Session 3: Value Capture from Innovation Flashcards
What are the options for appropriability?
- Use in own products and exclude others from use. (All revenue and cost for innovator)
- Collaborate and jointly bring the product to market
(Shared costs and shared revenue) - License technology to others (Development costs earned back through license fee)
Who profits from innovation?
- Suppliers and complementors benefit by selling larger quantities.
- Imitators benefit by marketing the imitation while saving on R&D cost.
- Customers benefit when their valuation of the new products exceeds its price
- Innovator benefits by selling the innovative product.
Example of alliance
EMI CAT Scanners
taken over by GE and Siemens because it lacked the high levels of training, support and servicing
What did Searle do?
1970: US patent for aspartame granted to Searle.
1982: FDA approval for human consumption
1985: Searle’s “NutraSweet” has 50% of the US sugar substitute market and is No.1 position in many other countries.
Competitors cannot ‘invent’ around the patent, as they would have to repeat the complete approval process when modifying the molecule.
By the time the patent expires (after extensions, in 1992), Searle has built strong complementary assets (brand, logo, client relations, experience with production) that keep imitators at bay.
What did IBM do?
1981: IBM introduces the PC, a small home computer with straightforward technological design.
Except the DOS system co-developed with Microsoft, the product used off-the-shelf parts from vendors.
Instead of relying on its patented hardware and copyrighted software, IBM adopted an open system architecture to allow third parties to develop software.
IBM’s strong market presence and reputation are strong complementary assets that allow it to set a new standard, for which by 1983 at least 3000 software and hardware products had been developed.
Explain the Teece Model
1. Appropriability regime (tight, weak) 2. Life Cycle Phase (pre-paradigmatic, paradigmatic) 3. Complementary assets (generic, specialised, co-specialised)
They all contribute to profitability of the innovation
What’s the Appropriability Regime in the Teece Model?
Table slide 16
Table slide 16
Appropriability regimes characterize industries in terms of the general ease or difficulty to appropriate value from innovations.
Tight (strong) and Loose (weak) appropriabilities
Draw The ease/difficulty of innovation square
- Nature of technology
a) Can the technology be easily reverse engineered?
b) What is the importance of tacit knowledge in the technology?
c) Is it realistic that key aspects of the technology are kept secret - Strength of formal IPR
a) Is formal IPR available/suitable for the technology?
b) Is formal IPR effective to protect against imitation?
c) Does disclosure of technology in the patent enable ‘designing around’? - Costs of imitation
- Time it will take to innovate around IPR
Where does the innovator’s success depend on in the fluid phase/transient?
In industries in which new products are easy to imitate and a dominant design has not yet been established, innovators’ success depends on their ability to make their technology the dominant design.
Where does the success of innovators depend in industries where the dominant design has been established?
Innovators’ success depends on control of complementary assets:
When:
– IPR protection is weak
– a dominant design exists
– and innovators do not control specialized complementary assets
being an imitator is a better strategy than being an innovator.
When is being an imitator a better strategy than being an innovator?
When:
– IPR protection is weak
– a dominant design exists
– and innovators do not control specialized complementary assets
being an imitator is a better strategy than being an innovator.
What is the definition of complementary assets?
Bundles of know-how and capabilities a firm needs – in addition to the core technological know-how - to successfully launch an innovation.
Often relates to manufacturing, distribution, service capabilities etc.
Also includes complementary goods: i.e. computers for software developer
If someone else owns essential complementary assets, it is highly likely they will get a “slice of your cake”.
How can firms manage complementary assets?
Firms can either:
INTEGRATION MODE
1. own the CAs already
2. build the CAs by themselves
CONTRACTUAL MODE
- acquire CAs from an external party
- contract CAs for access.
What happens in Integration Mode of Complimentary assets?
– Firms bear the full cost of developing the CAs, but also retain control.
What happens in Contractual Mode of Complimentary assets?
- Reduces risks and capital expenditures for innovator.
- Holder of complementary assets shares in the profits.
- Potentially brings credibility to innovator if they are unknown and the contractor is well established.
What are the types of complementary assets?
- Generic complementary assets
2. (Co-)specialized complementary assets
What are the characteristics of Generic complementary assets?
- Do not need to be modified to fit the innovation
- Tend to be available in competitive supply
- Can typically be accessed through contract-based transactions.
What are the characteristics of (Co-)specialized complementary assets?
- Are specific to the innovation: they need to be fundamentally modified to fit the innovation.
- If innovator does not own or cannot build these assets, it may dependent on those who hold them.
- This dependency is particularly strong if the assets are ‘tightly held’ or scarce: i.e. when only few players in the market own these CAs.
Draw the appropriability strategy box according to teece
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Y: Appropriability regime: LOOSE/TIGHT
X: Complementary assets
GENERIC CAs/TIGHTLY HELD
- Difficult to make money
- Holder of CAs makes money
- Inventor makes money
- Party with both technology and assets or with bargaining power makes money
Explain the stepwise approach to Teece’s Model
- Is the appropriability regime tight or loose?
- What are the key CAs the firm needs to successfully launch its innovation? Characterize the key CAs. Are they…
– Generic and freely available?
– Specific and tightly held by the innovator?
– Specific and tightly held by third parties? - If important CAs are held by third-parties, the innovator has to decide whether to choose the integration or contractual mode.
Contractual mode: appropriate when appropriability regime tight and CAs available in competitive supply (Box 3)
Integration mode: Costly but essential in loose appropriability regimes and if specialized assets are important (Box 2)
Example of firm in box 2
- Wim Obouter was a former Swiss banker invented the micro-scooter
- Lacking the complementary assets to produce and market the scooter he partnered with a Chinese company to fund the manufacturing and a Japanese retail partner to sell his product .
- Patenting was not an option because of the delay in obtaining them and the investment needed to enforce them.
- The only way to survive was to have a strong brand, to maintain a market leadership position and to introduce new product innovations.
Outline all appropriability strategies
Appropriability strategies
A. Protection mechanisms
- Formal
- Informal
B. Appropriation mechanisms
- Exclusion
- Licensing
- Own use
- Control over complementary assets
Key learning points about appropriability
- A smart idea is not enough to profit from innovation!
- Firms need appropriability strategies to appropriate the returns on their (R&D)
investment. - Firms can appropriate returns on their innovations, either by excluding their use by others or by profiting from their use by others (e.g. licensing)
- Firms need to have access to complementary assets. In combination with the degree to which a technology is imitable, these largely determine whether a firm can profit from its innovations.
- Firms can either attempt to integrate key complementary assets or access them through contracts with other firms.
Why do we have Intellectual Protection Rights?
- They confer ownership and incentives to the innovator
- R&D is expensive but cheap to copy
- IPRs protect against rapid imitation and allows the monopoly of the innovator, which pays back the R&D cost
- Without protection, the market would under-produce knowledge
