Global Innovation Management

A Strategic Approach

by J. Christopher Westland

Key Points

Click on the links below to read an overview of the key points covered in each chapter – handy for revision!

CHAPTER 1: Innovation, Globalization and Commoditization

  • Innovation = Invention + Commercialization.
  • Creating new businesses = Entrepreneurship (it can happen either inside or outside a corporation).
  • Rates of return on successful innovations typically average over 50 per cent, compared with those of traditional businesses, which average in the range of 15 per cent. Improved profits come with elevated risk – business and technological – which needs to be managed.
  • The US asset base today consists of around 40 per cent intellectual assets (patents, copyrights and the like). A bit more than 15 per cent of US GDP consists of the production of tangible goods; the other 85 per cent represents ideas and services.
  • The rapid pace of globalization and technology development ensure that in the future most new businesses will be innovation businesses.
  • Successful innovators are action-oriented.
  • When moving fast (innovating) complexity creates confusion and delay; innovators order and simplify complexity by: identifying generic business models and action strategies for innovation businesses stretching their own innovation skills exercising their ability to capitalize on uncertainty and take calculated risks.
  • Innovations require the development of new businesses that are predicated on new inventions, and which often require new business models (entrepreneurship).
  • Disruptive innovations are even riskier; they demand that you educate investors, customers and other stakeholders.
  • Things that distinguish successful innovators: passionately seek new opportunities pursue opportunities with discipline pursue only the best opportunities focus on execution engage the energies of everyone in their domain
  • There is no checklist.
  • Incremental improvement of existing products or business models is insufficient. You need to really make a difference.

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CHAPTER 2: Understanding Innovation

  • Innovations provide the primary means for differentiating a product from its competitors.
  • Digital services especially benefit from innovation. With no shelf space to pay for, purely digital services, no manufacturing costs and hardly any distribution fees, there are no ‘hits’, only ‘sales’ with the same margins as a hit. A hit and a miss are on equal economic footing, both just entries in a database called up on demand, both equally worthy of being carried.
  • These are the economics of the ‘long tail’. In the long tail, profitable companies are the ones that offer the largest choice (they scale on database size, not factory output).
  • Digital goods can theoretically reduce distribution costs to near zero; opportunities for innovation exist in transforming physical distribution into lower cost and scalable digital distribution.
  • Successful innovation happens in four realms: new products, new technologies, new markets, and new ways of matching firm assets and competences to consumer needs.
  • The core competences a firm needs to acquire and risk it must bear to innovate depend on the maturity of the underlying technology
  • In the era of ferment, technology and standards are fluid, and do not necessarily perform well. Risk is high, and commercialization of innovations should be approached with caution.
  • Once technologies are mature, and standards have been agreed upon, risk may be lowered sufficiently to warrant innovation.
  • Well-developed scientific theories provide the raw material for emerging technologies.
  • An innovation’s life-cycle is determined by physical and economic limits on its performance growth (the Foster S-curve).
  • Profitability is determined by the nature of the innovation, barriers to entry in imitating it, understanding complements required to complete the innovation, and coreness of the technology (whether the firm can compete cost-effectively on this technology).
  • Innovations are categorized by the degree of impact that they have on firm operations, as a result of technical, market, architectural and component knowledge that is affected by an innovation.
  • The majority of innovations are ‘incremental’ in that they make no demands for significant change in firm competences or markets.
  • Innovation demands firm-wide change and involvement in the new business models, markets and products.
  • Nearly all mistakes commonly made by firms with respect to innovation focus on individual departments, or individual styles of behaviour as being a ‘silver bullet’ that will bring about change.

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CHAPTER 3: Assessing the Potential of an Innovation

  • Core capabilities consume your resources; innovations are responsible for generating future resources to support the acquisition of future capabilities. Because of this strategy, companies must keep a resource-based perspective.
  • These are the steps for assessing the potential demand for an innovation:
  • For each customer segment sketch the consumption chain.
  • Identify the trigger events that precipitate customer movement from link to link.
  • Put in place procedures to alert you when the trigger is pulled (and plan your response).
  • Quiz to assess needs that may not be met currently.
  • Create a feature map for each significant link in the consumption chain.
  • Use your knowledge of customer experience to create blockbuster services and products.
  • Put the ideas you generate into your opportunity register.
  • The innovator’s mindset: Successful innovators are action-oriented. When moving fast (innovating), complexity creates confusion and delay.
  • Innovators order and simplify complexity by: identifying generic business models and action strategies for innovation businesses stretching their own skills exercising their ability to capitalize on uncertainty and to take calculated risks.
  • Innovation is seldom radical and completely new. Typically it is incremental, reconfiguring and re-differentiating existing services, business models and products, by reconfiguring existing value maps, or introducing entirely new kinds of solutions.
  • Reconfiguration is about breaking down the barriers (technological, regulatory or organizational) that set limits on the features you can offer, or on the way that consumption chains can be configured. It builds on your insights from the consumption chain analysis and feature map, looking to remove the limitations imposed by existing core capabilities.
  • Reconfiguration takes advantage of opportunities arising from the knowledge that underpins new innovations, the commercialization of those innovations, and the value flows generated.
  • The analysis toolkit consists of: quizzing, and organization of resulting insights through mind maps the consumption chain the feature map.

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CHAPTER 4: Business Models

  • Business modelling is the managerial equivalent of the scientific method.
  • Business models supporting an innovation are composed of first, a story, and second, financial analysis tied to the story components.
  • Stories behind successful business models have been getting progressively more complex: as technology evolves and offers more distinct types of opportunities as competition becomes more intense as competitors get better at innovation.
  • Business models, like fictional stories, are variations on a few archetypes giving voice to universal themes underlying all human experience.
  • Complexity in today’s business models requires an innovative response to providing financial support for the story supporting a new innovation.
  • Value propositions motivate the entire business model: they are the first choice that needs to be made in commercializing an innovation there may be separate value propositions for each customer group for an invention.
  • Value maps graphically depict the core and supporting (inductive) processes of a business, while value flows describe how their value is generated.
  • The environment box describes the outside parties (customers, vendors, competitors etc.) with which the firm needs to interact.
  • The fundamental unit of value is the transaction, which is a packet that carries costs, revenues and unit quantities.

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CHAPTER 5: Assessing and Managing Capabilities

  • The fundamental equation – capabilities = competences + assets – determines the space in which we can effectively compete.
  • Industries evolve along four distinct trajectories called radical, progressive, creative and intermediating.
  • Radical change occurs when an industry’s core assets and core activities are both challenged; around 19 per cent of US industries in the 1990s faced radical change.
  • When neither core assets nor core competences are threatened, the industry’s change trajectory is progressive; about 43 per cent of US industries were changing progressively in the 1990s.
  • Intermediating change occurs when core competences are threatened with obsolescence, while core assets retain the capacity to generate value; in the 1990s about 32 per cent of industries underwent intermediating change.
  • Creative change occurs when core assets depreciate quickly but core competences are stable. It is rare: in the 1990s only 6 per cent underwent creative change.
  • Capabilities are often a constraint on innovation and market entry not only because it is expensive to acquire capabilities, but also because it is difficult to determine the value of has been acquired when a firm invests in particular capabilities.
  • Assets are easier to buy, sell and value than are people.
  • Competences are nearly always human resource-based.
  • Five categories of people with distinct personalities are required to implement competence in a specific area:
  • Idea generators are good at sifting through large quantities of technological and market data to identify ‘innovations’.
  • Boundary spanners are conduits for knowledge from other firms and labs.
  • Evangelists are the champions who can sell the innovation.
  • Coaches will sponsor and support politically those individuals essential for the success of the innovation.
  • Project managers attend to the details of making the innovation a success.
  • Innovation is structured in two ways: Functional relationships are between groups and individuals (such as customer and manufacturer). Circumstantial innovation requires capabilities that can address the circumstances in which a product or service (innovation) will be encountered.
  • Innovations can be created in a firm’s own laboratories, but they may also be procured indirectly from their competitors’ laboratories, universities, government laboratories or other sources. Corporate laboratories are responsible for comparatively few innovations used by a typical firm.

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CHAPTER 6: Service Innovations

  • Services are activities that are sold for profit.
  • We differentiate between:
  • business to consumer services such as financial services, retailing and leisure services
  • business to business services such as consulting, office equipment support and communications
  • internal services, such as information technology, accounting and human resources
  • public services such as police, education and health services
  • not for profit services such as churches and charities.
  • The fastest growth in US wealth creation over the past two decades has occurred in service industries with high rates of innovation (computer and network services, financial services).
  • Innovation in service industries has been studied most actively in logistics and supply-chain management, finance and marketing.
  • Financial innovations have radically altered the character of financial markets over the past 30 years. In particular they have increased the speed of market transaction execution, and have shifted the industry’s focus towards the management of risk.
  • Defining business models to analyse service innovations is both complex and difficult. It is also a source of significant competitive advantage for firms.
  • Services firms such as are likely to change their business model every few years, as options provided by new technologies open up new opportunities.

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CHAPTER 7: Protecting Innovations

  • Laws establish our responsibilities and our rights to help us avoid or resolve problems before they become unmanageable. They are the basic business ‘rules of the game.’
  • Intellectual property is covered by four types of legally recognized property rights: patents for novel ideas copyrights for artistic works trademarks for brands and logos trade secrets for secret formulae.
  • At the core of rights and enforcement of those rights is the idea of excludability – the ability to exclude others from use of the property through ‘tollboths’ which artificially congest access to the property. Advances in technology over the past several decades have steadily eroded the ability to create and operate such ‘tollbooths’.
  • IP strategy recognizes that the management of property rights is both imperfect and expensive. Good strategy aligns costs of legal rights with the benefits they provide – sometimes in complex ways, as in the evolution of Hitachi’s patent applications away from specific products and processes, towards general patents that could be used for strategic lawsuits and cross-licensing agreements.

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CHAPTER 8: Entrance Strategies for Innovations

  • As markets and technologies change and evolve, organizational capabilities need to evolve to keep up with the changing demand for products and services.
  • The organization must decide where it will acquire new capabilities (assets and competences) based on an analysis of its existing and planned products/services by growth, profit and revenue size.
  • Risk (of failure or success) must also be factored into decisions on where capabilities will migrate in the future.
  • Real options are a variation on the models for analysing options in financial markets.
  • Three particularly useful options in developing an entrance strategy are positioning options, scouting options and stepping-stone options.
  • Where risk is low, options do not need to be used, and direct launches are likely to be faster and less expensive.
  • The key to discovery-driven entrance strategies is early engagement of potential customers.
  • Identify the first few customers for the new business model.
  • You cannot sell 100 items before you sell three. The first three customers are the most important in developing an entrance strategy.
  • Determine the priority to give potential customers, using risk/benefit trade-offs.
  • Articulate the strategy you will use to persuade customers to begin transacting with the organization by mitigating any risks they anticipate.
  • The following action steps should be taken to assure the competitiveness of a firm’s market entry:
  • Identify the first few customers for the new business model (using the ‘first three sales’ as a guiding principle).
  • Determine the priority to give them, using risk/benefit trade-offs.
  • Articulate the strategy to be used to persuade target customers to begin transacting with the organization by mitigating any risks they anticipate.
  • Make sure that all the parties in the client organization who will need to be positively involved in the purchase are clearly identified.
  • For each major customer arena the organization intends to pursue, identify the major competitors that will be affected.
  • Assess the level of corporate support that each player can expect. With their potential corporate support in mind, assess the commitment and capacity of the players to respond aggressively to the organization’s potential moves.
  • Specify the criteria by which to categorize arena attractiveness. Analyse and map the arena attractiveness of each of the industry’s major categories.
  • Specify the criteria to be used to decide on the organization’s business position, and map competitor positions.
  • Map the competitive positions of each player, using one map per player.
  • Use these figures to do a first-cut assessment of the strategic inclinations that the organization and each of its major competitors will have.
  • Systematically build a competitive mapping of the organization’s business categories versus those of each competitor.

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CHAPTER 9: Technology and the Growth of Productivity

  • Every commercially viable technology has a particular rate of advancement that is stable over long periods of time. This rate of progress is called technology acceleration. It is the source of exponential increases in performance that underlie anecdotal rules such as Moore’s law.
  • Technology acceleration explains how companies come to be held captive by their markets, even though this leads them to destroy their long-term viability. This conundrum of disruptive innovation has been called the ‘innovator’s dilemma’. The phenomenon was first articulated by Soviet economist Nikolai Kondratieff, and developed throughout the 20th century.
  • The innovator’s dilemma occurs when a firm’s most profitable products are in steady (inelastic) demand by customers, effectively locking in the firm to its old technology and customers. If research is developing similar technologies with slightly less performance, but costs that are orders of magnitude lower, then only new markets would buy the new technologies, and they attract producers that operate at smaller scales and larger volumes. Once the new technology’s performance overtakes the old, the market entrants grab the old firm’s customers, and service them with lower-cost products.
  • The innovator’s dilemma occurs when technology acceleration is greater than the acceleration of consumer demand. When this occurs, incumbent firms tend to be locked into existing customers, hampering their ability to adopt better-performing technologies.
  • Organizational scaling results from the substitution or augmentation of labour with better-performing technologies. Organization scaling is the reason that technology puts people out of jobs. Typically the replacement of people with machines is not a dramatic one-to-one replacement. Instead, machines can allow one person to improve performance by some amount, leading to a proportional reduction in total employment at the firm. From a business modelling standpoint, organizational scaling represents a reduction in the time and money cost for a given level and quality of output.
  • Geographical scaling results from the reorganization or replacement of physical products and transport with information. For example, internet download of music occurs nearly instantaneously to any place on the globe; this replaces the need for people to travel to retail stores to purchase CDs, which may take a finite amount of time. In contrast, computer scheduling of postal delivery allows more packages to be delivered to more places in less time. From a business modelling standpoint, both represent a reduction in the time and money cost of product distribution.

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CHAPTER 10: Communities, Networks and Reputation

  • Conceptually, anything called a network can be described using ‘links’ that connect ‘nodes’: Two-way networks include railroad, road, and many telecommunications networks. One-way networks include radio or television broadcasting networks.
  • The crucial relationship in both one-way and two-way networks is the complementarity between the pieces of the network.
  • Standards assure that various links and nodes on the network can be mixed and matched at zero marginal cost to produce demanded (and thus valuable) goods.
  • Network effects are a net benefit that arises to all users of the network, that increases (perhaps at a non-linear and increasing rate) as the number of network ‘nodes’ increases.
  • Lock-in of a user to a network occurs because the size of the network effect makes it costly to switch to competing networks. Critical mass is the size at which (purportedly) the lock-in effect becomes significant.
  • There are three models that have been used to describe real-world networks; each has its own functional form of network effect:
  • Random networks where the number of links on the average node tends to cluster around the mean of a normal distribution.
  • Small world networks which add a few extra long-range links to what is otherwise the limited networking of a small local social community. These long-range links drastically shorten the average separation between all nodes.
  • Scale-free networks where the number of links attached to an arbitrary node tends to follow a power law – i.e., the frequency with which we encounter a node with k links will be k–x where x is some fixed number that characterizes the way the scale free network is connected. The World Wide Web is a scale-free network.
  • The value drivers defined by these models, as they contribute to network economics are:
  • Average path length: the distance between any two nodes.
  • Clustering coefficient: a measure of tendencies of clusters to occur; and
  • Degree distribution: the probability that there are k links attached to an arbitrary node.

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CHAPTER 11: Financing Innovations

  • The value of an innovation lies in the future, and in the plans that management have for commercializing that innovation.
  • To realize the innovation payoff, innovators must prepare to compete in not just one, but two markets – first in the consumer market for their new product or service, and second in the capital market to finance their innovation.
  • Financial analysis and reporting play an essential role in a business’s ‘reporting–control’ cycle.
  • A firm’s or project’s performance is realized on many dimensions – profit, competitive positioning, strength of workforce and so forth.
  • Three factors complicate an assessment of an innovation’s value:
  • by definition, an innovation is new, and thus there is no history of production or marketing to guide analysis; or, if there is, it will be incomplete and with very few datapoints
  • innovation business can be several orders of magnitude riskier than traditional business; the returns can commensurately be several orders of magnitude higher as well
  • the actual drivers of an innovation and its business model are too often things that never appear in the financial statement – such as the size of the network externality, the rapidity with which the technology’s performance improves, and the appeal of the brand – and which are measured through figures of merit – observable, sometimes synthetic, measures that move in tandem with the strategy drivers.
  • Up until the late 1970s, the total balance sheet valuation of the S&P 500 firms hovered around that of the stock market. But by the early 1980s, the ratio of balance sheet assets to stock market value began to decline. By 1990 book value had declined to around 40 per cent of the market value; by 2000 it was at less than 20 per cent of the market value. The majority of firm value today is contained in ‘unmeasured’ assets such as ideas, patents and skills.
  • The strategy model is the econometric forecasting counterpart to the business model. As with the business model, the strategy model has two parts – a compelling narrative story line about how, why and when cash will be generated from the innovation, and a forecasting model that ties this to the numbers that can generate future forecasts and present values.
  • Real options assume that future performance will not be the result of a series of smooth future cash flows, as with, say, a traditional investment such as a bank’s mortgage contract. Rather cash flows will be contingent on future events or management decisions which may or may not occur and are uncertain in timing and amount.
  • Forecasts should be non-arbitrary, collective, reliable and consistent.

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CHAPTER 12: Understanding and Managing Creative People

  • Understanding creative people
  • No one knows exactly what triggered the increases in brain size that differentiate human beings from apes, and presumably the concurrent rise in human creativity. But can you, in a Darwinian context of random genetic mutations, and aggressive natural selection, outline a scenario in which creativity becomes as much of a human necessity as hunger or sex?
  • Beyond a certain level of IQ, probably around 120, there is no clear correlation between intelligence and creativity. Creators are hard-driving, focused, dominant, independent risk-takers.
  • Complexity is the ability to harbour tendencies that normally appear to be at opposite extremes.
  • Very creative individuals can alternate between the two extremes of being rebellious or highly disciplined almost at the drop of a hat.
  • Psychological androgyny – being on one hand very sensitive and more ‘feminine’ and on the other aggressive and offensive – is another creative trait.
  • Child prodigies usually exhibit only one extreme of the spectrum of characteristics – they tend to be intense, driven and introverted. Creative people exhibit stimulus freedom – what we might call the ability to think outside the box.
  • Managing creative people
  • Recruit for diversity, hire for philosophy.
  • Rehab the neighbourhood.
  • Within limits, let them make the rules.
  • Keep their eyes on the prize.
  • Feed their heads.
  • Teach them a new language.
  • Allow time for blue-sky thinking.
  • Protect your team from creativity killers.
  • Add liberal doses of fun.

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CHAPTER 13: Society and Innovation

  • Some societies are more innovative than others, which is important because wealth has increasingly clustered around creative centres.
  • The distinguishing feature of innovation driven processes is that knowledge is the primary input factor to production.
  • Knowledge is neither a conventional good, nor is it a public good.
  • Knowledge is non-rival and partially excludable. Standard free market assumptions of price-taking competition cannot be supported, and equilibrium in a knowledge economy is one with monopolistic competition.
  • New Growth Theory concludes that government intervention may be necessary for optimal levels of innovation, because:
  • the stock of human capital determines the rate of growth of an economy or business
  • too little human capital is devoted to research in equilibrium
  • integration into world markets will increase growth rates
  • having a large population is not sufficient to generate growth.
  • Creative cities are diverse, with a high tolerance for divergent life styles, new immigrants and artistic inclinations.
  • Creative nations tend to set a stable, reasonably fair system of government for the activities of creative people.
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