Learning Objectives

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Learning Objectives

• What are the main strategies for mantaining
  profitability of innovation?
• What are the relationship between the
  strategies? How and why can a firm realize
  combinations?
• Which is the relationship between strategies,
  nature of complementary asset and type of
  technology?
• How can a firm implement an innovation process?

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Strategies for innovation
Learning contents

• The Block Strategy
• The Run Strategy
• The Team-Up Strategy
• The condition under which a firm can combine the
  three strategies
• The types of technology and the nature of
  complemetary assets that influence the choice of
  a combination of the three strategy.

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Strategies for sustaining profits
The firms profit froms an innovation is usually
only temporary.
As an incunbent or a new entrant an innovator can
prolog the time over which it can keep profits
choosing one or more of the following strategies

• The chooice of block, run or team up strategy at
  any stage of the value chain is a function of
  several factors
• The firms capabilities
• Its type of product or service
• The phase of the evolution of innovation
• Its strategy

Block

• Capabilities
• Product or industries
• Life cycle phase
• Firm strategy

Run
Team-up
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Strategies for sustaining profits Block
This strategy allow a firm to provent entry by
competitors
By limiting the competitors access to inimitable
and coreness capabilities
By signaling the competitors that post-entry
price will be low
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Strategies for sustaining profits Block
The effectiveness of a firm in blocking entry to
any stage of the value chain is a function of how
unique and inimitable its competences and assets
and are at that stage.
At the development level, intellectual property
protection can make very difficult for new
entrants to offer designs that are comparable to
those of incumbents
At the research stage, close relationship with
universities can provide fast access to
scientific research findings
At the manufacturing stage, example of endowments
that a firm can use to prevent entry are
exclusive access to certain inputs, licenses that
allow to manufacture product at lower cost, ecc.
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Strategies for sustaining profits Block
If all firms are equally capable of performing
the activities of each stage of the value chain
and have equal access to the underlying
technological and market knowledge then the block
strategies is based on some signals that suggest
to potential new entrant that post entry price
will be low. Some of these signals are
Technology drivers and coshared resources in the
face of the introduction of an innovation in a
market, an incumbent is likely to stay and fight
if its existing technology also serves as a
technology driver for its other products.
Management committment to existing technology if
the management of a firm is committed to its
existing tecnhnology the firm is not likely to
take entry expecially if the technology is one of
the major source of revenue of the firm.
History of retailation if an incumbent has an
history of retaiiatiating against firms that have
ventured into its product-market, that may be a
signal that it will lower its prices with entry.
High Minimum Efficient Scale for Industry if the
minimum volume that a firm has to produce in
order to attain the minimum per unit cost
possible in the industry is large, entrant are
less likely to enter since they can expect to
drop considerably, given how much they have to
add to the industrys capacity.
Idiosyncratic asset an asset is idiosyncratic to
a market if is of litte value in another market.
If an incumbent invests in such assets, it is
sending a signal to potential entrants that it
can lower its prices post entry.
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Strategies for sustaining profits Run
This strategy is base don the evidence of the
rapidity of the innovation process.
A firm must be innovative enogh to build new
capabilities and introduce new product rapidly
and do so well ahead of competitors
We can classify run as a function of their inpact
on the capabilities of the firm in question and
the extent to which the run cannibalizes existing
product.
Product cannibalization

Type III e.g. Microwave oven Type II e.g. Apple Macintosh
Type IV e.g. Shrink of Pentium Type I e.g. Pentium
High
Low
High
Obsolescence of existing capabilities
Low
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Strategies for sustaining profits Team-up
In a team-up strategy a firm formally cooperates
with others to allow it to keep profiting from
innovation.
This cooperation can be in the form of a
strategic alliance, an acquisition or another
agreements to cooperate in adding value in a
firm s value-creating activities
The type of collaborations are

• Strategic alliances
• Venture capital
• Acquisitions
• Join ventures
• Licensing

• Distribution agreements
• Co-marketing agreements
• Technology agreements
• Design agreements
• Manufacturing agreements

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Strategies for sustaining profits Team-up

• There are five reasons why a firm might want to
  give away its technology
• To win a standard or dominant design making a
  design open invites other firms to enter the
  market using it ? increment of manifacture of the
  design ? more complementary innovators ? more
  commitments to developing complementary products
  for it.
• To increase upstream demand a firm can give away
  its technology downstream to increase demand for
  its product upstream.
• To build capabilities very often a firm has to
  license its innovation to competitors so that it
  can build competences in an area in which it
  lacks such capabilities.
• To exploit the second source effect some
  customers are reclutant to incorporate a
  component in their system unless they are sure
  that compatible generations of the component will
  be forthcoming when they need them.
• To access to a market that would otherwise be
  inaccessible sometime a firm have to team-up
  with a firm in a foreign country so as to enter
  that market.

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Relationship between the three strategies
Block

• Capabilities
• Product or industries
• Life cycle phase
• Firm strategy

Run
Team-up
They all rest on competences and endowements as
well as on the underlying technological and
market knowledge. A firm ability to joggle all
three in the face of the technological change,
deregulation or regulation, changing customer
preferences and expectations, and global
competition is critical to mantaining
entrepreneurial rents
The three strategies can be reinforcing and
corroborating
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Relationship between the three strategies Why
combinations
Secondary strategy Secondary strategy Secondary strategy
Block Run Team-up
Main strategy Block While fithing imitation of its innovation by blocking competitors, a firm can run developing new product generations to cannibalize existing ones. Advantage secured through blocking last only until such regulation, deregulation and changing in customer preferences render them obsolete ? the firm have to team-up to exploit technologies and markets that are unfamiliar.
Main strategy Run In that industries in which new product development is very expensive a firm can use Blocks to slow down competitors enough to introduce new products. Where the Run involves radically different technological and market knowledge unfamiliar to the firm, it may need to form alliances.
Main strategy Team-up After a firm wins a standard through an alliance, it must still do something distinctive that allows it to perform better than the members of its team. After a firm wins a standard through an alliance, it must still do something distinctive that allows it to perform better than the members of its team.
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Relationship between the three strategies When
combinations
Combinations along the value chain
A firm would successfully run or block or team up
only at those stages of its value chain where it
has the capabilities to underpin each strategy
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Relationship between the three strategies
Combinations along the value chain Dell Computer
Example
Marketing Sells
Value chain activities
Production
Distribution
Idea Generation
Supply chain
Block Team up
Run Team up
Block Run
Strategies
Team up
Run
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Relationship between the three strategies When
combinations
Combinations over Innovation Life Cycle
The strategies that a firm pursues over the life
cycle of a technology also vary
Following the emergence of the dominant design
the firm may want to introduce versions of the
design more frequently (run) than its
competitors. It may also want to defend its
intellectual property or brand name reputation
(block)
At a discontinuity, the type of strategy pursue
depend on the nature of the discontinuity Compete
nce enhancing ? run, block or both Competence
destroying ? team-up
During the phase of development of a new product,
an innovator can team-up to win the dominant
design.
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Relationship between the three strategies
Type of technology and nature of complemetary
assets
The type of strategy that a firm pursues at any
phase of a technology life cycle, is also a
function of the imitability of technology and
nature of the complementary assets needed to
profit.
Cell I When imitability of the technology is high
a firm can pursue a run strategy a firm can keep
innovating so that the time competitors catch up
with yesterdays technology, it has moved on to
tomorrows technology. Sometimes, a firm may need
to team up in order to run.
Cell II The firm must develop the complementary
assets internally (run) or get them by teaming up
with someone else.
Cell III If a firm has both the technology and
the complementary asset, it can pursue block
stretegy in order to protect both. If technology
becames obsolete, the firm must team up with
someone that have a new technology.
Cell IV When thechnology is difficult to imitate
but complementary assets are easy to come by, a
firm can pursue a block strategy in order to
protect that technology. A firm can also pursue a
run strategy to allow it to stay ahead of its
competitors.
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Relationship between the three strategies
Internal development or external sourcing
Firms that pursue a team up strategy go outside
thier boundaries for some of the capabilities
that they need to exploit the technology.
Whether a firm decides to develop a technology
internally or go outside for help is also a
function of two factors

1. The firms familiarity with the new technology
   and market
2. Transaction costs.

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Relationship between the three strategies
Internal development or external sourcing

1. Familiarity of the new technology and market

The more the technological and market
capabilities need to exploit an innovation differ
from a firms existing capabilities, the more
likely the firm will fail in trying to exploit
the innovation.
Since building these capabilities is often
difficult and takes time, a firm may be better
off teaming up with another firm that has them
Such co-operation allows the firm to learn from
its partner and develop its own capabilities or
co-develop capabilities for joint use.
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Relationship between the three strategies
Internal development or external sourcing

1. Familiarity of the new technology and market

Cell I The firm brings technological capabilities
to the table while the partner bring market
capabilities and both companies can form a joint
venture to exploit the new technology.
Cell II When innovation is competence destroying
a firm can pursue one of the three options to
learn and build the new capabilities while not
being handicapped by the existing ones.
Cell III A firm that faces an unfamiliar new
technology but has the market capabilities can
licence the technology from another firm. An
important precaution is to make sure that the
licence has the absorptive capacity to
successfully trasfer the technology.

• Cell IV
• Internal development is preferred in three cases
• When the technological change is competence
  enhancing or incremental
• When the firm is not in a rush
• When the firm want to protect its technology.

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Relationship between the three strategies
Internal development or external sourcing

1. Transaction costs

Transaction costs theory suggest that whether a
firm organizes activity internally or externally
is a function of the cost of carrying out the
activity in either mode.
These costs depend on four factors
The frequency of transactions
The amount of uncertainty
How opportunistic the parties are
The asset specificity of any assets used in the
activity
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Relationship between the three strategies
Internal development or external sourcing

1. Transaction costs

Opportunism of the parties
A party is opportunistic if it take advantage of
an information asymmetry and cheats in pursuing
its own ends the more uncertainty information
that is needed, the more easy is to create room
for opportunism. The chances to exercise
opportunism are also a function of asset
specificity
Asset specificity
Asset specificity refers to how idiosyncratic an
asset in a relationship becomes as the
relationship develops.
Frequency of transaction
Frequency of transaction is how often the
transaction between the perties must take place
the higher the asset specificity and the
frequency of transactions, the more chances there
are for opportunism.
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Relationship between the three strategies
Internal development or external sourcing

1. Transaction costs

Opportunism is not the only source of transaction
cost

• Since individuals are cognitively limited, a
  party to a transaction may be not be able to
  articulate the information it has.
• Even if the party could articulate it, the
  other party may not be able to understanding it.

For certain type of informations, transaction
costs may be high even when the parties are not
opportunistic
Innovation often requires specialized plants and
individuals, increasing the chances for
opportunism.
Radical innovation has the qualities that would
suggest internalization to minimize transaction
costs.
It may be difficult to specify in contracts what
is that expected from each party.
If it fully of uncertainty and leaves a lot of
room for opportunism.