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This newsletter provides information about the CIMS and articles about the latest advances in innovation management. You can view newsletters from any year or view all at once.
CIMS Newsletter: November/December 2015
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Riding Waves of Innovation to Profits By Ram Mudambi, Tim Swift, T.J. Hannigan RESEARCH APPLICATIONS Firms that cycle between improving or extending existing capabilities and ideas (exploitative R&D) and searching for “the next big thing” (exploratory R&D ) generate superior sales growth, higher market valuations and more patented knowledge as well as new products when compared to firms that don’t shift between these two R&D modes over time. Evidence for this comes from recent research by Ram Mudambi and Tim Swift, professors at Temple and St. Joseph’s Universities, respectively. Here’s their explanation: After highperforming firms exhaust the opportunities available from their existing product offerings, they tend to cut back on exploitative R&D and ramp up exploratory R&D where they discover new avenues of competitive advantage that carry them forward (1,2). Scholars call this cycling between exploration and exploitation over time “sequential ambidexterity” (3). Our findings come from the database we created of all publicly traded manufacturing firms in the U.S. from 1997 to 2006. We gathered financial results from Compustat, patenting data from the National Bureau of Economic Research, and product release data from company press releases. Our final dataset contained over 1,700 firms and 11,140 firmyear observations. Cut R&D Spending, Increase Patents One of our surprising findings is that firms increase patented knowledge output after significant oneyear changes in R&D spending whether these are positive or negative changes. (Significant changes are defined as normalized deviations—spikes and valleys—above and below the firm’s R&D spending trend.) While it might seem obvious that firms will gain more patents after big spending increases, that does not explain why patent output can also grow after R&D spending decreases. Spending decreases when firms transition from exploratory to the generally less costly exploitative R&D. Although firms engaging in exploitative R&D do extend or enhance existing innovation capabilities, they tend to create more incremental and defensive patents whose quality (as measured by citations) is relatively lower.
https://cims.ncsu.edu/cims_newsletter/novemberdecember-2015/riding-waves-of-innovation-to-profits/
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Riding Waves of Innovation to Profits | CIMS | Center for Innovation Management Studies As one would expect, the patented knowledge created after an R&D spending increase, when firms are moving to exploratory R&D, is different from the knowledge created after an R&D spending decline, when firms are moving into R&Dbased exploitation. We have found that firms are more likely to create highly cited patents following a big R&D spending increase (2). In addition, the technological scope of their patented knowledge widens. While exploring for new ideas, firms branch into newer areas of innovation that are relatively distant from the firm’s existing base of technological knowledge. The inverse is also noteworthy; during periods of R&Dbased exploitation, when firms are focused on exploiting existing competencies, the technological scope of their patented knowledge narrows.
What The Best Companies Do Nokia introduced its first GSM handset, the 1101, in 1992. For the remainder of the decade, the firm saw steady sales growth and continued improving its handsets with incremental innovations, releasing the 2100 in 1994, the 3210 in 1999 and 3310 in 2000. By this point the industry was looking forward to the new 3G standard and Nokia shifted into exploration mode and developed a device to fit this new environment. The consequent R&D spike in 2003 (see illustration) led to the release of the 1100 3G handset that became the bestselling mobile phone of all time —200 million units. The exploratory R&D spike also presaged the release of Nokia’s Symbian smartphone platform that exploited the increased capabilities of 3G networks. The platform remained Nokia’s platform through 2011. It is well known that following the entry of Apple into the smartphone market, Nokia’s fortunes declined rapidly. One of us (Mudambi) has argued that this was due to Nokia’s continued focus on primacy in the manufacture of tangible products through vertical integration (4). The firm failed to recognize the paradigm shift wherein value creation became concentrated in intangibles. Apple, in contrast, excelled under this paradigm by specializing in intangibles (design and marketing) and outsourcing the manufacture of tangible hardware. Intel, one of the Silicon Valley pioneers, rode a series of innovation explorationexploitation waves beginning with random access memories in the 1960s and followed by microprocessors in the 1970s and 1980s. This cycling between exploration (when Intel focuses on making breakthroughs into new areas of technology), and exploitation (when the company leverages those breakthroughs to generate substantial sales and profits), is an excellent example of sequential ambidexterity. Intel rode the wave of the Pentium chip architecture for most of the 1990s. It debuted the Pentium processor in 1993 and continued with exploitative, incremental innovations, releasing the Pentium Pro in 1995, the Pentium II in 1997, the Pentium III in 1999, and Pentium IV in 2000. Toward the end of the century, the company recognized that the Pentium’s market space was becoming so crowded and competitive that it switched to exploratory mode, ramping up R&D spending, which peaked in 1999. The outcome of this exploratory burst was the first Xeon workstation level processor in 2001—a highend chip with enterpriselevel applications and high prices to match. Intel continues to produce variants of the Xeon processor today. Medtronic focused on implantable devices throughout much of the 1990s. By the late 1990s these products were facing fierce competition and price pressure in the marketplace, so the company shifted from exploitation to exploration. Following an R&D spending spike in 1998, it released a groundbreaking product in 1999 – an aortic stent graft, the first new treatment for aortic aneurysms in 40 years. This was followed by a tissue heart valve in 2000. Both marked a dramatic change for the company and both are still being improved through incremental innovation and continue to sell well. Qualcomm focused mainly on CDMA technologies in the 1990s and early 2000s but this technology began declining in the face of the increased market presence of GSM. This prompted Qualcomm to transition to exploration and resulted in an R&D spike in 2005. The firm released Scorpion, its first mobile processor, in 2005 and followed with the broadly used Snapdragon chipset in 2007. Finally, Cisco began as one of the early entrants in the space of GSR Internet router products. However, as routers became a commodity around 2000 the company transitioned into a leader in wireless networking products for homes and businesses. From 1999 to 2001, Cisco’s R&D spending roughly doubled, and during this period of exploration it produced the lion’s share of its most highly cited networking patents. From 2002 through 2004, Cisco’s R&D dropped by about $1.5 billion, and the technological scope of its patented knowledge narrowed significantly, indicating a shift from exploration to exploitation (5). As of late, Cisco is transitioning again, leading a push into multimedia conferencing. Already some of these leadingedge technologies are becoming exploitable platforms and the firm is experimenting with offering a wider array of cloudbased services. Bottom Line Our research shows that many of the best technology companies achieve innovation success over significant periods of time by mastering sequential ambidexterity. Their leaders have learned how to conduct highquality exploitative R&D while recognizing when it faces a drastic
https://cims.ncsu.edu/cims_newsletter/novemberdecember-2015/riding-waves-of-innovation-to-profits/
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Riding Waves of Innovation to Profits | CIMS | Center for Innovation Management Studies decline in value. At this point, they are able to make the leap to exploratory R&D, whether it be by creating inventions or by acquiring small, inventive companies or promising startups. References Mudambi, R. and Swift, T. 2011. Proactive R&D and firm growth: a punctuated equilibrium model. Research Policy, 40(3): 429440. Mudambi R. and Swift T. 2014. Knowing when to leap: Transitioning between explorative and exploitative R&D. Strategic Management Journal, 35(1): 126145. Tushman, M.L. and O’Reilly, C.A. 2013. Organizational ambidexterity: past, present and future. Academy of Management Perspectives, 27(4): 324338. Mudambi, R. 2008. Location, control and innovation in knowledgeintensive industries. Journal of Economic Geography, 8(5): 6990725. Mudambi, R., Swift, T. and Hannigan, T.J. 2015. Sometimes cutting R&D can yield more innovation. Harvard Business Review online, January 8. Ram Mudambi is Frank M. Speakman Professor of Strategy at Fox School of Business, Temple University, Philadelphia PA;
[email protected] Tim Swift is Associate Professor of Management at St. Joseph’s University, Philadelphia PA;
[email protected] T.J. Hannigan is a doctoral candidate at Fox School of Business, Temple University, Philadelphia PA;
[email protected] Center for Innovation Management Studies | Campus Box 7229 Ralelgh, NC 27695 | T 919.513.0166 | E-mail Us | 2012 Meeting Docs
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