CPET 575 Management Of Technology Summary & Discussion Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy, by David J. Teece (1986) From the text book: Reading I-1, pp.32-48 Robert A. Burgelman, Clayton M. Christensen, and Steven C. Wheelwright, Strategic Management of Technology and Innovation, 5th edition, McGraw-Hill, ISBN 0073381543, 2009. Paul I-Hai Lin, Professor http://www.ipfw.edu/~lin M.S. Technology Purdue University Fort Wayne Campus 1 Summary & Discussion Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy, by David J. Teece (1986) 2 1
Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy Question: Why innovating firms often fail to obtain significant economic returns from an innovation while customers, imitators, and other industry participants benefits? Executive Summary (Abstract) Introduction The Phenomenon Profiting from Innovation: Basic Building Blocks Implications for Profitability Implications for R&D Strategy, Industry Structure, and Trade Policy 3 Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy Main Questions: What is the value of technological innovation? Why innovating firms often fail to obtain significant economic returns from an innovation while customers, imitators, and other industry participants benefits? 4 2
Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy Abstract Business strategy (integrate & collaborate) When imitation is easy, market don t work well (complementary assets => profits from innovation; IP?) ; a need to establish a prior position in these complementary assets 5 Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy Abstract (continue) Innovators with new products & processes which provide values to consumers may ill positioned in the market => fail Innovating firms without the required manufacturing and related capacities may die, even though they are the best at innovation Examine Implications for trade policy and domestics economic policy 6 3
Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy - INTRODUCTION Innovation firms 1 st to commercialize a new product or process The clear existence and persistence phenomenon: competitors/imitators profited more than the innovation Question 2 Why a fast 2 nd or even a slow 3 rd might outperform the innovator? 7 Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy - INTRODUCTION Exhibit 1 Explaining the Distribution of the profits from Innovation: Customers, Imitators & followers, Suppliers, Innovator (Pie Chart) Question 3 How does a firm capture the financial returns from innovation? New product/services/improved process Commercialization Joint venture, Co-production agreements, cross distribution arrangement Technology licensing (IP) 8 4
Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, & Public Policy - INTRODUCTION Exhibit 1 Explaining the Distribution of the profits from Innovation: Customers, Imitators & followers, Suppliers, Innovator (Pie Chart) Question 4 What determines the share of profits captured by the innovator? 9 THE PHENOMENON Exhibit 2 Taxonomy of Outcomes from the Innovation Process Win Innovator Pilkington (Float Glass) G.D. Searle (NutraSweet) DuPont (Teflon) Follower-Imitator IBM (personal computer) Matsushita (VHS video recorders) Seiko (quartz watch) Lose RC Cola (diet cola) EMI (scanner) Bowmar (pocket calculator) Xerox (Office computer) De Haviland (Comet) Kodak (instant photography) Northrup (F20) DEC (personal computer) 10 5
THE PHENOMENON Question 5 What are the issues involved in managing technological innovation? And Why a fast second or even slow third outperform the innovator? 11 PROFITING FROM INNOVATION: Basic Building Blocks A Framework: identifies the factors which determine who wins from innovation Three fundamental building blocks The Appropriability regime The Dominant Design Paradigm Complementary Assets 12 6
Exhibit 3. Appropriability Regime: Key Dimensions Legal Instruments Patents Copyrights Trade secrets Nature of technology Products Process Tacit Codified 13 The Dominant Design Paradigm The Preparadigmatic Stage Trial and error in market place Fierce competition on design Dominant design begin to emerge The Paradigmatic Stage Dominant design meets the needs of majority of users Competition shifts to pricing Examples The Model T Ford IBM 360 mainframe computer Douglas DC-3 14 7
Technology Adoption Process/Product Life Cycle 15 Exhibit 4 Innovation over Product/Industry Life Cycle 16 8
Complementary Assets Exhibit 5. Complementary Assets Needed to Commercialize an Innovation Core Technological Know-How in Innovation (Center) Competitive manufacturing Distribution Service Complementary Technologies Others 17 Complementary Assets Exhibit 6. Complementary Assets Dependence of the Assets on the Innovation (Vertical Axis) Dependence of Innovation on Complementary Assets Generic Specialized Unilateral dependence of assets on the innovation Unilateral dependence of innovation on the assets Co-specialized Bilateral dependence 18 9
IMPLICATION FOR PROFITABILITY Tight Appropriability Regimes Iron clad patent or copyright protection, or The nature of product trade secrets effectively deny imitators access to the relevant knowledge Complementary Assets Generic contractual; licensing its technology Specialized or Co-Specialized Assets Investment required Contractual Relationship (?exposed to hazards?) Integration (build or acquire?) Is this a right design, dominant design? Competitors (muted?) 19 IMPLICATION FOR PROFITABILITY Weak Appropriability Regimes Innovators must turn to business strategy to keep imitator/followers at bay Competitive process: Preparadigmatic Phase Careful let Basic Design float Design Industry Standard Examples: Microelectronic (IC) Design lock in when the circuitry is chosen; product modification: debugging and software modification New families of microprocessors define a new industry and software standard: basic design parameters less well defined, until market acceptance is apparent 20 10
IMPLICATION FOR PROFITABILITY Weak Appropriability Regimes Competitive process: Preparadigmatic Phase Examples: Steam cars/internal combustion engine De Haviland Comet I (world first commercial jet, http://en.wikipedia.org/wiki/de_havilland_comet ) Boeing 707 (1 st ) : Douglas (3 rd ) 21 IMPLICATION FOR PROFITABILITY Exhibit 7 Complementary Assets Internalized for Innovation: Hypothetical Case #1 (Innovation Integrated into All Complementary Assets) Core Technological Know-How in Innovation (center) Competitive Engineering Distribution Service Complementary Technologies Others Personal Computer Example Complementary Assets needed Prohibitively Expensive 22 11
IMPLICATION FOR PROFITABILITY Exhibit 8 Complementary Assets Internalized for Innovation: Hypothetical Case #2 (Innovation Subcontracted for Manufacturing and Service) Core Technological Know-How in Innovation (center) Distribution Complementary Technologies Others 23 Contractual/Integration Strategies Possible Modes acquire needed complementary assets Contractual Modes Integration Modes Mixed Modes Decisions to integrate or license Trade-offs Compromises Mixed approached 24 12
Contractual/Integration Strategies Contractual Modes Independent suppliers, manufacturers, or distributors No upfront capital expenditure to build or buy the assets in need Reduced risks and cash requirements Add credibility to the innovator: IBM PC + Microsoft MS-DOS (contractual/strategic partnering) Optimal strategy when Innovator s appropriability regime is tight, and Complementary assets are available in competitive supply Integration Modes Mixed Modes 25 Contractual/Integration Strategies Integration Modes If the innovation is not tightly protected and once out is easy to imitate => securing control of complementary assets (a key success factor) Integration consider: Time and the amount of investment needed to acquire needed complementary assets See Exhibit 9 26 13
Exhibit 9 Specialized Complementary Assets and Weak Appropriability: Integration Calculus 27 Integration vs. Contract Strategies: An Analytic Summary 28 14
Further Decision If Specialized Assets in Question 29 Implications for R&D Strategy, Industry Structure, and Trade Policy (1986) Allocating R&D Resources Small-Firm vs. Large Firm Comparisons Regimes of Appropriablity and Industry Structure Industry Maturity, New Entry, and History The Importance of Manufacturing to International Competitiveness How Trade and Investment Barriers can Impact Innovators Profits 30 15
Implications for R&D Strategy, Industry Structure, and Trade Policy (21 st century?) Are those issues still important? Allocating R&D Resources Regimes of Appropriablity and Industry Structure Industry Maturity, New Entry, and History The Importance of Manufacturing to International Competitiveness How Trade and Investment Barriers can Impact Innovators Profits What are Implications of Internet age to innovations in 21 st century? Open Innovation model? R&D outsourcing Global Manufacturing Global distribution, services 31 SUMMARY Question: Why innovating firms often fail to obtain significant economic returns from an innovation while customers, imitators, and other industry participants benefits? The Phenomenon Lesson learned How to Profiting from Innovation: Basic Building Blocks Use the three building blocks: the appropriability regimes, the dominant design, complementary assets Implications for R&D Strategy, Industry Structure, and Trade Policy 32 16