Management Question

‫المملكة العربية السعودية‬
‫وزارة التعليم‬
‫الجامعة السعودية اإللكترونية‬

Kingdom of Saudi Arabia
Ministry of Education
Saudi Electronic University

College of Administrative and Financial Sciences

Assignment 1
Management of Technology (MGT 325)
Due Date: 2nd March 2025@ 23:59

Course Name: Management of Technology

Student’s Name:

Course Code: MGT325

Student’s ID Number:

Semester: 2nd Sem

CRN:
Academic Year:2024-25

For Instructor’s Use only
Instructor’s Name: Dr. Suliman Alazzaz
Students’ Grade: 00 /10

Level of Marks: High/Middle/Low

Instructions – PLEASE READ THEM CAREFULLY
• The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be
reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or
other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) font.
No pictures containing text will be accepted and will be considered plagiarism).
• Submissions without this cover page will NOT be accepted.

Restricted – ‫مقيد‬

Course Learning Outcomes-Covered
➢ Recognize the dynamics and the importance of managing technological innovation
strategically. (LO 1)

Reference Source:
Textbook:Schilling M.A (2020),Strategic Management of Technology Innovation (6th Edition). McGraw Hill Education. Electronic Version: ISBN-13: 978-1260087956 ISBN-10:
1260087956, Printed Version: ISBN-13: 978-1260087956 ISBN-10: 1260087956

Students are required to refer to Chapters 1, 2, and 3 of their textbook to develop a
comprehensive understanding of the fundamental concepts of technological
innovation, sources of innovation, and patterns of innovation. A critical analysis of
each topic and subtopic is essential, demonstrating not only knowledge retention but
also an ability to evaluate and apply theoretical concepts to real-world scenarios.
Assignment 1-Essay

Total Marks: 10

Write an essay on “ The Role of Innovation in KSA’s Economic Diversification” in 12001500 words with the mentioned key focus Areas :
1. Introduction (1Mark)
✓ Define technological innovation and its significance in shaping global
economies and Provide an overview of Saudi Arabia’s Vision 2030 and its
emphasis on technology-driven economic transformation.
2. The Importance of Technological Innovation (3 marks) (Referencing Chapter 1)
✓ Explain why technological innovation is a critical driver of competitive
advantage and economic growth.
✓ Discuss the impact of innovation on industries such as oil and gas, renewable
energy, artificial intelligence, and fintech.
✓ Provide real-world examples of how Saudi Arabia is leveraging technological
advancements to enhance productivity and economic sustainability.

Restricted – ‫مقيد‬

3. Sources of Innovation in Saudi Arabia (3 marks) (Referencing Chapter 2)
✓ Discuss the various sources of innovation (e.g., firms, universities, government
policies, research institutions, and entrepreneurship).
✓ Analyse the role of government initiatives such as NEOM, King Abdulaziz City
for Science and Technology (KACST), and the Saudi Data and AI Authority
(SDAIA) in fostering innovation.
✓ Evaluate the collaboration between academia and industry in driving research
and development (R&D) efforts in KSA.
4. Types and Patterns of Innovation in KSA (2 Marks) (Referencing Chapter 3)
✓ Differentiate between radical vs. incremental innovation and competenceenhancing vs. competence-destroying innovation.
✓ Provide examples of Saudi companies and industries that have embraced
different innovation strategies.
5. Conclusion (1 marks)
✓ Summarize key findings and insights from the essay.
Submission Guidelines
✓

Word Count: 1200-1500 words

✓

Formatting: Times New Roman, 12pt, double-spaced

✓

Referencing Style: APA (in-text citations and reference list)

✓

Plagiarism Policy: Submissions must be original and properly referenced. Any
plagiarized content will result in penalties as per university guidelines.

Directions:
✓ All students are encouraged to use their own words.
✓ The assignment should be approximately 1200-1500 words in length.
✓ Use Saudi Electronic University academic writing standards and APA style
guidelines.
✓ Use proper referencing (APA style) to reference, other styles will not be accepted.
✓ Support your submission with course material concepts, principles, and theories from
the textbook and at least two scholarly, peer-reviewed journal articles unless the
assignment calls for more.
✓ It is strongly encouraged that you submit all assignments into the safe assignment
Originality Check prior to submitting it to your instructor for grading and review the
grading rubric to understand how you will be graded for this assignment.

Restricted – ‫مقيد‬

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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

!

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” Chapter ! 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.

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Chapter ! Introduction #

FIGURE !.!
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.

sch87956_ch01_001-012.indd

3

!”## –

!”##—Electric battery
!”#$—Steam locomotive
!”#%—Internal combustion engine
!”#&—Telegraph
!”!%—Bicycle

!”‘# –

!”‘!—Dynamo
!”‘$—Braille writing system
!”‘”—Hot blast furnace
!”(!—Electric generator
!”()—Five-shot revolver

!”$# –

!”$!—Bunsen battery (voltaic cell)
!”$’—Sulfuric ether-based anesthesia
!”$)—Hydraulic crane
!”*#—Petroleum refining
!”*)—Aniline dyes

!”)# –

!”)’—Gatling gun
!”)%—Typewriter
!”%)—Telephone
!”%%—Phonograph
!”%”—Incandescent lightbulb

!””# –

!””*—Light steel skyscrapers
!””)—Internal combustion automobile
!””%—Pneumatic tire
!”&’—Electric stove
!”&*—X-ray machine

!# –

!’—Air conditioner (electric)
!(—Wright biplane
!)—Electric vacuum cleaner
!&!#—Electric washing machine
!&!$—Rocket

!&’# –

!&’!—Insulin (extracted)
!&’%—Television
!&'”—Penicillin
!&()—First programmable computer
!&(&—Atom fission

!&$# –

!&$’—Aqua lung
!&$(—Nuclear reactor
!&$%—Transistor
!&*%—Satellite
!&*”—Integrated circuit

!&)# –

!&)%—Portable handheld calculator
!&)&—ARPANET (precursor to Internet)
!&%!—Microprocessor
!&%(—Mobile (portable cellular) phone
!&%)—Supercomputer

!&”# –

!&”!—Space shuttle (reusable)
!&”%—Disposable contact lenses
!&”&—High-definition television
!&—World Wide Web protocol
!&&)—Wireless Internet

‘### –

‘##(—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.

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$ Chapter ! Introduction

FIGURE !.”

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

19

80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16

–

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

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Chapter ! Introduction %

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 “”#weeks from concept to market introduction.
More innovative projects took significantly longer,

clocking in at $% weeks. The development of radical
products or technologies took the longest, averaging
&’ weeks. The study also found that on average, for
more innovative and radical projects, firms reported
significantly shorter cycle times than those reported
in the previous PDMA surveys conducted in !(($
and ‘))*.
a

Adapted from Markham, S. K., and H. Lee, “Product Development and Management Association’s ‘)!’ Comparative Performance Assessment Study,” Journal of Product
Innovation Management “), no. ” (‘)!”): *)&–'(.

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 !.#

The New Product Development Funnel in
Pharmaceuticals
5000
Compounds

125
Leads

Discovery & Preclinical
3–6 years

sch87956_ch01_001-012.indd

5

2–3 drugs tested

Clinical Trials
6–7 years

1 drug

Rx

Approval
½–2 years

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& Chapter ! 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

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Chapter ! Introduction ‘

FIGURE !.$

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

Chapter 12
Managing New
Product
Development Teams

Chapter 13
Crafting a
Deployment
Strategy

Feedback

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( Chapter ! 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

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Chapter ! Introduction )

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.

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!* Chapter ! 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.

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Chapter ! Introduction !!

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?” American
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.

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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 evolution 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.

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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

Chapter 12
Managing New
Product
Development Teams

Chapter 13
Crafting a
Deployment
Strategy

Feedback

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Chapter Two
Sources of Innovation
The Rise of “Clean Meat”a
In late !”#$, 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 #%&”,
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
#”””‘gallons of water, and each egg requires (” gallons. Each gallon of cow’s
milk required %””‘gallons of water. A study by Oxford University indicated that
meat grown from cells would produce up to %& percent lower greenhouse gas
emissions, use )( percent less energy, %% percent less land, and %& percent
less water.c
Scientists also agreed that producing animals for consumption was simply
inefficient. Estimates suggested, for example, that it required roughly !* 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
!”

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!# 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 !””), Jason Matheny, a !%-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 #%%%. 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 !””(, 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 !””%, the foundation of Sergey Brin, cofounder of Google, contacted Matheny
to learn more about cultured meat technologies. Matheny referred Brin’s

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Chapter ! Sources of Innovation !$

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 !”##, 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 !”#*, 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 #”” 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 !”#(, Uma Valeti, a cardiologist at the Mayo Clinic founded his own culturedmeat 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-*s? 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 !”#(.
On the menu: a meatball. This time the giant agribusiness firms took notice.

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!% Part One Industry Dynamics of Technological Innovation

At the end of !”#&, Tyson Foods, the world’s largest meat producer, announced
that it would invest $#(” million in a venture capital fund that would develop
alternative proteins, including meat grown from self-reproducing cells. In
August of !”#$, agribusiness giant Cargill announced it was investing in Memphis Meats, and a few months later in early !”#+, Tyson Foods also pledged
investment.
That first meatball cost $#!””; 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 $!.& billion in R&D—much more than the first cultured meats. Scale and learning curve efficiencies would drive that cost down.
Valeti had faith that the company would soon make cultured meat not only
competitive with traditional meat, but more affordable. Growing meat rather than
whole animals had, after all, inherent efficiency advantages.
Some skeptics believed the bigger problem was not production economies,
but consumer acceptance: would people be willing to eat meat grown without animals? Sergey Brin, Bill Gates, Jeff Bezos, Jack Ma, and Richard Branson
were willing to bet that they would. As Branson stated in !”#$, “I believe that in
*” 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
#. What were the potential advantages of developing clean meat? What were
the challenges of developing it and bringing it to market?
!. What kinds of organizations were involved in developing clean meat? What
were the different resources that each kind of organization brought to the
innovation?
*. 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

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Chapter ! Sources of Innovation !&

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 ‘.!

Sources of
Innovation as a
System

Firms

Individuals

Private
Nonprofits

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Universities

GovernmentFunded Research

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‘( 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

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Chapter ! Sources of Innovation ‘!

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

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” 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.

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Chapter ! Sources of Innovation ‘)

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 enterprisewide 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.

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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
‘( Percent Time: All Google engineers are encouraged
to spend !” 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 $”” to !””#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. !”$$. Google’s rise and rise. Backbone,
Oct:!%–!&.
b
Groysberg, B., Thomas, D.A. & Wagonfeld, A.B. !”$$. Keeping Google “Googley.” Harvard Business School Case
‘:%”‘–”(‘.
c
Kirby, J. !””‘. How Google really does it. Canadian Business,
)!($)):*%–*).

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.
‘*

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Theory in Action

Dean Kamen

In January !””$, 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 !””‘, 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 (* miles per hour.
The Segway was the brainchild of Dean Kamen, an
inventor with more than $*” 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 $’)), 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’ $”( Medical Product of the Year award.
In $”’, 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, !””(.
b
E. I. Schwartz, “The Inventor’s Play-Ground,” Technology Review
$”*, no. ) (!””!), pp. +)–&(.
c
Ibid.
d
The Great Inventor. Retrieved November $’, !””!, 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
‘”

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‘# 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 Indermil, a tissue adhesive based
on Super Glue. Super Glue is a powerful instant adhesive, and while its strength and
speed of action were a great asset in most product applications, these features also
caused a key product concern—its tendency to bond skin. Managers at Loctite, the
company that developed Super Glue, wondered if this tendency could be exploited to
develop an alternative to sutures for surgical applications. In the 1970s, the company
experimented with developing a version of the adhesive that could be packaged and
sterilized, but the project failed and funding for it was canceled. In 1980, the project was resurrected when Loctite was approached by a pharmaceutical company that
wanted to collaborate on developing a wound closure product. The two companies spent
three years attempting to develop special Super Glues that would degrade quickly in
the”body, but ultimately shelved the project again. By this point most managers in the
company no longer wanted to be involved in developing an alternative to sutures—it
was considered far too risky. However, in 1988, Bernie Bolger of Loctite was contacted
by Professor Alan Roberts, a worldwide figure in reconstructive surgery. Roberts proceeded to give the managers at Loctite a stunning presentation about doctors who had

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Chapter ! Sources of Innovation ‘$

basic research

Research targeted
at increasing
scientific knowledge for its own
sake. It may or
may not have
any long-term
commercial
application.

applied
research

Research targeted
at increasing
knowledge for a
specific application or need.

responded to the Bradford football stadium fire of 1983. Roberts and many other doctors had been called in to carry out surgery and skin grafting in makeshift tents around
the stadium. Because stitching was too slow and skin damage was such that sutures
would be ineffective, the doctors had used standard tubes of Super Glue to repair the
skin and stick skin grafts in place! Roberts showed pictures of doctors in green garb
standing around with Super Glue tubes stuck to their aprons, and pictures of people
with large areas of skin missing and then those same people years later, with almost
perfect skin repairs. Roberts begged the Loctite managers to continue their work on
developing a version of Super Glue for tissue adhesion. Roberts’s presentation was so
compelling that the company again took up the project, this time with support from the
CEO and serious funding. Approval from the U.S. Food and Drug Administration was
won in 2002, and by 2003 the product was selling well in over 40 countries.30

Research and Development by Firms
Across all nations, one of the most obvious sources of firm innovation is the firm’s
own research and development efforts. In most developed countries, firms account for
the majority of R&D performed (see Figure”2.2).
Though the terms research and development are often lumped together, they actually
represent different kinds of investment in innovation-related activities. Research can
refer to both basic research and applied research. Basic research is effort directed at
increasing understanding of a topic or field without a specific immediate commercial
application in mind. This research advances scientific knowledge, which may (or may
not) turn out to have long-run commercial implications. Applied research is”directed

FIGURE ‘.’

Percent of
R&D That Is
Basic, Applied,
or Experimental, by Country, 2015

90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
United
States

China

% Basic

sch87956_ch02_013-042.indd

27

Japan

% Applied

South
Korea

France

India

% Experimental development

United
Kingdom

% Other

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‘% Part One Industry Dynamics of Technological Innovation

development

Activities that
apply knowledge
to produce useful
devices, materials, or processes.

at increasing understanding of a topic to meet a specific need. In industry, this research
typically has specific commercial objectives. Development refers to activities that
apply knowledge to produce useful devices, materials, or processes. Thus, the term
research and development refers to a range of activities that extend from early exploration of a domain to specific commercial implementations. A firm’s R&D intensity
(its”R&D expenditures as a percentage of its revenues) has a strong positive correlation
with its sales growth rate, sales from new products, and profitability.31
Figure”2.2 shows the percent of R&D that was basic, applied, or experimental for
a selected number of countries in 2015. As shown, China, Japan, and Korea placed
much higher emphasis on development than the other countries.
During the 1950s and 1960s, scholars of innovation emphasized a science-push
approach to research and development.32 This approach assumed that innovation
proceeded linearly from scientific discovery, to invention, to engineering, then
manufacturing activities, and finally marketing. According to this approach, the
primary sources of innovation were discoveries in basic science that were translated into commercial applications by the parent firm. This linear process was soon
shown to have little applicability to real-world products. In the mid-1960s, another
model of innovation gained prominence: the demand-pull model of research and
development. This approach argued that innovation was driven by the perceived
demand of potential users. Research staff would develop new products in efforts
to respond to customer problems or suggestions. This view, however, was also
criticized as being too simplistic. Rothwell, for example, points out that different
phases of innovation are likely to be characterized by varying levels of science push
and demand pull.33
Most current research suggests that firms that are successful innovators utilize multiple sources of information and ideas, including:
! In-house research and development, including basic research.
! Linkages to customers or other potential users of innovations.
! Linkages to an external network of firms that may include competitors, complementors, and suppliers.
! Linkages to other external sources of scientific and technical information, such as
universities and government laboratories.34

Firm Linkages with Customers, Suppliers, Competitors,
and Complementors
Firms often form alliances with customers, suppliers, complementors, and even competitors to jointly work on an innovation project or to exchange information and other
resources in pursuit of innovation. Collaboration might occur in the form of alliances,
participation in research consortia, licensing arrangements, contract research and
development, joint ventures, and other arrangements. The advantages and disadvantages of different forms of collaboration are discussed in Chapter Eight. Collaborators
can pool resources such as knowledge and capital, and they can share the risk of a new
product development project.
The most frequent collaborations are between firms and their customers, suppliers,
and local universities (see Figure”2.3).35 Several studies indicate that firms consider

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Chapter ! Sources of Innovation ‘&

FIGURE ‘.)

Percentage of Companies That Report Extensive Collaboration with Customers, Suppliers,
and Universities
Source: E. Roberts, “Benchmarking Global Strategic Management of Technology,” Research Technology Management, March–April
2001, pp. 25–36.

North America (%)

Europe (%)

Japan (%)

))
)(
*)

*+
)(
*!

(!
)#
*)

Collaborates with:
Customers
Suppliers
Universities

complementors
Producers of
complementary
goods or services
(e.g., for video
game console
producers such
as Sony or
Nintendo, game
developers) are
complementors.

absorptive
capacity

The ability of
an organization
to recognize,
assimilate, and
utilize new
knowledge.

users their most valuable source of new product ideas. The use of such collaborations
is consistent across North America, Europe, and Japan, though Japanese firms may be
somewhat more likely to collaborate extensively with their customers (see Figure”2.3).
Firms may also collaborate with competitors and complementors. Complementors
are organizations (or individuals) that produce complementary goods, such as lightbulbs for lamps, chargers for electric vehicles, or applications for smartphones. In
some industries, firms produce a range of goods and the line between competitor and
complementor can blur.
In some circumstances, firms might be bitter rivals in a particular product category
and yet engage in collaborative development in that product category or complementary product categories. For instance, Microsoft competes against Rockstar Games in
many video game categories, yet also licenses many Rockstar Games to play on its
Xbox models. Rockstar is thus both a competitor and complementor to Microsoft. This
can make the relationships between firms very complex—firms may have to manage a
delicate balance between its roles of competitor versus complementor, or complementors might refuse to cooperate. For example, when Google bought Motorola Mobility in
2011, makers of mobile phone handsets that used Google’s Android operating system
such as Samsung and HTC were watching closely to see if Google would give Motorola
handsets preferential access to Google software. Many analysts speculated that Samsung
and HTC would begin developing more phones based on Microsoft’s mobile operating
system. To avoid the ire and defection of its complementors, Google announced that
Motorola would be run as a separate entity and be given no advantages over makers of
other Android-powered handsets. Android was to remain an equal-opportunity platform
where any handset maker had a shot at making the next great Android phone.36

External versus Internal Sourcing of Innovation
Critics have often charged that firms are using external sources of technological innovation rather than investing in original research. But empirical evidence suggests that
external sources of information are more likely to be complements to rather than substitutes for in-house research and development. Research by the Federation of British
Industries indicated firms that had their own research and development were also
the heaviest users of external collaboration networks. Presumably doing in-house
R&D helps to build the firm’s absorptive capacity, enabling it to better assimilate

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)( Part One Industry Dynamics of Technological Innovation

and utilize information obtained externally.37 Absorptive capacity refers to the firm’s
ability to understand and use new information (absorptive capacity is discussed in
more detail in Chapter Four).

Universities and Government-Funded Research
Another important source of innovation comes from public research institutions such
as universities, government laboratories, and incubators. A significant share of companies report that research from public and nonprofit institutions enabled them to
develop innovations that they would not have otherwise developed.38

Universities
Universities in the United States performed $64.6 billion worth of R&D in 2015, making them the second largest performer of R&D in the United States after industry, and
making the United States the place where universities spend the most money on R&D,
on an absolute basis, in the world (see Figure”2.4). Of that, over $40 billion was for
basic research (versus applied research), making universities the number one performer of basic research in the United States. The nation where universities perform
the highest share of R&D, on the other hand, is the United Kingdom, where universities
spend $11.9 billion, accounting for 25.6% of total R&D performance in the country.
Many universities encourage their faculty to engage in research that may lead to useful
innovations. Typically the intellectual property policies of a university embrace both
patentable and unpatentable innovations, and the university retains sole discretion over
the rights to commercialize the innovation. If an invention is successfully commercialized, the university typically shares the income with the individual inventor(s).39

90.0
% of total R&D performance

Total R&D
Expenditures
and Percent of
R&D Funds
by Performing Sector, by
Country 2015

600.0

80.0

500.0

70.0
60.0

400.0

50.0

300.0

40.0
30.0

200.0

20.0

100.0

10.0
0.0

United
States

China

Japan Germany South France
Korea

India

United
Kingdom

0.0

Total R&D expenditures (PPP $billions)

FIGURE ‘.*

R&D performance: Share of total (%) Business
R&D performance: Share of total (%) Government
R&D performance: Share of total (%) Higher education
R&D performance: Share of total (%) Private nonprofit
Total R&D Expenditures (PPP $billions)

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Chapter ! Sources of Innovation )!

technology
transfer
offices

Offices designed
to facilitate the
transfer of technology developed
in a research
environment to
an environment
where it can be
commercially
applied.

science parks

Regional districts, typically
set up by government, to foster
R&D collaboration between
government,
universities, and
private firms.

incubators

Institutions
designed to nurture the development of new
businesses that
might otherwise
lack access to
adequate funding
or advice.

To” increase the degree to which university research leads to commercial innovation,
many universities have established technology transfer offices.
In the United States, the creation of university technology transfer offices accelerated rapidly after the Bayh–Dole Act was passed in 1980. This act allowed universities
to collect royalties on inventions funded with taxpayer dollars. Before this, the federal government was entitled to all rights from federally funded inventions.40 Several
European and Asian countries subsequently followed the U.S. lead and established
legislation similar to Bayh–Dole, including Denmark, Austria, Finland, Norway,
Germany, France, United Kingdom, Japan, China, and India. Sweden and Italy, on
the other hand, still have a policy of “professor’s privilege” where university faculty
retain sole ownership rights over their inventions. While the revenues from the university technology transfer activities are still quite small in comparison to university
research budgets, their importance is growing. Initially, many anticipated that businesses would flock to license the intellectual property created by universities, leading to a substantial flow in licensing revenues. This “if you build it they will come”
mindset turned out to be wrong, and licensing revenues were far less than expected.
Now universities are taking a much more active role in helping to create start-ups
based on their intellectual property, and in proactively forging relationships with the
commercial sector.41 Universities also contribute significantly to innovation through
the publication of research results that are incorporated into the development efforts
of other organizations and individuals.

Government-Funded Research
Governments of many countries actively invest in research through their own laboratories, the formation of science parks and incubators, and grants for other public or
private research entities. For example, the U.S. Small Business Administration manages two programs that enable innovative small businesses to receive funding from
federal agencies such as the Department of Defense, the Department of Energy, the
Department of Health and Human Services, and others. The first is the Small Business Innovation Research (SBIR) program. Under the SBIR program, agencies award
grants of up to $1,150,000 to small businesses to help them develop and commercialize a new innovation. The second is the Small Business Technology Transfer (STTR)
program, which awards grants of up to $1,150,000 to facilitate a partnership between
a small business and a nonprofit research institution—its objective is to more fully
leverage the innovation that takes place in research laboratories by connecting research
scientists with entrepreneurs.
Notable examples of science parks with incubators include:
!
!
!
!

Stanford Research Park, established near Stanford University in 1951.
Research Triangle Park, established in North Carolina in 1959.
Sophia Antipolis Park, established in Southern France in 1969.
Cambridge Science Park, established in Cambridge, England, in 1972.

These parks create fertile hotbeds for new start-ups and a focal point for the
collaboration activities of established firms. Their proximity to university laboratories and other research centers ensures ready access to scientific expertise. Such
centers also help university researchers implement their scientific discoveries in

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)’ Part One Industry Dynamics of Technological Innovation

commercial applications.42 Such parks often give rise to technology clusters that
have long-lasting and self-reinforcing advantages (discussed later in the chapter).

Private Nonprofit Organizations
Private nonprofit organizations, such as private research institutes, nonprofit hospitals, private foundations, professional or technical societies, academic and industrial
consortia, and trade associations, also contribute to innovation activity in a variety of
complex ways. Many nonprofit organizations perform their own research and development activities, some fund the research and development activities of other organizations but do not do it themselves, and some nonprofit organizations do both in-house
research and development and fund the development efforts of others.

INNOVATION IN COLLABORATIVE NETWORKS
As the previous sections indicate, there is a growing recognition of the importance of
collaborative research and development networks for successful innovation.43 Such collaborations include (but are not limited to) joint ventures, licensing and second-sourcing
agreements, research associations, government-sponsored joint research programs,
value-added networks for technical and scientific interchange, and informal networks.44
Collaborative research is especially important in high-technology sectors, where it is
unlikely that a single individual or organization will possess all of the resources and
capabilities necessary to develop and implement a significant innovation.45
As firms forge collaborative relationships, they weave a network of paths between
them that can act as conduits for information and other resources. By providing member firms access to a wider range of information (and other resources) than individual
firms possess, interfirm networks can enable firms to achieve much more than they
could achieve individually.46 Thus, interfirm networks are an important engine of
innovation. Furthermore, the structure of the network is likely to influence the flow of
information and other resources through the network. For example, in a dense network
where there are many potential paths for information to travel between any pair of
firms, information diffusion should be fairly rapid and widespread.47
Figure”2.5 provides pictures of the worldwide technology alliance network in 1995
and in 2000.48 The mid-1990s saw record peaks in alliance activity as firms scrambled
to respond to rapid change in information technologies. This resulted in a very large
and dense web of connected firms. The network shown here connects 3856 organizations, predominantly from North America, Japan, and Europe. However, there was a
subsequent decline in alliance activity toward the end of the decade that caused the
web to diminish in size and splinter apart into two large components and many small
components. The large component on the left is primarily made up of organizations
in the chemical and medical industries. The large component on the right is primarily
made up of organizations in electronics-based industries. If the size and density of the
collaboration network influences the amount of information available to organizations
that are connected via the network, then the difference between the network shown for
1995 and the network shown for 2000 could have resulted in a substantial change in
the amount of information that was transmitted between firms. (The strategic implications for a firm’s position within the network are discussed in Chapter Eight.)

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Chapter ! Sources of Innovation ))

FIGURE ‘.”

The Global Technology Collaboration Network, 1995 and 200049
1995

IBM Corp.
Motorola Inc.
Hewlett-Packard Co.

Technology Clusters

technology
clusters

Regional clusters
of firms that have
a connection to a
common technology, and may
engage in buyer,
supplier, and
complementor
relationships, as
well as research
collaboration.

Sometimes geographical proximity appears to play a role in the formation and innovative activity of collaborative networks. Well-known regional clusters such as
Silicon Valley’s semiconductor firms, lower Manhattan’s multimedia cluster, and the
Modena, Italy, knitwear district aptly illustrate this point. This has spurred considerable interest in the factors that lead to the emergence of a cluster. City and state
governments, for example, might like to know how to foster the creation of a technology cluster in their region in order to increase employment, tax revenues, and other
economic benefits. For firms, understanding the drivers and benefits of clustering
is useful for developing a strategy that ensures the firm is well positioned to benefit
from clustering.
Technology clusters may span a region as narrow as a city or as wide as a group
of neighboring countries.50 Clusters often encompass an array of industries that are
linked through relationships between suppliers, buyers, and producers of complements. One primary reason for the emergence of regional clusters is the benefit of
proximity in knowledge exchange. Though advances in information technology have

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)* Part One Industry Dynamics of Technological Innovation

FIGURE ‘.” Continued
2000

Stressgen Biotechnologies Corp.

Seven-Eleven Japan Co. Ltd.

Elan Corp. PLC

Bayer AG

Matsushita Electric Industrial
Hitachi Ltd.

Sun Microsystems Inc.

Microsoft Corp.
Monsanto Co.

CSIRO

Magazine House Co. Ltd.
Qualcomm Inc.
Toyota Motor Corp.

complex
knowledge

Knowledge
that has many
underlying
components,
or many interdependencies
between those
components, or
both.

tacit
knowledge

Knowledge
that cannot be
readily codified
(documented in
written form).

made it easier, faster, and cheaper to transmit information great distances, several studies indicate that knowledge does not always transfer readily via such mechanisms.
Proximity and interaction can directly influence firms’ ability and willingness to
exchange knowledge. First, knowledge that is complex or tacit may require frequent
and close interaction to be meaningfully exchanged.51 Firms may need to interact frequently to develop common ways of understanding and articulating the knowledge
before they are able to transfer it.52 Second, closeness and frequency of interaction can
influence a firm’s willingness to exchange knowledge. When firms interact frequently,
they can develop trust and reciprocity norms. Firms that interact over time develop
greater knowledge of each other, and their repeated interactions give them information
as to the likelihood of their partner’s behaving opportunisticall…
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