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Alberto Galasso, "The Management of Innovation: Managing and Creating Technology Capital" (Rotman-UTP Publishing, 2024)
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Alberto Galasso
Welcome to the New Books Network
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Alfred Marcus
welcome to the New Books Network. I'm Alfred Marcus and this is on the cusp between Strategy and Ethics, where we explore how organizations navigate the tensions between performance, foresight and responsibility. Today we're discussing the Management of Innovation by Alberto Galasso. The book is not a typical innovation manifesto full of butterflards. Instead, it's a compact, research driven guide to how firms can actually manage and create what Glasso calls technology capital. Glasso, a leading researcher on innovation and intellectual property, sets out to bridge the gap between decades of academic work in Economics and management and the real world decisions that managers face every day. He lays out two main stages of innovation, technology management and technology creation, and shows how each is shaped by a series of concrete trade offs with institutional choices. So Alberto, you framed the book around technology capital and the management of innovation. How do you define technology capital and why did you feel we needed a dedicated book on how to manage it?
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Alberto Galasso
So thank you so much first of all for having me on the podcast. It's a pleasure to talk about my book with you. The term technology capital is a term that has been used in the passed by several scholars across different disciplines. I would say the one that I encounter and made me think about this term was the work by the Nobel Prize macroeconomist Edward Prescott. But in general, I like to think about technology capital as capital that is not tangible capital that is not linked to specific physical objects. So we're not talking about plants or equipment, not even linked to specific people. They're not really talking about human capital or hiring strategy of firms, but something more related to new knowledge, new idea, new scientific insights. I would say in the newer, you know, in the more recent development in the economy and also related to new content, new information that is developed by a firm or by an entrepreneurs and that can be used across different locations, can be used by different people. But I would say the main characteristic is really the fact that it's not a tangible thing, is the idea is not really embedded in an asset or in a person. And I thought the most important tool to protect this type of capital is intellectual property. And I thought it was important to have a book that provides some kind of summaries on the idea that have been generated in academia across different discipline of how to think through the creation and the management of this type of capital. Because in the past three decades, if you see the value the companies have generated, especially the leading company that are traded in the stock market, a lot of this value is linked to this intangible assets. Estimates today suggest that if you look at the largest companies traded in the stock market, you know, a very large fraction of their value is generated by these intangible assets. And patents are probably one of the of the leading one. And from this perspective, I have to say that I also notice in the discussions that you see in the press and the statement of top management that something changed in the past 30 years. Thirty years ago, intellectual property and patent was seen as something important, but something important mostly from the legal perspective. You wanted to have all your kind of books in order to make sure you could claim your property over what is the thing that you develop or not. And it was seen as mostly a large firm, large firm, strategic kind of issue. Things have changed. If you look at some statement, for example, by Bill Gates about 20 years ago, he was saying, look, we need to stop thinking about intellectual property as a problem for the legal department of the firm. This can be really crucial tools that companies can use to create value and to sustain their competitive advantage. And you know, if you, if you show, if you see how history has evolved now, you know, as I mentioned before, Bill Gates was right now a lot of the, of the value generated by the larger company is associated with this intellectual property and intangible assets. From the academic perspective, my view is that this is not something that it was really very surprising for the academic community. There are studies in the 80s, in the 90s that were showing that companies with larger patent portfolio, companies with more value patents were doing better in terms of stock markets. But probably something that has been noticed more recently, I would say by the academic community is that these IP are not just things for large company, for company trading in the stock market can be also extremely important for entrepreneurs and technology startups. There are a series of recent work, very careful empirical work to show that thinking carefully about the first filing of the patent and doing well in the term of first initial step in setting up the IP strategy for a small firm can have very large long term effects on survival of the company, on the ability of raising capital and profitability. So this is, you know, in a nutshell, why, you know, I thought the book was, was useful and what are the key aspects that I wanted to stress?
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Alfred Marcus
Intellectual capital is not just patents, right? It's much more than patents. So what's, how do you define the difference between patents and intellectual capital and technology capital and intellectual property? Why are they all intangible? I mean, because a patent, I think is somewhat more tangible because it can be bought and sold in the marketplace. But while some of these other concepts I think are more intangible, can you make some distinctions between them?
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Alberto Galasso
Yeah, so there are two things. So the, what is intangible is the idea, the knowledge, the information that has the potential to generate value for a firm. So think about in a, you know, a producer of cars that comes out with a new type of steering wheel. When you come up with the new type of steering wheel, you may have a prototype of something that is unique, but you have two things. You have the physical object that is this prototype, but you have also the idea of a new steering wheel, the kind of knowledge required to assemble something, to put together something that nobody has assembled before. And it's this knowledge, this information that is intangible, how to protect this information, how to make this intangible protected, how to generate some property right of it, that is through what is called intellectual property. And there are different types of intellectual properties. So patents is the most common one that is used for product or production processes. But there are other type of intellectual property. Copyright, for example, extremely important these days with artificial intelligence that create content that is not necessarily protected by patents, but is creative work that is protected by copyrights, trademarks. But you can also choose to protect this information in other ways that are not necessarily related to intellectual property. So, for example, secrecy is a way to protect this. So that's the kind of distinction that I typically have in my mind when I think about these issues.
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Alfred Marcus
So it's information and know how essentially it's how to do things. And some of this may be tradable on a market because it's in a form that has a legal form, but some of it is intangible in the sense that it can't be reproducible outside of the firm. Is that how you would describe the differences?
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Alberto Galasso
And in the term of whether it can be traded or not, it can also itself be a strategy of the company. You can choose whether to patent something. Once you patent it for 20 years, you have the protection over that technology. You have a document say that you are the actual right holder of that knowledge and nobody can use or sell that product described there without your permission. So you choose essentially to be able to use the intellectual property to block or to transfer the right to use. But you can also choose to protect this new information through secrecy is the very same information. In one case you can trade it, in the other case you cannot. Because the idea of secrecy is to make sure that nobody else has access to it.
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Alfred Marcus
And yeah, and when it becomes a patent, people do have access to it, but they can't legally use it. That's the difference in the book. You distinguish between technology management and technology creation. And can you walk us through that distinction and why it matters for managers?
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Alberto Galasso
So, yeah, the idea here is really if we think about innovation as creating this new knowledge, this new information, there are two different kind of aspects in managing innovation that is sometimes are confounded between itself is how to facilitate, how to stimulate the production of this new knowledge. And the second aspect is like, once this new knowledge, this new information, these new ideas are generated what to do with it. Okay. And I see these two or two different kind of parts because one is really about understanding how the way you organize your company or the external environment lead to more or less innovation activity. And the second aspect is more like conditional. Having some new products, a new process, some new innovation, how to extract value, how to protect this technology, how to decide whether to commercialize it or not. I have to say the first part, like what you know, how to generate more ideas in your company sometimes is seen as something that should not be, you know, discussed much by business school professor or by economist. You think is like what you know is something more related to the activity of scientists and engineers. But one point that comes out from the business literature is that the internal aspect of the organization matter. The way you hire your scientists, your engineers, the way you pay them, the type of culture that you have in the organization matters. The external factors of the company, like the industry which you're in, the changes in this industry, the type of competition they are engaging, also matters. So it's important to, to make. To understand that it's not just something in the domain of the. Of the scientists and the engineer engineers that are involved in innovation, but also decision related to the business aspect and management aspect of the organization and the economic environment are really important to shape the innovation activity of a firm.
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Alfred Marcus
Is that also related to what projects get funded and, and how long a company will persist in funding a project before it produces something of value? Their gate posts, I think that's a term that's often used.
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Alberto Galasso
Yeah. In general. Yeah. Like the term experimentation, like how for how much you need to experiment on a project before deciding whether to move on over something else or to actually implement the project into a commercializable product. It is definitely related to that too.
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Alfred Marcus
Yeah. And the portfolio of investments in innovation that a company have, the innovative projects that they have, and how they balance innovation investments as opposed to investments to operational investments of their existing technologies. I think also is very important and probably varies by industry to a great extent. Like in some industries, that's the name of the game. I think, like pharmaceutical industries, it's very critical. But some other industries, they're just trying to maximize what is already known and innovation plays less of a role. Is that true? Is that how you say it?
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Alberto Galasso
Definitely, yes, I completely agree with you. It relates to the nature of the industry, relates also on the. Sometimes on the speed of the innovation process. In essence, in pharmaceuticals you require a lot of capital. And these projects typically require a very long time before they Actually generate profits in industry like software in which things are. Can be changed much more frequently and to. You know, and products have very much shorter life cycle than you can. Is. Is. Is easier essentially to rebalance your portfolio and to change direction. So you know, it may require a bit less thinking about, you know, the, the. The overall complementarity, the overall feature of your innovation portfolio.
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Alfred Marcus
Well, what about the issue of risk? So let's say you're a manager and you're. You have a portfolio of projects that are going and some of them are high risk, high return. There's all kind of portfolio management issues involved. How diversified you should be in your portfolio. It's almost like managing financial investments at some point in time. Is that how you would see it also? And how do you see managers carrying out that. That process where they're dealing with risk?
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Alberto Galasso
Yeah, so definitely there is the aspect of. Of. Of risk when you're managing a portfolio of. Of assets. So in that perspective, the, that that idea of managing the risk, the different risk in a portfolio of asset is not specific to technology. Right. In a, in various other aspect of. Of corporate strategy or business strategy, you may have multiple assets to manage. You want to think about the underlying risk for each of them and then the right complementarity and substitutability and the best allocation of resources. Something that probably is unique to management of technology and management of IP that is not there with other assets is that by nature. Patents in particular, they have a very specific and well determined duration. 20 years. Everybody knows that that asset after 20 years is gone and is not only gone is something that everybody else in the industry then can use. This is not something that is there with other financial assets. If you have a plant, I may have an expectation about how long you can still use the plant, but I'm not exactly sure. I cannot pin down the date. But for a patent, everybody can pin down the date at which your intellectual property is going to aspire. And the second thing, when your plant cannot be used anymore. Not necessarily. This implies that every other competitor in your industry can use it. But we know for example, when a pharmaceutical, the patent of pharmaceutical product expires, that means that you're flooded by generic entry. You're flooded by other firms that can use the same. The same asset that you were using before. So that is some. There is something unique there in terms of risk that is different. That is this duration specific duration set
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Alfred Marcus
by law, the duration is a barrier to entry for that period of time. In pharmaceuticals, Is it also 20 years? I was wondering. I think yeah.
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Alberto Galasso
20 years is across the board. There are strategies some pharmaceutical firm use to try to extend the duration but typically by filing additional type of patents. But then is a very important feature for a lot of people. C is also not a great property of the patent system that you give 20 year duration to every single type of new product and process. It doesn't matter if it is a software product that after six months is obsolete or a pharmaceutical product that took decades to be developed. And out of these 20 years you may have 15 years of clinical trials. So the actual actual duration of the patent is not 20 but is only 5 years. So is. But it goes back to the very first patent system. In Renaissance Venice. They set a law in which they decided that everything had the same duration and it was taken and follow by all the other laws then were essentially developed by copying the very first patent system.
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Alfred Marcus
Is software patentable? I My understanding is that it's at least some soft. It's harder to patent software. Is that correct? Compared to let's say a new drug or a new medicine software.
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Alberto Galasso
It is patentable. But compared to other areas of technology there has been very big changes over time in the. You know what the both the patent office but courts in particular consider patentable. In the. In the 80s there was this idea that it was very hard to patent software. Most. Most attempt to patent software were rejected. Then people started patenting software with various. You needed some very strong connection to some other tangible product. Like you could say you know I have a machine that produces something if they can use in a factory a part of this machine. There is this software develop. So but. And then things became easier and easier to patent. I would say until about 10 years ago. And then we start now having a reversal more decision of high courts in US striking down and reducing the patentability of software. So I would say it's not. There are lots of software patent. It's definitely possible to software to patent software. But is one of these areas which for example you would like to be sure you have a very good patent agent. You need to have someone experienced and know how to write this type of patents. Because the standards have been changed over time and there are speculation about what can be patentable or not five, ten years from now and unnecessarily.
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Alfred Marcus
a big pharma company like a Pfizer or Merck, they're essentially a portfolio of they might be $50 billion in revenue, but that may consist of maybe 10 major drugs that are on patent and that's and they. And those 10 major drugs are a result of maybe a thousand attempts to develop those 10 drugs. Maybe even more. Yeah. Is that true of other industries? Other where the relationship between your patent holdings and your value and your whole business model is so closely intertwined?
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Alberto Galasso
I have to say a lot of the if you talk with venture capitalists, a lot of what they're doing very often is to invest in startups that they know that only a very small fraction of them are gonna make it. And very often the time in which they make their investment, the only thing that the startup has is intellectual property. So I see them also as essentially betting on patents. They know that maybe the startup itself may not have the right team or the right, you know, but they know that the IP is going to be there and in the worst case they can get the IP or sell the ip. So from that perspective, yeah, pharmaceutical probably is one of the most extreme in the sense that the return is driven by few blockbusters. So the patents for those are really, really important. But I would say more in generally like estimates of the value of patents show that there is very, you know, distribution is such that most of the of the patent portfolios are driven. The value is driven by relatively few of those patents.
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Alfred Marcus
It's not just accumulating lots of patents, but it's accumulating impactful patents.
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Alberto Galasso
Yeah, in a sense, if you think about, yes, revenue generation, profit generation, you're right. Large portfolio, they may have different usage, they can help as a barrier to entry, as making sure people don't enter in your technology area, even if it's not necessarily too close to your main product, they can still help from that respect. They can essentially also be used as a way to kind of exchange then technologies with others, giving freedom to operate to other firms that want to enter your area. The more you can share with them, the more you are likely to have access to other technologies. So there are, from the context of thinking about, you know, commercialized product, it's right that most of the value is driven by few patents. But there is also value generated by having a large portfolio.
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Alfred Marcus
What are the biggest mistakes that managers make in the management of their patents?
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Alberto Galasso
So I think at least the area that I know more is the management of IP of a startup, a smaller company that I have. I had much more discussion with them than management of large firm and the area. My understanding is that sometimes there is not appreciation of the impact that this intellectual property may have on their ability to, for example, raise capital. A lot of startup founders, if you ask them two, three years down the road of what they would have done differently, a lot of them I heard telling me I would take more seriously the filing of my first patents and not necessarily that means investing more money, but for example, in finding the right patent agent. Defining someone that can help you thinking through about these things, not just as legal documents, but also something that can help you protecting the technology, where your company will have to work on and potentially generate not just one particular product, but a future line of products. So the idea of not, you know, of not spending enough time and resources in this aspect is something that I noticed is something where your founders told me to, they regret not having done.
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Alfred Marcus
There's also oftentimes big legal contests later on about who owns capital. Like Apple I think has confronted some of those legal challenges. Other companies do often too. But you want to talk a little bit about that and what role those play? Can you anticipate them? Should you try to anticipate them? Are they inevitable if you have a valuable patents that someone will contest it?
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Alberto Galasso
Yeah. So public litigation is also an important, very important thing to consider. And this I would say is something that sometimes starts a founder under, you know, is one of the reason why these, these startups or entrepreneur don't invest as much. They say, look, in any case, even if I have a patent, I will not be able to actually enforce the path. Because if a large company works on my technology area, the amount of money and the resources required is just extremely large. But the idea is that, first of all, it is important to have the IP in order to raise capital, and the capital itself, if the AIP is valuable enough, can be raised also to defend your position with large firms in terms of, like, litigation. The other thing that sometimes I notice needs to be considered by founder entrepreneurs is before really developing a business plan or thinking about the type of products and areas which are going to operate, is to assess is there evidence of patent litigation or big battles of IP litigation In that technology area, I've seen companies that were doing really well in terms of, like, investors saying, I like the idea, I like the product, I like the team, but I'm not investing because this is too. There's too much litigation here. I'm worried that there's going to be, you know, conflict on what you were saying or whether the company cannot operate or not in a technology space. So even if you cannot, you don't have resources to be involved in litigation. Understanding the, the presence of litigation and who litigates in your technology area, whether this is a risk or not for raising capital, is really important because it may lead you actually to kind of pivot toward alternative technology, alternative application or technology where there may be less litigation.
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Alfred Marcus
What's more important if you're a startup, is it establishing the rights for your technology by patenting it, or is it to demonstrate a product that has some appeal to customers, or are the two both important and how do they relate?
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Alberto Galasso
So for me, their complement is like their complement. They're very different aspect in the sense that what the IP does is, does kind of control on the use of the underlying technology. But the fact that you have a patent doesn't tell you anything about whether the product will be a success in the product market or not. It just tells you that some experts have looked at the technology and they can tell you that it is something new, something different from things that have been patented before or more generally published in the prior art. But it's actually something I like often to discuss with my students. It can be big tensions between what the engineers, scientists, your company find exciting and novel and impactful, and what your consumers think is valuable. So understanding that the two things are in a sense complementary. The successful company, they have a new product that can do well in the market and they know how to protect it. But not necessarily having intellectual property leads to success in the product market is also important to understand sometimes.
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Alfred Marcus
I've argued that the use in our research of patenting as a representation of innovation is incorrect because innovation means a lot more than adding up how many patents a company has and how many footnotes and references they have to the patent. Would you agree with that?
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Alberto Galasso
I agree and disagree in the sense that in one hand is like I agree, like if you think about what it means to innovate, there are a lot of things that affirm does a lot of outputs that can, you know, be associated with the idea of innovation that are not patents or not intellectual property. On the other hand, compared to many other areas of management, I think we should recognize that we have some metrics here to measure new products and technology developed by firms and that these sometimes is. It can be overused sometimes in academic setting people, you know, use innovation as a metric path, a matter of innovation when they should not have used it. But it's also something that especially from the business perspective sometimes is under appreciated that you can lose patent data. You can do some searches on patent to really understand the innovation activity in your technology fields. You can track what your competitors are working on. I think in business school we often say we need data driven decision making. We don't want managers to take big decision only based on their insights. If you can support your decision by looking at some data that is much more. It makes much more sense. It can be much more useful to avoid taking bad decisions. And very often like for manager or especially for small company entrepreneurs, they tell you about what data can I use? Like if I'm Amazon, if I'm Facebook, I sit on a lot of data. It's part of my business model to collect data. But what if I don't have data? What if I don't have resources to buy data or to pay someone to collect data for me? And here we have a resource that has free. So patent data are by nature free. They are related to something important. It's not that, you know, when you think about what patent capture they capture new technologies developed by firms. Very often you first patent something and then you sell it in the market. So they can give you a window on what is that firms are going to sell three, four years from now. And they're also high quality data in the sense that you can get an intern and tell the intern collect data on the new products that was, you know, are launched by my competitors. And every intern may have a very different standard what a new product is. There is like someone that says, oh, maybe this is just a new version of an existing product. This is not. Instead for patents, you have expert there, you have expert in the patent office in the field that can tell you, yes, this is something distinct, is something novel compared to what we have seen before. They're very detailed information. They give you all the drawings, all the information that can help you understand the new technology. They even give you windows inside the firms that you not have with a lot of other data sources. You don't only know that IBM developed this new technology from the patent data. You know, the location where the inventor took place is something that was done in the US lab, in the Japanese lab, in the European lab. You know the name of the people that develop the technology. You know something about the teams of people working together in a particular project. Something you cannot easily find for other type of managerial decisions. So in a sense, it's important to understand this can be something that managers can use. An example that I give, you know, exercise I make do to my to my students, like take a startup and then figure out who are the other firms that operate in the very same technology area. With some search on Google patents that is like as easy to use as Google, you can, you know, identify firms that are working on similar technology. Then you know whether are they large firm, are they small firms, are there American firms, are there European firms, are there Asian firms, are there universities working in that area, are there nonprofit organizations? You can get a lot of insights and information for free because this is publicly available data.
- [39:21]
Alfred Marcus
What about Wall street analysts? Do you think that they have the capability of understanding this? Because the way you're describing it is that the underlying characteristic of most firms, maybe not in all industries, but in a large percentage of industries, they're underlying characteristics and their ability to create value is dependent upon the types of patents they have, the number of patents they have. And if that is so, when I read the typical Wall street analysts report, they do not generally rely on patent data. And do you think that's a mistake? Do you think that's actually a problem that we would understand more about the inherent value of companies if the investment community did closer analysis of the patents of firms?
- [40:22]
Alberto Galasso
So my understanding is that there is stock market reaction. The new patents are released every Tuesday. So every Tuesday there is this big release of information by the patent office. At the same time companies do statement which they say, we got this patent granted this week. And you see, of course, as we were talking before, sometimes the patent filing is just an extra patent in a very large portfolio of an area in which your firm is probably not investing heavily, but when these things are associated with things that the investment community perceive as important, you see stock market reaction.
- [41:13]
Alfred Marcus
So that's, that's to new patents. But you don't see comprehensive analysis of the whole portfolio that a company has as being the foundation for its value today and its future value.
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Alberto Galasso
Yeah, I agree. So that more can be done probably there. There are also some techniques that have been developed in the management literature and economic literature, not only looking at the portfolio of a company in isolation, but also looking at some kind of comparative relationship with the other firms in the industry. And in particular you can use, there's other ways you can use patent data to look at the link between patents. You can see that the patents of firm A tend to rely much more on the knowledge of firm B than the other way around. And that also give you insights about which technologies are more valuable than others.
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Alfred Marcus
Are there some really good recent papers on this in the management literature that you think have come up with some new insights that you can think of?
- [42:22]
Alberto Galasso
So it's always been difficult to kind of in practice disentangle this kind of what are called spillovers effect in terms of like what, what is really means that you know, I'm building on your knowledge and you're building on mine compared to for example, disentangly competition, you know, are we just close to each other because we build on each other technology or we're close to each other because we're competing in the product market? And I think there is a, a very nice paper was published about a decade ago in In Econometrica by Nick Bloom, John Varin and Mark Shankerma that really makes a step forward in this entangling these two, these two. I really think it was an interesting, an interesting approach.
- [43:13]
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Commercial Announcer
K Pop Demon Hunters, Haja Boy's breakfast meal and Hunt Tricks Meal have just dropped at McDonald's.
- [44:49]
Alfred Marcus
They're calling this a battle for the fans.
- [44:51]
Commercial Announcer
What do you say to that Rumi? It's not a battle. So glad the Saja Boys could take breakfast and give our meal the rest the of of the day.
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Ebglis Advertisement Voice
It is an honor to share.
- [44:59]
Commercial Announcer
No, it's our honor.
- [45:01]
Alberto Galasso
It is our larger honor. No really, stop.
- [45:05]
Alfred Marcus
You can really feel the respect in this battle.
- [45:08]
Commercial Announcer
Pick a meal to pick a side
- [45:12]
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and participate in McDonald's while supplies last.
- [45:14]
Alfred Marcus
What about the creation side of innovation? You talk about incentives, organizational design. What does the evidence tell us about which incentive structures actually encourage more radical rather than incremental innovation?
- [45:28]
Alberto Galasso
That's a good, you know, it's a big question and in essence when I think about the creation side. So like what makes a firm more innovative in the sense of coming up with more idea, with more knowledge? I like to think about this as saying, okay, there is a is important for managers to understand that the literature in management, in economics, in finance identify a very long list of possible mechanisms or possible factors that affect innovation activity and they can be internal to the company like the corporate Culture may matter or can be external. Like changes in the competition in your industry may change innovation. Now what effect do they have? Like are they increasing, decreasing innovation or are they as you mentioned, like pushing me toward doing things that are more radical than incremental? There is not easy. Each of those mechanisms may have cost and benefits and they may have effects that are sometimes even firm dependent. In a sense. If we knew what are the ways in which organize the company and generate incentives which would lead to radical innovation, probably we would see on the company's design in this way. So I think, you know, there is a book that was published a few years ago by Gary Pisano that I think makes a very important point. We know that some things matter, like a tolerance for failure, experimentation, collaboration, for example. But the difficult aspect of the key managerial problem is to understand what is the. What, what is the right level of these things. Like you, you. We know that in order to generate innovation, especially radical and ideas, you want to learn for failure because otherwise people don't take enough risk. If you, but when do you stop? Like at a certain point you have to say, okay, you know, we need to kind of. Or, or the ideal experimentation. You want to have a lot of experimentation. But a certain point you need to say stop. We need to stop experimenting. We need to decide and we need to commercialize. So this is the crucial thing that what makes designing incentive and organizations that are really innovative difficult because in a sense we know some of these elements matter. But the right level is what exactly?
- [48:15]
Alfred Marcus
Some organizations have more people who are trained technically as engineers and scientists and top management positions. And some would tend to have more people who are trained as MBAs and perhaps lawyers. Would you say that you need a high dose of the technically trained people to sustain an innovative culture and that sometimes the MBAs, when they take over, they're too impatient with innovative efforts that are not paying off and they cut them off too quickly. And I can think of some companies, I can name them, Boeing, intel, that sort of got taken over by the MBAs and their, their innovative culture. 3M is another example. Sort of decayed, let's say.
- [49:18]
Alberto Galasso
No, no, that's a. Yeah. So I suspect, you know, you need both type of expertise. Like the, you know, definitely. I know at the startup level, venture capital really like to see teams that are balanced in which, you know, don't have only the technical expertise or you don't. Only too much of the business expertise is a kind of to think about large company or what type of, you know, top executive you need is very. Is very difficult. And there is research that I've done with, you know, 10, 15 years ago with Tim Cinco, that is at Boston University. We were looking for example that at that time there were all these metrics developed by the finance literature on overconfidence of CEO. They were looking at. They were kind of metrics to capture whether or not CEOs has excessive kind of confidence in their ability and their ability to kind of push the firm toward growth. And all these papers in finance that were showing that this is very. Has negative effect on the profitability of the firm, it leads to empire building, it leads to excessive investment in plant and equipment. And what we did essentially we took the very same measures and we started looking at the innovation activity of these firms and we found that the very same CEO that were kind of not creating value in the dimension were actually way more innovative. They were like filing more patents, exploring new technology areas, so finding patents also in technology area that the firm were not investing more R and D per other units of assets. So in a sense you can see even within the same type of type of CEO, even things like beliefs may matter. So there is all this psychological aspect too, but also the understanding there may be something that can create value in innovation, may create problems in other aspects of the management of the company, or the other way around things that may characteristics of top management they can do well in other areas. The firms may not be the best for innovation. So it's all a matter of balancing all these aspects.
- [51:44]
Alfred Marcus
So too far on the spectrum on exploitation is a problem and that mentality is a problem. But if it's too far, perhaps on exploration, that can be an equal problem. It's again finding the proper balance.
- [52:00]
Alberto Galasso
Exactly.
- [52:02]
Alfred Marcus
This is something I've actually thought a bit about my work. But the role of regulation, health and safety in enforcing and shaping innovation, it can both constrain it, but it also can be an incredible incentive. And they also can shape it in very important ways in terms of providing guardrails for protection of society. But that can be also a stimulus for innovation. We can talk like a lot about air pollution standards, whether they're pro innovation or anti innovation or environmental standards in general. What's your view on that and how do you. Is it again a matter of balance or how do you see it?
- [52:52]
Alberto Galasso
No, I think we have a very similar view there. And you probably have explored it more from the environmental perspective, came to it from the more kind of safety perspective of technology. The phase in the sense that product injure customers you know, think about problems that can happen with self driving cars, not, you know, driving effectively or you know, accident with airplanes and so on. So, and I think this is an area where it's definitely, you know, if you talk to managers, they tell you that those are important concern that they take into account when they decide key strategic aspect of their technology development. But it's something that has not been studied enough in the management literature. Definitely also outside, outside the environmental concerns. Like there is not a lot of of work in thinking about safety. Really. How should I think about the worst case scenario in which my technology ends up not necessarily not generating profit, but actually harming consumers. And there are cases in which accident led to substantial changes in technological development. An important one that I studied related to the CT scanner technology, these big X ray machines. In 2009, there was a series of accidents in a hospital in which patients that went through CT scanning exam, they receive a huge amount of radiation, much higher than the level of radiation that should expect that they came back to the hospital showing that they were losing hair and they tried to understand what was going on. And they realized that there was a technician that changed the setting of these scanners and increased dramatically the level of radiation. This thing can be really dangerous in terms of risk of cancer. This is an interesting case because there was no problem with the machine itself. It was just an error by one user. But it got a lot of media attention. A journalist in particular from the New York Times used this accident as a way to write several articles on the risk associated with radiation diagnostic technologies. And that led to a substantial change in the design of these machines. Before it looked like users or doctors were typically concerned only about quality of the image. And to have better quality image, you needed more radiation. So all the research was directed to one particular direction, like how do we improve the quality of the image with less concerns about actual the amount of radiation. And then there was a kind of a shift in the demand and people started saying, look, we don't, okay, the image should be good, good enough, but we also want to make sure there is no risk to the patient. And there they started having much more development of some incremental technology like extra settings to kind of, if you have to change the setting of the, you need more password and so on. But also much more substantial changes in the way the image was constructed that reduced the amount of radiation used. So that you see the industry has responded substantially to this type of risk. Not necessarily. My understanding is that had negative financial consequences on this company. Actually because of the shift in demand, many more hospitals replaced their CT scanner way earlier than they would have predicted because they wanted machines that were safer. But it suggests that essential liability risk may have a substantial effect on the type of technology the firm decide to develop and the innovation strategy of firms.
- [57:27]
Alfred Marcus
What about large incumbents and startups? And they have different constraints and opportunities and they should probably have different innovation strategies? I mean, of course, I think these startups are where we look to for innovation in pharmaceuticals. Going back to pharmaceuticals, I think almost all the innovation that may be going too far, but a high percentage is being done by startups and smaller firms. And the larger firms make acquisitions and proceed with getting drug approval and commercialization. Is that the right division of labor? And so startups are freer in many respects to go full heart, full thrust behind innovation, while larger firms are more constrained. But that's an old argument, isn't it, in the literature about where does innovation really come from? Does it come from small firms? If I recall, it goes back to Schumpeter and yeah, yeah.
- [58:35]
Alberto Galasso
So it's been a long story, long analogy of these arguments. But the interesting thing is that probably this also relates to your earlier comments about the appropriateness of the use of patent data. If you just count, for example, patents and you ask the question who is responsible for more innovation? There is clearly a large, large firms have way more patent than startups every week. If you look at it, it's just so early on, this was used actually as a way to say we need to subsidize more large firm. We need to kind of the innovation comes from there and then people start noticing then aspect of, you know, it's not just the number is also the, you know, how incremental compared to radical innovation is how much product compared to process innovation. We have as small fir much more, much more inclined to find things that are new products, something completely new from what you have in the market, and also more radical, most distinct from existing things. So that is the way to think that large company may have a kind of disadvantage, not necessarily in filing new patents and coming up with new technology, but in coming up in something that is substantially different from the current technology which they're working on. And for that perspective, like monitoring the activity of small firms potentially engaging in acquisition or licensing can be an important strategy.
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Alfred Marcus
How do you just distinguish between revolutionary or incremental? I use that term all the time, but if you would press me, I'm not sure I've come up with a good definition.
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Alberto Galasso
I agree there are so Many different so many different definitions out there. It is in general related to the. You know this. So usually I like to think about product and process innovation as telling you about the type is it something that generates returns through the revenue side of the firm is really new product that you sell to consumers or through the process through the cost side like by reducing costs. But even there it can be very difficult to kind of something some technology have both aspects or what is product for a firm is process for the other. Like if I if I'm if I produce oven then I I my product are oven but if I am a a bakery like oven is a is a production machine. So the very same technology that is an improvement in the oven is a is a process in a way. The thermo radical and an incremental depends on the size how big is the reaction of the demand or how big is the cost of reduction. They're not necessarily. There's not really agreement on those. I think Ken Arrow was one of the first that had an attempt to classify radical process innovation as saying if your new production process is so good that as a monopolist on that production process no one else can compete with you then is what he was calling radical innovation or. Yeah, so so. But but is you know there is no real agreement on the what are
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Alfred Marcus
the from research and what would you what are some of the key findings from recent research that you would think are very important for managers to know about and that they should apply and things that they overlook that we in academic from the academic side have produced.
- [62:39]
Alberto Galasso
Yeah. So rather than went into very specific findings I would say the appreciation of the value of intellectual property, understanding the role of intellectual property and try to as a manager see what is your current intellectual property portfolio. What else can be protected what you're not protecting and is the way you're protecting the best way. What are the cost and benefit of engaging in different type of IP protection? That is clearly something comes out. There's a lot of academic literature but especially from the small firms the startup world is not sometimes fully understood. The idea that we discussed before patent data can be a very useful source of analytics for decision making is information that is valuable and is available is available for free and can be collected at no cost. So it's something that can for example to assess whether a startup should invest more or not in a particular project to see before is there any who owns the patent in this technology area. It's something that not necessarily is considered a priority to do by a lot of Firms and it's not just necessarily identifying patents, but they give you a sense of who is working there, what are the firms that you will have to kind of deal with and the nature of the competition in the industry, potential conflicts in the industry in terms of litigation and so on. And then the other aspect, there are this plurality of drivers of innovation that have been recognized by the literary management, economics and. And finance. I think they are. One important message that we get from the academic literature is that there are cost and benefits in all of these. And these cost and benefits can very often be firm specific. The fact that another firm chooses a particular compensation structure for their engineers not necessarily means that you have to do the same. You have to understand what are the cost and benefit of paying engineers or hiring particular type of engineers in a particular way and say, you know, does it make sense for my company? What are the costs and the benefits are the reason why it may backfire in my company or not reach the same objective. So that these things are, you know, there are a lot of drivers, they connected to each other and you need to understand the cost and benefit. I think it's important.
- [65:27]
Alfred Marcus
Alberto, what are you working on now? Where does your passion lie?
- [65:31]
Alberto Galasso
At this moment I'm thinking a lot about copyright. That is the other aspect of intellectual property management of copyright, especially because I think we talked a lot about patents. But with the new developments in artificial intelligence, copyright is going to be really the most, to me, like one of the most important form of intellectual property firms will have to deal with in the next decades. Because all this content that is created by these new models of artificial intelligence is content that is not necessarily cannot be protected by patents, but is things that we were protecting with copyrights. So understanding the differences between IP type and what kind of situation the presence of copyrights can create challenges for firms is something I'm kind of spending quite a bit of time thinking of some
- [66:29]
Alfred Marcus
of my prior writings. I've received messages from the publishers that I may be able to read economic rewards from them because the LLMs are
- [66:41]
Alberto Galasso
buying are using it as a training. Yes, for example, that is something we will need to see how courts are going to decide. Is this training considered the same as training for students? So if a student goes to the library and just reads your book is not considered something that requires copyright license, but that is the argument used by these AI companies or is it different? It is something really different in this case and that requires negotiations.
- [67:15]
Alfred Marcus
Yeah, I mean AI and regulation and how the courts are going to make decisions and guide. This is going to be very, very critical. I think we made some incredible mistakes in just the Internet and allowing total freedom of expression without any guardrails. And it's very hard to go back. So sometimes when the decisions are made, they just become embedded and we can't get rid of them. So this has been a great discussion. The book is the Management of Innovation by Alberto Glasso. I'm Alfred Marcus and this has been on the cusp of on the New Books Network. If you have comments or suggestions for future episodes, please contact me at amarcusmn. Edu. Thank you very much Alberto for being with us and I really enjoyed your book. I think you have a lot to say of importance about this area, so keep it up.
- [68:13]
Alberto Galasso
Thank you so much for. Thank you so much for giving me the opportunity. Really a pleasure.
- [68:17]
Alfred Marcus
Great. Great. Foreign.
- [68:30]
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