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Strategic Management of Technological Innovation Strategic Management of Technological Innovation Sixth Edition Melissa A. Schilling New York University First Pages 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. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 LCR 21 20 19 ISBN 978-1-260-56579-9 MHID 1-260-56579-3 Cover Image: ©Shutterstock/iSam iSmile All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. mheducation.com/highered sch65793_fm_ise.indd iv 12/04/18 11:25 AM About the Author Melissa A. Schilling, Ph.D. Melissa Schilling is the John Herzog family professor of management and organizations at New York University’s Stern School of Business. Professor Schilling teaches courses in strategic management, corporate strategy and technology, and innovation 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 institution of Politecnico di Milano and Politecnico di Torino. Professor Schilling’s research focuses on technological innovation and knowledge creation. She has studied how technology shocks influence collaboration activity and innovation outcomes, how firms fight technology standards battles, and how firms utilize collaboration, protection, and timing of entry strategies. She also studies 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 structure 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, Management Science, Organization Science, Strategic Management Journal, and Journal of ­Economics and Management Strategy and Research Policy. She also sits on the editorial 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. v 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 possibilities, while accelerating economic growth and providing advances in such crucial human endeavors as medicine, agriculture, and education. For industrial organizations, the primary 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 management, 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 environments and identify meaningful trends. The second part of the book begins the process 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 management of new product development teams, and crafting the firm’s deployment strategy. 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 vi 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 Preface vii 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 engineering students. Similarly, some of the material in Chapter Eleven (Managing the New Product Development Process) on computer-aided design or quality function deployment 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 traditional meat consumption. Furthermore, it would dramatically reduce animal suffering. 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 difference 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 landing pads, specially trained pilots (at least until autonomous eVTOLs became practical), 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? viii Preface 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 commonly 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 additions, 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 available online from Connect at connect.mheducation.com and includes: ∙ An instructor’s manual with suggested class outlines, responses to discussion questions, 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. Students—study more efficiently, retain more and achieve better outcomes. Instructors—focus on what you love—teaching. SUCCESSFUL SEMESTERS INCLUDE CONNECT For Instructors You’re in the driver’s seat. Want to build your own course? No problem. Prefer to use our turnkey, prebuilt course? Easy. Want to make changes throughout the semester? Sure. And you’ll save time with Connect’s auto-grading too. 65% Less Time Grading They’ll thank you for it. Adaptive study resources like SmartBook® help your students be better prepared in less time. You can transform your class time from dull definitions to dynamic debates. Hear from your peers about the benefits of Connect at www.mheducation.com/highered/connect Make it simple, make it affordable. Connect makes it easy with seamless integration using any of the major Learning Management Systems—Blackboard®, Canvas, and D2L, among others—to let you organize your course in one convenient location. Give your students access to digital materials at a discount with our inclusive access program. Ask your McGraw-Hill representative for more information. ©Hill Street Studios/Tobin Rogers/Blend Images LLC Solutions for your challenges. A product isn’t a solution. Real solutions are affordable, reliable, and come with training and ongoing support when you need it and how you want it. Our Customer Experience Group can also help you troubleshoot tech problems—although Connect’s 99% uptime means you might not need to call them. See for yourself at For Students 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. ©Shutterstock/wavebreakmedia I really liked this app it “ Study anytime, anywhere. made it easy to study when — Download the free ReadAnywhere app and access your online eBook when it’s convenient, even if you’re offline. And since the app automatically syncs with your eBook in Connect, all of your notes are available every time you open it. Find out more at www.mheducation.com/readanywhere you don’t have your textbook in front of you. ” – Jordan Cunningham, Eastern Washington University No surprises. The Connect Calendar and Reports tools keep you on track with the work you need to get done and your assignment scores. Life gets busy; Connect tools help you keep learning through it all. 13 14 Chapter 12 Quiz Chapter 11 Quiz Chapter 13 Evidence of Evolution Chapter 11 DNA Technology Chapter 7 Quiz Chapter 7 DNA Structure and Gene… and 7 more… Learning for everyone. McGraw-Hill works directly with Accessibility Services Departments and faculty to meet the learning needs of all students. Please contact your Accessibility Services office and ask them to email accessibility@mheducation.com, or visit www.mheducation.com/about/accessibility.html for more information. 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 suggestions, 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 Deborah Dougherty Rutgers University Cathy A. Enz Cornell University Rajaram B. Baliga Wake Forest University Robert Finklestein University of Maryland–University College Sandy Becker Rutgers Business School Sandra Finklestein Clarkson University School of Business David Berkowitz University of Alabama in Huntsville Jeffrey L. Furman Boston University John Bers Vanderbilt University Cheryl Gaimon Georgia Institute of Technology Paul Bierly James Madison University Elie Geisler Illinois Institute of Technology Paul Cheney University of Central Florida Sanjay Goel University of Minnesota in Duluth Pete Dailey Marshall University Andrew Hargadon University of California, Davis Robert DeFillippi Suffolk University Steven Harper James Madison University xi xii Acknowledgments 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 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 Brief Contents 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 xiii Contents 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 xiv 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 xv 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 xvi Contents 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 Contents xvii 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 Walt Disney Company   277 Overview   279 Constructing New Product Development Teams   280 Team Size   280 Team Composition   280 The Structure of New Product Development Teams   285 Functional Teams   285 Lightweight Teams   286 Heavyweight Teams   286 Autonomous Teams   286 The Management of New Product Development Teams   288 Team Leadership   288 Team Administration   288 Managing Virtual Teams   289 Summary of Chapter   292 Discussion Questions   292 Suggested Further Reading   293 Endnotes   293 Chapter 13 Crafting a Deployment Strategy   297 Deployment Tactics in the Global Video Game Industry   297 Overview   306 Launch Timing   306 Strategic Launch Timing   306 Optimizing Cash Flow versus Embracing Cannibalization   307 Licensing and Compatibility   308 Pricing   310 xviii Contents Distribution   312 Selling Direct versus Using Intermediaries   312 Strategies for Accelerating Distribution   314 Marketing   316 Major Marketing Methods   316 Tailoring the Marketing Plan to Intended Adopters   318 Using Marketing to Shape Perceptions and Expectations   320 Summary of Chapter   323 Discussion Questions   324 Suggested Further Reading   324 Endnotes   325 Index   327 Chapter One Introduction THE IMPORTANCE OF TECHNOLOGICAL INNOVATION technological innovation The act of ­introducing a new device, method, or material for application to commercial or practical objectives. In many industries, technological innovation is now the most important driver of competitive success. Firms in a wide range of industries rely on products developed within the past five years for almost one-third (or more) of their sales and profits. For example, at Johnson & Johnson, products developed within the last five years account for over 30 percent of sales, and sales from products developed within the past five years at 3M have hit as high as 45 percent in recent years. The increasing importance of innovation is due in part to the globalization of markets. Foreign competition has put pressure on firms to continuously innovate in order to produce differentiated products and services. Introducing new products helps firms protect their margins, while investing in process innovation helps firms lower their costs. Advances in information technology also have played a role in speeding the pace of innovation. Computer-aided design and computer-aided manufacturing have made it easier and faster for firms to design and produce new products, while flexible manufacturing technologies have made shorter production runs economical and have reduced the importance of production economies of scale.1 These technologies help firms develop and produce more product variants that closely meet the needs of narrowly defined customer groups, thus achieving differentiation from competitors. For example, in 2018, Toyota offered 22 different passenger vehicle lines under the Toyota brand (e.g., Camry, Prius, Highlander, and Tundra). Within each of the vehicle lines, Toyota also offered several different models (e.g., Camry L, Camry LE, Camry SE, Camry Hybrid SE, etc.) with different features and at different price points. In total, Toyota offered 193 car models ranging in price from $15,635 (for the Yaris ­three-door liftback) to $84,315 (for the Land Cruiser), and seating anywhere from three passengers (e.g., Tacoma Regular Cab truck) to eight passengers (Sienna Minivan). On top of this, Toyota also produced a range of luxury vehicles under its Lexus brand. Similarly, in 2018 Samsung produced more than 30 unique smartphones. Companies can use broad portfolios of product models to help ensure they can penetrate almost every conceivable market niche. While producing multiple product variations used to be expensive and 1 2 Chapter 1 Introduction time-consuming, flexible manufacturing technologies now enable firms to seamlessly transition from producing one product model to the next, adjusting production schedules with real-time information on demand. Firms further reduce production costs by using common components in many of the models. As firms such as Toyota, Samsung, and others adopt these new technologies and increase their pace of innovation, they raise the bar for competitors, triggering an industry-wide shift to shortened development cycles and more rapid new product introductions. The net results are greater market segmentation and rapid product obsolescence.2 Product life cycles (the time between a product’s introduction and its withdrawal from the market or replacement by a next-generation product) have become as short as 4 to 12 months for software, 12 to 24 months for computer hardware and consumer electronics, and 18 to 36 months for large home appliances.3 This spurs firms to focus increasingly on innovation as a strategic imperative—a firm that does not innovate quickly finds its margins diminishing as its products become obsolete. THE IMPACT OF TECHNOLOGICAL INNOVATION ON SOCIETY gross ­domestic product (GDP) The total annual output of an economy as measured by its final purchase price. If the push for innovation has raised the competitive bar for industries, arguably making success just that much more complicated for organizations, its net effect on society is more clearly positive. Innovation enables a wider range of goods and services to be delivered to people worldwide. It has made the production of food and other necessities more efficient, yielded medical treatments that improve health conditions, and enabled people to travel to and communicate with almost every part of the world. To get a real sense of the magnitude of the effect of technological innovation on society, look at Figure 1.1, which shows a timeline of some of the most important technological innovations developed over the last 200 years. Imagine how different life would be without these innovations! The aggregate impact of technological innovation can be observed by looking at gross domestic product (GDP). The gross domestic product of an economy is its total annual output, measured by final purchase price. Figure 1.2 shows the average GDP per capita (i.e., GDP divided by the population) for the world from 1980 to 2016. The figures have been converted into U.S. dollars and adjusted for inflation. As shown in the figure, the average world GDP per capita has risen steadily since 1980. In a series of studies of economic growth conducted at the National Bureau of Economic Research, economists showed that the historic rate of economic growth in GDP could not be accounted for entirely by growth in labor and capital inputs. Economist Robert Merton Solow argued that this unaccounted-for residual growth represented technological change: Technological innovation increased the amount of output achievable from a given quantity of labor and capital. This explanation was not immediately accepted; many researchers attempted to explain the residual away in terms of measurement error, inaccurate price deflation, or labor improvement. Chapter 1 Introduction 3 FIGURE 1.1 Timeline of Some of the Most Important Technological Innovations in the Last 200 Years externalities Costs (or benefits) that are borne (or reaped) by individuals other than those responsible for creating them. Thus, if a business emits pollutants in a community, it imposes a negative externality on the community members; if a business builds a park in a community, it creates a positive externality for community members. 1800 – 1800—Electric battery 1804—Steam locomotive 1807—Internal combustion engine 1809—Telegraph 1817—Bicycle 1820 – 1821—Dynamo 1824—Braille writing system 1828—Hot blast furnace 1831—Electric generator 1836—Five-shot revolver 1840 – 1841—Bunsen battery (voltaic cell) 1842—Sulfuric ether-based anesthesia 1846—Hydraulic crane 1850—Petroleum refining 1856—Aniline dyes 1860 – 1862—Gatling gun 1867—Typewriter 1876—Telephone 1877—Phonograph 1878—Incandescent lightbulb 1880 – 1885—Light steel skyscrapers 1886—Internal combustion automobile 1887—Pneumatic tire 1892—Electric stove 1895—X-ray machine 1900 – 1902—Air conditioner (electric) 1903—Wright biplane 1906—Electric vacuum cleaner 1910—Electric washing machine 1914—Rocket 1920 – 1921—Insulin (extracted) 1927—Television 1928—Penicillin 1936—First programmable computer 1939—Atom fission 1940 – 1942—Aqua lung 1943—Nuclear reactor 1947—Transistor 1957—Satellite 1958—Integrated circuit 1960 – 1967—Portable handheld calculator 1969—ARPANET (precursor to Internet) 1971—Microprocessor 1973—Mobile (portable cellular) phone 1976—Supercomputer 1980 – 1981—Space shuttle (reusable) 1987—Disposable contact lenses 1989—High-definition television 1990—World Wide Web protocol 1996—Wireless Internet 2000 – 2003—Map of human genome But in each case the additional variables were unable to eliminate this residual growth component. A ­consensus gradually emerged that the residual did in fact capture technological change. Solow received a Nobel Prize for his work in 1981, and the residual became known as the Solow Residual.4 While GDP has its shortcomings as a measure of standard of living, it does relate very directly to the amount of goods consumers can purchase. Thus, to the extent that goods improve quality of life, we can ascribe some beneficial impact of technological innovation. Sometimes technological innovation results in negative ­externalities. Production technologies may ­create pollution that is harmful to the surrounding communities; agricultural and fishing technologies can result in erosion, elimination of natural habitats, and depletion of ocean stocks; medical technologies can result in unanticipated consequences such as antibiotic-resistant strains of bacteria or moral ­dilemmas regarding the use of genetic modification. However, technology is, in its purest essence,­ knowledge—­ knowledge to solve our problems and pursue our goals.5 Technological innovation is thus the creation of new knowledge that is applied to practical problems. Sometimes this knowledge is applied to problems hastily, without full consideration of the consequences and alternatives, but overall it will probably serve us better to have more knowledge than less. 4 Chapter 1 Introduction FIGURE 1.2 Gross ­Domestic Product per Capita, 1989– 2016 (in Real 2010 $US Billions) 90,000 Source: USDA Economic Research Service, www.ers.usda.gov, accessed April 16th, 2018. 50,000 80,000 70,000 60,000 40,000 30,000 20,000 10,000 00 20 02 20 04 20 06 20 08 20 10 20 12 20 14 20 16 98 20 96 19 94 19 92 19 90 19 88 19 86 19 84 19 82 19 19 19 80 – INNOVATION BY INDUSTRY: THE IMPORTANCE OF STRATEGY As will be shown in Chapter Two, the majority of effort and money invested in technological innovation comes from industrial firms. However, in the frenetic race to innovate, many firms charge headlong into new product development without clear strategies or well-developed processes for choosing and managing projects. Such firms often initiate more projects than they can effectively support, choose projects that are a poor fit with the firm’s resources and objectives, and suffer long development cycles and high project failure rates as a consequence (see the accompanying Research Brief for a recent study of the length of new product development cycles). While innovation is popularly depicted as a freewheeling process that is unconstrained by rules and plans, study after study has revealed that successful innovators have clearly defined innovation strategies and management processes.6 The Innovation Funnel Most innovative ideas do not become successful new products. Many studies suggest that only one out of several thousand ideas results in a successful new product: Many projects do not result in technically feasible products and, of those that do, many fail to earn a commercial return. According to a 2012 study by the Product Development and Management Association, only about one in nine projects that are initiated is successful, and of those that make it to the point of being launched to the market, only about half earn a profit.7 Furthermore, many ideas are sifted through and abandoned before a project is even formally initiated. According to one study that combined data from prior studies of innovation success rates with data on patents, venture capital Chapter 1 Introduction 5 Research Brief   How Long Does New Product Development Take?a In a large-scale survey administered by the Product Development and Management Association (PDMA), researchers examined the length of time it took firms to develop a new product from initial concept to market introduction. The study divided new product development projects into categories representing their degree of innovativeness: “radical” projects, “more innovative” projects, and “incremental” projects. On average, incremental projects took only 33 weeks from concept to market introduction. More innovative projects took significantly longer, clocking in at 57 weeks. The development of radical products or technologies took the longest, averaging 82 weeks. The study also found that on average, for more innovative and radical projects, firms reported significantly shorter cycle times than those reported in the previous PDMA surveys conducted in 1995 and 2004. a  Adapted from Markham, S. K., and H. Lee, “Product Development and Management Association’s 2012 Comparative Performance Assessment Study,” Journal of Product ­Innovation Management 30, no. 3 (2013): 408–29. funding, and surveys, it takes about 3000 raw ideas to produce one significantly new and successful commercial product.8 The pharmaceutical industry demonstrates this well—only one out of every 5000 compounds makes it to the pharmacist’s shelf, and only one-third of those will be successful enough to recoup their R&D costs.9 Furthermore, most studies indicate that it costs at least $1.4 billion and a decade of research to bring a new Food and Drug Administration (FDA)–approved pharmaceutical product to market!10 The innovation process is thus often conceived of as a funnel, with many potential new product ideas going in the wide end, but very few making it through the development process (see Figure 1.3). FIGURE 1.3 The New Product Development Funnel in Pharmaceuticals 5000 Compounds 125 Leads Discovery & Preclinical 3–6 years 2–3 drugs tested Clinical Trials 6–7 years 1 drug Approval ½–2 years Rx 6 Chapter 1 Introduction The Strategic Management of Technological Innovation Improving a firm’s innovation success rate requires a well-crafted strategy. A firm’s innovation projects should align with its resources and objectives, leveraging its core competencies and helping it achieve its strategic intent. A firm’s organizational structure and control systems should encourage the generation of innovative ideas while also ensuring efficient implementation. A firm’s new product development process should maximize the likelihood of projects being both technically and commercially successful. To achieve these things, a firm needs (a) an in-depth understanding of the dynamics of innovation, (b) a well-crafted innovation strategy, and (c) well-designed processes for implementing the innovation strategy. We will cover each of these in turn (see Figure 1.4). In Part One, we will cover the foundations of technological innovation, gaining an in-depth understanding of how and why innovation occurs in an industry, and why some innovations rise to dominate others. First, we will look at the sources of innovation in Chapter Two. We will address questions such as: Where do great ideas come from? How can firms harness the power of individual creativity? What role do customers, government organizations, universities, and alliance networks play in creating innovation? In this chapter, we will first explore the role of creativity in the generation of novel and useful ideas. We then look at various sources of innovation, including the role of individual inventors, firms, publicly sponsored research, and collaborative networks. In Chapter Three, we will review models of types of innovation (such as ­radical ­versus incremental and architectural versus modular) and patterns of innovation (including s-curves of technology performance and diffusion, and technology cycles). We will address questions such as: Why are some innovations much harder to create and implement than others? Why do innovations often diffuse slowly even when they appear to offer a great advantage? What factors influence the rate at which a technology tends to improve over time? Familiarity with these types and patterns of innovation will help us distinguish how one project is different from another and the underlying factors that shape the project’s likelihood of technical or commercial success. In Chapter Four, we will turn to the particularly interesting dynamics that emerge in industries characterized by network externalities and other sources of increasing returns that can lead to standards battles and winner-take-all markets. We will address questions such as: Why do some industries choose a single dominant standard rather than enabling multiple standards to coexist? What makes one technological innovation rise to dominate all others, even when other seemingly superior technologies are offered? How can a firm avoid being locked out? Is there anything a firm can do to influence the likelihood of its technology becoming the dominant design? When are platform ecosystems likely to displace other forms of competition in an industry? In Chapter Five, we will discuss the impact of entry timing, including first-mover advantages, first-mover disadvantages, and the factors that will determine the firm’s optimal entry strategy. This chapter will address such questions as: What are the advantages and disadvantages of being first to market, early but not first, and late? What determines the optimal timing of entry for a new innovation? This chapter reveals a number of consistent patterns in how timing of entry impacts innovation success, and Chapter 1 Introduction 7 FIGURE 1.4 The Strategic Management of Technological Innovation Part 1: Industry Dynamics of Technological Innovation Chapter 2 Sources of Innovation Chapter 3 Types and Patterns of Innovation Chapter 4 Standards Battles, Modularity, and Platform Competition Chapter 5 Timing of Entry Part 2: Formulating Technological Innovation Strategy Chapter 6 Defining the Organization’s Strategic Direction Chapter 7 Choosing Innovation Projects Chapter 8 Collaboration Strategies Chapter 9 Protecting Innovation Part 3: Implementing Technological Innovation Strategy Chapter 10 Organizing for Innovation Chapter 11 Managing the New Product Development Process Feedback Chapter 12 Managing New Product Development Teams Chapter 13 Crafting a Deployment Strategy 8 Chapter 1 Introduction it outlines what factors will influence a firm’s optimal timing of entry, thus beginning the transition from understanding the dynamics of technological innovation to formulating technology strategy. In Part Two, we will turn to formulating technological innovation strategy. ­Chapter Six reviews the basic strategic analysis tools managers can use to assess the firm’s current position and define its strategic direction for the future. This chapter will address such questions as: What are the firm’s sources of sustainable competitive advantage? Where in the firm’s value chain do its strengths and weaknesses lie? What are the firm’s core competencies, and how should it leverage and build upon them? What is the firm’s strategic intent—that is, where does the firm want to be 10 years from now? Only after the firm has thoroughly appraised where it is currently can it formulate a coherent technological innovation strategy for the future. In Chapter Seven, we will examine a variety of methods of choosing innovation projects. These include quantitative methods such as discounted cash flow and options valuation techniques, qualitative methods such as screening questions and balancing the research and development portfolio, as well as methods that combine qualitative and quantitative approaches such as conjoint analysis and data envelopment analysis. Each of these methods has its advantages and disadvantages, leading many firms to use a multiple-method approach to choosing innovation projects. In Chapter Eight, we will examine collaboration strategies for innovation. This chapter addresses questions such as: Should the firm partner on a particular project or go solo? How does the firm decide which activities to do in-house and which to access through collaborative arrangements? If the firm chooses to work with a partner, how should the partnership be structured? How does the firm choose and monitor partners? We will begin by looking at the reasons a firm might choose to go solo versus ­working with a partner. We then will look at the pros and cons of various partnering ­methods, including joint ventures, alliances, licensing, outsourcing, and participating in ­collaborative research organizations. The chapter also reviews the factors that should influence partner selection and monitoring. In Chapter Nine, we will address the options the firm has for appropriating the returns to its innovation efforts. We will look at the mechanics of patents, copyright, trademarks, and trade secrets. We will also address such questions as: Are there ever times when it would benefit the firm to not protect its technological innovation so vigorously? How does a firm decide between a wholly proprietary, wholly open, or partially open strategy for protecting its innovation? When will open strategies have advantages over wholly proprietary strategies? This chapter examines the range of protection options available to the firm, and the complex series of trade-offs a firm must consider in its protection strategy. In Part Three, we will turn to implementing the technological innovation strategy. This begins in Chapter Ten with an examination of how the organization’s size and structure influence its overall rate of innovativeness. The chapter addresses such questions as: Do bigger firms outperform smaller firms at innovation? How do formalization, standardization, and centralization impact the likelihood of generating innovative ideas and the organization’s ability to implement those ideas quickly and efficiently? Is it possible to achieve creativity and flexibility at the same time as efficiency and reliability? How do multinational firms decide where to perform their development Chapter 1 Introduction 9 activities? How do multinational firms coordinate their development activities toward a common goal when the activities occur in multiple countries? This chapter examines how organizations can balance the benefits and trade-offs of flexibility, economies of scale, standardization, centralization, and tapping local market knowledge. In Chapter Eleven, we will review a series of “best practices” that have been identified in managing the new product development process. This includes such questions as: Should new product development processes be performed sequentially or in parallel? What are the advantages and disadvantages of using project champions? What are the benefits and risks of involving customers and/or suppliers in the development process? What tools can the firm use to improve the effectiveness and efficiency of its new product development processes? How does the firm assess whether its new product development process is successful? This chapter provides an extensive review of methods that have been developed to improve the management of new product development projects and to measure their performance. Chapter Twelve builds on the previous chapter by illuminating how team composition and structure will influence project outcomes. This chapter addresses questions such as: How big should teams be? What are the advantages and disadvantages of choosing highly diverse team members? Do teams need to be colocated? When should teams be full time and/or permanent? What type of team leader and management practices should be used for the team? This chapter provides detailed guidelines for constructing new product development teams that are matched to the type of new product development project under way. Finally, in Chapter Thirteen, we will look at innovation deployment strategies. This chapter will address such questions as: How do we accelerate the adoption of the technological innovation? How do we decide whether to use licensing or OEM agreements? Does it make more sense to use penetration pricing or a market-skimming price? When should we sell direct versus using intermediaries? What strategies can the firm use to encourage distributors and complementary goods providers to support the innovation? What are the advantages and disadvantages of major marketing methods? This chapter complements traditional marketing, distribution, and pricing courses by looking at how a deployment strategy can be crafted that especially targets the needs of a new technological innovation. Summary of Chapter 1. Technological innovation is now often the single most important competitive driver in many industries. Many firms receive more than one-third of their sales and profits from products developed within the past five years. 2. The increasing importance of innovation has been driven largely by the globalization of markets and the advent of advanced technologies that enable more rapid product design and allow shorter production runs to be economically feasible. 3. Technological innovation has a number of important effects on society, including fostering increased GDP, enabling greater communication and mobility, and improving medical treatments. 10 Chapter 1 Introduction 4. Technological innovation may also pose some negative externalities, including pollution, resource depletion, and other unintended consequences of technological change. 5. While government plays a significant role in innovation, industry provides the majority of R&D funds that are ultimately applied to technological innovation. 6. Successful innovation requires an in-depth understanding of the dynamics of innovation, a well-crafted innovation strategy, and well-developed processes for implementing the innovation strategy. Discussion Questions 1. Why is innovation so important for firms to compete in many industries? 2. What are some advantages and disadvantages of technological innovation? 3. Why do you think so many innovation projects fail to generate an economic return? Suggested Further Reading Classics Arrow, K. J., “Economic welfare and the allocation of resources for inventions,” in The Rate and Direction of Inventive Activity: Economic and Social Factors, ed. R. Nelson (Princeton, NJ: Princeton University Press, 1962), pp. 609–25. Baumol, W. J., The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism (Princeton, NJ: Princeton University Press, 2002). Mansfield, E., “Contributions of R and D to economic growth in the United States,” Science CLXXV (1972), pp. 477–86. Schumpeter, J. A., The Theory of Economic Development (1911; English translation, Cambridge, MA: Harvard University Press, 1936). Recent Work Ahlstrom, D., “Innovation and Growth: How Business Contributes to Society,” ­Academy of Management Perspectives (August 2010): 10–23. Lichtenberg, F. R., “Pharmaceutical Innovation and Longevity Growth in 30 Developing and High-Income Countries, 2000–2009,” Health Policy and Technology 3 (2014):36–58. “The 25 Best Inventions of 2017,” Time (December 1, 2017). Schilling, M. A., “Towards Dynamic Efficiency: Innovation and Its Implications for Antitrust,” Antitrust Bulletin 60, no. 3 (2015): 191–207. Endnotes 1. J. P. Womack, D. T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Associates, 1990). 2. W. Qualls, R. W. Olshavsky, and R. E. Michaels, “Shortening of the PLC—An Empirical Test,” Journal of Marketing 45 (1981), pp. 76–80. 3. M. A. Schilling and C. E. Vasco, “Product and Process Technological Change and the Adoption of Modular Organizational Forms,” in Winning Strategies in a Deconstructing World, eds. R. Bresser, M. Hitt, R. Nixon, and D. Heuskel (Sussex, England: John Wiley & Sons, 2000), pp. 25–50. Chapter 1 Introduction 11 4. N. Crafts, “The First Industrial Revolution: A Guided Tour for Growth Economists,” The ­American Economic Review 86, no. 2 (1996), pp. 197–202; R. Solow, “Technical Change and the Aggregate Production Function,” Review of Economics and Statistics 39 (1957), pp. ­312–20; and N. E. Terleckyj, “What Do R&D Numbers Tell Us about Technological Change?” A ­ merican Economic Association 70, no. 2 (1980), pp. 55–61. 5. H. A. Simon, “Technology and Environment,” Management Science 19 (1973), pp. 1110–21. 6. S. Brown and K. Eisenhardt, “The Art of Continuous Change: Linking Complexity Theory and Time-Paced Evolution in Relentlessly Shifting Organizations,” Administrative Science Quarterly 42 (1997), pp. 1–35; K. Clark and T. Fujimoto, Product Development Performance (Boston: Harvard Business School Press, 1991); R. Cooper, “Third Generation New Product Processes,” Journal of Product Innovation Management 11 (1994), pp. 3–14; D. Doughery, “Reimagining the Differentiation and Integration of Work for Sustained Product Innovation,” Organization Science 12 (2001), pp. 612–31; and M. A. Schilling and C. W. L. Hill, “­Managing the New Product Development Process: Strategic Imperatives,” Academy of Management Executive 12, no. 3 (1998), pp. 67–81. 7. Markham, SK, and Lee, H. “Product Development and Management Association’s 2012 comparative performance assessment study,” Journal of Product Innovation Management 30 (2013), issue 3:408–429. 8. G. Stevens and J. Burley, “3,000 Raw Ideas Equals 1 Commercial Success!” Research Technology Management 40, no. 3 (1997), pp. 16–27. 9. Standard & Poor’s Industry Surveys, Pharmaceutical Industry, 2008. 10. DiMasi, J. A., H. G. Grabowski, and R. W. Hansen, “Innovation in the Pharmaceutical Industry: New Estimates of R&D Costs,” Journal of Health Economics 47 (May 2016):20–33. Part One Industry Dynamics of Technological Innovation In this section, we will explore the industry dynamics of technological innovation, including: ∙ The sources from which innovation arises, including the roles of individuals, organizations, government institutions, and networks. ∙ The types of innovations and common industry patterns of technological evo- lution and diffusion. ∙ The factors that determine whether industries experience pressure to select a dominant design, and what drives which technologies to dominate others. ∙ The effects of timing of entry, and how firms can identify (and manage) their entry options. This section will lay the foundation that we will build upon in Part Two, Formulating Technological Innovation Strategy. Industry Dynamics of Technological Innovation Part 1: Industry Dynamics of Technological Innovation Chapter 2 Sources of Innovation Chapter 3 Types and Patterns of Innovation Chapter 4 Standards Battles, Modularity, and Platform Competition Chapter 5 Timing of Entry Part 2: Formulating Technological Innovation Strategy Chapter 6 Defining the Organization’s Strategic Direction Chapter 7 Choosing Innovation Projects Chapter 8 Collaboration Strategies Chapter 9 Protecting Innovation Part 3: Implementing Technological Innovation Strategy Chapter 10 Organizing for Innovation Chapter 11 Managing the New Product Development Process Feedback Chapter 12 Managing New Product Development Teams Chapter 13 Crafting a Deployment Strategy Chapter Two Sources of Innovation The Rise of “Clean Meat”a In late 2017, Microsoft founder Bill Gates and a group of other high-powered investors—who comprise Breakthrough Energy Ventures, such as Amazon’s Jeff Bezos, Alibaba’s Jack Ma, and Virgin’s Richard Branson—announced their intention to fund a San Francisco–based start-up called Memphis Meats with an unusual business plan: it grew “clean” meat using stem cells, eliminating the need to breed or slaughter animals. The company had already produced beef, chicken, and duck, all grown from cells.b There were many potential advantages of growing meat without animals. First, growth in the demand for meat was skyrocketing due to both population growth and development. When developing countries become wealthier, they increase their meat consumption. While humanity’s population had doubled since 1960, consumption of animal products had risen fivefold and was still increasing. Many scientists and economists had begun to warn of an impending “meat crisis.” Even though plant protein substitutes like soy and pea protein had gained enthusiastic followings, the rate of animal protein consumption had continued to rise. This suggested that meat shortages were inevitable unless radically more efficient methods of production were developed. Large-scale production of animals also had a massively negative effect on the environment. The worldwide production of cattle, for example, resulted in a larger emissions of greenhouse gases than the collective effect of the world’s automobiles. Animal production is also extremely water intensive: To produce each chicken sold in a supermarket, for example, requires more than 1000 gallons of water, and each egg requires 50 gallons. Each gallon of cow’s milk required 900 gallons of water. A study by Oxford University indicated that meat grown from cells would produce up to 96 percent lower greenhouse gas emissions, use 45 percent less energy, 99 percent less land, and 96 percent less water.c Scientists also agreed that producing animals for consumption was simply inefficient. Estimates suggested, for example, that it required roughly 23 calories worth of inputs to produce one calorie of beef. “Clean” meat promised to bring that ratio down to three calories of inputs to produce a calorie of beef— more than seven times greater efficiency. “Clean” meat also would not contain 15 16 Part One Industry Dynamics of Technological Innovation antibiotics, steroids, or bacteria such as E. coli—it was literally “cleaner,” and that translated into both greater human health and lower perishability. The Development of Clean Meat In 2004, Jason Matheny, a 29-year-old recent graduate from the John Hopkins Public Health program decided to try to tackle the problems with production of animals for food. Though Matheny was a vegetarian himself, he realized that convincing enough people to adopt a plant-based diet to slow down the meat crisis was unlikely. As he noted, “You can spend your time trying to get people to turn their lights out more often, or you can invent a more efficient light bulb that uses far less energy even if you leave it on. What we need is an enormously more efficient way to get meat.”d Matheny founded a nonprofit organization called New Harvest that would be dedicated to promoting research into growing real meat without animals. He soon discovered that a Dutch scientist, Willem van Eelen was exploring how to culture meat from animal cells. Van Eelen had been awarded the first patent on a cultured meat production method in 1999. However, the eccentric scientist had not had much luck in attracting funding to his project, nor in scaling up his production. Matheny decided that with a little prodding, the Dutch government might be persuaded to make a serious investment in the development of meatculturing methods. He managed to get a meeting with the Netherland’s minister of agriculture where he made his case. Matheny’s efforts paid off: The Dutch government agreed to invest two million euros in exploring methods of creating cultured meat at three different universities. By 2005, clean meat was starting to gather attention. The journal Tissue Engineering published an article entitled “In Vitro-Cultured Meat Production,” and in the same year, the New York Times profiled clean meat in its annual “Ideas of the Year.” However, while governments and universities were willing to invest in the basic science of creating methods of producing clean meat, they did not have the capabilities and assets needed to bring it to commercial scale. Matheny knew that to make clean meat a mainstream reality, he would need to attract the interest of large agribusiness firms. Matheny’s initial talks with agribusiness firms did not go well. Though meat producers were open to the idea conceptually, they worried that consumers would balk at clean meat and perceive it as unnatural. Matheny found this criticism frustrating; after all, flying in airplanes, using air conditioning, or eating meat pumped full of steroids to accelerate its growth were also unnatural. Progress was slow. Matheny took a job at the Intelligence Advanced Research Projects Activity (IARPA) of the U.S. Federal Government while continuing to run New Harvest on the side. Fortunately, others were also starting to realize the urgency of developing alternative meat production methods. Enter Sergey Brin of Google In 2009, the foundation of Sergey Brin, cofounder of Google, contacted Matheny to learn more about cultured meat technologies. Matheny referred Brin’s Chapter 2 Sources of Innovation 17 foundation to Dr. Mark Post at Maastricht University, one of the leading scientists funded by the Dutch government’s clean meat investment. Post had succeeded in growing mouse muscles in vitro and was certain his process could be replicated with the muscles of cows, poultry, and more. As he stated, “It was so clear to me that we could do this. The science was there. All we needed was funding to actually prove it, and now here was a chance to get what was needed.”e It took more than a year to work out the details, but in 2011, Brin offered Post roughly three quarters of a million dollars to prove his process by making two cultured beef burgers, and Post’s team set about meeting the challenge. In early 2013, the moment of truth arrived: Post and his team had enough cultured beef to do a taste test. They fried up a small burger and split it into thirds to taste. It tasted like meat. Their burger was 100 percent skeletal muscle and they knew that for commercial production they would need to add fat and connective tissue to more closely replicate the texture of beef, but those would be easy problems to solve after passing this milestone. The press responded enthusiastically, and the Washington Post ran an article headlined, “Could a TestTube Burger Save the Planet?”f Going Commercial In 2015, Uma Valeti, a cardiologist at the Mayo Clinic founded his own cultured-­ meat research lab at the University of Minnesota. “I’d read about the inefficiency of meat-eating compared to a vegetarian diet, but what bothered me more than the wastefulness was the sheer scale of suffering of the animals.”g As a heart doctor, Valeti also believed that getting people to eat less meat could improve human health: “I knew that poor diets and the unhealthy fats and refined carbs that my patients were eating were killing them, but so many seemed totally unwilling to eat less or no meat. Some actually told me they’d rather live a shorter life than stop eating the meats they loved.” Valeti began fantasizing about a best-of-both-worlds alternative—a healthier and kinder meat. As he noted, “The main difference I thought I’d want for this meat I was envisioning was that it’d have to be leaner and more protein-packed than a cut of supermarket meat, since there’s a large amount of saturated fat in that meat. . . . Why not have fats that are proven to be better for health and longevity, like omega-3s? We want to be not just like conventional meat but healthier than conventional meat.”h Valeti was nervous about leaving his successful position as a cardiologist— after all, he had a wife and two children to help support. However, when he sat down to discuss it with his wife (a pediatric eye surgeon), she said, “Look, Uma. We’ve been wanting to do this forever. I don’t ever want us to look back on why we didn’t have the courage to work on an idea that could make this world kinder and better for our children and their generation.”i And thus Valeti’s company, which would later be named Memphis Meats, was born. Building on Dr. Post’s achievement, Valeti’s team began experimenting with ways to get just the right texture and taste. After much trial and error, and a growing number of patents, they hosted their first tasting event in December 2015. On the menu: a meatball. This time the giant agribusiness firms took notice. 18 Part One Industry Dynamics of Technological Innovation At the end of 2016, Tyson Foods, the world’s largest meat producer, announced that it would invest $150 million in a venture capital fund that would develop alternative proteins, including meat grown from self-reproducing cells. In August of 2017, agribusiness giant Cargill announced it was investing in Memphis Meats, and a few months later in early 2018, Tyson Foods also pledged investment. That first meatball cost $1200; to make cultured meat a commercial reality required bringing costs down substantially. But analysts were quick to point out that the first iPhone had cost $2.6 billion in R&D—much more than the first cultured meats. Scale and learning curve efficiencies would drive that cost down. Valeti had faith that the company would soon make cultured meat not only ­competitive with traditional meat, but more affordable. Growing meat rather than whole animals had, after all, inherent efficiency advantages. Some skeptics believed the bigger problem was not production economies, but consumer acceptance: would people be willing to eat meat grown without animals? Sergey Brin, Bill Gates, Jeff Bezos, Jack Ma, and Richard Branson were willing to bet that they would. As Branson stated in 2017, “I believe that in 30 years or so we will no longer need to kill any animals and that all meat will either be clean or plant-based, taste the same and also be much healthier for everyone.”j Discussion Questions 1. What were the potential advantages of developing clean meat? What were the challenges of developing it and bringing it to market? 2. What kinds of organizations were involved in developing clean meat? What were the different resources that each kind of organization brought to the innovation? 3. Do you think people will be willing to eat clean meat? Can you think of other products or services that faced similar adoption challenges? a Adapted from a NYU teaching case by Paul Shapiro and Melissa Schilling. Friedman, Z., “Why Bill Gates and Richard Branson Invested in ‘Clean’ Meat,” Forbes (August 2017). c Tuomisto, H. L., and M. J. de Mattos, “Environmental Impacts of Cultured Meat Production,” Environmental Science and Technology 14(2011): 6117–2123. d Shapiro, P. Clean Meat: How Growing Meat without Animals Will Revolutionize Dinner and the World (New York: Gallery Books, 2018), 35. e Shapiro, P. Clean Meat: How Growing Meat without Animals Will Revolutionize Dinner and the World (New York: Gallery Books, 2018), 60. f “Could a Test-Tube Burger Save the Planet?” Washington Post, August 5, 2013. g Shapiro, P. Clean Meat: How Growing Meat without Animals Will Revolutionize Dinner and the World (New York: Gallery Books, 2018), 113. h Shapiro, P. Clean Meat: How Growing Meat without Animals Will Revolutionize Dinner and the World (New York: Gallery Books, 2018), 115. i Shapiro, P. Clean Meat: How Growing Meat without Animals Will Revolutionize Dinner and the World (New York: Gallery Books, 2018), 118. j Friedman, Z., “Why Bill Gates and Richard Branson Invested in ‘Clean’ Meat,” Forbes (August 2017). b Chapter 2 Sources of Innovation 19 OVERVIEW innovation The practical implementation of an idea into a new device or process. Innovation can arise from many different sources. It can originate with individuals, as in the familiar image of the lone inventor or users who design solutions for their own needs. Innovation can also come from the research efforts of universities, government laboratories and incubators, or private nonprofit organizations. One primary engine of innovation is firms. Firms are well suited to innovation activities because they typically have greater resources than individuals and a management system to marshal those resources toward a collective purpose. Firms also face strong incentives to develop differentiating new products and services, which may give them an advantage over nonprofit or government-funded entities. An even more important source of innovation, however, does not arise from any one of these sources, but rather the linkages between them. Networks of innovators that leverage knowledge and other resources from multiple sources are one of the most powerful agents of technological advance.1 We can thus think of sources of innovation as composing a complex system wherein any particular innovation may emerge primarily from one or more components of the system or the linkages between them (see Figure 2.1). In the sections that follow, we will first consider the role of creativity as the underlying process for the generation of novel and useful ideas. We will then consider how creativity is transformed into innovative outcomes by the separate components of the innovation system (individuals, firms, etc.), and through the linkages between different components (firms’ relationships with their customers, technology transfer from universities to firms, etc.). FIGURE 2.1 Sources of Innovation as a System Firms Individuals Private Nonprofits Universities GovernmentFunded Research 20 Part One Industry Dynamics of Technological Innovation CREATIVITY idea Something imagined or pictured in the mind. creativity The ability to produce novel and useful work. Innovation begins with the generation of new ideas. The ability to generate new and useful ideas is termed creativity. Creativity is defined as the ability to produce work that is useful and novel. Novel work must be different from work that has been previously produced and surprising in that it is not simply the next logical step in a series of known solutions.2 The degree to which a product is novel is a function both of how different it is from prior work (e.g., a minor deviation versus a major leap) and of the audience’s prior experiences.3 A product could be novel to the person who made it, but known to most everyone else. In this case, we would call it reinvention. A product could be novel to its immediate audience, yet be well known somewhere else in the world. The most creative works are novel at the individual producer level, the local audience level, and the broader societal level.4 Individual Creativity An individual’s creative ability is a function of his or her intellectual abilities, ­knowledge, personality, motivation, and environment. The most important intellectual abilities for creative thinking include intelligence, memory, the ability to look at problems in unconventional ways, the ability to analyze which ideas are worth pursuing and which are not, and the ability to articulate those ideas to others and convince others that the ideas are worthwhile. One important intellectual ability for creativity is a person’s ability to let their mind engage in a visual mental activity termed primary process thinking.5 Because of its unstructured nature, primary process thinking can result in combining ideas that are not typically related, leading to what has been termed remote associations or divergent thinking. Sigmund Freud noted that primary process thinking was most likely to occur just before sleep or while dozing or daydreaming; others have observed that it might also be common when distracted by physical exercise, music, or other activities. Creative people may make their minds more open to remote associations and then mentally sort through these associations, selecting the best for further consideration. Having excellent working memory is useful here too—individuals with excellent working memory may be more likely or more able to search longer paths through the network of associations in their mind, enabling them to arrive at a connection between two ideas or facts that seem unexpected or strange to others.6 A connection that appears to be random may not be random at all—it is just difficult for other people to see the association because they are not following as long of a chain of associations. Consistent with this, studies by professors Mathias Benedek and Aljoscha Neubauer found that highly creative people usually follow the same association paths as less creative people—but they do so with such greater speed that they exhaust the common associations sooner, permitting them to get to less common associations earlier than others would.7 Benedek and Neubauer’s research argues that highly creative people’s speed of association is due to exceptional working memory and executive control. In other words, the ability to hold many things in one’s mind simultaneously Chapter 2 Sources of Innovation 21 and maneuver them with great facileness enables a person to rapidly explore many possible associations.8 The impact of knowledge on creativity is somewhat double-edged. If an individual has too little knowledge of a field, he or she is unlikely to understand it well enough to contribute meaningfully to it. On the other hand, if an individual knows a field too well, that person can become trapped in the existing logic and paradigms, preventing him or her from coming up with solutions that require an alternative perspective. Thus, an individual with only a moderate degree of knowledge of a field might be able to produce more creative solutions than an individual with extensive ­knowledge of the field, and breakthrough innovations are often developed by outsiders to a field.9 Consider, for example, Elon Musk. Elon Musk developed a city search Web portal called Zip2 in college, then founded an Internet financial payments company that merged with a rival and developed the PayPal financial payment system. Then after selling PayPal, Musk decided to found SpaceX to develop reusable rockets, and also became part of the founding team of Tesla Motors, an electric vehicle company. Tesla subsequently acquired Solar City (a solar panel company that Elon Musk had helped his cousins create) and diversified into energy storage and more. Musk crosses boundaries because he enjoys tackling new, difficult problems. He has been able to be successful in a wide range of industries in part because he challenges the traditional models in those industries.10 For example, SpaceX was able to dramatically decrease the price of rocket components by building them in-house, and Solar City was able to dramatically increase solar panel adoption by offering a business model based on leasing that gave customers the option of putting no money down and paying for the panels with part of their energy savings. Another great example is provided by Gavriel Iddan, a guided missile designer for the Israeli military who invented a revolutionary way to allow doctors to see inside a patient’s gastrointestinal system. The traditional approach for obtaining images inside the gut is a camera on the end of a long flexible rod. This method is quite uncomfortable, and cannot reach large portions of the small intestine, but it was the industry standard for many decades. Most gastroenterologists have invested in significant training to use endoscopic tools, and many have also ­purchased endoscopic equipment for their clinics. Not surprisingly then, most innovation in this domain has focused on incremental improvements in the rod, cameras, and imaging software. Iddan, however, approached the problem of viewing the inside of the gut like a guided missile designer—not a gastroenterologist. He did not have the same assumptions about the need to control the camera with a rod, nor to transmit images with a wire. Instead, he invented a capsule (called the PillCam) with a power source, a light source, and two tiny cameras that the patient can swallow. The patient then goes about her day while the camera pill broadcasts images to a video pack worn by the patient. Roughly eight hours later, the patient returns to the doctor’s office to have the images read by a software algorithm that can identify any locations of bleeding (the camera pill exits naturally). The PillCam has proven to be safer and less expensive than traditional endoscopy (the PillCam costs less than $500), and it is dramatically more comfortable. For patients, the camera pill 22 Part One Industry Dynamics of Technological Innovation was a no brainer; getting doctors to adopt it has been slower because of their existing investment and familiarity with endoscopy. The PillCam is now sold in more than 60 countries, and several companies now offer competing products. The camera pill is a remarkable solution to a difficult problem, and it is easy to see why it came from an outsider, rather than an endoscope producer.11 Outsiders often face resistance and skepticism. People tend to discount generalists and are suspicious of people who engage in activities that seem inconsistent with their identity. Outsiders like Musk, however, bring an advantage that insiders and industry veterans often lack. They aren’t trapped by the paradigms and assumptions that have long become calcified in industry veterans, nor do they have the existing investments in tools, expertise, or supplier and customer relationships that make change difficult and unappealing. The personality trait most often associated with creativity is “openness to ­experience.”12 Openness to experience reflects an individual’s use of active imagination, aesthetic sensitivity (e.g., the appreciation for art and literature), attentiveness to emotion, a preference for variety, and intellectual curiosity. It is assessed by asking individuals to rate their degree of agreement or disagreement with statements such as “I have a vivid imagination,” “I enjoy hearing new ideas,” “I have a rich vocabulary,” “I rarely look for deeper meaning in things” (reversed), “I enjoy going to art museums,” “I avoid philosophical discussions” (reversed), “I enjoy wild flights of fantasy,” and more. Individuals who score high on the openness to experience dimension tend to have great intellectual curiosity, are interested in unusual ideas, and are willing to try new things. Intrinsic motivation has also been shown to be very important for creativity.13 That is, individuals are more likely to be creative if they work on things they are genuinely interested in and enjoy. In fact, several studies have shown that creativity can be undermined by providing extrinsic motivation such as money or awards.14 This raises serious questions about the role played by idea collection systems in organizations that offer monetary rewards for ideas. On the one hand, such extrinsic rewards could derail intrinsic motivation. On the other hand, if the monetary rewards are small, such systems may be primarily serving to invite people to offer ideas, which is a valuable signal about the culture of the firm. More research is needed in this area to know exactly what kind of solicitation for ideas, if any, is most effective. Finally, to fully unleash an individual’s creative potential usually requires a supportive environment with time for the individual to explore their ideas independently, tolerance for unorthodox ideas, a structure that is not overly rigid or hierarchical, and decision norms that do not require consensus.15 Organizational Creativity The creativity of the organization is a function of creativity of the individuals within the organization and a variety of social processes and contextual factors that shape the way those individuals interact and behave.16 An organization’s overall creativity level is thus not a simple aggregate of the creativity of the individuals it employs. The organization’s structure, routines, and incentives could thwart individual creativity or amplify it. Chapter 2 Sources of Innovation 23 intranet A private network, accessible only to authorized individuals. It is like the Internet but operates only within (“intra”) the organization. The most familiar method of a company tapping the creativity of its individual employees is the suggestion box. In 1895, John Patterson, founder of National Cash Register (NCR), created the first sanctioned suggestion box program to tap the ideas of the hourly worker.17 The program was considered revolutionary in its time. The originators of adopted ideas were awarded $1. In 1904, employees submitted 7000 ideas, of which one-third were adopted. Other firms have created more elaborate systems that not only capture employee ideas, but incorporate mechanisms for selecting and implementing those ideas. Google, for example, utilizes an idea management system whereby employees e-mail their ideas for new products and processes to a company-wide database where every employee can view the idea, comment on it, and rate it (for more on how Google encourages innovation, see the Theory in Action on Inspiring Innovation at Google). Honda of America utilizes an employee-driven idea system (EDIS) whereby employees submit their ideas, and if approved, the employee who submits the idea is responsible for following through on the suggestion, overseeing its progress from concept to implementation. Honda of America reports that more than 75 percent of all ideas are implemented.18 Bank One, one of the largest holding banks in the United States, has created an employee idea program called “One Great Idea.” Employees access the company’s idea repository through the company’s intranet. There they can submit their ideas and actively interact and collaborate on the ideas of others.19 Through active exchange, the employees can evaluate and refine the ideas, improving their fit with the diverse needs of the organization’s stakeholders. At Bank of New York Mellon they go a step further—the company holds enterprise-­ wide innovation competitions where employees form their own teams and compete in coming up with innovative ideas. These ideas are first screened by judges at both the regional and business-line level. Then, the best ideas are pitched to senior management in a “Shark Tank” style competition that is webcast around the world. If a senior executive sees an idea they like, they step forward and say they will fund it and run with it. The competition both helps the company come up with great ideas and sends a strong signal to employees about the importance of innovation.20 Idea collection systems (such as suggestion boxes) are relatively easy and inexpensive to implement, but are only a first step in unleashing employee creativity. Today companies such as Intel, Motorola, 3M, and Hewlett-Packard go to much greater lengths to tap the creative potential embedded in employees, including investing in creativity training programs. Such programs encourage managers to develop verbal and nonverbal cues that signal employees that their thinking and autonomy are respected. These cues shape the culture of the firm and are often more effective than monetary rewards—in fact, as noted previously, sometimes monetary rewards undermine creativity by encouraging employees to focus on extrinsic rather than intrinsic motivation.21 The programs also often incorporate exercises that encourage employees to use creative mechanisms such as developing alternative scenarios, using analogies to compare the problem with another problem that shares similar features or structure, and restating the problem in a new way. One product design firm, IDEO, even encourages employees to develop mock prototypes of potential new products out of inexpensive materials such as cardboard or styrofoam and pretend to use the product, exploring potential design features in a tangible and playful manner. Theory in Action   Inspiring Innovation at Google Google is always working on a surprising array of projects, ranging from the completely unexpected (such as autonomous self-driving cars and solar energy) to the more mundane (such as e-mail and cloud services).a In pursuit of continuous innovation at every level of the company, Google uses a range of formal and informal mechanisms to encourage its employees to innovate:b 20 Percent Time: All Google engineers are encouraged to spend 20 percent of their time working on their own projects. This was the source of some of Google’s most famous products (e.g., Google Mail, Google News). Recognition Awards: Managers were given discretion to award employees with “recognition awards” to celebrate their innovative ideas. Google Founders’ Awards: Teams doing outstanding work could be awarded substantial stock grants. Some employees had become millionaires from these awards alone. Adsense Ideas Contest: Each quarter, the Adsense online sales and operations teams reviewed 100 to 200 submissions from employees around the world, and selected finalists to present their ideas at the quarterly contest. Innovation Reviews: Formal meetings where managers present ideas originated in their divisions directly to founders Larry Page and Sergey Brin, as well as to CEO Eric Schmidt.c a  Bradbury, D. 2011. Google’s rise and rise. Backbone, Oct:24–27. b  Groysberg, B., Thomas, D.A. & Wagonfeld, A.B. 2011. Keeping Google “Googley.” Harvard Business School Case 9:409–039. c  Kirby, J. 2009. How Google really does it. Canadian Business, 82(18):54–58. TRANSLATING CREATIVITY INTO INNOVATION Innovation is more than the generation of creative ideas; it is the implementation of those ideas into some new device or process. Innovation requires combining a creative idea with resources and expertise that make it possible to embody the creative idea in a useful form. We will first consider the role of individuals as innovators, including innovation by inventors who specialize in creating new products and processes, and innovation by end users. We then will look at innovation activity that is organized by firms, universities, and government institutions. The Inventor The familiar image of the inventor as an eccentric and doggedly persistent ­scientist may have some basis in cognitive psychology. Analysis of personality traits of inventors suggests these individuals are likely to be interested in theoretical and abstract thinking, and have an unusual enthusiasm for problem solving. One 10-year study of inventors concludes that the most successful inventors possess the following characteristics: 1. They have mastered the basic tools and operations of the field in which they invent, but they have not specialized solely in that field; instead they have pursued two or three fields simultaneously, permitting them to bring different perspectives to each. 2. They are curious and more interested in problems than solutions. 24 Theory in Action   Dean Kamen In January 2001, an Internet news story leaked that iconoclastic inventor Dean Kamen had devised a fantastic new invention—a device that could affect the way cities were built, and even change the world. Shrouded in secrecy, the mysterious device, code-named “Ginger” and “IT,” became the talk of the technological world and the general public, as speculation about the technology grew wilder and wilder. In December of that year, Kamen finally unveiled his invention, the Segway Human Transporter.a Based on an elaborate combination of motors, gyroscopes, and a motion control algorithm, the Segway HT was a self-balancing, twowheeled scooter. Though to many it looked like a toy, the Segway represented a significant advance in technology. John Doerr, the venture capitalist behind Amazon.com and Netscape, predicted it would be bigger than the Internet. Though the Segway did not turn out to be a mass market success, its technological achievements were significant. In 2009, General Motors and Segway announced that they were developing a twowheeled, two-seat electric vehicle based on the Segway that would be fast, safe, inexpensive, and clean. The car would run on a lithium-ion battery and achieve speeds of 35 miles per hour. The Segway was the brainchild of Dean Kamen, an inventor with more than 150 U.S. and foreign patents, whose career began in his teenage days of devising mechanical gadgets in his parents’ basement.b Kamen never graduated from college, though he has since received numerous honorary degrees. He is described as tireless and eclectic, an entrepreneur with a seemingly boundless enthusiasm for science and technology. Kamen has received numerous awards for his inventions, including the Kilby award, the Hoover Medal, and the National Medal of Technology. Most of his inventions have been directed at advancing health-care technology. In 1988, he invented the first self-service dialysis machine for people with kidney failure. Kamen had rejected the original proposal for the machine brought to him by Baxter, one of the world’s largest medical equipment manufacturers. To Kamen, the solution was not to come up with a new answer to a known problem, but to instead reformulate the problem: “What if you can find the technology that not only fixes the valves but also makes the whole thing as simple as plugging a cassette into a VCR? Why do patients have to continue to go to these centers? Can we make a machine that can go in the home, give the patients back their dignity, reduce the cost, reduce the trauma?”c The result was the HomeChoice dialysis machine, which won Design News’ 1993 Medical Product of the Year award. In 1999, Kamen’s company, DEKA Research, introduced the IBOT Mobility System, an extremely advanced wheelchair incorporating a sophisticated balancing system that enabled users to climb stairs and negotiate sand, rocks, and curbs. According to Kamen, the IBOT “allowed a disabled person, a person who cannot walk, to basically do all the ordinary things that you take for granted that they can’t do even in a wheelchair, like go up a curb.”d It was the IBOT’s combination of balance and mobility that gave rise to the idea of the Segway. a  J. Bender, D. Condon, S. Gadkari, G. Shuster, I. Shuster, and M. A. Schilling, “Designing a New Form of Mobility: Segway Human Transporter,” New York University teaching case, 2003. b  E. I. Schwartz, “The Inventor’s Play-Ground,” Technology Review 105, no. 8 (2002), pp. 68–73. c  Ibid. d  The Great Inventor. Retrieved November 19, 2002, from www.cbsnews.com. 3. They question the assumptions made in previous work in the field. 4. They often have the sense that all knowledge is unified. They seek global ­solutions rather than local solutions, and are generalists by nature.22 These traits are demonstrated by Dean Kamen, inventor of the Segway Human Transporter and the IBOT Mobility System (a technologically advanced wheelchair), profiled in the Theory in Action section on Dean Kamen. They are also illustrated in the following quotes by Nobel laureates. Sir MacFarlane Burnet, Nobel Prize–winning 25 26 Part One Industry Dynamics of Technological Innovation immunologist, noted, “I think there are dangers for a research man being too well trained in the field he is going to study,”23 and Peter Debye, Nobel Prize–winning chemist, noted, “At the beginning of the Second World War, R. R. Williams of Bell Labs came to Cornell to try to interest me in the polymer field. I said to him, ‘I don’t know anything about polymers. I never thought about them.’ And his answer was, ‘That is why we want you.’”24 The global search for global solutions is aptly illustrated by Thomas Edison, who did not set out to invent just a lightbulb: “The problem then that I undertook to solve was . . . the production of the multifarious apparatus, methods, and devices, each adapted for use with every other, and all forming a comprehensive system.”25 Such individuals may spend a lifetime developing numerous creative new devices or processes, though they may patent or commercialize few. The qualities that make people inventive do not necessarily make them entrepreneurial; many inventors do not actively seek to patent or commercialize their work. Many of the most well-known inventors (e.g., Alexander Graham Bell, Thomas Alva Edison, Albert Einstein, and Benjamin Franklin), however, had both inventive and entrepreneurial traits.26 Innovation by Users Innovation often originates with those who create solutions for their own needs. Users often have both a deep understanding of their unmet needs and the incentive to find ways to fulfill them.27 While manufacturers typically create new product innovations in order to profit from the sale of the innovation to customers, user innovators often have no initial intention to profit from the sale of their innovation––they create the innovation for their own use.28 Users may alter the features of existing products, approach existing manufacturers with product design suggestions, or develop new products themselves. For example, the extremely popular small sailboat, the Laser, was designed without any formal market research or concept testing. Instead it was the creative inspiration of three former Olympic sailors, Ian Bruce, Bruce Kirby, and Hans Vogt. They based the boat design on their own preferences: simplicity, maximum performance, transportability, durability, and low cost. The resulting sailboat became hugely successful; during the 1970s and ’80s, 24 Laser sailboats were produced daily.29 Another dramatic example is the development of Inderm…

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