TIM Summary

Technology and Innovation Management Introduction

TUM - Prof. Dr. Joachim Henkel

Summer Term 2011

Page

TIM 01 – Introduction 1

TIM 02 - Who innovates? 3

TIM 03 – User Innovation 5

TIM 04 – Competition Analysis 8

TIM 05 – Market Analysis and Diffusion 11

TIM 06 – Intellectual Property Protection 15

TIM 07 – Technology Analysis 18

TIM 08 – Appropriation and Stragegy 22

TIM 09 – Function and roles in the innovation process 25

TIM 10 – QFD and Stage-Gate Processes 28

TIM 11 – Management of internal interfaces 30

TIM Guest Lecture 1 –New Electricity Age 33

TIM Guest Lecture 2 – Innovation Mmgt. in Start-ups: 34

TIM 01 – Introduction “Innovations are qualitatively new products or processes that differ significantly from what existed before” Innovation vs. Imitation, Example from the pharmaceutical Industry

Innovation vs. Imitation

R&D Investment High out-of-pocket costs for testing, marketing, etc.

Little costs

Gestation period Long testing period Short period

Success rate Low costs, little products entering clinical trials make it through to approval (22%)

High success rate in demonstrating bioequivalence to original product (90%-100%)

Innovation - is risky (technology, demand, competition) - can be very costly - can be copied (spill over) - is “creative destruction”, often causes resistance - is a new combination of needs and technical solution The mgmt. of innovation requires different skills, tools, incentives (Antriebe) and organization than other function Schumpeter Thesis The fundamental impulses for capitalist engine are:

1. The new consumer goods 2. The new methods of production or transportation 3. The new markets 4. The new forms of industrial organization

Creative Destruction Competitive elimination of the old forms of production due to new combinations of production factors fundamental trait (Merkmal) of capitalism How can competitive advantage be built and maintained?

Market based view: New markets, entry barriers…

Resource based view: Know-How related to Innovation, patents

Relationship based view: Customers as source of Innovation

Opportunity based view: Opportunities due to new technology, link to entrepreneurship

Strategic value of resources: Related to value: - Rare / Unique? - Value generating? Related to value sustainability: - Imitable / Substitutable? - Sustainable? - Profits appropriable? - Scalable (anpassbar) / Mobile?

cH

1

The innovation process

exploitation = Ausbeutung New combination of needs and solution

Interface problems: Example of warship Vasa: When the problems start… nobody dares to voice concerns, or these who do are not listened or even punished If problem occurred, nobody is held responsible lack of open communication is a big problem Summary:

Innovation is risky and differs from other functions of the firm

A very tricky issue is the interaction of engineering and marketing

Innovation is a new combination of needs and solutions, it includes commercialization

cH

2

TIM 02 - Who innovates? 1. Market Structure Cost and benefits are the dominant drivers of innovation: - Highest gains - Lowest costs What market structure is most conductive (leitend) to innovation? - Schumpeter I: “Entrepreneurs” and new firms drive innovation → fragmented markets (typically) - Schumpeter II: Large firms drive innovation → markets with (some) monopoly power Basic neoclassical model (Arrow 1962): – Linear demand curve – Constant marginal cost of c – Radical innovation reduces marginal cost to c’ – Only the innovator benefits (no information spill-overs) – Three cases are compared: a) Ex-ante perfect competition → ex-post monopoly b) Ex-ante monopoly → ex-post monopoly c) Ex-ante social planer → ex-post social planer Question: what price would the innovator be willing to pay for the innovation?

cH

3

2. Strengths and liabilities (Verbindlichkeiten, Anfälligkeiten) of young firms Liabilities of newness: – Roles and tasks have to be assigned (takes time, creates inefficiencies and conflicts) – New organizations lack reputation and experience – Exchange relationships with various actors have to be established – New firms have to rely on interactions among “strangers” Liabilities of smallness: – Limited resources (financial, personal, ...), Lower market power – Low variety of skills in the firm; some critical skills may be lacking – No buffer to survive times of crisis Lower survival rate confirmed by empirical studies Advantages of new firms: Organization-related advantages: – No path-dependence; can create business from scratch, are thus more willing to pursue completely new approaches – Less “inertia“; company structure more flexible – Open and innovative culture – Not afraid of cannibalization – Innovation is only chance to beat incumbents HR-related advantages: – Can hire people that exactly match the task at hand; no need for re-training – Will have, on average, more flexible employees (younger, more entrepreneurial) Advantages of small firms: – Company structure easier to identify, clearly laid out – Short ways, direct communication, fast decision-making – Higher job satisfaction Example SAP: - Five former IBM employees are the founders - One vision - Flexible working hours, in the night and at the weekends - High sales gain with only 9 employees after the first year

3. Disruptive Innovation – These innovations are technologically straightforward – Initially, they do not satisfy customers in established markets, they are sold to niche/new markets – Over time, performance of both established and new technology grow faster than market needs – Eventually, the new technology supplants the old one even in the established, main market Examples Hard Drives: From 8 to 5,25 to 3,5 to 1,8 Inch. Always new entrants capture a higher volume of the market than the established ones. Examples Shovel Excavator (Schaufelbagger) Sustaining Change: From steam-powered to gasoline-powered cable shovels Entrants capture 30-40% of the market Disruptive Change: From cable to hydraulic shovels Entrants capture 80-90% of the market Established firms listen to much to their existing customers and & too focused on existing procucts But the Concept of Disruptive Technologies is mainly oversold, can only be found out afterwards.

cH

4

TIM 03 – User Innovation 1. Innovation along the value chain Classical View: Manufacturer generates ideas and developes prototypes New View: User often supply ideas and even prototypes Note: The distribution of innovative activity along the value chain varies strong between industries

First type innovations rarely come from users. Exception: Copper based semi-conductors produced by IBM to make their computers faster. Degrees of user activity in innovation CAP: Customer active paradigm MAP: Manufacturer active Paradigm Various degrees between the extremes of CAP and MAP

Example MIG21 Engine as Fire Extinguisher Remember: Innovation = new combination of need and solution Here: existing solution (engine) applied to existing (but unusual) need Further examples: new uses of drugs, often discovered by “users” (i.e., doctors) Also Suppliers can be innovators: e.g. aluminium beer can and bottle from Alcoa (Aluminium Company of America)

cH

5

Change of functional roles Typically a user benefits form using his innovation (lead user). Although also benefits by manufacturing and licensing are possible. However: – Manufacturing: a change of functional role from user to manufacturer (vertical integration) is typically difficult (e.g., complementary assets may be missing) – Licensing a user innovation brings numerous problems and is typically very difficult The change of functional roles is very difficult

2. Lead user method “Lead Users” are users that: 1. Have needs that foreshadow general demand in the marketplace; 2. Expect to obtain high benefit from a solution to their needs. (Such users are more likely to innovate – “Necessity is the mother of invention!”) Classical market research is based on a static concept of a representative customer LeadUser Method focuses on users that are ahead of the trend Classical market research: – Focus on “average customer” – Quantitative methods preferred for comparability Problems: Average user... – is mentally focused on existing reality – typically has difficulties in articulating new needs (“sticky information” problem) – mostly has no pressing need for new products Lead user method avoids these problems Own developments are the strongest indicator for a Lead User. Expertise in his department is indicator as well. Example of PC-CAD system developed with Lead Users – Acceptance Test

cH

6

Lead User Critique:

Risks / downsides: Operational difficulties:

– Development of niche solutions – Problems with intellectual property – Costly and time-consuming – Internal acceptance: “not invented here”

– Identifying the right trends – Identifying the true lead users – Problems in lead user workshop – Problems with testing acceptance

Example Lead User Innovation: WWW - Berners-Lee did not set out to invent a contemporary cultural phenomenon; rather, he says, “it was something I needed in my work.” - Berners-Lee’s innovation was to apply hypertext to the growing reality of networked computers. - He expanded the idea he had developed at CERN and made it available on the Internet in the summer of 1991. Lead User innovation: Beyond customers

Lead Users are often not customers of your firm

They may not have an incentive to “lead” you to their innovations Searching for Lead Users in related fields

Example of Breakthrough due to User Innovation: 3M: Air cushion packaging (Also part of the Reading material) Video watched in the Lecture: Idea: Inventing tape to glue bacteria onto the body before doing an operation in order to prevent them of getting into the body. Lead User team: - Veterinary surgeon: Animals don’t bath / Need of low costs - Make-up artist: Has to handle different types of skin - Chemical specialist: Knowledge of glue

cH

7

TIM 04 – Competition Analysis 1. Who benefits from an innovation?

Conditions for profitable innovations:

Customer benefit Supplier’s benefit: Simple Model

Innovator IN faces a demand curve p=1–q for its innovation

Fixed and marginal cost of IN are zero, except that one unit of the innovation requires as input one unit of good G

G is sold by a monopolistic supplier S; it is produced at zero cost

Assumption: S sets price p(S); innovator determines which quantity it buys at this price What profits do innovator and supplier make?

Lecture Solution: Innovators & Suppliers Profit

first order competition p* = 0.5 (1+ ) = 1-p* = 0.5 (1- ) Suppliers profit:

first order competition

= 0

Quantity A* =

Supplier realizes twice the profits of the innovator!

cH

8

Examples of innovators who Profitability of an innovation depends on three factors:

R.C. Cola: first cola in a can and first diet cola Xerox Alto: first computer with GUI and mouse 2. Appropriability regime The “appropriability conditions” denote all factors that influence the possibility of profitable imitation of an innovation.

– Availability and strength of legal protection

– Viability of secrecy (Möglichkeit der Geheimhaltung)

– Characteristics of underlying technology

3. Life Cycle Phase

Industry evolution and dominant design

– 1896: first sale of an automobile in USA – Market entry by many firms 1908: more than 250

automobile manufacturers in USA – 1908: Ford introduces Model T (standardized

product; production using conveyor belt, specialized machines, etc.)

– until 1920: first wave of consolidation – 1923: closed steel body becomes industry standard – until 1940: second wave of consolidation No of manufacturers drops to 9

cH

9

4. Complementary assets

Successful innovation requires several complementary assets.

Innovations and complementary assets can depend on each other in different ways.

Complementary assets can be 1. Specialized 2. Co-specialized 3. Generic

Co-specialized assets: – Mazda rotary engine (innovation) needs special repair facilities (complementary assets) – Containerization needs co-specialized assets in ocean shipping and terminals Specialized assets: – Trucks (convert from containers to flat beds at low cost) Generic assets (general purpose assets which do not need to be tailored to the innovation) – Electric energy for a computer Example CAT-Scanners: Electric and Musical Industries develops first CAT-Scanner. Technical sophistication much higher than would normally be found in a hospital high level of training, support and servicing required Problem 1: EMI lacked these capabilities, could not contract for them and was slow to realize their importance ( complementary assets) Problem 2: Very limited intellectual property protection ( appropriability regime) Imitators could reverse engineer and copy the scanner GE and Siemens, who possessed complementary capabilities (such as marketing experience, reputation, service) took over the market (and EMI’s scanner business). Contract vs. Integrate Solution

cH

10

TIM 05 – Market Analysis and Diffusion (Verbreitung) 1. Success of Innovation What determines the success of an innovation?

Market pull or technology push? Most successful new products were often designed to perceive an existing need rather than the availability of a new technology. Product failure is highly associated with the “We know best” attitude, especially were technical inventors fail to consult with potential users regarding innovations

2. Demand Analysis Questions: What are the needs of potential customers? How strong is demand? Relevant product characteristics?

Tools:

cH

11

Delphi Analysis

Various applications in innovation management

Prediction of long-term development of – needs – competition – technology

Examples:

– Adoption of cars with methane engines

– Technological development and use of fuel cell

convergence = Annäherung holistic = ganzheitlich

Example from ISI (Frauenhofer Institut für Systemtechnik und Innovationsforschung): Methodology: Two step process 1st: Small Number of experts ~ 100 make cases and forecasts. They are given to a larger number of specialists ~ 7000. 2nd: Replies are processed and sent out again to the specialists who answered in Step 1 (2.453): seeing other expert assessments may cause a change in opinion (1.856 replies received) Several short term (-2005), medium-term (-2015), and long-term (2015-) scientific and technological trends identified, as well as current major strength and weaknesses

cH

12

Conjoint Analysis “Conjoint analysis” denotes methods of preference analysis that allow to derive the preference for individual characteristics and realizations from “holistic” judgments.

3. Diffusion of Innovation What determines diffusion?

1. Innovation (as perceived by potential adopters) 2. Communication channels 3. Adopters 4. Social system

Perceived attributes of innovation

1. Relative advantage “Degree to which an innovation is perceived as better than the idea it supersedes.” 2. Compatibility (Kompatibilität, Vereinbarkeit) “Degree to which an innovation is perceived as being consistent with the existing values, past experiences, and needs of potential adopters.” 3. Complexity (Komplexität) “Perceived difficulty of understanding and using a technology” 4. Trialability (Erprobarkeit) “Degree to which an innovation may be experimented on a limited basis.” 5. Observability (Beobachtbarkeit) “Degree to which the results of an innovation [adoption] are visible to others

cH

13

Adopters Categories

Innovators – “venturesome” – active information seekers – cosmopolite social relationships – able to cope with a high degree of uncertainty – gatekeeping role in the flow of

new ideas into a system

Early adopters – often opinion leaders – more integrated part of local social system than innovators – sought by change agents as a “local missionary” – decreases uncertainty about a new idea by adopting it (put “stamp of approval” on new idea)

Early majority (“deliberate”) Late majority – interact frequently with their peers – Adoption may be an economic necessity – seldom hold positions of opinion leadership – or the result of increasing peer pressures – makes up about one third of all members – system norms must favor the innovation Laggards – very localite, near isolates in social network – the past is point of reference – limited resources – tend to be suspicious of innovations and Formula describing network effects

Additional buyers

High : decision of customers doesn’t depend on former buyers High : network effects important : Number of people N(t): people who already have the product

cH

14

TIM 06 – Intellectual Property Protection Patents can help to appropriate profits from innovation – In order to use them effectively, one needs to know how to use them They thus can increase incentives to innovate – relevant for the whole economy Patents (of competitors) can make a firm’s life and innovative activity difficult Patents (of competitors) contain valuable information – one needs to know where to find that information and how to interpret it

1. What can be protected by legal means (Mittel)? Technical inventions: patents (focus of this lecture) “Gebrauchsmuster” Trade marks (”Marken”) Designs (“Geschmacksmuster”) Writings, music, software code: Copyright (“Urheberrechtsschutz”) “Sui generis protection” for: – Topography of semiconductors 2. What is a patent? One often hears: “A patent is a monopoly”. NOT CORRECT. A patent is an exclusion right granted by a state for a technical invention that is – new – based on inventive activity (non-obvious) – and commercially usable Patent protection is excluded for – discoveries – species of animals – methods of thinking Some details to counter common prejudices:

Patents aren’t only for revolutionary inventions, most of them are for incremental ones.

Patents are national exclusion rights – there is no “World Patent“ or “International Patent“. However, there are application procedures that simplify obtaining patents in several countries (e.g., application at the European Patent Office, EPO)

How to obtain a patent?

To obtain a patent, one submits a patent application to the patent office

The application – describes the technical invention – defines the desired area of protection

The application is examined and approved (or rejected) by the patent office Why are patents granted? Economic reasoning: A limited period of protection and increased market power (potentially even monopoly) shall create incentives to invest in innovation Lawyers reasoning: The inventor has a right to his/her intellectual property which is embodied in the invention. Other protective mechanisms (often more effective) - Secrecy, complexity of design - Lead-time, learning-curve advantages - Complementary assets (production facilities, skilled workers, sales channels, service, brand recognition...)

cH

15

3. Patents as information sources Patents contain the following information: – Title – Abstract – IPC class (“International Patent Classification“ - field of technology) – Date of priority and publication – Applicant – Inventor – Designated states – Citations of earlier, related patents (“backward“ citations) – Renewals Patent databases supply additional information: Using information from patents Patent value estimation: – Important indicator (forward citations) Technology analysis: – Attractiveness of a certain technology field? Change over time? – Technology focus of competitors? – Our technology strength compared to that of competitors? 4. Costs of patenting Benefits:

1. Profits from – use in own production without risk that a competitor receives the patent – Licensing against cash – Licensing in exchange for other patents (cross-licensing) 2. Creates costs for rivals (for invent-around) and potentially entry barriers 3. Image, signaling (esp. for young firms seeking venture capital)

Costs:

1. Process cost (incomplete): – attorney – research – patent office application fee – renewal fees – translation cost 2. Opportunity cost to secrecy (application is made public!) 3. Detection of infringement 4. Assertion of patent in case of infringement New page fee, 12 Euro for the 36th and every subsequent page, because of the large increasing of claims in the last few years.

Patents cost to society

Patents provide (under suitable conditions) incentives for developing new technology → dynamic efficiency

But, on the other hand, granted patents provide exclusion rights, and typically an inefficiently low use of the existing technology → static inefficiency

Example: Watt blocked all attempts to improve his invention until the patent expired. Then a strong engine performance increase was realized. Example of bad patent quality: Often patents are granted that never should have passed the examination. (Especially in software) E.g. IBM’s patent for replacing the mouse pointer with any graphical object.

cH

16

4. Patent infringements (Verletzungen)

Must be found out by patent holder

If court rules in favor of patentee (i.e., if infringement indeed took place), then the patentee is entitled to …

– injunction (Unterlassung, Verfügung): the infringer must stop using the patented technology – damages: the infringer must pay damages to the patentee

Injunction: very powerful tool, especially when infringer has invested in complementary assets (e.g., production technology)

Damages: different calculation mechanisms possible – Lost profits of patentee – Infringer’s profits (due to use of the patented technology) – “Reasonable royalty”

Increasing No. of patent claims makes infringements more probably.

Patent infringement – Simple model Situation: – Most simple case: patent corresponds 1-to-1 to product – Symmetric duopoly (patent holder, infringer) – Cournot (quantity) competition – Variable cost = 0 Model: – p = 1 –Qtotal – Monopolist maximizes Π = q (1-q), Result: qM = ½, pM = ½, ΠM = ¼ – Duopolists maximize: Π1 = q1 (1 – q1 – q2) Nash equilibrium (i.e., each action is a best response to the opponent‘s action): q1 = q2 = 1/3, p(duopoly) = 1/3, Π1 = Π2 = 1/9 Effects of infringement, compared to monopoly: – Lower output of patentee – Market price goes down Examples: Alcatel-Lucent vs. Microsoft Alcatel-Lucent sues Microsoft for allegedly infringing on their patent technologies related to MP3 compression. Judge decides that Microsoft has to pay 1.52 billion damages. Although Microsoft paid Fraunhofer only 16 million for licensing the technology. Later another judge ruled that Microsoft hasn’t violated the patent. Examples: Polaroid vs. Kodak Kodak used Polaroid’s “instant camera”. Kodak was judged to pay high damages and had to close down a 1,5bn manufacturing plant (high injunction costs) Are small firms well positioned against large firms in lawsuits? Only if patent is very strong and infringement is obvious. In general, however, infringement suits are difficult for small firms (given their cost, duration, and management attention needed). This situation is particularly difficult when a small firm is sued for patent infringement by a large company.

cH

17

TIM 07 – Technology Analysis Example Toyota Prius: Toyota Prius is the most CO2-efficient car on the market. But this is only the technical aspect. If the costs to avoid CO2 are considered as well than it’s much more profitable to make changes / improvements on existing diesel / gasoline cars.

Purpose of Technology Analysis Acquire and interpret information about technology related to innovation activity faster than your competitor:

Potential for further development, limits of existing technologies(e.g., how far can technology A be further improved?)

Technological discontinuities (e.g., are there are any breakthrough inventions or new technologies?)

Substitutional relationships between technologies (e.g., does technology A substitute technology B once it is developed?)

Windows of opportunity (e.g., does technology A lead to an opportunity to develop a new product? (“technology push”)

Thorough technology analysis helps to avoid products … … that are already out of date when introduced to the market … that show technical deficiencies … whose development has to be cancelled due to technical non-feasibility (but after a lot of money has already been spent)

Main topics of technology Analysis Technology monitoring: What is the current state of scientific and technological evolution? Who advances technological progress at what expense? Impact on company and it’s technological competencies Comparative evaluation: How will the potential of technology X or Y evolve (long run)? Technology X or Y? Where can the needed competencies for technology X be obtained (universities, joint venture, etc.) 1. Monitoring Sources of Information

cH

18

Types of Information

Methods of Data Collection Field observation: Test of new products, reverse engineering, visits to factories Direct contact to experts: (e.g., scientists, lead users)Long-standing cooperation, interviews Indirect contact to experts: Via consultants, contacts within JVs and licensing agreements Publications: Technical / academic, company publications, industry news, conference proceedings, patent reports Data bases: Patents, business data (possibly panel data) Organizations: Industry associations, networks

Forecasting methods – Overview

Question: what are the benefits of qualitative versus quantitative forecasting methods and vice versa?

cH

19

2. S-Curve The S-Curve concept can help in determining when to switch to a new technology It can thus help to avoid some typical problems of established companies:

Currently used technology is over-estimated

R&D budgets are linked to revenues

Misinterpretation of market signals due to biased attitude

Lack of flexibility of historically grown organizational structures and cultures

S-Curve of two technologies (Note: S-Curve of one technology is just the red one) Four stages: 1. Emergence 2. Rapid improvement 3. Declining improvement 4. Maturity

Note: It is not clear where the blue curve should start. Logically, if “aggregate R&D spending” is on the x-axis, it should start where the red curve starts (at zero). However, it is common to plot it this way. The problem does not arise when “time” is on the x-axis.

Problems of the S-curve:

Input variable (Aggregate R&D spending in $ or Time? different shape of the curve)

Performance variable

The curve itself Sailing Ship Phenomenon: Rejuvenation of the S-curve through improvements at the old technology as reaction to the introduction of a new technology. S-Curve interpretation more reliable for historic data The S-Curve is a model for further discussion; it is not a law of nature!

1

.

2

.

3

.

4

.

.

cH

20

3. Roadmapping Technology and Product interact in various ways. - The arrival of a new technology allows improving an existing product - Customer demands force the firm to develop a new technology Technology strategy should account for both the product and technology space roadmapping is a tool that helps in this regard

Roadmapping: “process that contributes to the integration of business and technology and to the definition of technology strategy by displaying the interaction between products and technologies over time” (Groenveld1997, p. 48) Product and technology roadmap are linked in order to analyze the use of and need for technologies. Explanation of illustration “The products A, B, … and the

technologies aa, bb, … to develop

and produce these products are

shown for roughly five years

ahead. Products A3, A4, … and

technologies bb, qq, … develope

from the earlier products A1, A2,

and technologies aa, bb,

respectively. Note that technology

qq “kills” technology bb.”

Groenveld 1997, p. 48).

Some benefits of roadmapping

Establishment of a shared product-technology strategy

Interlinked approach for long-range product and technology-planning

Stimulation of learning and improvement of cross-functional communication

Improvement of time-to-market and time-to-money

Analysis Tools – Overview Management of Technology and Innovation has to include the technological state of the art, customer needs, and competitors’ actions:

cH

21

TIM 08 – Appropriation (Verwendung, Aneignung) and Stragegy How can innovations / inventions be turned into profits? 1. Use in own products / services (most important) 2. Excluding others from the use (patents, secrecy) 3. Direct profits (license fees) from use by others (microelectronics: VHS / VCR) 4. Indirect profits from use by others (e.g. Java/Sun, increased demand for my complement) Often used in combination Use in own products / services

Requires complementary assets

Potential benefits due to lower costs, new markets, better products, etc.

Doesn’t require patent protection, but danger that competitor patens my invention Way out: Making the invention public, for “prior art” no patent can be granted anymore. But check whether your competitive advantage could get lost.

Excluding other from the use Requires strong patent protection a) In conjunction with own use: exclusive use by innovator b) without own use: blocking patents to keep competitors from inventing-around other patents of patentee Benefits: - Competitors cannot attain the benefits linked to the invention: – quality improvements – cost reduction – product differentiation - No competitor can attain these benefits exclusively (monopolistic control is prevented) Costs: - Establishing and maintaining intellectual property rights - Monitoring and prosecution of infringements Appropriation by licensing Requires strong patent protection Can be very profitable (esp. for large firms): IBM made US$ 1.25 bn profits from licensing or selling IP in 2001 However, often difficult for small firms – need legal department – litigation is costly and time-consuming for management Benefits: Licensing fees Potentially: advantages from controlled diffusion (e.g., Matsushita with VHS) Costs: Establishing and maintaining IPRs / Monitoring and prosecution of infringements Finding licensee (Licensing marketplaces in the internet) Closing and monitoring licensing contracts Cross-Licensing In industries with “cumulative” technologies, many hundreds of patents may be needed for a single product cross-license large bundles of patents (quantity instead of quality) Those who bring less to the table (smaller firms) have to pay for the difference

cH

22

Benefiting from diffusion Increased demand for – Inputs (supplier innovation; Alcoa, aluminum can) – Complements

1. Standard setting (IBM, copper interconnects) 2. Establishing prior art (IBM, “Technical Disclosure Bulletin“) 3. Marketing (embedded Linux) 4. Development of complements by others (Intel, interfaces) 5. External development support (Example OSS)

When diffusion is very advantageous and licensing difficult, freely revealing (Aufdecken) the invention may be the best option. Favorable circumstances: - Diffusion of high advantage - Innovation difficult to protect - Innovation protected through complementary assets - Culture in which others will develop my invention further and reveal their improvements as well (given for open source software) Protection vs. Appropriation The concepts of “protection mechanism“ and “appropriation mechanism“ must be kept apart Protection (e.g. patents) is an enabler for appropriation (e.g. licensing) Superior “Sales and Service Efforts” and “Lead-Time” are considered as the most effective protection mechanism Example Lion for restricted means of protection

cH

23

Innovation Strategy Michael Porter defining “Strategy” (Video) The strategy is, what unique position we will be able to achieve. What’s our advantage going to be at the end of the day… … how we’re going to sustain that advantage over time. “Strategy”is the definition of … long-term goals of an enterprise, … suitable measures to reach these goals, and … the required resource allocation. “Strategy” aims at creating sustainable competitive advantage. In doing so, possible reactions of other parties are taken into account. Changing a strategy is typically costly and not possible in the short run. Issues of innovation Strategy

Pioneer or Imitator? Niche or Complete Market? Cooperation or Going-it-alone? Technology push or Market pull?

“Technology push” vs. “Market pull” Three patterns for managerial R&D initiatives: 1. Marketing-oriented managers direct scientists into what appear to be exciting markets (need pull). 2. “Scientists, attuned to the realities of the corporation’s interests, look for new technologies and scientific breakthroughs with good commercialization potential.” (technology push) 3. “Marketing and scientific specialists work together, bringing their own skills to a joint endeavor to develop new technology with sound market possibilities.”

cH

24

TIM 09 – Function and roles in the innovation process 1. Obstacles (Hindernisse) to innovation Creative entrepreneurs implement innovations because they expect monopoly profits from doing so. “Side-effect”: creative destruction. Phases: strong growth, imitation and deceleration of growth, depression. An entrepreneur has to face different obstacles: – Lack of experience and information about the innovation – Habitual, routine ways of thinking – Counter pressure from the social environment Dilemma of innovation: – Innovation is a precondition for economic growth – Innovation destroys existing structures and positions (→ losers from innov.) Forms of resistance

1. Rational-technological arguments – Doubts about operability: “Does it work?” – Objections against the timing of the innovation: “Now is not a good time!” – Objections because of missing/limited fit: “It does not fit to our processes / products!” 2. Rational-economic arguments – Objections against destruction of valuable assets/competences – Objections against risk: “The risk is too high!” – Doubt about the necessity of the innovation (reversed burden of proof): 3. Ecological arguments 4. Ethical arguments (not in lecture material)

Causes of resistance

1. Barriers of “not-knowing” / due to lack of knowledge – Innovation may require intensive learning and intellectual deliberation / adaptation – This leads to resistance when individuals are (or feel) incapable of coping with the innovation – Individual effects can be amplified in groups (e.g. departments) 2. Barriers of “not-wanting“ / due to lack of willingness – Constitutional or learned mechanisms of regulation/governance – Reasons related to power (re-)distribution, high risk aversion – “Group Think“, ideological world-views, conservative attitude – Objective reasons, innovation creates winners and losers

Example: Fifa refuses to introduce support technology for referees like it’s established in many famous sports (e.g. American Football, Rugby, etc.) Who can help to overcome the obstacles?

cH

25

2. Promotor model Discovered during the first-time introduction of computers to private companies and public authorities Central Theorems

Correspondence theorem: Specific types of resistance to innovation require specific sources of power to overcome them – Barriers due to lack of knowledge must be overcome by technical knowledge (technical promotor) – Barriers due to lack of willingness must be overcome by hierarchical power (power promotor)

Division of labor theorem – It is more effective when different individuals take on the different promotor roles than when one individual takes on all roles

Interaction theorem – promotors need to cooperate in order to make the innovation process successful

Technical promotor

has idea for new product, process, or technology

contributes creative effort that allows to initiate the innovation project Process promotor

recognizes the value the idea has for the company

can identify the relevant resources

involves power promotor and other key individuals Power promoter

allocates resources to innovation project

overcomes resistance, possibly using hierarchical potential Management Implications (Management Schlussfolgerungen)

The technical promotor is usually the originator of initiatives.

The deficits of the technical promotor must be identified and compensated systematically by the power promotor.

In case of “large distances” (in discipline, language) a process promotor should facilitate the process.

Preference should be given to self-organization: team members should find each other “on their own”.

Self-organization can be supported by facilitating initial contacts. Practical Implementation (Praktische Durchführung)

Technical promotor is the center of specialization – s/he is providing the impetus for innovation

The deficiencies of the technical promotor need to be identified systematically and need to be compensated by a power promotor

In case of large “distances” (e.g., due to language or subject), a process promotor should be introduced into the process

Predominance of self-organization: team members need to combine into a team; support of this procedure can be in the form of assistance for initial contacts

cH

26

3. Model by Roberts / Fusfeld Similar to promotor Model, but different focus. Promotor Model: – focus on individuals – number of promotor types rather low

Roberts/Fusfeld: – focus on roles – number of roles relatively high – an individual often takes on more than one role Important role in Roberts/Fusfeld model: gatekeeper 4. Gatekeepers Features: – central person – good knowledge of information from external sources Functions: – information collector / producer – information catalyst – unlike promotors, not linked to specific project Characteristics: – high technical / professional competence – many publications and presentations – high formal level of education – employed already for a long time – lower leadership level in hierarchy

Positive effects:

Adapts information specifically to respective R&D subsystem

Prevents other R&D staff from being overwhelmed (überfordert) by too much information

Potential negative effects:

Might filter and modify information in an undesired way

May reduce others’ efforts to acquire information too much Instead of appointing someone to champion, gatekeeper, etc. suitable individuals – who already act informally in such a role – must be identified and supported in their role “natural gatekeepers” etc.

cH

27

TIM 10 – Quality Function Deployment (Aufstellung) and Stage-Gate Processes 1. QFD and its Tool “House of quality”

is a systematic method to link customers‘ quality

requirements to technical product features

aims a developing products and services that fulfill customers‘ needs

uses tables and graphs to link Customer attributes (CAs) to Engineering Charact. (ECs)

concerns both internal and external interfaces of the company

extends responsibility for product quality to all departments of the company Public Viewing Phenomenon is a good example how customer needs and technology as an enabler are linked together

Example: Building a House of Quality for a car door Step 1: Determine relevant customer attributes (CAs). What does the customer want? – Survey or observation of customers – Identification of relevant CAs – Aggregation of CAs to bundles by project teams – Phrasing in the customer’s own words (even if interpretation might be difficult) Step 2: Determine the relative-importance weights of CAs Step 3: Customers’ evaluation of competitive products

Step 4: Technical realization of customer attributes How can desired product features / changes be realized? – Customer: “what?” → Engineer: “how?” – Top of the House of Quality: Engineering Characteristics (ECs) that affect CAs – Dimensions of measurement need to be determined – Helpful: use of creativity and moderation techniques Step 5: Relationship matrix shows how engineering decisions affect customer perceptions Step 6: Objective measures to evaluate competitive products Step 7: Roof matrix to show interactions between ECs Step 8: Estimates of cost and technical difficulty complete the HoQ Thinkable way of using the method

cH

28

2. Stage-Gate Processes The Stage-Gate process (Cooper) Based on key goals and critical success factors for NPD (New Product Development)

Stages and gates break the innovation process into defined stages, each consisting of a set of defined, parallel and cross-functional activities. Link of Stage-Gate to Portfolio Management Pass-versus-kill and go-versus-hold decisions are integrated. Caveats (Vorsichtsmaßnahmen) of stage-gate processes

More haste (Eile), less speed: Goal should always be successful product introduction.

Tyranny of the process: The process should not become an end to itself.

Use the process as a guideline, rather than a “rule book”

Incremental improvements or routine developments likely need a different stage-gate process than radical innovation.

The right incentives are critical: The reward systems need to support the behavior needed to make the process work:

Summary: Stage-gate processes

Stage-gate processes help to guide the new product development process

Ideally, they are very structured, moving in the direction of marketable products and integrate the project, portfolio and strategy levels (as is proposed in the development funnel)

In practice, caveats need to be avoided when using stage-gate processes in firms

Higher-generation new product processes are fluid (overlapping stages), have fuzzy gates, are focused (in that they look at the whole project portfolio, rather than one project at a time) and flexible (each project has its own route through the general stage-gate process)

NPD- Funnel (Trichter)

cH

29

TIM 11 – Management of internal interfaces 1. Central Questions

Division of labor in firms causes particular difficulty to innovation management. Often, … – functions do not cooperate well – resources are misallocated – important information does not reach its intended recipients fast enough

Which are the symptoms that indicate that cooperation between functions does not work well?

What are the reasons for such “organizational failure”?

What could be solutions for innovation management?

How does architecture influence communication? 2. The R&D/production interface Symptoms:

Development cycles are too long and too expensive

Late, unplanned changes in product design Reasons:

Rigid sequential development process with little overlapping

High uncertainty when defining cost and time targets

Too little flow of information between functions

Strategic objectives of top management not clear Use of resources in classical development process:

Planned True

Suggested solutions:

Overlapping development phases

Matrix organization

Cross-functional teams

Proximity of relevant actors (premises, architecture!)

Use of suitable communication technologies

cH

30

3. The R&D/marketing interface “R&D designs the product, marketing sells it and then manufacturing builds it.“ Many empirical studies confirm the high importance of the R&D/marketing interface for innovation. – Core variables: • Technical result • Commercial result • Quality of interaction between R&D and marketing In the majority of cases (59%), disharmony characterized the interaction between R&D and marketing. Reasons for “lack of harmony” according to Souders’ study

Differences in language and culture (technical vs. business people)

Different objectives (Ziele, Zielvorgaben)

Lack of trust in information from other functions

Lack of credibility (Glaubwürdigkeit) of information source Recommendations for innovation Management (Souders)

Split larger projects in sub-projects

Open discussions about conflicts and interface problems

Early integration of both functions in innovation process

Support contacts between individuals

Integrating task force of management

Clear definition of competencies 4. A proposal for solution: cross-functional development teams By combining staff from all relevant functions in a develop-ment team, high cost and time (to market) advantages can be realized. This is why cross-functional development teams are a dominant form of organization in NPD. A model to explain team performance Stage-setting elements and enablers have an indirect effect on team performance because they influence the behavior of the team members.

cH

31

5. The influence of architecture on communication Allen (1997) examined the effect of spatial (räumlich) distance on the communication and cooperation of employees in a firm.

Spatial proximity (Nähe): empirical findings Which effect does spatial proximity have on communication activities between employees in a firm? Result: only within the first 30 meters, distance plays a role for the frequency of communication, i.e. communication only takes place with those colleagues which are closest Which effect does group membership have on communication activities between employees in a firm? Result: Communication between groups is significantly lower than within a group. Effects of spatial proximity

Traditional architecture is a linear sequence of offices which maximizes the separation distance:

What results is a building architecture in H form, N form, Z or W form to enable

window access for all staff - this is problematic, since it may lead to considerable isolation of employees

An option would be to position walks alongside the outside walls (with windows) of

buildings, and to put common rooms (library, meeting rooms) with windows and general manager offices in the centre of the building, possibly with an inside opening of the building

Effect of vertical segregation (Abtrennung) Seems to has a more negative effect on communication and cooperation than horizontal segregation but many factors have an influence on this (e.g. position of stairs, elevators, etc.) Number of stories to minimize separation distance 1-storey buildings are optimal for a surface below 10000 , otherwise a 4-storey building with an elevator would be needed.

cH

32

TIM Guest Lecture 1 – Innovative Management for the New Electricity Age Dr. Michael Weinhold – Chief Technology Officer at Siemens Energy 1. Introduction

19th Century 20th Century 21th Century

Consumer attributes No environmental concerns

Environmental awareness

Technology innovation Unsustainable energy system

Sustainable energy system

Technology used Coal, Hydro Coal, gas, petrol, nuclear, hydro

Hydro, Wind, Biomass, solar, “Clean” coal, gas, nuclear

Enablers - Digitalization is the key to information - Virtual global networks and communities - Periods for doubling of knowledge getting shorter and shorter (centuries, decades, years) 2. Trends and Drivers in the Electricity System

Higher efficiency due to integrated electric systems

High potential in Wind power (newest Wind mills are bigger than the Cologne Cathedral)

Better storage technologies for electric energy

Siemens already transports energy over distances up to 2000km (distance from West Sahara dessert to central Europe)

Integrated energy system – more volatile and complex Smart Grids: Integration of producers, consumers and Electromobility

3. Innovation Management Innovation strategy 1. Focus on innovation with highest customer value and profit expectations Understand the customer 2. Trend scouting to respond immediately to upcoming developments in the energy market Understand trends and rules 3. Cross-Divisional innovation strategies Fill the innovation pipeline Business Strategy drives Innovation Strategy Processes

Action Plan – implemented within existing processes

Market segmentation for several products

Radar screen (Radarschirm): Suppliers, Customers, Technology, Competition

SWOT-Analysis: Strengths, Weaknesses, Chances, Risks Conclusions

Portfolio Strategy, Roadmap, Budgeting Partnering with leading universities and research institutions, customers and suppliers Collaboration examples: Corporate Technology Inductive charging for electric cars (BMW) Open Innovation: TechnoWeb Access to implicit knowledge, TechnoSearch explicit Pictures of the Future: dt. Strategische Frühaufklärung, Long term strategic visioning

cH

33

TIM Guest Lecture 2 – Innovation Management in Start-ups: Competing and Collaboration with Global Players – Wolfgang Herfurther – Evoluce AG (CEO)

How to invent money & get funded?

Management: getting people together to accomplish desired goals and objectives

Invent money (by selling what you don´t have)

Find or create a market Evoluce business story

Compete –Sell the disadvantage of your product

World market leader sells disadvantage of a technology

How to compete as a start-up

A disruptive technology changes the game

3D-sensors deliver information that helps to create a virtual, digital image of the “reality”

Intelligent Software & 3D-sensors will change the way we work, live and play Managing Processes in Innovation in Start-ups R&D/Product and Innovation-It is not about the technology-It is about business

model and execution Organization and Innovation-It is about the people-“Luck is when opportunity meets

preparation.”Lucius AnnaeusSeneca/ Erwin Huber

cH

34

cH

35