LECTURE 4:

DEVELOPING THE FRAMEWORK FOR 1

AN INNOVATION STRATEGY
BACKGROUND

“ Innovation plays an important and dual

role, as both a major source of uncertainty and
change in the environment, and a major
competitive resource within the firm.
In this chapter, we develop what is considered to
be the Most useful framework for
defining and implementing
corporate innovation strategy”
SCOPE
Review of :
• ‘ Rationalist ‘ VS ‘Incrementalist’ approaches to
technological innovation
• Michael Porter’s Framework
• David Teece and Gary Pisano Framework
RATIONALIST APPROACH
‘Military’ style
• Strategy :
Evaluate (1) Describe, understand and analyze environment
Tool :
SWOT Analysis -
The analysis of corporate Strengths and Weaknesses in the
light of external Opportunities and Threats

Determine (2) Determine course of action in light of analysis

Act (3) Carry out the decided course of action.

RATIONALIST APPROACH
• Advantages :
• Know company’s competitive advantages
• Aware of trends in the competitive environment.
• Prepared for a changing future
• Align whole organization with its objectives
• Analyze prospects for sales and profitability
• Allow for the development of contingency plans

• Disadvantages :
• Rigid
• Too much focus on elimination of competition
• Analysis not completely accurate
RATIONALIST APPROACH –
HISTORY OF FAILURES
1960s • Event : Oil company Gulf defined its “Strength” as producing
energy, acquired a Nuclear energy firm

• Diagnosis : Inaccurate identification of scope of strength

Actual strength is in finding, extracting, refining and distributing oil-based products ( i.e. geology
and chemical processing technologies, logistics, consumer marketing) which were largely
irrelevant to the design, construction and sale of nuclear reactors, where the key skills are in
electromechanical technologies and in selling to relatively few, but often politicized electrical
utilities

1960s & 70s • Event : Firms in the electrical industry bet heavily in
future of Nuclear energy as revolutionary breakthrough that will provide
costless energy

• Diagnosis : Inaccurate identification of opportunities & threats, wrong

timing
Nuclear energy failed to fulfill its promise, and firms only recognized later that the main
revolutionary opportunities and threats for them came from the virtually costless storage and
manipulation of information provided by improvements in semiconductor and related
technologies.
RATIONALIST APPROACH –
HISTORY OF FAILURES
1980s • Event : Analysts and practitioners predicted convergence of
computer and communications technologies through digitalization (i.e.
VoIP using Skype, Digital / Internet Phone )

• Diagnosis : Unfamiliarity with the technology and market Many firms

tried to diversify other markets, often through acquisitions or alliances, e.g. IBM bought
Rohm, AT&T bought NCR. Most proved unsuccessful, in part because the software
requirements in the telecommunications and office markets were so different

1990s • Event : Commitments in the fast-moving fields of ICT

(information and communication technology)

• Diagnosis : Unfamiliarity with the technology and market; a

misjudged assessment own position; lack of awareness own activities
within the group.
The investments of major media companies in the Internet in the late 1990s took more
than a decade to prove profitable: problems remain in delivering products to consumers
and in getting paid for them, and advertising remains ineffective. There have been similar
disappointments so far in development and commercialization of ‘e-
entertainment’.
RATIONALIST APPROACH –
HISTORY OF FAILURES
1990s • Event : The Internet Bubble - wildly optimistic and unrealistic
valuations on new ventures utilizing e-commerce.
“ Everyone with a website was set to become an instant Billionaire”

• Diagnosis : Opportunities without risk assessment

• Burst by 2000
• Companies sprouting up were overvalued
• In particular, most of the new e-commerce businesses selling to consumers which floated on
the US and UK stock exchanges between 1998 and 2000 subsequently lost around 90% of
their value, or were made bankrupt. Notorious failures of that period include Boo.com in the UK,
which attempted to sell sports clothing via the Internet, and Pets.com in the USA, which
attempted to sell pet food and accessories.
2000s
“INCREMENTALIST” APPROACH
• ‘Trial and Error’ style
“Complete understanding of complexity and change is impossible: our
ability both to comprehend the present and to predict the future is therefore inevitably
limited……which explicitly recognizes that the firm has only very imperfect
knowledge of its environment, of its own strengths and weaknesses, and of the
likely rates and directions of change in the future. It must therefore be ready to adapt
its strategy in the light of new information and understanding, which it must
consciously seek to obtain.”
• Strategy :
(1) Make deliberate steps / changes towards the stated objective.

(2) Measure and evaluate the effects of the steps / changes.

(3) Adjust (if necessary) the objective and decide on the next step/change.
In context of medical doctors dealing with patients :

Symptom Diagnosis Treatment Diagnosis Adjust Treatment Cure

 “RATIONALIST” VS “INCREMENTALIST”
• Implications :
In view of complex, uncertain environment :
“ Incrementalist strategies are more rational and
efficient than rationalist strategies”.
“ Corporate strategy, which should be seen as a
form of corporate learning, from analysis and
experience, how to cope more effectively with
complexity and change.”

“Successful management practice is never fully

reproducible”
MICHAEL PORTER’S FRAMEWORK

5 Forces Driving Industry Competition :

• Relations with suppliers.
• Relations with buyers.
• New entrants.
• Substitute products.
• Rivalry amongst established firms.

Michael Porter :
“The goal of competitive strategy . . . is to find a position
in an industry where a company can best defend itself
against these competitive forces or can influence them in
its favor’. Technological change can influence all the five
forces.
MICHAEL PORTER’S FRAMEWORK
“ To be profitable focus on 1,
• Market Strategies Select more than 1, incurs low profits”
MICHAEL PORTER’S FRAMEWORK
Michael Porter :
• Market Strategies : “ Choose 1”
• Innovation ‘leadership’ –
• where firms aim at being first to market, based on technological leadership.
• Involves creativity and risk-taking, with close linkages both to major sources of
relevant new knowledge, and to the needs and responses of customers.

• Innovation ‘followership’ –

• where firms aim at being late to market, based on imitating (learning) from the
experience of technological leaders.
• Involves competitor analysis and intelligence, to reverse engineering and to
cost cutting and learning in manufacturing.

Michael Porter :
“Innovation strategy should aim to repel competitive threats, both from
incumbents in the industry and potential new entrants, including new and
substitute products based on new technological opportunities.”
 Michael Porter’s Framework Weakness
Case study : Computer Industry

1970s • Few Mainframe producers

• High barriers to entry
•Suppliers are weak
•Customer has limited choices

IBM, an (established and

Technological Breakthrough in
technological advanced
Microprocessor
firm ) was aware of trends
•Reduced cost of computing but still unable to “ find a
•Lowers barriers to entry position … defend itself
against competitive forces
or influence them in its
1990s favor.
• Increase in new entrants
• New opportunities and applications
• Customer spoilt for choice
 Michael Porter’s Framework

Main Critics :
• underestimates the power of technological
change to transform industrial structures
• underestimates the importance of technological
trajectories, and of the firm specific technological
and organizational competencies to exploit them.
David Teese & Gary Pisano Framework

“Dynamic Capabilities” Approach

1. It refers to the shifting character of the environment

2. It emphasizes the key role of strategic management

in appropriately adapting, integrating and re-
configuring internal and external organizational skills,
resources and functional competencies towards a
changing environment
David Teese & Gary Pisano Framework
“Dynamic Capabilities” Approach

• Strategy :
Firm’s Capability :
• Improved / perfected to meet a user need
• Unique
•Difficult to replicate

Strategic dimensions of the firm are its:

§ Managerial and organizational processes

its ‘routines’, or patterns of current practice and learning

§ Its present position

current endowment of technology and intellectual property, its customer base and upstream relations
with suppliers

• Paths available to it
strategic alternatives available to the firm, and the attractiveness of the opportunities which lie ahead