Profiting from Innovation

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Profiting from Innovation

• Innovation and Performance (for companies and
  countries)
• Valuable Innovations do not always equate to High
  Profits

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If a man can make a better mousetrap than his
neighbour, though he lives in the woods the world
will make a beaten path to his doorRalph Waldo
Emerson
Is Managing Innovation More than Simply
Successful Invention?
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Apples Innovations
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Technology and Performance

• Overall, evidence suggests that tech-intensive
  sectors have experienced modest excess returns
  over the past quarter century
• Overall risk-adjusted rate of return 3 boost
  to RD investment over alternative investments
  from free cash
• This aggregate boost masks dramatic variation
  across sectors and firms
• Pharmaceutical industry remains the single most
  successful industry investment over the past
  twenty-five years
• During the Internet bubble, very strong claims
  that technology was a proven winner
• Were still sorting out the mess.

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Technology-driven sectors have experienced
extreme variability in returns
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For example, returns to VC Investments have
varied dramatically over time.
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National Innovative Capacity

• Innovation Country Performance

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The Last Decade of Australian Economic Growth
Stands Out Among Leading Nations
Real GDP per capita Growth
Source EIU (2001), OECD (2002), Singapore
Statistics (2002)
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Despite this impressive performance, the
Australian record on innovation is mixed
Annual U.S. patents per 1 million population, 2001
USA
Taiwan
Japan
Sweden
10,000 patents granted in 2001
Germany
Finland
Israel
Canada
Singapore
South Korea
UK
AUSTRALIA
New Zealand
Compound annual growth rate of US-registered
patents, 1990 - 2001
Source US Patent and Trademark Office
(www.uspto.gov). Authors analysis.
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Not simply an IP problem, Australian firm
employs fewer innovators than other leading
nations
Company Researchers per 10000 Employed, 1998
OECD Average 38.9
Source OECD Science, Technology and Industry
Scoreboard 2001.
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How do you Explain the Concentration of
Innovation around the World
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Assessing National Innovative Capacity

• Approach Weighted Sum of National Innovative
  Capacity Drivers
• Weights derived from regression analysis relating
  the development of new-to-the-world technologies
  to drivers of national innovative capacity
• Technology output is measured by international
  patents
• National Innovative Capacity drivers
• Innovation Infrastructure, Cluster Environment,
  Linkages
• Advantage of this Approach
• Avoids ad-hoc weighting of proposed drivers
• Per capita evaluation in order to allow
  international comparison
• Focuses attention on relative changes in National
  Resources and Policies versus other nations

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What Makes Up National Innovative Capacity?
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The Evolution of Innovation Capacity Over Time

• Looking across the OECD for more than 20 years,
  key Innovative Capacity measures are highly
  significant in explaining international patenting
  output
• Infrastructure Investments and Policies have a
  significant influence
• RD spending Employment
• Strength of Intellectual Property Protection
• Higher Education Overall Technological
  Sophistication
• RD composition has an additional impact
• RD spending by business more productive than
  Govt. RD
• Innovation productivity is higher for countries
  specialised in (broad) technology areas
• Universities play a key role in translating
  funding into innovation performance

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Finding 1 Over the past two decades, Australia
has evolved from a classic imitator to a
second-tier innovator nation
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Finding 2 Despite Advances Australia Maintains
its Place at the lower end of Second-Tier
Innovators
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Projected Innovation Rankings (2005)
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Innovation Strategy

• What can companies do?

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Turning innovation into the basis of sustainable
advantage depends on two key types of factors.

• Organisational - ability to create value through
  technological innovation
• Strategic - ability to capture value from
  technological innovation
• .both require an understanding of the dynamics
  of technology-driven markets

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Foundations of Innovation Strategy
TechnologyDynamics
Technological Competition
Organising for Innovation
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An Economics Lens

• Work backwards
• When are innovations likely to create value?
• What determines an innovations profitability?
• Added value in the product market
• When does an innovator appropriate rents?
• Added value in the ideas market
• How do innovators attract resources (e.g.,
  financing)?

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Innovation Profits

• When is there a relationship?

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Fosters S Curve
Pattern Initially increasing then declining RD
productivity within a given physical
architecture
Physical limits
Technical Metric
Examples Lightbulbs, disk drives, automobiles,
even pharmaceuticals Framework Early returns
are small and filled with failures, dead ends,
and competing versions. Once key choices are
made (dominant design?), RD can be productive
-- both focused and with few physical barriers.
As natural limits are approached, progress
becomes more expensive .
RD Effort
Strategic Implications Once returns to effort
fall, it may be time to move to a new S curve
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Complementary Innovations

• Sometimes value from an innovation only realised
  if other complementary innovations are generated
• Two cases
• Photocopier
• Containerisation

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Photocopiers

• Many firms offered the photocopying patent but
  turned it down
• At the time, copying seemed a waste because
  typing on carbon paper main substitute
• But main value of copier was to make copies of
  copies and so on
• Required a change in office management and work
  practices

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Xeroxs Strategy

• Enabled a marketing innovation
• Stopped trying to sell copiers but instead sold
  copies earned fees based on usage
• removed customer risk
• put machines in offices to evolve changing
  practices

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Containerisation

• Traditional Break-Bulk goods loaded directly
  onto ships. No organisational integration
  between transport modes.
• Container System goods loaded first onto
  containers. Allowed flow between modes.

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Organisational Innovation

• 1950s idea of containers but no
  organisational/contractual innovations.
  Experimentation showed organisational dimension
  to be the critical bottleneck.
• 1960s wide spread adoption of containerisation
  despite large capital costs.
• Was it tipping or learning?

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Case

• EMI and the CT Scanner

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Where is technology headed?

• Improvements in
• Resolution
• Speed
• Functionality
• Cost
• Other factors driving adoption
• Medical liability
• Complementarities and network effects

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Demand for CT Scanner

• Main uses
• Head and brain imaging
• Main buyers
• Large hospitals 170 628
• Substitute technologies
• X-ray, nuclear, ultrasound
• Price 400,000 per machine
• Powells forecasts up to 50 in first year

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Evaluating alternative strategies for EMI

• In-House

JV / Alliances
Licensing
PROS
CONS
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Strategic Issues

• Vertical integration should they bring the CT to
  market themselves? (or license?)
• Marketing Lack of experience in medical
  products knowledge of North America
• Manufacturing required mass production
  techniques
• Learning effects gaining experience in diverse
  areas
• Licensees not as committed
• Potential competitors with greater marketing and
  manufacturing capabilities
• Pre-empt competitors and first mover advantages

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Profitability

• Bargaining power of buyers
• Bargaining power of suppliers
• Threat of substitutes
• Threat of entry
• Degree of rivalry
• EMI positioning

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Key Thoughts

• For emerging technologies, a key source of
  strategic advantage arises from the quality of
  information
• Competitive Intelligence is difficult to assess
• In the absence of experience, near-term market
  evaluation is very sensitive to ad-hoc
  assumptions
• Technological innovation does not give a company
  a birthright to downstream commercialisation
• Independent development invites competition,
  creating a wedge between the overall diffusion of
  technology and the ability of the innovator to
  appropriate returns
• Licensing or joint venture strategies can provide
  key advantages in information, distribution, and
  amortising large fixed commercialisation costs

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Part B

• What happened?
• Diffusion
• Technical Improvements
• Challenges Facing EMI
• Scientific
• Competitive
• Organisational
• Reconsidering EMIs 1972 Strategy
• Choosing EMIs 1977 Strategy Action Plan

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CT Scanner Shipments
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CT Scanner Shipments (EMI versus field)
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CT Scanner Technical Performance
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Strategic Issues (1976)

• Giving away upgrades
• Servicing
• Reduced delivery
• US manufacturing
• Acquisitions and product diversity
• Organisational tensions

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EMI the CT Scanner Afterword

• U.S. demand dropped dramatically. Saturation
  level of 6 / million people nearly reached by
  1981
• Major price competition with 12 competitors at
  the peak -- rapid shakeout thereafter
• Hounsfield receives Nobel Prize in 1979
• EMI taken over by Thorn Electric in response to
  cash crisis
• GE buys Medical Division

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Managerial Implications

• Diffusion paths
• Exhibit slow starts
• Take-off occurs as complementary factors come to
  play
• Pioneer innovators face difficulties riding the
  diffusion curve
• Commercialising in-house is difficult
• Face greatest competition precisely when adoption
  takes-off
• Sustaining leadership requires development of
  system that entrants find difficult to copy
• Does diversification make sense?