Choices in Pursuing Innovation
Oil Rig; Source: Wikimedia
Whenever a company is presented with the opportunity to pursue an innovation they must make several choices. A company will need to determine if it possesses the required expertise, if there is the potential to make a profit and if the innovation can be properly appropriated (patented or other intellectual property). How does a company know if they have an expertise in a specific innovation field or not? Shell knows Oil so does that mean that Shell knows all energy? Could they move into solar or wind energy? What about Seagate moving into flash memory? Are there cases where innovation on a technology can actually reduce profits for a company? Are there other ways to protect technologies besides patenting? Are they effective and does it matter what industry the company is in?
There are several different ways to look at the first group of questions. One way is by looking at what is called Dynamic Capabilities. These represent what skills the company has developed through employees and how flexible an organization is to changes. For instance the ability to adapt as a manufacturer of ceiling fans when the first box fan was introduced. This new innovation is clearly within the skill set of a ceiling fan manufacturer, however they may not actually be successful at manufacturing and producing the ceiling fan. Why though? Well, the box fan requires a completely different manufacturing processes and materials to create a well designed box fan. Clearly understanding a firm’s dynamic capabilities can help with choices in pursuing technologies.
How do you measure dynamic capabilities though? Described in this way, there’s not much in terms of an actual tool. It essentially means you should know your company well, which is trite management advice. Fortunately it is possible to put an actual number to dynamic capabilities through looking at technologies that a company already has experience. This is where the evolution of technology becomes very important. Patents not only provide an agreement between the state and an inventor, but it also provides a method to track the technological heritage of a technology and for a company.
How does this work? It actually depends on the organization issuing the patent. In the US, inventors are required to include patents that they are aware of that influenced their technology, examiners find patents that are related that inventors may have missed. In Europe, only examiners can add related patents. These are called patent citations, which is exactly the same in scientific articles. The additional benefit, for companies in the US, is that companies will include as many patents as possible which they already own. This allows for a better understanding of the depth of knowledge related to a technology. Researchers, Leten et al, have been able to use this depth of knowledge to determine if a firm is likely to succeed in a new (to them) technology regime.
They were able to do this based on what they called technological adjacency. Which essentially means that the technology uses similar scientific and technological properties. Shell has moved into biofuels because these are chemically very similar to oil. Refining technologies will be extremely similar. Based on the analysis of Leten et al, this makes a great deal of sense. Not only has Shell entered the market, they have also been extremely successful in the field. The researchers also looked at Shell moving into other energy fields such as solar panels and wind energy. Shell has already bought and sold solar energy production once and are again looking to move back into solar. Based on this analysis, Shell will likely perform better the second time than they did the first time. This is assuming they retained some of the staff that were building expertise in solar panels previously. Knowledge of this kind is very tacit and isn’t likely to be codified once Shell abandoned solar the first time.
Internal picture of a hard drive; Source: Wikimedia
In the book Innovator’s Dilemma, published in 1997, the author, Clayton Christensen, poses the question if Seagate will go into flash memory. At the time, he argued that Seagate could have and may move into the space in the future. However, we know that Seagate has not, but we don’t know why. However, if we look at things from the evolutionary perspective of technology adjacencies it’s obvious why Seagate didn’t move into the field. These hard drive technology is based on totally different technology principles. While both technologies, semiconductors and hard drives, use material science and a substrate (silicon/aluminum) the two technologies are constructed using different principles. One is electron based another is magnet based, while there are definitely overlaps within the realm of physics the two different technologies just do not have enough in common for Seagate to easily move into that technology to be successful.
From a leadership perspective, ensuring a clear understanding of your current patent portfolio can allow you to make an informed decisions on what types of innovations you should pursue. In this case I’ve mostly been discussing something of a radical or regime shifting technology. In many cases it’s obvious to pursue incremental innovation. The difficulty is whenever the technology shift or a new large market outside of a company’s expertise. The green energy market is a going to be a huge market, firms moving into the market will be more likely to succeed if the technology is adjacent to their own dynamic capabilities.
In upcoming articles I will address the other two questions I raised, what economic reasons would prevent a company from innovating, and what other types of protection to firms use for innovations?
Follow Ryan on Twitter: @kapsar
Actually the Seagate example depends on what you mean by "getting into a technology". Could Seagate manufacture Flash memory chips (the lowest indivisible meaning of "getting into Flash memory")? The is almost certainly "NO" because Seagate doesn't have any experience in leading edge, minimal geometry IC manufacturing. In fact even a semiconductor company that did still might not presume they could get into Flash because Flash isn't a "trivial" IC process change that is assured of profitability. On other hand Seagate HAS gotten into Flash with their SSD drives which are a supply chain step downstream from actually "manufacturing Flash" as a consumer of Flash memory ICs built into systems. This is in contrast to Seagate's HDD business where they actually do make everything that constitutes "the disk memory" including the disk heads. The reason this works is because the controller of an SSD drive is quite similar to the controller of an HDD, and Seagate already has reputation and market presence with the those who connect into that controller boundary of the system. Many times it's about the systems boundaries and picking the right one and on which side to focus. In the context of Green Energy, the US itself has a serious mismatch which has been accelerating over the last 30 years. There's a reason why 85% of all photovoltaic (PV) cells are manufacturing in Asia (very closely related to why Silicon Valley manufactures very little silicon anymore). There's also the reality that 95% of all world-wide consumption of PV cells is directly and downstream EVERYWHERE BUT THE USA (Europe is around 80%). The US gets no experience or exposure to the innovation-needing manufacturing or consumption of the technology, and therefore has largely been shut-out. Stories like Solyndra (and several other similar PV companies) going out of business doesn't surprise me. If you don't manufacture a technology, you can never innovate that technology. When it comes to technology, manufacturing and design are joined at the hip and virtually inseparable as activities if you want to do well at either. The higher the tech, the more leading edge the tech, the more fundamentally inseparable they are. Having abandoned many key and critical technology manufacturing capabilities, the US is in an ugly "chick or egg" situation to reboot its capabilities. By that I mean both activities must be done in very close physical proximity. And your supply chains must be nearby also. You must have this because you must have rapid iteration and turn-around between design, manufacturing and suppliers to innovate - so fast that formal bureaucratic mechanism are usually not fast enough. Instead direct personal social networks take over but not even just established one but serendipitous ones at equally importantly. For that only face-to-face interaction provides the possibility. This is what allowed the Silicon Valley to thrive at one time and exactly that sapped most of the innovation out of it since the 1990s.
You are of course right in Seagate. I did mean as a manufacturer of Flash itself not as a final product using flash. In the Innovator's Dilemma the author means as a full manufacturer from raw material to final product. Seagate got into SSD through a combination of flash and hdd a few years ago with Samsung and then moved into the market as a finished goods manufacturer. Your final point is spot on. If you haven't read "Make it in America" by Andrew Liveris, link below, you should check it out. Liveris is the CEO of Dow chemical and argues that creating policies that encourage manufacturing in the US will increase the amount of R&D and keep the US on the cutting edge of R&D. I plan in the future to write some articles about this, because there's a great deal to be said about research following manufacturing. Another researcher in that field is Cesar Hidalgo, he works at MIT, he uses this sort of premise to create a developmental growth theory to explain why some countries have developed like South Korea and others like Columbia haven't even though they started at roughly the same point at the same time. http://www.amazon.com/Make-America-Case-Re-Invent...
[...] are many different types of factors that impact innovation rates (Choices in pursuing innovation). There are cases when high levels of profits can prevent companies from investing in innovation. [...]
[...] the suburbs. The End of Suburbia argues that suburban life is not sustainable and that the end of the oil economy will cause a disastrous end to the suburbs. Author James Howard Kuntsler claims that the suburbs [...]