The Strategic Management

of Innovation: Concepts
Prof. Dr. Ir. K. Debackere
K.U. Leuven
Innovation as strategy: a
view ...
 Understanding your value chain /
value constellation
 Industry analysis
 Segmentation analysis
 SWOT analysis

2
Understanding value
creation ...
Subscription
Fees Flat Rate
Total
Revenue
Revenue
Number of
Households
Revenue
per Use Usage
Subscribers Revenue

Take Rate
Usage
Usage Volume
per Day input to
Expense & 3
Capital
Strategy

The firm: Industry:

- goals.values - value chain
- resources Strategy:
.suppliers
- capabilities - corporate .buyers
- organization - business unit .customers
.structure - functional .complementors
.systems .competitors
.style

4
Strategy
Industry
attractivenss Corporate
In which industries
strategy
should we compete?

Rate of profit
above the
competitive level

How do we make money?

Competitive
advantage Business
strategy
How should we
compete? 5
 Patents
Barriers to
Brands
entry Capacity to retaliate

Industry Market Market shares

attractiveness structure Concentration

Vertical
Rate of profit Firm size
bargaining Financial resources
in excess of power
competitive level

Process technology
Cost
Size of plants
Competitive advantage Access to inputs
advantage

Brands
Differentiation Product technology
advantage Market&service
capability
6
Industry analysis
Porter model:
Suppliers

Bargaining power

Potential Substitutes
Industry
entrants
Rivalry
Threat Threat

Bargaining power
Customers 7
Industry rivalry
 Concentration
 Diversity of competitors
 Product differentiation
 Excess capacity and exit barriers
 Cost conditions

8
Beyond the zero-sum game
Suppliers

Complementors Firm Competitors

Customers

9
Beyond the zero-sum game
 Players and activity networks
 Added value
 Rules
 Tactics
 Stakes

10
SWOT analysis
 Strengths (internal)
 Weaknesses (internal)
 Opportunities (external)
 Threats (external)

11
How do resources contribute
to competitive edge?
 Extent of advantage
– scarcity and relevance
 Sustainability of advantage
– durability, mobility, replicability
 Appropriability of advantage
– property rights, bargaining power,
embeddedness of resources

12
Market versus non-market
strategy ...
 Also, consider the non-market
strategy of your company:
– Institutions
– Issues
– Interests
– Information
 Influence from evolutionary
thinking: stakeholders, actors, ...
13
Innovation as strategy: a
view ...
System economics
Lock-in, standard creation
“ignore the customer”

Customer economics Product economics

Value identification & creation Price, quality
constructive capacity “led by the customer”
“lead the customer”
14
Solving customer problems:

Value = Visible quality / functionality / excitement

Purchase cost

15
Solving customer problems:
Latent / excitement
High Explicit

Customer
Satisfactio
n Implicit

Low
Low Performance relative to competition High 16
How does R&D contribute to
innovation?
 Mission of R&D?
– types of R&D:
 incremental R&D: small “r” and big “D”

 radical R&D: large “R” and large “D”

 fundamental R&D: large “R” and no “D”

– strategic purposes of R&D:

 to defend, support and expand existing business

 to drive new business platforms

 to broaden and deepen technical competencies

17
R&D and innovation along
the value chain ...
Internal // External Technology -- Gatekeeping

Market
Development Production Sales Aftercare
search

- R&D’s role in product development

- R&D’s role in process development
- R&D’s role in value creation: integrating aftercare and market search
- R&D’s role in new technology development
- Issues: lead users, buyers versus customers

18
R&D and innovation along
the value chain ...

Steel Can
Breweries
Making Manufacturing

19
Innovation along the value
chain ...
100% 1XX% 1YY% 1ZZ%

Integrated
Components Transformer Switchgear
stations
...

Services
- utilities/environment
- maintenance XX’YY’ZZ’%
- optimization
- financial … Atlas Copco ...
- performance monitoring 20
… ABB GenTrafo ...
R&D and innovation along
the value chain ...
Level of competence
MAKE

BUY

Value step

LCD-technology Application SW
Casing & connections 21
 Third Generation R&D and
innovation: the Partnership Model

First Generation Second Generation Third Generation

No long-term strategic Partial strategic Holistic strategic

framework framework framework
No explicit link with the Some customer-supplier R&D contributes along
value chain relationships the value chain
Cost center approach Project-based approach Value creation approach

Professional control of Customer/supplier Partnership approach to

resource allocation involvement in resource resource allocation
allocation
No clear performance Project performance Regular performance
indicators indicators reviews
No targeting of expected Consistency between Combining business &
results business / R&D objectives technological objectives
22
The dichotomy: “R” versus “D”
Research Development
effectiveness efficiency
informal culture formal culture
operational freedom operational control
progress-driven outcome-driven
team-based project-based
multi-specialty cross-functional
knowledge creation knowledge deployment
individual/collective strategic-alignment
creativity expertise experience
“champions” project managers
leadership & coaching management & control
handling ambiguity handling uncertainty
23
The partnership model, criteria
for evaluating and selecting ...
 Criteria:
– Annual innovation project cost
– Innovation project cost to completion
– Probability of success
– Technological maturity
– Technological competitive strength
– Project attractiveness
– Competitive impact of the technologies embedded in the project
– Time-to-completion
– Capacity utilization
 But, not all innovation projects are equal:
– Need for portfolio management
– Familiarity mapping

24
The portfolio as a consolidation of
the ongoing innovation effort ...
 A project typology (as a measure of complexity):
– research and advanced development
– breakthrough (e.g. quick style change looms, new refining
(process) technology)
– platform (product-market diversification, e.g. new battery
powders)
– derivative (incremental changes within product-market
combinations, e.g. volume changes)
 Managing & balancing the distribution of projects:
– the transilience map (enhancing - disrupting relations)
– avoiding project proliferation
 Selecting collections of projects:
– interdependencies
– spillovers

25
The portfolio as a consolidation
of the ongoing innovation effort
 The basic processes:
– need for high-level (senior executive level)
steering board to manage the MULTI-PROJECT
aspects
– need for project management process (decision
gates, flowcharts, multi-functional team
approach) to steer MONO-PROJECT aspects
– need for project review process (auditing and
reporting function) to link MULTI- and MONO-
PROJECT contexts

26
 Research &
Advanced Development Degree of
Process Change
New Minor/Incremental
Core Process Process Change

New
Core Product
Breakthrough
Projects

Degree of
Product Change Platform
Projects

Derivative
Minor/Incremental Projects
Product Change
27
Familiarity mapping ...
TECHNOLOGY

Uncertainty

Region
of
familiarity

Uncertainty
Uncertainty

PRODUCT FUNCTIONS
MARKET SEGMENTS
28
Portfolio exercises ...
Dominant
Technological competitive position

1 2
Strong 3 6

4
Favorable 5

Tenable 7
 S-curves

Weak

Embryonic Growth Mature Aging T, $

29
Technological maturity
Portfolio exercises ...
Outstanding

2 1
3

4
Reward

Modest 6

100% 50% 0% research

30
Success probability (technical X operational X commercial)
Portfolio exercises ...
p r o b a b ility o f c o m m e r c ia l s u c c e s s

to ta l p r o b a b ility o f s u c c e s s
(te c h n ic a l x c o m m e r c ia l)
100% 100%
4246 38
52
51
49
44 4743 31
4528 36
80% 80%
1433 25 35 1 32 7
50 1140
48 554 41
19 53
30
24 3915 3 23
29
60% 12 60%
27 26 54
5
37
349 16 10 212022 8
172
40% 40%
18

13
20% 20%

0% 0%
0% 20% 40% 60% 80% 100%
probability of technical success at start of project

31
Portfolio exercises ...

Uncertainty frontier
Market

New to the
world
1

New to the 2
company
5

3
Known to the
company 4 Technology

Known to the New to the New to the

32
company company world
Portfolio exercises ...

Budgets

3
1 4 6
2
5

‘98 ‘99 ‘00 Time-to-completion

33
Portfolio exercises ...
technology maturity grid
technological com petitive position

te n a b le fa v o u ra b les tro n g d o m in a n t

17

cash cow
1019361 14 3813495 33 45
12 41 4743

1618 3432
522

2055 54 23282748 46 3115 247 42

1150

37 8 35 21
44

53 26259 22 51
29 30
strengthen 3
4
weak

40

39

embryonic emerging growth mature aging

maturity of key technology

34
Portfolio exercises ...

HIGH

Importance

LOW

LOW HIGH
Urgency 35
Portfolio exercises ...
Portfolio Matrix
High DELIVER IT EXPLOIT IT
• Manage the budget • Target best markets
• Manage specifications • Make time an explicit
• Manage the schedule priority
P
E
S MOVE IT PROVE IT
Up :Simplify execution  Resolve critical hurdles
Over :Expand first
Out :Replace with more  Verify and monitor

promising opportunity potential application

Low
36
Low High
VALUE
Objectives & practices of
portfolio management ...
 Objectives:
– communication +
– interface linkages +
– urgency +
– transparency +
– tolerance for failure +
– killing projects +
– corporate wide
optimization +
 Practices:
– common vocabulary
– clear choice processes
– priority setting
– backlog of projects
– shoot approach
– resource management
– program management
– project planning
– project team work
37
Major steps in portfolio
management
 Define project types as either breakthrough, platform,
derivative, R&D or partnered projects
 Identify existing projects and classify by project type
 Estimate average time and resources needed for each
project type based on past experience
 Identify existing resource capacity
 Determine the desired mix of projects
 Estimate the number of projects that existing resources
can support
 Decide which specific projects to pursue
 Work to improve development capabilities

38
Improvement thinking ...
4
commercial applicability

3 "success"
0 = nothing at all; totaly insufficient
2 1 = insufficient
2 = average; acceptable
3 = good; as expected
1 4 = excellent; better as expected
"failure"

0
0 1 2 3 4

achievement of technical results

39
To summarize:
Individual
project Management Strategic
attractiveness responsibility project
balance
Market share,
ROI, NPV, “assumptions”
hurdle rates, ...

Capacity
profiles
&
Need for utilisation Re-balance
more information strategic priorities
40
Managing innovation:
different layers …
products-markets
processes

PLATFORMi ... PLATFORMN

CORE TECHNOLOGIES

COMPETENCIES
41
Dynamic portfolio approaches:
the roadmap ...
 Roadmaps are instruments to integrate business
unit strategies and corporate technology strategy
 Roadmaps have a dual function:
– linking technology to the business unit by
improving/diversifying product/process
platforms
– stimulating the creation of new businesses
 Developing roadmaps is not a top-down exercise
“only” but requires active bottom-up participation
and cross-functional processes

42
 MARKETS

product product 1 product 2 product 3

lines

product 4

internal technology technology technology

technology 1 2 5

external
technology technology
technology
3 4

Time 43
COMPETENCIES
Knowledge economies ...

Knowledge areas Level of competence

or specialties 0 1 2 3
Hydrometallurgy 14 5 6 1

Pyrometallurgy 5 14 3 4

Physical metallurgy 0 18 4 4

Modelling 20 5 1 0

...

44
45
Roadmaps require ...

 Cross-functional integration and planning

 An ability to balance (future) vision and present reality
 An ability to combine re-active and pro-active thinking
 Transparency of information and decision processes
 Improvement of interface management at:
– the organizational level (B.U. versus corporate)
– the functional level (marketing, R&D, manufacturing)
– the competence level (fundamental research areas,
development, engineering disciplines, …)
 A continuous process of planning, combining FIT as well as
STRETCH with respect to platform-definition and
technology development
46
Roadmaps allow for ...
 Development of a common language
 Planning and vision building
 Identification of generic technologies
 Establishing a common product-technology strategy
 Timely availability of new technology (internal or via
partnerships)
 Detection of inconsistencies
 Supporting the budget cycle
 Benchmarking against ‘best in class’ as well intra-
as inter-company

47
Best practices ...
 Common methodology and vocabulary on:
 portfolios and roadmaps
 life cycles (product & technology)
 time-horizon
 interdependencies and spillovers
 Clear processes for selection and follow-up, including
sponsor role of management
 Identifying core businesses/technologies/products
(SWOT-analysis)
 Benchmarking and effectiveness measurement
 Scouting and transfer methodology

48
Best practices ...
 Make-and-buy decision:
– complementary nature of intra- and extra-muros R&D
– need for explicit criteria:
 regime of appropriability (weak versus strong)

 need for complementary assets (low versus high)

 (internal) familiarity with technology and market

– three generic approaches:

 make (internal development, hierarchical organization)

 cooperate (co-development, network model)

 buy (external acquisition, market transaction)

– the need for absorptive capacity

49
To conclude ...
Innovation strategy is about:
Enhancing competencies Absorptive capacity
Top-down
processes

Strategic Strategic
fit stretch or intent

Bottom-up
Gatekeeping Disrupting competencies 50
processes