Chapter 12 Innovation & Strategy To gain an overview of the functioning of the international monetary system To understand the nature of foreign exchange.

Chapter 12

Innovation & Innovation & StrategyStrategy

To gain an overview of the functioning of the international monetary systemTo understand the nature of foreign exchange operationsTo appreciate the role of global capital markets To identify and assess corporate financing options, including their impacts on managers and stakeholdersTo assess changes in corporate control, including the roles of hedge funds and private equity groups

To evaluate changes taking place in international accounting

Aims of the lectureAims of the lectureTo identify the elements of innovation in the organizational context

To account for national differences in capacity for innovation and technology development

To examine diverse approaches to innovation in terms of corporate strategy and organization

To appreciate the potential of co-operative innovation strategies

To become familiar with ways in which innovation is fostered and managed within the international company

Elements of innovationElements of innovationInnovation covers all activities which yield new or improved products or ways of doing things.

Radical innovation is driven by technology – the systematic application of scientific knowledge to practical purposes.

New products or processes = inventions, for which patent application can be made.

Incremental innovation is associated with continuous improvement.

Innovation is now seen as central to corporate culture, not just R&D departments.

Figure 12.1: Elements of innovation

Elements ofinnovation

R&D capabilities,including networks

Corporate culture

Focus on the consumer needs

Patentable inventions –products and processes

Cross-functionalcooperation

Manage-ment of IP rights

Incremental improvementsin products and processes

Elements ofinnovation

R&D capabilities,including networks

Corporate culture

Focus on the consumer needs

Patentable inventions –products and processes

Cross-functionalcooperation

Manage-ment of IP rights

Incremental improvementsin products and processes

Innovation and competitive advantage

Innovation is a core competency and source of competitive advantage.

Catalysts of innovation (Porter):

New technology New or shifting buyer

needs New industry segment Shifting input costs or

availability

Changes in government regulation

Innovation and economic development

Capitalist economic development relies on radical changes which break with the past (Schumpeter’s “Creative destruction” model):

New productsNew methods of productionNew marketsNew forms of industrial organization

Economic development can be depicted in stages, from low innovation-intensive to high innovation-intensive, but...

No two countries present exactly the same pattern.

In Hinduism, the god Shiva is simultaneously the destroyer and the creator, portrayed as Shiva Nataraja (Lord of the Dance), which is proposed as the source of the Western notion of "creative destruction". In The Communist Manifesto, Karl Marx and Friedrich Engels described the tendency of capitalism to constantly reinvent itself.

In western capitalism, "creative destruction" is most associated with Schumpeter, particularly in his 1942 book Capitalism, Socialism and Democracy. The most likely source of this can be found in the concept of Business Cycles, as in the long-wave cycle of Nikolai Kondratieff that, Schum-peter believed, were caused by innovations

Creative Destruction: from Nataraja Shiva to Joseph Schumpeter

•Figure 12.2: Stages of development (change)

Stage 1Early development Reliance on natural resources

or low-level, labor-intensive, manufactures for export.

Craft industries, few competencies

Inward investment limited to enclaves of economic activity

Stage 2Investment-based development Increasing expenditure on transport, infra-

structure, utilities, communications, education. Growth in capital-intensive sectors, e.g., chemicals

and moderately knowledge-intensive consumer goods (e.g., electricals).

Increase in FDI

Stage 3Innovation-ledgrowth Growing consumer society. Greater expenditure on

education and communication Promotion of FDI in

innovation-intensive sectors, facilitating spill-over effects and technology transfer

Stage 4Services-led development Focus on direct services of goods with high level of

service content. More cross-border, inter-firm linkages, aiming for

global competitive roles for domestic firms. Increase in outward MNE activity. Aim to attract high-value FDI, e.g., R&D.

National innovation capacityNational innovation capacityWhy have some countries forged ahead in technological innovation, and others have lagged behind?

Huge gap in innovation capacity between the developed and developing countries

Some of the necessary conditions to boost innovation:

Public spending on education, skills, infrastructure

Cultural values associated with entrepreneurial activity

Strengths in science and technology

• Figure 12.3: The national innovation system

Nationalinnovation

system

Education& Trainingsystems

R&D intensity

Investment inadvanced telecmmuni-cations infrastructure

Inter-firmrelationships

Industrial structure

Governmentpolicies and the funding of research

Interactions between firms, univer-sities and research centers

Science and techno-logy strengths and weaknesses

Cultural factors like attitudes to learning and entreprise.

•Source: OECD (2007) Main Science and Technology Indicators, www.oecd.org

Figure 12.4: Gross domestic expenditure on R&D as a percentage of GDP in selected countriesNote: For 1975, Germany refers to Western Germany (the Federal Republic of Germany)

•Figure 12.5: The top seven countries in R&D: Breakdown in sector, 2006

Source: UK Department of Trade and Industry (2007) The R&D Scoreboard 2006, www.innovation.gov.uk

Technology transferTechnology gap between developed and developing countries can be partially bridged by technology transfer.Technology consists of both...

Codified knowledge (tangible elements, such as products, designs)

Tacit knowledge (intangible elements, such as skills and know-how)

The greater the extent of tacit knowledge, the more difficult it is for host developing countries to benefit.

• Table 12.1: Channels of technology transfer

Innovation in the organization• Why are some firms and people innovative and others

are not?

• Strategies vary according to the type of business:

• Born-global firm in knowledge-based sector – new products and global ambitions from the outset.

• Research-intensive MNE – usually with strong R&D department, and record of innovative products.

• MNE in consumer mass markets – broadly based strategy and incremental innovation, adapting to new markets.

• Figure 12.6: Innovation in different types of international business

In-house R&D

Inter-firm cooperation

Technology licenses

Acquisition of specialist firms

Continuous improvement

Cross-functional teams

Patentable inventions/software copyright

Product or service improvements

Cost-saving business process innovations

Incremental innovations in supply chains

Born-global in knowledge-

based sector

Research-based MNE

MNE inconsumer products

mass markets

Innovative outputs

Sources of Innovation

Business type

•Table 12.2: The world’s 20 largest companies by R&D spending, 2006

Source: UK Department of Trade and Industry (2007) The R&D Scoreboard 2006, www.innovation.gov.uk

Co-operative innovation strategies

Some reasons for growth of co-operative strategies:

• Need to reduce costs generally, and curb rising R&D costs in particular

• Shorter product life cycles, and shorter technology life cycles

• Increasing complexity of some products

• Increasing integration of formerly independent sectors

• Collaboration can be to seek complementarities, or to pool skills to speed up the research process

• Figure 12.7: Potential benefits and risks of co-operative R&D agreements

•Figure 12.8: Equity and non-equity R&D agreements

Managing innovationNew ideas from within: what can the management do?

• Foster a culture of openness

• Be willing to change

• Hire creative people

What about external sources of new ideas?

• Co-operative R&D agreements

• Customer-focused innovation

• Innovation from any participant in the supply chain

• Figure 12.9: Internal and external aspects of managing innovation

Managinginnovation

In-house IP management R&D

strategy

Corporateculture

Parent-subsidiaryinteractions

HRpolicies

IP lic

ensin

g

Collaborative

R&D agreements

Networking

Interaction within supply chains

Join

t ven

ture

s

External aspectsInternal aspects

Managing IP rightsIntellectual property rights (IPR) – a source of ownership advantage.

Every product represents a bundle of rights, which must be legally protected and defended, in differing national environments.

The rise in outsourcing, licensing and collaboration in R&D leads to the need for greater attentiveness to who owns what IP rights.

Where IP rights are managed to deliver maximum value to the firm, innovation is at the heart of corporate strategy.

Figure 12.10: The main intellectual property rights

Managing IP (intellectual property)

New productor technological

process

Brandor

logo

Media content,software

Appearance,logos, packaging,

graphics

Patent Trademark Copyright Design right

Licenseto

use

Need arisesautomatically

Need to registerGrant permission

apply

Licenseto

produce

ConclusionsInnovation enhances competitive advantage through both radical and incremental improvements in products and processes.

Reflecting levels of economic development, national environments differ in innovation capacity.

Innovation within the firm is not just about R&D activities, but involves openness to new ideas throughout the organization.

Co-operative innovation strategies complement and enhance the firm’s in-house innovation resources.

Competitive success depends on managing IPR in both the legal and organizational contexts.

Case studies 12.1: Kodak (page 462)

1.What were Kodak’s failings in innovation strategy which led to it being left behind?

Kodak realized that it would have to adapt to the new digital age, but failed to anticipate how quickly digital cameras would replace traditional photography. Even when the price of digital cameras started to fall dramatically, Kodak was still manufacturing huge quantities of film. The new CEO who took over in 2005 immediately called for reduction in manufacturing capacity by two-thirds, but by then, the company was in crisis.

Kodak had an active R&D department, which had been researching digital technology for years, acquiring IP rights along the way. It had long supplied X-ray laboratories and film studios. Its expertise in imaging is now a platform for further expansion. Kodak faced an uphill task in lower-end digital cameras, as it rivals were well established. The new CEO guided its evelopment of printing products, spotting a gap in the market. The digital printing business was thus central to its new strategy. The company is seeking further innovation in the sharing and display of images in different media, such as mobile phones and internet. A partnership with Motorola, the mobile phone company, has been formed to foster these developments. The new products, such as easy-to-use home printers, would be considered a break with its past, but Kodak as a brand has long been had a reputation for catering for family and holiday photo-taking. Its sound reputation, especially in the US, would transfer to the printer activities, which are largely targeted at this same market.

2. In what ways does its new strategy stem from its long-standing business strengths, and in what ways is it breaking with its past?

Kodak’s experience and research in imaging can be a source of competitive advantage in the future. Much of these expertise is in specialist applications, and the company would also need to maintain its competitive position in mass-market products such as low-end cameras. The link with Motorola in technology for sharing images over different media can be a source of competitive advantage in the future.

3.How would you assess Kodak’s core competencies as sources of competitive advantage in the future?