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Prof. Ing.

Marco Cantamessa

Innovation Management

“To want a humanism of the future means the endless


toil of assimilating and mastering technology: an
unlimited challenge to human effort”
Karl Jaspers

POLITECNICO DI TORINO
Department of Management and Production Engineering 1

What are the key things that are happening in this world of innovation?

POLITECNICO DI TORINO
Department of Management and Production Engineering 2

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What is this course about?

• It is about the future! Try writing down


• one color that you would associate to "future"
https://answergarden.ch/m/655754

• two adjectives that you would associate to "future"


https://answergarden.ch/m/655760

• two verbs that you would associate to "future"


https://answergarden.ch/m/655763

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Department of Management and Production Engineering 3

• Who would you want to be?


Tricky «trivial pursuit» question• Who were the innovators and how did they do it?
• What’s the value of technology without the
management of innovation?
•Who invented the light bulb?

Sir Humphry Davy Joseph Wilson Swan


(1778-1829) (1828-1914)

Thomas Alva Edison Alessandro Cruto


(1847-1931) (1847-1908)

Nikola Tesla George Westinghouse


(1856-1943) (1846-1914)

POLITECNICO DI TORINO
Department of Management and Production Engineering

2
S.S. Columbia
May 1880

J.P. Morgan’s home, New York


June 1880

Holborn Viaduct, London


January 1882

Pearl Street Station, New York


September 1882
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Department of Management and Production Engineering 5

Let’s try flipping the classroom

• It’s not about teaching, it’s about learning!


• Read material at home before the lecture
• The lecture is to
• Recap
• Solve doubts I hear and I forget
I see and I remember
• Go deeper into details/new topics I do and I understand
• Discuss examples

POLITECNICO DI TORINO
Department of Management and Production Engineering

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The exam

Part of exam What How How much


Practice Solve a case study with Pen, paper, calculator, 12 (minimum
calculations (90 minutes) books threshold 6/12)
Theory Answer 3 questions on theory Pen, paper, no books 12 (minimum
and briefly discuss an excerpt threshold 6/12)
from a newspaper (45 minutes)
Assignment Apply theory throughout the Desk research, primary 10
year research, groupwork

Practice Theory

Assignment
POLITECNICO DI TORINO
Department of Management and Production Engineering

Code of conduct

POLITECNICO DI TORINO
Department of Management and Production Engineering 8

4
Aeneid, VIII book
• Aeneas is at war in Latium
• Venus "asks" Vulcan to build new
weapons for him
• Vulcan accepts and heads for the
Aeolian islands to build the weapons
• Aeneas' shield bears the images of
the future of Rome

A. Van Dyck, 1632


Venus asking Vulcan for the Armour of Aeneas
POLITECNICO DI TORINO
(Musée du Louvre, Paris)
Department of Management and Production Engineering 9

A few definitions
The five Ws of (technological?) innovation
What • "The economic exploitation of an invention" (Roberts, 1998)
• "The act or process of introducing new ideas, devices, or methods" (Merriam
Webster dictionary)
Who • Supply People or organizations who propose the innovation (taking risks)
• Demand People or organizations who adopt the innovation (taking risks)
Why • Craftsmanship and ingenuity making it possible (= technology?)
• Competition making it necessary
• Culture making it agreeable It's a cultural issue! Try reading
Alfred Tennyson's Ulysses aloud
When • Cost of change < Cost of staying put
Where • Products, processes, organizations, business models, society
• "Promethean" places (national/regional innovation systems, entrepreneurial
ecosystems) where
• a 'dynamic' and 'modern' culture prevails (Phelps 2013)
• resistance to change is weaker or manageable (Juma 2016)
• B2B technology adoption is not encumbered by 'socioemotional wealth' biases typical
of family firms (Souder et al., 2017)
POLITECNICO DI TORINO
Department of Management and Production Engineering 10

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Modern culture, according to Phelps (2013)

• Modern economies have witnessed "Rostowian take offs" thanks to "flourishing" systems of
"indigenous" innovation
• Societies whose cultures value "modernity"
• the Jeffersonian individual pursuit of happiness
• dynamism and radical change vs. tradition
• dealing with Knightian uncertainty and accepting both failure and success
• innovation vs. trade
• Institutions that
• Allow capitalism and competition (interpreted as a Hayekian "discovery process") to prevail over
corporativism and socialism
• Facilitate business and do not have a claim to direct or co-manage it
• Place incentives for long-term value cration vs. short-term opportunistic behavior
• Availability of economic knowledge (supply and demand side)
• Technical creativity,
• Entrepreneurial and strategic insight
• Technical and managerial capability to execute
• Financial judgement

POLITECNICO DI TORINO
Department of Management and Production Engineering 11

Modern culture, according to Phelps (2013)

• Modern economies have witnessed "Rostowian take offs" thanks to "flourishing" systems of
"indigenous" innovation

Societies valuing "modern" culture Institutions that


• Jeffersonian individual pursuit of happiness • Allow capitalism and competition (interpreted
• Dynamism and radical change vs. tradition as a Hayekian "discovery process") to prevail
• Dealing with Knightian uncertainty over corporativism and socialism
• Accepting failure and success • Facilitate business and do not have a claim to
direct or co-manage it
• Innovation vs. trade
• Place incentives for long-term value cration
vs. short-term opportunistic behavior

Economic knowledge (supply and


demand side)
• Technical creativity
• Entrepreneurial and strategic insight
• Technical and managerial capability to
execute
• Financial judgement
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Department of Management and Production Engineering 12

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A few definitions

• What is the role of this "perennial gale of creative distruction"


in the capitalist system?
• Should it be studied by economists (= what portion is
endogenous to the economy)? What about historians and
technologists?
• Can you also manage innovation?
• Look for patterns in the past
• Balance risk and reward

“History does not repeat


itself, but it does rhyme”
(Mark Twain) Joseph Schumpeter
POLITECNICO DI TORINO
Department of Management and Production Engineering 1883-1950 13

A few definitions
Invention / Technology Invention
Discovery (demonstrator) (prototype) Product Innovation

Product
Basic Applied
development Diffusion
research research
(pre- and post- competitive)

If
"research and invention = using $ to generate ideas and knowledge"
Then
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"Innovation = using .... to generate
Department of Management and ......"Production Engineering

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A few definitions
Invention / Technology Invention
Discovery (demonstrator) (prototype) Product Innovation

Product
Basic Applied
development Diffusion
research research
(pre- and post- competitive)

Risk & failure rate

Failure can be beneficial for society because of


•Selection
•Competition (i.e. stimulus)
•Spillovers

POLITECNICO DI TORINO
Department of Management and Production Engineering

A few definitions
Invention / Technology Invention
Discovery (demonstrator) (prototype) Product Innovation

Product
Basic Applied
development Diffusion
research
• Not enough ROI ($ & time!) research
(pre- and post- competitive)
• Keeping results secret would be
socially suboptimal
• Markets for technology allow waiting
Risk & failure rate
Business
Government, academia,
research institutions

Generally not allowed (state aid!)… • Schumpeterian innovator-entrepreneurs (widening


• funding unless government is innovations)
• public • regulator at large • Schumpeter’s large firms (deepening innovations)
knowledge • Chesbrough’s Open Innovation networks and
• regulator w.r.t. standards
• skilled ecosystems
• customer (SBIR, DoD, NASA, etc.)
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workforce • Ramaswamy’s co-creative customers (?)
Department of Management and Production Engineering

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Type of Explanation Pros Cons
private
financing
Bootstrapping Use margins from operations to finance No dilution and reliance Time required, entity and
innovation from external variability of margins
stakeholders
Debt Get loans from bank or issue bonds No dilution Endeavors might be too
risky for debt
Customer Early customers finance your innovation Deep engagement with Narrow engagement with
financing market needs customer needs
No dilution and risk You need such a customer
sharing
Venture Capital VC funds (GPs) raise money from investors Risk acceptance Dilution
(LPs) and provide staged financing to high- Need an exit Need an exit
risk startups, supporting their growth and
looking for an exit (IPO/trade sale).
A few "home runs" hopefully compensate
for the many failures and write-offs
Private Equity Like VC, but for less risky firms, might not Risk acceptance Dilution
need an exit and with greater PE Loss of control
involvement in management
IPO Raise money from the markets Amount that can be Costly and complex
POLITECNICO DI TORINO raised process
Department of Management and Production Engineering
Liquidity of shares 17

TypePublic
of public funding
Rationale Tools Pros Cons
policy
Supply side / State provides Grants, low interest Speed Allocational efficiency (picking
Direct resources that Market loans Ex-ante definition of budget winners based on proposals?)
does not supply (e.g., Smart&Start, Bureaucracy involved (time
H2020 SME and cost)
instrument)
Supply side / State increases Tax breaks Speed Allocational efficiency
Incentives benefits to Market in (e.g., tax breaks for Market involvement Risk of opportunistic behavior
supplying resources startup financing) + breaking budgets
Supply side / State increases Reduced income tax Resources go those who 'risk Needs a market capable of
Boosting benefits to Market (e.g., 0 income tax, and reap' after benefits have selecting
outcomes when results are hyperamortization) accrued Difficult to quantify ex-ante
achieved cost of policy (so what?)
Demand side / State stimulates Public Technology Award given to actual results Requires a specific
procurement innovation by creating Procurement and not promises administrative culture
an early market for (e.g., SBIR, DoD) Creates a market
innovation
State avails itself of improved
technology
Demand side – State creates and Product-specific Zero cost Arbitrariness of technological
regulation & shapes the demand for regulation choices and risk of lock-in
standardization innovation (e.g., biodegradable Requires State credibility and
bags) a capable Market
Non-specific State improves
POLITECNICO general General reforms
DI TORINO Stable and visible impact Time required
"business
Department friendliness" and Production Engineering
of Management throughout the economy 18

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A few definitions
Invention / Technology Invention
Discovery (demonstrator) (prototype) Product Innovation

Product
Basic Applied
development Diffusion
research research
(pre- and post- competitive)

Business
Government, academia,
research institutions

POLITECNICO DI TORINO
Department of Management and Production Engineering

A few definitions

• Beyond the linear model of innovation


• Chain linked model (Kline and Rosemberg 86)
• The main process occurs in product development
• Research has an ancillary role to product development
• Product development can support research activity

POLITECNICO DI TORINO
Department of Management and Production Engineering

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A few definitions

• Beyond the linear model of innovation


• The Pasteur Quadrant (Stokes 97)

POLITECNICO DI TORINO
Department of Management and Production Engineering

A few definitions

• Beyond the linear model of innovation


• Pavitt's Taxonomy (Pavitt 84)

Specialized
Components suppliers Equipment
materials
Instrumentation
Traditional
Equipment Materials
Science based
Natural resource
intensive
Components
Materials
materials Scale intensive

POLITECNICO DI TORINO
Department of Management and Production Engineering

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A few definitions
• Innovation tends to occur in confined geographies
• Local (i.e., national or regional) systems of innovation exhibit
• A Marshallian district-like behavior, based on economies of agglomeration
• specialization around a focal + complementary technology/industry,
• labor and resource pooling among multiple and flexible firms,
• low transaction costs due to spatial, cultural and relational proximity
• knowledge spillovers
• A knowledge producing and sharing interplay betwen heterogeneous actors (from Etzkowitz's
triple helix to Carayannis' quadruple helix)
• Is there an emerging "entrepreneurial ecosystems + "Bridging
model" centered around (Autio et al., 2018)? Institutions"
• high-growth opportunity discovery, pursuit and scaling-up
• digital and business model innovation Media
• a community of (serial) entrepreneurs and and civil
State society
complementary actors
• a common "economic knowledge" and culture
• continual recycling of resources Academia Industry
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Department of Management and Production Engineering 23

Terminology

• Product development
• Is the business process in which product innovation occurs
• Is interfunctional and multidisciplinary

Product System-level Detailed Prototyping Production


planning design design & testing ramp-up
Project management
Business case analysis
Marketing XX X XX
Purchasing X XX XX
Finance X X X X X
Product design X XX XX XX X

Manufacturing X X X XX XX
process design
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Manufacturing X
Department of Management and Production Engineering XX 24

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Hyman (2018) argues that technology does not
"shape" society and work. Pre-existing trends
Basics of economics of innovation leverage technology and are empowered and
amplified by it (e.g., gig economy vs. Manpower)

• Technological innovation is hugely relevant to society today


• Social impact of technology • network effects
• users’ switching costs
• job displacement and "industry disruption" • combined effect of big
• adoption divides between social strata and countries data and machine learning

• wealth/income inequality, mostly between-firm, due to enduring monopolistic power


• Philosophical and ethical aspects (from Heidegger to Galimberti)
• Technology is a strong and pervasive force acting on the environment and on humankind
• Impact can be inherently irreversible (e.g., nuclear war) or self-sustaining (e.g.,
dystopian visions of AI/robotics)
• People are identified by the technology they adopt, with varying levels of
consciousness
society needs time to develop "proper" use modes (Anders’ «Promethean discrepancy»)
• Absent social norms, technology is not a neutral ( “innocent”) tool that humans use (or do
not use) as means to a (consciously deliberated) end it can become the end, obeying
own criteria of effectiveness and efficiency (e.g., designer babies, critical decisions
delegated to opaque deep learning algorithms, etc.)
POLITECNICO DI TORINO
Department of Management and Production Engineering 25

Basics of economics of innovation

• Technological innovation is hugely relevant to society today


• Different approaches to ethics of technology
• The «Promethean discrepancy» (Anders) calls to go beyond both «ethics of intention»
and «ethics of responsibility»
• Anglo-saxon approach (utilitarian, based on deontological principles and specialization)
• Continental approach (principles-based, stresses “unintended consequences” and tends
to view technology as a whole)
• Business-level aspects
• Business ethics and Corporate Social Responsibility
• Risks associated to non-acceptance of technology (e.g., GMOs, nanotech, etc.)
• Legal liability risks due to "unforeseeable" consequences of innovation
• Objective liability vs. liability associated to behavior
• Liability vs. compliance with regulatory processes
• The definition of liability regimes requires a balance between consumer protection
and incentive to conduct proper investigations vs. incentive to innovate (e.g.,
development risk clause in the EU)
POLITECNICO DI TORINO
Department of Management and Production Engineering 26

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Knowledge

• Knowledge is central to the innovation process


• Knowledge is coupled to the organization
• Knowledge management vs. innovation management

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Department of Management and Production Engineering 27

Within an organization,
Knowledge individuals act as ‘pools
and filters’ of knowledge
• Features of knowledge
• Embedded in people vs. incorporated in capital
What features are
• Possible to codify vs. non-codifiable Public good = non-rival likely to characterize
• Tacit vs. explicit AND non-excludable each of these forms
• Public vs. private good of knowledge?
• Forms of knowledge (based on OECD classification)

Forms of Example in the «supply» side Example in the «demand»


knowledge side
Factual knowledge Statistics of engine failure across Europe Statistics on number and
(know what) composition of families in a region
Causal knowledge Models that show correlation and causation between Deep understanding of a need that
(know why) climate and failure these families have
Procedural knowledge Engineering skills leading to the development of a Defining a product and the sales
(know how) proper technical solution to engine failure process that addresses such a
Combinatory knowledge allowing integration need
heterogeneous knowledge sources (Singh et al. 2016)
Positional knowledge Knowing who can provide relevant knoweldge both within and outside the organization
POLITECNICO DI TORINO
(know who)
Department of Management and Production Engineering 28

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Knowledge

• Does scientific knowledge play a role in technological innovation?


• Scientific knowledge has traditionally been considered as an input
to the innovation value chain
• Scientific and technological progress are nowadays considered to
be parallel and complementary
• The strength of the “science technology” connection depends on the
industry (Fleming & Sorenson 2004)
• Technology operates on a “local search” basis (i.e. variations starting from
known solutions) and by trial and error. Scientific knowledge can provide a
“wider picture” (i.e. a map) that allows technologists to operate more
efficiently
• less experiments (analytical models provide forecasts of results)
• look for globally-optimal solutions (i.e., go straight to the theoretically best
solutions)
• provide rational explanations for “go/no go” decisions

POLITECNICO DI TORINO
Department of Management and Production Engineering 29

Knowledge

• Knowledge in technical domains (Vincente 1990)


• Summary of design in the aeronautical industry
• Technological knowledge is different from “applied science”
• A taxonomy of technological knowledge should not be based on
“disciplines”
• Six categories of technological knowledge
• Basic concepts (working principles, standard product configurations, etc.)
• Design criteria and specifications (requirements, technical standards, etc.)
• Theoretical tools (formulae, math models, etc.)
• Quantitative data
• Practical knowledge (experience, past failures, “rules of thumb”, etc.)
• Design instrumentalities (procedures, judgemental rules, etc.)
• Economic knowledge (Phelps 2013) is concerned with coupling techhnology
(the means) with market needs (the aims)
POLITECNICO DI TORINO
Department of Management and Production Engineering 30

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In a world of digital platforms, resources
Knowledge may be owned or affiliated, with more or
less stickiness (Amit and Han, 2017)

• The firm according to evolutionary economics (Nelson and Winter 1982)


• Static view: the firm as an organized association of complementary
resources
• Dynamic view: the firm as a bundle of organizational routines that involve /
activate resources through a common language (Arrow)
X K L X
Y Y Y J
Z Z M
• The concept of “routine” What does a “star perfomer”
is more general than the really take with him when leaving
one of “process” the firm? (Groysberg et al. 2008)
• Routines are sometimes
designed, but generally • Management’s role is to
emerge as “appropriate assemble a good resource base What are the property rights of a firm
behavior” and to initiate routines (i.e. what does a company really own)
• Are routines good or bad? with respect to (Foss & Foss 2005)?
(e.g. impact of ISO9000 on • Physical assets
incumbents facing radical • A firm knows what it does
• Employees’ knowledge
change, • A firm is what it does & knows
Benner 2009) DI TORINO
POLITECNICO • Organizational routines
Department of Management and Production Engineering 31

Knowledge

• Consequences of the evolutionary economics model of the firm:


• Firms “self-evolve”, mostly in reply to stimuli and uncertainty perceived from the environment
• Firms are “path dependent” This explains
• “Stickiness” of knowledge (Von Hippel), which is competitive advantage
• “contextually related”
• “organizationally embedded” This explains sustainability
• Firms are different! (Toyota, Dell, Scania, etc.) of competitive advantage…
• It is difficult and time-consuming for competitors to imitate successful firms
• Observe resources & routines (hidden + causal ambiguity) competitive intelligence
• Experiment (combinatorial complexity)
• Replicate (path dependency + idiosincracy of the sets of resources and routines)
• Luck matters…
• otherwise factor prices would grow to the level of rents (Barney 1991)
• you observe sustained differences in cumulative phenomena (such as competencies accumulation) even
when subject to random walks (Denrell 2005)
• Firms can find it difficult to imitate best practice across business units
• Firms' boundaries define the set of resources and routines that maximize value creation and
capture This explains vertical and horizontal
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integration with a perspective on growth
Department of Management and Production Engineering (≠ TCE's focus on cost minimization) 32

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Organizational learning

• Four “modes” (Huber 1991)


• Innate learning
• Contribution of individual founding members
• Tied together by a common “vision of the world” and objective there is path
dependency from prior experience, moderated by team diversity (Fern et al.
2012)
• Experiential learning
• Learning by doing
• “exploitation learning” vs. “exploration learning” (March 1991) path
dependency + negative mediating effect of exploitation learning on the outcome of
exploration learning activities
• Learning can be unconscious vs. explicitly managed (e.g. action research)
• Is there something like organizational IQ (= ability to learn from new problems)?
Knott 2008
POLITECNICO DI TORINO
Department of Management and Production Engineering 33

Organizational learning

• Vicarious learning (acquiring knowledge from the outside)


• Scanning vs. focused search
• A two-phase process (reception internal diffusion)
• Depends on the “absorptive capacity” of the organization (Cohen
and Levinthal, 1990), which in turn
• depends on the stock of related knowledge
So you
• depends on the existence of ”gatekeepers”
need to do
some R&D • requires internal communication channels
if you want • exhibits a tradeoff between reception and diffusion
to learn

from others In case of knowledge which is “embedded” in a separate
(and avoid organization it depends on
doing too
much R&D)!
• similarity in organizational structure and routines
• similarity in context and environmental stimuli
• existence of incentive fostering communication
POLITECNICO DI TORINO
Department of Management and Production Engineering 34

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Organizational learning

• Technological capability can lead to competency traps (Zhou and Wu


2010)
• The more you have, the more you can effectively pursue exploitation projects
• The more you have, the more you have absorbtive capacity and you can
effectively pursue exploration projects
• The more you have, the greater your organizational inertia, and
• you do not pursue exploration projects
• you do not use results from exploration projects (Sirèn et al., 2012)
• Knowledge management systems can reinforce “competency traps” by codifying
moderately successful practices along with “best” practices (Lee and Van den
Steen 2010) Effectiveness in pursuing
exploration projects

Effectiveness in pursuing
exploitation projects
Competency
trap
POLITECNICO DI TORINO
Department of Management and Production Engineering Technological capability

Organizational learning

• Learning by “grafting”
• Knowledge is absorbed by inserting individuals (hiring
people) or organizations (acquisitions)
• Faster, but integration can be difficult
• Requires to incorporate resources in existing routines or
to create new ones

POLITECNICO DI TORINO
Department of Management and Production Engineering 36

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Does it look like a story characterized
Paradigms
by continuous progress?

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Department of Management and Production Engineering 37

Paradigms Not really! Dosi and Freeman show that innovation follows a
continuous alternation of
R&D and - Evolutionary and revolutionary change
marketing - Performance s-curves
have different - Bounded by technological limits
roles within the - Initiated by tapping into new technical solutions (technology push)
process - Emerging after a period of uncertainty (revolution)
- Evolving in accordance to the emergent paradigm (demand pull)

Performance (?)

X
X
POLITECNICO DI TORINO Time(?)
Department of Management and Production Engineering 38

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Paradigms

Airliner Year Airframe Engines Cruise speed Range Max Fuel eff.
(km/h) (km) pass. (km seat/l)
Flyer 1903 Wood + fabric 1 piston + propeller 48 - 1 -
Farman Goliath 1919 Wood + fabric 2 piston + propeller 120 400 14 13.4
Douglas DC-3 1936 Metal 2 piston + propeller 333 2400 32 8.4
Boeing 314 1938 Metal 4 piston + propeller 340 5900 74 23.5
Vickers Viscount 700 1948 Metal 4 turboprop 496 2220 48 15.3
De Havilland Comet 1949 Metal 4 turbojet 740 2400 44 3.56
Boeing 747-100, 200 1970 Metal 4 turbojet 893 12690 550 26.9
Concorde 1976 Metal 4 turbojet 2158 7222 120 6.4
POLITECNICO DI TORINO
Boeing 787
Department of2011 Composites
Management 2 turbofan
and Production Engineering 913 15400 440 36.6
39

Paradigms

Performance
(as currently valued by the
market)

X
X
X Effort
40

POLITECNICO DI TORINO
Department of Management and Production Engineering

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The distinction between
Paradigms - suppliers (integration done by producers)
- complementors (integration done by customers)
is not ‘objective’, but depends on producers’ integration choices
Supply side
Demand side
•Technological regime
• Beliefs,
(knowledge, methods and tools)
• Needs,
• Business models
• Objectives,
• Rules,
Complementors Complementary
systems • Meanings

Suppliers Producers Product Society

Research &
Educational
institutions
POLITECNICO DI TORINO
Department of Management and Production Engineering 41

Paradigms

•What were the competing paradigms they proposed?


•Which one won?
•Why?

POLITECNICO DI TORINO
Department of Management and Production Engineering 42

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•What are the competing paradigms?
Paradigms
•Which one might win?
•Why? Model Technology Main use Meaning Complement to
Mercedes- Energy- Allround Freedom to Fossil fuel
Benz E class efficient IC + travel + infrastructure
2016 hybrid option status
symbol
Tesla S Full electric Allround "Green & Recharging
fast" status stations
symbol
BMW i3 Electric + Urban or "Green" Recharging
REX option allround status stations + fossil
symbol? fuel
infrastructure
Autolib Full electric Urban Pure Carsharing
carsharing mobility system

Google pod Full electric Urban Enhanced ???


mobility
POLITECNICO DI TORINO
Department of Management and Production Engineering 43

Types of innovation

Criterion (look at...) An "evolutionary" A "revolutionary"


innovation is called innovation is called
Product and the technical Incremental innovation Radical innovation
tradeoffs that define it
Producer and its organization Competence enhancing Competence destroying
innovation innovation
Product architecture Peripheral innovation Core innovation
Business impact Sustaining innovation Disruptive innovation

What kind of innovation is it?


POLITECNICO DI TORINO It depends on who you are!
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Types of innovation Product architecture ≈ components
and their mutual relationships

• Innovation and product architecture (Henderson and Clark)


• Product architecture and the organization are coupled
• What must happen if product architecture changes?
A B A B

C D C D

α β α X β
?
γ δ γ δ
POLITECNICO DI TORINO
Department of Management and Production Engineering 45

Types of innovation

• Innovation and product architecture (Henderson and Clark)


• Product architecture and the organization are coupled
• It is generally harder to change architecture than technology
• Innovations often are not incremental or modular (but incumbents
tend to downplay them as such)

•B&O Beogram 4000 (1972)


Relationships between Do not Change
components change
Reference technologies

Change Modular Radical


innovation innovation

Do not change Incremental Architectural


POLITECNICO DI TORINO
Department of Management and Production Engineering
innovation innovation
46

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Relationships between Do not Change
components change
Reference technologies
Change Modular Radical
innovation innovation
Do not change Incremental Architectural
POLITECNICO DI TORINO
innovation innovation
Department of Management and Production Engineering 47

Types of innovation

• Why can innovations be disruptive (i.e. why do incumbent firms fail to tackle
them)?
1. The old technology does not keep pace with growing or new customer
needs, but new technology does AND misaligned resources and
organizational inertia refrigerators
• competence destruction and competency traps often arise in firms that have
survived highly competitive industries (a weapon is valued when you’ve won many
battles with it... Microsoft’s focus on Windows and losing out in upcoming markets)
• the effect is increased by three additional “traps”
• Sunk cost trap (“the old technology is more profitable because we already have
assets associated to it”... will this true beyond the short term, when assets will have to
be replaced or maintained?)
• Status quo trap (“our old technology is more profitable because it is superior”... for
how long?)
• Incentive trap (Employees lack high-powered incentives linked to expected firm
growth and do not go "above and beyond", Bennet and Levinthal 2017)
POLITECNICO DI TORINO
Department of Management and Production Engineering 48

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Types of innovation

• Why can innovations be disruptive?


2. New technology satisfies unmet or changing customer needs or
entirely new markets … while incumbents focus on reference
markets and powerful customers (Christensen) PCs, digital
cameras, Blackberry vs. touch-screen smartphones, cars.
Performance Performance of
new technology
Needs of current
reference market

Needs of
emerging market

The new market may be


Perceived window of opportunity anything between a beach-
The new market may look for for old technology head and a huge opportunity
• low-performance / low cost
POLITECNICO DI TORINO
• a different performance mix Time
Department of Management and Production Engineering

Types of innovation Legacy complementary assets


create incentives to invest in
disruptive technology, but following
• Why can innovations be disruptive? biased and suboptimal strategies
(Wu et al., 2014)
• This "Christensen effect" is mainly due to
• Criteria used for resource allocation and project selection, (market risk is
overweighted w.r.t. technical risk)
• Market research dominating over envisioning
• The choice of suboptimal technology trajectories / business models that may
leverage on existing complementary assets, often leading to «hybrid» products
and services (e.g., Polaroid and Kodak)
• Middle managers, who are in the position of championing innovative projects…
but can’t “change the givens”
• Profitability of existing business and shareholders’ expectations to go on "milking
the cash cow" until the very last moment (Kodak vs. Netflix)
• Moving to commercialization implies managing heterogeneous business models
conflicts within the organization / value chain (risk of being deserted and
"stuck in the middle") and diseconomies of scope (Greenstein 2017)
POLITECNICO DI TORINO
Department of Management and Production Engineering

25
Types of innovation

• Why can innovations be disruptive (i.e. why do incumbent firms fail to face them)?
3. Incumbents invest in order to maximize expected profits E[NPV], while startups
invest in order to maximize probability of survival P[NPV>0] (Swinney et al 2011)
rational choices follow and are different!
Monopolistic established firm Monopolistic startup
Investment costs Decreasing Constant or Investment costs Decreasing Constant or
Demand uncertainty increasing Demand uncertainty increasing
High Late Late High Late Early
Low Late Early Low Late Early

Established vs. startup duopoly This is the usual case for radical innovations:
Investment costs Decreasing Constant or • demand uncertainty is high by definition
Demand uncertainty increasing • the model considers exogenous trends in
High Both late Startup early costs. Endogenous costs usually are constant.
Established late Costs can decrease if there is some external
Low Both late Both early progress in technology. But they may increase
if one considers the need to produce products
POLITECNICO DI TORINO
at higher quality and/or in higher volume
Department of Management and Production Engineering

Types of innovation

• Why can innovations not become disruptive (with follower-incumbents


win over innovators-new entrants)?
1. Adoption might be delayed / rejected because of lock-in and/or
switching costs
2. "Appropriability regimes” and complementary assets matter a lot
3. Many things can happen within a “maturing” S-curve weak
forecasting power
4. Markets for technology allow incumbents to acquire new entrants

POLITECNICO DI TORINO
Department of Management and Production Engineering 52

26
Utility of new tech will
increase cz we know
Types of innovation performance will increase of
Utility of “new” Utility of “old” new tech , we also have to
(customer think of previous tech , like
• Adoption decisions are based who continues what came before Netflix,
on 5 factors (Rogers, 2003) investing) what is the utility of that tech
, another possible customer
• Relative advantage is one who has invested in
• Compatibility old tech DVD but have
stopped investing cz new
• Complexity tech is coming and they stop
t
• Trialability Utility of “old” , another customer who has
Utility of “old” (customer who (customer who substantial investment in old
• Observability has not invested significantly)
Tech will be adopted stops investing) and investing more , so the
based on individual • Technological change is first one to switch to Netflix
customer , ie should I ‘localized’ (Antonelli, 2012) will be the daughter
switch to new or not , ie • Each customer continuously
possibliy of waiting for Utility of “old” is path-dependent and depends on (endowment advantage):
the second evaluates the opportunity of • Costs and revenues accruing from “old”
switching from “old” to “new” • Experience gained with “old”
• The customer will switch • Complementary assets to “old”
if/when utility of “new” is
greater than utility of “old” Utility of “new” depends on:
• Costs and revenues accruing from “new”
• Switching costs to “new”
POLITECNICO DI TORINO
Expected value
Department of Management and •Production of costs needed to switch back to “old” (cost x probability)
Engineering 53

Tesla is typical company who


can think in term of disruption
and also complement assets
Types of innovation
It’s not about selling new tech
like charging poles for Tesla it’s about ensuring
cars • Risk of focusing on product innovation and neglecting market-making Complementary assets
Distribution
(Godley 2013)
• In the case of durables and experience goods (≠ search goods), customers can be
• Risk averse
• Afraid of miscalculating utility deriving from adoption
• Wary of information asymmetries w.r.t. the utility of the innovation
• Producers must invest in «market-making»
• Lower price (can backfire!)
• Make customers aware of their latent needs and their proximity to product specifications
• Generate trust on the product and on their own future actions
•The far-reaching complexity of this process opens doors to entrepreneurial firms

• Enroll key influencers and opinion leaders


• Make credible commitments
• warranties
• license parts of the process to competitors (e.g., production, after-sales service, etc.)
• sell a service (not the product), or offer a cheap and reliable service subsidized by a high purchase
POLITECNICO DI TORINO
price (Singer sewing machines)
Department of Management and Production Engineering 54

27
Types of innovation Entrants may have to
• develop an ecosystem from scratch
• work from within the existing ecosystem
• Appropriability and relationship with «disrupters’ dilemma» requiring a well-
complementary assets required to develop thought coopetion strategy with incumbents
the business / ecosystem / paradigm (Teece) and complementors (Ansari et al., 2016)

Are you able to capture the The innovator may attempt to


Complementary assets can be
economic vale that comes The “appropriability regime” of own complementary assets (
generic, specialized
from innovation , technology can be strong or need for finance), buy them on
(technology shaped on asset,
Pattentent weak (w.r.t. legal protection or the market, or leverage on the
or viceversa) or co-specialized
Copying , nature of technical knowledge) existing ecosystem (
ownership is critical
Incumbent copying you is coopetion)
stronger than you ,
Appropriability Strong Weak
Owners of Commissioning Commissioning
complementary complementary assets easy complementary assets easy
assets are for innovator for all
Weak Contract Innovator should win Contract Innovator should Contract Either innovator
win or imitator could win.
Strong Contract or integrate Integrate Innovator should Contract Innovator will
POLITECNICOInnovator should win but profits
DI TORINO win, but profits will be shared probably lose to imitators
Department will be shared withand
of Management asset holders Engineering
Production with asset holders and/or asset holders 55

Types of innovation

• It is often misleading to use s-curves to predict radical and disruptive change


• s-curves exhibit some discontinuity because of nested s-curves (product
generations, individual products) difficult to understand what is saturating
• s-curves are often drawn with time on the x axis (just add effort + retreat to the
applications where technology can stay stronger for a while! “sailing ship
effect”, Harley 1971)
Are incumbents going to wake
Is it saturating or will a up and start innovating again?
new product come up?

t t
POLITECNICO DI TORINO
Department of Management and Production Engineering 56

28
Types of innovation

• Adner and Kapoor (2016) merge the impact of the sailing-ship effect and
of the ecosystem (or paradigm) building challenge
• Adoption of potentially disruptive
technology can be delayed by the
Utility of new if ecosystem
• ease with which the old technology can develops slowly
still improve
Utility of old if
• difficulty with which the new improvement is possible
technology can develop a utility- Baseline
utility of old
creating ecosystem

Utility of new if
ecosystem
develops quickly
POLITECNICO DI TORINO
t
Department of Management and Production Engineering

Types of innovation

• Analyzing maturity of s-curves is especially tricky at component level

• If a supposedly radical innovation • Radical change (maturing s-curves)


really occurs at component-level at architectural level are more
• This causes limited disruption disruptive to incumbents, since
to the organization (switch architectural innovation
suppliers!) • is disruptive to the organization
• Component-level innovation and the value chain
tends to be incremental and • tends to be radical (i.e. it alters
enhances performance the tradeoffs between
indicators valued by current performance indicators)
markets incumbents still creates a potential offering for
have an advantage “new” markets

POLITECNICO DI TORINO
Department of Management and Production Engineering 58

29
Types of innovation

• When a radical innovation is upcoming what could your strategy as incumbent be?
• Aside from «objective» rigidities, the main problem lies in top management’s ability to
perceive the risk of disruption and react by changing business models
• 2 possible strategies are exploitation and exploration (Osiyevskyy and Dewald, 2015)
Exploitative strengthening No Yes
of current business model
Explorative adoption
of disruptive business model
Yes Pure exploration Integration (complex
(jump ship quickly) migration or create a spinoff)
No Defiant resistance Pure exploitation
(no change) (incremental innovation)
• Empirical research tells us that the choice depends on
• The perception of the innovation, as an opportunity ( leads to exploration) or as a threat
( leads to doing nothing)
• Managers’ prior experience in dealing with risk ( leads to doing something)
• Industry experience ( leads to doing nothing)
POLITECNICO DI TORINO
Department of Management and Production Engineering 59

Types of innovation

• When a radical innovation is upcoming what could your strategy as incumbent be?
• There always will be tension between the need for renewal and the cannibalization of
the extant business
• In principle, exploitation and exploration are complements but – at organizational level
– they induce negative externalities on one another
• Literature proposes two major approaches (Boumgarden et al., 2012)

Ambidexterity Vacillation
• Have both exploitation and exploration activities • Have the organizational focus alternate between
within the company phases of exploration and phases of exploitation
• Place them in different organizational units, with • Use organizational change to determine the shift
different KPIs and management approaches (e.g., centralize / decentralize)
• Rely on top management’s skills to mediate / • Be aware that formal organizational change can be
balance / integrate appropriately discontinuous, but that informal routines will adapt
• Try inducing ambidexterous behavior throughout with inertia
the firm (down to each BU, team and individual) • Vacillation lessens the risk of being «stuck in the
• Ambidexterity allows a smoother evolution middle»

POLITECNICO DI TORINO
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30
Types of innovation

• So, when a radical innovation is upcoming what could your strategy as incumbent be?
• Pre-emptively lock customers in your technology
• Try “killing” the new technology or buy time
• improve the old technology
• start a price war
• Segment the market by “needs” and closely monitor (or serve) them all
(“incumbent’s advantage” )
• Be wary of “sunk cost” and “status quo” traps
Acquiring a «complementary» large incumbent
• Migrate to the new technology with vested interests is dangerous (Sony/CBS,
• Listen to “people on the edges” AT&T/AOL)... inertia is simply amplified
• Fund R&D top-down and/or go for acquisitions
• Bring new champions on your top management team on time and allow some tension
• Look for the “right” market and business model
• Involve entrants in your ecosystem and work on the new paradigm in order to minimize disruption
• Retreat to a niche or relocate to a different market where you can use your assets
POLITECNICO DI TORINO
Department of Management and Production Engineering 61

Speed of diffusion and technical


Types of innovation progress, cash burn rates are key
elements to consider

• ... and what if you are a new entrant?


• Find the right beach-head market that is
• right for your immature technology
• likely to be overlooked by incumbents
• Stay away from markets that are overserved and locked-in the old
technology
• Make the right vertical integration choices
• Strengthen your IPRs
• Be wary of your lack of complementary assets and develop the right
strategy, eventually coopeting with incumbents (e.g., B2C fintech firms
moving to B2B2C)
• Watch out for improvements in the existing technology
• Consider selling your business to an incumbent
POLITECNICO DI TORINO
Department of Management and Production Engineering 62

31
Dynamics of innovation The product life-cycle model
works for most products that
have to do with new technology.
• S-Curves and diffusion The co-constructivist
perspective says that “products
performance stay alive as long as there is a
social network of actors that see
value and meaning in producing
and purchasing them” (think
t
about food, fashion, design, etc.)
Performance and meaning, can
be weighted differently by
Cumulated markets as time goes by
sales

t subsequent
purchases
sales (additional and
replacement sales)

1° purchase
incubation maturity t decline (adoption sales)
POLITECNICO DI TORINOdiffusion
Department of Management and Production Engineering 63

The early bird catches the worm…


Dynamics of innovation but the second mouse eats the cheese
• Moore
• Moving to the early majority requires new competencies and assets
• Is it better to be leaders or followers? It depends on capability to lock-in the early market,
rate of learning and observability of lessons learned.. Think of iPods, e-cigs, etc.

performance
Crossing the chasm
Innovators How can you
often define make your
distinct niches, sales t
product attractive
and different to each segment?
competing Innovators
technologies (lead users & early early majority late laggards t
might therefore enthusiasts, 2%) adopters (pragmatists, majority (skepticals, 16%)
be adopted by (Visionaries, 14%) 34%) (conservatives, 34%)
each
Bowling alley
Early market

Main street

End of life
Tornado

POLITECNICO DI TORINO
Department of Management and Production Engineering

32
Dynamics of innovation

• How can you make your radically innovative product attractive to ...
Innovators? Early Adopters? the Early Majority?
• Understand who these • Start creating a solid “adoption • Work hard on ease of use,
beach-head innovators are network” (distributors, design, etc.
and their specific needs complementors, etc.) • Consolidate the “adoption
• Find a way to contact them • Start working on ancillary network” (ensure that
• Make sure that initial features such as ease of use, complementary products &
technical shortcomings can design, etc. services are made available)
be overcome by users and • Define a satisfactory (if not • Sell as a bundle with other
field service perfect) price-benefit ratio goods with which the user is
• Engage in dialogue with • Ensure that the product is familiar
them reliable and “cool”, so that • Make technical features “just
early adopters can start a good enough” but not more
positive imitation effect • Look carefully at pricing (not
• Lower purchasing risk (“get too high to discourage, not too
your money back”, razor-blade low to kill margins)
business models, etc.) • Lower risk in purchasing
POLITECNICO DI TORINO
Department of Management and Production Engineering

Dynamics of innovation

• Abernathy-Utterback (assembled products)

performance
The “dominant
design” emerges
t
sales

Fluid Specific phase t


phase Transition phase
Number
of firms

rate of process innovation


t
innovation
product innovation
POLITECNICO DI TORINO t
Department of Management and Production Engineering 66

33
Fluid Transitional Specific
Dynamics of innovation
Main Entering Switching to the «right» Surviving further shakeouts
strategic • with the “right” technology / technology at the right time, if Surviving commoditization
challenges product concept, making best feasible (looking for further innovations)
use of technological assets and Readjusting specific and Anticipating the next S-curve
vision of the future (Benner and wrong choices associated to
Tsipras 2012) the right technology (which is
• at the «right time» in the hard – Eggers 2014)
«window of opportunity» Managing initial growth and
(Christensen et al. 1998) surviving the shakeout
Trying to make your design /
technology dominant
Keeping some options open with
other competing technologies
Competitive Functional performance on the Product variation Cost and quality
emphasis «right» product features
Favored Probably no difference between Diversifying entrants (because Startups might find it easier to
firms diversifying entrants and startups of scale and complementary keep abreast with technology and
(diversifying who make the «right» choice. assets) have no fear of cannibalizing
entrants vs. Among the others, diversifying existing products
startups) entrants may switch technology Diversifying entrants may find the
with greater ease. «transition to incumbency»
easier because of prior
POLITECNICO DI TORINO
experience (Chen et al. 2012)
Department of Management and Production Engineering 67

Dynamics of innovation

Fluid Transitional Specific


Innovation stimulated Market and technology Internal technical Pressure to reduce cost and
by opportunities in capability improve quality
Predominant type of Radical on product Radical on process Incremental on product and
innovation (to scale volume up) process
Production processes Flexible Becoming rigid Rigid
Equipment General purpose, requires Islands of automation Special-purpose and highly
skilled labor automated
Materials and Generally available or internally Specialized, from Specialized, sometimes through
components developed (critical decision!) suppliers or through vertical integration
vertical integration
Plant Small-scale Growing Large-scale
Organizational control Informal and entrepreneurial Project- and task- Bureaucratic
based

POLITECNICO DI TORINO
Department of Management and Production Engineering 68

34
Case of gasoline-powered vs. steam-powered and electric cars (Geels 2005)
Dynamics of• prevailing
innovationinitial niches and seamsless progression to new ones (taxis, luxury urban transport,
sports, tourism, followed by doctors, salesmen and farmers, but not freight transportation)
• gasoline as “surplus” of oil cracking already having an initial distribution network
• Ransom Olds attending 1895 car race
• horse troughs shut down because of livestock diseases
• technical improvements (e.g., clutch and gearbox) and spillovers from competing dominant
designs (e.g., electric starter)

• Dominant designs emerge because of selection criteria that are endogenous


to the technical and economic environment
• Superior technology (as perceived by the initial customer niches) and opportunity to
improve products and processes
• Seamless diffusion across market niches, with little reaction by actors affected by
disruption
• Reputation of the firm(s) following the design, especially if the leader allows some
technological spillover to competitors
• Existence of complementary assets
• Public policy (regulation, taxation, infrastructure)
Spillovers reduce competitors’ incentives to develop
• a different technology lower risks and shorter time
POLITECNICO DI TORINO
• own competencies weaker competitors
(Pacheco
Department of Management and Production de Almeida and Zemsky 2012), e.g. Intel and AMD, Tesla69
Engineering

Dynamics of innovation

• Dominant designs remain stable (lock-in) because of


• Economies of scale in production
• Organizational learning within firms & value chains
• Network externalities
• Investment in complementary assets
• Unsuccessful designs tend to disappear… or serve niches

POLITECNICO DI TORINO
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35
Dynamics of innovation

• The model by Abernathy and Utterback applies to non-assembled


goods (process industry) and services (Barras) too but
• In such industries it is difficult to observe innovation
(organizationally embedded)
• Dominant designs emerge in the process (not in the product)
• Rates of innovation for product and process are inverted
• The process/infrastructure determines lock-in

POLITECNICO DI TORINO
Department of Management and Production Engineering 71

Dynamics of innovation

• Does the Abernathy-Utterback model still hold today?


• Modularity makes dominant designs less important (Cebon et al., 2002)
• Specialization resides within modules (not architectures)
• Economies of scale are found at the level of modules (not products)
• The role of organizational learning is reduced by functional independence
• The Abernathy-Utterback model does not deal with product-services
• The model doesn’t say much about vertical integration choices, which are critical
• The fluid phase is very complex
Even before commercialization, there is a long and complex "investment-incubation" process
The dominant design emerges as a process, with an «innovation shock» (launch of a highly successful
product, Argyres et al., 2015, or emergence of a «dominant category», Suarez et al., 2015) simultaneous
attraction of entrants and initial shakeout emergence of the related dominant design
• There can be numerous «false starts»
• Subsequent process (process) innovation may or not effectively allow the long-term establishment of a
dominant design emerging in the product (process)
• Uncertainty is such that later adopters «follow leaders» blindly, allowing some diffusion of soon-to-be-
abandoned innovations (Greve and Seidel, 2015)
• Innovation is not only “product” and “process”
POLITECNICO DI TORINO
Department of Management and Production Engineering 72

36
Dynamics of innovation • Radical innovation
“disappears” (evolution
occurs along “generations”
and not paradigms)
• From the S-Curve to the S-Mesh • The “technology life
cycle” is no longer a well-
(www.modumobile.com) defined sequence of
Incremental Modular innovaiton (a Architectural innovations
innovation new module arises or innovation (a new • It is less risky to
(along the is substituted) architecture is defined) experiment on new products
S-curve of a the “fluid phase” is faster
module) • Dominant designs do not
determine
• a strong lock-in
effect
• barriers to entry
• shakeouts during the
transition phase,
• oligopolies in the
specific phase,
Architectural • Modular architectures
innovation allow lower degrees of
(along an vertical integration and the
architecture’s development of enterprise
POLITECNICO DI TORINO S-curve) networks
Department of Management and Production Engineering 73

Dynamics of innovation

• Given that assembled products and services exhibit opposite behavior,


what happens for bundles of product-services (e.g. Tom Tom
navigation systems, iOS devices - iTunes music)?
• What happens if these bundles are also based on modular
architectures (in the product vs. in the infrastructure)?
• You have to look at standards (where do they make sense?, e.g.
DRM in music)
• You have to look for components where economies of scale might
arise (e.g. SIRF chips and maps for navigators)
• The “typical” dynamics (dominant design, innovation rates, etc.)
arises in the part (product vs. infrastructure) where you have less
modularity
POLITECNICO DI TORINO
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37
Dynamics of innovation

• Vertical integration choices are strategically important


• The degree of vertical integration will be lower if (Christensen et al., 2002)
• an open architecture / dominant design allowing the development of a value chain
has emerged (i.e. initial architectural problems have been solved)
• the market values component-level (i.e. localized) product performance instead of
performance that is determined by system integration
• Architectural and component knowledge is partitioned among assemblers and
suppliers with some overlap. Overlap will decrease (Lee and Veloso 2008).
• as the paradigm progresses along the s-curve (at first both actors focus more on
architectural innovation)
• if modular architectures arise
• as long as the trajectory does not encounter significant uncertainties (market or
technological)
Assembler Supplier
High
Architectural knowledge Component knowledge
overlap
Architectural knowledge Component knowledge Little
overlap
POLITECNICO DI TORINO
Department of Management and Production Engineering 75

Dynamics of innovation

• The rise of a dominant design requires interplay between «Ease» is not


product and process innovation necessarily in
absolute terms...
• Abernathy and Utterback’s model assumes that, once the dominant could be in «local»
design has been established in the product, process innovation will terms (w.r.t.
take care of ensuring manufacturability and economies of scale (for industry,
continuous products and services, product innovation will allow a geography,e tc.)
fuller economic exploitation of the infrastructure)
• However, a candidate dominant design could fail prematurely if this e.g., integrated
does not happen, i.e., if the product dominant design is not easy to photonics chips,
many
manufacture (for continuous products and services, if it is not easy
contemporary
to generate new products) battery designs
• The transition phase can therefore take a long time and exhibit a
sequence of «false» dominant designs, and the final will be the one e.g., proprietary
for which the second stream of innovation (process or product) network
becomes feasible protocols before
TCP/IP

POLITECNICO DI TORINO
Department of Management and Production Engineering 76

38
Dynamics of innovation

• Industry dynamics in the incubation period is critical, and 'entry' must consider both the incubation
and the commercialization phases (Moeen and Agarwal, 2017, Agarwal et al, 2017, Moeen 2017)

Incubation
Trigger Commercialization
(pure investment)

Trigger event Key actors Technological Market actions


actions
Scientific Academia and Developing core and Finding the 'right'
discovery (e.g., research complementary applications
GMOs) Firms technologies in Building identity "Hype"
absolute terms and for and acceptance
the 'right' applications Incubation implies
Unmet user User inventors, Moving from prototype Finetuning user • A trigger event
needs (e.g., entrepreneurs, to product requirements • Heterogeneous actors
dishwashers) communities
• Knowledge sharing
Mission- Government Moving from prototype Moving from • Iterative activities aimed at
oriented 'grand agencies, to product 'generic' to reducing technology and market
challenges' nonprofits, Developing core and 'commercial' need
(e.g., POLITECNICO
academiaDIand complementary Finding new
uncertainty (technology as 'enabler'
TORINO or 'affordance', Gibson 77)
antibiotics) research,
Department firms technologies
of Management applications
and Production Engineering

Dynamics of innovation

• Industry dynamics in the incubation period is critical, and 'entry' must consider both the incubation
and the commercialization phases (Moeen and Agarwal, 2017, Agarwal et al, 2017, Moeen 2017)

Incubation
Trigger Commercialization
(pure investment)

Trigger event Key actors Technological Market actions


actions
Scientific Academia and Developing core and Finding the 'right'
discovery (e.g., research complementary applications
GMOs) Firms technologies in Building identity
absolute terms and for and acceptance
the 'right' applications
Unmet user User inventors, Moving from prototype Finetuning user
needs (e.g., entrepreneurs, to product requirements
dishwashers) communities
Mission- Government Moving from prototype Moving from
oriented 'grand agencies, to product 'generic' to
challenges' nonprofits, Developing core and 'commercial' need
(e.g., POLITECNICO
academiaDIand complementary
TORINO Finding new
antibiotics) research,
Department firms technologies
of Management applications
and Production Engineering

39
Dynamics of innovation

• Industry dynamics in the incubation period is critical, and 'entry' must consider both the incubation
and the commercialization phases (Moeen and Agarwal, 2017, Agarwal et al, 2017, Moeen 2017)

Incubation
Trigger Commercialization
(pure investment)

Three types of firms enter and exit


• Incumbents from closest industry,
• De alio (diversifying) entrants,
• De novo (startup) entrants
Different knowledge bases are brought to the industry
• Obsolescing
• Emerging
• Complementary
Firms operate a flurry of activity (competition, alliances, acquisitions) leading to
• Knowledge and technology transfer
• A first shakeout
• A variety of modes
POLITECNICO for capturing value (i.e., getting to commercialization, being acquired, licensing)
DI TORINO
Department of Management and Production Engineering

Dynamics of innovation

• Innovations are always related (Pistorius, Utterback, 1997)


• You don’t only have competition
• Relationships may change in time

Effect of new technology on growth Positive Negative


rate of extant technology (complementary goods, or (substitution effect)
Effect of old technology on growth stimulus to incumbents)
rate of new technology
Positive (complementary goods, or Symbiosis Prey – Predator
exploitation of extant market) es. PC games vs. CD USB pens vs. ZIP
players on PCs drives
Negative (reactions by incumbents, Predator-Prey Competition
inertia due to complementary assets) Ceramic materials vs. Typewriters and
POLITECNICO DI TORINO special alloys PCs
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40
Dynamics of innovation

• It is possible to link innovation content at (upstream) component level and (downstream)


complementary good level (Adner and Kapoor, 2010)... look at Project Better Place
• Challenges have to be managed both upstream and downstream... and this is tough
• With multiple challenges, probabilities are multiplied, and lead times may not be in parallel!
• Impact on “first-mover advantage” Also depends on
degree of modularity
• greater if challenges are at component level (creates room for improvement)
• lower if challenges are at complementor level (slower demand reduces progress on the learning
curve and buys time for imitators)
Also depends on whether complementary
• Impact on vertical integration choices goods are proprietary or not
• At the beginning of the s-curve vertical integration should be focused on solving technological
uncertainty AND behavioral ambiguity in the market
• Later on, it should mostly be focused on behavioral ambiguity

External complement challenges Easy Tough


External component challenges
Easy Only internal innovation Internal challenges + constraint
challenges on demand
Tough Internal challenges + Internal challenges + constraints
POLITECNICO DI TORINO
constraint on production
Department of Management and Production Engineering
on demand and production
81

Traditional and reverse innovation

• Traditionally, innovations diffused in developed countries and then «trickled down» to


emerging countries
• In «reverse innovation» (Govindarajan and Ramamurti, 2011), innovation diffuses in
developing countries and «trickles up» to developed countries
• 5 main reasons

Features of the emerging country innovation Determinants of diffusion in the developed country
Low cost Appeals to poor people in rich countries
Low cost Expands demand in rich countries
Particular features (e.g. ruggedness, portability) Creates new market segments in rich countries
«Good enough» product, with room for Mainstream customers adopt improved versions of the
improvement product
Incorporation of radically innovative technology The emerging country leads the dominant design-
(leapfrogging) thanks to large demand, absence of formation process, and the innovation quickly enjoys
legacy technology, low regulatory barriers economies of scale

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41
Dynamics of innovation

• Doblin and Keeley – innovation categories, types and landscapes


• As with Abernathy and Utterback, innovation follows “waves”… product, process,
followed by the rest
• if you miss them out, you risk disruption even within the same s-curve (Netflix
vs. Blockbuster)
• need to keep constant watch on the business model, change management
team, recruit talent, with a long-term (5-7 years) view (Nunes and Breene 2011)

Corporate competencies will


become obsolete before it
shows on P&L statement

You can have incremental or


radical innovations in each
of these categories!
The more categories are
POLITECNICO DI TORINO
affected, the more radical is
Department of Management and Production Engineering the overall innovation 83

Dynamics of innovation Brands as easy-to-recognize


Strategic integration choices and strong tradeoffs when “tradeoff solutions” in complex
dealing with platforms (Boudreau 2010): products
- “Completely open” vs. “open but with controls” vs. The innovation content has to
“closed” systems be coherent to the brand
- “adoption vs. appropriability” tradeoff When dealing with radically
innovative products should firms
- “investment vs. appropriability” tradeoff (for all actors!)
use new brands or extend old
- “diversity vs. control” tradeoff ones? (Klink and Athaide 2010)

Includes “design-
driven“ innovations,
which affect the
aesthetics of the
product and the
meanings attached
Includes
Includes
user-driven
user-driven
co-creation
co- to it (e.g. B&O as
through
creation
“kits”, through
“communities”,
kits furniture, Swatch as
POLITECNICO
passive
and/or
contribution,DIetc.
communities TORINO fashion item, etc.)
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Type The service complements product purchase The service substitutes
Dynamics of innovation product purchase
Smoothing Adapting Substituting
Definition The service does not significantly The service significantly X as a service (e.g., SaaS, «pay
alter product functionality expands or alters product by the hour», etc.)
(e.g., insurance, technical support, functionality (e.g., customization
EV charging stations) of «solutions», consulting)
Role in fluid phase Provide services needed to solve Educate the market to introduce
«chicken and egg problems» the innovation Reduce risks of ownership
Role in transitional Capture value from the «profit - -
phase pool»

Role in specific Capture value Capture value, educate the Capture value, stimulate
phase market to new sophisticated replacements
functions

Need to (Cusumano and Suarez, 2015)


• classify «servitization» strategies
• locate them on the s-curve

POLITECNICO DI TORINO
Department of Management and Production Engineering 85

Dynamics of innovation

• Osterwalder’s business model representation (www.businessmodelalchemist.com)

Key activities Customer


relationships
The activities that Customer
must be done to The relationships
Key partners segments
make the business the firm establishes
The network of Value proposition with specific CSs The groups of
suppliers and model work
The bundle of people or
partners that products and organizations
make the services that create the firm aims to
business model Key resources value for a specific Channels reach and
work The assets required CS How the firm serve
to make the communicates with
Infrastructure business model and reaches its CSs Customer
management work Product to deliver a VP interface

Cost structure
The costs incurred to Revenue streams
operate the business The cash the firm generates
POLITECNICOmodel
DI TORINO from each CS
Financial aspects
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Dominant designs and standards

• Standard:
“set of specifications that provide value to the product because
of its conformity to the standard”
• Standards can be dominant designs or not

Dominant design Non dominant design


Standard GSM, BlueRay Layout of pedals in
cars
Non Monocoque --
standard automobiles

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Department of Management and Production Engineering 87

Lee et al. (2016) show that the


Dominant designs and standards effect is significant if the underlying
social network exhibits relatively
low degrees of separation

• Standards can provide value through


• Network externalities (e.g., fax, e-mail, data
exchange formats)
• Complementarity with other goods (e.g. HW &
SW, VCRs & content)
• Specific learning (e.g., human interfaces)
• Economies of scale (e.g., screws, threads)
• Modularity (es. BUS architectures on PCs)

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Dominant designs and standards

Standards can arise


• De facto (standards war monopoly)
• By agreement
• De iure Standards war dilemma
• Agreeing («let’s make sure there is one big
Standards wars can be socially cake and then we can compete for a
undesirable slice»)
vs.
• Proprietary standards lead to
•fighting («let’s try to get 100% of the cake,
monopolies
with the risk of getting nothing... and a
• Adoption is delayed possibly a smaller cake)”
• Risk of being locked in a low- • The decision is influenced by the number
quality standard which just of competitors
happened to come out sooner • Technical tradeoffs that have different
appeal to the parties might make
Fighting a standardsDIwar
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TORINO agreement impossible
specific strategiesof Management and Production Engineering
Department 89

Dominant designs and standards

• Products that are (or may be) associated to standards have peculiar
competitive factors
• Achieving critical mass as fast as possible
• Accelerating entry
• Spending lots of money on advertising
• Penetration pricing (Microsoft, freemium services)
• Boosting imitative / reciprocal diffusion effects (smartphone app stores)
• Licencing to competitors (Intel, Open Source)
• Gaining support from players that are closer to customers (Sony and
Blockbuster)
• Arising expectations (Microsoft with handheld PCs and smartphones)
• Declaring irreversible commitments (Sony with Blue Ray)
• Supporting the availability of complementary goods (Microsoft with applications)
• Exploiting the lock-in phenomenon
• Supporting “competitive migrations” (Microsoft Excel)

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Innovation and industry

• Innovation has long-term impact on industries and markets


• De-segmentation (e.g., IT and telecoms) or segmentation (e.g.,
aircraft)
• Globalization and concentration (e.g., automotive)
• Vertical integration (e.g., monocoque cars) or disintegration (e.g.,
modular cars)
• Outsourcing of R&D (e.g., automotive)
• New industries (e.g., photocopying equipment)
• Decline of industries (e.g., SLRs)
Automotive platform
• Rebirth of industries (e.g., autofocus SLRs) R&D cost ≈ 1 G€,
• Substitution of industires (e.g., home video) production run ≈ 0.5-1 M units,
contribution margin ≈ 20%
Airbus 380
R&D cost = 10 16 G€
Breakeven 250 420 units
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Department of Management and Production Engineering 91

Technological forecasting

• Technological forecasting methods


• “the only certain element of a forecast is
1° 2° 3° round
that is will be proved wrong”
• Qualitative methods (e.g., Delphi) vs. quantitative methods
(statistically-based)

• Scenario analysis vs. forecasting

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Technological forecasting

• Forecasting models I – constant progress

• Forecasting models II – progress is proportional to the performance


reached by technology

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Department of Management and Production Engineering 93

Technological forecasting

• Forecasting models III - progress is proportional to the performance


reached by technology, plus a quadratic saturation effect

Autoregressive formulation
(multicollinear!!!)
Limit of
technology L

Requires an
independent
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estimate
Department of Management and Production of L
Engineering 94

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