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Introduction
The goal of this thesis is to build a perspective on the most recent trends and dynamics of
innovation and the related companies‘ strategies. The evolutionary nature of the concept
of innovation gives reason to investigate it always in the perspective of economic and
business changes and trends, leading to redefinitions of the idea itself and of the
strategies it generates.
Therefore, although the analysis utilizes an empirical methodology, the results lead to the
identification of what innovation has become in companies‘ perspective.
Considering the goal of being as updated as possible, the thesis deals with the business
world of the BICs, in particular with the emerging Dragon business model and the
Chinese innovation system. The selection of China as the country of analysis comes from
my experience in Shanghai, working for an international consulting company and
studying in the MIT – Fudan International MBA. The months spent there gave me
various advantages in analyzing the extremely complex chinese system: a comprehensive
understanding of the market, the experience of dealing with chinese clients or partners,
the experience in their educational system and of collaborating with the most brilliant
business students and professors.
China is such a complex and sometimes not trasparent country that it is hard to
understand it comprehensively. Everyone approaches it with doubts and curiosity, but
whatever are the analysis and the studies, the doubts do not find a solution, but just
evolve in different and new questions. To my opinion, therefore, it is not possible to
understand the future path of the country, since its demographic, political and social lines
are likely to take unpredictable evolutions. Nonethless, it is possible to understand where
8
China is now: the second economy, the largest population, the first country after the
second world war challenging the USA in their world leadership.
To study its innovation system and in particular its companies‘ strategies to innovate has
been as interesting as challenging, and the latecomer framework concept of Prof. John
Mathews consistently helped to do it. Given the positive factors conditions that Chinese
companies can exploit, strategies most frequently involve a process of technology
acquisition through external different channels. Moreover, Chinese companies often
developed strategical and organizational models to be considered innovations themselves.
The thesis consists in three parts:
I. The first part provides an updated perspective on the concept of innovation and on
the latest trends in the strategies that large multinational corporations embrace. It
starts with the definiton of the strategic meaning of innovation and the description
of the evolution of this concept from Shumpeter to idea of disruptive innovation.
It then analyzes the organizational aspects behind it, in particular tits drivers and
metrics. The fourth chapter illustrates the most interesting models and trends in
multinationals‘ strategies to innovate, with particular reference to specific cases. It
finally introduces the idea of a new world order approaching business, with the
rise of emerging companies from the BICs that are introducing brand new
strategies.
II. The second part deals with the case of Dragon latecomers, the Chinese companies
that are challenging incumbent giants. The analysis starts with a macro-
environmental analysis and a detailed study of the National Innovation System
and Chinese ‗economic learning‘ that aim at providing the collective perspective
within which Dragon companies develop their strategies. From chapter three the
analysis become individualistic, introducing the concept of the latecomer
framework and the trends in Dragon strategies, like the LLL process, M&A
activity and R&D internationalization.
9
III. The third part analyzes the Chinese wind power energy sector, that is so
interesting for the boom it had in the recent few years, leading China from a
limited capacity and a zero production to be have the second largest capacity and
being the first manufacturer. It develops, again, in a first part that deals with the
National Competitive Advantage in the sector and it institutional policies, and a
second part relative to the strategies adopted by the main companies.
About the methodology of the thesis, two considerations have to be done. First of all, to
be as updated as possible, several reports of consulting companies have been used (in
particular BCG and McKinsey). Secondly, in analyzing the case of Chinese strategies,
much space has been dedicated to the country system. However, it is not possible to
understand the individual perspective of companies without understanding the
environment in which they operate, in particular the Chinese one so involved in any
business sector as promoter and often shareholder.
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Part 1.
Innovation in 2010: New Perspectives.
Models, Cases and Trends.
11
Ch. 1 The strategic meaning of innovation and the role of
government
The latest years have been characterized by an economic scenario sprinkled with question
marks and doubts, so that the word innovation has acquired a debatable meaning. Since a
few years, countries like China, India and Brazil have emerged in global competition, but
in 2010, after the 2009 crisis, appears clear that these countries are changing the rules of
the game, posing brand new challenges to Western economic and business models. These
new countries are breaking into the world economy with new economic models, and new
companies are competing with giants using original business strategies.
The innovation concept, criteria and process is one of the milestone of this period of
change: not only the methods and systems are under debate, but the whole idea of what
innovation represents is questioned. Business innovation remains a strategic imperative,
probably more than ever: it is considered a critical driver of growth, competitiveness and
long-term shareholder value1. But as long as it is considered integral to a company‘s
success, it is also harder to define it and to understand which company represents a
successful model of innovation.
That is why this first part of the thesis aims at analyzing the theoretical evolution of this
concept, its definitions and meanings, the models and systems that it has generated
worldwide, and especially the current trends that affect both theories and business
models.
This first chapter, in particular, will try to give a definition of innovation and to mention
the most relevant strategical issues around it. This chapter will then deal with the role that
1
BCG Report. 2010 ―The innovation imperative in manufacturing‖ p.2
12
the government should play in the innovation environment of a country. It will finally
raise some debates and issues that are going to be treated in next chapters.
Once narrowly defined as simply the development of new products, innovation is now
understood to apply to all aspects of a business. These broader view considers the
business model, the enterprise structure, the value chain, proprietary processes, channels,
services, the brand, the customer experience all relevant aspects of innovation2.
In any sense, they are ultimately related to the concept of gaining a competitive
advantage3, since innovate means keeping the path of changes in the society, customers
and in general in the economy. It is therefore of crucial importance for the long term
survival, growth and prosperity of a company to be able to innovate and keep, upgrade or
change their competitive advantage.
The new vision of innovation, as underlined before, is deepening the distance between
invention and innovation. Invention is defined as the creation of new products and
processes through the development of new knowledge or from new combinations of
existing knowledge4. Innovation, instead, is defined as the initial commercialization of
invention by producing and marketing a new good or service or by using a new method
of production5.
After the introduction, the diffusion of the innovation starts, taking place on the demand
side through customers‘ purchases, and on the supply side through competitors‘
imitation.
What is important to underline, is that not all inventions become innovations. It can be
empirically proved looking at the huge number of inventions in technology-intensive
firms that do not take the path of diffusion or even of market introduction.
But this semantic difference between invention and innovation becomes even more
relevant considering the new fields in which innovation is said to be fundamental: the
value chain, the brand, company organization and other aspects in which new knowledge
does not play a vital rule, and managerial capabilities are the sources of changes.
2
BCG Report. 2010 ―The innovation imperative in manufacturing‖ p.8
3
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 ch.11
4
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 p.290
5
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 291
13
In particular, this new meaning that innovation is gaining, has to do with the structural
changes that he world economy is facing. New markets, that often have totally different
uses than traditional ones, are targeted; new labor forces become part of the economy;
managers of companies of emerging countries are adopting new strategies that fit better
with their internal systems and markets; in general, several aspects of the real economy
are living a transition period with newcomers and old giants competing for the lead.
It is clear that, in such an evolutionary scenario, many economic and business theories are
under debate. Being innovation the engine of competitive advantage, it has become the
centre of many surveys and researches by consulting companies and scholars.
There are a number of issues that have to be considered as the traditional, main featureas
that characterize the discussion upon innovation. They can be summarized in four
categories: profitability from innovation, how and when to enter the market, and how to
implement the innovation strategy.
Profitability from innovation. This is the most relevant and primary issue as innovation
is not guarantor at all of profits. The profitability of an innovation to the innovator
depends upon the value that the innovator is able to appropriate6. To achieve this goal a
company has to use the proper mix of strategies and tools, that can be unified in four
main factors: property rights, like patents, trade secrets, copyrights; the complexity of the
technology, that poses tough challenges for imitators; lead time, which is one of the most
debated issues nowadays, but that can give relevant advantages like moving down the
learning curve ahead of followers; complementary resources, which involves different
activities that enable to commercialize the innovation.
A company, in trying to profit from innovation, must set clear payback goals for its
innovation efforts, operate in a disciplined way, select the optimal innovation business
model for each new product or service, align its organization around innovation, and
exercise leadership practices that encourage, motivate, and enable people within the
6
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 p. 292
14
company to innovate7.
Indeed, successful innovation can only be defined as profitable innovation. To realize a
profit from new products and services, it is imperative that innovation be seen and
managed as an entire process, rather than as a short-lived event. The process comprises
three phases:
• Idea generation: the phase during which ideas spring to life, and are developed, tested,
evaluated, and refined.
• Commercialization: the phase that begins with a green light from management to
develop a proposed idea and ends when the product or service is launched to a buying
audience.
• Realization: the phase that begins with market launch and concludes when the product
or service comes to the end of its life cycle.
To achieve payback, companies must manage the three phases of the innovation process
holistically and with discipline.
How and when to enter the market. Given the final aim of maximizing profits and
long-term growth, there are various ways that a company can adopt to approach the
market with an innovation. The strategy to choose mainly depends on two factors: the
characteristics of the innovation and the resources and capabilities that the firm owns8.
This table gives a useful semplification of some alternative strategies that can be chosen:
7
Andrew, J., Sirkin, H. 2007 ―Payback: reaping the rewards of innovation‖ Harvard Business
School
8
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 p. 300
15
Strategy
Outcomes
Licensing Outsourcing Strategic
alliances
Joint
venture
Internal
commercialization
Risk and
return
Limited
financial
risk and
return.
Risk to lose
the
innovation
or lack of
motivation
Limited
capital.
Risk of
dependance
on suppliers.
Risk of
informal
structure.
Benefit
from
flexibility.
Share
investment
and risk.
Risk of
clashing
with
partner.
Great investment
requirement. Great
risk.
Largest reward or
loss.
Benefits from
control.
Resource
requirements Limited
Access to
external
resources can
be good.
Pooling
resources
from more
than one
firm
Pooling
resources
from more
than one
firm
Need of all
complementary
resources.
These are some strategies a company can use to exploit its innovation, but another
fundamental point is the timing of innovation, which ultimately means being a leader or a
follower in the market. Optimal timing of entry into a market or the introduction of a new
technology are very complex issues, especially in this perios in which changes in global
markets and the emergence of new players are causing several changes.
Being the leader or the firts mover is not necessarily giving an advantage, and depends on
a few factors: the extent to which innovation can be protected by property rights or lead-
time advantages; the importance of complementary resources; the potential to establish a
standard9.
This is anyway a topic that is largely discussed in the second part of this thesis, analyzing
the strategies of Chinese firms that exploit a latecomer advantage.
The implementation of innovation strategies. In any field, the implementation process
of a theory or strategy has a fundamental importance, but in technology-intensive
business this matters even more.
9
Grant, R. 1995 ―Contemporary Strategy Analysis‖ ed.2008 p. 304
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