management of technological innovation -...

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MANAGEMENT OF TECHNOLOGICAL INNOVATION

Professor CHEN Song (陈松）,Ph.D. School of Economics & Management,

Tongji University [email protected]

Professor WANG Qing，Ph.D.Warwick Business School,

University of [email protected]

April 2013

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CONTENTThe Process of Technological Innovation;Sources of Innovation and Types of Innovation;The Changing landscape of Innovation in China;Linking Marketing and Innovation; New Product Entry Timing;Technology Strategy Formulation;New Product Development Process and Project Management;Innovation Organization and R&D team Management;Innovation Protection and Technology Transfer as a Competition Strategy;Innovation in Chinese Companies

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COURSE MATERIALS

Required Textbook– Strategic Management of Technological

Innovation，McGraw Hill (or TsinghuaUniversity Press)，2010.

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GRADING POLICY

Participation, Discussion and Presentation in Class --- 15%

Group Work --- 20%

Assignment --- 25%

Exams --- 40% (including Team Project 15%)

Chapter 1

Introduction

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Importance of Technological InnovationTechnological innovation now the single most important driver of competitive success in many industries– Many firms earn over one-third of sales on products

developed within last five years– Product innovations help firms protect margins by

offering new, differentiated features.– Process innovations help make manufacturing more

efficient.

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Importance of Technological Innovation–Advances in information technology have

enabled faster innovation• CAD/CAM systems enable rapid design and shorter

production runs

–Importance of innovation and advances in information technology have lead to: • Shorter product lifecycles (more rapid product obsolescence)• More rapid new product introductions• Greater market segmentation

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Impact on Society

Innovation enables a wider range of goods and services to be delivered to people worldwide– More efficient food production, improved medical

technologies, better transportation,etc.– Increases Gross Domestic Product by making labor and

capital more effective and efficient

– However, may result in negative externalities,• E.g., pollution, erosion, antibiotic-resistant bacteria

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Impact on Society

The majority of R&D funds spent in OECD countries come from industry, and percentage has been increasing.

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Innovation by Industry: The Importance of Strategy

Successful innovation requires carefully crafted strategies and implementation processes.Innovation funnel– Most innovative ideas do not become successful new products.

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How long does new product development take?–Study by Abbie Griffin of 116 firms found:

• Length of development cycle varies with innovativeness of project

• Incremental improvements took 8.6 months from concept to market introduction

• Next generation improvements took 22 months.• New-to-the-firm product lines took 36 months• New-to-the-world products took 53 months.• Half of the companies had reduced their cycle time by an

average of 33% over last five years.

Research Brief

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Discussion Questions

1. Why is innovation so important for firms to compete in many industries?

2. What are some of the advantages of technological innovation? Disadvantages?

3. Why do you think so many innovation projects fail to generate an economic return?

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Industry Dynamics of Technological Innovation

The sources from which innovation arises, including the role of individuals, organizations, government institutions, and networks,Types of innovations, and common industry patterns of technological evolution and diffusion, The factors that determine whether industries experience pressure to select a dominant design, and what drives which technologies dominate others, Effects of timing of entry, and how firms can identify (and manage) their entry options.

Chapter 2

SOURCES OF INNOVATION

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Overview

Innovation can arise from many different sources and the linkages between them.

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Creativity

Creativity: The ability to produce work that is useful and novel.–Individual creativity is a function of:

• Intellectual abilities (e.g., ability to articulate ideas)• Knowledge (e.g., understand field, but not wed to

paradigms)• Style of thinking (e.g., choose to think in novel ways)

• Personality (e.g., confidence in own capabilities)

• Motivation (e.g., rely on intrinsic motivation)

• Environment (e.g., support and rewards for creative ideas)

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Creativity

–Organizational Creativity is a function of:• Creativity of individuals within the organization• Social processes and contextual factors that shape

how those individuals interact and behave

–Methods of encouraging/tapping organizational creativity:• Idea collection systems (e.g., suggestion box)• Creativity training programs• Culture that encourages (but doesn’t directly pay

for) creativity.

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Transforming Creativity into Innovation

Innovation is the implementation of creative ideas into some new device or process.Requires combining creativity with resources and expertise.Inventors

– One ten-year study found that inventors typically:1. Have mastered the basic tools and operations of the field in which

they invent, but they will have not specialized solely on that field.2. Are curious, and more interested in problems than solutions.3. Question the assumptions made in previous work in the field. 4. Often have the sense that all knowledge is unified. They will seek

global solutions rather than local solutions, and will be generalists by nature

– Such individuals may develop many new devices or processes but commercialize few.

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Case: Segway Human Transporter

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Dean Kamen–The Segway HT: A self-balancing,

two-wheeled scooter.–Invented by Dean Kamen

• Described as tireless and eclectic• Kamen held more than 150 U.S. and foreign

patents• Has received numerous awards and

honorary degrees• Never graduated from college• To Kamen, the solution was not to come up

with a new answer to a known problem, but to instead reformulate the problem


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1. What factors do you think enable Dean Kamen and his company, DEKA research, to come up with novel innovations such as Segway?

2. What are the advantages and disadvantages of Kamen’sphilosophy of “kissing frogs”?

3. What role did external organizations play in helping Kamen translate his creative inspiration for the Segway into a commercial innovation?


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Innovation is the implementation of creative ideas into some new device or process.Requires combining creativity with resources and expertise.Inventors

– One ten-year study found that inventors typically:1. Have mastered the basic tools and operations of the field in which

they invent, but they will have not specialized solely on that field.2. Are curious, and more interested in problems than solutions.3. Question the assumptions made in previous work in the field. 4. Often have the sense that all knowledge is unified. They will seek

global solutions rather than local solutions, and will be generalists by nature

– Such individuals may develop many new devices or processes but commercialize few.

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Innovation by Users–Users have a deep understanding of their own

needs, and motivation to fulfill them.–E.g., Laser sailboat developed by Olympic

sailors

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The Birth of the Snowboarding Industry– First snowboards not developed by sports equipment

manufacturers; rather they were developed by individuals seeking new ways of gliding over snow• Tom Sims made his first “ski board” in wood shop class.• Sherman Poppen made a “snurfer” as a toy for his daughter

– later held “snurfing” contests• Jake Burton added rubber straps to snurfer to act as

bindings– By 2001 there were approximately 5.3 million

snowboarders in the United States

Theory In Action

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Research and Development by Firms–Research refers to both basic and applied

research.• Basic research aims at increasing understanding of a topic or

field without an immediate commercial application in mind.• Applied research aims at increasing understanding of a topic

or field to meet a specific need.

–Development refers to activities that apply knowledge to produce useful devices, materials, or processes.

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Research and Development by Firms– Most firms consider in-house R&D to be their most

important source of innovation.

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Research and Development by Firms–Science Push approaches suggest that

innovation proceeds linearly:Scientific discovery invention manufacturing marketing

– Demand Pull approaches argued that innovation originates with unmet customer need:Customer suggestions invention manufacturing

– Most current research argues that innovation is not so simple, and may originate from a variety of sources and follow a variety of paths.

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Firm Linkages with Customers, Suppliers, Competitors, and Complementors– Most frequent collaborations are between firm and their

customers, suppliers, and local universities.

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Firm Linkages with Customers, Suppliers, Competitors, and Complementors–External versus Internal Sourcing of

Innovation• External and internal sources are complements

– Firms with in-house R&D also heaviest users of external collaboration networks

– In-house R&D may help firm build absorptive capacitythat enables it to better use information obtained externally.

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Universities and Government-Funded Research–Universities

• Many universities encourage research that leads to useful innovations

• Bayh-Dole Act of 1980 allows universities to collect royalties on inventions funded with taxpayer dollars– Led to rapid increase in establishment of technology-

transfer offices.• Revenues from university inventions are still very small, but

universities also contribute to innovation through publication of research results.

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Universities and Government-Funded Research– Governments invest in research through:

• Their own laboratories• Science parks and incubators• Grants for other public or private research organizations

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Private Nonprofit Organizations–Many nonprofit organizations do in-house

R&D, fund R&D by others, or both.

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Innovation in Collaborative Networks

Collaborations include (but are not limited to):– Joint ventures– Licensing and second-sourcing agreements– Research associations– Government-sponsored joint research programs– Value-added networks for technical and scientific

exchange– Informal networks

Collaborative networks are especially important in high-technology sectors where individual firms rarely possess all necessary resources and capabilities

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Technology Clusters are regional clusters of firms that have a connection to a common technology

• May work with the same suppliers, customers, or complements.

• Agglomeration Economies:– Proximity facilitates knowledge exchange.– Cluster of firms can attract other firms to area.– Supplier and distributor markets grow to service the

cluster.– Cluster of firms may make local labor pool more valuable

by giving them experience. – Cluster can lead to infrastructure improvements (e.g.,

better roads, utilities, schools, etc.)

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Likelihood of innovation activities being geographically clustered depends on:–The nature of the technology

• e.g., its underlying knowledge base or the degree to which it can be protected by patents or copyright, the degree to which its communication requires close and frequent interaction;

–Industry characteristics• e.g., degree of market concentration or stage of the industry

lifecycle, transportation costs, availability of supplier and distributor markets; and,

–The cultural context of the technology • e.g., population density of labor or customers, infrastructure

development, national differences in how technology development is funded or protected.

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–Technological spillovers occur when the benefits from the research activities of one entity spill over to other entities. • Likelihood of spillovers is a function of:

– Strength of protection mechanisms (e.g., patents, copyright, trade secrets)

– Nature of underlying knowledge base (e.g., tacit, complex)– Mobility of the labor pool

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Knowledge Brokers– Hargadon and Sutton point out that some firms (or

individuals) play a pivotal role in the innovation network – that of knowledge brokers.

– Knowledge brokers are individuals or firms that transfer information from one domain to another in which it can be usefully applied. Thomas Edison is a good example.

– By serving as a bridge between two separate groups of firms, brokers can find unique combinations of knowledge possessed by the two groups.

Research Brief

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Discussion Questions1. What are some of the advantages and disadvantages of a)

individuals as innovators, b) firms as innovators, c) universities as innovators, d) government institutions as innovators, e) nonprofit organizations as innovators?

2. What traits appear to make individuals most creative? Are these the same traits that lead to successful inventions?

3. Could firms identify people with greater capacity for creativity or inventiveness in their hiring procedures?

4. To what degree do you think the creativity of the firm is a function of the creativity of individuals, versus the structure, routines, incentives, and culture of the firm? Can you give an example of a firm that does a particularly good job at nurturing and leveraging the creativity of its individuals?

Chapter 3

TYPES AND PATTERNS OF INNOVATION

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Case: Ericsson’s Gamble on 3G Wireless

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Overview

Several dimensions are used to categorize innovations.– These dimensions help clarify how different innovations

offer different opportunities (and pose different demands) on producers, users, and regulators.

The path a technology follows through time is termed its technology trajectory. – Many consistent patterns have been observed in

technology trajectories, helping us understand how technologies improve and are diffused.

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Types of Innovation

Product versus Process Innovation– Product innovations are embodied in the outputs of an

organization – its goods or services.– Process innovations are innovations in the way an

organization conducts its business, such as in techniques of producing or marketing goods or services.

– Product innovations can enable process innovations and vice versa.– What is a product innovation for one organization might be a

process innovation for another• E.g., UPS creates a new distribution service (product innovation)

that enables its customers to distribute their goods more widely or more easily (process innovation)

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Types of Innovation

Radical versus Incremental Innovation– The radicalness of an innovation is the degree to which

it is new and different from previously existing products and processes.

– Incremental innovations may involve only a minor change from (or adjustment to) existing practices.

– The radicalness of an innovation is relative; it may change over time or with respect to different observers.• E.g., digital photography a more radical innovation for

Kodak than for Sony.

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Types of Innovation

Competence-Enhancing versus Competence-Destroying Innovation– Competence-enhancing innovations build on the firm’s

existing knowledge base• E.g., Intel’s Pentium 4 built on the technology for Pentium III.

– Competence-destroying innovations renders a firm’s existing competencies obsolete.• E.g., electronic calculators rendered Keuffel & Esser’s slide

rule expertise obsolete.– Whether an innovation is competence enhancing or competence

destroying depends on the perspective of a particular firm.

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Types of Innovation

Architectural versus Component Innovation– A component innovation (or modular innovation)

entails changes to one or more components of a product system without significantly affecting the overall design.• E.g., adding gel-filled material to a bicycle seat

– An architectural innovation entails changing the overall design of the system or the way components interact.• E.g., transition from high-wheel bicycle to safety bicycle.

– Most architectural innovations require changes in the underlying components also.

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Technology S-Curves

Both the rate of a technology’s improvement, and its rate of diffusion to the market typically follow an s-shaped curve.S-curves in Technological Improvement

Technology improves slowly at first because it is poorly understood.

Then accelerates as understanding increases.

Then tapers off as approaches limits.

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Technology S-CurvesTechnologies do not always get to reach their limits– May be displaced by new, discontinuous technology.

• A discontinuous technology fulfills a similar market need by means of an entirely new knowledge base.– E.g., switch from carbon copying to photocopying, or vinyl

records to compact discs• Technological discontinuity may initially have lower

performance than incumbent technology.– E.g., first automobiles were much slower than horse-drawn

carriages.

– Firms may be reluctant to adopt new technology because performance improvement is initially slow and costly, and they may have significant investment in incumbent technology

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Technology S-CurvesS-Curves in Technology Diffusion– Adoption is initially slow because the technology is

unfamiliar.– It accelerates as technology becomes better

understood.– Eventually market is saturated and rate of new

adoptions declines. – Technology diffusion tends to take far longer than

information diffusion.• Technology may require acquiring complex knowledge or

experience.• Technology may require complementary resources to make it

valuable (e.g., cameras not valuable without film).

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Technology S-CurvesS-Curves as a Prescriptive Tool– Managers can use data on investment and

performance of their own technologies or data on overall industry investment and technology performance to map s-curve.

– While mapping the technology’s s-curve is useful for gaining a deeper understanding of its rate of improvement or limits, its use as a prescriptive tool is limited.• True limits of technology may be unknown• Shape of s-curve can be influenced by changes in the market,

component technologies, or complementary technologies.• Firms that follow s-curve model too closely could end up

switching technologies too soon or too late.

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Technology S-Curves

S-curves of diffusion are in part a function of s-curves in technology improvement– Learning curve leads to price drops, which

accelerate diffusion

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Theory In ActionTechnology Trajectories and “Segment Zero”

– Technologies often improve faster than customer requirements demand

– This enables low-end technologies to eventually meet the needs of the mass market.

– Thus, if the low-end market is neglected, it can become a breeding ground for powerful competitors.

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Technology Cycles

Technological change tends to be cyclical:– Each new s-curve ushers in an initial period of

turbulence, followed by rapid improvement, then diminishing returns, and ultimately is displaced by a new technological discontinuity.

– Utterback and Abernathy characterized the technology cycle into two phases:• The fluid phase (when there is considerable uncertainty about

the technology and its market; firms experiment with different product designs in this phase)

• After a dominant design emerges, the specific phase begins (when firms focus on incremental improvements to the design and manufacturing efficiency).

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Technology Cycles– Anderson and Tushman also found that technological

change proceeded cyclically.• Each discontinuity inaugurates a period of turbulence and

uncertainty (era of ferment) until a dominant design is selected, ushering in an era of incremental change.

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Technology Cycles– Anderson and Tushman found that:

• A dominant design always rose to command the majority of market share unless the next discontinuity arrived too early.

• The dominant design was never in the same form as the original discontinuity, but was also not on the leading edge of technology. It bundled the features that would meet the needs of the majority of the market.

– During the era of incremental change, firms often cease to invest in learning about alternative designs and instead focus on developing competencies related to the dominant design.

– This explains in part why incumbent firms may have difficulty recognizing and reacting to a discontinuous technology.

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1. What are some of the reasons that established firms might resistthe adoption of a new technology?

2. Are well-established firms or new entrants more likely to a) develop and/or b) adopt new technologies? What are some reasons for your choice?

3. Think of an example of an innovation you have studied at work or school. How would you characterize it on the dimensions described at the beginning of the chapter?

4. What are some of the reasons that both technology improvement and technology diffusion exhibit s-shaped curves?

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The Changing Innovation Landscape in China

Professor. Song CHEN, Ph.D.School of Economics & Management

Tongji UniversityE-mail: [email protected]

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Agenda

1. China’s Position in Technology Competition------ A Rising Technology Exporter

2. Technology Catch-up in Chinese Companies------Technology Sourcing and Innovation

3. MNCs’ R&D Centers in China

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1. China’s Position in Global Technology Competition

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1. China’s Position in Global Technology Competition:A Rising Technology Exporter

In 2004, China became the world’s largest exporter of IT products (US$180 billion, vs US$149 billion for the US)

This shift has occurred entirely within the foreign invested companies

Some component manufacturing networks have shifted to China

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Foreign invested firms account for 85% of high-tech exports– WOFE (Wholly-owned foreign enterprises) account for 68%

The entire tech trade surplus is due to the activities of foreign firms

Very high proportion of firms are OEMs and ODMs from Chinese Taipei.

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1. China’s Position in Global Technology Competition:FIEs

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1.1 The Sources of Technology

China is mainly a platform for global companies and ODMs from Chinese Taipei– Foxconn Technology– With 450,000 young workers at its plant in Shenzhen, 850,000 in China

China enables firms from Chinese Taipei to enjoy economies of scale – for both production and R&D – they cannot get at home

Small startups founded by returnees from the West are competitive in software, chip design, and niche components

Management and distribution channels are key constraints –partnerships with MNCs are essential

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1.1 The Sources of Technology

Foxconn Technology

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1.2 Technology Export Potential---Huawei Technology

Huawei is a leading telecom solutions provider. Through continuous customer-centric innovation, it has established end-to-end advantages in

– Telecom Network Infrastructure, – Application & Software, – Professional Services and Devices.

With comprehensive strengths in wireline, wireless and IP technologies, Huawei has gained a leading position in the All-IP convergence age. Its products and solutions have been deployed in over 100 countries and have served 45 of the world's top 50 telecom operators, as well as one third of the world's population.

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1.2 Technology Export Potential---Huawei Technology

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Huawei’s Strategy

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R&D in Huawei

Huawei is committed to investing in R&D to create competitive products and solutions.

There are more than 51,000 employees (46% of our overall headcount) engaged in R&D and have established 20 research institutes in countries around the world including the USA, Germany, Sweden, Russia, India, and China.

Huawei have also set up over 20 joint innovation centers with top operators to transform leading technologies into a competitive edge for customers and to achieve business success.

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Patents in Huawei

As at 31 December 2010, there are 17,765 authorized patents granted for Huawei , in which 3,060 were overseas patents. Huawei holds a leading position in terms of essential LTE patent applications.

Huawei's PCT Patent Applications (Items / week)

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1.2 Technology Export Potential

IT markets will continue to be dominated by Taipei and returnee-startup firms, with final demand in US and Europe.

Domestic firms will find it difficult to compete in the IT sector.

They will more likely to specialize in mid-range machinery and industrial intermediates.

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Innovation in IT has been captured by MNCs and their Taipei-controlled supply chains.

China will find it very difficult to produce domestic equivalents to Sony and Samsung.

Niche firms founded by returnee engineers (esp. those with over 10 years overseas work experience) will be very successful at micro-innovation.

Shortage of management talents will constrain growth.

Indigenous competitive advantage is in mid-range industrial machinery and electronics.


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Chinese comparative advantage is not in high tech but in midstream industries where labor cost advantage and economies of scale matter most.

Innovation already exists in these industries, mainly through incremental process improvements.


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2. Technology Catch-up in Chinese Companies-----The Case of Huaqiang Holdings

Shenzhen Huaqiang Group is an integrative capital operation enterprise in Shenzhen

Shenzhen——the biggest Special Economic Zone (SEZ) near Hong Kong in China 1980 since China’s policy of reform and opening to the outside world proposed by former Chinese leader Deng Xiao-ping.

2.1 Introduction

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2.1 Introduction

Market Share in the World

– Laser optical pick-up --- 25%

– Micro motors---25%

– Digital AV products, developed in-house exported to Europe and America.

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2.2 The Path of Technology Catch-up

2.2.1 1979, OEMThe start-up of manufacturing capability

2.2.2 Joint Ventures with Sanyo from Japan6 joint ventures set up with Sanyo in 10 years

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2.2.2 Joint Ventures with Sanyo

In July 1984，Huangqing Sanyo Electronics Co.– Color televisions

• successfully cooperation with Sanyo for ten years• building up mutual trust• pave the way for further cooperation and joint ventures

In April 1993, Sanyo Huaqing Laser Electronics Co.– Laser pick-up and related application products

• market share 25% of global market, the biggest laser pick-up production base in the world

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In June 1995，Sanyo Huaqiang Energy Co. set up– high-capacity batteries– DVD home theater– Batteries

• lithiumion, nickel-hydrogen, nickel-cadmium rechargeable batteries are mainly supplied to large manufacturers such as Motorola, Nokia, etc.

In Sept. 1995, Huaqiang Sanyo Technology Design Co. established– to import advanced design technology for AV products design and

other product design business

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In March 1996，Guangdong Huaqing Sanyo Holding Ltd. was set up.– to manage its subsidiaries to improve the investment efficiency

In Sept.1996, Huangqing Sanyo Motors (Dongguan) Co. started– recorder motors– video recorder motors– Beeper motors– digital camera

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2.2.3 Internal R&D

Huaqing Artificial Intelligent Technology Co. in 1999– intelligent entertainment system

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Mature Tech., Manufacture Capability (OEM)Mature Tech., Manufacture Capability (OEM)

New Product Design Capability (JVs)New Product Design Capability (JVs)

Emerging product parts manufacture capability (JVs)Emerging product parts manufacture capability (JVs)

Mature Tech.,End product manufacture capability (JVs)Mature Tech.,End product manufacture capability (JVs)

R&D Capability（Internal R&D、alliances、M&A）R&D Capability（Internal R&D、alliances、M&A）

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2.3 The Modes of Technology Sourcing

Technology Purchase– OEM, pruchase of original manufacturing

Technology Alliances– JVs with Sanyo

Technology-motivated M&A– Acquired research institutes

There is a reverse sourcing paradigm in the process of technology sourcing in catching-up enterprises.

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The growing MNC R&D centers in China

The huge Chinese market, low labor costs for both high end and low end talents, improved technology and policy environment contribute to the dramatic growth.

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200

400

600

750 > 800

0

200

400

600

800

1000

End 1997 End 2000 End 2001 Feb. 2003 Jun. 2004 End 2004 Oct. 2006

No. of MNCs’ R&D Centers in China

3. MNCs’ R&D Centers in China

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Local V.S. GlobalMajor MNC China R&D centers focus on product localization or develop new product for China market while some start shifting towards global innovation

3.1 Evolution of R&D Centers in China

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Traditional System

MNC Headquarter

China R&D Center

China University &

Research Institutes

China Government and Think

Tank

Local Concerned Parties (e.g.

Supplier)

Domestic Firms and

other MNCs

MNC Headquarter

China R&D Center

IncubatorSystem

3.2 R&D Structure Evolution

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Summary

China’s indigenous innovation capability is still limited though it enjoys high-tech trade surplus. China’s manufacture capability, as a part of innovation capabilities is strong, however, the indigenous manufacturing businesses are weak.Joint ventures (alliances) are a prime model for technology catch-up in Chinese companies.The path of technology capability is reverse to the technology evolution and innovation in the developed countries. Private businesses, such as Huawei Technology, are playing an increasing role in innovation.The spillover effect of MNCs’ R&D centers on China’s technology capability growth currently is negative.

Chapter 4

STANDARDS BATTLES AND DESIGN DOMINANCE

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In 1980, Microsoft didn’t even have a personal computer (PC) operating system – the dominant operating system was CP/M.

However, in IBM’s rush to bring a PC to market, they turned to Microsoft for an operating system and Microsoft produced a cloneof CP/M called “MS DOS.”

The success of the IBM PCs (and clones of IBM PCs) resulted in the rapid spread of MS DOS, and an even more rapid proliferation of software applications designed to run on MS DOS. Microsoft’s Windows was later bundled with (and eventually replaced) MS DOS.

Had Gary Kildall signed with IBM, or had other companies not been able to clone the IBM PC, the software industry might look very different today!

The Rise of Microsoft

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Discussion Questions:1. What factors led to Microsoft's emergence as the

dominant personal computer operating system provider? Is Microsoft's dominance due to luck, skill, or some combination of both?

2. How might the computing industry look different if Gary Kildall had signed with IBM?

3. Does having a dominant standard in operating systems benefit or hurt consumers? Does it benefit or hurt computer hardware producers?

The Rise of Microsoft

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Overview

Many industries experience strong pressure to select a single (or few) dominant design(s).

There are multiple dimensions shaping which technology rises to the position of the dominant design.

Firm strategies can influence several of these dimensions, enhancing the likelihood of their technologies rising to dominance.

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Why Dominant Designs Are Selected

Increasing returns to adoption– When a technology becomes more valuable the more it is

adopted. Two primary sources are learning effects and network externalities.

– The Learning Curve: As a technology is used, producers learn to make it more efficient and effective.

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–Prior Learning and Absorptive Capacity• A firm’s prior experience influences its ability to

recognize and utilize new information.– Use of a particular technology builds knowledge base

about that technology.– The knowledge base helps firms use and improve the

technologySuggests that technologies adopted earlier than others are likely to become better developed, making it difficult for other technologies to catch up.

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–Network Externalities• In markets with network externalities, the benefit

from using a good increases with the number of other users of the same good.

• Network externalities are common in industries that are physically networked– E.g., railroads, telecommunications

• Network externalities also arise when compatibility or complementary goods are important– E.g., Many people choose to use Windows in order to

maximize the number of people their files are compatible with, and the range of software applications they can use.

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A technology with a large installed base attracts developers of complementary goods; a technology with a wide range of complementary goods attracts users, increasing the installed base. A self-reinforcing cycle ensues:

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A Standards Battles in Digital Audio Formats– In 1996, record companies and electronics companies joined

together to form the DVD Audio Consortium to create a new high-fidelity audio format.

– In 1999, Sony and Philips unveiled their own high-fidelity audio format, Super Audio CD, setting the stage for a standards battle similar to the VHS versus Beta battle in video recorders.

– Fearing a format war that would select one standard as dominant (and one as failed), many manufacturers decided to bear the extra cost of producing “Universal players” that would support both formats.

– Neither format has been extremely successful, and popularity of MP3 format may further dampen demand.

Theory In Action

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Government Regulation– Sometimes the consumer welfare benefits of having a

single dominant design prompts government organizations to intervene, imposing a standard.• E.g., the NTSC color standard in television broadcasting in

the U.S.; the general standard for mobile communications (GSM) in the European Union.

The Result: Winner-Take-All Markets– Natural monopolies

• Firms supporting winning technologies earn huge rewards; others may be locked out.

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– Increasing returns indicate that technology trajectories are characterized by path dependency:• End results depend greatly on the events that took place

leading up to the outcome.

– A dominant design can have far-reaching influence; it shapes future technological inquiry in the area.

– Winner-take-all markets can have very different competitive dynamics than other markets.• Technologically superior products do not always win.• Such markets require different firm strategies for success

than markets with less pressure for a single dominant design.

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Multiple Dimensions of Value

In many increasing returns industries, the value of a technology is strongly influenced by both:

– Technology’s Standalone Value– Network Externality Value

–A Technology’s Stand-alone Value• Includes such factors as:

– The functions the technology enables customers to perform

– Its aesthetic qualities– Its ease of use, etc.

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Multiple Dimensions of Value• Kim and Mauborgne developed a “Buyer Utility Map” that is useful

for identifying elements of a technology’s stand-alone value:

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Multiple Dimensions of Value–Network Externality Value

• Includes the value created by:– The size of the technology’s installed base– The availability of complementary goods

• A new technology that has significantly more standalone functionality than the incumbent technology may offer less overall value because it has a smaller installed base or poor availability of complementary goods.– E.g., NeXT Computers were extremely advanced

technologically, but could not compete with the installed base value and complementary good value of Windows-based personal computers.

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• To successfully overthrow an existing dominant technology, new technology often must either offer:– Dramatic technological improvement (e.g., in videogame

consoles, it has taken 3X performance of incumbent)– Compatibility with existing installed base and complements

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– Subjective information (perceptions and expectations) can matter as much as objective information (actual numbers)

– Value attributed to each dimension may be disproportional

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Competing for Design Dominance in Markets with Network Externalities– We can graph the value a technology offers in both standalone

value and network externality value:

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– We can compare the graphs of two competing technologies, and identify cumulative market share levels (installed base) that determine which technology yields more value.

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– When customer requirements for network externality value are satiated at lower levels of market share, more than one dominant design may thrive.

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Are Winner-Take-All MarketsGood for Consumers?

– Economics emphasizes the benefits of competition.

– However, network externalities suggest users sometimes get more value when one technology dominates.

– Should the government intervene when network externalities create a natural monopoly?

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Are Winner-Take-All MarketsGood for Consumers?

– Network externality benefits to customers rise with cumulative market share

– Potential for monopoly costs to customers (e.g., price gouging, restricted product variety, etc.) also rise with cumulative market share.

Curve shapes are different; Network externality benefits likely to grow logistically, while potential monopoly costs likely to grow exponentially.

Where monopoly costs exceed network externality benefits, intervention may be warranted. Optimal market share is at point where lines cross.

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1. What are some of the sources of increasing returns to adoption?

2. What are some examples of industries not mentioned in the chapter that demonstrate increasing returns to adoption?

3. What are some of the ways a firm can try to increase the overall value of its technology, and its likelihood of becoming the dominant design?

4. What determines whether an industry is likely to have one or a few dominant designs?

5. Are dominant designs good for consumers? Competitors? Complementors? Suppliers?

Chapter 5

TIMING OF ENTRY

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From 1990-1993, a flurry of companies began developing PDAsand analysts predicted millions would be sold by 2004.However, market confusion and under-developed enabling technologies slowed PDA adoption. Many PDA companies ran out of money by 1994.The surviving companies included those that specialized in industrial devices, and Palm Computing, which had entered relatively late and produced a streamlined PDA.By 2003, another storm was on the horizon for the PDA industry: the arrival of smartphones, and much larger competitors such as Nokia, Ericsson, and Samsung.By 2006, over 13 million smartphones had been shipped, and PDA sales had virtually ground to a halt.

The Personal Digital Assistant Industry

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Discussion Questions:1. Why did most of the early PDA companies fail, even

if they had innovative and sophisticated product designs?

2. Is there anything early PDA companies could have done differently in order to survive?

3. Why was Palm able to be successful where so many others had failed?

4. How did the emergence of smartphones change the competitive landscape?

The Personal Digital Assistant Industry

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Overview

Increasing returns suggests that timing of entry can be very important.There are a number of advantages and disadvantages to being a first mover, early follower or late entrant. These categories are defined as follows:– First movers are the first entrants to sell in a new product

or service category (“pioneers”)– Early followers are early to market but not first.– Late entrants do not enter the market until the product

begins to penetrate the mass market or later.

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First-Mover Advantages and Disadvantages

Being a first mover can confer the advantages of:– Brand loyalty and technological leadership– Preemption of scarce assets– Exploiting buyer switching costs– Reaping increasing returns advantages.

However, first movers often bear disadvantages also:– High research and development expenses– Undeveloped supply and distribution channels– Immature enabling technologies and complements– Uncertainty of customer requirements

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First-Mover Advantages and Disadvantages

– The market often perceives first movers as having advantages because it has misperceived who was first.

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Obstacles to the Hydrogen Economy– Hydrogen offers an inexhaustible and

environmentally fuel source that could be used to power automobiles and the electrical grid that serves homes and businesses.

– However, several serious obstacles stood in the way of utilizing hydrogen for energy:• Hydrogen vehicles would require a new fueling infrastructure.• Isolating hydrogen for energy in an environmentally-friendly way

required a major shift to windmills or solar energy which were not considered mature technologies.

• Implementing hydrogen as a primary energy source required the cooperation of numerous stakeholders, including government, automakers, oil (or other energy) companies, etc.

Theory In Action

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Factors Influencing Optimal Timing of Entry1. How certain are customer preferences?

• If customer needs are well understood, it is more feasible to enter the market earlier.

2. How much improvement does the innovation provide over previous solutions?

• An innovation that offers a dramatic improvement over previous generations will accrue more rapid customer acceptance.

3. Does the innovation require enabling technologies, and are these technologies sufficiently mature?

• If the innovation requires enabling technologies (such as long-lasting batteries for cell phones), the maturity of these technologies will influence optimal timing of entry.

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Factors Influencing Optimal Timing of Entry4. Do complementary goods influence the value of the

innovation, and are they sufficiently available?• Not all innovations require complementary goods, but for

those that do (e.g., games for video consoles), availability of complements will influence customer acceptance.

5. How high is the threat of competitive entry?• If there are significant entry barriers, the may be less need

to rush to market to build increasing returns ahead of others.

6. Are there increasing returns to adoption?• If so, allowing competitors to get a head start can be very

risky.

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Factors Influencing Optimal Timing of Entry7. Can the firm withstand early losses?

• The first mover bears the bulk of R&D expenses and may endure a significant period without revenues; the earlier a firm enters, the more capital resources it may need.

8. Does the firm have resources to accelerate market acceptance?

• Firms with significant capital resources can invest in aggressive marketing and supplier and distributor development, increasing the rate of early adoption.

9. Is the firm’s reputation likely to reduce the uncertainty of customers, suppliers, and distributors?

• Innovations from well-respected firms may be adopted more rapidly, enabling earlier successful entry.

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Whether and When to Enter?– Will Mitchell studied 30 years of data on whether and

when an incumbent in one subfield of the medical diagnostic imaging industry would enter another subfield. He found:• If only one firm can produce an inimitable good, it can enter if and

when it wants. If several firms could produce a good that will subsequently be inimitable, they race to capture the market.

• If good is highly imitable, firms prefer to wait while others invest in developing the market.

• Firms were more likely to enter if they had specialized assets that would be useful in the new subfield or if their current productswere threatened by the new subfield.

• Firms entered earlier when their core products were threatened and there were several potential rivals.

Research Brief

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Thank You！Q & A

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