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OF ENGINEERING & MANAGEMENT, KOLKATA
DEFINING THE ORGANIZATION’S

STRATEGIC DIRECTION
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Reinventing Hotels: citizenM

• In 2008, Michael Levie, Rattan Chadha, and Robin
Chadha set out to create a new kind of hotel chain.
• Convinced that innovation in the hotel industry had
stagnated, they believed that there was an
opportunity to create more value for customers that
were frequent travelers, or “Mobile Citizens of the
World.”
• They named their new hotel chain “citizenM,” and
they set out to rethink what dimensions customers
really cared about, and which they didn’t really
value.
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• First, the founders concluded that frequent travelers
wanted to be in stylish and modern hotels that reflected
their own identities, but they did not really care about
front desks and porters—after all, who wants to wait in
line after a long flight, and why would they need a porter
to get the luggage to the room if they had already
managed to get it from the airport?
• Instead, the chain could greatly reduce both costs and
waiting lines by having self-service check-in machines
that dispensed keys (similar to the self-service machines
that dispense boarding passes at airports) and
eliminating porters.
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• Second, in cosmopolitan cities such as London or
New York, Levie and the Chadhas did not believe that
it made sense to try to compete with the local bars
and restaurants by offering premium service inside
the hotel.
• Instead they created a stylish and comfortable space
with an open-plan round-the-clock kitchen, where
customers can help themselves to a quick meal
whenever they wanted by simply using their credit
card.
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• Third, the founders reasoned that most travelers do not want to
hang out in their hotel rooms. They thus made the bedrooms small
and pod-like—similar to those offered in cruise ships.
• A typical citizenM room is 172 square feet, significantly smaller
than the average 280 square feet of a London hotel room or the
average 250 square feet of a Manhattan hotel room.
• However, they outfitted the rooms with king-sized beds and the
kind of high quality bedding, upscale fixtures, big fluffy towels, and
free Internet service that frequent travelers would be likely to have
at home.
• The rooms also had “mood pads”—electronic tablets that guests
could use to control the television, lighting, and temperature. The
idea was to create “affordable luxury.”
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• By eliminating many of the costly features of a typical
hotel, citizenM’s construction and staffing costs averaged
40 percent less than other four-star hotels.
• This resulted in nightly prices that were roughly $50 less
than those of other four-star hotels in its major markets.
• The combination of the comfortable and stylish
ambiance with affordable prices resulted in occupancy
rates that were consistently higher than industry
averages—over 95 percent compared to 85 percent.
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• As noted by Robin Chadha, “We’ve started from scratch,
looked at the behavior of this new generation of travelers and
built our company accordingly . . . . We’re an online company
with no reservations team—everything on the Internet—and
we use technology to offset staff costs.
• All the savings, we pass on to our guests.” Within a year after
opening, citizenM was ranked by the Sunday Times, CNBC, and
Fortune as the best business hotel.
• It went on to win the “Trendiest Hotel in the World” from
TripAdvisor (2010 & 2011), Fodor’s 100 Hotel awards (2011),
and “Best New Hotel Concept” from Entrepreneur (2013).
• By 2015, the chain had hotels in Amsterdam, Glasgow,
London, New York, Paris, and Rotterdam.
https://www.youtube.com/watch?v=coP6KoHMUHI
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Overview
• A coherent technological innovation strategy leverages
the firm’s existing competitive position and provides
direction for future development of the firm.
• Formulating this strategy requires:
– Appraising the firm’s environment,
– Appraising the firm’s strengths, weaknesses, competitive
advantages, and core competencies
– Articulating an ambitious strategic intent.
– Determining the key resources and capabilities the firm needs
to develop or acquire to meet its long-term objectives
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Assessing the Firm’s Current Position

• External Analysis
– Two common methods are Porter’s Five-Force Model and
Stakeholder Analysis.
– Porter’s Five-Force Model
• Has been used to analyze whether a particular industry as a whole
will be profitable or to determine an individual firm’s chances for
success viz-a-viz its competitors
– Telecommunication industry is very competitive and
restrictive and thus unattractive for new entrants but an
individual entrant such as Reliance Jio could be profitable
because of its scale, use of advanced technology, pricing
strategies, etc.
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• Degree of existing rivalry: Determined by number of firms,
relative size, degree of differentiation between firms, demand
conditions, exit barriers (for firm to leave the market)
• Threat of potential entrants: Determined by attractiveness
of industry, height of entry barriers (e.g., start-up costs, brand
loyalty, regulation, etc.)
• Bargaining power of suppliers: Determined by number of
suppliers and their degree of differentiation, the portion of a
firm’s inputs obtained from a particular supplier, the portion
of a supplier’s sales sold to a particular firm, switching costs,
and potential for backward vertical integration - firm produce
its own supplies
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• Bargaining power of buyers: Determined by number of
buyers, the firm’s degree of differentiation, the portion of a
firm’s inputs sold to a particular buyer, the portion of a
buyer’s purchases bought from a particular firm, switching
costs, and potential for forward vertical integration - supplier
enters firm’s business
• Threat of substitutes: Determined by number of potential
substitutes, their closeness in function and relative price.
– Substitutes are not competitive products but can fulfill a strategically
equivalent role for the customer
– Other coffeehouses are competitors to Starbucks but bars, restaurants,
beer, soft drinks are substitutes
– Buses are substitutes for airlines
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The Five-Forces Model of Competition

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• Recently Porter has acknowledged the role of
complements.
– The availability, quality and price of complements will influence
the threats and opportunities posed by the industry
– Must consider:
• how important complements are in the industry,
• whether complements are differentially available for the products of
various rivals (impacting the attractiveness of their goods), and
• who captures the value offered by the complements.
– The ink cartridge market is extremely profitable to desktop
printer manufacturers and thus the cartridge of one company is
incompatible with the printer of another company
• The market is so profitable that third-party vendors produce clones or
refill the empty cartridge with ink
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The Five-Forces Model of Competition

• Identify key aspects or elements of each competitive
force that impact the firm.
• Evaluate how strong and important each element is
for the firm.
• Decide whether the collective strength of the
elements is worth the firm entering or staying in the
industry.
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The Five-Forces Model

• Rivalry among competing firms
– Most powerful of the five forces
– Focus on competitive advantage of strategies over other
firms
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• Potential Entry of New Competitors
– Barriers to entry are important
– Quality, pricing, and marketing can overcome barriers
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Barriers to Entry
• Need to gain economies of scale quickly
• Need to gain technology and specialized know-how
• Lack of experience
• Strong customer loyalty
• Strong brand preferences
• Large capital requirements
• Lack of adequate distribution channels
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Barriers to Entry
• Government regulatory policies
• Tariffs
• Lack of access to raw materials
• Possession of patents
• Undesirable locations
• Counterattack by entrenched firms
• Potential saturation of the market
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• Potential development of substitute products
– Pressure increases when:
• Prices of substitutes decrease
• Consumers’ switching costs decrease
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• Bargaining Power of Suppliers is increased when
there are:
– Large numbers of suppliers
– Few substitutes
– Costs of switching raw materials is high
• Backward integration is gaining control or
ownership of suppliers
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• Bargaining power of consumers
– Customers being concentrated or buying in volume affects
intensity of competition
– Consumer power is higher where products are standard or
undifferentiated
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Conditions Where Consumers Gain

Bargaining Power
• If buyers can inexpensively switch
• If buyers are particularly important
• If sellers are struggling in the face of falling
consumer demand
• If buyers are informed about sellers’ products,
prices, and costs
• If buyers have discretion in whether and when they
purchase the product
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1. Who are the stakeholders?
2. What does each stakeholder want?
3. What resources do they contribute to the
organization?
4. What claims are they likely to make on the
organization?
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Stakeholder Analysis
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• Typically, the first step of a stakeholder analysis is to
identify all the parties that will be affected by the
behavior of the firm (and thus have a “stake” in the firm).
• For each party, the firm identifies what that stakeholder’s
interests are, what resources they contribute to the
organization, what claims they are likely to make on the
organization, and which will be most important from the
firm’s perspective.
• Stakeholders include (but are not limited to)
stockholders, employees, customers, suppliers, lenders,
the local community, government, and rivals.
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• Internal Analysis
– Identify the firm’s strengths and weaknesses. In Porter’s
model of a value chain, activities are divided into primary
activities and support activities
• Primary activities are those directly related to the product or
service provided by the firm
• Support activities are those indirectly related to the main business
of the firm
– Each activity can then be considered from the view of how
it contributes to the overall value produced by the firm
and what the firm’s strengths and weaknesses are in that
activity
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Value-Chain Analysis
for Take2 Interactive Software
• Take2 Interactive Software
– Produces Grand Theft Auto video game
– R&D is considered a primary activity, but the support
activity of the technology development is not considered
• Because all the game manufacturing is performed by the console
producers rather than by Take2, its primary technology activities
center on design and games which is part of R&D
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Value-Chain Analysis
for Take2 Interactive Software
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Take2 Interactive Software

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• Once the key strengths and weaknesses are identified,
the firm can assess which strengths have potential to be
a source of sustainable competitive advantage to
implement its strategic intent for the future
• To be a source of sustainable competitive advantage,
resources must be Rare, Valuable, Durable and Inimitable
– Rare and valuable resources may yield a competitive advantage,
but that advantage will not be sustainable if the firm is
incapable of keeping the resources or if other firms can imitate
them
• A positive brand image can be a rare and valuable resource, but it
requires ongoing investment to sustain it or else it will erode
• Technological advances are reverse-engineered, skillful marketing
campaigns are copied, innovative HR practices copied, etc.
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• Resources are difficult (or impossible) to imitate when
they are:
– Tacit – resources of an intangible nature, such as knowledge,
that can not be readily codified in written form
– Path dependent – dependent on a particular historical sequence
of events
– Socially complex – they arise through the interaction of multiple
people
– Causally ambiguous – the relationship between a resource and
the outcome it produces is poorly understood
• Talent is considered to be a tacit and causally ambiguous resource; an
inherent trait that can not be trained and the methods by which
individuals acquire it or tap into it is poorly understood
• A first-mover advantage is a path-dependent advantage that can not be
copied; only one firm can be first
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Identifying Core Competencies and

Capabilities
• Once a baseline internal analysis has been established, a
firm can move on to identifying its core competencies
and formulate its strategic intent
• Core Competencies: A set of integrated and harmonized
abilities that distinguish the firm in the marketplace.
– Competencies typically combine multiple kinds of abilities e.g.,
• Managing the market interface
• Building and managing an effective infrastructure
• Technological abilities
– Several core competencies may underlie a business unit and
several business units may draw from same competency.
• The organization’s structure and incentives must encourage
cooperation and exchange of resources across strategic business unit
boundaries
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Capabilities
• Core competencies should:
– Be a significant source of competitive differentiation
– Cover a range of businesses
– Be hard for competitors to imitate
• Sony’s core competency is miniaturization which
arises from harmonizing multiple technologies
(liquid crystal displays, semiconductors, etc.) and is
leveraged into multiple markets (TVs, radios, PDAs,
etc.)
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Capabilities
• Prahalad & Hamel compare competencies to roots
from which grow core products such as major
components or subassemblies
• Core products, in turn give rise to business units,
whose fruits are the various end products of the
company
– Individuals in the corporation should be viewed as
corporate assets that can be redeployed across the
organization and not wed to a particular business unit
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Capabilities
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Capabilities
• Prahalad & Hamel offer the following tests to identify
the firm’s core competencies
– Is it a significant source of competitive differentiation?
Does it provide a unique signature to the organization?
Does it make a significant contribution to the value a
customer perceives in the end product?
• For example, Sony’s skills in miniaturization have an immediate
impact on the utility customers reap from its portable products.
– Does it transcend a single business? Does it cover a range
of businesses, both current and new?
• For example, Honda’s core competence in engines enables the
company to be successful in businesses as diverse as automobiles,
motorcycles, lawn mowers, and generators.
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Capabilities
• Is it hard for competitors to imitate? In general,
competencies that arise from the complex harmonization
of multiple technologies will be difficult to imitate. The
competence may have taken years (or decades) to build.
This combination of resources and embedded skills will be
difficult for other firms to acquire or duplicate.
• According to Prahalad and Hamel, few firms are likely to
be leaders in more than five or six core competencies. If a
company has compiled a list of 20 to 30 capabilities, it
probably has not yet identified its true core competencies.
• By viewing the business as a portfolio of core competencies, managers are
better able to focus on value creation and meaningful new business
development, rather than cost cutting or opportunistic expansion
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Research Brief –
Blue Ocean Strategy
• In a series of articles and their 2005 book, Renée
Mauborgne and W. Chan Kim describe firms who crafted
what they call “blue ocean” strategies by innovating in a
way that allowed them to enter untapped market space.
• In most industries, firms compete by trying to outdo
each other on the accepted dimensions of competition.
• Firms hope to capture a greater share of existing
demand, and as the industry becomes crowded, the
likelihood of firm profits or growth diminishes. Cutthroat
competition turns the ocean bloody (also known as “red
ocean”).
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Research Brief –
Blue Ocean Strategy
• Blue oceans refer to untapped market space that firms
create by redefining the dimensions of competition. Blue
ocean strategies are thus fundamentally about
differentiation through innovation.
• Mauborgne and Chan suggest that firms can identify “blue
ocean” strategies by first using a visualization tool, the
“strategy canvas,” to help them understand how different
players are competing in an industry, and how they might
choose to compete differently.
• The horizontal axis lists the factors that the industry
competes on/invests in, and the vertical axis indicates
“high” or “low.”
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Research Brief –
Blue Ocean Strategy
• Managers can then plot “value curves” for different product
offerings. For example, comparing one and two star hotels
you might draw the following:
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Research Brief –
Blue Ocean Strategy
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Research Brief –
Blue Ocean Strategy
Managers can then challenge the industry’s strategic
logic by asking the following four questions:
1. Which of the factors that the industry takes for
granted should be eliminated?
2. Which factors should be reduced well below the
industry’s standard?
3. Which factors should be raised well above the
industry’s standard?
4. Which factors should be created that the industry
has never offered?
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Research Brief –
Blue Ocean Strategy
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Risk of Core Rigidities

• When firms excel at an activity, they can become over
committed to it and rigid.
– Incentives and culture may reward current competencies
while thwarting development of new competencies.
– For example, a firm’s emphasis on a scientific discipline
that is central to its core competency can make the firm
less attractive to individuals from other disciplines.
Rewards for engaging in core competency activities can
discourage employees from pursuing more exploratory
activities.
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Dynamic Capabilities
• Dynamic capabilities are competencies that enable the firm to
quickly respond to change, emerging markets and major
technological discontinuities
• e.g., firm may develop a set of abilities that enable it to rapidly deploy new
product development teams for a new opportunity; firm may develop
competency in working with alliance partners to gain needed resources
quickly.
• Corning has made its own evolvability one of its most important core
competencies
– Invests heavily in research areas likely to provide scientific breakthroughs
– Develops pilot plants to experiment with new products and production
processes
– Manages its relationships with alliance partners as an integrative and
flexible system of capabilities that extend the firms boundaries not as
individual relationships focused on particular projects
Mopar glass https://www.youtube.com/watch?v=BUX6TlUUXoc

Gorilla glass https://www.youtube.com/watch?v=gZPeyErbqz4
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•
Strategic
Strategic Intent
Intent
– A firm’s purpose is to create value not just by cutting costs or
improving operations but by developing new businesses and
markets and leveraging corporate resources
– Strategic intent is a long-term goal that is ambitious, builds
upon and stretches firm’s core competencies, and draws from
all levels of the organization.
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Strategic Intent
• Strategic Intent
– Canon’s obsession with overtaking Xerox, Google’s
corporate vision is “to provide access to the world’s
information in one click.” and Yahoo’s goal of becoming the
world’s largest Internet shopping mall (Hamel & Prahalad)
– Typically looks 10-20 years ahead, establishes clear
milestones for employees to target
– Without it, firms follow their customers instead of leading
them
– Firm should identify resources and capabilities needed to
close gap between strategic intent and current position.
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The Balanced Scorecard

• Kaplan and Norton point out that a firm’s methods of
measuring performance will strongly influence whether
and how the firm pursues its strategic objectives
• They argue that effective performance measurement is
more than just reliance on financial indicators. It should
incorporate:
– Financial perspective
• Goals: meet shareholder’s expectations, double corporate value in 7
years
• Measures: return on capital, net cash flow, earnings growth
– Customer perspective
• Goals: improve customer loyalty, offer best-in-class customer service
• Measures: market share, percent of repeat purchases, customer
satisfaction surveys
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Theory In Action
• Internal perspective
– Goals: reduce internal safety incidents, build best-in-class franchise
teams, improve inventory management
– Measures: number of safety incidents per month, franchise quality
rating, inventory costs
• Innovation and learning perspective
– Goals: accelerate and improve new product development, improve
employee skills
– Measures: percentage of sales from products developed within the
past 5 years, average length of the new product development cycle,
employee training targets
• The scorecard may have to be adapted to fit different markets
and businesses, but a 2002 survey found that approximately
50% of Fortune 1,000 companies in the US and 40% in
Europe use some version of the balanced scorecard
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Theory In Action
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Summary
1. The first step in establishing a coherent strategy for the firm is
assessing the external environment. Two commonly used models of
external analysis are Porter’s five-force model and stakeholder
analysis.
2. Porter’s five-force model entails assessing the degree of existing
rivalry, threat of potential entrants, bargaining power of suppliers,
bargaining power of customers, and threat posed by substitutes.
Recently Porter added a sixth force, the role of complements.
3. Stakeholder analysis involves identifying any entity with an interest
in the firm, what it wants from the company, and what claims it can
make on the company.
4. To analyze the internal environment, firms often begin by
identifying strengths and weaknesses in each activity of the value
chain. The firm can then identify which strengths have the potential to
be a source of sustainable competitive advantage.
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Summary
5. Next the firm identifies its core competencies. Core competencies
are integrated combinations of abilities that distinguish the firm in the
marketplace. Several core competencies may underlie each business
unit, and several business units may draw upon the same core
competency.
6. Sometimes core competencies can become core rigidities that limit
the firm’s ability to respond to a changing environment.
7. Dynamic capabilities are competencies that enable a firm to quickly
reconfigure the firm’s organizational structure or routines in response
to change in the firm’s environment or opportunities.
8. A firm’s strategic intent is the articulation of an ambitious long-term
(10 to 20 years out) goal or set of goals. The firm’s strategic intent
should build upon and stretch its existing core competencies.
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Summary
9. Once the firm articulates its strategic intent,
managers should identify the resources and
capabilities that the firm must develop or acquire to
achieve its strategic intent.
10. The balanced scorecard is a measurement system
that encourages the firm to consider its goals from
multiple perspectives (financial, customer, business
process, and innovation and learning), and establish
measures that correspond to each of those
perspectives.
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How to Access Technology Needs

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Accessing Technology Needs

• Technology audit
– Process of clarifying the key technologies on which an
organization depends
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Measuring Current Technologies

• Emerging • Pacing technologies
technologies are still have yet to prove their
under development full value but have the
and thus are unproved potential to alter the
rules of competition by
providing significant
advantage
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Measuring Current Technologies

• Key technologies • Base technologies are
have proved effective, those that are
but they also provide a commonplace in the
strategic advantage industry; everyone
because not everyone must have them to be
uses them able to operate
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Accessing External Technological Trends
• Benchmarking
– the process of comparing the organization’s practices and
technologies with those of other companies
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Accessing External Technological Trends
• Scanning
– focuses on what can be done and what is being developed
– places greater emphasis on identifying and monitoring the
sources of new technologies for an industry
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Key Factors to Consider in Technology Decisions
Anticipated market receptiveness
Technology feasibility
Economic viability
Anticipated capability development
Organizational suitability
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Framing Decisions about Technological

Innovation
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Sourcing & Acquiring New Technologies
• Make-or-buy decision
– The question an organization asks itself about whether
to acquire new technology from an outside source or
develop it itself.
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• Internal development • Technology trading
• Purchase • Research partnerships
• Contracted and joint ventures
development • Acquisition of the
• Licensing owner of the
technology
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• Managers should ask the following basic questions:
1. Is it important (and possible) in terms of
competitive advantage that the technology remain
proprietary?
2. Are the time, skills, and resources for internal
development available?
3. Is the technology readily available outside the
company?
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Technology Acquisition Options

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CHOOSING INNOVATION PROJECTS

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The Development Budget

• Most firms face serious constraints in capital and
other resources they can invest in projects.
• Firms thus often use capital rationing: they set a
fixed R&D budget and rank order projects to support.
– R&D budget is often a percentage of previous year’s
sales.
– Percentage is typically determined through industry
benchmarking, or historical benchmarking of firm’s
performance.
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Angel Funding
An angel investor is someone who puts their own finance into
the growth of a small business at an early stage, also
potentially contributing their advice and business experience.
They might be a wealthy, well-connected individual who’s
taken a personal liking to your product, a group of angel
investors who club together to fund startups, or even a friend
or member of your family who’s decided to put some money
in.
Angels make their own decision about the investment, and in
return for providing personal equity they take shares in the
business. The amount they invest is flexible – it could be a
small amount to get you off the ground, or a larger amount.
While they can provide insight and advice about your
business, their job isn’t to build up your company.
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Venture Capital
Venture capital funding is a whole other level. For a start, rather than
individual investors, winning venture capital usually involves a
whole firm – investors, board members, and people whose job is to
generally help your business develop. Venture capital firms are
made of professional investors, and their money comes from a
variety of sources – corporations and individuals, private and
public pension funds, foundations.
The job of venture capital firms is to find businesses with high

growth potential. The firm take shares and have a say in the future
of the company and its running, and in exchange for their
involvement venture capitalist firms expect a high return on
investment. After a period of time, often years, the venture
capitalists sell shares in the company back to the owners or
through an initial public offering, hopefully making much more that
what they put in.
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Angel Vs VC
Amounts Invested:
Angel investors will put in a variety of amounts, but as it’s generally
seed funding you’re not looking at the kind of figures that VC
investment deals with. As a general rule, groups of angel investors
might go as high as £1 million – but VC firms are unlikely to invest
less than £1 million. Because so much time and effort goes into
brokering a VC deal, it needs to be worth the company’s while.
Who They Invest In:
Angel investors specialise in early-stage businesses, while VC firms
are generally more unwilling to invest in startups unless they show
really compelling promise and growth potential (though this is
changing as the startup scene continues to flourish). While
incredibly exciting startups in key industries might be able to win
VC funding with little track record, most businesses will have to
demonstrate that they can walk the walk, not just talk the talk.
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Angel Vs VC
Involvement:
Angel investors might have valuable advice for you, but ultimately they can
be as hands-on or hands-off as you want. They will have equity in your
business but will not have a seat on your board – unlike with VC
investment. Agreeing to VC investment means committing to bringing
more people into how your business, people who have a say in how it’s
run and whose job it is to help your business reach its potential.
Timescale:
VC firms need to evaluate their involvement with you – due diligence,
research, and all the other aspects that help them decide if investing in you
is a smart business decision that will see them reap a big return. This all
takes time. On the other hand, angel investors can make quick decisions,
as they’re often working alone or have a personal interest in the business.
Motivation:
The job of VC firms is to find the best businesses, help them, and then make
a lot of money. For angel investors, their motivations might be different –
for e.g. to help less experienced businesses within their sector.
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Venture vs Traditional Capital

• Traditional
– More fluid
– Bears lower return
– Invested based on immediate future
– Concerned with past performance
– Loaning bank is creditor and requires collateral
• Venture capital
– Less fluid
– Requires high return rate
– Invested based on longer-run future
– Concerned with product and market potential
– Venture capitalist and partner are co-owners
• Venture capitalist brings credibility to the company and mentoring
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Quantitative Methods for Choosing

Projects
• The difference between the present value of cash inflows and the present value
of cash outflows. NPV is used in capital budgeting to analyze the profitability of
an investment or project.
• NPV compares the value of a dollar today to the value of that same dollar in the
future, taking inflation and returns into account. If the NPV of a prospective
project is positive, it should be accepted. However, if NPV is negative, the project
should probably be rejected because cash flows will also be negative.
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• NPV = Net Present value = Present value of net cash

flows
– Each cash inflow/outflow is discounted back to its PV and
then they are summed.
t - the time of the cash flow

N - the total time of the project
r - the discount rate (the rate of return that could be earned on an investment in the
financial markets with similar risk.)
Ct - the net cash flow (the amount of cash) at time t
(for educational purposes, C0 is commonly placed to the left of the sum to
emphasize its role as the initial investment.).
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• Commonly used quantitative methods include discounted cash flow
methods and real options.
– Discounted Cash Flow (DCF)
• Net Present Value (NPV): Expected cash inflows are discounted and
compared to outlays.
• In Excel use the formula NPV(interest rate, cell range of cashflows)
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Projects
• Internal Rate of Return (IRR): The discount rate that
makes the net present value of investment zero.
– It is an indicator of the efficiency of an investment, as opposed
to NPV, which indicates value or magnitude.
– The IRR is the annualized effective compounded return rate
which can be earned on the invested capital, i.e., the yield on the
investment.
– A project is a good investment proposition if its IRR is greater
than the rate of return that could be earned by alternate
investments (investing in other projects, buying bonds, even
putting the money in a bank account).
• Thus, the IRR should be compared to any alternate costs of capital
including an appropriate risk premium.
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Projects
– Mathematically the IRR is defined as any discount rate that
results in an NPV of zero of a series of cash flows.
– In general, if the IRR is greater than the project's cost of
capital, or hurdle rate (minimum rate of return that must be
met for a company to undertake a particular project), the
project will add value for the company.
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Projects
• Strengths and Weaknesses of DCF Methods:
– Strengths
• Provide concrete financial estimates
• Explicitly consider timing of investment and time value of money
– Weaknesses
• May be deceptive; only as accurate as original estimates of cash flows.
• May fail to capture strategic importance of project
– Technology development plays a crucial role in building and leveraging firm
capabilities and creating options for the future
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Qualitative Methods of Choosing Projects
• Many factors in the choice of development projects are extremely difficult (or
misleading) to quantify.
• Almost all firms thus use some qualitative methods.
– Screening Questions may be used to assess different dimensions of the
project decision including:
• Role of customer (market, use, compatibility and ease of use, distribution and
pricing)
• Role of capabilities (existing capabilities, competitors’ capabilities, future
capabilities)
• Project timing and cost (time to complete, first to market, readiness of market,
project cost, other costs)
– Can create a scoring mechanism that can weight the questions according to
importance
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Qualitative Methods of Choosing Projects

• Advanced R&D Projects: develop cutting-edge technologies; often no
immediate commercial application.
• Breakthrough Projects: incorporate revolutionary new technologies into a
commercial application.
• Platform Projects: not revolutionary, but offer fundamental improvements
in cost, quality and performance of a technology over preceding generations
of products.
• Derivative Projects: incremental improvements in products and/or
processes to provide a variety in design features.
– Toyota’s Camry platform offers LE, SE and XLE models to appeal to
different market segments
• Derivative projects pay off the quickest, and help service the firm’s short-
term cash flow needs. Advanced R&D projects take a long time to pay off
(or may not pay off at all), but can position the firm to be a technological
leader.
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Combining Quantitative and

Qualitative Information
• Managers may use multiple methods in combination.
– Use quantitative methods to estimate the cash flows anticipated from a
project when balancing their R&D portfolio on a project map
• May also use methods that convert qualitative
information into quantitative form (though this has
similar risks as discussed with quantitative methods)
– Conjoint Analysis estimates the relative value individuals place
on attributes of a choice which can then be used in development
and pricing decisions.
• Individuals given a card with products (or projects) with different
features and prices.
• Individuals rate each in terms of desirability or rank them.
• Multiple regression then used to assess the degree to which an attribute
influences rating. These weights quantify the trade-offs involved in
providing different features.
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Cojoint Analysis
• Conjoint analysis is one of the most effective models in extracting consumer
preferences during the purchasing process into a quantitative measurement. It
evaluates products or services in a way no other method can.
• Traditional rating surveys and analysis do not have the ability to place a value
on the different attributes that make up a product. Conjoint analysis
extrapolates the respondent’s preference for a quantitative measurement.
Conjoint Analysis Example
Let’s assume a scenario, where a product marketer needs to measure the
impact of individual features on the estimated market share or sales revenue.
• Consider an organization producing tablets, perhaps a competitor to the Apple
iPad and Samsung Galaxy. The organization needs to understand how different
customers value Attributes such as Size, Brand, Price, and Battery Length.
Armed with this information they can create their product range and offering.
• Conjoint Analysis seeks to assign values to these product Attributes and Levels
by creating realistic choices and asking people to evaluate them. Math is then
used to calculate what the underlying values are.
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Conjoint Analysis enables businesses to mathematically analyze consumer or

client behavior and make decisions based on real insights from data! This
allows them to better cater to consumer needs and develop business strategies
that provide a competitive edge. This is because the fulfillment of customer
wishes in a profitable way requires companies to fully understand which
aspects of their product and service are most valued by the customer.
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Combining Quantitative and

Qualitative Information
• Data Envelopment Analysis (DEA) uses linear
programming to combine measures of projects based on
different units (e.g., rank vs. dollars) into an efficiency
frontier.
– Projects can be ranked by assessing their distance from efficiency
frontier.
– As with other quantitative methods, DEA results only as good as
the data utilized; managers must be careful in their choice of
measures and their accuracy.
– DEA has been applied in many situations such as:
• health care (hospitals, doctors), education (schools, universities)
• banks, manufacturing
• benchmarking, management evaluation
• fast food restaurants, retail stores
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• Practice numerical of NPV and IRR

A co. is to purchase a machine – either MA or MB, each
costing Rs. 500,000. cash inflows are as follows:-
Year MA MB
1 150,000 50,000
2 200,000 150,000
3 250,000 200,000
4 150,000 300,000
5 100,000 200,000
Indicate which machine would be profitable using the
followings methods –
•NPV method at 8% discounting.
•NPV method at 10% discounting.
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COLLABORATION STRATEGIES
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The XenoMouse
• Abgenix spent seven years and $40 million to produce a
genetically-engineered mouse that could produce antibodies
that would treat human illnesses.
• One antibody, ABX-EGF showed great promise for treating
several types of cancer. Abgenix had to decide whether to:
– License ABX-EGF to a pharmaceutical company which would do all
further testing and commercialization (bear little risk and receive
license royalties)
– Use a joint venture with a biotechnology company to complete the
testing and commercialization (bear moderate risk and split profits)
– Pursue the ABX-EGF project as a solo venture (bear all risks and keep
all profits)
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Overview
• Firms must often choose between performing
innovation activities alone or in collaboration.
• Collaboration can enable firms to achieve more, at
a faster rate, and at less cost and risk.
• However, collaboration also entails sharing control
and rewards, and may risk partner malfeasance.
• The advantages of going solo are compared with
those of collaborating, and then different forms of
collaboration are compared.
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Reasons for Going Solo

• Whether a firm chooses to engage in solo development or
collaboration will be influence by:
– Availability of capabilities (does firm have needed capabilities in
house? Does a potential partner?)
• In 1970s Monsanto developed powerful herbicide, but killed plants
unless applied very carefully. Needed to develop plants that could
resist herbicide to make it easier to apply and use in larger quantities.
Biotech industry still quite young and no appropriate partners who
had this knowledge. Monsanto went solo.
– Protecting proprietary technologies (how important is it to
keep exclusive control of the technology?)
• Abgenix needed cash and access to development and marketing
capabilities it did not have but would have to give up exclusive control
over the drugs developed.
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Reasons for Going Solo

– Controlling technology development and use (how
important is it for firm to direct development process and
applications?)
• Honda did not join the Alliance of Automobile Manufacturers
which was fighting against tougher fuel and emission standards
– Pragmatic reasons: felt it would limit their discretion over its
development of environmentally friendly autos which Honda
wanted to be a leader in
– Cultural reasons: Honda’s culture emphasized retaining complete
control over the firm’s technology development and direction.
Honda President Yoshino – “it’s better for a person to decide about
his own life rather than having it decided by others.”
– Building and renewing capabilities (is the project key to
renewing or developing the firm’s capabilities?)
• Boeing philosophy about development of the Sonic Cruiser
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Advantages of Collaborating
• Collaborating can offer the following advantages:

• Obtaining needed skills or resources more quickly
• Reducing asset commitment and increase flexibility
• Learning from partner
• Sharing costs and risks
• Can build cooperation around a common standard
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Types of Collaborative Arrangements

• There are numerous types of collaborative arrangements, each with its
own advantages or costs.
– Strategic Alliances: formal or informal agreements between two or
more organizations (or other entities) to cooperate in some way.
– Joint Ventures: A particular type of strategic alliance that entails
significant equity investment and often establishes a new separate
legal entity.
– Licensing: a contractual arrangement that gives an organization (or
individual) the rights to use another’s intellectual property, typically
in exchange for royalties.
– Outsourcing: When an organization (or individual) procures
services or products from another rather than producing them in-
house.
– Collective Research Organizations: Organizations formed to
facilitate collaboration among a group of firms.
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Choosing a Mode of Collaboration

• Firms should match the trade-offs of a
collaboration mode to their needs.
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Choosing and Monitoring Partners

• Partner Selection
– Resource fit: How well does the potential partner fit the resource
needs of the project? Are resources complementary or supplementary?
– Strategic fit: Does the potential partner have compatible objectives and
styles?
– Impact on Opportunities and Threats: How would collaboration
impact bargaining power of customers and suppliers, degree of rivalry,
threat of entry or substitutes?
– Impact on Internal Strengths and Weaknesses: Would collaboration
enhance firm’s strengths? Overcome its weaknesses? Create a
competitive advantage?
– Impact on Strategic Direction: Would the collaboration help the firm
achieve its strategic intent?
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Choosing and Monitoring Partners

• Partner Monitoring and Governance
– Successful collaborations require clear yet flexible
monitoring and governance mechanisms.
• May utilize legally binding contractual arrangements.
– Helps ensure partners are aware of rights and obligations.
– Provides legal remedies for violations.
• Contracts often include:
– 1. What each partner is obligated to contribute.
– 2. How much control each partner has in arrangement.
– 3. When and how proceeds of collaboration will be distributed.
– 4. Review and reporting requirements.
– 5. Provisions for terminating relationship.
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ORGANIZING FOR
INNOVATION
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Procter & Gamble’s “Organization 2005”

• In 2003 Procter & Gamble was the world’s largest household and
personal products company, with $43.4 billion in net revenues. It had
almost 7,500 scientists working in 20 technical centers on four
continents.
• In 1999, P&G’s CEO Durk Jager had initiated a major reorganization,
“Organization 2005,” intended to accelerate innovation.
– New product development would be more decentralized,
conducted in both U.S. and foreign markets.
– Products would be tested in U.S. and foreign markets
simultaneously.
– Regional business units were replaced with global business units
based on product lines.
– Business services would be centralized.
• By 2000, stockholders had become impatient for results, and Jager
was pressured to step down.
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Discussion Questions:
1. What are some of the advantages and disadvantages
of replacing P&G’s regional divisions with with
global product divisions? What impact was this likely
to have on P&G’s innovation processes?
2. What are some of the advantages and disadvantages
of centralizing P&G’s business services?
3. What are some of the challenges of changing the
culture of a company as big as P&G?
4. Was Organization 2005 a good idea? Should P&G’s
board of directors have given Jager more time?
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Overview
• A firm’s size and structure will impact its rate and
likelihood of innovation.
• Some structures may foster creativity and
experimentation; others may enhance efficiency and
coherence across the firm’s development activities.
• There may also be structures that enable both
simultaneously.
• Some structural issues are even more significant for
the multinational firm.
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Size and Structural Dimensions of

the Firm
• Size: Is Bigger Better?
– In 1940s, Schumpeter argued that large firms would be
more effective innovators
• Better able to obtain financing
• Better able to spread costs of R&D over large volume
– Large size may also enable…
• Greater economies of scale and learning effects
• Taking on large scale or risky projects
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the Firm
– However, large firms might also be disadvantaged at
innovation because…
• R&D efficiency might decrease due to loss of managerial control
• Large firms have more bureaucratic inertia
• More strategic commitments tie firm to current technologies
– Small firms often considered more flexible and
entrepreneurial
– Many big firms have found ways of “feeling small”
• Break overall firm into several subunits
• Can utilize different culture and controls in different units
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Theory In Action
Xerox and the Icarus Paradox
• In Greek mythology, Icarus was so enthralled with
his exceptional wax wings that he flew close to the
sun, melting his wings and crashing to his death.
Icarus Paradox: That which you excel at can be your undoing.
• Similarly, in 1960s and 70s, Xerox had such a
stranglehold on the photocopier market, it did not
pay attention to new Japanese competitors making
inexpensive copiers.
• By the mid-1970s, Xerox was losing market share
to the Japanese at an alarming rate and had to
engage in a major restructuring and turnaround.
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the Firm
• Structural Dimensions of the Firm
– Formalization: The degree to which the firm utilizes rules
and procedures to structure the behavior of employees.
• Can substitute for managerial oversight, but can also make firm rigid.
– Standardization: The degree to which activities are
performed in a uniform manner.
• Facilitates smooth and reliable outcomes, but can stifle innovation.
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the Firm
– Centralization: The degree to which decision-making
authority is kept at top levels of the firm OR the degree to
which activities are performed at a central location.
• Centralized authority ensures projects match firm-wide objectives,
and may be better at making bold changes in overall direction.
• Centralized activities avoid redundancy, maximize economies of
scale, and facilitate firm-wide deployment of innovations.
• But, centralized authority and activities might not tap diverse skills
and resources, and projects may not closely fit needs of divisions or
markets.
–Some firms have both centralized and
decentralized R&D activities.
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• Centralized and Decentralized R&D Activities

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Theory In Action
Shifting Structures at 3M
• Under McKnight 3M had both a central research laboratory and
decentralized R&D labs. His “grow and divide” philosophy encouraged
divisions to be split into small, independent and entrepreneurial
businesses.
• Lou Lehr consolidated the 42 divisions and 10 groups into 4 business
sectors. He also established a three-tiered R&D system: central
research laboratories for basic research, sector labs for core
technologies, and division labs for projects with immediate
applications.
• Jake Jacobsen encouraged more disciplined project selection and
shifted focus from individual entrepreneurs to teams.
• “Desi” Desimone eased company back toward a looser, more
entrepreneurial focus with less centralization.
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the Firm
• Mechanistic versus Organic Structures
– Mechanistic Structures have high formalization and
standardization.
• Good for operational efficiency, reliability.
• Minimizes variation  may stifle creativity
– Organic structures have low formalization and
standardization; described as “free flowing”
• Encourages creativity and experimentation
• May yield low consistency and reliability in manufacturing.
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the Firm
• Size versus Structure
– Many advantages and disadvantages of firm size are actually due to
structural dimensions of formalization, standardization, and centralization.
• Large firms typically make greater use of formalization and standardization
because of challenges of oversight.
• The Ambidextrous Organization: The Best of Both

Worlds?
– Some divisions (e.g., R&D, new product lines) may be small and organic.
– Other divisions (e.g., manufacturing, mature product lines) may be larger
and more mechanistic.
– Can also alternate through different structures over time.
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Modularity and “Loosely-Coupled”

Organizations
• Modular Products
– Modularity refers to the degree to which a system’s
components can be separated and recombined.
– Products may be modular at user level (e.g., Ikea shelving
systems), manufacturing level (e.g., Sony’s Walkman), or
other levels.
– A standard interface enables components to be combined
easily.
– Modularity can enable many different configurations to be
achieved from a given set of components.
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Modularity and “Loosely-Coupled”

Organizations
• Loosely-Coupled Organizational Structures
– In a loosely-coupled organization, activities not tightly integrated;
achieve coordination through adherence to shared objectives and
standards.
– Shared standards and information technology reduce need for
integration.
– Less need for integration enables firms to pursue more flexible
configurations; may specialize in a few activities and outsource
others.
– Results in a network of loosely connected firms or divisions of
firms.
– May not be good when very close coordination is needed, or
when there is high potential for conflict.
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Managing Innovation Across

Borders
• Centralization versus decentralization is a
particularly important issue for multinational firms.
– Foreign markets offer diverse resources, and have diverse
needs.
– Innovation tailored to local markets might not be leveraged
into other markets.
• Customization might make them poor fit for other markets.
• Divisions may be reluctant to share their innovations.
• Other divisions may have “not invented here” syndrome.
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Managing Innovation Across

Borders
• Bartlett and Ghoshal identify four strategies of
multinational innovation
– Center-for-global: all R&D activities centralized a single hub
• Tight coordination, economies of scale, avoids redundancy, develops core
competencies, standardizes and implements innovations throughout firm.
– Local-for-local: each division does own R&D for local market
• Accesses diverse resources, customizes products for local needs.
– Locally leveraged: each division does own R&D, but firm attempts
to leverage most creative ideas across company.
• Accesses diverse resources, customizes products for local needs, improve
diffusion of innovation throughout firm and markets.
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Managing Innovation Across Borders

– Globally linked: Decentralized R&D labs but each plays a different
role in firm’s strategy and are coordinated centrally.
• Accesses diverse resources, improve diffusion of innovation throughout firm
and markets, may help develop core competencies.
• Bartlett and Ghoshal encourage transnational approach:
resources and skills anywhere in firm can be leveraged to
exploit opportunities in any geographic market. Requires:
1. Reciprocal interdependence among divisions
2. Strong integrating mechanisms such as personnel rotation, division-
spanning teams, etc.
3. Balance in organizational identity between national brands and global image
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Discussion Questions
1. Are there particular types of innovation activities for which large firms
are likely to outperform small firms? Are there types for which small firms
are likely to outperform large firms?
2. What are some of the advantages and disadvantages of having formalized
procedures for improving the effectiveness or efficiency of innovation?
3. What factors should a firm take into account when deciding how
centralized its R&D activities should be? Should firms employ both
centralized and decentralized R&D activities?
4. Why is the tension between centralization and decentralization of R&D
activities likely to be even greater for multinational firms than firms that
compete in one national market?
5. What are some of the advantages and disadvantages of the transnational
approach advocated by Bartlett and Ghoshal?
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MANAGING THE NEW PRODUCT

DEVELOPMENT PROCESS
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Objectives
• Frog Design
• Objectives of the new product development process
• Sequential versus Party Parallel Development Processes
• Project Champions
• Involving customers and suppliers in the development
process
• Tools for improving the new product development
process
• Tools for measuring new product development
performance
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frog design
• frog design is a 300+ employee global design firm
known for its “techno hip” style
• frog developed the design for the Apple Macintosh
and the Sony Trinitron TV, among other things.
• For frog, “design” meant more than creating new
products – it meant helping firms plan their strategic
directions for the future, sometimes, “recreating”
themselves.
• frog’s client list includes Disney, HP, AT&T, Dell, Louis
Vuitton, MTV, Sprint, Microsoft among others
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frog design
• Frog engaged in three kinds of activities:
– Evolving: Reinvigorating a company’s existing assets. E.g. frog
redesigned Lufthansa’s first and business class cabins and
lounges, the products they already had rethinking the customer
experience for them.
– Expanding: Identifying new products and services for existing
and new markets. E.g. frog developed a line of consumer
electronics for Disney that included DVD players, televisions,
walkie-talkies, cordless phones by identifying features and cost
points desired by retailers and worked backwards to develop a
line of products that became highly successful.
– Envision: Rethinking the brand, E.g. frog helped Motorola
identify an opportunity to reinvent itself for the future by
envisioning what kinds of products it could create for the future.
https://www.youtube.com/watch?v=KRblFWFdAp4
https://www.youtube.com/watch?v=h2jBP3oOJZM&t=60s
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Sustaining Breakout Disruptive

(Evolve) (Expand) (Envision)
$ $ $
0 1 2 3 4 5 6 7 0 1 2 3 ^4 5 6 7 0 1 2 3 4 5 6 7
Go/No-Go years Go/No-Go Go/No-Go years
(Director Level) (VP/SVP Level)
years (CEO/Board Level)
Short -Term Advantage Near-Term Advantage Long-Term Advantage

Sustain product life with incremental Create new products within an existing Innovate new to the world products that
enhancements and consumerbenefits. product category that leverage high value lead the creation of new markets or
Since product categories exist, sustaining benefits for consumers. industries. Market acceptance may be
products are easily accepted by the market. The greater benefits of the product and the slower to gain as multiple industry
On the other hand profitability can diminish fact that it is within a know category drives standards compete for dominance.
quickly due to ease of imitation. rapid short-term growth. These products are a long term investment
These products are low risk bets with a high These product are higher risks bets with with high potential returns over the long
probability of short term returns. higher yet diminishingreturns. term. Other benefits include market
dominance & strong competitiveposition
Product Level Innovation Category Level Innovations Industry Level Innovation

Competitive Advantage: 1-3 years Competitive Advantage: 3-5 years Competitive Advantage : 5-7 years
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frog design
• frog’s development process uses teams, and a “discover,
design, and deliver” approach:
– Discover: Activities to generate novel design solutions, including
facilitated brainstorming sessions, structured ideation sessions.
Activities employ a combination of intuition, emotion, and
analysis.
– Design: Activities to transform idea into tangible solutions,
including design charrettes, and rudimentary prototypes. Relies
heavily on feedback from potential consumers.
– Deliver: Solutions are refined and documented. Product
specifics, models, tools, and production details turned over to
client. frog may provide training, testing, and/or manufacturing
support.
• Phases of the above stages may overlap or occur in
parallel.
https://www.youtube.com/watch?v=KRblFWFdAp4
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Overview
• In many industries, the ability to develop new products
quickly, effectively, and efficiently is now the single most
important factor driving firm success.
• In industries such as computer hardware and software,
telecommunications, automobiles, and consumer electronics,
firms often depend on products introduced within the past
five years for more than 50 percent of their sales.
• Despite the intense attention paid to innovation, failure rates
are still very high.
• More than 95% of new product development projects fail to
earn an economic return.
• This chapter summarizes research on how to make new
product development more effective and efficient.
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OBJECTIVES OF THE NEW PRODUCT

DEVELOPMENT PROCESS
For new product development to be successful, it must
simultaneously achieve three sometimes-conflicting
goals:
(1) maximizing the product’s fit with customer
requirements,
(2) minimizing the development cycle time, and
(3) controlling development costs.
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Maximizing Fit with Customer

•
Requirements
For a new product to be successful in the marketplace, it must
offer more compelling features, greater quality, or more
attractive pricing than competing products.
• Despite the obvious importance of this imperative, products
fail, and this may occur for a number of reasons:
– First, the firm may not have a clear sense of which features customers
value the most, resulting in the firm’s overinvesting in some features at
the expense of features the customer values more.
– Firms may also overestimate the customer’s willingness to pay for
particular features, leading them to produce feature-packed products
that are too expensive to gain significant market penetration.
– Firms may also have difficulty resolving heterogeneity in customer
demands; if some customer groups desire different features from
other groups, the firm may end up producing a product that makes
compromises between these conflicting demands, and the resulting
product may fail to be attractive to any of the customer groups.
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Minimizing Development Cycle Time

• Even products that achieve a very close fit with customer
requirements can fail if they take too long to bring to
market.
– A firm that brings a new product to market late may find that
customers are already committed to other products resulting in
a high switching cost.
– Also, a company that is able to bring its product to market early
has more time to develop (or encourage others to develop)
complementary goods that enhance the value and
attractiveness of the product.
– Other things being equal, products that are introduced to the
market earlier are likely to have an installed base and
availability of complementary goods advantage over later
offerings.
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Controlling Development Costs

• Sometimes a firm engages in an intense effort to
develop a product that exceeds customer
expectations and brings it to market early, only to
find that its development costs have ballooned so
much that it is impossible to recoup the development
expenses even if the product is enthusiastically
received by the market.
• This highlights the fact that development efforts
must be not only effective, but also efficient.
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Sequential versus Partly Parallel

Development Processes
• Before mid-1990s, most US
companies used sequential
NPD process; now many use
partly parallel process.
• Partly parallel process

shortens overall development
time, and enables closer
coordination between stages.
• In some situations, however,

a parallel development
process can increase risks.
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Project Champions
• As of 2001, 68% of North American firms, 58% of European
firms, and 48% of Japanese firms reported using senior
executives to champion their NPD projects.
• Benefits of Championing
– Senior execs have power to fight for project
– They can gain access to resources
– They can communicate with multiple areas of firm
• Risks of Championing
– Role as champion may cloud judgment about project
– May suffer from escalating commitment
– Others may fear challenging senior executive
• May benefit firm to develop “antichampions” and encourage
expression of dissenting opinion.
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Theory In Action
The Development of Zantac
• In the 1970s, David Jack of Glaxo Holdings began working on
an ulcer drug. Unfortunately, SmithKline Beecham beat Glaxo
to market, introducing Tagamet in 1977.
• Jack decided to introduce an improved product, and
implemented the first parallel process in pharmaceuticals to
beat Merck and Eli Lilly to market. The compressed
development process would shorten development time, but
was also expensive and risky.
• Fortunately, Paul Girolami, Glaxo’s director of finance, chose
to champion the project, and encouraged Jack to develop
improvements to the product which would differentiate it.
• By 1987, Glaxo’s Zantac was outselling Tagamet. Jack and
Girolami were knighted, and Girolami became Glaxo’s
chairman.
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Research Brief
• Five Myths About Product Champions
Markham and Aiman-Smith argue that a number of myths have become
widely accepted about champions.
1. Projects with champions are more likely to be successful in the
market (many factors determining market success are typically
beyond champion’s control)
2. Champions get involved because they are excited about project
rather than from self-interest (results suggest that champions more
likely to support projects that benefit their own departments)
3. Champions are more likely to be involved with radical innovation
projects (equally likely to be involved with incremental projects)
4. Champions are more likely to be from high (low) levels in firm
(either is equally likely)
5. Champions are more likely to be from marketing (15% from R&D,
14% from marketing, rest were from other functions or were users)
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Involving Customers and Suppliers in

the Development Process
Why?
• Many products fail to produce an economic return
because they do not fulfill customer requirements
for performance and price, or because they take too
long to bring to market.
• Both of these problems can be reduced by involving
customers and suppliers in the development process.
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• Involving Customers
– Customer is often best able to identify the maximum
performance capabilities and minimum service
requirements of new product.
– Customers may be involved on NPD team.
– Firms may also use beta testing to get customer input
early in the development process.
– Some studies suggest that it is more valuable to use “lead
users” than a random sample of customers.
• Lead users: Customers who face the same general needs of
marketplace but experience them earlier than rest of market and
benefit disproportionately from solutions.
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Research Brief
The Lead User Method of Product Concept Development
• Hilti AG used the lead user method to develop a new pipe
hanger.
• First customers with lead user characteristics were identified
through phone interviews.
• Lead users participated in a three-day product concept
generation workshop. At end of workshop, a single design
was selected as best.
• Hilti then presented this design to 12 long-term customers;
10 of the 12 preferred the new design and 9 of the 10 were
willing to pay a 20% price premium for it.
• The lead user method reduced the cost and time of the
project by almost half.
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• Involving Suppliers
– Involving suppliers on NPD team or consulting as an alliance
partner can improve product design and development
efficiency.
– Suppliers can suggest alternative inputs that reduce cost or
improve functionality.
• Suppliers may be actual members of the product team or
consulted as an alliance partner.
• In either case, they can contribute ideas for product
improvement or increased development efficiency.
• For instance, a supplier may be able to suggest an
alternative input (or configuration of inputs) that would
achieve the same functionality but at a lower cost.
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• Boeing’s development of the 777 involved both
customers and suppliers on the new product
development team
• United employees (including engineers, pilots, and
flight attendants) worked closely with Boeing’s
engineers to ensure that the airplane was designed
for maximum functionality and comfort.
• Boeing also included General Electric and other parts
suppliers on the project team, so that the engines
and the body of the airplane could be simultaneously
designed for maximum compatibility.
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Crowdsourcing
• Firms can also open up an innovation task to the public
through crowdsourcing.
• Many crowdsourcing platforms such as InnoCentive,
Yet2.com, and TopCoder present an innovation problem
identified by a firm on a public Web platform, and provide
rewards to participants who are able to solve them.
• Some crowdsourcing initiatives target people with special
skills (e.g., TopCoder matches companies that need
technical expertise such as software design with
experienced specialists), while others solicit participation
from the general public
https://www.youtube.com/watch?v=UF6pXmt2-WU
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Tools for Improving the New Product
Development Process
• Stage-Gate Processes
– Escalating commitment can lead managers to support projects
long after their expected value has turned negative, and the cost
of pushing bad projects forward can be very high.
– Utilize tough go/kill decision points in the development process
help filter out bad projects.
• At each stage, a cross-functional team of people (led by a
project team leader) undertakes parallel activities
designed to drive down the risk of a development
project.
• At each stage of the process, the team is required to
gather vital technical, market, and financial information
to use in the decision to move the project forward (go),
abandon the project (kill), hold, or recycle the project.
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Typical Stage-Gate Process,
from Idea to Launch
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Typical Stage-Gate Process,

from Idea to Launch
• Preceding each stage is a go/kill gate. These gates are
designed to control the quality of the project and to
ensure that the project is being executed in an effective
and efficient manner.
• Gates act as the funnels that cull mediocre projects. Each
gate has three components:
– deliverables (these are the results of the previous stage and are
the inputs for the gate review),
– criteria (these are the questions or metrics used to make the
go/kill decision),
– and outputs (these are the results of the gate review process
and may include a decision such as go, kill, hold, or recycle;
outputs should also include an action plan for the dates and
deliverables of the next gate).
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Development Process
• The time and cost of projects escalates with each stage,
thus stage-gate processes only permit a project to
proceed if all assessments indicate success.
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Development Process
• The stage-gate process can be modified to better fit a
firm’s particular development needs.
– E.g., Exxon Research and Engineering’s stage-gate system
– 68% of U.S. firms, 56% of European firms and 59% of
Japanese firms use some type of stage-gate process to
manage their NPD process.
Basic research stages
Applied research & development stages

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Quality Function Deployment (QFD) –

The House of Quality
• QFD was developed in Japan as a comprehensive
process for improving the communication and
coordination among engineering, marketing, and
manufacturing personnel.
• It achieves this by taking managers through a
problem-solving process in a very structured
fashion.
• QFD improves communication and coordination
between engineering, marketing, and manufacturing.
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Steps for QFD
• Team identifies customer requirements.
• Team weights requirements in terms of relative importance.
• Team identifies engineering attributes that drive performance.
• Team enters correlations between different engineering attributes.
• Team indicates relationship between engineering attributes and
customer requirements.
• Team multiplies customer importance rating by relationship to
engineering attribute and then sums for each attribute.
• Team evaluates competition.
• Using relative importance ratings for engineering attributes and
scores for competing products, team determines design targets.
• Team evaluates the new design based on the design targets.
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• The great strength of the house of quality is that it
provides a common language and framework within
which the members of a project team may interact.
• The house of quality makes the relationship between
product attributes and customer requirements very
clear.
• The house of quality is used in settings as diverse as
manufacturing, construction, police service, and
educational curriculum design.
• Advocates of QFD maintain that one of its most valuable
characteristics is its positive effect upon cross-functional
communication and, through that, upon cycle time and
the product/customer fit.
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Design for Manufacturing (DFM)

• Design for Manufacturing often involves a set of design
rules that reduce cost and development time, while
boosting quality.
• The easier products are to manufacture, the fewer the
assembly steps required, the higher labor productivity
will be, resulting in lower unit costs.
• Considering manufacturing at an early stage of the
design process can shorten development cycle time.
• In addition, by lowering costs and increasing product
quality, DFM can increase the product’s fit with customer
requirements.
https://www.youtube.com/watch?v=Z8YKhxBh5ZA
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Design for Manufacturing (DFM)

• Figure below summarizes a set of commonly used
design rules, along with their expected impact on
performance.
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Computer-Aided Design/
Computer-Aided Manufacturing
• Computer-aided design (CAD) and computer-aided
engineering (CAE) is the use of computers to build and
test product designs.
– Enables rapid and inexpensive prototyping.
• CAD enables the creation of a three-dimensional model;
CAE makes it possible to virtually test the characteristics
(e.g., strength, fatigue, and reliability) of this model.
• The combination enables product prototypes to be
developed and tested in virtual reality.
• Engineers can quickly adjust prototype attributes by
manipulating the three dimensional model, allowing
them to compare the characteristics of different product
designs.
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• Computer-Aided Manufacturing (CAM) is the use of
machine-controlled processes in manufacturing.
– Increases flexibility by enabling faster changes in
production set ups. More product variations can be offered
at a reasonable cost.
• Computers can automate the change between
different product variations and allow for more
variety and customization in the manufacturing
process.
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• A recent incarnation of computer-aided
manufacturing is three-dimensional printing (also
known as additive manufacturing), whereby a design
developed in a computer aided design program is
literally printed by laying down thin horizontal cross
sections of material until the model is complete.
• Unlike traditional methods of constructing a model,
which typically involve machining a mold that can
take several days to complete, three-dimensional
printing can generate a model in a few hours
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Theory In Action
Computer-Aided Design of an America’s Cup Yacht
• Normally designing America’s Cup yachts required
several months to develop smaller-scale models at a
cost of $50,000 per prototype.
• Using computer-aided design, Team New Zealand
was able to consider many design specifications in a
matter of hours at little cost, enabling more insight
into design trade-offs.
• Computer-aided design also avoided inaccurate
results from using scaled-down prototypes.
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Tools for Measuring New Product

Development Performance
• Measuring performance of NPD process can help
company improve its innovation strategy and
process.
– Measures of NPD performance can help management:
• identify which projects met their goals and why,
• benchmark the organization’s performance compared to that of
competitors, or to the organization’s own prior performance,
• improve resource allocation and employee compensation, and
• refine future innovation strategies
– Important to use multiple measures to provide fair
representation
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• New Product Development Process Metrics include:
– What was the average cycle time (time-to-market) for
development projects? How did this cycle time vary for
projects characterized as breakthrough, platform, or
derivative projects?
– What percentage of development projects undertaken
within the last five years met all or most of the deadlines
set for the project?
within the last five years stayed within budget?
within the last five years resulted in a completed product?
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• Overall Innovation Performance measures include:
– What is the firm’s return on innovation? (This measure assesses
the ratio of the firm’s total profits from new products to its total
expeditures, including research and development costs, the
costs of retooling and staffing production facilities, and initial
commercialization and marketing costs.)
– What is the percentage of projects that achieve their sales
goals?
– What percentage of revenues are generated by products
developed within the last five years?
– What is the firm’s ratio of successful projects to its total project
portfolio?
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Theory In Action
• Postmortems at Microsoft
• At Microsoft, almost all projects receive postmortem
reports.
– Team will spend 3-6 months creating report
– Report will be anywhere from <10 pgs to >100 pgs.
– Tend to be extremely candid and can be quite critical.
– “The purpose of the document is to beat yourself up.”
– Report describes team and development activities, product
size, product quality, and evaluation of what worked well,
what didn’t work well, and what group should improve.
– Distributed to team and senior management.
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Managing Innovation Across Borders

– Globally linked: Decentralized R&D labs but each plays a
different role in firm’s strategy and are coordinated centrally.
• Accesses diverse resources, improve diffusion of innovation
throughout firm and markets, may help develop core competencies.
• Bartlett and Ghoshal encourage transnational approach:
resources and skills anywhere in firm can be leveraged to
exploit opportunities in any geographic market.
Requires:
• 1. Reciprocal interdependence among divisions
• 2. Strong integrating mechanisms such as personnel rotation, division-
spanning teams, etc.
• 3. Balance in organizational identity between national brands and
global image
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MANAGING NEW PRODUCT

DEVELOPMENT TEAMS
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New Product Development at Dell Computer

• In 1993 Dell began developing a new notebook
computer. Its first line of notebook computers
(introduced in 1992)had technical problems that
resulted in recalling 17,000 units.
• Dell had traditionally used a small R&D budget,
autonomous teams consisting mostly of developers, and
an informal process. It was often successful, but
outcomes were inconsistent.
• For the new notebook, Dell decided to use cross-
functional teams with project leaders. Teams would be
dedicated to project from start to finish. Teams would
direct (and be held accountable for) each phase.
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New Product Development at Dell Computer

Discussion Questions:
1. What are some of the advantages of Dell's adoption
of a more structured new product development
process? Are their risks of abandoning its previous
informal approach?
2. How does including engineers from different
functions impact Dell's development process?
3. What are the benefits and costs of keeping the same
team members on the development project for its
complete duration?
4. If you were a senior manager at Dell, are their any
recommendations you would make for further
improving the development process?
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Overview
• Many organizations now use cross-functional teams
to lead and manage the NPD process.
• There is considerable variation in how these teams
are formed and managed.
• The chapter will look at size, composition, structure,
administration, and leadership of teams.
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Constructing New Product

Development Teams
• Team Size
– May range from a few members to hundreds.
– Bigger is not always better; large teams create more
administrative costs and communication problems
– Large teams have higher potential for social loafing.
• Team Composition
– Including members from multiple functions of firm
ensures greater coordination between functions.
– In 2000, 77% of U.S. firms, 67% of European firms, and
54% of Japanese firms used cross-functional teams.
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Constructing New Product

Development Teams
– Diversity in functional backgrounds increases breadth of
knowledge base of team.
– Other types of diversity (e.g., organizational tenure, cultural,
gender, age, etc.) can be beneficial as well.
• Provides broader base of contacts within and beyond firm.
• Ensures multiple perspectives are considered.
– However, diversity can also raise coordination costs.
• Individuals prefer to interact with those they perceive as similar
(“homophily”)
• May be more difficult to reach shared understanding.
• May be lower group cohesion.
– Extended contact can overcome some of these challenges.
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Research Brief
Boundary-Spanning Activities in NPD Teams
– Ancona and Caldwell studied 45 NPD teams to identify
the roles team members engage in to collect
information and resources within and beyond the
firm. Found three primary types:
• Ambassador activities: representing team to others and
protecting from interference.
• Task coordination activities: coordinating team’s activities
with other groups.
• Scouting activities: scanning for ideas and information that
might be useful to the team.
– Scouting and ambassador activities more beneficial
early in development cycle; task coordination
activities beneficial throughout life of team.
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Structure of New Product Development Teams
• One well-
known
typology of
team structure
classifies teams
into four types:
– Functional
– Lightweight
– Heavyweight
– Autonomous
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Structure of New Product

Development Teams
– Functional Teams
• Members report to functional manager
• Temporary, and members may spend less than 10% of their time on
project.
• Typically no project manager or dedicated liaison personnel.
• Little opportunity for cross-functional integration.
• Likely to be appropriate for derivative projects that primarily affect
only a single function of the firm.
– Lightweight Teams
• Members still report to functional manager.
• Temporary, and member may spend less than 25% of their time on
project.
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Development Teams
• Typically have a project manager and dedicated liaison personnel.
• Manager is typically junior or middle management.
• Likely to be appropriate for derivative projects where high level of
coordination and communication is not required.
– Heavyweight Teams
• Members are collocated with project manager.
• Manager is typically senior and has significant authority to command
resources and evaluate members.
• Often still temporary, but core team members often dedicated full-
time to project.
• Likely to be appropriate for platform projects.
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Development Teams
– Autonomous Teams
• Members collocated and dedicated full-time (and often permanently)
to team.
• Project manager is typically very senior manager.
• Project manager is given full control over resources contributed from
functional departments and has exclusive authority over evaluation
and reward of members.
• Autonomous teams may have own policies, procedures and reward
systems that may be different from rest of firm.
• Likely to be appropriate for breakthrough and major platform
projects.
• Can be difficult to fold back into the organization.
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Theory In Action
“Platform Teams” at Chrysler
– From 1988 to 1996, Chrysler reduced its development
cycle from 60 months to 24 months, and kept its
development costs remarkably low.
– The primary mechanism it used to accomplish this was
the formation of cross-functional autonomous
development teams (called “platform teams”).
– Members were collocated, and given considerable
autonomy to achieve target prices.
– Close contact kept teams fast, efficient, and flexible. By
1998 Chrysler’s vehicle lineup was considered one of the
most innovative in industry.
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The Management of New Product

Development Teams
• Team Leadership
– Team leader is responsible for directing team’s activities,
maintaining alignment with project goals, and
communicating with senior management.
– Team leaders impact team performance more directly than
senior management or champions.
– Different team types need different leader types:
• Lightweight teams need junior or middle manager.
• Heavyweight and autonomous teams need senior manager with high
status, who are good at conflict resolution, and capable of influencing
engineering, manufacturing, and marketing functions.
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Development Teams
• Team Administration
– Many organizations now have heavyweight and
autonomous teams develop a project charter and contract
book.
• Project charter encapsulates the project’s mission and provides
measurable goals. May also describe:
– Who is on team
– Length of time members will be on team
– Percentage of time members spend on team
– Team budget
– Reporting timeline
– Key success criteria
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Development Teams
• Contract book defines in detail the basic plan to achieve
goals laid out in charter. It provides a tool for monitoring
and evaluating the team’s performance. Typically
provides:
– Estimates of resources required
– Development time schedule
– Results that will be achieved
• Team members sign contract book; helps to establish
commitment and sense of ownership over project.
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Development Teams
• Managing Virtual Teams
– In virtual teams, members may be a great distance from
each other, but are still able to collaborate intensely via
videoconferencing, groupware, email, and internet chat
programs.
• Enables people with special skills to be combined without disruption
to their personal lives.
• However, may be losses of communication due to lack of proximity
and direct, frequent contact.
• Requires members who are comfortable with technology, have
strong interpersonal skills and work ethic, and can work
independently.
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Virtual International R&D Teams
– Gassman and von Zedtwitz studied 34 technology-intensive multinationals and
identified four patterns of virtual international R&D teams:
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Discussion Questions
1. Why are the tradeoffs in choosing a team's size and level of
diversity?
2. What are some of the ways that managers can ensure that a
team reaps the advantages of diversity while not being
thwarted by some of the challenges team diversity raises?
3. Can you identify an example of a development project, and
what type of team you believed they used? Do you think this
was the appropriate type of team given the nature of the
project?
4. What are some of the advantages and disadvantages of co-
location? Are there some types of projects for which “virtual
teams” are inappropriate?
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PROTECTING INNOVATION
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Introduction
• INTELLECTUAL:
• Creation of Human Intellect
• PROPERTY:
» Intangible Property
• RIGHTS:
• Exclusive Monopoly Rights
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• INVENTION-Patents
• LITERARY AND ARTISTIC WORK-Copy Rights
• TRADE LOGOS/TRADE NAMES-Trade marks
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• Protecting Innovation
• Overview
• Appropriability
• Patents, trademarks, and copyrights
• Patents
• Trademarks and Service Marks
• Copyright
• Trade Secrets
• Advantages of Protection
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The Digital Music Distribution
Revolution
• In 1991, Fraunhofer IIS of Germany invents the MP3 format; by late 1990’s the
format is wildly popular.
– Compressed digital audio to 1/10th the of the original size with minimal compromise in
audible quality
– A song was now a file that could be shared over the Internet
• Franuhofer pursued a partially open licensing approach by partnering with
Thomson Multimedia as the exclusive licensing representative of MP3 patents in
1995
– Thomson then negotiated agreements with Apple, Adobe, Creative Labs and Microsoft to
name a few.
– This gave consumers easy access to the technology
– Other companies developed competing technologies Sonywith ATRAC and MS with WMA but
MP3 was dominant
• In 1999, Shawn Fanning releases Napster, a free software program that allows
users to easily share MP3 files (“peer-to-peer”)
– The RIAA starts to worry about illegal trade of copyrighted music. In 2001 it gets a court
ruling against Napster, taking it offline.
– However, new peer-to-peer music services began to sprout up to meet the demand of the
large population of “music pirates.”
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Patents, Trademarks & Copyrights

• Most sources attribute the origin of formalized
protection of IP to 15th century England where the
monarchy granted certain privileges to
manufactureres abd traders as signified by “letters
patent” which were marked by the king’s great seal
– In 1449, Henry VI granted John Utynam a 20 year
monopoly on a method of producing stained glass that was
unknown in England
• Copyright protection arrived in 1710 when
Parliament gave protection to books and other
written works
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Patent
3 basic requirements of patentability

1.Innovative
2.Inventive step/Non-obvious
3.Industrial use
According to latest amendment to Indian

Patent Act,1970,Patent is available for 20 years from
the date of its grant and When it expires after 20
years, it goes to public domain.
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Patents
• Patents, trademarks and copyrights each protect different
things.
– Patents: rights granted by the government that excludes others
from producing, using, or selling an invention.
– Must be useful, novel, and not be obvious.
• Utility patents protect new and useful processes, machines,
manufactured items or combination of materials.
• Design patents protect original and ornamental designs for
manufactured items.
• Plant patents protect distinct new varieties of plants.
– In 1998, many software algorithms became eligible for patent
protection, previously covered only under copyright laws
• It unleashed a flood of applications for software patents
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• To apply for a patent, the inventor must explain how to
make use of the invention and make claims about what
it does that makes it a new invention
– In the US, the patent is reviewed by an examiner who
may make modifications to the scope of the claims of the
patent
– The patent is then published and can be challenged by
other inventors (e.g., infringes on an existing patent)
– If the standards are met, then the patent is issued
• Patents are issued for 20 years
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Patents
• Patent Laws Around the World
– Countries have their own laws regarding patent protection.
Some treaties seek to harmonize these laws.
• Paris Convention for the Protection of Industrial Property
– Foreign nationals can apply for the same patent rights in each
member country as that country’s own citizens.
– Provides right of “priority” – once inventor has applied for
protection in one member country, they can (within certain time
period) apply for protection in others and be treated as if they had
applied on same date as first application.
• Patent Cooperation Treaty (PCT)
– Inventor can apply for patent in a single PCT receiving office and
reserve right to apply in more than 100 countries for up to 2 ½
years. Establishes date of application in all member countries
simultaneously. Also makes results of patent process more
uniform.
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– Trademarks and Service Marks: a word, phrase, symbol, design,
or other indicator that is used to distinguish the source of goods
form one party from goods of another (e.g., Nike “swoosh”
symbol)
• Rights to trademark are established in legitimate use of mark; do not
require registration.
• However, marks must be registered before suit can be brought over
use of the mark.
• Registration can also be used to establish international rights over
trademark.
– Two treaties simplify registration of trademarks in multiple
countries: Madrid Agreement Concerning the International
Registration of Marks, and the Madrid Protocol. Countries that
adhere to either or both are in Madrid Union (77 members)
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Copyrights
– Copyright: a form of protection granted to works of authorship.
• Copyright prohibits others from:
– Reproducing the work in copies or phonorecords
– Preparing derivative works based on the work
– Distributing copies or phonorecords for sale, rental, or lease
– Performing the work publicly
– Displaying the work publicly
• Work that is not fixed in tangible form is not eligible.
• Copyright is established in first legitimate use.
• However, “doctrine of fair use” stipulates that others can typically use
copyrighted material for purposes such as criticism, new reporting,
teaching, research, etc.
• Copyright for works created after 1978 have protection for author’s
life plus 70 years.
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Copyrights
• Copyright Protection Around the World
– Copyright law varies from country to country.
– However, the Berne Union for the Protection of Literary
and Artistic Property (“Berne Convention”) specifies a
minimum level of protection for member countries.
– Berne convention also eliminates differential rights to
citizens versus foreign nationals.
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Trade Secrets
• Trade Secret: information that belongs to a business that
is generally unknown to others.
– Firm can protect proprietary product or process as trade secret
without disclosing detailed information that would be required
in patent.
– Enables broad class of assets and activities to be protectable.
– To qualify:
• Information must not be generally known or ascertainable.
• Information must offer a distinctive advantage to the firm that is
contingent upon its secrecy.
• Trade secret holder must exercise reasonable measures to protect its
secrecy.
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The Effectiveness and Use of

Protection Mechanisms
• In some industries, legal proection mechanisms are more
effective than others
– e.g., in pharmaceutical patents are powerful; in electronics they
might be easily invented around.
• It is notoriously difficult to protect manufacturing
processes and techniques.
– Nov 2002, P&G sued Potlatch Corp for stealing trade secret
methods for producing Bounty and Charmin products by hiring
two of P&Gs paper manufacturing experts. Settled out of court
• In some situations, diffusing a technology may be more
valuable than protecting it (open source software)
– However, once control is relinquished it is difficult to reclaim.
Fragmentation of the technology may result
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Theory In Action
• IBM and the Attack of the Clones
• In 1980, IBM was in a hurry to introduce a personal
computer (PC). It used off-the-shelf components such as
Intel microprocessors an operating system from
Microsoft, MS DOS.
• It believed that its proprietary basic input/output system
(BIOS) would protect the computer from being copied.
• However, Compaq reverse engineered the BIOS in a
matter of months without violating the copyright, and
quickly introduced a computer that behaved like an IBM
computer in every way. Compaq sold a record-breaking
47,000 IBM-compatible computers its first year, and
other clones were quick to follow.
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The Effectiveness and Use of

Protection Mechanisms
– Video game console producers use a wholly proprietary
strategy for their consoles but a limited licensing policy for
their games
• This encourages developers to produce games for the systems while
enables the console producers to maintain a great deal of control
over the games produced
• Xbox game developers must first apply and be accepted into one of
the Xbox programs in order to receive development tools. The games
are subject to a rigorous approval process
– Microsoft Windows
• Protected by copyright and only MS can augment the software
• Does allow access to portions of the source code to facilitate
development of complementary goods, licenses the rights to such
providers to produce complementary applications and licenses OEMs
to distribute the software by bundling it with hardware
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Theory in Action
• Sun Microsystems and Java
• In 1995, Sun developed a software programming language called
Java that enabled programs to be run on any operating system (e.g.,
Windows, Macintosh). This would lessen pressure for one
operating system to be dominant.
• Members of the software community felt that Sun should make Java
completely “open” – they argued that “Java is bigger than any one
company.”
• However, Sun was afraid that if Java were completely open,
companies would begin to customize it in ways that would
fragment it as a standard.
• Sun decided to distribute Java under a “community source”
program: no license fees, but all modifications to Java required
compatibility tests performed by Java’s own standards body (Java
Community Process)
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CRAFTING A DEPLOYMENT
STRATEGY
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Deployment Tactics in the U.S. Video

Game Industry
• 1972, Nolan Bushnell founded Atari and introduced the game
Pong that was played on a TV set with an Atari console. Pong
earned $1million revenue in its first year
• By 1984, video game console and game sales reached $3
billion in the US alone. Console makers did not provide strict
security and unauthorized games of poor quality flooded the
market. Sales dropped dramatically and by 1985 the video
game industry was declared dead.
• Much to everyone’s surprise, Nintendo and Sega entered the
market with 8-bit systems. They spent $15 million on
advertising. Nintendo had a near monopoly from 1985-1989.
– Nintendo made games in-house and through 3rd part developers with
strict licensing policies
• Limited number of titles a licensee could produce
• Developer had to pre-order a minimum number of cartridges
• Developer could not make similar games for other consoles
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Game Industry
• In 1989, Sega was able to overthrow Nintendo’s dominance by introducing
the 16-bit Genesis system 1½ years before Nintendo.
– Backward compatible to their 8-bit games
– Nintendo introduced its 16-bit system in 1991 but Sega had too much of a jump on
them and was the market leader
• Nintendo did not make it backward compatible
• In 1995, Sony was able to break into the video game industry by
introducing a 32-bit system, investing heavily in game development, and
leveraging its massive clout with distributors.
– By 1996, Sony’s installed base was 2.9 million units vs Sega’s 1.2 million units
• In late 2001, Microsoft entered the video game industry with a 128-bit
system. It had an advanced machine, and spent a lot on marketing and
games, but Playstation2 (also 128-bit) already had an installed base of 20
million.
– On the first weekend of PS2 sales (March 4, 2000), 1 million units were sold. The
website had more than 100,000 hits in one minute and had to temporarily shut
down
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Game Industry
• In late 2005, Microsoft was the first to introduce
seventh-generation console - the Xbox 360, beating the
Playstation3 to market.
• The console was designed around a custom IBM
processor that had three Power PC processors on a single
chip, and a custom graphics processor from ATI.
• The result was a powerful console that generated high-
definition video with stunning graphics. The Xbox 360
was also backward compatible with a portion of the Xbox
game library (though not with all Xbox games).
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Game Industry
• Instead of joining Sony and Microsoft in a technological
arms race, Nintendo changed the rules of the game with
its Wii console in time for the Christmas season of 2006.
• Instead of a controller with buttons or a joystick that
players had to vigorously manipulate, it offered an
innovative wireless motion-sensing remote that enabled
users to simulate real play, such as swinging a tennis
racket in a tennis match or punching an opponent in a
boxing match.
• The console was also launched at a price of $250—
significantly cheaper than the Xbox 360 or PS3.
UNIVERSITY

Game Industry
• In fall of 2008, Microsoft slashed the price of the
Xbox 360 to $199, making it the cheapest console of
the generation.
• In 2010, both Sony and Microsoft launched their own
motion-based controllers.
• The Playstation Move was a handheld motion sensor
wand, similar to the Wii Remote.
• Microsoft’s Kinect, on the other hand, did not require
holding anything— it was a webcam-style peripheral
that detected user motion within a range of play in
front of the device.
UNIVERSITY

Game Industry
• Microsoft reported that it had sold more than ten million
Kinect sensors worldwide, making it the fastest selling
consumer device ever, according to the Guinness World
Records Committee.
• The eighth generation saw the video game console
makers focusing on further integration with other media
and connectivity.
• Mobile device platforms such as Android and Apple’s iOS
were beginning to account for significantly more gaming.
Though the devices were small and the games lacked the
high fidelity and motion-based play offered by the home
consoles, they made up for it—at least in part—by a
rapid proliferation of free or low-cost games.
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Game Industry
• https://www.youtube.com/watch?v=DdxH5rRFRbg
• https://www.youtube.com/watch?v=n6I6iP0RVCw
• https://www.youtube.com/watch?v=BvYFM6eUn-M
• https://www.youtube.com/watch?v=4SRJO5n5xoQ
UNIVERSITY
Overview
• Only part of the value of any technological
innovation is determined by what the technology can
do.
• A large part is determined by the degree to which
people understand it, access it and integrate it with
their lives.
• An effective deployment strategy is thus a key
element in a technological innovation strategy.
– It is not just a way for the firm to earn revenues but is a
core part of the innovation process itself
UNIVERSITY
Overview
– Deployment strategies can
• influence the receptivity of customers, distributors and
complementary goods providers
• Reduce uncertainty about the product, lower resistance to
switching from competitors and accelerate adoption
– 3DO and Phillips introduced the first two 32-bit systems but
they failed because they were priced too high and had few
games
– Sega’s 32-bit system was priced right but weak distribution
hobbled its deployment
– Sony, on the other hand, used intense marketing, low prices,
strong game availability and aggressive distribution to ensure
a very successful launch of the Playstation
UNIVERSITY
Five key elements of the deployment

process
• Launch timing,
• Licensing and compatibility,
• Pricing,
• Distribution, and
• Marketing.
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Launch Timing
• The timing of a market launch can be an important deployment
strategy
– Nintendo held back on releasing its 16-bit system for fear of cannibalizing
their 8-bit system even though Sega had released Genesis
• Strategic Launch Timing
– Firms can use the timing of product launch to take advantage of business
cycle or seasonal effects
• e.g., video game consoles are always launched just before Christmas.
– Timing also signals customers about the generation of technology the
product represents.
• e.g., if a next generation console is launched too soon after a previous generation
console, the market may not want to spend money on a new console after having
just purchased a previous generation console.
– Xbox next generation but launched too close to PS2s launch
– Timing must be coordinated with production capacity and complements
availability, or launch could be weak.
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Launch Timing
– Optimizing Cash Flow versus Embracing Cannibalization
• Traditionally firms managed product lifecycles to optimize cash flow
and return on investment
– would not introduce new generation while old generation selling
well.
• However, in industries with increasing returns this is risky
– Competitors can gain a substantial lead that will be difficult to
overcome
• Often better for firm to invest in continuous innovation and willingly
cannibalize its own products to make it difficult for competitors to
gain a technological lead.
– Cannibalization: when a firm’s sales of one product (or at one
location) diminish its sales of another (or another location).
– In the late 1980s, Nintendo did not want to cannibalize their 8-bit
system despite Sega’s launch of a 16-bit system and thus lost
market share
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Licensing and Compatibility

• Protecting a technology too little can result in low quality complements
and clones, a fragmented market and little revenue for the developer
• Protecting too much may impede development of complements.
• Firm must carefully decide:
– How compatible to be with products of others
• If firm is dominant, generally prefers incompatibility with others’ platforms but may use
controlled licensing for complements.
• If firm is at installed base disadvantage, generally prefers some compatibility with others and
aggressive licensing for complements.
– Whether to make product backward compatible
• If installed base and complements are important, backward compatibility usually best –
leverages installed base and complements of previous generation, and links generations
together. Can be combined with incentives to upgrade.
– Sony did this with PS2 which gave incentive to current customer base to upgrade and not
forfeit existing games they own from previous generation of console
– Microsoft does this with Windows; backward compatible with major s/w applications
developed for previous generations
UNIVERSITY
Pricing
• Price simultaneously influences product positioning, rate of
adoption, and cash flow.
– In order to determine a pricing strategy, a firm has to decide on its
objectives
• Industry has intense price competition and/or overcapacity objective short-
run strategy may be simply survival
– Cover variable and some fixed costs
• In the long-run the firm will want to create additional with a strategy of
maximizing current profits
– Firm estimates costs and demand and then sets the price to maximize
cash flow or rate of return on investment
• For new technological innovations, firms often emphasize maximum market
skimming or maximum market share
– Market skimming strategy (high initial prices)
» Signals market that innovation is significant
» Recoup development expenses (assuming there’s demand)
» Attracts competitors, may slow adoption
UNIVERSITY
Pricing
– When seeking high volume, firms will emphasize maximum
market share objective
– Penetration Pricing is used to achieve this goal (very low price or
free)
» Accelerates adoption, driving up volume, build installed base,
attract developers of complementary goods
» Requires large production capacity be established early
» Risky; may lose money on each unit in short run
» Common strategy when competing for dominant design
» Honda priced the hybrid car Insight below cost because
believed it would be profitable in the long run and presented
Honda as a “green” car company
» Video console developers have sold their consoles at or
below cost but profit from game sales and licensing royalties
UNIVERSITY
Pricing
– Can manipulate customer’s perception of price
» Free initial trial or introductory pricing enables consumer
to overcome uncertainty about the new technology,
become familiar with the technology and appreciate the
benefits
» Initial product free but pay for monthly service
» Cable television model
» Firms also use introductory pricing for a stipulated
amount of time to test the market’s response without
committing to a long-term pricing structure
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Distribution
• Selling Direct versus Using Intermediaries
– Selling direct
– Gives firm great control over selling process, price and service
– Firm can capture more information about customers and can
facilitate the customization of products
– Can be expensive and/or impractical
– Intermediaries may include:
• Manufacturers’ representatives: independent agents that may
promote and sell the product lines of one or a few manufacturers.
– Useful for direct selling when its impractical for manufacturer to
have own direct sales force for all markets.
• Wholesalers: firms that buy manufacturer’s products in bulk then
resell them (typically in smaller, more diverse bundles)
– Provide bulk breaking and carry inventory.
– Handles transactions with retailers and provides transportation.
UNIVERSITY
Distribution
• Retailers: firms that sell goods to public
– Provide convenience for customers
– Enable on-site examination and service
• Original equipment manufacturers (OEMs):
– A company that buys products (or components) from other
manufacturers and assembles them or customizes them and sells under
its own brand name. E.g., Dell Computer
– Aggregates components from multiple manufacturers
– Provides single point-of-contact and service for customer
– Also called Value Added Resellers (VARs)
– In some industries, information technology has enabled
disintermediation or reconfiguration of intermediaries.
– Digital product may be delivered directly to the consumer over the
Internet
– E.g., online investing enables customers to bypass brokers; online
bookselling requires retailer to provide delivery services, online grocery
shopping shifts “the last mile” from the consumer to grocer
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Distribution
• These factors help determine whether and what types of
intermediaries the firm should use:
• How does the new product fit with the distribution requirements of firm’s
existing product lines?
– If there is an existing distribution channel and does the new product fit
into it?
• How numerous and dispersed are customers, and how much product
education or service will they require? Is installation or customization
required?
– Customers dispersed but require little training use mail order or online
ordering
– Customers dispersed and require moderate training or service use
intermediaries
– Customers not dispersed but require extensive training or service may
need to provide this directly
• How are competing products or substitutes sold? The sales channel can
influence the customer’s perception of the product
UNIVERSITY
Distribution
• Strategies for Accelerating Distribution
– Alliances with distributors
• Providing distributor with stake in product’s success or exclusivity
contract can motivate them to promote more.
– Sega had limited distribution for its Saturn launch, Nintendo
had unlimited distribution for Nintendo-64 and Sony had
unlimited distribution and extensive experience negotiating
with retailing giants such as Wal-Mart
– Bundling relationships
• Sell in tandem with product already in wide use.
– MS Windows on almost all PCs, MS IE via AOL
UNIVERSITY
Distribution
– Contracts and sponsorship
• Provide price discounts, special service contracts or advertising
assistance to distributors, complementary goods providers or large
and influential end users.
– New medical technology is donated or lent to large teaching
hospitals so that the benefits can be seen first hand by doctors
and administrators which increases future purchases
– Guarantees and consignment
• When there is uncertainty about a product, distributors can be given
guarantees to take back unsold stock thereby reducing the risk to
intermediaries and complements providers.
– Distributors were reluctant to carry Nintendo’s NES after crash of
video-game market in the 1980s. Nintendo agreed to accept
payment for sold consoles rather than require up front payment
UNIVERSITY
Marketing
• Major marketing methods include advertising,

promotions, and publicity/public relations.
– Advertising
• Requires effective message
• Requires media that conveys message to appropriate target market
– Varies in match to audience, richness, reach, and cost.
• Must strike appropriate balance between entertainment or
aesthetics (to make memorable) versus information content (to
make useful)
UNIVERSITY
Marketing
• Advantages and Disadvantages of Advertising Media
UNIVERSITY
Marketing
– Promotions
• Temporary selling tactics that include:
– Samples or free trial
– Cash rebates after purchase
– Including an additional product (a “premium”) with purchase
– Incentives for repeat purchase
– Sales bonuses to distributor or retailer sales representatives
– Cross promotions between two or more non-competing products
to increase pulling power
– Point-of-purchase displays to demonstrate the product’s features
– Publicity and Public Relations
• Attempt to generate free publicity and word-of-mouth (e.g., mention in
articles, television programs, etc.)
• Produce own internally generated publications
• Sponsor special events
UNIVERSITY
Marketing
• Tailoring the Marketing Plan to Intended Adopters
• Innovators and Early Adopters respond to marketing that offers
significant technical content and emphasizes leading-edge nature
of product.
– Need media with high content and selective reach
• Early Majority responds to marketing emphasizing product’s
completeness, ease o fuse, consistency with customer’s life, and
legitimacy.
– Need media with high reach and high credibility
• Late Majority and Laggards respond to marketing emphasizing
reliability, simplicity, and cost-effectiveness.
– Need media with high reach, high credibility, but low cost.
UNIVERSITY
Marketing
• Often hard to transition from selling to early
adopters to early majority, resulting in “chasm.”
UNIVERSITY
Marketing
• Using Marketing to Shape Perceptions and
Expectations
– Perceptions and expectations of value can be as important
as actual value. To influence, can use:
• Preannouncements and press releases
– Can build “mind share” in advance of actual market share
– Can forestall purchases of competitors’ products
• Reputation
– Provides signal to market of likelihood of success
• Credible commitments
– Substantial irreversible investments can convince market of
firm’s confidence and determination
UNIVERSITY
Research Brief
• Creating an Information Epidemic
– Gladwell notes that some individuals have a disproportionate
impact on marketplace behavior:
• Connectors
– Have exceptionally large and diverse circle of acquaintances
– Knack for remembering names and important dates
• Mavens
– Driven to obtain and disseminate knowledge about one or more of
their interests
– Will track prices, tend to be consumer activists
– Take great pleasure in helping other consumers
• Salespersons
– Naturally talented persuaders
– Acute ability to send and respond to nonverbal cues; can infect
others with their mood!

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OF ENGINEERING & MANAGEMENT, KOLKATA

DEFINING THE ORGANIZATION’S

Reinventing Hotels: citizenM

Reinventing Hotels: citizenM

Reinventing Hotels: citizenM

Reinventing Hotels: citizenM

Reinventing Hotels: citizenM

Reinventing Hotels: citizenM

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

The Five-Forces Model of Competition

Assessing the Firm’s Current Position

The Five-Forces Model of Competition

The Five-Forces Model

The Five-Forces Model

The Five-Forces Model

The Five-Forces Model

The Five-Forces Model

The Five-Forces Model

Conditions Where Consumers Gain

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Take2 Interactive Software

Assessing the Firm’s Current Position

Assessing the Firm’s Current Position

Identifying Core Competencies and

Identifying Core Competencies and

Identifying Core Competencies and

Risk of Core Rigidities

Mopar glass https://www.youtube.com/watch?v=BUX6TlUUXoc

The Balanced Scorecard

How to Access Technology Needs

Accessing Technology Needs

Measuring Current Technologies

Measuring Current Technologies

Accessing External Technological Trends

Accessing External Technological Trends

Key Factors to Consider in Technology Decisions

Anticipated market receptiveness

Anticipated capability development

Framing Decisions about Technological

Sourcing & Acquiring New Technologies

Sourcing & Acquiring New Technologies

Sourcing & Acquiring New Technologies

Technology Acquisition Options

CHOOSING INNOVATION PROJECTS

The Development Budget

The job of venture capital firms is to find businesses with high

Venture vs Traditional Capital

Quantitative Methods for Choosing

• NPV = Net Present value = Present value of net cash

t - the time of the cash flow

Quantitative Methods for Choosing

Quantitative Methods for Choosing

Quantitative Methods for Choosing

Qualitative Methods of Choosing Projects

Qualitative Methods of Choosing Projects

Combining Quantitative and