National Chiao Tung University
GMBA Program

Global Technology Strategy

McKinsey Quartely
Creating value through Innovation

Team
Lolo - 9988542
Alfonso – 9988

Date: May 31, 2011

Summary
Innovation, according to the article, involves the development of new products or processes and the knowledge that produces them and those new products can either take the form of high-level building blocks, midlevel intermediate goods and ground-level final products. The underlying knowledge for new products includes high-level general principles, midlevel technologies, and ground-level, context-specific rules of thumb but technological innovations, especially high-level ones, usually have limited economic or commercial importance unless complemented by lower-level innovations.
The world that we live in facilitate the quick dissemination of knowledge and breakthroughs travel easily, but their national origins are fundamentally unimportant and the debate as to whether innovations or innovators make the greatest contribution to economic prosperity, is deemed as ‘not helpful’, because they all play necessary and complementary roles. The enhancement of research in China and India, and their share of ‘cutting-edge work’, will improve living standards in the United States, implying that other countries can benefit from the advances without them actually affecting the country’s economy.
Many cross-border flows are important to innovators, namely, the dissemination of knowledge including scientific principles and technological breakthroughs, the information licensing, the export and import of final products, the obtaining of intermediate goods and services, equity investments, and the use of immigrant labor.
The ability of ‘lower-level players’ to come up with new ideas and products is as important to an economy as the scientific and technological breakthroughs on which they rest and high-level science and engineering are just as important than the ability to use them in mid- and ground-level innovations. It is believed he United States should reverse policies that show bias toward one form, and cease to worry that the advancement of the rest of the world will, as the article put it, ‘reduce it to ruin’, because ‘it doesn’t matter where scientific discoveries and breakthrough technologies originate—for national prosperity, the important thing is who commercializes them.’

Analysis:

Positives

• It doesn't matter what kind of innovations are developed, or where innovations are created. What does matter is who implements them. The implementers gain the vast majority of the value from innovation. More than the patent holders or the countries where inventors live.

• Historically America has been a hotbed for trying new things. America was advantaged over Europe because it didn't have the regulations and other innovation testing roadblocks. America was advantaged over Africa and much of South America because it didn't have a legacy of dictator governments and corruption that kept things from moving forward - blocking innovation. America was advantaged over China and India because it's per capita GDP has been very high, meaning there were ample resources to invest in trying new innovations. Thus, America has historically been an innovation testing grounds that has paid enormous dividends by keeping its companies on the leading edge of competitiveness.

• Despite flat-worldly access to—and global movement of—information, cultural strengths of different regions and peoples tend to persist, which can be exploited in a positive sense.

• The United States enjoys an advantage that emerging economies like China and India don’t have yet—the spirit of entrepreneurship and the climate for assimilation of innovation.

Negatives:

• The failure to acknowledge that only with a profound understanding of “high-order” technologies can the “mid-level” and “ground-level” innovations be made to commercialize a new product.

• The example of the commercial applications of the transistor in the 1950s fails to recognize the historical context in which they were developed – that is, following the massive investment in R&D during the second world war in which legions of scientists had been trained and funded to develop innovations at all three levels.

• It is short-sighted to believe that because lower-level innovations that serve to commercialize new technologies are best conducted close to potential customers, the US will continue to maintain a competitive advantage in this area. Given the technological advances that have led to globalization and the emergence of the Chinese and Indian markets, these arguments may be obsolete already.

• Why American retailers might have absorbed German inventory-reduction technologies better? Go-to-market is what separates a great idea from blockbuster revenues we don’t believe it has anything to do with great teams or time (150 years), as Bhide asserts. In our opinion, it’s attitude. An average German citizen believes that it’s unfair to make store employees work on Sundays or beyond 6PM on Saturdays. That’s why German shopping hours are much less than American ones, that’s why they’re inefficient. Even today, many Indians use the words ‘crass’ and ‘commercialization’ in the same sentence. It takes a recession like the present one for them to understand the importance of things like commercialization/go-to-market. In India and many other parts of the world, invention for the sake of invention is considered as noble, whereas profiting from it is seen as greed. It’s this attitude in many countries outside the US that explains America’s lead in productivity and usage of innovation. This lead will be challenged severely if India and some of these other countries lose this attitude—that could take even more than 150 years

• The article will lull the west into a state of self-congratulatory complacency just when it should be developing strategies to compete effectively at all levels of the innovation continuum.

Interesting points

The author of this article makes the important distinction between innovation and creating wealth. The fundamental thesis that this article supports is that there is a need for balance • The taxanomy of innovation at three levels • Different countries have relatively superior competency in one or the other areas (of innovation or execution), as Porter had stated

This is a great article that dispels the hype about innovation. While product innovation is indeed important, it is ultimately application innovations which harness technological innovations that bring about economic benefits.

The arguments in this paper do however suggest the removal of the tendency of policy makers to favor upstream innovation and neglect or even impair what happens mid- and downstream. Such a bias is apparent in the promotion of research and the denigration of marketing

Marketing plays an even more important role in realizing the value of innovations where there are no guidelines offered by authoritative professional bodies and users face significant Knightian uncertainty about the utility of their purchases

Some more Interesting facts

For more than half a century, the United States has led the world in scientific discovery and innovation. It has been a beacon, drawing the best scientists to its educational institutions, industries and laboratories from around the globe. However, in today’s rapidly evolving competitive world, the United States can no longer take its supremacy for granted. Nations from Europe to Eastern Asia are on a fast track to pass the United States in scientific excellence and technological innovation.

Benchmarks in six essential areas—education, the workforce, knowledge creation and new ideas, R&D investments, the high-tech economy, and specific high-tech sectors:

Education Benchmarks
Undergraduate science and engineering (S&E) degrees within the United States are being awarded less frequently than in other countries. For example, the ratio of first university degrees in natural sciences and engineering (NS&E) to the college-age population in the U.S. is only 5.7 degrees per 100. Some European countries, including Spain, Ireland, Sweden, the United Kingdom, France and Finland, award between 8 and 13 degrees per 100. Japan awards 8 per 100, and Taiwan and South Korea each award about 11 per 100.3

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The proportion of U.S.-citizens in S&E graduate studies within the U.S. is declining. From 1994 to 2001, graduate S&E enrollment in the U.S. declined by 10 percent for U.S. citizens but increased by 25 percent for foreign born students. In 2001 approximately 57 percent of all S&E postdoctoral positions at U.S. universities were held by foreign born scholars.

Workforce Benchmarks
Asian students are less likely to study in the U.S. From 1994 to 1998, the number of Chinese, South Korean, and Taiwanese students who chose to pursue their Ph.D.s at U.S. universities dropped 19 percent (from 4,982 to 4,029). At the same time, the number who chose to pursue their Ph.D.s at universities in their own countries nearly doubled (from 4,983 to 9,942). This indicates that these countries are quickly growing their own higher educational capabilities.

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Knowledge Creation and New Ideas Benchmarks

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From 1988 to 2001 the U.S. increased its number of published S&E articles by only 13 percent. In contrast, Western Europe increased its S&E article output by 59 percent, Japan increased by 67 percent and countries of East Asia, including China, Singapore, Taiwan, and South Korea, increased by 492 percent. Though both Japan and East Asia started from a far smaller base in 1988, and still do not publish as many articles as the U.S., their growth rate is dramatic.

U.S. Patent applications from the Asian countries of China, India, Singapore, South Korea, and Taiwan grew by 759 percent from 1989 to 2001. Patent applications from the U.S. during the same period grew more slowly at 116 percent (though, as with the above, it should be mentioned that the Asian countries started out at a much lower base level).

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R&D Investment Benchmarks

Collectively, the world’s fastest growing economies are on track to catch up to U.S. R&D investment. From 1995 through 2001, the emerging economies of China, South Korea, and Taiwan increased their gross R&D investments by about 140 percent. During the same period the U.S. increased its investments by 34 percent.

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High-tech Economy Benchmarks
The U.S. share of worldwide high-tech exports has been in a 20-year decline. From 1980 until 2001 the U.S. share fell from 31 percent to 18 percent. At the same time, the global share for China, South Korea, and other emerging Asian countries increased from just 7 percent to 25 percent.

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During the 1990s, the U.S. maintained a trade surplus for high-tech products even as the trade balance for other goods plummeted. But since 2001, even the trade balance for high-tech has fallen into deficit.

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Even while the U.S. high-tech industry grew rapidly throughout the 1990s, the high-tech industry in many Asian countries grew even faster. For example, from 1989 to 2001, U.S. high-tech output doubled, growing from $423 billion to $940 billion, but China’s high-tech output shot up more than 8-fold, from $30 billion to $257 billion.

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Despite negative trends, U.S. R&D continues to lead the world by a large margin. In 2007, America’s $369 billion R&D spending exceeded all of Asia’s $338 billion and all of the European Union’s $263 billion. The United States spent more than the next four countries — Japan, China, Germany and France — combined.

America’s share of all high-tech manufacturing has risen — and it continues to lead the world — even though the U.S. share of exports has declined. That’s because the United States consumes so much of its product domestically. The United States makes nearly a third of the world’s high-tech goods, compared with the European Union’s 25 percent and China’s 14 percent. It’s the world leader in communications, semiconductors, pharmaceuticals and aerospace. It trails only the EU in scientific instruments and China in computers.

In reflection:

Entry Timing – United States of America

First Mover Advantages and Disadvantages

What is the first mover position about, then? The position has its advantages and disadvantages. When talking about first mover advantages, we assume that the benefits from being the first into market exceed the costs of having to be the first to explore a wholly new business area. We can define the benefits of being a first entrant in a market to be

• A large and lasting impression on customers • Strong brand recognition • High switching costs incurring to customers from changing to another company; customer lock-on. • Technology leadership • Moving down the learning curve in product and process innovation. • Avoiding products that have no potential • Lower R&D expenditures • Lower costs to imitating than innovating • Ability to catch innovator with heavy marketing expenditures • Lower costs of educating customers about innovative product ideas • The possibility of stranding the innovator with an obsolete product standard

Disadvantages to be: • followers’ chance to “free ride on pioneers”; to learn from their mistakes, successes and processes • the resolution on the market regarding both market and technological uncertainties • possible technological discontinuities that make first mover investments obsolete

On the whole, a market pioneer, or a first mover, meets a significant amount of uncertainty in forecasting customer response, technological developments and the maturity of the first generation technology. The early followers get to learn from the mistakes their predecessor has made, and may enter the market equipped with an improved solution. Of course they must enter equipped with an improved offering, because the first mover can enjoy the benefits gained by sacrificing a great deal of resources. They possess some amount of customer loyalty, maybe a de facto industry standard, distribution network, and an established product line. And of course: the longer the first entrant can dominate the market in monopoly before the entry of first rivals, the greater is the head start.

Crossing the Chasm: Germany example

The Laggards listen to the Late Majority for economic reasons big enough to make them change. The laggards are the brakers, the ones that are the last to take on a new technology. They are important for the coming economical success, but not for the technological development.

Germany is considered to be in this category

• Germany’s primary exports to emerging markets are capital goods, which are used among other things for expanding the industrial infrastructure, e.g. machinery, cars and chemical products. These are mid-tech products. Developing such products is relatively demanding, but less research intensive than high-tech products such as semiconductors. As countries such as China and Brazil become progressively more developed, however, they will increasingly be in a position to make up their deficit in such relatively complex industries and to manufacture products themselves. This will limit the demand for German export goods in the long term.

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• The great breadth and depth of the capital markets thus mean that the high-tech segment has a more favorable environment in the US than in Germany. For instance, the origins of biotechnology lie in the US, which dominates this highly promising sector to this day. Although German exporters are currently able to play to their strength in the mid-tech segment given the demand of booming emerging markets, it does obscure their weakness in high technology.