Capturing Innovation: Value from Knowledge Assets
Innovation: Where does it fit in?
Innovation
can create and/or protect against threats to competitive advantage: imitation, substitution, slack, and hold-up Own Innovation
A
way to create or protect ones own competitive advantage
Rival
A
Innovation
threat to a firms competitive advantage
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Do firms always profit from innovation?
Examples of firms that capture little or no value from innovations are numerous
Xerox PARC and window operating systems EMI and CAT scans Sony and Beta VCRs RC Cola and canned/diet sodas University of Illinois (Netscape) Iridium
What did these firms do wrong?
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How do innovators capture the value created?
Technology transforms inputs into products or services
Smelting technology transforms alumina and electricity into aluminum
Innovation is the process of technology improvement typically enabled by knowledge assets
Strategic Question: how can a firm capture more value from its knowledge assets?
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Value of innovation shared
The value of innovation is divided among several groups:
Buyers Suppliers Providers of complementary assets Imitators Substitutors
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Knowledge Asset vs. Tangible Asset
Exclusive, no rival good Depreciation based on replacement knowlegde Hard to share info Limited property rights
Rival goods exist Physical depreciation occurs Easy to share attributes Strict property rights
Unclear boundaries
Clear boundaries
Sale by License
Units sold difficult to measure Cost per unit vague
Sale in units (lb., volume)
Units sold easy to measure Specific cost per unit
Difficult to trade assets
Easy to trade
$ value hard to determine
Value determined by cost to produce
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Framework for profiting from innovation
Consider three attributes of the application of knowledge assets to innovation
Appropriability Dominant design Complementary Assets
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Appropriability
Mechanisms to protection innovation
Patents Copyright Trademark Trade secret
Nature of the knowledge
Product or process
Positive and negative knowledge (what works and what doesnt)
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Tacit or codified
Patent Issues
Requirements Cost Renewal Strategy Defense Remedy of Infringement Complicated technologies Bayl-Dole act
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Overall Appropriability
Nature knowledge
Mechanisms of for protection Weak mechanisms
Process/Tacit Knowledge
Product/Codified Knowledge
Moderate
Weak
Strong mechanisms Strong
Moderate
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Dominant Design
Innovation is often characterized by emergence of a dominant design, the general characteristics of the most widely adopted technology
Pre-paradigmatic (before dominant design):
Competition among designs Steam vs. gas engines Emphasis on product innovation Cellular telephone standards
Post-paradigmatic (after dominant design)
Competition within a design Emphasis on process innovation Migration to price/quality rather than design fundamentals
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Complementary Assets
Assets required for commercialization of an innovation
Generic
Steel for computer cases, sweetener for a new soft drink
Specialized
Container ships and trucks
Co-specialized
Container ships and cranes, microprocessors and operating systems, GE engines and Boeing 777
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Strategies Before Dominant Design
Strong Appropriability (easy to capture value)
Enter early and loudly Focus on ensuring technology is adopted as a dominant design Think about how to profit after dominant design emerges
Weak Appropriability (may be hard to capture value)
Use caution entering market since disclosure will prompt imitation Do not disclose idea until good prototype suitable for dominant design is available But, do not wait until complementors make irreversible investments in rival technologies Be prepared to move quickly and build a learning curve
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Strategies After Dominant Design
High-volume production typically increases need for specialized asset
Specialized equipment needed for economies of scale Large distribution network needed to reach customers
Value captured then depends on three factors:
Appropriability Specialization of complementary assets Position vis--vis rivals in obtaining complementary assets
Need to think about how to obtain complementary assets: vertically integrate? Contract for access? License technology?
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Conclusions
Innovation can be a source of competitive advantage and a threat to rivals competitive advantage. Important to find ways to prevent imitation/substitution sometimes easier, sometimes more difficult. Tradeoff between disclosure and protection. Need to access complementary assets but avoid/limit hold up.
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