Message from Jeremy: To all Tech IT Easy readers, who could obviously not necessarily remember the initial announcement, I have invited Fidji Simo to write about web strategies and provide you with insights on how to manage and develop small & medium businesses. Fidji’s mission statement is that there’s no mission statement: what matters most is to start nice conversations and have fun.
There are not so many book reviews on this blog, but as we are making changes, it might be interesting when great books generate great discussions.
I have just finished “Payback” (James P. Andrew, Harold L. Sirkin), and even if there’s nothing revolutionary, it gives a clear vision of the three different innovation models: integration, orchestration and licensing.
What is really fascinating is that there is no winning model; not even for a specific industry; it really depends on the company and on the type of product. The choice must be conditioned by the different components of the cash curve (prelaunch investment, time to market, time to volume, support costs) and the required risk exposure level.
Integration (e.g. the company manages all the innovation process internally) seems to be the best model when:
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control is necessary,
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the company has world class capabilities,
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the risks are manageable,
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knowledge assets must be protected.
This model was until recently the most chosen, but the Polaroïd example shows that it also carries some risks: although this model had always worked perfectly to the company, it has caused major delays when entering the digital market which has led to bankruptcy.
Ochestration (e.g. the company collaborates with others to innovate, arbitraging between what to keep in house and what to delegate) should be considered when:
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a capability is missing,
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entering unfamiliar territory,
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you don’t want to invest in building capabilities,
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you trust others,
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you want to share risks.
One great example of orchestration (sure that Jeremy will agree 
) is the creation of the Tablet PC by Microsoft (even if Microsoft is traditionally a licensor): to launch into pen-based computing, Microsoft needed to also create Tablet PC hardware as no such platform existed. But without the key resources and experience to do that, Microsoft preferred to stick to what it knew well (software) and partner with hardware companies (IBM, HP, Toshiba, Acer…) to help them create hardware and adapted the software to their needs.
Licensing (e.g. the company is the primary owner of the spark of innovation, but has limited involvement in the realization) is an under-used model which is becoming more and more popular to generate payback. It is particularly relevant when:
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the company doesn’t have the possibility to commercialize innovation,
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the innovation can create critical mass or lead to the creation of a standard,
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competition can be transformed into a royalty source.
This last point is very well illustrated by P&G strategy. I know it is not tech-related but this really clever strategy can easily be imitated by tech companies: CEO claims that his goal is to license his innovations to his competitors for one dollar less, and one day sooner than they can do it themselves. Of course it totally nips into the bud any willingness of competitors to invest in risky innovation.
A little quiz to finish: what is the innovation model of:
- iPod?
- iTunes?
- TiVo?
- AIBO from Sony?
- Dolby?
- Intel Microprocessors?
Free beer for those who find all the answers…
one key factor in managing innovation is managing and maintaining the right people. . .
Comment by tivo — June 14, 2007 @ 03:13
No doubt on that! And it is true across the 3 models.
Comment by Fidji SIMO — June 14, 2007 @ 07:28
[...] I have based my thoughts on a really good book (even if it is a bit too academical for me) : Payback? (James P. Andrew, Harold L. Sirkin). It gives a clear vision of the three different innovation models: integration, orchestration, licensing. I have shared these thoughts and examples with Tech IT Easy’s readers here. [...]
Pingback by A Fresh Start (up) » Blog Archive » How to manage innovation? — June 14, 2007 @ 09:31
I’m not awake yet, but..
iPod – hiring a consultant (it was just in the economist)
iTunes – I used to know… need my coffee. But Apple does nearly nothing inhouse, it’s like Nike, so I would again guess working with an external party
AIBO – inhouse? Strange, because I played with a gen 1 or 2 when I worked at Sony. But it sounds like something Sony would do.
Dolby – I know Lucasarts had something to do with it, so I would guess partnerships.
Intel – acquisitions and in-house?
TiVo – licensing?
All guesses, no research, so pardon any stupidity.
Licensing is a mechanism that is very popular with patents and universities, and more evolved in the US. Much much less here, though I interviewed a medical incubator in the Netherlands where they were pretty good at it.
Comment by Vincent van Wylick — June 14, 2007 @ 12:26
Not bad at all! If you try to stick to the 3 models (integration, orchestration, licensing) it would be easier to get your free beer
I will give all the answers tonight.
Concerning the end of your comment, actually I have read that medical companies are really in advance concerning the use of licensing.
Comment by Fidji SIMO — June 14, 2007 @ 12:37
iPod – orchestration
iTunes – integration
AIBO – integration
Dolby – licensing
Intel – orchestration
TiVo – licensing
Comment by Jeremy Fain — June 14, 2007 @ 12:44
Jeremy, you smart***. I’m sure all your teachers loved you :p (actually I know they did)
Regarding iTunes, you can look at it on different levels. Regarding the “code,” a purchase was involved, so integration. Regarding the codecs used (AAC. etc.), it’s licensing (though no fees are paid), as that’s a group-standard. I’m not sure how the distribution works, but I can see some outsourcing, aka orchestration, going on there.
For the medical industry, you are right Fidji. It is one of the oldest industries to use licensing, which makes sense as there’s a very strong tradition of duality – one side creates, the other markets.
Comment by Vincent van Wylick — June 14, 2007 @ 13:32
Right on iPod, iTunes, Aibo and Dolby, so not bad at all!!!! You deserve 2/3 of a beer!
So what about Intel and TiVo?
Comment by Fidji SIMO — June 14, 2007 @ 14:11
For Intel, if you include software, which I think is a vital ingredient, orchestration. Technology, mostly integration, though the processor is of course part of an ecosystem of technology inside a computer, which has to speak to each-other.
Tivo, I, like many Europeans, am not so familiar with. But some research revealed that it’s a software and that they partner with technology and media-companies. So licensing.
Comment by Vincent van Wylick — June 14, 2007 @ 14:38
According to my source both are integrators.
Intel controls everything from R&D (4bn per year) to commercialization, but I speak about microprocessors, it does not include software, you are right Vincent.
For TiVo I did not know about the partners, but I think that they arrived when the product was already realized; it was such an innovation that TiVo did all by itself; it seems that they invest so much in support costs to educate customers that they will never achieve payback, even if the product is a huge success in terms of penetration now.
Thanks guys for participating, you will both have your free beer!
Comment by Fidji SIMO — June 14, 2007 @ 14:49
You’re too nice.
Incidentally if people are wondering why its so quiet on this site, people all over are having exams. Big student-readership here, I guess.
Comment by Vincent van Wylick — June 14, 2007 @ 22:22
Regarding TiVo and partners, I’m reminded of Schumpeter’s definition of innovation:
“The making of the invention and the carrying out of innovation are, economically and sociologically, two entirely different things. They may, and often have been, performed by the same person; but this is merely a chance coincidence which does not affect the validity of the distinction. Personal attitudes—primarily intellectual in the case of the inventor, primarily volitional in the case of the businessman who turns the invention into an innovation—and the methods by which the one and the other work, belong to different spheres” (source: Schumpeter, 1939)
So in his (and my) view, innovation is the commercialisation of an invention, not the invention alone. So, TiVo’s partnership with companies like Thomson and Philips is part of the innovation process as well, as it brings an technology to the market. But that’s merely semantics.
Comment by Vincent van Wylick — June 14, 2007 @ 22:27
Indeed I was wondering, but I did not think about exams, really good point…
I thought that the idea of a free beer with me was not so appealing!
Anyways, when are we gonna do this big bloggers’ meeting? And more interestingly, where?
Comment by Fidji SIMO — June 14, 2007 @ 22:28
Concerning your definition of innovation, I totally agree, it is a whole process, which business decisions must be analysed until the withdrawal of the product from the market.
It is always the same story: ideas are not the most crucial part, execution is…
Apparently the main problem for companies are to go from creativity to innovation, whereas I thought (before having any professional experience) that it was the lack of ideas, at least in big structures.
I really advise you this book, it makes a perfect list of “wrong” business decisions when innovating, giving examples. And it is clear that the most obvious mistakes are still made when it comes to innovation; notably trying to avoid risks at all costs which in the end minimizes the chance of payback.
Comment by Fidji SIMO — June 14, 2007 @ 22:37