Case Study: What is your opinion of each case

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Strategic
Management of
Technological
Innovation

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Strategic
Management of
Technological
Innovation
Sixth Edition

Melissa A. Schilling
New York University

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First Pages

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STRATEGIC MANAGEMENT OF TECHNOLOGICAL INNOVATION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2020 by McGraw-Hill
Education. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced or
distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent
of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission,
or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the
United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 LCR 21 20 19

ISBN 978-1-260-56579-9
MHID 1-260-56579-3

Cover Image: ©Shutterstock/iSam iSmile

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not
indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the
accuracy of the information presented at these sites.

mheducation.com/highered

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About the Author
Melissa A. Schilling, Ph.D.
Melissa Schilling is the John Herzog family professor of management and organiza-
tions at New York University’s Stern School of . Professor Schilling teaches
courses in strategic management, corporate strategy and technology, and innova-
tion management. Before joining NYU, she was an Assistant Professor at Boston
University (1997–2001), and has also served as a Visiting Professor at INSEAD
and the Bren School of Environmental Science & Management at the University of
California at Santa Barbara. She has also taught strategy and innovation courses at
Siemens Corporation, IBM, the Kauffman Foundation Entrepreneurship Fellows
program, Sogang University in Korea, and the Alta Scuola Polytecnica, a joint institu-
tion of Politecnico di Milano and Politecnico di Torino.

Professor Schilling’s research focuses on technological innovation and knowl-
edge creation. She has studied how technology shocks influence collaboration activ-
ity and innovation outcomes, how firms fight technology standards battles, and how
firms utilize collaboration, protection, and timing of entry strategies. She also stud-
ies how product designs and organizational structures migrate toward or away from
modularity. Her most recent work focuses on knowledge creation, including how
breadth of knowledge and search influences insight and learning, and how the struc-
ture of knowledge networks influences their overall capacity for knowledge creation.
Her research in innovation and strategy has appeared in the leading academic journals
such as Academy of Management Journal, Academy of Management Review, Man-
agement Science, Organization Science, Strategic Management Journal, and Journal
of Economics and Management Strategy and Research Policy. She also sits on the edi-
torial review boards of Academy of Management Journal, Academy of Management
Discoveries, Organization Science, Strategy Science, and Strategic Organization.
She is the author of Quirky: The Remarkable Story of the Traits, Foibles, and Genius
of Breakthrough Innovators Who Changed the World, and she is coauthor of Strategic
Management: An Integrated Approach. Professor Schilling won an NSF CAREER
award in 2003, and Boston University’s Broderick Prize for research in 2000.

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Preface
Innovation is a beautiful thing. It is a force with both aesthetic and pragmatic appeal:
It unleashes our creative spirit, opening our minds to hitherto undreamed of possibili-
ties, while accelerating economic growth and providing advances in such crucial human
endeavors as medicine, agriculture, and education. For industrial organizations, the pri-
mary engines of innovation in the Western world, innovation provides both exceptional
opportunities and steep challenges. While innovation is a powerful means of competitive
differentiation, enabling firms to penetrate new markets and achieve higher margins, it is
also a competitive race that must be run with speed, skill, and precision. It is not enough
for a firm to be innovative—to be successful it must innovate better than its competitors.

As scholars and managers have raced to better understand innovation, a wide range
of work on the topic has emerged and flourished in disciplines such as strategic man-
agement, organization theory, economics, marketing, engineering, and sociology.
This work has generated many insights about how innovation affects the competitive
dynamics of markets, how firms can strategically manage innovation, and how firms
can implement their innovation strategies to maximize their likelihood of success. A
great benefit of the dispersion of this literature across such diverse domains of study
is that many innovation topics have been examined from different angles. However,
this diversity also can pose integration challenges to both instructors and students.
This book seeks to integrate this wide body of work into a single coherent strategic
framework, attempting to provide coverage that is rigorous, inclusive, and accessible.

Organization of the Book
The subject of innovation management is approached here as a strategic process. The
outline of the book is designed to mirror the strategic management process used in
most strategy textbooks, progressing from assessing the competitive dynamics of the
situation, to strategy formulation, and then to strategy implementation. The first part
of the book covers the foundations and implications of the dynamics of innovation,
helping managers and future managers better interpret their technological environ-
ments and identify meaningful trends. The second part of the book begins the pro-
cess of crafting the firm’s strategic direction and formulating its innovation strategy,
including project selection, collaboration strategies, and strategies for protecting the
firm’s property rights. The third part of the book covers the process of implementing
innovation, including the implications of organization structure on innovation, the
management of new product development processes, the construction and manage-
ment of new product development teams, and crafting the firm’s deployment strat-
egy. While the book emphasizes practical applications and examples, it also provides
systematic coverage of the existing research and footnotes to guide further reading.

Complete Coverage for Both
and Engineering Students
This book is designed to be a primary text for courses in the strategic management of
innovation and new product development. Such courses are frequently taught in both

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business and engineering programs; thus, this book has been written with the needs
of business and engineering students in mind. For example, Chapter Six (Defining the
Organization’s Strategic Direction) provides basic strategic analysis tools with which
business students may already be familiar, but which may be unfamiliar to engineer-
ing students. Similarly, some of the material in Chapter Eleven (Managing the New
Product Development Process) on computer-aided design or quality function deploy-
ment may be review material for information system students or engineering students,
while being new to management students. Though the chapters are designed to have
an intuitive order to them, they are also designed to be self-standing so instructors can
pick and choose from them “buffet style” if they prefer.

New for the Sixth Edition
This sixth edition of the text has been comprehensively revised to ensure that the
frameworks and tools are rigorous and comprehensive, the examples are fresh and
exciting, and the figures and cases represent the most current information available.
Some changes of particular note include:

Six New Short Cases
The Rise of “Clean Meat”. The new opening case for Chapter Two is about the
development of “clean meat”—meat grown from animal cells without the animal
itself. Traditional meat production methods are extremely resource intensive and
produce large amounts of greenhouse gases. Further, the growing demand for meat
indicated an impending “meat crisis” whereby not enough meat could be produced
to meet demand. “Clean meat” promised to enable meat production using a tiny
fraction of the energy, water, and land used for traditional meat production. Its
production would create negligible greenhouse gases, and the meat itself would
have no antibiotics or steroids, alleviating some of the health concerns of tradi-
tional meat consumption. Furthermore, it would dramatically reduce animal suf-
fering. If successful, it would be one of the largest breakthroughs ever achieved in
food production.
Innovating in India: The Chotukool Project. Chapter Three opens with a case about
the Chotukool, a small, inexpensive, and portable refrigerator developed in India. In
rural India, as many as 90 percent of families could not afford household appliances,
did not have reliable access to electricity, and had no means of refrigeration. Godrej
and Boyce believed that finding a way to provide refrigeration to this segment of the
population offered the promise of both a huge market and making a meaningful differ-
ence in people’s quality of life.
UberAIR. Chapter Five now opens with a case about UberAIR, Uber’s new service
to provide air transport on demand. Uber had already become synonymous with
on-demand car transport in most of the Western world; it now believed it could
develop the same service for air transport using electric vertical take-off and landing
aircraft (eVTOLs). There were a lot of pieces to this puzzle, however. In addition to
the technology of the aircraft, the service would require an extensive network of land-
ing pads, specially trained pilots (at least until autonomous eVTOLs became practi-
cal), and dramatically new air traffic control regulations and infrastructure. Was the
time ripe for on-demand air transport, or was UberAIR ahead of its time?

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Tesla Inc. in 2018. Chapter Six opens with a new case on Tesla, no longer just an
electric vehicle company. This case reviews the rise of Tesla, and then explores the
new businesses Tesla has entered, including solar panel leasing and installation (Solar
City), solar roof production, and energy storage systems (e.g., Powerwall). Why did
the company move into these businesses, and would synergies betweeen them help to
make the company more successful?

Where Should We Focus Our Innovation Efforts? An Exercise. Chapter Seven now
opens with an exercise that shows how firms can tease apart the dimensions of value
driving technological progress in an industry, map the marginal returns to further
investment on each dimension, and prioritize their innovation efforts. Using numerous
examples, the exercise helps managers realize where the breakthrough opportunities
of the future are likely to be, and where the firm may be currently overspending.

Scrums, Sprints, and Burnouts: Agile Development at Cisco Systems. Chapter Eleven
opens with a case about Cisco’s adoption of the agile development method now com-
monly used in software development. The case explains what agile development is,
how it differs from other development methods (such as stage-gated methods), and
when (and why) a firm would choose agile development versus gated development for
a particular innovation.

Cases, Data, and Examples from around the World
Careful attention has been paid to ensure that the text is global in its scope. The
opening cases and examples feature companies from China, India, Israel, Japan, The
Netherlands, Kenya, the United States, and more. Wherever possible, statistics used in
the text are based on worldwide data.

More Comprehensive Coverage and Focus on Current Innovation Trends
In response to reviewer suggestions, the new edition now provides an extensive
discussion of modularity and platform competition, crowdsourcing and customer
co-creation, agile development strategies, and more. The suggested readings for each
chapter have also been updated to identify some of the more recent publications that
have gained widespread attention in the topic area of each chapter. Despite these addi-
tions, great effort has also been put into ensuring the book remains concise—a feature
that has proven popular with both instructors and students.

Supplements
The teaching package for Strategic Management of Technological Innovation is avail-
able online from Connect at connect.mheducation.com and includes:

∙ An instructor’s manual with suggested class outlines, responses to discussion ques-
tions, and more.

∙ Complete PowerPoint slides with lecture outlines and all major figures from the
text. The slides can also be modified by the instructor to customize them to the
instructor’s needs.

∙ A testbank with true/false, multiple choice, and short answer/short essay questions.
∙ A suggested list of cases to pair with chapters from the text.

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Acknowledgments
This book arose out of my research and teaching on technological innovation and
new product development over the last decade; however, it has been anything but a
lone endeavor. I owe much of the original inspiration of the book to Charles Hill, who
helped to ignite my initial interest in innovation, guided me in my research agenda,
and ultimately encouraged me to write this book. I am also very grateful to colleagues
and friends such as Rajshree Agarwal, Juan Alcacer, Rick Alden, William Baumol,
Bruno Braga, Gino Cattanni, Tom Davis, Sinziana Dorobantu, Gary Dushnitsky,
Douglas Fulop, Raghu Garud, Deepak Hegde, Hla Lifshitz, Tammy Madsen, Rodolfo
Martinez, Goncalo Pacheco D’Almeida, Joost Rietveld, Paul Shapiro, Jaspal Singh,
Deepak Somaya, Bill Starbuck, Christopher Tucci, and Andy Zynga for their sug-
gestions, insights, and encouragement. I am grateful to director Mike Ablassmeir and
marketing manager Lisa Granger. I am also thankful to my editors, Laura Hurst Spell
and Diana Murphy, who have been so supportive and made this book possible, and to
the many reviewers whose suggestions have dramatically improved the book:

Joan Adams
Baruch School
(City University of New York)

Shahzad Ansari
Erasmus University

Rajaram B. Baliga
Wake Forest University

Sandy Becker
Rutgers School

David Berkowitz
University of Alabama in Huntsville

John Bers
Vanderbilt University

Paul Bierly
James Madison University

Paul Cheney
University of Central Florida

Pete Dailey
Marshall University

Robert DeFillippi
Suffolk University

Deborah Dougherty
Rutgers University

Cathy A. Enz
Cornell University

Robert Finklestein
University of Maryland–University
College

Sandra Finklestein
Clarkson University School of

Jeffrey L. Furman
Boston University

Cheryl Gaimon
Georgia Institute of Technology

Elie Geisler
Illinois Institute of Technology

Sanjay Goel
University of Minnesota in Duluth

Andrew Hargadon
University of California, Davis

Steven Harper
James Madison University

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xii Acknowledgments

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I am also very grateful to the many students of the Technological Innovation and
New Product Development courses I have taught at New York University, INSEAD,
Boston University, and University of California at Santa Barbara. Not only did these
students read, challenge, and help improve many earlier drafts of the work, but they
also contributed numerous examples that have made the text far richer than it would
have otherwise been. I thank them wholeheartedly for their patience and generosity.

Melissa A. Schilling

Donald E. Hatfield
Virginia Polytechnic Institute and State
University

Glenn Hoetker
University of Illinois

Sanjay Jain
University of Wisconsin–Madison

Theodore Khoury
Oregon State University

Rajiv Kohli
College of William and Mary

Aija Leiponen
Cornell University

Vince Lutheran
University of North
Carolina—Wilmington

Steve Markham
North Carolina State University

Steven C. Michael
University of Illinois

Michael Mino
Clemson University

Robert Nash
Vanderbilt University

Anthony Paoni
Northwestern University

Johannes M. Pennings
University of Pennsylvania

Raja Roy
Tulane University

Mukesh Srivastava
University of Mary Washington

Linda F. Tegarden
Virginia Tech

Oya Tukel
Cleveland State University

Anthony Warren
The Pennsylvania State University

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xiii

Preface vi
1 Introduction 1

PART ONE
Industry Dynamics of Technological Innovation 13
2 Sources of Innovation 15
3 Types and Patterns of Innovation 43
4 Standards Battles, Modularity, and Platform Competition 67
5 Timing of Entry 95

PART TWO
Formulating Technological Innovation Strategy 113
6 Defining the Organization’s Strategic Direction 115
7 Choosing Innovation Projects 141
8 Collaboration Strategies 167
9 Protecting Innovation 197

PART THREE
Implementing Technological Innovation Strategy 223
10 Organizing for Innovation 225
11 Managing the New Product Development Process 249
12 Managing New Product Development Teams 277
13 Crafting a Deployment Strategy 297

INDEX 327

Brief Contents

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Chapter 1
Introduction 1
The Importance of Technological
Innovation 1
The Impact of Technological Innovation
on Society 2
Innovation by Industry: The Importance of
Strategy 4

The Innovation Funnel 4
The Strategic Management of Technological
Innovation 6

Summary of Chapter 9
Discussion Questions 10
Suggested Further Reading 10
Endnotes 10

PART ONE
INDUSTRY DYNAMICS
OF TECHNOLOGICAL
INNOVATION 13

Chapter 2
Sources of Innovation 15
The Rise of “Clean Meat” 15
Overview 19
Creativity 20

Individual Creativity 20
Organizational Creativity 22

Translating Creativity Into Innovation 24
The Inventor 24
Innovation by Users 26
Research and Development by Firms 27
Firm Linkages with Customers, Suppliers,
Competitors, and Complementors 28

Universities and Government-Funded
Research 30
Private Nonprofit Organizations 32

Innovation in Collaborative Networks 32
Technology Clusters 33
Technological Spillovers 36

Summary of Chapter 37
Discussion Questions 38
Suggested Further Reading 38
Endnotes 39

Chapter 3
Types and Patterns of Innovation 43
Innovating in India: The Chotukool Project 43
Overview 46
Types of Innovation 46

Product Innovation versus Process
Innovation 46
Radical Innovation versus Incremental
Innovation 47
Competence-Enhancing Innovation versus
Competence-Destroying Innovation 48
Architectural Innovation versus Component
Innovation 49
Using the Dimensions 50

Technology S-Curves 50
S-Curves in Technological Improvement 50
S-Curves in Technology Diffusion 53
S-Curves as a Prescriptive Tool 54
Limitations of S-Curve Model as a Prescriptive
Tool 55

Technology Cycles 56
Summary of Chapter 62
Discussion Questions 63
Suggested Further Reading 63
Endnotes 64

Contents

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Chapter 4
Standards Battles, Modularity,
and Platform Competition 67
A Battle for Dominance in Mobile
Payments 67
Overview 71
Why Dominant Designs Are Selected 71

Learning Effects 72
Network Externalities 73
Government Regulation 76
The Result: Winner-Take-All Markets 76

Multiple Dimensions of Value 77
A Technology’s Stand-Alone Value 78
Network Externality Value 78
Competing for Design Dominance
in Markets with Network Externalities 83

Modularity and Platform Competition 87
Modularity 87
Platform Ecosystems 89

Summary of Chapter 91
Discussion Questions 92
Suggested Further Reading 92
Endnotes 93

Chapter 5
Timing of Entry 95
UberAIR 95
Overview 98
First-Mover Advantages 98

Brand Loyalty and Technological
Leadership 98
Preemption of Scarce Assets 99
Exploiting Buyer Switching Costs 99
Reaping Increasing Returns Advantages 100

First-Mover Disadvantages 100
Research and Development Expenses 101
Undeveloped Supply and Distribution
Channels 101
Immature Enabling Technologies and
Complements 101
Uncertainty of Customer Requirements 102

Factors Influencing Optimal Timing of
Entry 104

Strategies to Improve Timing Options 108
Summary of Chapter 108
Discussion Questions 109
Suggested Further Reading 109
Endnotes 110

PART TWO
FORMULATING TECHNOLOGICAL
INNOVATION STRATEGY 113

Chapter 6
Defining the Organization’s Strategic
Direction 115
Tesla, Inc. in 2018 115
Overview 123
Assessing the Firm’s Current
Position 123

External Analysis 123
Internal Analysis 127

Identifying Core Competencies and Dynamic
Capabilities 131

Core Competencies 131
The Risk of Core Rigidities 132
Dynamic Capabilities 133

Strategic Intent 133
Summary of Chapter 137
Discussion Questions 138
Suggested Further Reading 139
Endnotes 139

Chapter 7
Choosing Innovation Projects 141
Where Should We Focus Our Innovation
Efforts? An Exercise 141
Overview 146
The Development Budget 146
Quantitative Methods For Choosing
Projects 149

Discounted Cash Flow Methods 149
Real Options 152

Disadvantages of Quantitative
Methods 154

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Qualitative Methods for Choosing
Projects 154

Screening Questions 155
The Aggregate Project Planning Framework 157
Q-Sort 159

Combining Quantitative and Qualitative
Information 159

Conjoint Analysis 159
Data Envelopment Analysis 161

Summary of Chapter 163
Discussion Questions 163
Suggested Further Reading 164
Endnotes 164

Chapter 8
Collaboration Strategies 167
Ending HIV? Sangamo Therapeutics and Gene
Editing 167
Overview 175
Reasons for Going Solo 175

1. Availability of Capabilities 176
2. Protecting Proprietary Technologies 176
3. Controlling Technology Development

and Use 176
4. Building and Renewing Capabilities 177

Advantages of Collaborating 177
1. Acquiring Capabilities and Resources

Quickly 177
2. Increasing Flexibility 178
3. Learning from Partners 178
4. Resource and Risk Pooling 178
5. Building a Coalition around a Shared

Standard 178
Types of Collaborative Arrangements 178

Strategic Alliances 179
Joint Ventures 181
Licensing 182
Outsourcing 183
Collective Research Organizations 184

Choosing a Mode of Collaboration 184
Choosing and Monitoring Partners 187

Partner Selection 187
Partner Monitoring and Governance 191

Summary of Chapter 192
Discussion Questions 193

Suggested Further Reading 193
Endnotes 194

Chapter 9
Protecting Innovation 197
The Digital Music Distribution
Revolution 197
Overview 201
Appropriability 202
Patents, Trademarks, and Copyrights 202

Patents 203
Trademarks and Service Marks 207
Copyright 208

Trade Secrets 210
The Effectiveness and Use of Protection
Mechanisms 211

Wholly Proprietary Systems versus Wholly Open
Systems 212
Advantages of Protection 213
Advantages of Diffusion 215

Summary of Chapter 218
Discussion Questions 219
Suggested Further Reading 219
Endnotes 220

PART THREE
IMPLEMENTING TECHNOLOGICAL
INNOVATION STRATEGY 223

Chapter 10
Organizing for Innovation 225
Organizing for Innovation at Google 225
Overview 227
Size and Structural Dimensions of the
Firm 228

Size: Is Bigger Better? 228
Structural Dimensions of the Firm 230

Centralization 230
Formalization and Standardization 231
Mechanistic versus Organic Structures 232
Size versus Structure 234
The Ambidextrous Organization: The Best of Both
Worlds? 234

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Modularity and “Loosely Coupled”
Organizations 236

Modular Products 236
Loosely Coupled Organizational
Structures 237

Managing Innovation Across Borders 240
Summary of Chapter 243
Discussion Questions 244
Suggested Further Reading 244
Endnotes 245

Chapter 11
Managing the New Product Development
Process 249
Scrums, Sprints, and Burnouts: Agile
Development at Cisco Systems 249
Overview 252
Objectives of the New Product Development
Process 252

Maximizing Fit with Customer
Requirements 252
Minimizing Development Cycle Time 253
Controlling Development Costs 254

Sequential versus Partly Parallel
Development Processes 254
Project Champions 257

Risks of Championing 257
Involving Customers and Suppliers in the
Development Process 259

Involving Customers 259
Involving Suppliers 260
Crowdsourcing 260

Tools for Improving the New Product
Development Process 262

Stage-Gate Processes 262
Quality Function Deployment (QFD)—The House
of Quality 265
Design for Manufacturing 267
Failure Modes and Effects Analysis 267
Computer-Aided Design/Computer-Aided
Engineering/Computer-Aided Manufacturing 268

Tools for Measuring New Product Development
Performance 269

New Product Development Process Metrics 271

Overall Innovation Performance 271
Summary of Chapter 271
Discussion Questions 272
Suggested Further Reading 272
Endnotes 273

Chapter 12
Managing New Product Development
Teams 277
Innovation Teams at the …