSrie<:es.,;;ij.Ciinfinns that early advocates of standards
via aremore.like!y,tu.=tt.standards.md acbieYe dominant positions in the industry net-
work (see. also Case stUdy 4.3 on E:icsson and the GSM standard) Contrast the faUu", of Philips
and Sony to estllblish their =pective analogue video standards, and subsequent recordable digital
mw. standards, compared to the su= ofVHS, CD and DVD standattlscw1tic:h-w= the reSult of
early alliances. Wh.,. strong appropriability regimes exist, compatibility s=dards may be less im-
portant than customer interface standards, which help to 'lock-in' cUstomers.;o Apples graphic user
inter-ace lS a good example of this trade-off.
8. Pioneering radical new products. It is not necessarily. great advantage to be a technological leader
in the early stages of the development of radically new products, when the product performance
characteristiCS, and valued by users, are not always clear, either io the producers or to
the users themselves. Espectally for consumer products, valued fearures emerge only gradually
thr01;gh a process of dynamic competition, which involves a considerablt amount of trial, error
and learning oy both produceIS and users. New features valued by users L., one product can eas-
ily 1?<; recognizedby competitors and incorporated in subsequent products. This is why market
leadership In the early stages of the deYe!opment of personal computers was so volatile, and
why pioneers are often displaced by new entrants.'1 In such circumstances, product .develop-
ment must be closely coupled with the ability to monitor competitC?rs' products and to learn
from customers. According to research by Tellis md In radic:a1 consumer Inno-
vations rarely succeed in establishing long-term market positions. Success goes to S<H:alled
'early entrants' with the. vision, patience and flexibility to establish a mass consumer market. ' 2
As result, studies suggest that the success of product pioneers ranges between 25% (for con-
sumer products) and 53% (for higher technology products). depending on the technological
www_managing-innovation.com

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.. ' ",;-:---.--, ' ._ 7' ---:-:::' .... . ' . . ,.. . . ".' " ._'_. _" . ' .. .
-
Standard
Betamax
VHS
CD
_4-_3:ti l"P'me'lHA"l:flRii J Iff lliiWttfrtrs:j,;l<llfM tllwa""'A\1""li1iI'""' , :R"'<
Cases of standardization and innovation success
and failure
Outcome Key actors and technology
Failure Sony, pioneering technology
Success Matsushita and]VC alliance, follower technology
Success
-- - -_ . . - ._ .. _- --_._--_.-
Sony and Philips alliance for hardware, Columbia
and Poly.gram [or content
DCC Failure
Minidisc Failure
MS-DOS Success
Philips, digital evolution of analogue cassette
Sony competitor to DCC, rciaunched after DCC
withdnwn, llmited subsequent success
Microsoft and iBM
;,. .. -............................................................................................................................ -............................................... _ ......................... .
J'.
,
Navigator Mixed Netscape was a pioneer and early standard for
Internet but Microsoft); Explorer
ovenook this
_ ... _ .................................................. .................................... .. _ .... ............... . _ ........ t .. ..
5ou.n:1'!: Dl'!.riveO. from Chiesa, V. and G. (2003) Standards-setting in the multimedia sector. InttmattonaI Journal oj
1"",,-. 7 (3), 281-300.
, ' . /
-,
and market conditions. For example, studies of the PIMS (Profit Impact of Market Strategy)
database indicate that (SUrviving) product pioneers tend to have hight: quality and a broader
product line thanfollowers, whereas followers lena to compete on price. deSpite haVing a cost
disadvantage. A pioneer strategy appears more succ<ssfol in markets where the purchasing
frequency is high, or distribution important (e,g. fast-moving consumer goods), but confers
no advantage where there are frequent product changes or high advertising expenditure (e.g,
consumer durables). 53
9. Strength of pateni protection can, as we ha"" already...,,;n the examples described above, be
strong determinant of the relative commerdal benefits to innovators and.intitators. Table 4.6 summa-
rizes the results of the surveys of the judgements ofmanagm-in large European and US firms about
the strength of patent protection, The firms' sectors are ordered according to the first column of
figures, showing the strength of patent protection for product innovations for European firms. On the
wtfiele. J!\!rep!aR firmi 'mh.,; chan their US C9unterpaItS. However, with one
exception (cosmetics), the variations across industry in the =gth of patent protection are Very
similar in Europe and the USA. Patents are judged to be more'effective in protecting product innova-
tions than process innO'_'3tionsin all sectors exx:ept petroleum relining, probably reflecting the impor-
tance of improvements in chemical catalysts for increasing process efficiency. It also shows that patent
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Inter-industry diff.,-ences in the effectiveness
of patenting
Industry Prnducts
Europe
ProCesses
USA
Europe

USA
Drugs 4.8 4.6 4.3 3.5
1-................................ _ .................................................................................................................................................................... ..
Plastic materials 4.8 4.6
:::.:-.::.:"..:: . =:::.;:::::=-:::::"::."::';:; .... : . ....... - .. : : ... ........................................................ _ ... . .
Cosmetics 4.6 2.9 3.9 2.1
Plastic products 3.9 3.5 2.9 2.3
Moter vehicle parts 3.9 3.2 3.0 2.6
Medical instruments 3.8 2 J 2.3
..... __ ................. _ ........ _ ... -............................................................... -...... -................... , ...... , ............................. _ .... , ................... -
Semiconductors 3.8 3.2 3.7 i.3
. - .. .... ...... ........ : ' ........ ' ............. _ .................. _ ............. _
Aircraft and parts 3.8 2.7 2.B 2.2
.................... _ .. "_.; ... ,.;.. ........ _.: .. ;: .... -._ .. . ; .. ,:.: ..:: ;::: .... .......... .......... -,.;.: .... .... ; ................... -............... , .......... _ ........................ ..
Communications equipment 3.6 2.6 2.2
.. ................ _ ..... _ _ m ................................ _ _ , ......................................................... _
Steel ICiIl products 3.5 . ........... ":>'6 '3:5'-'-- -rr-
, ............... ............ _ ................................................................................... _ ............................................................. _ ................... ..
Measuring devices 3.3 2.8 2.2 2.6
Petroleum rdining . 3.1 3.1 3.6 3.5
Pulp and paper 2.6 2.4 3.1 1.9
1 - bOl " 011 elI'.aM:; 5 ""l'.&a;...
Nate: Somt tndustries omitted because of lack of - USA .compm:bility.
Sou",,, IlIUM.!, 11.., G. von d. Poal mel L. S .. " (1995) rn ..... tionStraltgia '!)'Eump.\ PACE Report.
MERIT, 1lnlvc1Iity oflJmbourg, M.,mid". mel levin, 1. et 0/. (1987) Appn>pri2l1ng th< "'.It'" !rom indUStrial resesn:h mel
Bnx>klnpl'lrprn on 3. 78>-820. Reproduced bypernli!s1Dl\ ofAIclmny Anmdel.
./
1-___ drugs) than in other sectors.
This is because itis more drlficult in gmeral te 'invent round'. clearly sptcified chemical formula than
round other forms of invention.
Radically new technolopJes are.naw posing new problems for the protection of intelkttual property,
including the patenting system. The number of p .."ts granted to protect software teclmology is
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.... . -;
1

4. J M!lR'OP R I ATi NG ,HE cartH : S FRJIM IN N QYtm UN'
growing ir: the USA ar.d so are the :l:J.mbers of fi.:lanciD.i insnrutio:tS geaing involved hi ?2tenti:1g for
the firsl time.5.; Debat..:: and comroversy S"olr.ound imparumt issues, such as the possible eS'e:cts of digl-
tal technology on copyright the validity of patents to protect living organisms, and the ap-
propriate breadth of patent protection in biotechnology36
Finally, we should note that Erms can use !nore than one of the above nine factors to defend their
innovative lead. For example, in the pharmaceutical industry secrecy is paramoUI'.t during the early
phases of research. but in the late: stages of research pattntS become critical. Comp]ementary assets
such as global sales and distribution become more imPOrtant at the later stages. Despite all the mergers
and acquisitions in this sector, these factors, combined with the need for a significant cri:ical mass of
R&D, have resulted in relatively stable international positiOns of countries in pharmacemical innovation
over a period of some 70 yea';; (Figure 4.3). By any measure, firms.in the USA have dominated the in-
dustry since the 1940s, followed by a second dhoision COnsisting of Switzerland, Gernanl', France and
the UK Some of the methods are mutually exclusive: for e.'Wl1ple, secrecy precludes patenLing, which
require; disclosure of information, although it can precede patenting. However, firms typically deploy
all the useful means available to them to defend their innovations agamst imitation . .57
300
250
"" z
0 200

>
0
z
!!!!
150
u..
o
a:
LoU
'"' 100
:liE
:>
z
50
.USA
mUK
gjI.
GERMANY
FRANCE
1800-1880 1880-1930 1930-1960
PERIOD
1960-1980 1980-1993
FIGURE 4.3: Innovative pOSitions of countries in the pharmaceutical industry
Sow'..z; Dc.n\"cd from B. AclUlladclis and. N. Antonalds (2001). !he dynamics of technological innovation: the
1:1I.5t of the: pnarmaceutical industry, Resean:h Policy, 30.
www.managing-innovation.com
7:" _.

Standards, intellectual ;:roperty and :'irst-mover advantages:
,._, ,,, ="', , -' ,%11
19H1. Around ]40 p:ut:nts ICr:l(!ci rht: cssemi<li inle!iecLu.d propcrry behind [he GSM standard. In:" -. ;'.t;. :
,)1 :1umber.j 01 p:Hems. MOlomlJ dominmcd \Y1lh follow..::d by (lQ) and Aicatt:l
H) . :1.150 had ::m initi."i.I strong pC/sllion \ ... 1.3 .:ssemioaj patents. but later made: a stnlte.-
gil.: (0 the mobile \Jephony business was UDUSUlJ,! in that it held only four
t:ssential patents for GSM. Om later becamt" (be rrul:-ket lC3der. One. 1"C!1S00 lor this was that.
Encsson \",Ole the ()rigmal i"or GSNl. Another is lhal it was second tmly lO Philips .. -.
in its po.c;iri\-JTj in the ne!Work of rdl!v:J.m [irrns. MOlorola continued to pateni.: .
ailer ,he basic h.:chnic:1i dCCSIO!lS haG <lgrced, whereas the other fimls did not. This allowed'"
\-IDlorola grc:IlC"[ connol over whkh (is",,,,' wtlulci be made :.\vaih.lok and also enabled it to
mflucnce ikcm,mg condirion..:; and :\cccss to \)lhcrs' .... irtually all
ik .......
the GSM -.:quiJ'lmcnl ",\.':1.5 suppiieu by .::>mpanies whic..:h panicipau:.c:i in the cross-licensing of this ..
imclkclulli properr)": :::ri<..:S50I1. :\"Kl.:l, Siemens. AicJtcl and Motorob., together account- . ..
ing ror amum: 8:5% of the markel f,'r sY!:!.ems ,lml SUltlons. ;1 market wonh US S lOO billion. ..: ..
As !.he GSM sl:mdarci moved beymlll Europe. Norrh .':"'merion .5Up?iiCTS such ;:IS Nonci Znd " .. :
Lucc:'11 began I" iicen.oSe tcr.::hnnil)[ to niTer s:'slems. bur never :JtChieved Lh.:.. success of t.l-te . ... .. . "
pj'-,nl.!!!!:;. W.!CSl --'---
sys(en1.5. Roy-allies for such be high. reprc:ienting up 10 of {he cosr of a GSM .
handsel. .
5c1U.r:c: Ro , G. :lnd B. Vcrsp:1gcn {lOO1\ lmelltaual righLrt .
Illlolr!(o!l i lrUCIUn!. Rr..i:artn Poiic.\'. JJ . 1 L.
In some r.:asc.<. Ihe advantages of plOneenng lechnology. imdlcctu.,l pro perry and standards combine
to CTCltC ZI sustain;lblc markel position (Case study 4,3).
4.4 Technological trajectories
In I his section w(' focus on [irms Olnd broad technological crajt:ctllries. ')}: Thi5 is bt:ClUS(, lirms and indus-
trial sectors differ gre:uly in their undL:rlying lechnologils. For designing and making:m aUlO-
mobile: is not (he same as designing ,md making .1 r.heropem-ic drug, or a personal compYlcr. We are
dealing not. with one technology, but wiLh several technologies, each with ils hislOrical pattern of develop
ment , skill reyuirements and slUlcgi.!.:.implica:.ions..lLis.iliercfore. a ma.ior challenge to dcvc:lop a hame
work, for inleg;al ing changing tcchnolngy inw strmegic that deals effectively with corpor:ue
and sectoral diversiry. We describe below lIle framework lhat one of us has developed ever the past 10
or more years 10 encompass Il has been strongly inHuenced by !he analyses of me emergence
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of the =jor new technologies over the pas[ 150 years by Chris Freeman and his colleagues,6C and by
David Mowery and Nathan Rosenberg. 51
A number of srudies have marked, similar and persistent differences amongst industrial
sectors in the sources and directions of tec..hnoiogica1 change. They can be summarized as follows:
Size of innovating firms: rypically big in chemicals, road vehicles, processing, aircraft and
electronic products; and small in machinery, iristruments and software.
Type of product made: rypically price s<nSitiv! in bulk materials and consumer products; and peifonnance
sensitive in ethical drugs and macbinery.
Objectives of innovation: rypically product innovation in ethical drugs and machinery; process innovation
in steel; and both in automobiles .
Sources ofin7lDll.arioruupplim of equipment and other production inputs in agriculture and traditional
manufacture (like textiles); customers in instrument, machinery and software; in-house tecbnological
activities in chemicals, electronics, transpon, machinery, instruments and software; and basic restarch
in ethical drugs.
Locus of OW7i innovation: R&D laboratories in c.'1emicals and electronics; production engineering depart-
ments in automobiles and bulk materials; d<sign offices in machine building; and systems departments
in service industries (e.g. banks and supermarketcbains).
In the face of such diversity there are two opposite dangers. On.e is to generalize about the nature,
source, directions and strategic implications of innovation on the basis of experience in one :firm or in
-cine sector. In'this caSe,tbere is-a-Strong probability that many of the conclusions will be misleading or
plain wrong: The oilier danger say-thatall firms and sectors are diiIerent, and that no generaliza-
tions dm be made. In this case, there can be no cumulative development of useful knowledge. In order
to' avoid these twin dangers, one of us distinguished five major technological trajectories, eacb with its
distinctive nature. and sources of innovation, and with for technology strat-
egy and innovation management. This was dODe on the basis of systematic information on more than
2000 significant innovations in the UK, and of a reading of historical and case material. In Table 4.7 we
identify for trajectory its typical core-sectors, its major sources of technological accumulation and
its main strategic management tasks .
Thus, in supplier-dominated firms, technical change comes almost exclusively from suppliers of
machinery and other production inputs. This is typically t11e case in both agriculture and textiles, wbere
most new techniques originate in firms in the macbinery and chemical' industries. Firms' technical
choices reflect input costs, and the opportunities for firm-specific teclmological accumulation are rela-
tively modest, being focused on improvements and modifications in production methods and associated
inputs. The main task of innovanon strategy is therefore to use technology from elsewhere to reinforce
other competitive advantages. Over the past I <i years. advances elsewhere in IT have opened up radical
new applications in design, distribution, logistics and transactions, thereby.malting production more
responsive to customer demands. But, since these revolutionary changes 'are available from specialized
suppliers to all firms, it is still far from clear whether they can be of a lasting advantage for firms
competi'Qg in -sllppJier-domiriated secmrs .. _ .. _
in scale-int<nSive firms, technologicaLaccumulation is generated by the design, building.and oper-
ation of complex production systems and/or products. Typical core sectors include the and
processIng of bulk materials, automobiles and large-scale civil engineeting projects. Given the poten-
tial economic advantages of increased scale, combined with the complexity of products andlor
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Five major technological trajectories
Supplier-
dominated
Typical core
AgriC"ultun::
products
Services
Traditional
ma-:J.ufacrure
MaiIJ. SOtlrces Suppliers
of technology
Production
learning
Main-uskoof . -
innovation
strategy
PoSitIOns Based on
n::m-techno-
Icgica\ ad-
vtmtages
Paths UseoflTin
finance and
dis:ribuDon
Scale-
intensive
Bulk materials
Consumer
durables
Automobiles
-eM1 eilgitieeriIig
Production
engineering
Production
learning
Supplier. Design
offices
Cost-effective
and safe com-
plex products
and processes
Incremental
integration of
new knowledge
(e.g. virtual pro-
totypes, nevi
materials, B2B*)
Science-- Information- Specialized
based intensive suppliers
Elecrronics Finance Machinery
Chemicals Retailing Instruments
Publishing Software
Travel
R&D Basic Software and Design
research systems
Advanced
depanments
users
Suppliers
Develop
New prod--Monitor and--
technically
uets and Trond to
related
se.rvices user needs
products
Exploit Design and Matching
basic sci- operation of changing
enee (e.g. compl<x tecJmologies
molecular information to user needs
biology) processing
systems
................................. _ ........................................................................................ -......................................... _ .................. _ .............. .
Processes F:exible Diffusion of best Obtain To match Stto">g iinks
response: to practice in comple- IT-based with lead
user design, produc- mentary opponunities users
tion and assets. with user
distribution Reddin. needs
-di"Visionai
boundaries
.-..... _._ ...... -........... __ .. _ .................................. _ .... -.................................................................. _ ....... _ .... _ ......... -._._ ............... .
"'B2B .,. business to business.
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produC"'Jon-sysrems. the risks of failu:-e associatea with radical but un[e5cec changes are pote.ntially
ve;y costly. P:-oce.ss and product technologies develop incrementally on the basis oi eariier
operating o.-perience, ana in maci'-j nery and subsystems. The main
sources of technology are in-house design and production engineering departments, operating
rience. and specialized suppliers of equipment and components. In these circunlstanCes, the main
tasks oj innovation are the incremental improvement of technological improvements in com-
plex products or production systems, and the diffusion throughoUf the firm of best-practice methods
in design and production. Recent advances in the techniques of large-scale computer simulation and
modelling now offer considerable opporrunities for saving time and money in the building and testing
of prototypes and pilot plant.
In sdm:t-ba.std firms, technological accumulation emerges mainly from corporate R&D laboratolies,
.. .. _ .... ana is-neaVily lmowledge; skills and techniques emerging from academic research.
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Typical core sectors are chemicals and t:lectronics; fundamental (electromagnetism, .adio
waves, transistor effect, synthetic chemicals, molecular biology) open up major new product markets
over a wide range of potential applications. The maj or directions of technologic:aJ accumulation in the
firm are hori::ontal searches for new and technologically related product markets. As a consequence, tJu
main tasks oj innovation strategy are to monitor and exploit advances from basic research, to
develop technolOgically related products and acquire the complementary assets (e.g. production and
marketing) to exploit them, and to reconfigure the operating divisions and business units in the light of
changing technological and market opponunities.
Informatian-intensivefirms.haY ... begun to emerge only in the past 10 to 15 years, panicularly in the
service finance, retailing, publishing, telecommunications and travel. The main sources of te:::h-
..nology are in-house software and syStems departments, and suppliers of IT hardware and of systems
and applications software. The main purpose is to design and operate complex systems for proceSsing
:information, in disnibution systems that make the provision of a service or a good more
. sensitive to customer demands. The main tasks of innovation are the-development and operation
of complex information-processing systems, and the development of related and often radic:aJly new
services.
Spe:cialized suppli<r finns are generally small, and provide high-performance inputs into complex sys-
tems of production, of informaticn processing and of product development, in the form of machinery,
components, instruments and (increasingly) software. Teclmological accumulation takes place through
the design, building and operational use of these specialized inputs: Specialized supplier firms benefit
from the operating experience of advanced users, in the fonn of information, skills and the identifica-
tion of possible modifications and improvements. Spe:cialized supplier firms accumulate the skills to
match.advances in technology with user requirements, which - given the COSt, complexicy and interde-
pendence of production processes - put a premium on reliabilicy and performance, rather than on price.
The main tasks of innovation strategy art keeping up with users' needs; leauting from advanced users and
matching new technologies to users' needs.
Knowledge of these major technological trajectories can improve analysis of particular companies'
technolOgical strategies, by helping answer the following questions:
Where do the company's technologies come from?
How do they contribute to competitive advantage?
'Nhat are the major tasks of innovation Strategy?
Where are the likely opponunities and threats, and how can they be dealt with?
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Although the above taxonomy has held up reasonably we!! to subsequent empirical :ests.
62
it
inevitably simplifies.
63
For example. we can find supplierdominated' fi.'1IlS in electroni", and, chemi-
cals, but the)' art unlikely to be tecb.nological pacesetters. In addition, firms can belong in more than
one trajectory. In particular, large finru in all sectors have capacities in scale-intenSive (mainly mechan-
ical and instrumentation) technologies. in order [0 ensure efficient production. Software technology is
beginning to playa similarly pervasive role across all sectors. We have recently extended this taxonomy
based on survey and interview data on the innovative activities of almost 1000 firms (see Research
Note and Table 4.8).
"\
Patterns of innovation in the 'new' and 'old' economies
Variable Newetonomy Old economy
R&D sets suategic vision of firm 5.14 356
R&D activt participant in making corporate "meg)' 5.87 4.82
R&D responsible for devdoping new business 5.05 3.76
....... ":'..... . !.,-... , ......... , ......... ,._-, . ........................ _ ....................................... - ........................................ _ ...... .
Transforming acad.mic research into products 4.64 3.09
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Accelerating ,.gulatory approval 4.62 3.02
Reliability and engineering
-4.79--'
...................................... ; ....................................... _ .. _ .......................... _ .......................................... _ ..................... _ .. : ................... .
products de facto standard 3.56 2.71
..................... _ ................ ........ _ .............................. _ ...... _ ..... _ ......... _ ............ .. " " " ..................... M " ...................................... ..
Anticipating complex client needs 4.95. 3.94
Exploration with potential customers and lead users 5.25 4.41
... _ .... _-_ .. _._._-_ .. __ ._ ......... _ ... __ . __ .. __ ._._-_ ... _-....... '"":'. __ ._ .... -:-.... _---_ ....... -_ .. __ .-
Probing user need> with preliminary designs U2 3.59
Using roadmaps of product generations., . 4.51 3.26
............................. -.-.-." ... -.-....... -" .......... -...... ........ -........... _ ....................................... __ ............ _ ................... _ .................. ..
P12nned rep12cem'''t ofc:lirient prodUcts . 3.56 ' 2.53
........... , .......... ;!', .'-................... -.-....... :.:.:.: .... ...... :-......................... _ ............................................ -.-.-........ -........ ............ ..
Build-<:oallnon with cOmmercialization partners 4.18 3.38
Working with suppliers to create comnlementarv offgs_ ' _ ._ '[.32 3.61
Seal" 1 now) -7 (high); only statistically si8nificant dlfI=n,,", du>wn, n - 75 6rms).
' . Sou.7U: from S. Floticel and R. Miller (2003) An exploratory comparison of the managemenl of innovation in the
new.nd old =omies. RW 33 (.5). 501-2.5.
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Diversity 01 strategic games for innovation
The MINE (Managing Innovation in the New Economy) res<arch program at Ecole
Poiytechnique in Montreal. Canada. together with SPRU. University of Sussex. UK. conducted
qualitative and quantitative studies to gain an understanding of the diversity of strategies for
innovation, Almost 925 chief technology officeIS (CTOs) and seniOT !minageIS of R&D (from
Asia, North and South America. and Europe) across all industIial s<ctOTS of the economy
r.sponded to a global survey, The survey tool is avwble at www.minesurvey.polymd.ca.
Respondents come from firms such as Intel. Synopsys, Motorola. IBM Global Services, Novarris
at:J.d Boeing. Executives were asked what competitive forces impact on innovation, what value-
creation and -capture activities are pursued in innovating. and what strategies and practices are
, us<d, - ,
Games of innovation involve many interdependent players, persist over time, and are
strategically complex. Games are distinct, coherent scenarios of value creation and capture
invoiving activities of collaboration and rivalry:
Each involves a distinct logic of innovative activities that is largely contingent on product
architectures and market lifecyclt stage,
They follow persistent trajectories, bound by some basic economic and technical fon:es and
thus tend to fall into a small number of natural trajectories.
They result in differing level of, performance, Market-creation games involve radical
innovations, grow fast. and display high variations in profitability. By contrast, market-
evolution games are characterized by process innovations, So slower pace of growth, but
good profitability.
However, games are, not fully determineci by their contexts.
freedom to interact with members of relevant ecosystems and to adopt collaborative and
. competitive moves to expand markets.
-Clustering analyses led td the identification of s<ven distinct and stable groups each
containing at least 100 firms that create and capture value in smwar ways, Each game is
characterized by sralistically different value-creation and <.Bpture activities:
Patent-driven discovery
Cost-baS<d competition
Systems integration
Systems engineering and cOllSulting
P1atfonn orchestration
Customized mass-production
Innovation suppon and services.
Bishop Okullu Memorial Ubrory
51. pours UniVersity
p. O. 801 Private Sag 00717, limuru.
5oIat< MJIIer, R. and s, FIoriW (2007) Special Wue.I_naIjow'nal of IMowttIon ManDgemtn<. 11 (I). Yti-rri,
www.managing:lnnovation.com
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4.5 Developing firm-specific competencies
The ability of firms to track and exploit the technological trajectories described above depends on their
specific tec..lmologi=ai and organizational competendes, and on me difficulties rhat competitors have in
imitating them. The notion of firm-specific competencies become increasingly influentiai amongst
economists, trying to explain why firms are different, and how they change over time,20 and also
amongst business pracorioners and consultants, trying to identify the causes of competitive success, In
the 19905, management began to shift interest from improvements in shan-term operational efficiency
and flexibility (through 'de-layering', 'dbwnsizing', 'outsourcing' and 'business process reengineering',
etc,), to a concern that - if taken too far - the 'lean corporation' could become the corpora-
tion', without any capadties for longer-term change and survival.
Hamel and Prahalad on competencies
The most influential business analystS promoting and developing the notion of 'core competencies' have
been Gary Hamel and C. K. Prahalad.
64
Their basic ideas can be summarized as follows:
I, The sustainable competitive advantage of finns resides nor in their products but in their COrt CDmpt-
'The real sources of advantage are to be found in managements ability to consolidate
corporate-wide technologies and production skills into competenci<5 that empower individual
businesses to adapt quickly tochanging opportunities' (I': 81).
2. Core rompe'tendiSfeed-;;',o than one which in tum feed into more than one
business.unit. They use the metaphor of the-tree:
End products = Leaves, flowers and fruit
Business units = Smaller hranches
Core products = Trunk and major limbs
Core competend<5 = Root systems
Examples of core competenctes include Sony in minianrrization, Philips il< optical media, 3M in
coating' and adhesives and Canon in the combination of the precision mechanics, fine optics and
microelectronics technolOgies that underlie all their products (see Case study 4.4). Examples of core
products include. Honda in lightweight. high-compr-..ssion engines and Matsushita in. key components
in video cassette recorders.
3. The importance of associated organizational compet<nctes is also recognized: 'Core competence is
communication, involvement. and a deep commitment to working aCfO$S orgmrlzational boundaries'
(1990, p. 82).
4. Core competencies require focus: 'Few companies are likely to bulld world leadership in more than
five or six fundamental competendes. A company that compiles a list of 20 to 30 capabilities has
probably not produced a list of core competencies' (1990, p. 84).
5. :zits !mIt shows, dn: nouon of cote tomperma.es"sUggestS that large and multidivisional inns
should be vi<wed not only as a collection of strategic busines5 units (SBUs), but also as bundles of
competenctes that do not necessarily fit tidily in one business unit.
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65
In the 1950s. . :ne time had corne foT' Canon to apply its precision mechanical and
opticd technologies to othe areas [!han cameras-). . such ilS business machines. By 1964
Canon had by de' __e1oping [he worlds fiTSlIO-key fully electronic calculator ... fol-
iowec1by emrr'into the coated paper [he development oran e1earofax
copiermode1 in 1965'. and theninto-... the revolutionary Canonplairr paper copier tech-
nology-unveUed in 1968 ... -Follov..ing_these sl:lccesses-ofproduct diversificatioh,CanonS
were buill on' a foundation-of precision precision engineeriirg- and
..
. ... ,-.,-i:BGr-eases.-in .!he-nl1mbersofprriciucts, -
... seemtQ be therapid .. groV!lhof irtiorination rechno[ugy ancielecttonics, tecbnc;logiruttans;,:.:"
. dBBS- to digital rechnologies;. technol0gkaJ fusion: of audio and -;;.ideo ..
.. and.the rei:hriologic.l fusicr of eleclWlljcs'and' physic.LOOptronici(-Pp, 24--6).
According to Hamel :md Pr.lhalad. the concepl of the based on core competencies should
nor replace the traditional one. bU! a commitment to It "Yin influence paltems of div;;rsifica-
tion, s"-'ill deployment. resourc.::s allocation priorities. :md approaches 10 alliances and outsourcing'
(1990. p. 86). More,speciliClIly. the conventiE>nal,mullidivislol1aistn.1cmre may laciliu:ne dfidcm innovation
Two views of corporate structure: strategic business
units and core competencies
Basis for competition
Corporate strucrure
Status of business unit
Resource allocation
Value added of top
\. manage.ment
www.managing-innovation.com
Strategic business unit
Competitiveness of today 5
products
Portfolio of businesses in re-
lated product markets
Autonomy: SBU 'owns' all re-
sources other than cash
SBUs are unit of analysis.
Capital allocated to SBU,
Optimizing returns through
trade-oITs among SBUs
Core competencies
Imer-firm competition to build com-
petencies
Portfolio of competencies, cort: prod-
and business
SBT] is a pOlenual reservoir of co!'e
competencies
SBUs and compelencies are unit of
analysis. Top management allocates
capit-al-and,talent
Enunciating strategiL:: .architecture, and
bUilding fumre: competencies
6.
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...vir....'in specific product markets, but may limit the scope for learning'new competencies: iir:ns with. fewer
divisional boundaries are associated with a st.-ategy based on capabilities broadening. whereas finns with
many divisional bounciaries are associated with a strategy b2.sed on capabilities deepe.."1ing.66
6. The identification and development of a firms core competencies depend on its architecture,
defineci as:
. .. a road map of the funm: that identifies which con: competencies to bui!d and their constituent
technologies ... should make resoun:e allocation priotities cranspareIlt to the'whole organization.
Top management must add value by mundating the saategtc architecrun: that guides the competence
acquisition process (1990, p. 89):
'. = convergence of computing and communication technologies
vickers, USA = being the best power and motion control company in the world
Honda = lighrweight, engines
3M = coatings and J.dhesive5
Assessment of the core competencies approach
The great strength of the approach proposed by Hamel and Prahalad is that it places the cumulative
velopmmt of competencies at the centre of the agenda of. corporate strategy.
Although they have done so by highlighting practice in contemporary firms, their deScriptions reflect
what has been happening in successful firms in industries since the beginning. of the
twentieth cenrury. For example, Gottfried Plumpe' hos 'showri that the"worfcl:i'JeiJing company in the
exploitation of the revolution in organic chemistry in the 19205 -IG Farben in Germany - had already
established numerous 'technical committees' at the corporate level, in order to explOit emerging tech-
nological opponunities that cut across divisional These enabled the firm to diversify
progressively OUt of dyesruffs into plastics, pharmaceutical and other related chemical products.
Other histories of businesses in chemicals and electrical products tell similar stories.158 In particular,
they show that the view of. the corporation has major implications for the organization
ofR&:!), for methods of resource allocation and for strategy derenilination, to which we shall return later.
In the meantime, their approach does have limitations and leaves at least three key questions unanswered.
(<<) DtjJtrlng potentials fOT diversification?.It is not clear whether the corporate
core competencies in all indusrries olIer a hasis for product diversification. Compare the recent histon: '
cal experience of most large chemical and electronics finns, where product diversification based on
technology has been the norm, with that of most steel and textile firms, where
uct diversification has proved very difficult (see, for example, the unsuccessful attempts \0 diversify by
theJapanese steel industry in the 19805).'9
__ .. that firms should concentrate resources on a few
fundamental (or 'distinctive') technological competencies are potentially misleading.
Large firms are typically active in a wide tange of technologies, in only a few of which do they achieve a
'distinctive' world-beating position.
70
In other technolOgical fields, a background technolOgical
tence is necessary to enable the finn to coordinate and benefit from outside linkages, especiany with

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s"J.pplie:s of components, subsystems, materials 2...Tld production In industries 'With complex
products or production processes, a high proportion of a finns technological competencies is deployed
in such background competencies,71 In acidition, firms are constrained to develop competencies in an
increasing range of technological fields (e.g. IT, new materials, nanotechnology) in order to remain com-
petitive as products become even more 'multi-technological'.
Thus, as is shown in Table 4.10, a finns :inIJ.o\.'"3.tion strategy will involve more than its distinctive
core (OT critical) competencies. In-house competencies in background (enabling) technolOgies are nec-
essary for the effective coordination of changes in production and distribution systems, and in supply
chai..'lS. In industries with complex product systems (like automobiles), background technologies can
account for a sizable proportion of corporate innovative activities. Background technologies can also be
the sources of revolUtionary and disruptive change. For example, giventhe major opportunities for im
proved that offer .. all. businesses today have no choice but to adopt advances in IT
technology, just as all factories in the past had no choice but to conven to electricity as a power source.
However, in terms of innovation strategy, it is imponant to distinguish finns where IT is a core technol-
ogy and a source of distinctive competitive advantage (e.g. Cisco, the supplier of Internet equipment)
from finns where it is a background technology, requiring major changes but available to all competi-
tors from specialized suppliers, and therefore unlikely to be a source of distinctive and sustainable com-
petitive advantage (e.g. Tesco, the UK supermarket chain).
In all industries, emerging (key) technolOgies can end up having pervasive and major impacts on
finns' strategies and (e.g. software). A good example of how an emerginglkey technology can
transform a company is provided by the Swedish telecommunications firm Ericsson. Table 4.11 traces
the accumulation of technological competencies, with succ.essive generations of mobile cellular phones
The strategic function of corporate. technologies
Strategic functions
Core or critical
functions
Definition
Central to corporate competi-
tiveness. Distinctive and
dIIlicult to imitate
Typical examples
Technologies for product design 'and
development. Key elements of process
technologies
..................... - ........................ - ............... ..................... -.............. -.... -... -.. -................................... -.-.-....... .................... - ..
Background or
enabling
Broadly available to all
competitors,. but essential fOT
efficient design, manufacture
and delivery of corporate
products
Production machinery, instruments,
materials, components (software)
.................. _ ................................................ _ .... _ ........................................................... -.-....................................... -....... - .......... ..
Emerging or key Rapidly developing fields of Materials, biotechnology, ICT-software
knowledge presenting poten-
'B"Onllreiit5,'"
WWII.managlng-innovation.com
when combined with existing
core and background
technologies
-.
D:Ild telecommunication cables. In both cases, each new generation required compete!ldes in a wider
range of technological 5elds. and very few established competencies We.T "",de obsolete. The process
of accumulation involved both increasing links w1th outside sources of knowledge, and greater expen-
ditul"""...5 on given greater product This was certainly not a process of concentration,
bur of dive!"sific:ation in both technology and product.
For these reasons. the notion of 'core competencies' should perhaps be replaced for technology by
the notion of 'distributed competencies'. given that. in Im'ge firms. they are distributed:
over a large number of technical fields
over a vartery of organizational and physical locations within the corporation - in the R&D, produc-
tion engineering and purchasing departments of the various divisions, and in the corporate laboratory
Technological accumulation across product generations
Product and
generation
No. of
important
technologies
Ca) (b) Total
. . - _. _.- ... ---- _ . .
Cellular phones
L NMT-'l50
2. NMT-900
3.GSM
Teleco= cables
1. Coaxial
2. Optical
n.a. = not applkablL
NOIZS:
n.a. n.a.5
5 5 10
9 5 14
n.a .. n.a.5
4 6 10
R&D costs
Cc) (base
-
=100)
. . -
n.a. 100
a 200
1 500
n.a.100
1 500
(a) No. of technologies: from the prtYXnls generation.
% of technologies
acquired
externally
12
28
29
30
47
(b) No. of new teclmologies. COtnpartd to pm'ious gment!on.
Main
technological
fields (d)
No. of
patent
classes (el
E 17
EPM 25
EPMC 29
EPM 14
EPCM 17
(c) No. now obsolete from JmVious generation.
are: E = elecuic:a1; P - physics; K - chemisny; M "'" mec:hanl.-
;:; - <:OD1pUlm.
(e) Numbu of lnranartonal potent cJas,., (!PO" 10W'-<i1git I .....
Sou"" lleriveO from Gmnsaand, 0 .. E. Bohlin, c. OsIwsson and N. Siorbci (1992) External technology ,cqutsicion In
large multi-technology corporatio1"..s. ,R6IDManagemt7lt., 22 (2), 111-133.
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amongst <tffereDl SC'ale:giC objeC'"Jves of the corporatio::., whic.a' !Delude not only me e5t3blishmc:nt of
2 distinctive advantage in e.xisting businesses (invoiving both core and background technologies), but
also the "-'q)loration and establishment of new ones (involving emerging technologies).
(c) Core rigiditifS7 />...5 Dorothy Leonard-Batton has pointed out, 'core compete.Tlcies' can also
become 'core rigidities' in the firm, when established competencies become too dominant. T.!. In addition
to sheer habit, this can happen because established competencies are central to mclay's products, and
because large numbers of top managers may be trained in them. As a consequence, imponanr new
competencies may be neglected or underestimated (e.g. the threat [0 mainframes from mini- and micro-
computers by management in malnframe companies). In addition, established innovation sn-...ngths may
overshoot the target. In Box 4.4, Leonard-Banon gives a fascinating exmnple from the japanese automo-
bile indusuy. how. successful 'heavyweight' product managers of the 1980s (see Chapter 9)
overdid it in the 1990s. Many eXamples show that, when 'core rigidities' become finnly enrrencned,
their removal often requires changes in top management.
Developing and sustaining competenCies
The final question about the notion ,of core competencies is very practical: how can management iden-
tify and develop them?
Definition and measlLrrrnent. There is no widely accepted definition or method of measurement of
competencies, whemer !echnological or otherwise. One possible measure is the level of junctiOT1Jli
'\
Heavyweight product managers and fat product designs
Some of the moSt admired features ... identified ... as :onveymg a competitive advantage Ito
japanese automobile companiesl were: (1) overlapping problem solving among the engine<->ing and
manufactUring functions, leading ro shoner model change cycles; (2) small teams with broad task
assignments, leading to bigh development productivity and shoner lead times; and (3) using a
'heavyweight' product manager - a competent individual with extensive project influence ... who
led a team with autonomy over product design decisions. By the early 19905, many of
these features had been emulated ... by US auto\llobile manufactu=s, and the gap between US
and Japanese companies in development lead time and productivity had vinually disappeared.
However ... there was another reason for the loss of the japanese competitive edge - 'fat prod-
uct designs' ... an excess inproduct variety, speed of model change, and Ullllecessary options ...
'overuse' of the same capability that created competitive advantages In the 1980s has been the
sourCe of the new problem in the 1990s. The formerly 'lem' japanese producers such as Toyota had
overshot their targets of cUstomer satisfaction and o_specified their products, catering to a long
'laundry of features and carrying their quest for quality to an extreme that could not be cost-
justified when the yen appreciated in 1993 ... Moreover, the practice of using heavyweight man-
agus to gllltle Impo",."t pro]ec", leu lO ==i1H:omp1I!Jtity of pans because these powerful indi-
viduals disliked sharing common pans with other car models.
Souru: Leonanl-Banon, D. (1995) wellsprings HlIrvard Business School Pn:so, Bas_.MA, p. 33.
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performance in <;. ge::J.enc product, componull or S'Jbsysrem: in, for example, perfonnance: in design,
development, manufacture and pe:-fonrumce of compact, high-performance combustion e..."1gines .. t\s a
strategic technological target for a firm like Honda, this obviously makes sense. Bur its achievement re-
quires the combination of technoiogical competencies froIL a va.-riery of fields of knowledge, the
composition of which changes (and increases) ave: tL.--ne. Twenty years ago, they included mechaflics
(statiCs and dynam:ics), materials, heat transfer, combustion, fluid flow. Today Lhey also include ceram-
ics, electronics, computer-aided deSign, simulation techniques and software.
Thus, the functional definition of technological competencies bypasses two central tasks of cor-
porate technology first, to identify and develop the range of diSCiplines or fields that must
be combined into J. functioning technology; second (and perhaps impon:ant) to identify and ex-
plore the new competencies that must be added if the functional capability is not to become obsolete .
. This is whya-definition-based on the measurement of the combination of competencies in different
technological fields is more useful for formuiating innovation strategy, and is in fact widely practised
in business.
73
Richard Hall goes some way towards identifying and measuring core competencies.
74
He distin-
guishes between intangible assecs and intangible competencies. Assets include intellectual propeny
lights and reputation. Competencies include the skills and know-how of employees, suppliers and dis-
tributors, and the collective attributes which constitute organizational culture. His empirical work,
based on a survey and case studies, indicates that managers believe that the most significant of these
intangible resources aTe company reputation and employee know-how, both of which may be J function
of-organizational culture .. Thus organiza,ional culture, defined as the shared values and beliefs of mem-
bers of an .organizational unit, and the associated artefacts, becomes central to organizationalleaming.
This framework -provides a useful way to assess the competencies of an organization, and to identify
how these contribute to performance.
Sidney Wmter links the idea of competencies with his own notion of organizational 'routines', in an
effon to contrast capabilities from other generic fonnulas sustainable advantage
aging change.
75
A routine is an organizational behaviour that is highly patterned, is leamed, derived in
pan from tacit knowledge and with specific goals, and is repetitious. He argues that an organizational
capability is a high-level routine, or collection of routines, and distinguishes l;>etween 'zero-level'
bilities as the 'how we earn our living now', and true 'dynamic' capabilities which change the product,
process, scale or markets; for example, new product development. These dynamic capabilities are not
the only or even the most common way organizations can He uses the tenn 'ad hoc problem
solving' to describe these other ways [Q manage change_ Incont",st, dynamic capabilities typically in-
volve long-tenn commitments to specialized resources, and consist of patterned activity to relatively
specific objectives_ Therefore dynamic capabilities involve both the exploiration of existing comperen-
cies and the development of new ones_ For example, leveragmg-exiSting competencies through new
.. . product development can consist of de-linking existing technological or commercial competencies from
.. one set of current products, and linking them in a different way to create new products. new
. ,""'- product development can also help to develop new competencies_ For example, an existing technolog-
..iE" ieal competence may demand new commercial competencies toreach a new market, or conversely a
. -- ".;; f new technological cOmpetelICe ttIiglrr:be-necessary to service an existing customer,76
. -< ::1t'j: The trick is to get the right balance between exploitation of existing competencies and the exploita-
.. .. tion and development of new competencies. Research suggests that over time some. firms are more
. .. . ... .. successful at this than others, and that a significant reason for this variation in performance is due to dif-
I7. _ab_ili_''_'l_, _Of_m_an_a_g_e_rs_tO_b_U_il_d-,-'_in_,_e_gr_a_te_an_d_re_c_o_nfi_gur __ __ ,,!l'_ "' ..... ,_ ... _
, . ...,... -.
'J " n :lITih': :TI .. : ;1f::!bilillt:$ ,niiut':1cG ;;ognition, human
c:l pltal and .:hlClal C:1pil;.c1. C)gtl itl .1n rdc:-s 10 :ht.' heliefs ;1nG mC:1I:li 010QC!5 which illi1uence
makmg. Thcst' rhc k.nawie:dge .11"",0 assumpti on:: .Iixll:l :UWf C ::! Y;"lliabk .\liematives <md :15.
50c:anon ;:Jl1SC and eiIel.:l. This will 1 :ickiJi '1SH.in. anci perce;>.
!ions ;mc ii: tcrpret:uions. Case .:ilUOy -L5 discusses the ;ole uf in the C:iSC oi Pe iarOiO
:md digllai imagmg. Human capnai rde-rs 10 lhe: leame-d skills thal ;-equl r.: ;5ome m'h!stment in c:duca.
[ion. training I!xpenencc and socialb:Hlon, and these em De genenc, or firm-specific, It is the
firm-specific factors that appe.:1r to be the mLlSl 3ignihClm it: c..iymmic m;lr.flge:-i:.ll Olpability. .:..:.1n
ie::ld to diITerent decisions when [:Iced with the same environment. Sod:d capital reiers lCI :he 1rtlemal
CASE STUDY
.- . ;. .. . ... :.
Capabflities. and cogniticm at Polaroid
. . .
" Eolaroiu ..... ;. the ikvelopment "r instant phot{)graphy. "It deveiop<d thelirsi instant
:camera.in 'f!X8, trudi"'iiiistnm.colQlir sonar automatic focosing
in 1978; Ii> chemistry, it baa technologicalconip<len-
':de5:in ,opdes. :md .marketing and distribution The
was technology-drtvea froiD 'itS f6,mdatienlnlll37. and the founder Edwin: land had
. mlltket tit 1976: Mirola
.sued the .companyfarpareritin.Crtngemerit,and was .warded'$9h.S million incbmages_.Polaroici
.. new all
k, pronts from thes.leofthe film liheso;called razoi-bc.de matt.ting suatcgy alS0 used, by
. -Gillet-"' .::.nu avet2'g'!
. . :.: ..... ; .. . , .... '.' .' : .' .
.. - .- ' Polaroioestabli&hedane!ictIoruc;unaM,groupasearlyas 1981. asitTeC0gnizec;f thq?oten-
t\!ltor .. ci;fjtolteclm0lOgiwas.Peri:ei.ea ....
1986 :tliegrciup res=h bUdget
' ;i$:];(, i9$9'1tibf tei:1in"loi9es.
'By 19902B'l9 of the fiI!ril; iia.ems' wcllpo-
.. '
cmUmerciol wi>e COmpaI11es 1!i .the
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,_ . of me lc.wquaiiiy (early) ouiput.r
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and external relationships which affect managers' ac:ess i.o information, their control and
powe!".
Tap managl!m1ent and 'strategic architecture' Jor [Itt: future . The importance given py Hamel and
Prahalad [0 tOP management in determining the 'strategic arc..ltitecrure' for the developmenr of futu!e
technologica1 competencies is debatable. As Tht Economisr has argued: i6
It is hardly surprising tmt companies which predict the 'future accu1'2tely make more money than
those who do not In fact, what firms want to know is what Mr Hamel aod Mr Prahalad steadfastiy
faillo telJ them: how lO goess correcciy, As if to compound their worries, the authors are oddly'reti-
cent about those who have gambled and lost.
The evidence.in facLsuggests.thauhe successful development .and exploitation of corG
does not depend on managements ability to forecast accurately long-term technolOgical and product de-
velopments: as Box 4.5 illustrates, me record hert: is not at all impressive.
79
Instead, the imponance of
new technological opportunities and their commercial pOlential emerge not through a flash of genius (or
a throw of the dice) from senior management, but gradually through an incremental corporate-wide
process of learning in knowledge building and strategic positioning. New core competencies cannot be
,The overvaluation of technological wonders
In 1986, Schnaars and Berenson published an assessm.!nt of the: accuracy of forecasts of future
growth markets since the 1960" with the benefit of 20 or more years ofhinclsigh<.Bo The list of fail-
ures is as long as the list of successes. Below are some of [he failures.
'The 1960.; were a time of great economic prosperity and technological advancement in the
United States , ,One of th" most extensive and widely publicized studies of future
growth markets )Vas TRW Inc:s 'Probe of the Future', The results, , , appeared in many
business publications in the late 1960s , , , Not all , , , were released, Of the ones that
were. released, nearly all were vvrong! Nuclear-powered underwater recreation centers, a
SOD-kilowatt nuclear power plant on the moon, 3-D color TV, robot soldiers, automatic
vehicle control on the system, and plastic germproof houses were amongst
some of the growth markets identified by this study,
, ' . In 1966, industry expens predicted, 'The shipping appears ready to enter the
jet age: By 1968, 1arge cargo ships powered by gas rwbine engines were expected to penetrine
the commeri:ial market. The benefits of this innovation were greater reliability, quicker engine
stans and shaner docking times,
, . Even dentisay foresaw technolOgical wonders , , in 1968, the Director of the
Nationallnstirute of Dental Research, a division of the US Public Health Service, predicted that
________ t-__
a vinual end', According to expertS at 'this agency, by the late 19705 false teeth and 'dentures
would be 'anachronisms' replaced by plastic teeth implant teehnology. A vaccine against (ooth
decay would also be widely available and there would be little need for dental drilling,
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CAS'E STUDY
Learning about optoelectronics in Japanese companies
Using a mixn:re of bibliomeuic z.nd intaview data, Miyazaki n:aced the
and o..-ploitation of optoelectronics technologies in Japal1ese firms. ner main were as
follows:
. . . Competence buildingis sn:ongly related.to ,. finns pasl.ccomplishrne:lts. The notiOns .of
path dependency and cumuIotivenessbav< a strong foundaticr. COmp-..!Ulc<-b-iildlng cmm,s:
in key = to enhance a fimis core capabilities.. . by examininglhe different types of paPers
-_. -,<Jilted r61emiCbIiriliclol la!.w 'ovrral3'cyeaT p<l'iod:."irwas:fuiIDd that it! mosr-!imrS.thei.
. Was'i deCrtaseJi expenmentaltyp.:papm _ in. papeI> marking 'new de-
.':'""Iopmems' at practicalapplicru:ions'; ola w.edge
fumed .. .. tfuiti:6niperence' bui\dihg is acilmuladve and' lotrgprocess.roiilimgfroin lrialimd
erioranii expenmmtaDon, w.bichmay lead to. fruid'ol oU['C'.JIIles. The actionof
selm:rrraj;.:tt,rieswas testednsing ... INsPEC and paleDldatL 'Firms sean:n over ,'broad
iii basit..,a appliedrueaiCh and, ." tn
other words: In the early pbasesof cOlTtpeience building, firins. "''Flore .. broad range of tech-
'nica! possibilities, ore not. sure no;' :be f.rr t!iem.'.;,s
.. ..... '"'<): .lea"",,,,,.o a<EJmUliue.dielr kri"""ledge'base., ,fi,,.Ds..:.,e ';mIt r...nm:ri,w.: the
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identified immediately and without trial and thus Case study 4.0 neglects to show that Canon
failed in electronic calculators and in recording products. R I
It was through a long process of trial ap.d errol that Ericsson'sne:w competence in mobile telephones
first emerged.
B2
As Case study 4.6 shows, it is also how Japanese firms developed and explOited their
competencies in optoelectronics.
A study of radical technological innovations found how visions can influence the development
or acquisition of competencies, arid identified three related mechanisms through which link
emerging technologies Lo markets that do "'"J.ot }fer exist: . insight and elaboration.
s3
Motivation serves to focus attention and to direct energy, and encourages the concentration of re-
sources, It reqUires senior management to communicate imponance of radicor.l innovation, and
to establish and, enforce challenging goals to influence the direction of innovative efforts. InSight rep-
__ For radical technolog-
ical innovations, such insight is rarely from the marketing function, customers or competitor5, but
is driven by those with extensive technical knowledge and expenise with a sense of both market
needs and opponuniries, Elaboration the demonstration of technical feasibility, validating
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had to tackle the what became known as 'flexible: critical mass', In 1974 il filed a patent
fOT lts new extrusion production technology. and in 1975 for <I new devt:l upmetlt of iLS eel arnic
material. The competitors' lechnoiogies prond unable to match the increasing reduction in emis-
sions needed. and by 1994 CllalYlic conveners generated mnual sales of S1 billion for Coming,
. ..!. m<.IrI.' detailed c.:t:;c :=;; udy is Jvailable. .
StNrcr: Cirnh:lm. H . and .A.. Shul.diner (2001) ClIr-ning and thf CraJ.t tJj lnnOYQtion., Oxford UnivfrslIY PICSS .oxford .
CASE.

Innovation inlnteillet
search engines demonstrate
dudes process, product:tnd busmess inno"",,ion; Perhaps surprislngly.
such os: Google and Yahoo! have nocbas<d their jrmoiJationsmitegieS on . .
and development, but raiheron l he nDveJ combinntions .ohechnciogical, proceSs; product aha:
. . . , ' . -
business innovations . . . . . .
. ;_ For Q:ampk, of the engine !"'teJ)ts Sran\eFin 1he,YSkbetweeri 1999 ';
. the market l<adm-Yahoo! and Google each only
ogy face with 16 but no .
Yahoo' published mare than 1000 new [eature
included; eXlStini
, .: ' ' .. :- . " .- .. ," . .. . : ; ,.:.' .. , ::. ... .: :: '-:
. Moreover, ofa:aniaJ range oityPeolinnovntions:.n.thertlian a narrow
technolOgical nodollowtheclassic produc,-prOCessiife cycle: A sdong.cOrlslS-::
0.0 process innonti6n ,
tipie' episodes of signific::ul:t"productand: ..
iruegraieci search, Ihi!= .. '.:"
high-teCh. sectors, . other .ccmpetmctes ,are: equally or bpsmes,.
. . '. . '. .. . . . .,' ... . ... . . , . . ... . . .. "'<.
:su,:cess. . .. ,. . '. ".
4.6 Globalization of innovation
Man)' analysts and practitioners have argued that, following the g!obalization' of product markets, finan-
cial transactions and direct investment,large finns' R&D activities should also be globalized - nat only in
their traditional role of supporting local production, but also in order to create interfaces with specialized
skills and innovative opportunities at a world leveLM This is consistent with more recent notions of'open
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mnovauon' , :-ather than 'dosed :I".novation which relies on inte!T.a! de,:e!oprne:ll. However. alt.;"ough
Striking e..'Camples of the intemaiJonalization of R&D can be found (e,g. i.he JiTge Duten finns, particu-
larly Philips85) , comprehensive evidence casts doubt on:he str-mgth of such a trend Crable 4.12).
This evidence is based on the count!i.es of ongin of the mveritors cited on the Crom ,page. of patents
granted in the USA, to nearly 359 of the world:S largt:St, technologically active firms (and Which. account
for abom of aC patenting i;' the USA). This information tums out to be an accurate' guide to the in-
ternational spread of large finns' :R&D activities.
Taken together, the evidence shows that:
86
Twenty years ago the worlds large perform about l::! % of their mnovative activities outside their
home country. The equivalent share of is now about 25%. " '-
The most imponant factor firms share of foreign innovative activities is-its share of
fore:ign production. Finns smaller COUntries in general have higher shares of innovative
ac:tivities, On average, foreign production is less innovation-.intensive than home production.
Most of the foreign innovative activities are performed in the and Europe (in
They are not 'globalized'. .
Since the late 1980s, European firms - and esp<cially those from France, Gennany and Switzerland -
have hem performing an increasing Shaft of their innovative the USA. in lxrge pan in or-
der to tap intO local skills and knowledge in such fields .. bioteclmology and 1T. .
Controversy remains both in [he interpretation of this general picture, and in the identification of
implications-for the future. OUr owp--viewsareas . - _'.' .
1. There are major efficiency advmtages in the conCentration m one place of strateglc
R&D f9r launching major new prodUcts and process" CfiTst model and production line). These are:
Ca) dealing with unforeseen problems, since proximity .llows .
(b) integrating R&D, production and marketing, since proxiInf!i> allows integration or tacit knowl-
edge through close personal contacts. . , . .'
2. The nature and degree of international dispersion 01: R&D will also dopeI'd on the company!; Illlljor
teclmological trajectory, and the strategically important points fo; and learning that relate
to it. Thus, whereas automobile firms find it difficult (0 separate their R&D geographically from.pro-
duction when la';nc/ring a major new produ.ct, .d.-ug finDS can do so, and locate. their R&D
close to strategically imponant basic research and testing procedures.
3. In deciding about1he internationalization of R&D, manage,,; must distinguish between:
Ca) becoming.part of globallmowltagt in oth,r words, being aware o.f, and able to absorb
- the of R&D being carried out globally. Practisingscientists and engineers have always
thi,s, and it is now easier with modern IT. However, business firms are finding it increas- '
ingly useflol to estllblish l:elatiVe!y. small laboratories in foreign countries in order to become
strong members of local research networks and thereby benefit from the person-embodied
knowledge behind the published
(b) the launching of maior innovatioru which remamS.complex, cqstly, and depends crucially on the
integration of tadt knowledge. This remains difficult to . achieve across national boundaries.
Firms therefore still tend to concentrate major product or process developments in one country. .
Tbey will sometimes choose a foreign country When it offers identifiable advantages in theskills
and resources required for such developmeni.s, and/or access to a lead marl<el
87
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innovaLior.', rather than 'closed innovation' which relies on internal development. However, alL.1.ough
sUi-lang e."""'ples of the internationalization of R&D can be found (e.g. the large Dutch firms. panicu-
larly PhilipsS'). more comprehensive evidence casLS doubt on the strength of such a trend (Table 4.12).
This evidence is based on the countries of origin of lhe ir.veritots cited on the front page, of patents
granted in the USA. to nearly 3.59 of the world> largest. tec.lmologicaIll' acdve firms (and which account
for about h# of all patenting in the USA). This information tums OUt to be an accurate' guide to the in-
ternational spread of large firms' R&D activities.
Taken tOgether, the evidence shows that:
86
,
Twenty years ago the world> large firms perform about 12% of their innovative activities outside their
home country. The equivalent share of is now about 25%. '- ' -
The most imponant factor ea,ch firms' shan: of foreign activities is its share of
foreign pfOducrion. countries in general have higher shares of foreign innovative
a'tivipes. On 2verage, foreign production is less innovation-;intensive !han home prodUction.
Most of the foreign innovative activities :ire performed in the USA and Europe (in facl,
They are not 'globaiizeci'. .
Since the late 1980;, European firms - and especially those from France, Germany and Switzerland -
have been performing an increasing Share of their innovative activities-in the USA, in lsrge pan in or-
der to tap intO loCal skills and koowledge in such fields as biotechnology and IT.' .
Controversy remains both in the interpretation of this general picture. and in the i!ientification of
implicatiDnsior thefurure. Oii!'oWjiViiWSati: as tollc;ws:-" -' . . .
1. Tnere are major e.'liciency advantages' in the geow.,phical concenmition m one place. of strattoglc
R&D. major ntw pro<lUlts and.processes (fu:st medel and production line). These art:
(a) dealing with 'unforeseen problems, since proximity allows quick; .aqaptiii1ecSions; .
-(1,) integrating R&D, productiorfand marketing, since proxiIIlffallows integration OJ'tadt knowl-
edge through close personal COntacts. . , . - .
2. The nature and degree of internationaI dispersion of: R&D will also dip..,d on the companys major '
technological trajectory, and the sirategicalJy imponant points and leanring that relate
to it. Thus. whereas automobIle firms find it difficult to separate their R&D geographically.from.pro-
duction when law.q,mg. major new .d.-ug firMS can do 'so, and 'iDsreo:d locate. their R&D
close to strategically imPOrUnt basic research ",-,d testing procedures. .
3. In deciding about 'the internationalization of R&D, managers mUSt distinguish between:
(a) becontingpart of global knowledge in othl:! words, be.ing aW!'re 0.1, and able to absorb
- the of R&D being canied out globally. Practising'scientisLS and' engineers have al.ways
done this, and it is now easier with modem IT. However, business firms Ore finding it increas- ,
inglyuseful to establish relatlVdy.smaJJ laboratort'es in foreign countries inorder to become
'strong m';;'bers 01 local ' research and thereby benefit from the person-embodied
koowledge behind the published papers; ,
(b) the launching of malor innovatiqru wbich rem,;n; CO!T!plex. CQSt!y, 'and depends crucially on the
integration of tadt !mowledge. This difficult to . achieve' a<!ross national bouiidaries.
Firtn5 therefore 'Still !<Dd to concentrate major product or process, developDlents in one country_
They will sometimes choose a foreign country when it offers identifiable adVllIltages in the skills
and resoun:es reqrm.d for such developments, and/or access to a lead tIlIl'ket.
87
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Matching global knowledge ne:works with the localized launchmg of major innovations will require
increasihg 'international mobility amongst technical personnel, and the increasing use of multina-
tional teams in launching lnnovations. -
4. Advances in IT will enable SpeCtaCUID increases. in the inte11llltional flow of codified lmowledge in
the fonn of operating 'instructions, manuals and soir,J,are. They may also have some positive impact
on international exchanges of tacir'lmowledge through teleconfe"encing, but ::lot anywhere near to
the same extent. The main impact will therefore be a[ the second stage of the 'product cycle', 88 when
product design has stabilized. and production methods are standardized and documented, thereby
fac:ilirating the internationalization of production. Product development and the first stage of the
product cycle will still require frequent and inrense personal exchanges, and be facilttated by physi-
cal prmdmiry. Advances in IT are therefore more likely to favour the internationalization of prQduc-
ti.on r!lm. _ the proc<;ss _of innovatiQ!l.
The two polar exrremes oi organizing innovation globally are the specialization-based and integration-
based, or netwo,* ,m,Cture,B9 In the specialization-based scructure the firm develops global centres of
excellence in clliferent lields, which are resPonsible globally for the development of Sjlectfic technology
, or product or process capability. The advantage of such global specialization is that i[ helps to achieve a
critical ma56 of !!.Sources and makes coorcilnation easier. As one R&D director notes:
. the of excellence StrUcture is the moSt preferable. Competencies related to certain field
are coocenttated, is easier, and economies scale c3n be achieved. Any R&oD director
has the dream to strucrure R&D ch a way However,the appropriate conditions seldom 0CCllT.
90
I
GlobaUzation strategies for Innovation
It is possible to distinguisb,Cerween two conflicting strategies for t1ie of inno, .. Uon:
augmenting, in whic!> locate innovation activities overs". primariJy.in order to learn from
fOreign syst<mS of innovation, public and pri'!"le; and exploiting, the exact opposite, where the
main motive is to gam competitive advantage from existing corporate-specilic capal;>i1ities in
an environme;nt overseas. hi practice funis will adopt a combination of 'these. [wo different
. approaches, and need to manage the trade-offs on a technology, and market-specific basis.
Christian Le Bas and Patel analysed the patenting behavionrof 297 multinational firms
over a period of eight years . . They found that overall the augmenting strategy was the moSt
common,'but this varied by nationality of rhefinn 3n.d technical field. Consistent with other
studies, they confirm that the strategy of augmenting was for European firms and
weakest for Japanese firms. The Japanese firms were more likely to adopr..strategy o(exploiting
home t<chnology overseas. By technological field, the for the .mpqruncc of augmenting
was (augmenting strategy most common in ihe first): instrumentation, consumer goods, ciw
engineering, processes, engineering and machineri chemicals and pharmaceuticals
and electrOnics. Moreover, \hey argue that these different strategies are persistent OYer time, and
. of Innovation,
SOlI"': Bas, C. Ind P. Pat,<! 0.007) Tht dowminm" of hom<base-.ugmtDdng ond b""",basc-exploiCing lodmologi-
al aai'fides: some new RSUlts on mwdnadona1s'loc:arionaJ SPRt: E'.earonic Workfn Pqpcr Serit!,I'SEWPS).
www.5ussex.ac.uk/spru/publications. '.

www.managing-lnnoYation.com
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f IKBEE4.ii: Indicators of the geographic Location of the innovative '\
activities of firms
Nationality
of large
firms (no.)
J.pan (95)
USA (!IS)
% share of
origin of US
p;o.tentS In
199
2
-96
Home Foreign
97.4 2.6
92.0 8.0
Europe (136) 77.3 22.7
Belgium 33.2 66.8
Finland 71.2 28.8
% share of
foreign
performed
R&D
expenditure
(y r)
2.1 (1 993)
11.9 (1994)
24.0 (1992)
% share of foreign origin
of us patents in 1992-96
US EuIO!", Japan Other
1.9 0.6 0.0 OJ
0.0 5.3 1.1 1.6
21.1 0.0 0.6 0.9
14,0 52.6 0.0 0.2
5.2 23.5 0.0 0.2
% change
in foreign
origin of us
patents. since
1980-84
...{J.7
2.2
3.3
4.9
6.0
_ ................ _ .................. _ ......... _ ..... _ ............ _ ............ -.-..... _ ....... .... : ................ :.::: .................................. -............ -_ .... - .... _ .... .
France 65.4 34.6 l S.9 14.2 0.4 1.2 12.9
Germany 78.2 21.S 18.0 (1995) 14.1 6.5 0.7 0.5
, ..........: .. - ....... ......... , ... -, .............. - ... ,-..................... _ ............................... ::.:-:::.:! ........... : ............................... - . - - .......... - .. .... -.
Italy 77.9 22.1 12.0 9.5 .. 0.0 . 0.6 7.+
Netherlands 40.1 59.9 30.9 27.4 0.9 0:6 6.6
1-....................................................................................................................................................... _ .................... _ . _ .. _ ....... _ .. .
Sweden . 64.0 36.0 21.8 (1995) 19.4 14.2 0.2 2.2 -5.7
Switzerland 42.0 5S.0 31.2 25.0 0.9 0.8 S.2
....................................................... _ ........................ _ ............................ _ ............. _ ........ _ .......... _ .................... _ .. _ ......... -........... _ .. .
UK 47.6 52.4 3S.1 12.0 0.5 1.9 7.6
All finns. (359) 87.4 12.6 11.0 (199.7) 5.5 5.5 0.6 0.9 2.4
_ _ _ , _ _ ......... _ ....... " _ ...................... . ..................................... __ _ _ 1 _ __
Soun:es: Derived from Pud. P. and K. Pavitt (2000) National systemS of innovation UDder saDr cbr: iDtCm.tiomltntion of
oorporaIt R&p. In R. BomIl, G. Muon md M. 0'Mahcmq, ods, buwMttIon .awl - PtTJt1nn-.
Cambridge Univmity 1'=. Cambridge; and P.w. P. and M. Vep. (199B) TechnololD' SralZ8l" of !mxe au.pean Pinns,
.
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Routines to help strategic analysis
Rese:arc!'l has :cpeatedly shown that org<lnizations which simply innov:lte: ,jD impulse: arc poor per-
fcr:ners . For exampie. a numbe:r of srudies cite firms that have adopted expensive Jnd comple..."C inno-
vations to upgrade thefr but which have failed to obcam compe.Litive advamage from.
process innovation,91 By contrast; those \>Jruch understand the cverall business, including their teC,,;.1.-
Cl.oibgicll and their desired developmenc trajectory are more. likely (0 succeed. In similar
fashion, studie.s of produc!/service innovation regularly point lack of strategic underpinning 35 a
key problem.
92
For this reason many vrganizations take time - often and away from the cay-
to-day pressures of their 'normal' operations - to reflect and develop a shared strategic framewqrk for
innovation.
The underlyingquestion this framework-has to answer isabout balancing fit with business strategy
- does the mnovation we are considering help us reach the strategic goals we ru.ve set ourselves (for
growth, marke.t share, profit margin, I!tc.)? - with the underlying competencies - do we !mow enough
,bout this to pull it off (or if not do we have a clear idea of how we would get hoid of and integrate such
knowledge)? Much can be gained through taking a systematiC approach to answering these questions _.
a lypical approach might be to cany out. some fonn of competitive analysis which looks at the position-
ing of the organization in tenns of irs and the key forces acting upon competition. Within
this picture questions can then bo ",ked about how a proposed innovation aright help shift the compet-
itive positioning fuvourably - by !owering or raising e.ntry barriers, by introdudng substitutes to rewrite
the m1e.s Of the s?rne .erc .. A "ride r;ansr qf rools is mrn:j1ab1e to help, this proce.ss. For example, the iPs
fmmework introduced in Chapter 2 can be. used to review the potential for innovation.
Many structured methodologies exist to help organizations work through these questionsand these
are often used to help smaller and less e.-tperienced players build management capability. E.-tamples in-
clude the SWCRD approach to help SMEs find and develop appropriate new product opportunities or
the 'Making IT PaY' framework offered by the UK DTI to help firms iIiak" sITatogic process innovation
decisioDS.
93
Increasing emphasis is being placed on the role of intermediaries - innovation consultants
and advisors - who can provide a degree of assistance in thinking through innoYation strategy - and a
number of regional and nad,onal government suppon progra= include this element. bamples in-
clude the IRAP programme (developed in Canada but widely used by other countries such as Thailand),
the European Unions MINT programme, the TEKES counselling scheme in Finland, the ManufactUring
Advisory Service in the UK (modelled in pan on the US Manufacturing Extension Service in the USA)
and the AMT programme in Ire!ahd.
9

In carrying out such a systematic analysis it is important to build on multiple perspet:tives. Rl:views
can take an 'outside-in' approach, using tools for competitor and market analysis, or they can adopt an
'inside-out' model, looking for ways of deplOying competencies. They can build on explorations of the
futUre such as the scenarios described earlier in this chapter, and they can make use of techniques like
'technology roadmapping' to help identify courses of action which will deliver broad strategic objec-
tiveS.
95
But in .the process of canying out such reviews it is critical to re.."'D.ember that strategy is not an
exact science so much as a process of building shared perspectives and developing a framework within
wlndlliSiCfd"CCSl"011S""CaItoe-locateCi-. -.. _._-_ ... .... .
It is also important nOl to neglect the need to communicate and share this Strategic apalysis. Unless
people within the organization understand and commit to the anoIysis it will be hard for them to use it
to frame their actions. The issue of strategy deplaymtnt - communicating and enabling people to use the
'RWI'i.m; naglng' inn 0 Yadon .tom
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- ;::sse::r..a! ::' :.:1t: vrgar:l:::..ucn :s:o ::.vOld :,)['::a'\lmg but not . know-why'
as :nnovaeon ti1is :c [he fore :r. :he: C:lSi! J{ icc-:.lsed inc:ememal
:r.rpoveme..."1t tmpie:ne."1talions 0)[ the. ' ::!:ll1' vI )f In it
is possibie :0 :nobiiize :rwst ci the people :n oln arganIzation :0 .:;omribme. [heir :oe3.s lnd G'eativity to-
\-12rcis ,:om:nuous improvement, but in practice this often fails. isSUe 1S the presence - or
- of :some :strategic foc:ls within which they can loca.te their multiple small-scale :nnovation
ThIS :-eo.uire.s twe key enabiers - th.!:! ;:reation of-a de:ir and. ;::Jne!"enr :strategy for the business and the
deplcymem d it cascaae process which builds llncierstanomg and ownership of the goals and
.5ub-goals.
This is 3. characteristic feature of many haizen 3YStemS lnd may help t.."Cplain why there is
:iuch. J strong track recora" ;)f strategiC gairts conunuous [n such plants overall
6usiness strategy is broken down into focused [hree.-year :nia-te:ml plans (MTPs): typically the plan is
gwen :\ slogan or motto to ielp identify :1. This forms ,as15 of banners ana .Jeher illustrations. bue
' L5 dlect:s lO .. ide a backdrop against which efforts :1.e.. 'C[ ye:ns can be focuuci. The
is .ipecifieci i10t JUSt in vague but .. lith speC'Jic :lIlG measurabie objectives - often described
.1S pillars. These are, in tum, decomposed. into manageable prcje::::s vnich have c!eJr targets and meas-
urable ac.t-lievemem milestones, and :s to Ihese workplace :nnovation activities are systematically
applied.
Policy deployment ::: f this kind reqUires suitable tools and t.echnic.ues and include hoshin
(participative) planning, how-why :'::"<lITS, 'bowling ct..ans
i
and brie.fing groups. Chapter 9 picks up this
theme in more detail.
Portfolio management approaches
. The:-e are a variety of approaches which have developed :.0 deai with the quesrimt"otwhar is broadly
tenned 'plmfolio managemem' , These range from simple judgements about risk and reward to comple..."'{
quantitative [Dais based on prooabilicy theory.96 But the underlying purpose is the same - [0 provide a
coherent basi!; on which [0 judge wr..ich projects should undenaken. and m ensure a good balance
ac..:"'"OSS the ponfolio of risk and porential reward. Failure to makt! such judge.ment:. can lead to a number
of problem issues, as Table 4.13 indicates.
In general we can identify three approaches to this problem of building a strategic portfolio - bene"
fit measur<ment techniques, economic models and portfolio models. Benefit measurement approaches
are usually based on relatively simple subjective judgem.ncs - for <XlImple, checkliscs whith ask
whether certain criteria are met or not. More advanced versions attempt some kinG. of scoring or weight-
ing so thatprojects C<ln be compared in terms of their overa1l1ttracrtveness. The main weakness is
that they consider each project in relative isolation. ,
Economic models attempt to 'put some financial or other quantitative data into the equation -
for example, by calculating a payback time or discounted cash flow arising from the project. Once
again these suffer from only treating single projects rather than reviewing a bundle, and they are
also heavily dependent on the availability of ood not always the case. at the outset
a ns proJect. e t ira group - portfolio methods - tries to deal with the issue of reviewing
across a set of projects and looks for balance. Chapter 8 discusses portfolio methods and tools i.n
more detail .
www.managfng-innova!fon.com
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Criteria for evaluating different of tesearch project
Technical EVlluation
activity erlterll (% of
aU R&D)
Basic Overltead cose
:research, allocalion
monuoring (2-10%)
Decislon- Market
takers analysis
R&D None
Nature
ofrlsk
Small =
of R&D
I
Hls!)er
volatility



Longer time Nature of
horizons external
alliances
Increases I{esearch
search gnmc
potential
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Strategic .
positioning
Focused
applied
research,
exploratory
development
'Options'
evaluB.ion
(W-25%)
Chief exec_
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division
Brpad
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Small =
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ReOeC!5
wide
poLemia'
Increases
search
pot.emtal"
R&D
contracl
Equily
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Invesnnent. and produc- value' analysis : COSl of . reduces net present ven"fure
lion epgi- (70-99%) ' . launching present value Majority
neerip.g . value control
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Strategy making in practice
\:o,.'e !!..'X:l.minc:Q how :m,uegy develops ,and tvoives (lver Lime. and now different (Ools dnd
processes 3rt llsed practice. Uniike most studies, WhlCh. rely on suJVeys Of interviews after the
evem. in this smciy we ccllected d.ata from tWO case study companies by direct obserVation over
many months, in .re,,/ lime. The cam we gener.:ue.d included: .
(0) 1392 digitoi photographs - the photographs we had taken of activities in the rwo settings in-
.:!uded ?ictures taken.duJing project and ciie!lt meetings. inte.ractior..s with visual materials,
ir:diviciual working and office ccnversaticl".s.
(b) Fi.eld notebooks - the notebooks had been :.lsed by researcher to keep a diary of their
jme in the Seld, jQ[ting down observations alongside the date and tlmc., and Jt rtlin-
qu:i!hing to and designers who :ook the notebooks and drew directly into

(c) 34 hours of audio Ill2.lerial- taped during project meetings anended as ?an of me obsu
vational \/otk and followup interviews . .This was also mmscribed.
Cd) Digital and physical files - additional documemation relating [a the new ?roriuct development
project was archived in bath digital and hard-copy [ormuts.
Business strategy cham aud roadmaps: These timeline chans are generated in PowerPoim,
and used by the general managers to dissemin&te corporme. strategy, sh'Jwing gross margin and
the competitive raadmap. They were used in a meeting c-lied by the manager a,,! ...
attended by everyhody in the division. Copies were then published on !he server.
Ttchnology development roadmap: This is a sector-level roadmap fOi: saicon iinpianr -
technology; which also shows R&D and product release schedules. It shows the lifetime of
produce models, with quarterl:, figures for spending on R.tSrD and continuous improvement.
A printed sits on the desk of the assistant to the product manager. A PowerPq,int
vernon was published on the server.
Financial forecast spreadsheets: These are used to manage cost reduction and projections
of revenut flow; the charts have a time dimension. For example; versions of cost reduction
spreadsheecs, generated by senior'management, are used in a frozen way in cross-function
team meetings between. representatives of the engineering and procurement departments to
negotiate and coordinate around delivcry of targets and re;ponsibilities for cost. . .
Strategic project timeliDes: These are time!ines showiItg the goals of ilie project; the differ-
ent streams of business and relationships with clients rnii[ relate to it. The general r.rranager
used a wbiteboard to sketch the first version, which was then convened over a number of
weeks into a proliferation of mare formalized and detailed
--1---6_ot-cIbsrt:r.fue==timm=forsdted1lrhrrpl:tlV'ilfu.As the project progressed, ver
u,am to' keep'presem understanding of
the activities involved in achieving production against a tight deadline. An example is posted
up on the office wall of the assistant to the product manage:. Hard copies and PowerPoint
versions were used in cross-function product development team meetinS'.
www.managinglnnovation.com
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Progress charts: These are timelines for progress towards phase e...'lQ.t (and hence, revenue
generation) shovm in a standardized format wir..i-J. 'srr-Jleys; used to represent the project man-
of risks. It is used by the a.uality manager for ge..."'leric product development
process, in :l fon!lightly cross-function meeting to revi.ew progress across the entire ponfoiio
of new product developmem activity.
Sou.rce: \Vhyre.j., 2. Ewenstein.:vi. Hales andJ. TIdd (2OCB) How to'visualize knowledge:n proJect-based Long
Range Planning, HG). 74-92.. Reproauce:d oy permission of Esevier.
Summaryand. further reading
Iit.fonnulating and executing their innovation strategies, organizations cannot ignore the national
systems of innovation and international value chains in which they are embedded, Throug\l, their strong
influences on demand and competitive conditions, the provision of human resources, and forms of
corporate governance, national systems of innovation open opportunities and impose constraints
on what firms can do.
However, although firms' strategieS are influenced by their own national systems of innovation, and
their position in international value chains, they are not detennined by them_ Learning (Le. assimilating
knowledge) from and 9f. innqyation is essential for developing capabilities,
but does require costly investments in R&D, training and skills development- in order to devel"Gp the
necessary -absorptive capacity. This depends in part on what management itself does, by way of invest-
ing in complementary assets in production, marketing, service and support, and its pOsition in IOGal and
international systems of innovation. It also depends on a variety of factors that make it more or less
difficult wappropriate the benefits from innovation; S1idns'ihten<ttilhl'prdpetty'incr'i!lrutiational
trading regjmes, and over which management can sometimes have ver-! little influence.
There are a number of texts describe and compare different systems of national innovation
policy, including National, InnovationSystems (Oxford University Press, 1993), edited by Richard Nelson;
National Systems of Innovation (Pinter, 1992), edited by B,A, Lundvall; and Sysrems of Innovation:
Technologies, 'Institu,tions and Organisations (Pinter, 1997), edited by Charles Edquist, The fonner is
strenger on US policy, the other two on European, but all have an emphasis on public policy rather than
corporate strategy Michael Poner!; The Competitive Advantage of Nations (Macmillan, 1990.) provides a
useful framework in which to e.."'<amine the direct impact on corporate behaviour of innovation systems.
At the other extreme, David Landes' Wealth and Poverty of Nations (little Brown, 1998) takes a broad
(and stimulating) historical and cultural perspective, The best overview is provided by the anthology of
Chris Freemans work iIi Systtms of Innovation (Edward Elgar, 2008).
Comprebensive and balanced reviews of the arguments and evidence for product leadership versus
follower positions are provided by G,], Tellis and P.N, Golder: Will'and Vision: How Latecomos Grow to
Dominate Markets (McGraw-Hill, 2002) and Past Second: How Smart Companies Bypass Rl:!dical Innovation
_..:...",.,,"'" ____ ""t"" .. ... :.tl .. r ... ".d.i*l2lom""i ",a .. 2004)by Costas Markides. More relevant to firmsfrom
emerging economies, and our favourite te: on the subject, is Naushad Forbes and David Wield!; From
Followers to Leaders: Managing Technology and'lnnovation (Routledge, 2002), which iIidudes numerous
:, ..
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case examples, For recent reviews of the core competence and dynamic capability perspectiVes see
David Teeces Essays iii Technology Management and Policy: Selected Papers (World Scientific Press, 2004)
www.managinginnovalion.com
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J,nd C.)nnie :ieifa[s Dynamic Capahllictes: L'ndersranding Scra[f:gIc Change in Organt::.:trions (Blac..i{.we:ll,
2006). Savenpcn, !..eibolc.: Jnd 'ioe:lpei an recent compilation ui' :eJding strategy v.; riters
in Scrateg\{: Managemenc rht: {nnovarion Economy I!ciition, \i\lliey, 2006), :md ieview e.ri ired by
Roben Gabvan, John :\<lur. ... y and COStas Marktdes. Slnuegy. Innovation .:uui Change (Oxford UnivC;rSity
Press. 2008), is ""ceIlent. On <he more specific issue of technology strategy Vi ttorio Chiesal; R&D
S[rar,EY and Organization (Imperial College Press, 2001) is 3. good place to start. The renewed interest in
business model innovation, chat is value 15 created and captured, L5 discussed in Strategic Market
Creation: .4 New Perspective on Marketing and Innovation Management, a review of research at Copenhagen
Business School and Bocconi University, edited by Karin Tollin and Antonella Can) (Wiley, 2008).
Here :lTe the full details of the resources available on the website flagged throughout the [ext:
..,
I
Case studies:
Polaroid
Corning
Interacuve
4Ps analysis
Tools:
Identifying innovative capabilities
Video podcast:
3M: Identifying lead u' ers
Audio podcast:
, Simon Murdoch: Bockpages
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