What are the conditions of profitable innovation?
New technology?
- suitable market?
- appropriation of profits possible?
- innovation possible
- appropriation of profits possible?
New market?
- Suitable technology?
- appropriation of profits possible?
- innovation possible
- appropriation of profits possible?
Who benefits from an innovation?
- Innovator (Selling)
- Imitator (Marketing imitation - save R&D costs)
- Suppliers and complementors (selling large quanteties and addons)
- Customer (benefit from the value)
What are the customers benefits? (Graph)
Examples of innovator vs imitator?
Innovator Follower / imitator
Win: Dupton (Teflon) IBM PC; Seiko Quartz
Lose: RC Cola, Xerox Kodak vs. Polaroid
What are the three factors of profitable innovation?
- Appropriability regime (Availability of strengt of legal protection, viability of secrecy, characteristics of underlying technology)
- strong
- high costs for imitation
- secrecy (Coca cola recept)
- patents (Aspirin)
- weak
- strong
- Life cycle phase (
- pre-paradigmatic
- paradigmatic
- Complementary asset
- generic (do not need to be tailored - genral like electiricty for pc)
- specialized (Trucks convert from containers to flat beds at low costs)
- co-specialized (Mazda rotary engine (innovation) needs special repair facilities)
What are advantages and drawback for complementary assets in terms of contraction or integration?
Contract:
- Pro: Lower capital needs; Reputation gain for smaller Partner
- Con: Difficult for specialized assets; dependence on contract partner; imitations become easier
Integration:
- Pro: Makes imitation more difficult
- Con: Time-consuming; capital-consuming; difficult to reserve
Why is contracting with specialized complementary assets difficult?
Incomplete Contracts:
- All contracts are incomplete: not all future contingencies can be taken into account
Hold-up:
- If one partner to a contract makes specific investments, a “hold-up” problem can arise
Example:
- A supplier invests in machines to manufacture an input for an innovative product. The machines can not be used for any other purpose. The supplier is in a weak negotiation position
- Once the investment has been made, the buyer could, e.g., complain about specification not being met, request a discount, and threaten to cancel the contract
Implication:
- Anticipating the hold-up, the supplier will not be willing to make large
investments
Complementary assets: contract or integrate?
Innovation requires access to complementary assets for commercial use?
- No: Commercialize immediately
- Yes:
- Complementary assets spezialized?
- No: Contract
- Yes: Appropriability regime weak?
- No: Contract
- Yes: Spezialized assets critical?
- No: Contract
- Yes: Cash position ok?
- No: Contract
- Yes: Imitators competitors besser positioned?
- Yes: Contract
- No: Integrate
What is Teeces Model?
When should a technology-based entrepreneur co-operate or compete with existing firms?
Go through the markets for products
- Compete with existing products
- Complement existing products
- Ability to acquire complementary assets to ensure that innovation offers novel customer value proposition
- Incumbents may be risk-adverse and slow to respond
- Product market entry by new firms
- Be aggressive, quick and paranoid
- Manage many factors – marketing, manufacturing, sales and service
- Establish a market presence
- Persuade customers of novelty of offering
- Avoiding detection by incumbents
- Gaining access to enforceable IPR
Go through the markets for ideas
- Sell ideas
- Sell your company
- Make alliances
- Co-operate with other firms by signing agreements for the commercialization of the idea
- Everything is in the price the new firm gets for the idea – sell high and go to the beach!
- Can be hazardous – the threat of competition from incumbent may hang in the air
- Different types of co-operation strategy
- License technology to one or more buyers
- Sell firm to incumbents
- Joint ventures or strategic alliances
Whate are the benefits of cooperation?
- Shares the potential benefits with others – less competition for Schumpeterian rents
- Allows new firms to build on other firms existing competencies
- Avoids costs of catching-up
- Many firms are skilled users of new firms in their innovation strategies – GE acquires a new firm every day!
What are the risks and costs of cooperation?
- Paradox of disclosure – willingness to pay depends on their knowledge of the idea, yet the knowledge of the idea implies that potential buyers need not pay for it
- Without IPR, buyers can claim they knew it already
- Bargaining power of new firms – are their threats credible?
- Finding partners and negotiating with them can be expensive and time consuming
