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Strategic Management of Technological Innovation

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Strategic Management of Technological Innovation Sixth Edition

Melissa A. Schilling New York University

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STRATEGIC MANAGEMENT OF TECHNOLOGICAL INNOVATION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

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ISBN 978-1-260-56579-9 MHID 1-260-56579-3

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About the Author Melissa A. Schilling, Ph.D. Melissa Schilling is the John Herzog family professor of management and organiza- tions at New York University’s Stern School of Business. Professor Schilling teaches courses in strategic management, corporate strategy and technology, and innova- tion management. Before joining NYU, she was an Assistant Professor at Boston University (1997–2001), and has also served as a Visiting Professor at INSEAD and the Bren School of Environmental Science & Management at the University of California at Santa Barbara. She has also taught strategy and innovation courses at Siemens Corporation, IBM, the Kauffman Foundation Entrepreneurship Fellows program, Sogang University in Korea, and the Alta Scuola Polytecnica, a joint institu- tion of Politecnico di Milano and Politecnico di Torino.

Professor Schilling’s research focuses on technological innovation and knowl- edge creation. She has studied how technology shocks influence collaboration activ- ity and innovation outcomes, how firms fight technology standards battles, and how firms utilize collaboration, protection, and timing of entry strategies. She also stud- ies how product designs and organizational structures migrate toward or away from modularity. Her most recent work focuses on knowledge creation, including how breadth of knowledge and search influences insight and learning, and how the struc- ture of knowledge networks influences their overall capacity for knowledge creation. Her research in innovation and strategy has appeared in the leading academic journals such as Academy of Management Journal, Academy of Management Review, Man- agement Science, Organization Science, Strategic Management Journal, and Journal of Economics and Management Strategy and Research Policy. She also sits on the edi- torial review boards of Academy of Management Journal, Academy of Management Discoveries, Organization Science, Strategy Science, and Strategic Organization. She is the author of Quirky: The Remarkable Story of the Traits, Foibles, and Genius of Breakthrough Innovators Who Changed the World, and she is coauthor of Strategic Management: An Integrated Approach. Professor Schilling won an NSF CAREER award in 2003, and Boston University’s Broderick Prize for research in 2000.

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Preface Innovation is a beautiful thing. It is a force with both aesthetic and pragmatic appeal: It unleashes our creative spirit, opening our minds to hitherto undreamed of possibili- ties, while accelerating economic growth and providing advances in such crucial human endeavors as medicine, agriculture, and education. For industrial organizations, the pri- mary engines of innovation in the Western world, innovation provides both exceptional opportunities and steep challenges. While innovation is a powerful means of competitive differentiation, enabling firms to penetrate new markets and achieve higher margins, it is also a competitive race that must be run with speed, skill, and precision. It is not enough for a firm to be innovative—to be successful it must innovate better than its competitors.

As scholars and managers have raced to better understand innovation, a wide range of work on the topic has emerged and flourished in disciplines such as strategic man- agement, organization theory, economics, marketing, engineering, and sociology. This work has generated many insights about how innovation affects the competitive dynamics of markets, how firms can strategically manage innovation, and how firms can implement their innovation strategies to maximize their likelihood of success. A great benefit of the dispersion of this literature across such diverse domains of study is that many innovation topics have been examined from different angles. However, this diversity also can pose integration challenges to both instructors and students. This book seeks to integrate this wide body of work into a single coherent strategic framework, attempting to provide coverage that is rigorous, inclusive, and accessible.

Organization of the Book The subject of innovation management is approached here as a strategic process. The outline of the book is designed to mirror the strategic management process used in most strategy textbooks, progressing from assessing the competitive dynamics of the situation, to strategy formulation, and then to strategy implementation. The first part of the book covers the foundations and implications of the dynamics of innovation, helping managers and future managers better interpret their technological environ- ments and identify meaningful trends. The second part of the book begins the pro- cess of crafting the firm’s strategic direction and formulating its innovation strategy, including project selection, collaboration strategies, and strategies for protecting the firm’s property rights. The third part of the book covers the process of implementing innovation, including the implications of organization structure on innovation, the management of new product development processes, the construction and manage- ment of new product development teams, and crafting the firm’s deployment strat- egy. While the book emphasizes practical applications and examples, it also provides systematic coverage of the existing research and footnotes to guide further reading.

Complete Coverage for Both Business and Engineering Students This book is designed to be a primary text for courses in the strategic management of innovation and new product development. Such courses are frequently taught in both

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business and engineering programs; thus, this book has been written with the needs of business and engineering students in mind. For example, Chapter Six (Defining the Organization’s Strategic Direction) provides basic strategic analysis tools with which business students may already be familiar, but which may be unfamiliar to engineer- ing students. Similarly, some of the material in Chapter Eleven (Managing the New Product Development Process) on computer-aided design or quality function deploy- ment may be review material for information system students or engineering students, while being new to management students. Though the chapters are designed to have an intuitive order to them, they are also designed to be self-standing so instructors can pick and choose from them “buffet style” if they prefer.

New for the Sixth Edition This sixth edition of the text has been comprehensively revised to ensure that the frameworks and tools are rigorous and comprehensive, the examples are fresh and exciting, and the figures and cases represent the most current information available. Some changes of particular note include:

Six New Short Cases The Rise of “Clean Meat”. The new opening case for Chapter Two is about the development of “clean meat”—meat grown from animal cells without the animal itself. Traditional meat production methods are extremely resource intensive and produce large amounts of greenhouse gases. Further, the growing demand for meat indicated an impending “meat crisis” whereby not enough meat could be produced to meet demand. “Clean meat” promised to enable meat production using a tiny fraction of the energy, water, and land used for traditional meat production. Its production would create negligible greenhouse gases, and the meat itself would have no antibiotics or steroids, alleviating some of the health concerns of tradi- tional meat consumption. Furthermore, it would dramatically reduce animal suf- fering. If successful, it would be one of the largest breakthroughs ever achieved in food production. Innovating in India: The Chotukool Project. Chapter Three opens with a case about the Chotukool, a small, inexpensive, and portable refrigerator developed in India. In rural India, as many as 90 percent of families could not afford household appliances, did not have reliable access to electricity, and had no means of refrigeration. Godrej and Boyce believed that finding a way to provide refrigeration to this segment of the population offered the promise of both a huge market and making a meaningful differ- ence in people’s quality of life. UberAIR. Chapter Five now opens with a case about UberAIR, Uber’s new service to provide air transport on demand. Uber had already become synonymous with on-demand car transport in most of the Western world; it now believed it could develop the same service for air transport using electric vertical take-off and landing aircraft (eVTOLs). There were a lot of pieces to this puzzle, however. In addition to the technology of the aircraft, the service would require an extensive network of land- ing pads, specially trained pilots (at least until autonomous eVTOLs became practi- cal), and dramatically new air traffic control regulations and infrastructure. Was the time ripe for on-demand air transport, or was UberAIR ahead of its time?

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Tesla Inc. in 2018. Chapter Six opens with a new case on Tesla, no longer just an electric vehicle company. This case reviews the rise of Tesla, and then explores the new businesses Tesla has entered, including solar panel leasing and installation (Solar City), solar roof production, and energy storage systems (e.g., Powerwall). Why did the company move into these businesses, and would synergies betweeen them help to make the company more successful?

Where Should We Focus Our Innovation Efforts? An Exercise. Chapter Seven now opens with an exercise that shows how firms can tease apart the dimensions of value driving technological progress in an industry, map the marginal returns to further investment on each dimension, and prioritize their innovation efforts. Using numerous examples, the exercise helps managers realize where the breakthrough opportunities of the future are likely to be, and where the firm may be currently overspending.

Scrums, Sprints, and Burnouts: Agile Development at Cisco Systems. Chapter Eleven opens with a case about Cisco’s adoption of the agile development method now com- monly used in software development. The case explains what agile development is, how it differs from other development methods (such as stage-gated methods), and when (and why) a firm would choose agile development versus gated development for a particular innovation.

Cases, Data, and Examples from around the World Careful attention has been paid to ensure that the text is global in its scope. The opening cases and examples feature companies from China, India, Israel, Japan, The Netherlands, Kenya, the United States, and more. Wherever possible, statistics used in the text are based on worldwide data.

More Comprehensive Coverage and Focus on Current Innovation Trends In response to reviewer suggestions, the new edition now provides an extensive discussion of modularity and platform competition, crowdsourcing and customer co-creation, agile development strategies, and more. The suggested readings for each chapter have also been updated to identify some of the more recent publications that have gained widespread attention in the topic area of each chapter. Despite these addi- tions, great effort has also been put into ensuring the book remains concise—a feature that has proven popular with both instructors and students.

Supplements The teaching package for Strategic Management of Technological Innovation is avail- able online from Connect at connect.mheducation.com and includes:

∙ An instructor’s manual with suggested class outlines, responses to discussion ques- tions, and more.

∙ Complete PowerPoint slides with lecture outlines and all major figures from the text. The slides can also be modified by the instructor to customize them to the instructor’s needs.

∙ A testbank with true/false, multiple choice, and short answer/short essay questions. ∙ A suggested list of cases to pair with chapters from the text.

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Effective, efficient studying. Connect helps you be more productive with your study time and get better grades using tools like SmartBook, which highlights key concepts and creates a personalized study plan. Connect sets you up for success, so you walk into class with confidence and walk out with better grades.

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Acknowledgments This book arose out of my research and teaching on technological innovation and new product development over the last decade; however, it has been anything but a lone endeavor. I owe much of the original inspiration of the book to Charles Hill, who helped to ignite my initial interest in innovation, guided me in my research agenda, and ultimately encouraged me to write this book. I am also very grateful to colleagues and friends such as Rajshree Agarwal, Juan Alcacer, Rick Alden, William Baumol, Bruno Braga, Gino Cattanni, Tom Davis, Sinziana Dorobantu, Gary Dushnitsky, Douglas Fulop, Raghu Garud, Deepak Hegde, Hla Lifshitz, Tammy Madsen, Rodolfo Martinez, Goncalo Pacheco D’Almeida, Joost Rietveld, Paul Shapiro, Jaspal Singh, Deepak Somaya, Bill Starbuck, Christopher Tucci, and Andy Zynga for their sug- gestions, insights, and encouragement. I am grateful to director Mike Ablassmeir and marketing manager Lisa Granger. I am also thankful to my editors, Laura Hurst Spell and Diana Murphy, who have been so supportive and made this book possible, and to the many reviewers whose suggestions have dramatically improved the book:

Joan Adams Baruch Business School (City University of New York)

Shahzad Ansari Erasmus University

Rajaram B. Baliga Wake Forest University

Sandy Becker Rutgers Business School

David Berkowitz University of Alabama in Huntsville

John Bers Vanderbilt University

Paul Bierly James Madison University

Paul Cheney University of Central Florida

Pete Dailey Marshall University

Robert DeFillippi Suffolk University

Deborah Dougherty Rutgers University

Cathy A. Enz Cornell University

Robert Finklestein University of Maryland–University College

Sandra Finklestein Clarkson University School of Business

Jeffrey L. Furman Boston University

Cheryl Gaimon Georgia Institute of Technology

Elie Geisler Illinois Institute of Technology

Sanjay Goel University of Minnesota in Duluth

Andrew Hargadon University of California, Davis

Steven Harper James Madison University

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xii Acknowledgments

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I am also very grateful to the many students of the Technological Innovation and New Product Development courses I have taught at New York University, INSEAD, Boston University, and University of California at Santa Barbara. Not only did these students read, challenge, and help improve many earlier drafts of the work, but they also contributed numerous examples that have made the text far richer than it would have otherwise been. I thank them wholeheartedly for their patience and generosity.

Melissa A. Schilling

Donald E. Hatfield Virginia Polytechnic Institute and State University

Glenn Hoetker University of Illinois

Sanjay Jain University of Wisconsin–Madison

Theodore Khoury Oregon State University

Rajiv Kohli College of William and Mary

Aija Leiponen Cornell University

Vince Lutheran University of North Carolina—Wilmington

Steve Markham North Carolina State University

Steven C. Michael University of Illinois

Michael Mino Clemson University

Robert Nash Vanderbilt University

Anthony Paoni Northwestern University

Johannes M. Pennings University of Pennsylvania

Raja Roy Tulane University

Mukesh Srivastava University of Mary Washington

Linda F. Tegarden Virginia Tech

Oya Tukel Cleveland State University

Anthony Warren The Pennsylvania State University

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Preface vi 1 Introduction 1

PART ONE Industry Dynamics of Technological Innovation 13 2 Sources of Innovation 15 3 Types and Patterns of Innovation 43 4 Standards Battles, Modularity, and Platform Competition 67 5 Timing of Entry 95

PART TWO Formulating Technological Innovation Strategy 113 6 Defining the Organization’s Strategic Direction 115 7 Choosing Innovation Projects 141 8 Collaboration Strategies 167 9 Protecting Innovation 197

PART THREE Implementing Technological Innovation Strategy 223 10 Organizing for Innovation 225 11 Managing the New Product Development Process 249 12 Managing New Product Development Teams 277 13 Crafting a Deployment Strategy 297

INDEX 327

Brief Contents

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Chapter 1 Introduction 1 The Importance of Technological Innovation 1 The Impact of Technological Innovation on Society 2 Innovation by Industry: The Importance of Strategy 4

The Innovation Funnel 4 The Strategic Management of Technological Innovation 6

Summary of Chapter 9 Discussion Questions 10 Suggested Further Reading 10 Endnotes 10

PART ONE INDUSTRY DYNAMICS OF TECHNOLOGICAL INNOVATION 13

Chapter 2 Sources of Innovation 15 The Rise of “Clean Meat” 15 Overview 19 Creativity 20

Individual Creativity 20 Organizational Creativity 22

Translating Creativity Into Innovation 24 The Inventor 24 Innovation by Users 26 Research and Development by Firms 27 Firm Linkages with Customers, Suppliers, Competitors, and Complementors 28

Universities and Government-Funded Research 30 Private Nonprofit Organizations 32

Innovation in Collaborative Networks 32 Technology Clusters 33 Technological Spillovers 36

Summary of Chapter 37 Discussion Questions 38 Suggested Further Reading 38 Endnotes 39

Chapter 3 Types and Patterns of Innovation 43 Innovating in India: The Chotukool Project 43 Overview 46 Types of Innovation 46

Product Innovation versus Process Innovation 46 Radical Innovation versus Incremental Innovation 47 Competence-Enhancing Innovation versus Competence-Destroying Innovation 48 Architectural Innovation versus Component Innovation 49 Using the Dimensions 50

Technology S-Curves 50 S-Curves in Technological Improvement 50 S-Curves in Technology Diffusion 53 S-Curves as a Prescriptive Tool 54 Limitations of S-Curve Model as a Prescriptive Tool 55

Technology Cycles 56 Summary of Chapter 62 Discussion Questions 63 Suggested Further Reading 63 Endnotes 64

Contents

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Chapter 4 Standards Battles, Modularity, and Platform Competition 67 A Battle for Dominance in Mobile Payments 67 Overview 71 Why Dominant Designs Are Selected 71

Learning Effects 72 Network Externalities 73 Government Regulation 76 The Result: Winner-Take-All Markets 76

Multiple Dimensions of Value 77 A Technology’s Stand-Alone Value 78 Network Externality Value 78 Competing for Design Dominance in Markets with Network Externalities 83

Modularity and Platform Competition 87 Modularity 87 Platform Ecosystems 89

Summary of Chapter 91 Discussion Questions 92 Suggested Further Reading 92 Endnotes 93

Chapter 5 Timing of Entry 95 UberAIR 95 Overview 98 First-Mover Advantages 98

Brand Loyalty and Technological Leadership 98 Preemption of Scarce Assets 99 Exploiting Buyer Switching Costs 99 Reaping Increasing Returns Advantages 100

First-Mover Disadvantages 100 Research and Development Expenses 101 Undeveloped Supply and Distribution Channels 101 Immature Enabling Technologies and Complements 101 Uncertainty of Customer Requirements 102

Factors Influencing Optimal Timing of Entry 104

Strategies to Improve Timing Options 108 Summary of Chapter 108 Discussion Questions 109 Suggested Further Reading 109 Endnotes 110

PART TWO FORMULATING TECHNOLOGICAL INNOVATION STRATEGY 113

Chapter 6 Defining the Organization’s Strategic Direction 115 Tesla, Inc. in 2018 115 Overview 123 Assessing the Firm’s Current Position 123

External Analysis 123 Internal Analysis 127

Identifying Core Competencies and Dynamic Capabilities 131

Core Competencies 131 The Risk of Core Rigidities 132 Dynamic Capabilities 133

Strategic Intent 133 Summary of Chapter 137 Discussion Questions 138 Suggested Further Reading 139 Endnotes 139

Chapter 7 Choosing Innovation Projects 141 Where Should We Focus Our Innovation Efforts? An Exercise 141 Overview 146 The Development Budget 146 Quantitative Methods For Choosing Projects 149

Discounted Cash Flow Methods 149 Real Options 152

Disadvantages of Quantitative Methods 154

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Qualitative Methods for Choosing Projects 154

Screening Questions 155 The Aggregate Project Planning Framework 157 Q-Sort 159

Combining Quantitative and Qualitative Information 159

Conjoint Analysis 159 Data Envelopment Analysis 161

Summary of Chapter 163 Discussion Questions 163 Suggested Further Reading 164 Endnotes 164

Chapter 8 Collaboration Strategies 167 Ending HIV? Sangamo Therapeutics and Gene Editing 167 Overview 175 Reasons for Going Solo 175

1. Availability of Capabilities 176 2. Protecting Proprietary Technologies 176 3. Controlling Technology Development

and Use 176 4. Building and Renewing Capabilities 177

Advantages of Collaborating 177 1. Acquiring Capabilities and Resources

Quickly 177 2. Increasing Flexibility 178 3. Learning from Partners 178 4. Resource and Risk Pooling 178 5. Building a Coalition around a Shared

Standard 178 Types of Collaborative Arrangements 178

Strategic Alliances 179 Joint Ventures 181 Licensing 182 Outsourcing 183 Collective Research Organizations 184

Choosing a Mode of Collaboration 184 Choosing and Monitoring Partners 187

Partner Selection 187 Partner Monitoring and Governance 191

Summary of Chapter 192 Discussion Questions 193

Suggested Further Reading 193 Endnotes 194

Chapter 9 Protecting Innovation 197 The Digital Music Distribution Revolution 197 Overview 201 Appropriability 202 Patents, Trademarks, and Copyrights 202

Patents 203 Trademarks and Service Marks 207 Copyright 208

Trade Secrets 210 The Effectiveness and Use of Protection Mechanisms 211

Wholly Proprietary Systems versus Wholly Open Systems 212 Advantages of Protection 213 Advantages of Diffusion 215

Summary of Chapter 218 Discussion Questions 219 Suggested Further Reading 219 Endnotes 220

PART THREE IMPLEMENTING TECHNOLOGICAL INNOVATION STRATEGY 223

Chapter 10 Organizing for Innovation 225 Organizing for Innovation at Google 225 Overview 227 Size and Structural Dimensions of the Firm 228

Size: Is Bigger Better? 228 Structural Dimensions of the Firm 230

Centralization 230 Formalization and Standardization 231 Mechanistic versus Organic Structures 232 Size versus Structure 234 The Ambidextrous Organization: The Best of Both Worlds? 234

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Modularity and “Loosely Coupled” Organizations 236

Modular Products 236 Loosely Coupled Organizational Structures 237

Managing Innovation Across Borders 240 Summary of Chapter 243 Discussion Questions 244 Suggested Further Reading 244 Endnotes 245

Chapter 11 Managing the New Product Development Process 249 Scrums, Sprints, and Burnouts: Agile Development at Cisco Systems 249 Overview 252 Objectives of the New Product Development Process 252

Maximizing Fit with Customer Requirements 252 Minimizing Development Cycle Time 253 Controlling Development Costs 254

Sequential versus Partly Parallel Development Processes 254 Project Champions 257

Risks of Championing 257 Involving Customers and Suppliers in the Development Process 259

Involving Customers 259 Involving Suppliers 260 Crowdsourcing 260

Tools for Improving the New Product Development Process 262

Stage-Gate Processes 262 Quality Function Deployment (QFD)—The House of Quality 265 Design for Manufacturing 267 Failure Modes and Effects Analysis 267 Computer-Aided Design/Computer-Aided Engineering/Computer-Aided Manufacturing 268

Tools for Measuring New Product Development Performance 269

New Product Development Process Metrics 271

Overall Innovation Performance 271 Summary of Chapter 271 Discussion Questions 272 Suggested Further Reading 272 Endnotes 273

Chapter 12 Managing New Product Development Teams 277 Innovation Teams at the …