Lecture 4

Lecture 4 is about Managing Innovation

Q1: Comparison of Tesla's Resources and Capabilities with Established Automakers

Tesla:

• Less Experience: Tesla is relatively new in the automotive industry compared to established automakers.

• More Money: Despite being a younger company, Tesla has significant financial resources.

• Public Support: Tesla enjoys considerable public support, likely due to its focus on sustainability and innovation.

• Innovative Approach: They are building completely new electric vehicles, not just modified versions of existing cars.

• Proven Battery Packs: Emphasis on using tested and reliable battery technology.

• Integrated Supply Chain: Tesla has a well-integrated supply chain, enhancing efficiency and control.

Competitors:

• The document does not provide specific points for competitors. However, we can infer that established automakers generally have more experience, possibly less financial flexibility compared to Tesla, and may not have the same level of public support or integrated supply chains. Their approach to EVs might also be more conservative, focusing on modifying existing models rather than creating entirely new designs.

Q2: Rationale for Tesla’s Strategy

Tesla's strategy is primarily based on accelerating the transition to sustainable energy, focusing on electric vehicle technology, vertical integration, and direct-to-consumer sales. This strategy plays to Tesla's strengths, such as their financial resources, public support, and innovative approach. By focusing on EV technology, Tesla leverages its expertise in this area, differentiating itself from competitors who might be less advanced in EV development. The vertical integration and direct sales model allow Tesla to maintain greater control over its supply chain and customer experience, addressing its relative inexperience in the automotive industry by bypassing traditional dealership models.

Q3: Tesla’s Decision to Open Its Patents

Tesla's decision to make its patents available to other companies is a strategic move that can be seen as an effort to encourage the broader adoption of electric vehicles. This decision could help standardize technology in the EV industry, potentially leading to faster overall market growth. By fostering a larger market for EVs, Tesla could benefit from increased infrastructure (like charging stations) and a general shift in consumer preferences towards electric vehicles. This strategy plays into Tesla's strengths in innovation and public support, as it positions Tesla not just as a company, but as a leader in the movement towards sustainable transportation. However, this approach also means Tesla is sharing its technological advancements with potential competitors, which could impact its competitive advantage in the long term. ​

Invention

Creation of new products and processes through the development of new knowledge or from new combinations of existing knowledge

Innovation

Conversion of new knowledge into a new product, process or service and launching it to the market

Invention is the act of creating something new, while innovation involves taking something, whether new or existing, and transforming it into a practical, marketable product or service. Both are crucial in technological and societal advancement, but they play different roles in the process of bringing new ideas and products to life and to the market.

1. Basic Knowledge: This is foundational information or research that forms the basis for new products or technologies.

2. Invention: Using basic knowledge, a new product, service, or process is invented.

3. Innovation: The invention is then turned into a marketable product or service, which can be commercialized.

4. Diffusion: The innovation spreads through the market. This happens on two fronts:

   • Supply Side: Competitors may imitate the product, which can lead to "Less Value Capture" by the original innovator due to increased competition.

   • Demand Side: Customers purchase the product, leading to "More Value Creation" as the product gains popularity and market share.

The two outcomes at the end, Imitation and Adoption, represent the two possible paths of diffusion. Imitation by competitors can dilute the market and reduce the profits of the innovating firm, while adoption by customers increases the value created by the firm.

Causal Ambiguity

• Definition: Causal ambiguity refers to the uncertainty or lack of clarity about the specific causes behind a company's success. When the exact reasons for a firm's competitive advantage are unclear or too complex, it becomes challenging for competitors to replicate them.

• Impact: For example, a company might have a unique organizational culture or proprietary technology that drives its success. If competitors cannot pinpoint how these elements contribute to the company's performance, they cannot effectively imitate them.

Social Complexity

• Definition: Social complexity involves the intricate and often intangible relationships, culture, and networks within a company. These can include team dynamics, company culture, brand reputation, customer loyalty, and relationships with suppliers and partners.

• Impact: These social elements are deeply embedded in the company's history and daily operations, making them extremely difficult to replicate. For instance, the unique culture at a tech giant like Google, characterized by innovative thinking and employee freedom, is a product of complex social interactions that cannot be easily duplicated by another firm.

Historical Conditions

• Definition: Historical conditions refer to the unique set of circumstances, timing, and context in which a company was established and grew. This includes the socio-economic environment, the state of technology at the time, and specific market conditions.

• Impact: A competitor cannot replicate these conditions. For example, Apple's rise in the personal computer industry was partly due to the historical context of the 1970s and 1980s, which saw rapid advancements in computing technology and a growing interest in personal electronics. New entrants cannot go back in time to capitalize on these unique conditions.

The slide describes the factors that influence how much value an innovator can retain from their creation:

1. Property Rights in Innovation: Using laws to protect inventions so others can't make money from them without permission. This includes patents, copyrights, trademarks, and trade secrets.

2. Tacitness and Complexity of Tech: How easy it is for others to understand and copy the technology. If it's very complex or relies on unspoken knowledge, it's harder for others to replicate.

3. Lead Time: The head start the innovator has before others can enter the market. During this time, they can establish their product and gain a competitive edge.

4. Complementary Resources: Other things needed to make and sell the innovation, like money, equipment, or skilled workers. Having these can help the innovator make the most of their invention.

The term "Regime of appropriability" refers to how these factors come together to affect the innovator's ability to control and profit from their innovation.

1. Technology Push vs. Market Pull:

   • This decision is about what drives the innovation process. "Technology push" means innovation is driven by technological advancements; the company develops new products because it has created new technology. "Market pull" implies that customer needs and demands in the market drive innovation; the company develops new products because there is a demand for them.

2. Which Kind of Investment?:

   • Companies must decide where to invest for innovation. This could be in research and development (R&D), acquiring startups with promising technology, or investing in skills and training for their workforce to foster innovation internally.

3. Open vs. Closed Innovation:

   • Open innovation refers to using external ideas and innovations as well as internal ones. This can involve collaborations, partnerships, and incorporating customer feedback. Closed innovation is when a company relies solely on its own research and maintains full control over the development and commercialization of its products and services.

Each of these decisions will shape the company's approach to innovation and can significantly affect its success in developing new products and services.

Technology push

R&D labs à Market

Market pull

Users as sources of innovation

• Lead users: Top surgeons, sports

champions,...

• Frugal innovation: Poor consumers

in emerging markets

• Laggards: See obstacles to adoption

Closed Innovation

• Definition: Closed innovation refers to the traditional model where a company relies solely on its internal resources and capabilities to innovate. Research and development (R&D) activities are conducted within the organization, and ideas are typically kept secret until they are fully developed and ready for the market.

• Characteristics:

  • Innovation is driven by internal staff.

  • Intellectual property (IP) is protected and kept within the company.

  • Emphasis on controlling the entire innovation process, from idea generation to market launch.

Open Innovation

• Definition: Open innovation is a more modern approach that emphasizes the use of both internal and external ideas and paths to market. Companies embracing open innovation actively seek and incorporate external knowledge, ideas, technologies, and even IP, in addition to their internal efforts.

• Characteristics:

  • Combining internal and external ideas for innovation.

  • Collaborations with external entities like other companies, universities, and research institutions.

  • Often involves sharing IP, co-development, and partnerships.

  • Recognizes that valuable ideas can come from outside the company and that internal ideas can also be taken to market through external channels.

In summary, closed innovation is about relying exclusively on internal capabilities and ideas, keeping the innovation process within the company's boundaries. In contrast, open innovation is about collaborating and integrating external and internal ideas, recognizing that valuable innovations can arise from a blend of both internal and external sources.

Closed Innovation

Advantages:

1. Control: Full control over the development process and intellectual property.

2. Protection of IP: Greater ability to protect trade secrets and proprietary technologies.

3. Aligned with Business Goals: Internal R&D efforts are closely aligned with the company's specific goals and strategies.

4. Consistency and Integration: Easier integration into existing production and distribution channels.

Disadvantages:

1. Limited Viewpoints: Restricts innovation to internal ideas, potentially missing out on external innovative opportunities.

2. Resource Intensive: Requires substantial investment in internal R&D capabilities.

3. Slower Time-to-Market: Innovations might take longer to develop internally.

4. Risk of Obsolescence: Internal resources may become obsolete or less competitive over time.

Open Innovation

Advantages:

1. Access to a Wider Pool of Ideas: Leverages external knowledge and expertise, which can lead to more diverse and creative solutions.

2. Cost-Effective: Can reduce costs by leveraging external R&D efforts.

3. Faster Time-to-Market: External collaborations can accelerate the innovation process.

4. Adaptability: More adaptable to changes and advancements in technology and market trends.

Disadvantages:

1. Intellectual Property Issues: Managing and protecting IP can be more challenging when collaborating with external parties.

2. Quality Control: Ensuring consistency and quality can be more difficult.

3. Dependency: Potential dependency on external entities for critical innovations.

4. Integration Challenges: Integrating external innovations with internal processes and systems can be complex.

In summary, closed innovation offers control and alignment with internal goals but can be resource-intensive and limiting in terms of idea diversity. Open innovation provides access to a broader range of ideas and can be more cost-effective and adaptable, but it comes with challenges in IP management, quality control, and integration.

Inside-out or Knowledge Outflows

Leverages internal knowledge through external commercialization processes (selling or revealing)

Knowledge outflow

• Out-licensing IP and technology

• Donating IP and technology

• Spin-outs

• Corporate venture capital

• Corporate incubators

• Joint ventures and alliances

Outside-in or Knowledge Inflows

Leverages external knowledge sources through internal processes

Knowledge inflows

• Research consortia

• Venture capital

• Collaboration with intermediates,

suppliers and customers

• Acquisition

• Outsourcing

• Crowdsourcing (crowds and user

communities)

Crowdsourcing is the act of outsourcing a task to a “crowd”(or community), rather than to a designated “agent”, such as a contractor, in the format of an open call to a large undefined group of people generally using the internet

crowd: anonymus

community: stable group

Pros:

• Innovative ideas

• Improved processes and products

• Shorter time to market

• Shared risk

• Low cost solution

Cons:

• Coordination costs

• Dependence on external knowledge •

• Internal culture adaptation

• Brand reputation

• Data paralysis