Innovation and Technology-Based
Industries
Gert Bruche
November 2012
'Strategic Foresight?
Whereas a calculator on the ENIAC is equipped with 18000 vacuum tubes
and weighs 30 tons, computers in the future may have only 1000 vacuum
tubes and perhaps weigh only 1,5 tons. (POPULAR MECHANICS, March 1949)
I can think of no conceivable reason why an individual should wish to have a
computer in his own home (KENETH OLSON, Chairman, Digital Equipment Corporation, 1977)
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Contents of this lecture
• Introduction
• Profitability of an innovation
• Ways to exploit innovations
• Competing for Standards
The Innovation Top 20 (R&D Spending), 2009
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The Innovation Process (technology based)
„Invention is the first occurence of an idea for a new product or process,
while innovation is the first attempt to carry it out in practice“
(Fagerberg, 2004)
Supply side IMITATION
Basic
Invention Innovation Diffusion
Knowledge
Electrostatics Xerography 1938 First Photocopier IBM Kodak,
Special chemistry Patent 1942 Xerox Ricoh, Canon
Etc. 1958 1974+
Demand side ADOPTION
First commercial First iPod
MP3 Player technology 1987 MP3 Player 1998 2001
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Contents of this lecture
• Introduction
• Profitability of an innovation
• Ways to exploit innovations
• Competing for Standards
Profitability of an Innovation
• Profit depends on the value created by the innovation and the share of that
value that the innovator is able to appropriate!
• Parties sharing
the value
Customers
Suppliers Innovator
Imitator and
other
‚followers‘
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Example: value sharing in the PC industry
- A rough estimate could look something like this
Customers
(increased performance
& falling prices)
Original
Intel, innovators could
Microsoft, MITS, Tandy,
Apple, Xerox not appropriate
Seagate, much of the
Sharp… value created
(component prices) IBM, Dell,
HP, Acer…
(Rivalry &
falling prices)
Reason why?
What determines the profit from an innovation?
Four Influencing Factors
1. Legal protection
2. Tacitness –
complexity Profits
Value of the
from
innovation 3. Complementary Innovation
resources
4. Lead time
V……………………..
….RIO
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1: Legal protection against imitation: Intellectual Property
Rights (IPR):
Patents Requires that invention is novel,
Exclusive rights to a new and useful process, useful, not very obvious.
substance, or design Patent law varies from country to
country; duration 14-20 years
Copyrights For example: articles, books,
Exclusive production, publication, or sales drawings, maps, photographs,
rights to creators of artistic, literary, dramatic, musical compositions
musical works
Trademarks Registered w. patent or special
Words, symbols, other marks used to trademark offices
distinguish goods or services supplied by a firm
Trade secrets Modest degree of legal protection
Recipes, formulae, industrial processes,
customer lists & other knowledge acquired in
the course of business
„Regime of
appropriability“
Patents: some remarcks
• Who assigns patents / trademark rights?
• Country by country basis!
• Signing of TRIPS=Trade Related Aspects of Intellectual Property Rights
pre-requisite of joining WTO (e.g. India: 1995/2005; China 2001, Vietnam
2007, Russia 2012)
Some other aspects
• 'First to file' vs 'first to invent' (US vs Europe)
• 'Invention patents' vs. 'design/utility patents'
• 'Triadic patents'
• 'Commercial period' < total patent period
• 'Licensing' (out-licensing, in-licensing, cross-licensing)
• 'Cross-border licensing'
• 'Risks of patenting'
• 'Strengths' of a patent
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2: ‚Tacitness‘ and ‚Complexity‘ of Technology:
• Apart from legal protection the possibility of imitation depends on how
easily technology can be comprehended and communicated
• Is the technology based on „codifiable knowledge“? [Can be articulated
and transmitted impersonally over distances] => easier to copy
• Is it more based on ‚tacit knowledge‘? [implicit, unspoken, embodied in human
experience, ‚buried‘ in organisational routines] => difficult to copy as it cannot be
easily transmitted out of context
• Is the technology complex or embedded in complex systems? => more
difficult to copy
• If a new technology / innovation involves a lot of tacit knowledge
and/or is very complex it is difficult to imitate
3: ‚Complementary Resources‘: needed to bring new
products or processes to the market
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4: Lead time
…the time it will take followers to catch up
• Use lead time to build capabilities and market position: gain leadership
• Move down the learning curve: turn lead time into cost advantage
• Our case: How did Apple use its lead time
Competing through fast replication of lead – time in fast
cycle industries
Profits from
a series of
replicable
actions
Firm has already
moved on to
advantage No.2
Exploitation
Launch
5 10 15
Counterattack Time (years)
Lead time Lead time Lead time Lead time
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The Profitability of Innovation Strategies
Four Influencing Factors
1. Legal protection
2. Tacitness –
complexity Profits
Value of the
from
innovation 3. Complementary Innovation
resources
4. Lead time
….RIO.
V………………….
E………………SA
Contents of this lecture
• Introduction
• Profitability of an innovation
• Ways to exploit innovations
• Competing for Standards
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Alternative ownership strategies to exploit innovations
high
Internal exploitation
[vertical integration]
Strategic Alliance
Equity
Joint venture
Own resource
committment Outsourcing
certain functions
(Out-) Licensing
Low
high low
Financial risk
Timing of innovation: to lead or to follow?
Depends on pioneer / early mover advantages vs. follower / late
mover advantages
• Can innovation can be protected by IPR, lead time advantages, secrecy,
complexity?
• What is the risk of pioneering if significant complementary resources are
required?
• Is there the potential to establish a standard?
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Timing of innovation: to lead or to follow?
PRODUCT INNOVATOR FOLLOWER WINNER
Jet Airliners De Havilland (Comet) Boeing (707) Follower
Float glass Pilkington Corning Leader
X - Ray Scanner EMI General Electric Follower
Office P.C. Xerox IBM Follower
VCRs Ampex/Sony Matsushita Follower
Diet Cola R.C. Cola Coca Cola Follower
Instant Cameras Polaroid Kodak Leader
Pocket Calculator Bowmar Texas Instruments Follower
Microwave Oven Raytheon Samsung Follower
Plain Paper Copiers Xerox Canon Not clear
Fiber Optic Cable Corning many companies Leader
Video Games Players Atari Nintendo/Sony Followers
Disposable Diapers Proctor & Gamble Kimberly-Clark Leader
Web browser Netscape Microsoft Follower
Cholesterol lowering Raisio Unilever Follower
margarine
MP3 players Diamond Multimedia Apple Follower
Contents of this lecture
• Introduction
• Profitability of an innovation
• Ways to exploit innovations
• Competing for Standards
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The world is full of standards…
Standards and strategy
What is a standard? A standard is a format, an interface or a
system that allows interoperability.
How does a standard relate to Early mover advantage becomes even more
a company’s strategy? important.
Chance of earning returns
unmatched by other type
of competitive advantage
How does a standard Once a standard has been set, displacing it
influence competition on a becomes exceptionally difficult.
(product) market?
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Types of standards
Public Private
Set by public bodies and Owned by companies and individuals
industry associations
Mandatory De facto
Set by government, enforced by law Voluntary adoption by producers
and users
Why standards 'freeze': network externalities
A network externality exists when the value of the product to an individual
customer depends on the number of other users of the product: 'law of
increasing returns'
Sources of network externalities:
Products where users are linked to a network
Availability of complementary products and services
Users' avoidance of high switching costs One of Apple's
earlier problems in
Dominance of MS PCs
Office (work in
different settings)
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Markets with networks and positive feedback tend to be
tippy
Winner ('takes all')
100
Market share (percent)
50 Battle zone
Do we have a 'winner-
takes-all' situation in
the mobile phone
standards war or is
Loser there room for several
0 standards to co-exist?
Time
Winning standard wars
Requirements in designing the strategy:
Analysis of the presence and source of network externalities: is this a
market that eventually will converge around on single standard?
Recognition of the role of positive feedback: Establish early leadership to
gain momentum
Building a 'bigger bandwagon' ('Mitläufereffekt')
Assemble allies (consumers, complementors, even competitors)
Preempt the market: early entry, fast-cycle product development, deals w
key customers, penetration pricing
Manage expectations: convince customers, suppliers and the producers of
complements that you w#oill emerge as the victor
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Winning standard wars
Key resources to win standard wars:
Control over an installed base of customers
Looks like the
Owning intellectual rights in the new technology prescription for
Ability to innovate in order to extend Apple's digital
and adapt the initial technological advance hub strategy!
First-mover advantage
Strength in complements
Reputation and brand name
QUERTY Case
• QWERTY is the public de facto standard for keyboards.
QWERTY Layout
DSK Layout
• DSK enables more efficient typing: increase typing speed by 15-25%
• Attempts to replace the QWERTY standard with the DSK standard. They all failed.
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