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Innovation

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Preview

  • Today
    • Productivity: Customer, sharing cont’d
    • Innovation strategy
      • Book reports
      • Anderson and Tushman, Innovation Cycle
  • Aug 31: Innovation cont’d: Clayton Christensen and critiques

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Measuring innovation

  • “What get’s measured, gets managed” (or “measure what you want to manage”)
  • Input
    • R&D – when difficult to measure output, measure input
  • Output
    • Survey: European Community Innovation Survey -- Product/process is
      • new to world
      • new to country
      • new to business
      • no new product

European CIS questions are binary – do not measure extent of innovation

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Measuring innovation

  • Patents
    • Organizational policy: Large organizations measure innovation performance by patents => many worthless patents
    • Ken Kunin: Arens Controls vis-a-vis Cherry Automotive
    • Appropriability strategy – patents disclose invention => facilitate inventing around
    • Trade secrecy
    • Complexity
  • Licensing revenue – encompasses inventions not protected by patents

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Measuring innovation

  • Non-technical innovations: Important but difficult to quantify
    • Marketing
    • Human resource management
    • General Management

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Outline

  • Innovation cycle
  • Strategy
  • Disruptive innovation

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Innovation cycle �(Anderson and Tushman 1990)

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Innovation cycle: Stage I

  • Breakthrough innovation causes discontinuity
    • Moves forward state of the art -- new product architecture
      • Digital cameras
      • Smartphones
      • Electric cars
      • Budget airlines
    • Order-of-magnitude improvement in price/performance
    • May enhance or destroy competence of incumbents

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Innovation cycle: Stage II

  • Era of ferment -- Competition between technical regimes and within technical regimes
    • Competence-enhancing: Builds on know-how in previous technology;
      • Initiated by incumbents
      • Shorter ferment
    • Competence-destroying: Renders previous know-how obsolete;
      • Initiated by new entrants
      • Many rival designs appear
      • Longer ferment: Firms that must abandon existing know-how in the face of competence destroying technical change will defend older technology more stubbornly (large sunk costs => low marginal cost)

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Reducing carbon: Electric power generation

  • Electric power producers
    • Fossil fuel
    • Renewables – solar, wind, wave, geothermal
  • “Let’s not under-estimate the challenge. The fossil fuel sector will react to falling green hydrogen prices by slashing the cost of oil and gas until it’s almost zero”, Andrew Forrest, Chairman, Fortescue Metals Group, Boyer Lecture, Australian Broadcasting Corporation, 23 January 2021.

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Singapore Airlines: Budget competition

  • Singapore Airlines vis-à-vis AirAsia
    • Budget carriers
      • 2003: TigerAir
      • 2012: Scoot
      • 2016: Merged

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Innovation cycle: Stages III & IV

  • If low appropriability, dominant design emerges
    • Forces for dominant design
      • Demand side: Network effects
      • Supply side: Economies of scale in production
    • Forces against dominant design: Heterogeneity in preferences
    • First mover does not [need not] produce dominant design
    • Dominant design is not [need not be] technically best
  • Incremental evolution until next breakthrough innovation
    • New cycle of variation, selection, and retention

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Innovation cycle �(Anderson and Tushman, 1990: 614-615)

  • “In regimes of low appropriability, a single dominant design will emerge following each technological discontinuity”
  • Examples
    • Cabin luggage: Without wheels => two wheels => four wheels
      • Low appropriability -- easy imitation, intense competition
    • QWERTY keyboard: After patent expired in 1878 => low appropriability

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Low appropriability but no dominance

    • Pain relievers – all patents expired but no dominance
      • Aspirin
      • Ibuprofen
      • Acetaminophen
      • Different chemical mechanisms and physiological pathways => different side effects => cater to heterogeneous needs
    • Airlines
      • Network carriers
      • Budget airlines
      • Different market segments – heterogeneous preferences

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Low appropriability but no dominance

    • Funds management returns, 2021
    • Hedge funds (actively managed): 10.3%
    • MSCI World Index: 20%
    • Why do investors continue to invest in hedge funds and other actively managed funds?
    • Not heterogeneous preferences – no one wants lower returns on investment
    • Information asymmetry
    • Misperception?
    • Hope?

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Low appropriability but no dominance

  • Life insurance
    • Whole life, investment
    • Term
    • Why do consumers still buy whole life insurance?
    • Not heterogeneous preferences – no one wants to pay higher price for insurance
    • Information asymmetry
    • Misperception?
    • Consumer loyalty

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High appropriability: No dominance

  • Wide-body airliners
    • Airbus A350
    • Boeing 777/787
    • Smart phones
    • Apple iOS
    • Android
  • Payment systems
    • WeChat Pay
    • AliPay

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Besides high appropriability, also need heterogeneity in buyer preferences for no dominance?

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High appropriability but dominance

  • Office productivity systems
    • Microsoft Office
    • Google Suite
    • (Historically: Lotus 123, Word Perfect,…)
  • Why does Microsoft Office dominate (despite high appropriability)?
    • Early mover + network effect => path dependence
    • Dominant design need not be the first
    • Dominant design need not be the best
    • Why is path dependence important?

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Reducing carbon: Motor vehicles

  • Are we in era of ferment?
    • Hybrid: Electric-gasoline
    • Fully electric: different standards
    • Hydrogen
  • Ferment around competence destroying innovation lasts longer
    • Electric cars may destroy competence of manufacturers of internal combustion (especially diesel) engine cars
    • Key to electric cars is battery [later class: adoption of innovations]

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Pharmaceuticals

    • Vaccines
    • mRNA – Pfizer, BioNTech, Moderna
    • Conventional (inactivated virus) – Astra Zeneca, Johnson & Johnson, Sinovac, Sinopharm, et al.
    • Ferment around competence destroying innovation lasts longer

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Outline

  • Innovation cycle
  • Disruptive innovation

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Source: King and Baatartogtokh (2015)

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Disruptive innovation (Christensen)

  • Examples
    • Oracle and SAP disrupted by Salesforce.com
    • Kodak disrupted by digital cameras -- but was film improved to the point of being “too good”?
    • Digital camera manufacturers disrupted by phone cameras – but were digital cameras improved to the point of being “too good”?

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Disruptive innovation (Christensen)

  • Christensen not actually advocating an innovation strategy, rather purports to describe evolution of industry
    • Similar to Anderson and Tushman (1990)
  • Predictive power: Which innovations will be disruptive?
  • King and Baatartogtokh (2015) interviewed 79 experts on 77 proposed examples of disruption identified by Christensen and Raynor
    • 58% academics
    • 18% historians of industry
    • 10% financial analysts
    • 14% industry practitioners

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Source: King and Baatartogtokh (2015)

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Disruptive innovation (Christensen)

  • Key principle: Avoid managerial myopia
  • Beware improvements that exceed customer needs
  • Watch out for competitors entering through low-value segment or adjacent category
    • Software as a service competing with mainframe systems
    • Mobile phones competing with digital cameras

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Disruptive innovation (Christensen):�Counter-examples

    • Low-end brands did not destroy high-end
    • Xiaomi, Oppo vs Apple, Samsung
    • Generic computer manufacturers vs Dell, Lenovo
    • Geely, Tata Nano vs BMW, Toyota
    • Mobile Virtual Network Operators vs Network Operators
    • Luckin Coffee vs Starbucks

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Disruption

  • Great innovations did not disrupt anything or hardly anything
    • Writing
    • Algebra
    • Penicillin
    • Electricity
    • Telegraph
    • Steam engine
    • Washing machine

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Electric cars: Disruptive innovation?

  • Lower quality
  • But not cheaper – actually more expensive
  • Sold on status and government subsidy

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Electric cars: Disruptive innovation?

  1. “Nokia was already a classic example of the perils of disruptive innovation” (Economist 2018). Please comment.
  2. “Manufacturers of electric cars should target markets where limited range would be less concerning, “growing, crowded, noisy, polluted cities of Southeast Asia. Vehicles can sit on Bangkok’s roads all day, mostly idling in traffic jams … Electric motors would not need to run and hence would not drain the battery while idling” (Christensen, 211). Please discuss.
  3. Pick any industry other than those mentioned by Christensen and apply the theory of disruptive innovation to explain how the incumbent firm was disrupted.

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Christensen

  • “the prediction of the theory would be that Apple won’t succeed with the iPhone … History speaks pretty loudly on that” Christensen, Business Week, 17 June 2007
  • Startup Grind, 2013: Interviewed by Mark Suster https://www.youtube.com/watch?v=KYVdf5xyD8I [0-13 minutes]
  • “15 years from now, maybe half the universities will be in bankruptcy, including the state schools … Pray for Harvard Business School”
  • “I pray for Apple … As the dominant architecture becomes open and modular, the value of their proprietary design becomes commoditized itself”

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Christensen

  • Using technology, how could
    • San Jose State (low quality) disrupt UC Berkeley?
  • UC Berkeley (high quality) disrupt San Jose State?
  • What should universities teach / what should employers demand from graduates?
    • Job skills
    • Fundamental skills