Chapter 4:

Innovation Strategy
Learning goals
- Give a description of the concept innovation strategy
- Explain the difference with the business strategy
- Describe the technology life cycle model
- Assess the influence of the phase in the technology life cycle on a firm’s innovation strategy
- Apply the disruptive innovation model to a specific industry
- Describe the advantages and disadvantages of an early mover strategy
- Explain the implications of the ecosystem or network characteristics of a market for path dependence
- Explain the implications of the network or platform characteristics of markets for dominance of a single
design and of single firms
- Explain the implications of the ecosystem or network characteristics of a market for the strategy of a firm
- List alternative intellectual property protection mechanisms and their main characteristics
Where are we?
Innovation strategy
Innovation strategy
• An innovation strategy outlines what a firm wants to achieve with its
innovation activities, and how it wants to achieve that goal
• Includes: new business development
• Traditionally focuses on:
- Technology
- Products
- Markets
- Timing (so: when?)
• Today, focuses on:
- Any element of the business model canvas
Business model canvas
Example: Innovation strategy of
a bank
• …. increase its presence full-time for its clients, including presence on
tablets and cell phones, so that customers can check balances, pay
and get a quotation for a mortgage from the bank at any moment and
from at any place.

• Plus: specification when you want to be present on which channel

with which service.
Example: Innovation strategy of
a bank
Business strategy
• A business strategy: the general strategy of a company, which defines
the direction in which the firm wants to develop and the decisions it
has to take to attain that direction
 Business strategies (related to
innovation)

(Based on Miles and Snow, 1978)

Life cycles of products
Technology Lifecycle
Desktop computers
Dominant design
• Dominant design: the architecture of a product or service that wins in
a design battle. The dominant design’s set of features becomes
common to most or all products or services in the market.
Technology lifecycle
Alternative fuel cars
Successive lifecycles
Successive lifecycles
Disruptive innovation
Disruptive innovation
• Budget airlines
• Failed first mover: Laker Airways (1977-1982)
• Start: Southwest Airlines (out of necessity – they had no landing
rights all over the US)
• Ryanair
• Easyjet
• Many others
What is disruptive innovation?
• New product, service or business model with a different set of
performance attributes
• Underperforming on the attributes that mainstream customers value
• High improvement potential on these attributes
Disruptive innovation
Financial performance
Ryanair (2018)
• Revenues € 7.2 billion
• Net profit € 1.1 billion

EasyJet (2019)
• Revenues £ 6.4 billion
• Net profit £ 347 million

Air-France / KLM (2019)

• Revenues € 27.2 billion
• Net profit € 293 million
2013 € 1.8 billion loss!!
Disruptive innovations
Examples

• Airbnb (versus hotels)

• News websites (versus newspapers)
• Honey tomatoes (versus standard tomatoes)
Sustaining innovation
• A sustaining innovation: a radical innovation that creates an
improvement on the currently dominant performance attributes for
customers.
• Examples
• Supersonic passenger airplanes, such as the Concorde
• Servitization
Disruptive?
• Dominant performance characteristics in the GSM market:
• Size
• Battery life
• Durability

• Was the smartphone disruptive?

Why is disruptive innovation so
difficult?
• Key people prohibiting disruptive innovation in large firms
• Marketing and sales
• Finance
• Key factors
• Revenue driven performance indicators
• Focus on lead users
How to do it?
 How to do it?
• Repositioning the legacy business
• Building the future
• Transformations
• Capabilities exchange

(Gilbert, Eyring and Foster, 2012)

Summary
• Managers focus too much on the current dimensions of competition
• Disruptive innovation is the most neglected innovation
Timing of innovation
Timing of innovation
• First mover advantage: the advantage that a player in a market acquires by entering
the market early, and thus enlarging its market share
• Reasons:
• Learning advantages
• Pre-emption of scarce assets
• Installed base (applies to network/platform markets only)
• Buyer switching costs

• Follower advantages:
• Lower uncertainty and risks
• Lower R&D investments
Ecosystem innovation
 Classic example: Michelin’s PAX
system
• Need: solution for flat tires

• 60 of US drivers experience a flat tire every 5 years

• 250,000 accidents/year due to low tire pressure

• Inferior competition

• Self supporting, run-flat tires of Goodyear, Bridgestone, etc. were too heavy, stiff ride, poor MPG

• These occupied <1% of market

• PAX System

• Run-flat tire with support ring clamped to alloy wheel with pressure monitoring device

• Most radical and functional change since the radial tire

Adner, R. (2006). Match Your Innovation Strategy to Your Innovation Ecosystem. Harvard Business Review, 84(4), 98-107.

Adner, R. (2012). The Wide Lens. Penguin, New York.

Expectations vs. Reality

• Michelin introduces PAX in 1997

• Rapid adoption on high end cars

• In 2004, it predicted that 80% of cars will have “run-flat” tires by 2010

• 2005, Link with Honda, PAX on Oddessy and extended 2-year warranty

• In 2007, the PAX system was discontinued with huge corporate loss

• We will see why…..

 Another example: Better Place
switchable battery packs
• Better Place: a switchable battery system for electric cars
• Advantage: electric cars would become much cheaper (since Better
Place owned the batteries)
• Better Place raised $200m in Round A, $875m in total!
• But only one car manufacturer (Renault) developed a car based on
the system
• Only a few switch stations were built
• The initiative failed
Youtube:
Better Place Battery Switch Station Model [Link]
Elon Musk Demos Tesla Beating Audi in Refueling Contest [Link]
Car Talk: Israel's Better Place Battery Switching [Link]
Why Hasn't Battery Swapping For Electric Cars Caught On Yet? [Link]
Definition of ecosytem

• The alignment structure of the multilateral set of partners that need to interact in
order for a focal value proposition to materialize

• Or more simply:

• A value proposition that requires actions from different parties to be successful

• These parties include complementors on top of the normal supply chain parties
What often goes wrong
• Firms that do not anticipate the ecosystem character of their
innovation
• Develop the innovation
• Then approach other actors to ask them to take their part of the action
• Have to find ways to convince them
• And then experience long delays caused by the development activities of other parties
How to prevent this from
happening
• Recognize in an early phase that your innovation has an ecosystem
character
• Approach relevant parties in an early phase (before you finish your
own development process)
• Stimulate them to take the necessary actions timely
Three types of parties determine the
success of ecosystems:
1. Core innovators: the party/parties that take the initiative and
orchestrate the ecosystem
2. Co-innovators (or ‘complementors’): parties that have to
adapt/innovate their products or services to make the core
innovation successful
3. Co-adoption partners: parties that have to adopt the innovation (as
part of the supply chain or as consumers)
Three types of risks (leading to
delays) are associated with Co-
innovation partners.
1. Initiative risks: risks in the company and its suppliers that create the innovation. In fact, these are the normal risks involved in
innovating.

- Uncertainties of the project

2 Interdependence risks: requirement of co-innovations for successful commercialization. Risks related to co-

innovating partners that have to produce innovations that fit the core innovation

• Uncertainties of coordinating with co-innovators

3. Integration risks: requirement of partners to adopt your product before end customers can assess the full value

proposition. Risks of co-adoption partners that have to adopt the product before the end customers can really

benefit from its value.

• Uncertainties of adoption across the supply chain

Some more theory…
 Dynamics of ecosystems
• Ecosystems can change over time
• Number / type of parties

• Agreements between parties

• Core value proposition

• Example:
• Apple initially developed apps for the iPhone itself (2007)

• It create the App Store for the (second generation) iPhone 3G

ttée, B., O. Alexy and E. Autio (2018). Maneuvering in poor visibility:

w firms play the ecosystem game when uncertainty is high.
ademy of Management Journal, 61(2), 466–498.
Dattee et al. (2018) presented a dynamic
model for the creation of ecosystems. Such a
dynamic model is necessary because, in the
beginning, it is not always clear what the
product or service - and consequently the
ecosystem - will look like. In addition,
ecosystems evolve over their development and
growth. Firms have to accommodate such
changes, without losing all control of the
ecosystem.
 Control points
• Ecosystems need control points
• Reason: prevent the ecosystem from drifting away from the
intentions of the core innovator(s)

Dattée, B., O. Alexy and E. Autio (2018). Maneuvering in poor visibility:

How firms play the ecosystem game when uncertainty is high.
Academy of Management Journal, 61(2), 466–498.
Control points are arrangements or
positions that facilitate that a core actor
keeps control over the development of an
ecosystem.
Failure due to lack of control
points: IBM PCs
• IBM wanted to enter the market for ‘microcomputers’
• It developed the IBM Personal Computer
• To be quick, it applied an open approach
• It developed the overall architecture itself
• It acquired all parts, including software, from others
• It did not protect the architecture and interfaces
• The IBM PC (1981) was highly successful
• But copies soon entered the market, and IBM did not remain the dominant
• One supplier, Microsoft, did protect its software, and took over the role of
core innovator in this market!!
Successful control points:
[Link]
• Control point: [Link] does not allow hotels to offer their room
for a lower price elsewhere
• In this way, it creates an entry barrier for potential competitors in
this market!
• So, it prevents the ecosystem to be taken over by another party
• Successful for [Link] (in this case not for hotels…..)
Strategies to convince parties in
an early phase (reference list)
• Co-innovators (Interdependence risks)
o Coordinating: agreeing on the interfaces between core innovation and complementor’s innovation
o Moving into the other business
o Give complementor exclusive license
o Creating a flexible interface with innovation of complementor, so that complementor can re-use its innovation later for other uses

• Co-adoption partners (Integration risks)

o Coordinating design: adapting design to requirements of co-adopters
o Marketing in advance to end consumers to create demand
o Pay changeover costs to co-adopters
o Create new entity to manage activities of co-adopters
o Do reconfiguration studies for adopters
Strategies to create control
points
• Patents
• Contracts
• Other rules
How do you analyse an
ecosystem?
How do we analyse an
ecosystem?
• Visualizing the required parties and the relations
• Coloring the parties
• Think of a traffic light system
What do the colours mean?
• Green
• Alignment of interests and goals
• Incentive plan with acceptable mutual benefit
• Plan defined, with responsibilities, consequences and timeline
• Agreement signed
• Yellow
• Alignment partial
• Incentive not pleasing to both parties
• Plan and responsibilities or timeline unclear
• Term Sheet or less
• Red
• Lack of alignment, incentives, plan and agreement
Three types of ecosystem actors
Run Flat tyre
Run Flat tyres: map it
Another example:
Sony Reader vs. Amazon Kindle
Networked markets
Networked markets
• Network effects mean that the adoption of a product or service by certain actors increases
the value of the product or service for other similar or dissimilar actors.

• Direct network effects: the more users of a product, the more benefit each user has
—Information exchange
—Technology network effects
—Learning effects: increasing quality and decreasing prices as a result of feedback.

• Indirect network effects: the more a product is used, the more complementary products are developed.
• Complementary products or services give rise to two sorts of indirect network effects: a. For
complementors: The more a product or service is used, the greater the incentive for
producers of complementary products or services to develop those, since the market is
larger. So, a larger installed base is a stimulus for complementors to join a product or
service. b. For users: The more complementary products or services, the greater the benefit
of the core product or service to the user.
• Path-dependency means that those firms or technologies that have a larger installed base
have a stronger position and are better able to strengthen that position further
In markets with strong network effects, a single firm may
own and produce the dominant design. We speak of a
winner-takes-all situation. Firms that have a strong
market position in the fluid phase of the market may
acquire a major market share later during the life cycle.

- Platform markets usually have a strong network

character!

- One-sided platform: e-commerce (Amazon shifted from

One-sided to two)
- Two-sided platform: connects two types of parties (buyers
and sellers (customers and suppliers) ), i.e., Uber and
[Link].
Try this out on:

• Uber

• WhatsApp

• Smartphones (operating systems)

• Electric/hybrid cars
Who wins?
Nine behaviours to win a standard
battle
Standardization
A standard is a specification of an interface in a product, service, process, or management system that is accepted by a specific target group

*Standards can be important elements of dominant designs

Why have standards?

• Compatibility between products

• Clarity for consumers
• Creates market competition
Airbus A380 was delayed by 22 months – one reason was incompatible
CAD software.
Costs: billions of euros!!

Airbus A380
• Preparation 6 years + Development and
manufacturing 6 years
• Development costs € 11 billion
• Problem: alignment of parts, delay of years
• Cause: alignment problems of modules due to
different versions of CAD software
Why have standards?
Mars Climate Orbiter Spacecraft

• Mismatch in interface
• Standard of forces: pounds (US) versus metric
• Cost: $326 Million
Disadvantage of standards: lock
in
• QWERTY Keyboard

• [Link]

• Why are superior alternatives (e.g. DVORAK) not implemented?

 Standards can originate in four
ways:
• In the market
• Consortium
• Standards organization (such as ISO)
• Government

Vision of ISO: [Link]

Intellectual Property
Intellectual Property
• Appropriability: The degree that a firm can capture the revenues from an innovation
• Intellectual property protection:
• Patents
• Copyrights
• Trademarks
• Secrecy
Patents

A patent is a form of intellectual property that gives the owner the right
to exclude others from using an invention.

1. Utility patents
2. Design patents
Utility patents
• Give inventors the exclusive right to prevent others from
commercially applying the invention for a period of 20 years

• Conditions:
1. Novelty: not too similar to previous inventions
2. Useful: applicable in practice
3. Not obvious: not easy for other people to invent the same device
Novelty
On 14 September 1964, the freighter Al Kuwait capsized at the docks in
Kuwait's harbor. The ship was carrying 5,000 sheep that started decomposing
in the harbour's water.

Karl Krøyer, Danish inventor: fill the ship with expandable polystyrene
foam balls, which makes the ship float to the surface. He applied for a patent

The patent examiner remembered the same idea in a Donald Duck comic
book. The patent was rejected!
Design patents
• Design refers to the appearance of an object, in terms of its shape,
colour, texture or ornamentation (or a combination)
• It does not protect any functionality, only appearance.
• Granted for 15 years
• Criterion: There is infringement if in the eyes of an ordinary observer,
giving such attention as a purchaser usually gives, two designs are
substantially the same.
 Copyrights
• Granted to authors of intellectual works such as texts, music or art
• For the life of the author, plus 70 years
• Automatically granted, no application
• Also for software and designs. In that case the design is of course
protected much longer than if protected by a patent
Case Robin Thicke versus Marvin Gaye: [Link]
Trademarks
• Trademarks or logos: signs or expressions that identify the origin of a
product or service
• Trademarks give brand protection
• Protect products of services against competition only if the users
recognize the trademark as a quality indicator
• The main requirement for the registration of trademarks is that the
trademark must have some distinctive character.

• Example: Coca Cola bottle

Secrecy
• Keep the underlying technology or chemical substances secret
• Particularly for manufacturing processes
• The composition of Coca-Cola is still secret, which, together with the
design rights, keeps competition at some distance
Open source
• Open up intellectual property to the public
• Conditions:
• Add-ons should be open
• Central authority has to grant approval
• Particularly software
• Linux
• Android