©2009 Prentice Hall 10-1 MGMT 738 Management of Technology Lecture 5 Capturing Value from...

©2009 Prentice Hall10-1

MGMT 738 Management of Technology

Lecture 5

Capturing Value from Innovation


Learning Objectives

1. Define appropriability2. Explain why most innovations are easy to imitate3. Understand when and how controlling a key resource will allow

you to appropriate the returns to innovation4. Explain when and how economics of scale allow you to

appropriate the returns to innovation5. Understand when and how moving up the learning curve allows

you to appropriate the returns to innovation6. Explain when and how establishing a reputation will allow you to

appropriate the returns to innovation7. Understand when and how obtaining architectural control will

allow you to appropriate the returns to innovation8. Explain when being a first mover is an advantage and a

disadvantage9. Understand the role of complementary assets in appropriating the

returns to innovation


Appropriability Mechanisms

• Companies need to deter imitation to appropriate the returns to investment in innovation

• Non-legal barriers to imitation are valuable because: Legal barriers cannot always be obtained Often more effective than legal barriers Legal and non-legal barriers are not mutually exclusive Degree of legal protection is of uncertain value in some fields Technological change has weakened the value of legal barriers in some

industries• As a technology strategist one needs to learn how to employ non-legal

mechanisms by: Controlling key resources Exploiting economies of scale Moving up the learning curve Building a brand name reputation Establishing architectural control Being a first mover


Effectiveness of Barriers to Imitation


Controlling Key Resources

• Controlling key resources is most effective when resources are rare and are a rival good (keeps it from being used by two companies simultaneously)


Controlling Key Resources


Establishing a Reputation

• Reputation matters more in industries that serve consumers than industries that serve businesses because businesses are less likely to be swayed by perceptions than by the economics of a transaction

• By building a reputation, companies can attract customers more easily and keep them from shifting suppliers

• Brand names are more effective at appropriating the returns to investment in innovation in industries that serve consumers, particularly those that are strongly affected by perception


Obtaining Architectural Control

• Architectural control allows firms to limit compatibility of their products to companies that are not a competitive threat, to bias compatibility to their own products, and to control the type and pace of product improvements


The Learning Curve

Experience and Learning Curves


Cost Effects ofNew vs. Old Technology

Old Technology

New Technology

1MillionUnits

2MillionUnits

4MillionUnits

8MillionUnits

Co

st p

er U

nit


Exploiting Economies of Scale

• The reduction in unit costs that occurs as production volume increases

• By exploiting economies of scale, companies can reduce their costs to less than those of their competitors, and make entry by other firms unprofitable


Moving up the Learning Curve

• By moving up the learning curve, companies become more efficient at making products and develop product features that competitors cannot match

• Learning curve advantages exist only if learning is proprietary and firms are good at learning


Exploiting a First Mover Advantage (Lead Time)

• The advantage that accrues to a company from being the first to enter a market

• Often results in higher market share and higher profits than late entrants


First Mover Advantages

• Help to appropriate the returns to investment in innovation in several ways: Obtain control over key resources Target the best customers in the market Exploit switching costs, or the cost to

customers of changing suppliers


Late Mover Advantages

• Many late movers have been more successful than early movers because: Benefit from the investments that the first mover

makes in creating supply infrastructure and distribution channels

Can design products that correct the mistakes that the first mover has made in meeting customer needs

Leapfrog ahead of the first mover’s technology Benefit from the investments in research and

development that the first mover has made Entry to the market is often better timed to take

advantage of the development of complementary technology


Successful Companies That Were Not First Movers


First Mover or Late Mover?

• First movers do better in industries where:1. Products and services are expensive, cannot be

valued easily prior to purchase, are durable, and are infrequently purchased

2. Advertising-intensive industries, and industries in which customers learn very little or very slowly about new products

3. Products require distributors to hold large stocks, additional parts, or complementary products to satisfy the needs of end users

4. Network externalities exist5. Patents are more effective6. Economies of scale are very large


Mechanisms to Appropriate Returns


Teece’s Model

• Based on the idea that imitators are more successful than innovators when innovations are easy to imitate, a dominant design has emerged in an industry, and imitators control the key complementary assets in the industry

• Complementary assets are upstream or downstream assets that are used to develop, produce, or distribute an innovative new product or service

TEECE MODEL

Difficult to make money

Holder of complimentary assets

Inventor Inventor or party with bargaining power

High

Low

Available orunimportant

Tightly held and important

Complimentary Assets

Imit

abil

ity


Teece Model


Difficult to Imitate

• In industries in which innovations are difficult to imitate, innovators tend to capture the returns to innovation


Easy to Imitate, No Dominant Design

• In industries in which new products and services 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


Easy to Imitate, Dominant Design

• In industries in which new products and services are easy to imitate and a dominant design has been established, innovators’ success depends on control of complementary assets

• Complementary assets are: Generic if they do not need to be modified to fit the innovation Specialized if they need to be modified

• When innovators do not control specialized complementary assets, intellectual property protection is weak and a dominant design exists, being an imitator is a better strategy than being an innovator

• New firms typically cannot adopt an imitation strategy, making their success dependent the effectiveness of their innovation strategy

• Effectiveness of an innovation strategy depends on whether the industry conditions make it easy for them to cooperate or compete with established firms

• If the industry conditions favor neither start-up cooperation nor start-up competition, then start-ups are unlikely to succeed in the industry


Imitator Strategy

©2009 Prentice Hall 10-1 MGMT 738 Management of Technology Lecture 5 Capturing Value from...

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