TOPIC2:

Beingfirstonthemarketwithaninventiondoesnotnecessarilyguaranteehighprofits.Explainthe
possiblereasonsforthis,referringtotheoreticalrationalesandexamples.
Introduction
Theimportanceofinnovationanditsstrategicroleinbusinesshasbeenincreasingdiscussedand
researchedtounderstandhowitislinkedtocompaniessuccessintermsofmarketshare,profit,
competitiveness,andlongevity.
AsispointedoutbyBurgelmanetal(2004),Thereisanimportantdistinctiontobedrawnbetween
inventionandinnovationwhichprovidesthefoundationforunderstandingwhyinventiondoesnot
alwaysleadtohighprofits.
Burgelmanetalarguesthatthecriteriaforsuccessofinventionsistechnicalratherthancommercial
whereas,throughinnovationthefirmseekstogainareturnontheinvestmentintheinventionby
applyingthediscoverytomarketneeds.Hencetheimportanceofdefininginnovationwhich
Burgelmanetalstatesis:
..theoutcomeoftheprocess,whichcanbedefinedasthecombinedactivitiesleadingtonew,
marketableproductsandservicesand/ornewproductionanddeliverysystems.
(Burgelman,Christensen,&Wheelwright,2004)
Therefore,itcouldbearguedthatinventionisthefirststepinthedevelopmentofamarket,but
innovationshapesthemarketanddeterminesitssize,growth,andlife.Theworkofseveraltheorists
canbedrawnupontounderstandwhysomecompaniessucceedinprofitingfromtheirinventions
whileothersdonot.
1.TeecesKeyDeterminants
Oneofthekeytheoristinprovidinginsightintohowinnovationworkstoprovideaprofitableoutcome
isDavidTeece,(1998).Heproposedtwomainfactorswhichinfluenceacompanysabilitytoprofit
frominnovationi)Itsabilitytotranslatetechnologyintomarketableproductsorprocessesandii)Its
abilitytodefenditsmarketadvantagefromimitators.Teecealsoproposedaframeworkforthe
analysisofthedeterminantsofprofitsfrominnovation,whichconsistsof:
1)RegimesofAppropriability
2)Thedominantdesignparadigm
3)Complementaryassets
1.3RegimesofAppropriability
Thisreferstothelegalandtechnologicalenvironmentalfactorsthatdeterminehowprofitablean
innovationbecomes.Themostimportantoftheformerarepatents,copyrightsandtradesecrets,
whilethemostimportantofthelaterareproduct,process,tacitknowledgeandcodified
knowledge.Thispointcanbesupportedandillustratedbythemusicindustrywheretheintellectual
propertyofmusicalartistsiscopyrighted,thecodifiedknowledgewouldbeproceduresforusing
recordingtechnologywhichisavailableinmanualsandontrainingcourse.Thetacitknowledge
wouldbestylisticinnature,suchastheproducerssignatureuseofinstrumentationortheunique
playingstylesofamusician.
Wheretheregimeofappropriabilityoffersadequateprotectionfortheinnovation,theregimeis
describedasbeingtight,whereaswhentheinnovationiseasilyimitated,theregimeisdescribedas
weakinTeecestheory.
Inthemusicindustrytheregimecouldbedescribedasweak,inrelationtotheeffectivenessoflegal
protections.Althoughmostoftheartistsworkisaffordedsystematiccopyright,itiscopiedand
sharedliberally,nowadaysviatheinternetdespiterecordcompaniesmakingconcertedeffortsto
haltthispractice,withpatchysuccess.
3.2TheDominantDesignParadigm
TeecereferstotheworkofUtterback,AlberthanyandDosiinnotingthattheemergenceofthe
industrystandardsintermofdesign,isaprocessofcompetitiontobeacceptedbythemarketas
thepreferreddesign,inotherword,thedominantdesignistheonewhichdominantsthemarket
place,suchastheModelTFordandtheIBM360.
AccordingtoTeece,theacceptanceofthedominantdesignhappenswhenscientificontaxonomyof
outcomesfromtheinnovationprocess.OneexampleofthefollowerimitatorthatwinsisIBMandits
modelofthepersonalcomputer,asopposedtheinnovatorloser,EMI.Theyillustratethefactorthat
thekeytomarketsuccessisnotinnovationonitsown.Thereasonwhyonefirmsdesigndominants
anothersisnotdowntotechnicalspecificationorperformance,buttothecombinedeffectof
importantstrategicdecisionsthatwillbeaddressedlater.
Teecearguesthatinordertobecomethedominantdesignafirmneedstohaveacautious
approachtothemarketingofitsdesigns.Abasicdesignshouldbereleasedinthepreparadigmatic
stagetogaugemarketresponsethoroughevidenceoftheemergingindustrystandardsanddesign
preference.
Thedominantdesignforsmartphonehasbecomethetouchscreeninterfacewhichcombinesmusic,
phone,andinternet.HoweverthiswasanevolutionaryprocesswithApple,Samsung,HTC,Nokia
andBlackberrydesignsconvergingtobecomemuchmoresimilarnowthantheywereintheearly
stagesofthesmartphonemarketdevelopment.
Teecealsonotesthattheincrementaldesignapproachismostimportantwhentheappropriability
regimeisweak,whereasuccessfuldesignwouldbeeasilyimitatedbyrivals.
Thecostofprototypingandclosenesstothemarketarealsoakeyfactorsinthedeterminationofthe
dominantdesign.Lowcostprototyping,whichdependsonthetechnologyandclosenesstothe
marketthroughorganisationaldesign,areconducivetowinningattheendofthepreparadigmatic
stage.
1.3ComplimentaryAssets
Complementaryassetsrefertothecapabilitiesorassets,whichmaybecodifiedortacit.Marketing,
complimentarymanufacturingandaftersalesservicearecommonexamplesofwhatTeeceis
referringto.
SomeexampleswhichillustratetheimportanceofcomplementaryassetsareApplewhichusesof
ARMprocessors,itsretailstorewhichareknownfortheiroriginaldesignandapproachtocustomer
service.Likewise,gamingconsolemanufacturerssuchasSonyandNintendo,wherethesuccessof
thehardwarereliesontheavailabilityofappealingsoftware,intheformofcompatiblegamesfrom
gamingsoftwarecompaniessuchasElectronicArtsandUBIsoft.
Inaddition,Teece1986proposedamodelforcategorisationofcomplementaryassetsintogeneric,
specialisedandcospecialised.Thisissignificantinthecompetitionforthemarketacceptanceas
themanagementofthespecialisedassetsisakeypointofcompetition.Acurrentexampleofthis
wouldbeapplicationsforsmartphoneplatforms.AppleandSamsunghavedifferentapproachesto
thewayinwhichtechnologyforthedevelopmentofapplication,Appleownsitsownoperatingsystem
whereasSamsungusesanopensourcetechnologycalledandroiddevelopedbygoogle.This
illustrateshowthestrategicchoicesofcompaniesbecomepartoftheircompetitiveposturingand
image.Customersreacttotheperformanceofthetechnologybutalsotothepolitical,socialand
culturalpreferencesnormscreatedbycompetingmodelsuntilonemodeldominatestheother.In
thecaseofApplesiosvsGooglesAndroid,,whichwerebothreleasedin2007,Androidhas
dominatethemarketwith79.3%shareofthemarketasopposedtoios13.2%.hasbeenlargely
duetothefactthatAndroidisopensourceandavailabletoanydevicemanufacturerwhereasiosis
onlylicensedforAppledevices.ConsequentlyasurveyinAugust2013foundthatAndroidwas
preferredby71%ofthemobiledeveloperscommunity.
(DeveloperEconomicsanalystreportQ32013http://www.visionmobile.com/DevEcon3Q13
RetrievedJuly2013)
2.SecrecyversusAlliances
TheworkofTidd(2013)andPisano(2006)highlighttheimportanceofthedevelopmentsinthe
appropriabilityregimesadoptedbythefirminachievingitsstrategicfinancialaim.WhilePisano
referencedMicrosoftversuslinuxin2006,Tiddreferstoopensourceregimes,VonHippelrefersto
democratizationofinnovationandClaytonChristensenreferstoopeninnovation.
VonHippelarguesthatdemocratisinginnovationaswithopensourceiscommerciallyattractive
propositionasleadusersareaheadofmarkettrendsandshouldbesoughtoutforitssocial
efficiencyarguingthathidinganinnovationasatradesecretisnotasuccessfullongtermstrategy.
Whereassecrecyandpatentsworkforthepharmaceuticalindustry,itappearsthatopenmodels,
alliances,collaborationandlooserformsofappropriacycanalsobesuccessfulstrategicoptions.
PisanousesMerckGeneindextoillustratethispointasbycreatingtheindextostimulateresearch
intocholesterolloweringdrugsresearchitsimultaneouslypreventedprivatisationofgenesthatcould
blocktheirfutureresearch.
2.Tiddsninefactors
JosephTiddlaterexpandedontheworkofTiddtoidentifyninefactorsthatinfluenceacompany's
abilitytoprofitfrominnovation
sher1972,Alsoshedslightonthefundamentalreasonswhyinventiondoesnotalwaysleadto
marketsuccessthroughhighprofits.
Invention,likeinnovation,willprovetobeasmuchasocialasacognitivephenomenon.John
Howell,20,usestheinventionofthelasertoillustratethemanystepsandcreditsinitsinventionand
innovationandthattheintendedapplicationoftheinventiondoesnotnecessarilydeterminethe
economiccriteriaoritssubsequentapplication.
(Howells,2005)
Thesupportforfirstmover,isthatthereareadvantagesoverfollowers.
Converselythereareadvantagesofbeingafollower.
PisanoreferencetoPFI,ProfitfrominnovationwiththeexamplesofGooglewhichtookoverthe
marketfromYahoo,whichitselfwasanimitatortoLycosandexciteintheinnovationofthesearch
engine.
(Pisano,2006)
Thehistoryofstrategicalliances
AccordingtoPisano,priorto1980sinnovationtookplacethroughverticalintegration.Thenfromthis
pointAmericanfirmbegantoexperimentwithalliancesandothercontractualformsofcollaboration,
suchaslicensingoftechnology.Thisphenomenaoccurredfirstlyinthetechnologysectorofthe
economythenspreadtoothersectorssuchaspharmaceuticals.Thiswasthebirthofthetrendto
globalisationasoncerestrictedmarketssuchasChinabecameopentotheWest.
PisanoalsohighlightsTeecesimportancetothedevelopmentoftheoriesrelatingtothe
understandingofthesestrategicalliances.
TheDeltaModel
HaxandWildereinterpretationofPorters5forces,theDELTAmodel,isausefultooltolookatthe
strategicroleofinnovation.Itsobjectivebeingtoassistmanagersarticulateandimplementeffective
corporatebusinessstrategy.
(Hax,2001)
AccordingtoHaxandWildeandimportantpartoftheprocessisthedefiningtherelevantstrategic
positioning.Howfirmsattract,satisfyandretaincustomersinrelationtoitscompetitorsinthe
market.Intheadaptiveprocessofstrategy,innovationisseenasoneofthreecentralprocesses,the
othertwobeingoperationaleffectivenessandcustomertargeting.
ThecentraltenetofstrategyisECONOMICVALUECREATION.
Example
Intelandthemicroprocessor
Disruptivetechnology/innovation
Schumpeter
Christensen
(Pisano,2006)
Digitalisation
Theimpactofdigitisationasadisruptivetechnologyonseveralindustrymodels.Music,
AccordingtoPisanoonefactorwhichwasnotconsideredintheoriginalTeecepaperwasthe
benefitsoflooseAppropriabilityregimesasinopensourcelicensingregimes.
Thisshiftisalsoneedstobeaddressedbycompaniesthathavetraditionallyfollowedtheopposing
strategyoftightAppropriabilityasithaschangedthecompetitivedynamics.Therearecultural
implicationsfortheconsumermarketasthedemocratizationofinnovationisapoliticalandsocial
force.Consumernowrespondtothisargument.
OtherImplications
Thechannelsstrategyispartofthefirmsmarketingstrategyandisimportantinhowaccessiblethe
firmsproductsaretothecustomers.Teecearguesthatthisiscriticaltoinnovatorssuccess.The
considerationhereistocorrectlyidentifywhichelementsofspecialised,complimentaryassets
shouldbefullyintegratedwiththeaddedcapitalinvestmentexpense,andwhichshouldbe
contractedout,toachievecostsavings.
Teecehassimplifiedhistheoryintoatwoquadrantsandadecisionprocessflowchart.
Thefirstquadrantexploretheoutcomesoftimerequiredtopositionthecompanyscomplementary
assetcapabilitieswiththeinvestmentrequired.Thesecondquadrantillustratestheoutcomesofthe
capitalinvestmentofaninnovationandhowcriticalitistothefirm
Theprocessflowproposesadecisionmakingmapforchoosingthestrategicdecisionofintegration
orcontractingout.Forexample,theculminatingdecisiononwhethertointegratethecomplimentary
assetsshoulddependonwhethertheimitatorsarebetterpositioned.Iftheyarenotthenthe
innovatorshouldintegrate
AccordingtoTeeceIBMPCisanexampleofafollower/imitatorthatwasabletosuccessfullyout
manoeuvretheinnovatorApplewithitssetofcomplimentaryassetsarounditsPC.TeececallsIBMs
approachanInducedcontractualapproach,whichwasanopensystemofarchitecturemakingthe
disseminationofsoftwaredevelopmentmuchmorerapidandwidespreadthatmayhavebeen
achievablethroughintegrationorcontracts.
Anexampleofaninnovatorthatusedatightappropriabilityregimetodominatethemarketis
NutrasweetbySearle.AnimportantreasonforthisisTheFDAapprovalprocesses(thegovernment
regulatorfortheUSAfoodindustry.)Searleinvestedintheprotectionofitsinnovationby
strengtheningitspatentprotectionthisallowedthefirmtimetoincreasethebarrierstocompetition
anditsdominanceofthelucrativeinnovation.Itstrengtheneditsgriponthemarketwerebycreating
adistinctivebrandnameandlogo,licensingtheuseoftheproducttoothermanufacturers,and
developingotherbrandssuchasequaltoexpandthemarketforitsinnovation.Finallytopreparefor
theexpirationofthepatentprotectionSearlehascollaboratedtoacquiremoretacitspecialised
complimentaryassetsintheformofbiomedicalprocessknowledgewhichwasintegratedtoits
productionplanttoachieveeconomieswhichwouldbedifficultforimitatorstocompetewith.
Theresearchanddevelopmentapproach
ThewayinwhichthefirmorganisesitsR&D,accordingTeeceisalsofundamentaltoasuccessful
outcometoinnovation.Whetherthefirmcaninvestinemergingtechnologiesthatcanbeeasily
protectedwithexistingintellectualpropertylaworcospecialisationassetsthatthefirmalready
possesses.
Thesizeofthefirmsresourcesthereforeiscriticalinthefirmsstrategicdecisionmaking.The
choiceofR&Dinvestmentwhichgivesthefirmasustainablecompetitiveadvantage.
Onecurrentexampleofhowfirmwithcapitalresourcesexpandrapidlyandachievelargershareof
themarketisbyacquisitionofinnovativecomplementaryfirms.Thesesacquiredfirmmaynotbea
directthreattothelargefirmbutmayallowthelargefirmtoenhanceitscompetitiveposition.
ThiscanbeillustratedbythestrategyofGoogle,whichacquiredsomebignameinnovatorssuchas
MotorolaandYouTube,andatleast100others.
AccordingtotheGoogleswebsitethebenefitsofthisstrategicdecisionwere.
a) TogetherwithMotorolamobilitytheycanaccelerateinnovationandchoiceinmobilecomputing,to
thebenefitoftheconsumer.
b) Motorolamobilityhadahugeportfolioofpatentsthatwouldhelpprotecttheandroidecosystem.
Thiswasseenasvitaltocompetitioninthemobiledevicespace,toensurethatthehardware
manufacturers,mobilephonecarriers,applicationdevelopersandconsumersallhadchoice.
(GoogleFactsaboutGooglesacquisitionofMotorola,2013)
Facebookhoweverisanexampleofaninnovatorthathasbeenabletobecomeamarketleaderand
withstandthecompetitionfromimitatorsthroughrapidtechnologicalinnovationofitsoriginaldesign,along
withthecultural,politicalandsocialsignificanceofthebrandsimage.Itisaphenomenainitsownright,
thefactthatitbecameahouseholdglobalbrandinacomparativeshortspaceoftime(10years).Inmany
respectsitgoesagainstmanyofTeecesassumptionsaboutweakappropriability,complimentaryassets.
FacebookdominanceofsocialmediaalongwithTwitterhashadahugeboostfromtheprominencein
modernculture.
Industrymaturity
Teecepointstotheshiftinthesignificanceoftheassetsovertime,awayfromcontractedorco
specialisedassets,theimportanceofthecospecialisedassetsbeingdrawnintothecorporation,making
itmoredifficultfornewentrants.Teecearguesthatthisisthereasonforincreaseinthepopularity.Healso
highlightstheimportanceofthehistoricalperspective,notingthatthemodernenterprisestructurechanges
inrelationtotherequirementsofthetime.
TeeceusestheexampleofIntelandthemicroprocessortoillustratethispoint.ItsCEOMichaelMoore
notedthatasimitatorshavecaughtinnovators,thereislittlecompetitiononthetechnologicaladvantages,
andthereforestrengthinmanufacturingandothercapabilitiesmustbeharnessed.Additionally,thestrategy
offocusontheinnovationdesignwhileoutsourcingthemanufacturingtothefareast,isseenasan
unsustainablecompetitivestrategy.
TeecealsoviewsMilesandSnowreferencetodynamicnetworksasapotentialthreattosustainable
competitiveadvantage.
TheroleofTradeBarriers
ThepoliticalforcesinthefirmsmacroenvironmentastheorisedbyMichaelsPorterhavebeenwidely
acceptedtheorytothefirmsstrategicoutlook.LikewiseTeeceseetheimplicationofgovernment
regulationsintheformofprotectionforlocalfirms,aspowerfuldeterminantofsuccess.
Additionallythestanceofthegovernmentcandeterminetheoutcomeoftheinternationaldistributionof
profitsfrominnovation.Whenspecializedorcospecializedresourcesareinternationallydistributed.
Teecereferstoanationsabilitytocapitalizefromcomplimentaryassetsasbenefitingfromspillover
effectsofinnovation.Thisisanecessaryifthereisnorigidprotectionofintellectualcapital.
Thereforetheoverallcompetitivenessofafirmonrelationtoprofitingfrominnovationisnotsimplybased
onitsproductsbeingbetter,butanimportantcriteriarelatestoitsabilitytomanagetheboundariesofthe
firminrelationtocontrolofspecialisedandcospecialisedcomplimentaryassets.Thereasonforthisis
thatthecostofmanufacturingandintellectualpropertyrightstiedinwithcomplimentaryassetsultimately
impactlongtermviabilityandcompetitivenessoftheinnovation.Othermacroenvironmentalfactorstobe
consideredbesidesthebalancingofsupplierpoweraretheinternationaldimensionsofthefirms
competitionandwherethefirmscomplimentaryassetsareinaforeign,thelawswhichgovernthat
countryshouldbeanalysedtoensurethefirmislosingtoomuchofleverageinrelationtoits
complimentaryassets.
GlobalEconomicGlobalEconomicPowerHowdoesthisrelatetohighprofitsfroman
invention?
SeeArchibugi,Howells,andMichieInnovationPolicyinaGlobalEconomy
TheimportanceofStrategicdecisionmakingintheeconomicsuccessofaninvention.