CH 04

Joe Tidd
and
John Bessant
ISBN: 9781118360637
© 2013 John Wiley & Sons Ltd.

1
www.innovation-portal.info
Chapter 4
Developing an innovation
strategy

2
Session Plan
Limits of Rational Planning
Leadership or
Follower Strategy? Influence of
National Systems
Firm-level processes
& capabilities

3
Innovation Strategy
Session 4 outline:
• Limitations of the rational planning approach to

strategy
• Positions - national systems & competitors
• Paths - competencies & opportunities
• Processes - specialization versus integration
• Identifying & sustaining capabilities

4
Innovation Strategy
Four factors have a major influence on the ability
of a firm to develop and create value through
innovation:
• The national system of innovation in which the firm
is embedded, and which in part defines its range of
choices in dealing with opportunities and threats.
• Its power and market position within the
international value chain, which in part defines the
innovation-based opportunities and threats that it
faces.
5
Innovation Strategy
Four factors have a major influence on the
ability of a firm to develop and create value
through innovation:
• The capability and processes of the firm, including
research, design, development, production,
marketing and distribution.
• Its ability to identify and exploit external sources of
innovation, especially international networks.

6
Innovation Strategy
Choice of strategy (& luck) are more important
than industry:
• choice of industry 8.35%

• choice of strategy 46.4%
• parent company 0.8%
• unexplained (e.g. luck) 44.5%
% total profitability explained. Source: Richard Rumelt “How much does industry matter?”, Strategic
Management Journal, 1991, 12, 167-186

7
Innovation Strategy
Key demands of innovation strategy:
• to develop firm-specific knowledge & capacity

to exploit it
• to cope with environmental complexity &

uncertainty
• to create organizational structures & processes
to manage trade-offs between specialized &
broad knowledge
8
Strategic Management
Two distinct models of strategy:
Rational/Planning Resource/Capabilities-
based
top-down bottom-up
outside-in inside-out
choice variation & selection
ahistorical cumulative
static dynamic/learning

9
Competitor Analysis
Example: Five 'forces' analysis of competitive
environment:
• rivalry amongst existing competitors
• threat of new entrants
• threat of substitute products & services
• power of suppliers
• power of customers

10
Competitor Analysis
But innovation affects all five forces:
• rivalry - basis of competition, industry boundaries

• new entrants - raise or lower entry barriers
• substitutes- relative price/performance, new
products
• customers & suppliers - switching costs, relative
power, vertical integration
11
Limitations of the rational planning:
• Focus on with competitors, not customers
• Difficult to identify internal strengths & weaknesses
e.g. oil firms & 'energy'; computer firms &
'information’
• Strategic objectives do not match internal capabilities
• The environment is often complex & uncertain e.g.
multi-media industry

12
Growth-Share Matrix: The ‘Boston Box’
HIGH
Star Problem
Child
Market Growth
Cash Cow
Dog
LOW
HIGH LOW
Relative Market Share
13
Attractiveness/Strength Matrix - The GE Grid
HIGH
Market
Attractiveness
LOW
STRONG AVERAGE WEAK

Business Position/Strength
14
Limitations of portfolio analysis:
• based on industry averages, not outliers
• ignores leverage/ synergy across businesses
• ignores relative opportunity to improve position

15
Rational planning approach ignores constraints:
• Size & resources of the firm

• Existing product & technological base
• Technological opportunities for innovation
• Market opportunities for innovation

16
Innovation Strategy
Concept of Blue Ocean strategies, compared to
traditional strategic thinking, or Red Ocean
strategies:
• Create uncontested market space, rather than compete
in existing market space
• Make the competition irrelevant, rather than beat
competitors
• Create &capture new demand, rather than fight for
existing markets and customers
• Break the traditional value/cost trade-off: Align the
whole system of a company's activities in pursuit of
both differentiation and low cost

17
Capabilities Approach
Key factors in innovation strategy:
• position of the firm - technologies, processes &
products compared to competitors
• paths open to the firm, given its competencies &
emerging opportunities
• processes to integrate & exploit competencies
within & between firms
Source: Teece & Pisano

18
Positions - national factors
National factors influencing competencies:
• input prices
• natural resources
• local buyers tastes
• public & private investments

19
Positions - innovation clusters
Internationalization or globalization?
• Markets > 70%

• Production > 25 %
• Innovation < 12 %

20
Position
National factors influencing competencies:
• input prices
• natural resources
• local buyers tastes
• public & private investments

21
Positions – Emerging Economies
Firms in emerging economies may pursue different routes to
upgrading through innovation:
• Process upgrading – incremental process improvements to

adapt to local inputs, reduce costs or to improve quality.
• Product upgrading – through adaptation, differentiation,
design and product development.
• Capability upgrading – improving the range of functions
undertaken, or changing the mix of functions, for example,
production versus development or marketing.
• Inter-sectoral upgrading - moving to different sectors, for
example, to those with higher value-added.

22
Positions - competition
Assessing competencies of competitors:
• How do they compare in terms of size & composition?
• How efficiently are they exploited?

• How effectively do we learn from their knowledge &
experience?
• How do we differentiate, develop & maintain our
innovation advantages?

23
Paths - time horizons
Level, time & focus of innovation strategy:
• Business unit - 2-3 years - improving cost & quality,

new product & service development
• Group/division - 5 years - positioning & exploiting
synergies across business units
• Corporate - 10 years - environmental scanning &
competence-building

24
Paths & Processes - capabilities &
innovation
Products &
services
Processes
Capabilities
Competencies
Resources/assets

25
Paths - capabilities & innovation
Innovation & strategic positioning:
• pioneering technology, processes, products

• accumulated tacit knowledge
• complexity
• complementary assets
• standards
• patents

26
Sources of sustainable advantage:
• positional e.g. past investments, reputation

• business systems e.g. process capability
• organizational e.g. culture
• regulatory e.g. patents, trademarks
Source: Coyne (1986)

27
Characteristics of competencies:
• firm-specific, idiosyncratic
• significant benefit or value to customers
• take time to develop
• sustainable as difficult to imitate or acquire
• unique configurations of resources
• strong tacit content & socially complex
Source: Hall (2000)

28
Processes - Knowledge
Key organizational issue is how to balance
conflicting requirements:
• to identify & develop specialized knowledge within

technologies & markets
• to exploit this knowledge by integrating across
technologies & markets

29
Processes - Innovation
Process of strategy formation:
• given uncertainty, explore implication of a range of

possible futures
• encourage the use of multiple sources of
information, debate & scepticism
• ensure broad participation & informal channels of
communication
• plan to change strategy in the light of new &
unexpected evidence

30
Processes - Resource Allocation
Resource allocation under uncertainty:
• encourage experimentation, risk-taking &

incrementalism
• apply different criteria for different types of project
• use simple, transparent criteria
• make rules for termination explicit
• identify & plan for uncertainties

31
Innovation Process
Generic phases of the innovation process:
• Searching & scanning the internal & external

environments
• Filtering & selecting potential opportunities
• acquiring the technical, financial & market resources
• implementing development & commercialisation
• reviewing & learning from experience

32
Innovation Process
Factors affecting the precise process:
• Sector - competitors, structure & constraints

• Markets - opportunities & rate of change
• Technology - maturity & costs
• Resources - firm & networks
• Location - regulation, policy & systems of innovation

33
Decision-making under Uncertainty
So, Innovation: Response or strategy?
“. . . chance favours only the prepared

mind”, L. Pasteur, 1854
“...the more I practice, the luckier I get…”,

Gary Player (champion golfer)

34
Innovation Strategy
Advantages of being first to market:
• reputation as a pioneer
• capture market share
• early learning curve benefits
• definition of standards
• establish entry barriers eg patents
• dominate supply & distribution chains
• earn ‘monopoly’ profits
35
Innovation Strategy
Disadvantages of being first to market:
• pioneering costs, educating buyers, regulatory

approval
• demand uncertainty
• changing buyer needs
• low-cost imitation
• followers ‘leapfrog’ technology

36
Conclusions:
Innovation Strategy
Conclusions and implications from observation and research:
• The elements national systems of innovation interact to

influence the degree and direction of innovation in a
country.
• The uneven global distribution of innovation demands
global search strategies for the development &
commercialization of innovation.
• The position of a firm in an international value chain will
constrain the opportunities for innovation and
entrepreneurship.

37
Conclusions:
Innovation Strategy
Conclusions and implications from observation and
research:
• National context influences, but does not determine

the rate and direction of innovation at the firm
level.
• Dynamic capabilities and firm-level processes
contribute to the development and growth of firms.
Sources: J. Bessant & J. Tidd (2007) Innovation and Entrepreneurship (Wiley); J. Tidd (2006) From Knowledge Management to Strategic
Competence (Imperial College Press, 2nd edition); J. Tidd, & J. Bessant (2009) Managing Innovation: Integrating technological, market &
organizational change (Wiley, 4th edition); S. Isaksen & J. Tidd (2006) Meeting the Innovation Challenge: Leadership for Transformation
and Growth (Wiley).

38

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Joe Tidd

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

Limits of Rational Planning

© 2013 John Wiley & Sons Ltd.

• Limitations of the rational planning approach to

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

• choice of industry 8.35%

© 2013 John Wiley & Sons Ltd.

• to develop firm-specific knowledge & capacity

• to cope with environmental complexity &

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

• rivalry - basis of competition, industry boundaries

© 2013 John Wiley & Sons Ltd.

STRONG AVERAGE WEAK

• ignores leverage/ synergy across businesses

• ignores relative opportunity to improve position

© 2013 John Wiley & Sons Ltd.

• Size & resources of the firm

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

Source: Teece & Pisano

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

• Markets > 70%

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

• Process upgrading – incremental process improvements to

© 2013 John Wiley & Sons Ltd.

• How do they compare in terms of size & composition?

• How efficiently are they exploited?

© 2013 John Wiley & Sons Ltd.

• Business unit - 2-3 years - improving cost & quality,

© 2013 John Wiley & Sons Ltd.

© 2013 John Wiley & Sons Ltd.

• pioneering technology, processes, products

© 2013 John Wiley & Sons Ltd.

• positional e.g. past investments, reputation

Source: Coyne (1986)

© 2013 John Wiley & Sons Ltd.

Source: Hall (2000)

• to identify & develop specialized knowledge within

© 2013 John Wiley & Sons Ltd.

• given uncertainty, explore implication of a range of

© 2013 John Wiley & Sons Ltd.

• encourage experimentation, risk-taking &

© 2013 John Wiley & Sons Ltd.

• Searching & scanning the internal & external

© 2013 John Wiley & Sons Ltd.

• Sector - competitors, structure & constraints

© 2013 John Wiley & Sons Ltd.

“. . . chance favours only the prepared

“...the more I practice, the luckier I get…”,

© 2013 John Wiley & Sons Ltd.

• pioneering costs, educating buyers, regulatory

© 2013 John Wiley & Sons Ltd.

• The elements national systems of innovation interact to