Lecture 2 FBS

Amsterdam Business School
Innovation Management
Lecture 2
CHAPTER 6: DEFINING A
STRATEGIC DIRECTION
Innovation Management / F. Situmeang 2
Overview
 A coherent technological innovation strategy
leverages the firm’s existing competitive position
and provides direction for future development of
the firm.
 Formulating this strategy requires:
 Appraising the firm’s environment,
 Appraising the firm’s strengths, weaknesses, competitive
advantages, and core competencies,
 Articulating an ambitious strategic intent.
External Analysis: Porter’s Five Forces
Recently Porter has acknowledged the role of

complements. Innovation Management / F. Situmeang 4
External Analysis: Stakeholder Analysis
Stakeholder Analysis
1. Who are the stakeholders.
2. What does each stakeholder
want.
3. What resources do they
contribute to the
organization.
4. What claims are they likely
to make on the
organization. Innovation Management / F. Situmeang 5
Internal Analysis
1. Identify the firm’s strengths and weaknesses.
Helpful to consider each element of value chain.

Internal Analysis
2. Assess which strengths have potential to be
sustainable competitive advantage
 Rare Competitive
 Valuable Advantage Sustainable
 Durable Competitive
 Inimitable Advantage
 Resources are difficult (or impossible) to imitate
when they are:
 Tacit
 Path dependent
 Socially complex
 Causally ambiguous

Core Competencies and Core
Capabilities
Core Competencies: A set of integrated and
harmonized abilities that distinguish the firm in the
marketplace.
 Competencies typically combine multiple kinds of abilities.
 Several core competencies may underlie a business unit.
 Several business units may draw from same competency.
 Core competencies should:
 Be a significant source of competitive differentiation
 Cover a range of businesses
 Be hard for competitors to imitate
Risk of Core Rigidities
 When firms excel at an activity, they can become
over committed to it and rigid.
 Incentives and culture may reward current
competencies while thwarting development of new
competencies.
 Dynamic capabilities are competencies that enable
the firm to quickly respond to change.
 E.g., firm may develop a set of abilities that enable it to rapidly
deploy new product development teams for a new
opportunity; firm may develop competency in working with
alliance partners to gain needed resources quickly.

 Strategic Intent
 A long-term goal that is ambitious, builds upon and stretches firm’s core
competencies, and draws from all levels of the organization.
 Typically looks 10-20 years ahead, establishes clear milestones
 Firm should identify resources and capabilities needed to close gap between
strategic intent and current position.

CHAPTER 7: CHOOSING
INNOVATION PROJECTS
Overview
 Methods of choosing innovation projects range

from informal to highly structured, and from
entirely qualitative to strictly quantitative.
 Often firms use a combination of method to
more completely evaluate the potential (and
risk) of an innovation project.

The Development Budget
 Most firms face serious constraints in capital
and other resources they can invest in projects.
 Firms thus often use capital rationing: they set a
fixed R&D budget and rank order projects to
support.
 R&D budget is often a percentage of previous
year’s sales.
 Percentage is typically determined through industry
benchmarking, or historical benchmarking of firm’s
performance.
Industry
Num. Industry R&D
Rank Industry description R&D
Firms revenue (mil) intensity
(mil)
1Drugs, biological products, pharma 730 $693,674 $112,984 16.00%
2Special industry machinery 42 $27,111 $3,955 15.00%
3Semiconductors and electronic 233 $428,554 $46,349 11.00%
4Software and computer 724 $789,878 $67,461 9.00%
5Medical equipment 241 $121,758 $9,721 8.00%
6Measuring equip. and instruments 102 $126,821 $9,149 7.00%
7Communications equip. 106 $319,869 $22,526 7.00%
8Computers and peripherals 91 $406,678 $28,215 7.00%
9Toys and games 18 $20,216 $1,245 6.00%
10Household audio and video equip. 22 $111,986 $6,124 5.00%

Company R&D ($millions) R&D intensity
Volkswagen $14,035 5%
Intel $10,611 20%
Roche Holding $10,411 19%
Microsoft $10,411 13%
Novartis $9,852 17%
Toyota $8,842 4%
Johnson & Johnson $8,763 12%
Google $7,952 13%
Merck $7,503 17%
General Motors $7,200 5%
Pfizer $6,678 13%
Sanofi $6,573 14%
Amazon.com $6,565 9%
GlaxoSmithKline $6,502 14%
Ford $6,400 4%
Honda $6,158 5%
IBM $5,959 6%
Cisco Systems $5,942 12%
Siemens $5,808 6%
Daimler $5,651 3%
 Financing New Technology Ventures
 Large firms can fund innovation internally; new start-ups must
often obtain external financing.

 In first stages of start-up and growth, entrepreneurs may have
to rely on family, friends, and credit cards.
 Start-ups might be able to obtain some funding from
government grants and loans.
 If idea and management are especially promising,
entrepreneur may secure funds from “angel investors”
(typically seed stage and <$1 million) or venture capitalists
(multiple early stages, >$1 million).

Quantitative Methods for Choosing
Projects
 Commonly used quantitative methods include
discounted cash flow methods and real options.
 Discounted Cash Flow (DCF)
 Net Present Value (NPV): Expected cash inflows are discounted
and compared to outlays.

Projects
 Internal Rate of Return (IRR): The discount rate that makes the net
present value of investment closer to zero.
 Calculators and computers perform by trial and error.
 Potential for multiple IRR if cash flows vary
 Strengths and Weaknesses of DCF Methods:
 Strengths
 Provide concrete financial estimates
 Explicitly consider timing of investment and time value of money
 Weaknesses
 May be deceptive; only as accurate as original estimates of cash
flows.
 May fail to capture strategic importance of project
Projects
 Real Options: Applies stock option model to nonfinancial

resource investments. E.g.,with respect to R&D:
 The cost of the R&D program can be considered the price of a call
option.
 The cost of future investment required to capitalize on the R&D
program (such as the cost of commercializing a new technology that
is developed) can be considered the exercise price.
 The returns to the R&D investment are analogous to the value of a
stock purchased with a call option.

Examples of Real Options in
Technological Innovations

Projects
 Options are valuable when there is uncertainty (as in
innovation)
 However, real options models have some
limitations:
 Many innovation projects do not conform to the same capital
market assumptions underlying option models.
 May not be able to acquire option at small price: may require full
investments.
 Value of stock option is independent of call holder’s behavior, but value of
R&D investment is shaped by the firm’s capabilities, complementary
assets, and strategies.
Qualitative Methods of Choosing
Projects
 Many factors in the choice of development projects are
extremely difficult (or misleading) to quantify.
 Almost all firms thus use some qualitative methods.
 Screening Questions may be used to assess different dimensions
of the project decision including:
 Role of customer (market, use, compatibility and ease of use, distribution
and pricing)
 Role of capabilities (existing capabilities, competitors’ capabilities,
future capabilities)
 Project timing and cost
Projects
 The Aggregate Project Planning Framework
 Managers map their R&D projects according to levels of risk,
resource commitment and timing of cash flows

Advanced R&D project
 Jet Pack
 Conceptualized by Aleksandr Fyodorovich
Andreyev -1919
 Patented but not built
 Is this a product of basic research, applied
research, or development?
 Picked up by both the Allied (US and Soviet)
and Axis Power
 Further developed by NASA for space suits
enabling extra vehicular activities.
Breakthrough R&D project
 Martin Jetpack
 30 years of development (1980s – 2016)
 Use of Gasoline
 Price US$250,000 (up to US$350,000 with tax)

Platform & Derivative Projects
Xbox One Xbox One S Xbox One X
1.75GHz 8-core 1.75GHz 8-core 2.3GHz 8-core AMD
CPU
AMD custom CPU AMD custom CPU custom CPU
Integrated AMD
Integrated AMD
graphics clocked at Integrated AMD
graphics with 6
GPU 853MHz with 1.31 graphics clocked at
teraflops of
teraflops of 914MHz
performance
performance
RAM 8GB DDR3 8GB DDR3 12GB GDDR5
500GB, 1TB, 2TB
500GB (5,400rpm)
(5,400rpm) hard
hard drive, supports
Storage drive options, 1TB hard drive
external hard drive
supports external
storage
hard drive storage

Projects
 Advanced R&D Projects: develop cutting-edge
technologies; often no immediate commercial
application.
 Breakthrough Projects: incorporate revolutionary new
technologies into a commercial application.
 Platform Projects: not revolutionary, but offer fundamental
improvements over preceding generations of products.
 Derivative Projects: incremental improvements and variety
in design features.
 Derivative projects pay off the quickest, and help service
the firm’s short-term cash flow needs. Advanced R&D
projects take a long time to pay off (or may not pay off at
all), but can position the firm to be a technological leader.
 Managers then compare actual balance of projects with
desired balance of projects. Innovation Management / F. Situmeang 28
Projects
 Q-Sort is a simple method for ranking ideas on different
dimensions.
 Ideas are put on cards.
 For each dimension being considered, the cards are stacked in
order of their performance on that dimension.
 Several rounds of sorting and debate are used to achieve
consensus about the projects.

Combining Quantitative and Qualitative
Information
 Managers may use multiple methods in
combination.
 May also use methods that convert qualitative
information into quantitative form (though this has
similar risks as discussed with quantitative methods)
 Conjoint Analysis estimates the relative value individuals
place on attributes of a choice.

Courtyard by Marriot

 Marriot used conjoint analysis to help it develop a
mid-price hotel line.
 First used focus groups to identify customer
segments and attributes they cared about in a
hotel.
 Then created potential hotel profiles that varied on
these features and asked participants to rate the
profiles.
 Regression identified which features were valued
most.
 Based on the results, Marriott developed Courtyard
concept: relatively small hotels with limited
amenities, small restaurants and meeting rooms,
courtyards, high security, and rates of $40-$60 a night.

CHAPTER 8: COLLABORATION
STRATEGIES
Overview
 Firms must often choose between performing
innovation activities alone or in collaboration.
 Collaboration can enable firms to achieve more,
at a faster rate, and at less cost and risk.
 However, collaboration also entails sharing
control and rewards, and may risk partner
malfeasance.
 The advantages of going solo are compared with
those of collaborating, and then different forms
of collaboration are compared.
Solo
 Whether a firm chooses to engage in solo development
or collaboration will be influence by:
 Availability of capabilities (does firm have needed capabilities
in house? Does a potential partner?)
 Protecting proprietary technologies (how important is it to keep
exclusive control of the technology?)
 Controlling technology development and use (how important is
it for firm to direct development process and applications?)
 Building and renewing capabilities (is the project key to renewing
or developing the firm’s capabilities?)

Advantages of Collaborating
 Collaborating can offer the following advantages:
 Obtaining needed skills or resources more quickly
 Reducing asset commitment and increase flexibility
 Learning from partner
 Sharing costs and risks
 Can build cooperation around a common standard
New Technology or Research
Worldwide 2000
formation
of 1500
Alliances
technology
or 1000
research
alliances
500
varies
over time.
0
1990
1991
1992
1993
1994
1995
1996
1997
1999
2000
2001
2002
2003
2004
2005
2006
2008
2009
2010
2007
1998
2011
Types of Collaborative Arrangements
 There are numerous types of collaborative arrangements, each with its own
advantages or costs.
 Strategic Alliances: formal or informal agreements between two or more
organizations (or other entities) to cooperate in some way.
Doz and Hamel note

that a firm’s alliance
strategy might
emphasize combining
complementary
capabilities or
transferring
capabilities. It might
also emphasize
individual alliances or
a network of
alliances.
Capability Complementarity

Capability Transfer
 Horizon 2020 main goals is to “Action 3: Make
Europe’s universities and public research
organizations more entrepreneurial”
 Knowledge transfer offices (KTOs) to engage in
different co-creation mechanisms between
European Universities or Public Research
Office with Companies
 Universities become more entrepreneurial,
companies become more knowledgeable about
advanced technologies
Types of Collaborative Arrangements
 Joint Ventures: A particular type of strategic alliance that entails significant
equity investment and often establishes a new separate legal entity.
 Licensing: a contractual arrangement that gives an organization (or individual)
the rights to use another’s intellectual property, typically in exchange for
royalties.
 Outsourcing: When an organization (or individual) procures services or
products from another rather than producing them in-house.
 Collective Research Organizations: Organizations formed to facilitate
collaboration among a group of firms.

Choosing a Mode of Collaboration

Licensing Typical Fees

Choosing and Monitoring Partners
 Partner Selection
 Resource fit: How well does the potential partner fit the resource needs of the
project? Are resources complementary or supplementary?
 Strategic fit: Does the potential partner have compatible objectives and
styles?
 Impact on Opportunities and Threats: How would collaboration impact
bargaining power of customers and suppliers, degree of rivalry, threat of entry
or substitutes?
 Impact on Internal Strengths and Weaknesses: Would collaboration
enhance firm’s strengths? Overcome its weaknesses? Create a competitive
advantage?
 Impact on Strategic Direction: Would the collaboration help the firm achieve its
strategic intent?
 Partner Monitoring and Governance
 Successful collaborations require clear yet flexible
monitoring and governance mechanisms.
 May utilize legally binding contractual arrangements.
 Helps ensure partners are aware of rights and obligations.
 Provides legal remedies for violations.
 Contracts often include:

1. What each partner is obligated to contribute.
2. How much control each partner has in arrangement.
3. When and how proceeds of collaboration will be distributed.
4. Review and reporting requirements.
5. Provisions for terminating relationship.

 May also use shared equity ownership (i.e., each partner contributes
capital and owns a share of equity in the alliance)
 Helps to align incentives and provide sense of ownership
 May rely on relational governance (self-enforcing governance
based on the goodwill, trust, and reputation of partners)
 Built over time
 Can facilitate more extensive cooperation, sharing, and learning by
partners

Next Week
 Standards battles and dominance

 Timing of entry
 Multi-mode interactions
 Aging and obsolescence

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Amsterdam Business School

Recently Porter has acknowledged the role of

Innovation Management / F. Situmeang 6

Innovation Management / F. Situmeang 7

Innovation Management / F. Situmeang 10

Innovation Management / F. Situmeang 11

 Methods of choosing innovation projects range

Innovation Management / F. Situmeang 13

Innovation Management / F. Situmeang 15

often obtain external financing.

Innovation Management / F. Situmeang 17

Innovation Management / F. Situmeang 18

 Real Options: Applies stock option model to nonfinancial

Innovation Management / F. Situmeang 20

Innovation Management / F. Situmeang 21

Innovation Management / F. Situmeang 24

Innovation Management / F. Situmeang 26

Innovation Management / F. Situmeang 27

Innovation Management / F. Situmeang 29

Innovation Management / F. Situmeang 30

Innovation Management / F. Situmeang 31

Innovation Management / F. Situmeang 34

Doz and Hamel note

Innovation Management / F. Situmeang 37

Innovation Management / F. Situmeang 39

Innovation Management / F. Situmeang 40

Innovation Management / F. Situmeang 41

 Contracts often include:

Innovation Management / F. Situmeang 43

Innovation Management / F. Situmeang 44

 Standards battles and dominance

Innovation Management / F. Situmeang 45

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