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Bridging The Innovation Gap

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Semiconductor 2K will hold it’s annual conference in Edinburgh under the auspices of JemiUK in June this year. The yearly event has grown in confidence and stature over the last few years. Bedwyr Humphreys and Mike Smyth, members of the JemiUK board of directors outline what can be expected in 2006.

The importance of innovation to national industry sustainability is an essential ingredient in maintaining country competitiveness on the international stage. Furthermore, innovation is the life blood of any company providing a means to command sustainable competitive advantage against its competitors either through iterative improvements in existing technologies or through technology breakthroughs.

Such approaches are referred to as competence enhancing and competence destroying respectively, where competence enhancing developments are iterative improvements to existing ways of doing things. Competence destroying developments, on the other hand, are the technology breakthroughs that not only destroy existing company competitiveness and conventional approaches to meeting a market need; they also have the possibility to create totally new ways of working that invalidate the previously accepted models.

Historically, competence enhancing developments have been the staple of established companies working in established markets. Continuous innovation allows the company to remain competitive either in new product introductions or via cost efficiencies in manufacturing. Such an approach maintains the overall market and business model status quo and relies on the existing way of doing things to continue, albeit in a better and more efficient way.

Some iterative improvements to the way things are done or to existing product capabilities also provide the ability to create totally new applications and markets, i.e. an enabling development, but most commonly, such an approach simply refines how things are done for existing applications.


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On the other hand, competence destroying developments come on the back of breakthrough technologies that possess the ability not only to improve how the established way of doing things take place, but to totally destroy existing business models and create completely new markets and industries. Competence destroying developments are also referred to as disruptive technologies that cause a discontinuity in industry life cycles and can be the make or break event that determines future industry viability. In the main, breakthrough technologies stem from innovative, adventurous, cross-discipline academic research and is commercialised via a spin-out or start-up company.

Established companies (apart from the major pharmaceuticals) tend not to invest sufficient efforts in blue-sky research, simply on the basis that R&D is seen as a cost on the P&L rather than a depreciable long-term investment. Additionally, investing in blue-sky research and in early-stage technology development is risky and possibly cannot be justified on the basis of a risk/reward calculation, especially the conventional net present value method. This emphasis on the bottom line and conservative approach thus lends itself to the iterative, competence enhancing approach.

Technology research and subsequent commercialisation of potentially disruptive technologies, industry and academia must bridge the gap that separates them and work more closely to take advantage of each others strengths and capabilities.

For example, the UK semiconductor industry suffers from a lack of capability in taking innovative academic research that has gone through proof of concept (PoC) to the next level of prototyping followed by alpha and beta qualification. A key need for prototyping is the ability to cost effectively create numerous demonstration samples that are reproducible in their performance and manufactured on a production line that has the capability of taking that product through development.

Of course, in wafer fab terms, the essential need is not necessarily to demonstrate the prototype at a major foundry such as TSMC or UMC, but to demonstrate the technology on a representative production line with established processes and equipment sets that are common place in the semiconductor industry.

Hence, one of the keys to success is the availability of appropriate facilities, which bridge the PoC to prototype gap, that offer access to the latest semiconductor equipment sets and technologists that are experienced in the disciplines of operating tight process control over the equipment and manufacturing lines.

In addition to the infrastructure support, enabling the transition from research to industry requires careful management of risk and product development. In established technologies, this can be difficult enough, but in emerging technologies, with high levels of uncertainty in terms of the market as well as the manufacturability of the design, this is fraught with even greater possibility for failure.

In this situation, conventional strategic planning, product development, sales and marketing and project valuation techniques tend not to be appropriate. The high level of uncertainty and the rapid pace of change in markets and competitor technologies means that companies must develop a fluid and dynamic approach to strategy making that provides both overall direction to the organisation, without stifling the need for continuous creativity and agility.

In much the same way, the same applies to product development, where managing emerging technologies requires an empathetic touch that allows the technology to develop, but underpinned by the adoption of industry best-practices that are appropriate to the company stage-of-development, the technology maturity and the market dynamics. Sales and marketing must focus on collaboration and partnership to ensure a customer driven focus on the product development, with the key being to develop early-adopter accounts that understand the difficulty and risk associated with developing the technology, but also understand and appreciate the potential upside to success.


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Finally, conventional project valuation techniques take into account the cost of capital associated with the project and decisions are made on a risk/reward basis, i.e. what return do I expect to get based on the risk that my investment is exposed to? Unfortunately, the risk premium or hurdle rate applied to calculate net present values of future cash flows can greatly underestimate project valuation, especially when hurdle rates for high-risk ventures can be as high as 50%. What is needed is a more dynamic approach that realises that value is embedded in management decisions at key project milestones, e.g. Go, Kill, Hold, Modify, which triggers further funding if milestones have been.

This is precisely what the Real Options valuation method does, and when supported by a results driven funding approach, can transform the way that projects (and start-up companies) are valued and forms a powerful method, alongside other valuation tools (comparables, adjusted cash flow, VC method) to generating a much more realistic risk/reward profiles for project valuation. Hence, to enable success in the UK semiconductor industry, key areas that need addressing in order to help bridge this gap between iterative and breakthrough developments is the encouragement of greater collaboration between industry and academia and the development of appropriate facilities and infrastructure alongside expertise in how to manage disruptive technologies in highly uncertain markets that are characterised by rapid technological change.



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