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March, 2004 © LINEN 1 A Model to Extract, Capture and Protect Value coming from Innovations of Small &/or New Innovative Companies (SNIC) HEC LINEN – INPI M. Santi (HEC) in partnership with H. Gasiglia, S. Reboud, A. Sabouret and with the support of A. Bachani
March, 2004 © LINEN 2 Introduction: objectives, founding concepts, methodology & mode of operation of the model
March, 2004 © LINEN 3 Objectives and Subjects dealt with This model was developed to: allow Small or/and New Innovative Companies (SNIC)SNIC to extract maximum value/profit from the innovations that they engender by adopting a development mode (internal or external) which is most appropriate for themdevelopment and to anticipate and define the best Intellectual Protection (IP) strategyIntellectual Protection However, this model can easily be extended and applied to other situations: innovations of large companies, valuation of a patents/innovations portfolio…
March, 2004 © LINEN 4 Directions for use of this Model Acronym, Action buttons, Help….or how to use the model and navigate within it : Use the Note function to find detailed explanations and comments of each slide this button enables the user to access a detailed content of the slide in action Glossary provides the user, through an internet link, the definition - and sometimes the illustration - of the underlined wordGlossary this button should be clicked to follow a pre-defined path either related to the configuration of the innovation or in case of junction this action button allows, after the use of one of the 3 previous buttons, to return to the original slide signals the existence of a mini case which illustrates the concept or approach used in the slide
March, 2004 © LINEN 5 At the heart of the model: The Concept of RentRent Rent: a super-profit linked to an abnormal competitive situation (market or asset monopoly) that a company enjoys in a sustainable way competitive situation Rent and innovation –The innovation allows the creation of a competitive advantage which generates a rate of potential profit > the industry norm competitive advantage norm –Only the innovation can benefit from a strong and lasting legal protection, creating a sustainable monopoly –Depending on the nature and type of innovation, the magnitude and the value of the rent will differ Rent Innovation
March, 2004 © LINEN 6 - - - + ++ Volume of the rent Profit Rate of the rent Duration of the rent The 3 Components of Rent Rent Configuration on Vol / Rate / Duration Magnitude of the rent = Vol x Rate x Duration
March, 2004 © LINEN 7 Typology: Rent configurations of an innovationconfigurations duration rate volume ++– duration rate volume ++– ++ volume rate duration rate volume ++– duration rate volume ++– 1. Dwarf 3. Gadget 6. Optical Trap 2. King of petrol 4. Joker duration rate volume ++– 5. Oasis
March, 2004 © LINEN 8 Gradual Erosion of the rent Type of innovation Insertion of the innovation in its environment, which generates friction effects due to the competitive contextenvironment Insertion of the innovation within the business and of the innovator characteristicsbusiness Potential Rent Potential Rent of the innovation Appropriable Rent Appropriable Rent for the innovator Residual Rent Residual Rent of the innovation
March, 2004 © LINEN 9 Approach and a Generic Model 1 – The innovation & its characteristics Type, magnitude & characteristics of the innovation & their effects on the rent: its volume its profit rate its duration 3 – Insertion of the innovation within a business RiskRisk analysis, friction & capturing effects on the rent of:frictioneffects attractiveness of the business 3.2 competitors reaction 3.3 competitive situation of the innovator 3.4competitive situation 2 – Insertion of the innovation within its environment RiskRisk analysis and friction effects on the rent of:friction effects demand-client (volume effect) 2.1 business chain (profitability effect) 2.2business chain substitutes (duration effect) 2.3substitutes complementors (global effect) 2.4complementors regulations and lobbying forces 2.5 Variables of the model Magnitude & configuration of the rentrent - -+ - -+ - -+ 3 – appropriable rent that may be captured by the innovatorappropriable rent 3 1 2 2 – residual rent, after the friction effects due to the economic contextresidual rent 3 1 2 1 – potential rent that the innovation is able to generatepotential rent 1 2 3 Development (valorization) & protection strategies(4) The analysis should be dynamic Autonomous development Abandon License-out Co-operative development ProtectionProtection Sell-out
March, 2004 © LINEN 10 Part One: Assess the potential rentpotential rent Analysis of the components of the potential rent in order to assess its magnitude and to spot its configuration Potential Rent Binem, IRSE300, OpenVox et PAC,
March, 2004 © LINEN 11 Assessment and Classification of the potential rent This first step of the model must be carried out whatever the innovation: first estimate the potential rent of the innovation thanks to the assessment - volume / rate / duration - tables that follow then take care to clearly identify 2 characteristics of the innovation that will have an impact on the whole analysis: standalonesystem the standalone or system nature of the innovation (effects on recommendations)standalonesystemstandalone system the existence of one or multiple business application domains for the innovation and finally come up with the configuration of the innovation potential rent that will structure the future path to be followed within the generic model Potential Rent
March, 2004 © LINEN 12 What is the nature of the innovation? Innovation Type STANDALONE STANDALONE Isolated or solo STANDALONE STANDALONE SYSTEM SYSTEM Component within a system, SYSTEM SYSTEM Substitution in an existing market It improves without significantly changing… and integrates in… ….a system & a network the dominant standardthe existing system: substitution of the existing component without changing the others (the architecture may possibly be modified) 1 – Harder & Better 2 – Meccano It creates a new standard… and rebuilds that eliminates the dominant standard that disqualifies the existing system and replaces it with a new one 3 – New Player4 – New Deal Creation of a market It creates a new market / business… …or constructs by introducing a new standardby offering a new system 5 – New Frontier6 – Full Monty Potential Rent Back to : Profit rate assessment Sacrifices CPUV substitution Complementors unavoidability The IP claims about the innovation may facilitate the identification of its type
March, 2004 © LINEN 13 Estimate the volume of the potential rent Potential Turnover (Volume) Very weakWeakMediumStrongVery High Business diffusion Business diffusion potential : the spectrum of potential applications is… Very limited (1 niche) Limited (2 or 3 niches) Medium (more than 1 large application) Large (several applications) Very large (multiple applications) Geographic diffusion Geographic diffusion potential: the natural market of the innovation is… Purely national European or regional Developed countries Developed countries + some developing ones Worldwide Potential size of the client-marketsPotential size of the client-markets: the size of the addressable market of the innovation, once in a mature phase, annually amounts to… < 50 million 50–200 millions 0.5 billion 1–2 billion d' > 3 billion Exploitation Limitation: The claims of the existing patents prohibit… All zones & application domains The key zones & application domains Certain application domains or zones Very few elements IP not existing / maintained. Freedom to operate Summary Value - ++ Reboud: Éviter les valeurs moyenne en synthèse Reboud: Éviter les valeurs moyenne en synthèse Potential Rent A solid IP policy can help extend the spectrum of application domains
March, 2004 © LINEN 14 Estimate the profit rate of the potential rent Profit Rate Very weakweakMediumStrongVery strong Mode of generation of the innovation: innovation was developed… In isolation from the market (except nuggets) With suppliers With Research Centers With clients With a large & diverse network Type of innovation: the innovation type is … Harder& Better Meccano New Player New Frontier New Deal Full Monty Nature of previous protections possibly limiting the profit rate potential … Disclosed, the innovation is public Negotiation with the patent holder is possible An improved patent is possible to be filed The innovation is free from any existing (or pending) form of protection. Freedom to operate Summary Value - ++ Potential Rent For more details on the type, click Upstream protection of innovation is a sine qua non condition
March, 2004 © LINEN 15 Potential duration of exploitation Very weakWeakMediumStrongVery strong Technological foundation of the innovation: the technological bases of the innovation are… Applied research & sciences Fundamental research & sciences Simple Process Original combination of techniques New dominant dominant design New technological platform New scientific paradigm Innovation intensity Innovation intensity of the application domain: the frequency of innovations & patents in the industry is… Very highHighMediumLowVery Low Technical imitability Technical imitability of the innovation: the natural base of the innovation makes copying… Very easyEasyNot very easyDifficultVery difficult Legal imitability: the value of the protection makes copying… Very easyEasyNot very easyDifficultVery difficult Summary Value - ++ Estimate the duration of the potential rent Potential Rent
March, 2004 © LINEN 16 Position the innovation on the potential rent components: Summary Potential Rent - - - + ++ Volume of the rent Profit Rate of the rent Duration of the rent
March, 2004 © LINEN 17 Potential rent of the innovation: Which Configuration?Configuration duration rate volume ++– duration rate volume ++– Potential Rent Dwarf : Dont keep on running the analysis, go directly to the recommendations & come to the conclusion that this innovation presents no possible development (valorization). …and which path to follow within the model Dwarf Path - always click on this button Gadget : Make sure that the profit rate stay significant (Part 2.2, & possibly 2.4 & 2.5 of the model, then 3.2) before analyzing the capability of the SNIC to capture this rent quickly (Parts 3.3 to 3.5 dealing with competition) Gadget Path – always click on this button duration rate volume ++– Oasis : First ascertain the true duration of the potential rent (Part 2.3 & possibly 2.4 & 2.5) then its profit rate (gadget approach) before possibly continuing with the rest of Part 3 once these hypotheses have been checked out Oasis Path - always click on this button
March, 2004 © LINEN 18 Potential rent of the innovation: Which Configuration?Configuration duration rate volume ++– duration rate volume ++– Potential Rent …and which path to follow within the model If necessary, click on this button Joker: Run the entire model King of Petrol : Run the entire model duration rate volume ++– Optical Trap : First ascertain the consistency of the potential rent volume (Part 2.1, and possibly 2.4 & 2.5) then of its profit rate (see the gadget approach) and, if necessary, study the competitive position of the SNIC (Part 3) Optical Trap Path – always click on this button If click here in a first instance If the rent volume is linked to the existence of several application domains, click here in a first instance !
March, 2004 © LINEN 19 In Case: High volume – Multiple applications Potential Business Volume (revenue) Very lowLowmediumHighVery high Business diffusion Business diffusion potential : the spectrum of the potential applications of the innovation is… Very limited (1 niche) Limited (2 or 3 niches) Medium (more than 1 large application) Large (several applications) Very large (multiple applications) Summary Value - ++ If the innovation fits to one of these 3 cases, then analyze each of the different application domains (markets or industries) that it covers on the 3 rent dimensions, determine the rent configuration for each and pursue an individual analysis for each configuration in Parts 2 & 3, in accordance with the indicated paths. We are looking for an attractive niche thatniche the SNIC may exploit in an autonomous way Click here to move on Potential Rent PAC
March, 2004 © LINEN 20 Part 2: Assess the Residual RentResidual Rent Analysis of the erosion or amplification effects on the potential rent since the innovation is inserted in its environment.erosion Residual Rent
March, 2004 © LINEN 21 Insertion in the environment: the risks Residual Rent Upstream Downstream Substitutes Substitutes (2.3) Substitutes Possible effects on the rent duration Client-Markets (2.1) Client-Markets (2.1) Possible effects on the rent volume Business Pressure, Pressure, regulations, lobbying (2.5) regulations, lobbying (2.5) Possible effects on the 3 components of the rent Complementors Complementors (2.4) Complementors Possible effect on the rent volume and profit rate Business Chain (2.2) Business Chain (2.2) Possible effects on the rent profit rate I nnovation
March, 2004 © LINEN 22 2.1.a Client-Market: Its Adoption Propensity face to innovations Usual adoption rate of an innovation within the client-market Usual adoption speed of an innovation within the client- market MarginalNormalAll or nothing Slow Bad Option Eliminate this application domain and find other applications. If not freeze all expenses… Exhaustion Particularly unfavorable for a SNIC Roulette Favorable but requires resources while waiting for results; not the best case for a SNIC Fast Wasted Exploit quickly on condition that massive investments are not required; if not move to Bad Option Gestation At first glance, the most favorable situation for a SNIC Money-Spinner Favorable, but the volume and growth are often difficult for a SNIC to handle alone Residual Rent
March, 2004 © LINEN 23 2.1.b A Key concept: The CPUV To find its place within a market, any innovation must bring the customer a significant advantage, so that he adheres to it and buys it; it should create value for the customer And this value should be sufficiently perceptible & useful for the client(s); we shall speak of Customer Perceived Utility Value (CPUV) We can estimate the CPUV as a trade off between what the innovation is likely to bring the client and what he is required to give-up or sacrifice in order to adopt it CPUV = Perceived Benefits – Perceived Sacrifices Differentiate the analysis depending on whether the innovation is – A substitution-innovation, in which case the CPUV is relative and measured against the current reference offering in the market – A market creation-innovation, without any possible reference and so measured in absolute terms Residual Rent OpenVox, Glacé, PAC
March, 2004 © LINEN 24 2.1.c CPUV of the innovation – in case of substitution-innovation: Benefits lowHIGH value / price Low Relative Advantage >>1 : High Relative Advantage Simplicity,visibility, testability Not very TransparentHighly Transparent Innovation Type, hence compatibility with what exits Low : New Deal or New Player High : Harder & Better and compatible Meccano Summary of perceived benefits lowHIGH Residual Rent
March, 2004 © LINEN 25 2.1.c CPUV of the innovation – in case of substitution-innovation: Sacrifices Low Perceived RiskHIGH Perceived Risk Type of innovation, hence effect on the standard Standard unaffected: Harder & Better and compatible Meccano Standard affected: New Deal or New Player Transfer CostslowHIGH Summary of perceived sacrifices lowHIGH Residual Rent To continue the session, click here For a refresher on the types, click
March, 2004 © LINEN 26 2.1.d CPUV of the innovation – in case of market creation-innovations: Benefits lowHIGH Resolution of an unsatisfaction (time, task, possibilities offered) Low Relative Advantage High Relative Advantage Simplicity, visibility, testability Not very Transparent Highly Transparent Compatibility of the know- how LowHigh Summary of perceived benefits lowHIGH Residual Rent
March, 2004 © LINEN 27 2.1.d CPUV of the innovation – in case of market creation-innovations: Sacrifices lowHIGH Adoption perceived risk lowHigh Anticipated price (minimum level price) lowHigh Summary perceived sacrifices lowHIGH Residual Rent
March, 2004 © LINEN 28 2.1.e Summary: CPUV & the Friction effects on the rent volumeFriction effects Perceived Sacrifices HIGH No Way Very important frictions, almost no rent volume can be captured No point in getting in? Infatuation High level of friction, uncertain rent volume Rework the innovation to diminish the sacrifice level Danger for a SNIC Low Wet Firecracker High level of friction, low level of rent volume to capture Keep on working the innovation to improve its performance, else drop it My Way Allows to quickly capture the maximum rent volume Favorable LowHIGH Perceived Benefits ! z Residual Rent OpenVox, Glacé, PAC
March, 2004 © LINEN 29 2.1.f Client-market: Effects on the rent configuration Residual Rent BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Potential Rent Residual Rent
March, 2004 © LINEN 30 2.2.a Balance of power within the Business Chain Business Chain UPSTREAM LINKBUSINESSDOWNSTREAM LINK Impact of upstream link on cost & quality of the downstream link offering highlowhighlow Transfer costTransfer cost/ Cost of changing suppliers highlowhighlow Relative Concentration + upstream+ business +downstream Relative Value of the IP portfolio + upstream+ business + downstream Capability to integrate Upstream / Downstream + upstream+ business + downstream Impact of Sale/Purchase Volume + upstream+ business + downstream Summary: Balance of power in favor of… upstreambusiness downstream Residual Rent BactiSTOP, Binem Glacé, PAC
March, 2004 © LINEN 31 2.2.b Summary: Business Chain & Friction effects on the rent profit rateFriction effects Balance of Power UPSTREAM LINK / business in favor of… UP STREAM +/– Strong dependence/suppliers Medium-Strong Friction: suppliers capture margin Recommendation: Partner with a SUPPLIER – Sandwiched Business Maximum friction on the margin rate Abandon this application or find another position within the chain Business ++ Position of Strength Little friction effect on margin Area of strategic autonomy, margin may be kept +/– Strong dependence/clients Medium-Strong Friction: clients capture margin Recommendation : Partner with a CLIENT BusinessDOWNSTREAM Balance of Power DOWNSTREAM LINK/ business in favor of… Residual Rent Protecting an innovation upstream is a sine qua non condition
March, 2004 © LINEN 32 2.2.c Business Chain: Effects on the rent configuration Residual Rent BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the Rent Profit rate of the rent Duration of the rent Potential Rent Residual Rent
March, 2004 © LINEN 33 2.3.a Substitution risk: technological dimensionSubstitution Technological risk Technological risk of substitution Spectrum of alternative paths & options narrowVery broad Predictable Lead time of the innovation v/v the alternatives Lead time HIGH Very low technological risk ++ Low technological risk + low Medium-Strong technological risk – Major technological risk – Residual Rent Glacé
March, 2004 © LINEN 34 2.3.b Substitution risk: business dimensionSubstitution Residual Rent Usual Adoption Rate of an innovation within a Client-market Usual Adoption Speed of an innovation within the Client-market MarginalNormalAll or nothing Slow Bad Option Zero Risk Exhaustion Medium Risk Roulette High Risk Fast Waste Very Low Risk Gestation High Risk Money-spinner Very High Risk See 2.1.a
March, 2004 © LINEN 35 2.3.c Summary: Substitutes & Friction effects on the rent duration Risk & Friction effects related to substitution Technological Risk Technological Risk : spectrum & level of advancement of the alternative technological options & paths lowHIGH Business RiskBusiness Risk: adoption propensity of innovation by clients HIGH Low risk & friction effectsfriction effects + Robinson Crusoe Very high risk & friction effects – Overcrowded low Very low risk & friction effects ++ Hermit Medium risk & friction effects – Bottleneck Residual Rent
March, 2004 © LINEN 36 2.3.d Substitution: Effects on the rent configuration Residual Rent BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Potential Rent Residual Rent
March, 2004 © LINEN 37 2.4.a Complementors: How needful?Complementors Degree of requirement & difficulty in gathering partners low HIGH Harder & BetterNew Player New Frontier Meccano New Deal Full Monty Zero need Low need for complementors, possibly for distribution Need to be accepted by the existing complementors Strong need for existing & new complementors Complementors are required, essentially new ones Residual Rent Go directly to pressure (2.5) For a refresher on the types, clicktypes Protecting an innovation upstream is a sine qua non condition PAC, OpenVox
March, 2004 © LINEN 38 2.4. The complementors: What power? Residual Rent Degree of complexity of the partnership network to build or integrate (mayonnaise effect) Very few different partners (1 ou 2) Lot of partners (more than 6) Impact of the complementors face to the innovator within the total value creation Low ImpactHigh Impact Degree of power of the complementors, linked to their position of strength (size difference, damaging power, IP portfolio, monopoly position,…) compared to that of the innovator Small, dispersed, without power Big & Sturdy Summary: Degree of dependence vis à vis the complementors LowHigh
March, 2004 © LINEN 39 2.4.c Summary: Complementors & Friction effects on the rent Complementors risk & friction effects Degree of dependence vis à vis the complementors lowHIGH Degree of requirement & difficulty in developing partnerships HIGH Imperative need, but low risk & friction effects Divide to rule Dangerous Position with strong friction effects Amateur low Position without any friction effect on the rent Egoist Relatively weak position with unavoidable friction effects Caudine Forks ! z Residual Rent
March, 2004 © LINEN 40 2.4.d Complementors: Effects on the rent configuration Residual Rent BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Potential Rent Residual Rent
March, 2004 © LINEN 41 2.5.a Institutional risk & possible effects on the 3 rent components 2.5.a Pressure, Regulation, Lobbying Institutional risk & possible effects on the 3 rent components Institutional risk Institutional risk Type of effect on the rent - The existing regulations or those likely to be put in place by the authorities under the pressure of the consumers & professionals lobbying will have a Strong friction Effect Non-existent or without any effect here Strong amplification effect - The official approvals (defined by regulation & controlled by professionals bodies) needed to run the business & market the innovation, have a Strong friction Effect Non-existent or without any effect here Strong amplification effect - The norms, fixed during special proceedings by key players of the industry and which are compulsory for all, have a Strong friction Effect Non-existent or without any effect here Strong amplification effect - The standard(s ), which rule certain industries and are imperative for all irrespective of their wish, have a Strong friction Effect Non-existent or without any effect here Strong amplification effect Summary Effect on the Rent volume Effect on the Rent profit rate Effect on the Rent duration Strong friction Effect Non-existent or without any effect Strong amplification effect Residual Rent PAC, Bio-Rad, Bactistop
March, 2004 © LINEN 42 2.5.b Institutional Risk: Effects on the rent configuration Residual Rent BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Potential Rent Residual Rent
March, 2004 © LINEN 43 Residual rent of the innovation: Which configuration? duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– Dwarf Gadget King of Petrol Joker Oasis Optical Trap Residual Rent
March, 2004 © LINEN 44 Part 3: Assess the appropriable rentappropriable rent Analysis of the erosion effects on the residual rent since the innovation is inserted in its competitive context & taking into account the competition position of the innovator Appropriable Rent
March, 2004 © LINEN 45 Insertion in the direct competitive context: risks, frictions & rent capturing Attractiveness of the business (3.2): – Maturity stages and life cyclelife cycle – Type of industry – Intensity of competition Intensity of competition friction effects on & possible capture of the residual rent The reaction of the competitors (3.3): The reaction of the competitors – Occurrence and foreseeable intensity – Nature of the reaction friction effects on & possible capture of the residual rent The competitive situation of the innovator (3.4): The competitive situation – Scientific & business legitimacy of the innovator Scientific & business legitimacy – Diagnosis of the innovators resources & competencies friction effects on & possible capture of the residual rent Appropriable Rent & Development/Valorization (3.5) Appropriable Rent
March, 2004 © LINEN 46 3.2.a Maturity Stages: businesses are different in term of attractiveness Appropriable Rent The business life cycle conceptlife cycle Window of opportunity Phases Indicators Growth Rate Growth Potential No. of Competitors Competition Type Technology Entry Barriers Attractiveness Emergence Unstable Good Strong Fragmented Faltering Weak, technological High but danger Start-up Strong Very good Increasing Not clear/visible Evolving Average, marketing is key Very high Growth Very strong Still good Diminishing Concentration Crystallization Strong & diverse High Maturity Weak/stable Zero Few Crystallization Frozen Very strong & complex Limited Decline Zero or negative Negative Few Oligopoly Frozen Uninteresting Zero Large external players appear on the scene through the external growth route (acquisition) and begin to dominate the business A standard or dominant design appears
March, 2004 © LINEN 47 3.2.b Industry Types: businesses are differentIndustry Types Sensitivity of the business to differentiation (existence of niches, groups of competitors,varied solutions/offerings…) HIGH Fragmentation Numerous small competitors continuously entering & exiting Changing competitive positions Local markets, customized offers Specialization Very diverse offerings Different groups of specialized competitors Several standards can coexist low Dead-end Strong barriers to entry & exit Structural overcapacitybarriers to entry & exit No player is profitable Volume Very similar offerings Economies of scale & experience A dominant design exists lowHIGH Sensitivity of the business to volume (existence of economies of scale, volume effect and experience curve) Appropriable Rent The different possible application domains may belong to different industry types Glacé
March, 2004 © LINEN 48 3.2.c Industry types: businesses are different in term of value & entry barriers Sensitivity to differentiation HIGH Value: – Fragmentation Value: – Entry and Development barriers are weak Value : + + Specialization Value : + + Entry and Development barriers are MEDIUM-STRONG MEDIUM-STRONG Nature of the entry barriers Access to distribution Costs to acquire access to clients Nature of the entry barriers Transfer Cost Access to specific resources Patents, Brands low Value : – – Dead end Value : – – STRONG entry barriers but the business is not profitable Value : + Volume Value : + Entry and Development Barriers are STRONG Unattractive Nature of the entry barriers Economies of scale & experience Access to distribution Norms, approvals, regulation lowHIGH Sensitivity to volume Appropriable Rent
March, 2004 © LINEN 49 3.2.d Rivalry & Intensity of competition: general attractiveness of a business HIGH 1. Growth of the businessbusiness low HIGH 2. Concentration/distribution of market share low HIGH 3. Diversity of competitors / DifferentiationDiversity of competitors / Differentiation low HIGH 4. Perceived transfer coststransfer costs low 5. Ratio fixed costs/variable costsRatio fixed costs/variable costs HIGH low 6. Exit barriers & costsExit barriers & costs HIGH low Intensity of Competition Intensity of Competition HIGH Appropriable Rent The present & potential degree of direct competition (players of the business) can be measured with the help of the following 6 criteria:
March, 2004 © LINEN 50 3.2.e Summary: Competitive Context, Attractiveness & Erosion effects Intensity of competition: - current (if the market exists) - or future (in the case of a creation - innovation) HIGH FAR WEST Strong but unlikely to appear friction effects Better not fighting in such a highly competitive activity BATTLE FOR THE FUTURE PARADISE Strong and likely to appear friction effects Better not fighting unless one masters the key success factors (KSF) and has sufficient resources low AFTER THE BATTLE Weak and unlikely to appear friction effects Make the best of the present without betting on an interesting future PAX ROMANA Weak-Medium and likely to appear friction effects The ideal situation for the innovation / innovator low (Fragmented / Dead end) HIGH (Specialized/ Volume) Value of the industry type ! Appropriable Rent This table allows the user to select the most attractive segments and applications
March, 2004 © LINEN 51 3.2.f Competitive Context: Effects on the rent configuration BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Residual Rent Appropriable Rent
March, 2004 © LINEN 52 3.3.a Competitors Reaction: occurrence & predictable intensity Value & attractiveness of the business (substitution & market creation) Type: Dead-end/ Fragmented Type: Volume or Specialization low High Existing Actors (substitution only)substitution Its a core business for the actor High Strong and probable reaction Very strong & highly probable reaction Its a marginal business for him low Unlikely weak / No reaction Very limited reaction Potential New entrants (substitution & creation) New entrants Substitution risk: Overcrowded & Bottleneck High Weak & probable reaction Very strong and likely reaction Substitution risk: Robinson Crusoe & Hermit low Unlikely weak / No reaction Strong but unlikely reaction Appropriable Rent See 2.3.c Within the same application sector, if the competitors react differently, it means that this sector consists of several different businesses/segments/markets IRSE300 See 3.2.b
March, 2004 © LINEN 53 3.3.b. Competitors reaction: of what kind? Value of the Residual Rent low Strong Existing Actors (substitution only) Exit barriers / Costs High Block 1)Block 2) Copy or Imitate low Uninteresting (no cause for alarm) Creative imitation or Disqualify Potential New Entrants (substitution & creation) Entry barriers / costs High Unattractive (contempt) Disqualifying Innovation lowCreative imitationPure copy imitation Appropriable Rent See 3.2.c IRSE300
March, 2004 © LINEN 54 Appropriable Rent 3.3.c Competitors reaction, Friction effects and recommended development strategy Nature of the competitors reaction Unattractive/ Uninteresting BlockPure CopyCreative Imitation Disqualifying Innovation Latent time before a reaction = Time available to the innovator low HIGH Command over resources from identified competitors F (financial) T (technological) L (legal) HIGHHIGH No friction hence no risk Very high risk of friction Find a white knight or sell outwhite knight Very high friction risk Reaction is a function of the competitors profile F + T – J + License-out / Share F + T + J – Block F – T + J + Find a sponsor/patron to beat the competitor lowlow Friction possible but limited risk Overcome obstacles if enough means Case of innovations with limited rent duration (dwarf, gadget, optical trap) "Don't protect, take the money and run" F + T – J – The competitor is a possible sponsor/benefactor F – T – J + Strengthen the technology & attack legally F – T + J – MinefieldMinefield, game of go? => IP strategygame of go? IRSE300
March, 2004 © LINEN 55 3.3.d Competitors reaction: Effects on the rent configuration BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Residual rent Appropriable rent Appropriable Rent
March, 2004 © LINEN 56 3.4.a Competitive Situation of the innovator: Scientific and Business legitimacylegitimacy LEGITIMACY BUSINESS (growth, reputation and command by the company of the business in question) lowHIGH SCIENTIFIC (academic reputation and the precedence of the R&D team in the concerned scientific domain) low Red Signal Unable to valorize its innovation autonomously, the SNIC has to license or sell out its innovation. Move to 3.5 Orange Signal the weak scientific legitimacy leads to an in-depth diagnosis of the companys position on the 1 st part of the 2 tables that follow. HIGH Orange Signal the weak business legitimacy leads to an in-depth diagnosis of the companys position on the 2 nd part of the 2 tables that follow. Green Signal the strong scientific & business legitimacy leads to a diagnostic of the companys position only on the 3 rd part of the 2 tables that follow. Appropriable Rent IRSE300Binem
March, 2004 © LINEN 57 3.4.b Resources & Competencies of the SNIC Next Step Does the SNIC hold the technological resources & competencies to get the innovation defendable & durable? Yes No It doesnt possess them They are not sufficient to sustain the innovation Can it acquire them or develop them internally ? YesNo Is a partnership with some technological complementors possible ? Yes Zone of strategic choice Partnership necessary NoInevitably alone External Development Can it procure them or have access to them ? Technological entry barriers Emerging industry Appropriable Rent STOP, license or sell out
March, 2004 © LINEN 58 3.4.c Resources & Competencies of the SNIC Next Step Does the SNIC have the business competencies that correspond to the application domain KSF? Yes No Can it acquire them or develop them internally? yesno yes Zone of strategic choice Partnership necessary Is a partnership with business complementors possible ? noInevitably alone External Development Entry & survival business barriers Industry in a start-up phase Appropriable Rent STOP, license or sell out
March, 2004 © LINEN 59 3.4.d Resources & Competencies of the SNIC Next Step Can the SNIC gather the magnitude of resources required to establish its innovation in a successful and lasting way? Yes No Can it find investors to finance the needed resources ? yesno Is a partnership with competitors possible ? yes Zone of strategic choice Partnership necessary noInevitably alone External development Profitable development barriers Industry in a growth phase Appropriable Rent STOP, license or sell out
March, 2004 © LINEN 60 3.4.e Competitive position of the SNIC & Effects on the rent configuration BEFORE- + Volume of the rent Profit rate of the rent Duration of the rent AFTER- + Volume of the rent Profit rate of the rent Duration of the rent Residual Rent Appropriable Rent
March, 2004 © LINEN 61 3.5 Summary: Appropriable Rent & Development/Valorization Strategies Magnitude of the rent appropriable by the SNIC HIGH Autonomous, strategically desired and possible, in partnership if useful License or sell-out or in cooperation… depending on the possibilities low Autonomous but purely tactical Abandon, license or sell-out… depending on the volume of the residual rent Development Strategy lowHigh Relative (for the SNIC) amount of investment needed to industrialize and launch the innovation in the market Appropriable Rent
March, 2004 © LINEN 62 Rent appropriable by the innovator: which configuration ? duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– duration rate volume ++– Dwarf Gadget King of petrol Joker Oasis Optical Trap Appropriable Rent
March, 2004 © LINEN 63 Part 4 : Determine the Development & Intellectual protection mode of the SNICs innovation Recommendations for a development/valorization & intellectual protection strategy of the innovation depending on its rent configuration Strategic Choice
March, 2004 © LINEN 64 Return End Part 1 End Part 2 End Part 3 For a Dwarf configuration Stand alone Innovation Market exists or to be created Recommendations Development : possible but not very attractive autonomous development. Abandon Protection : Without any real interest. However to safeguard against the possible appropriation of the innovation by a third party, it is advisable to: 1) publish the invention (making it non - patentable), 2) in a confidential medium (so that the competitors chances of discovering it and exploiting it are weak) and 3) locally or abroad. Strategic Choice Attractiveness: zero in absolute terms, very low for a SNIC The innovation is : stand alonesystem based
March, 2004 © LINEN 65 Return End Part 1 End Part 2 End Part 3 For a Dwarf configuration System-basedInnovation Existing marketsMarkets to be created Recommendations Development: Abandon, except for the Meccano type, if the innovation convinces the architect of the system Protection : General case: In order to avoid all likely appropriation, publish the invention in a confidential medium, locally or abroad. Meccano case: file a national smoky screen patent, extend it using the PCT procedure and sell it off to the architect; if not possible, dont maintain the patent. Development : Abandon (not worth developing given the risks and chances of success) Protection : Not worth it at all. However to safeguard the innovation, 1) publish the invention (making it non -patentable), 2) in a confidential medium (so that the competitors chances of discovering it and exploiting it are weak) and 3) nationally or abroad. Strategic Choice
March, 2004 © LINEN 66 Return End Part 1 End Part 2 End Part 3 For a Gadget configuration Stand alone Innovation Market exists or to be created Recommendations Development : an interesting configuration of a quick & autonomous development for a SNIC Protection : The natural rent duration being short, only a kind of smoky screen protection will be targeted. File a national patent (+ brand & design if possible), geographically extended to attractive countries through the PCT (Patent Cooperation Treaty) procedure. Dont validate the application to most of these countries 30 months after the first legal patent application; possibly forget to maintain the patent. Strategic Choice Attractiveness: low in absolute terms, medium for a SNIC The innovation is : stand alone system-based
March, 2004 © LINEN 67 Return End Part 1 End Part 2 End Part 3 For a Gadget configuration System based Innovation Market exists or to be created Recommendations Development : a difficult configuration for a cooperative development – the rent duration being short, a rapid reaction is needed but quickly creating and running a network is a rather delicate affair. Protection : The rent duration being weak, only a smoky screen kind of patent is sought. File for a national patent (+ design & brand if possible) with extensions suing the PCT procedure for attractive countries. At the end of the 30 months period (before the national procedures) and depending on the existing network, validate or abandon, one by one the patented countries and even dont maintain the patent. Accept the principle to mix/cross licenses with complementors to favor the emergence of the new system (dominant design). Strategic Choice
March, 2004 © LINEN 68 Return End Part 1 End Part 2 End Part 3 For a Oasis configuration Stand alone Innovation Market exists or to be created Recommendations Development : Ideal configuration for a SNIC autonomous development strategy, but a partnership could be interesting if it is generating an amplification effect. Protection: Protection is crucial : compulsory patent and/or secret, closely related protection on the basis of codified knowledge, possibly complementary protection (design, brands…). Quickly extend the national patent through the PCT procedure to a maximum number of countries; at least to the innovator country, Europe, USA (possibly apply for a direct patent here to avoid interference procedures) and Japan. At the end of the 30 months legal period, validate and reposition only in the countries that are interesting. Strategic Choice Attractiveness: medium in absolute terms, high for a SNIC The innovation is : stand alone system-based
March, 2004 © LINEN 69 Return End Part 1 End Part 2 End Part 3 For an Oasis configuration System-based Innovation Market exists or to be created Recommendations Development : Ideal configuration for a cooperative development, assuming the system leadership in the case where the degree of dependence vis-à-vis the complementors is weak and transferring it to (a) key and dominant partner(s) in the opposite situation. Protection: It is crucial : compulsory patents and/or secrets, closely related protection on the basis of codified knowledge, possible complementary protection (brands, designs…). Make use of mixed/crossed licenses with complementors to favor the emergence of a new system. Extend the national patent through the PCT procedure to a maximum of countries (118 possible); at least to the innovator country, Europe, the US (possibly apply for a direct patent here to avoid interference procedures) and Japan. At the end of the 30 months period, validate and reposition only in the countries that are interesting. Strategic Choice
March, 2004 © LINEN 70 Return End Part 1 End Part 2 End Part 3 For an optical trap configuration Stand alone Innovation Existing MarketMarket to be created Recommendations Development : Sell out or license out – dont get involved in this situation Protection : A luring patent with a possible anticipated publication demand, followed by a local real patent application, extended with the PCT procedure to a maximum no. of countries (a direct application for the US). 30 months to negotiate licensing agreements and to protect, in the national phase of the PCT, only the countries to be covered (eventually use a European patent); if no agreement within the 30 months abandon the patent. Development : In a tactical first phase, autonomous or cooperative development (start, create a niche and develop a brand, prove), then very quickly sell out or license out ; if not possible abandon Protection : A luring patent with anticipated publication asked, followed by a local real patent application, extended by the PCT procedure to a maximum no. of countries. At the end of the 30 months period, before the national phase of the PCT, validate only in the countries concerned with licensees; abandon in case of no agreement Strategic Choice Attractiveness: medium in absolute terms, low for a SNIC The innovation is : stand alone system based
March, 2004 © LINEN 71 Return End Part 1 End Part 2 End Part 3 For an optical trap configuration Stand alone Innovation Existing MarketMarket to be created Recommendations Development : dont get involved in this – license or sell out options are compulsory. Protection : A luring patent with anticipated publication asked for; followed by filing a real local patent, extended by the PCT procedure to a maximum number of countries (direct filing for the US). 30 months to negotiate licensing agreements and to protect, in the national phase of the PCT, only the countries to be covered (eventually use a European patent); if no agreement within the 30 months abandon the patent. Development : Use the cooperative option in the beginning (to set the global offering, create the niche and the standard, prove) and then very quickly license or sell out to a major complementor or competitor; else abandon. Protection : A luring patent with anticipated publication asked for, followed by a real local patent application with geographic extension to a maximum no. of countries with the PCT procedure. At the end of the 30 months period (in the PCT national phase) validate only the countries concerned with licensees; abandon in case of no agreement. Strategic Choice
March, 2004 © LINEN 72 Return End Part 1 End Part 2 End Part 3 For a Joker configuration Stand alone Innovation Existing MarketMarket to be created Recommendations Development : Dont touch…unless evidence is required to be given. Immediately sell out or license out. Protection : Super protection is compulsory: a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales. Development : Start alone or with partners to prove and valorize (market share and brand). In case you cant make it big, license or sell out. Protection : Super protection is compulsory : a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure. Direct filing in the US. Allocate partial licenses or sales. Strategic Choice Attractiveness: strong in absolute terms, limited for a SNIC The innovation is : standalonesystem-based
March, 2004 © LINEN 73 Return End Part 1 End Part 2 End Part 3 For a Joker configuration System based Innovation Existing MarketMarket to be created Recommendations Development : Stay away … license or sell-out immediately to a big player (generally among the complementors) Protection : Super protection is compulsory : a series of patents (+complementary protection if needed & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales. Development : At the start, to prove ones self, develop in a partnership (volume, standard, network of complementors), then license or sell out if one cannot make it big. Protection : Super protection is compulsory : a series of patents (+complementary protection if possible & needed)) covering a maximum of applications and countries thanks to the PCT procedure. Direct application for the US. Allocate partial licenses or sales. Strategic Choice
March, 2004 © LINEN 74 Return End Part 1 End Part 2 End Part 3 For a King of Petrol configuration Stand alone Innovation Existing MarketMarket to be created Recommendations Development : Dont touch …unless evidence is required to be given. Immediately sell out or license out. Protection : Super protection is compulsory : a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales. Development : Start alone or with partners to prove and valorize (market share and brand). In case you cant make it big, license or sell out. Protection : Super protection is compulsory : a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure. Direct filing in the US. Allocate partial licenses or sales. Strategic Choice The innovation is : stand alone system based Attractiveness: strong in absolute terms, limited for a SNIC
March, 2004 © LINEN 75 Return End Part 1 End Part 2 End Part 3 For a King of Petrol configuration System based Innovation Existing MarketMarket to be created Recommendations Development : Stay away … license or sell-out immediately to a big player (generally among the complementors) Protection : Super protection is compulsory : a series of patents (+complementary protection if needed & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales. Development : At the start, to prove ones self, develop in a partnership (volume, standard, network of complementors), then license or sell out if one cannot make it big. Protection : Super protection is compulsory : a series of patents (+complementary protection if possible & needed)) covering a maximum of applications and countries thanks to the PCT procedure. Direct application for the US. Allocate partial licenses or sales. Strategic Choice
March, 2004 © LINEN 76 Development: Confidentiality, Ownership, Protection During all the development phases of the innovation (conception, prototype, versioning…) & especially if the innovation is developed in cooperation with partners, the management of confidentiality, ownership and protection of the results is crucial for appropriating the maximum rent linked to the innovation. Legal matters related to IP being outside of the scope of this model, we recommend the user to consult an IP expert, but the following points should be kept in mind: – Confidentiality: confidentiality agreements, Non Disclosure Agreement ( NDA) – Traceability, origin, dating of results Evidence/Proof : laboratory journal (data processing or classic), registration of the design/source code of a software in a legal office,…. & all other methods of written proof – Ownership of results: inventions coming from salaried vs independent employees, indications of the inventors, possible co-ownership, contract for cooperative development
March, 2004 © LINEN 77 Innovation Intensity & Technical Imitability Innovation intensity of the principal application domain of the innovation: It is measured on the basis of 2 criteria: The frequency & (using inverse correlation) the life time (duration) of the innovation taken in a broad sense (new process, products, formulas,…) The frequency, relative to other application domains & an estimated all businesses average, of the patents filed in the concerned application domain Technical Imitability of the Innovation : Linked to the natural technical characteristics of the innovation (the more complex the innovation, the more difficult to copy and hence the longer the duration), it can be estimated using the following 3 criteria: its non-transparency : the innovation will be that much easier to sustain if it is the result of a combination of complex techniques and is based on specific and difficult to identify competencies (know how). It will obviously be easier to copy if the resources on which it is based are easy to spot and the competencies on which it rests are public and widely disseminated. its non-accessibility : the innovation will be less sustainable if it is put in products with very few intangibles that are easily accessible in the market (ease of purchase and reverse engineering) ; it will be easier to sustain if the intangible part (integrated and difficult to access software for example) in the innovative offering is higher and reverse engineering is not possible or not effective. its technological lead: the innovation will be more sustainable if it is genuinely new or a technological breakthrough and if it leaves quite no place for further improvement, to avoid smart copies. On the contrary, it will be so much easier to copy if it is not very original, not well mastered and leaves lot of room for improvement.
March, 2004 © LINEN 78 Legal Imitability of the Innovation To judge the legal imitability of an innovation, it is worth to measure the quality of the protection (or non-protection) that the innovation can benefit from in terms of rights (patents in particular). 2 dimensions can be used for this: The patentability of the innovation which is linked to the fact that the technical phenomenon or object that makes up the innovation should be: –An invention, I.e. that contributes to the technological state of art –Untouched by any possible exclusion from patenting –Related to an inventive activity (problem/solution, original lay-out, overcoming a misconception, etc) –Likely to have an industrial application –New at the time of filing the patent –And clearly and sufficiently described The scope (extent) and validity of the possible claims concerning the innovation that can cover a wide range of dimensions going from : powder for eyes patent limited limited patent engrossing or princeps patent in applications favoring the duration multiple patent patent Easy to copy Difficult to copy
March, 2004 © LINEN 79 Adoption Propensity of an Innovation The client-markets enjoy a natural receptivity face to an innovation that differs according to 2 criteria: The frequency of innovation in a client-market or, in academic terms, innovation intensity of a market appear to be a pertinent indicator to assess the speed and rapidity with which the market-client adopts an innovation. For methodological simplicity, we will distinguish 2 cases of innovation intensity: low (reticent to adopt innovations market) and (rapid to adopt innovations market) The adoption or penetration rate which illustrates the degree of potential diffusion of the innovation in the market under consideration and can be represented through an innovation diffusion curve. The normal innovation distribution curve takes the form of a flattened S. Right at the beginning, only the technological innovators and early adopters, who account for a very small portion of a market (1-5%) are seduced. Then the innovation successively gains the pragmatics and the conservators before it gradually stagnates with the skepticals and laggards. We can further classify this situation into 2 cases: –All or nothing markets where the innovation is either a complete failure or is quickly capturing the market depending on some recognized opinion leaders – Markets where innovations can subsist even when remaining marginal (fragmented markets without norms) The 3 curves can be graphically represented as follows : Diffusion Curve All or nothing Normal Marginal Rate of penetration Time
March, 2004 © LINEN 80 Assess the Client Perceived Utility Value (CPUV) Perceived benefits: 3 types 1- Relative advantage, directly linked to the level of improvement brought about by the innovation & perceived by the client. In the case of substitution, the potential client will compare the differential of perceived value & the differential of anticipated price between the reference offering & the innovation which aims to replace it. In the case of creation, the value lever is linked to the resolution of a client high unsatisfaction: overcoming a constraint, saving time, simplifying life, offering new options/possibilities 2 - Simplicity to understand, ease of use, possibility to test in small quantities and visibility of the results are indicators which are clubbed together under the term transparency 3 - Compatibility measures the consistency of the innovation with the existing practices, in terms of competence, equipment, norms and earlier systems. Perceived sacrifices: 3 types 1 - The anticipated price level which measures the financial effort that the consumer estimates to achieve when buying the product. It is always relative to the perceived value or estimated cost. 2 - The perceived risk linked to the adoption of the innovation which corresponds to the risk of making the wrong choice. This risk is particularly high in case of system innovations (modification of the standard, network externalities) 3 - If he chooses to adopt the innovation, the potential client may be required to renounce a series of previous choices. These have been clubbed under the name oftransfer costs and will be take place only in case of a substitution-innovation.
March, 2004 © LINEN 81 Life Cycle of a Business PhaseEmergenceStart-upGrowthMaturityDecline Strategy The key Dominant Function Innovate Technology Improve / target Marketing Grow / Dominate Development Make Profitable Management accounting Milk Finance Key Success Factors - Work out an innovative offering even if it is imperfect - Succeed in conducting beta- tests - Capture the early adopters -Increase the value of the offering by continuous improvement -Target and capture the most receptive segments - Create a network and a brand - Finance the growth - Manage the costs - Cover the market (segments & countries) - Invest in marketing & production - Finance the growth - Manage the costs & the equipment - Rationalize the range - Extend the offering and the geographical reach - Finance the working capital - Reduce the range - Select the clients - Look for exit options Entry Barriers Weak, technology oriented Medium, stress on marketing Strong, diverse and high Very high in quantity/complexity Of no interest
March, 2004 © LINEN 82 Entry & Development barriers This essential concept, which enables to characterize and understand the competition intensity within an industry, is based on the barriers to entry concept coming from Industrial Economics. The level of these entry barriers & rights can be assessed by evaluating the business using the 6 criteria that follow: barriers to entry 1.Existence & level of cost and scale economies 2.Existence & importance of transfer costs, including those linked to the existence of differentiated offerings from players of the industry (loyalty effect) 3.Difficulties in accessing the distribution network 4.Existence of and difficulty to access rare & specific business resources 5.Existence and value of patents and brands 6.Importance & difficulty in obtaining norms, approvals and regulations Appropriable Rent
March, 2004 © LINEN 83 Rights & Exit Barriers This notion is key to understand that some industries, though rather unattractive, are nevertheless and perpetually victims of fierce competition. The reason is that irrecoverable costs are very high and it usually costs more to exit than to continue operations. The magnitude of these exit barriers & rights can be estimated by assessing the industry using the following 6 indicators: 1.Existence & importance of business specialized assets 2.Level of fixed costs to exit 3.Existence & importance of strategic inter-connections between the business and other businesses within the player portfolio 4.Government restrictions to exit 5.Union restrictions to exit 6.Emotional obstacles (attachment syndrome - initial business difficult to quit)
March, 2004 © LINEN 84 GLOSSARY B Barriers to Entry Obstacles which limit and/or prohibit access to a particular industry. These barriers may be technological, regulatory (norms…), economic (critical mass…), human (access to rare competencies),… and finally result in the financial entry ticket. E.g.: authorization to run a pharmacy, norms for the security equipment industry, critical size in the cement industry… Barriers to Exit Obstacles which limit or prohibit a player from exiting a particular industry. When the exit barriers and the level of irrecoverable/sunk costs are very high, it is often less expensive for a player to stay in the business rather than to quit it. E.g.: Equipment of a shipyard is almost impossible to convert/transform/reuse, the this or nothing dilemma faced by companies operating in only one business… Business (equivalent to the terms - industry, sector or domain of activity) All the products/services - and companies producing these services - that are characterized by the mastering of a specific set of competencies (or Key Success Factors). A business corresponds neither to a sector as defined the SIC (Standard Industrial Classification) code in the US (too broad) nor to market segment (too narrow). E.g.: project management software application packages, aromatic compositions industry, specialized DIY distribution centers. Business Chain All the economic stages through which raw material is transformed to comer up with an end product/service that is destroyed by a final consumer. All companies fit into a specific business chain in a link surrounded with upstream and downstream links. Some use the words value chain to underline the process of value creation/distribution that characterizes a business chain. E.g.: the wood business chain, food & agribusiness chain
March, 2004 © LINEN 85 GLOSSARY C Competition (internal rivalry) Used in the classical sense of the term, it means the rivalry that exists between players of the same industry or business. Competitive rivalry or intensity It measures the degree of competition within a sector. E.g.: Competitive rivalry is specially high in case of the industrial cleaning sector, very low in case of aromatic raw materials and normal in the case of beauty products. Competitive Advantage Enhanced control over one or several Key Success Factors (KSF) of an activity (as compared to the competitors). A competitive advantage should be symbolized by a profit rate superior to the average of the activity under consideration. E.g.: One of the competitive advantages of the fast food chain Mac Donalds is its capacity to identify and select the best geographic locations for its outlets. Competitive position/situation This indicator evaluates the quantitative and qualitative robustness/strength of a company, as compared to that of competitors, on the KSF of a given business. Complementor Any player whose offering complements the one of another company that hence may propose a complete/global offering that is valued much higher by final clients than if it were a sole or separate solution. E.g.: CDs are required complements for a CD player, a computer is a useful complementary object for a digital camera.
March, 2004 © LINEN 86 GLOSSARY C Concentration It is linked to the distribution of market shares between the companies within a same business. Generally, the fewer the players, the greater the concentration. Technically, the level of concentration is measured through an indicator - C2 or C5 for example - that computes the total market shares owned by the - 2 or 5 - main players. E.g.: The C2 of the worlds soft drink industry is greater than 60% (Pepsi & Coke). Concentration (relative) It measures the level of concentration or distribution of market shares between 2 businesses which are adjacent links in the same business chain. E.g.: The number of wine producers are very high and hence diluted when compared to the 5 central purchasing units of the French hypermarket chains. The relative concentration is undoubtedly in favor of the purchasing units of these mega food stores. Configuration It represents the positioning of an innovation on each of our 3 rent components (volume, profit rate and duration). Costs (Fixed) Costs which are independent of the quantity produced and insensitive to the variation of the activity level. E.g.: depreciation costs for an equipment or building, overhead costs. Costs (Variable) Costs which vary in proportion to the level of activity. E.g.: raw materials consumption, remuneration paid to distributors.
March, 2004 © LINEN 87 GLOSSARY D Development/Valorization The way a company may generate and capture the financial value of the innovation it developed and holds. This valuation may concern: Internal development (company markets the innovation autonomously) Cooperative development (development with the help of other companies) External development (licensing or sell-out to a third party to exploit the innovation). Autonomous Development The company develops the innovation itself. E.g.: Polaroid and its instant photo (a well protected innovation). Co-operative Development The company exploits the innovation, sharing the rent with one or more partners who support the company in the technical and commercial development of the innovation. E.g.: Sony & Kodak who came together (and share all their patents related to this technology) to develop and launch a new CD format on the market. License out Development The owner of the innovation grants a license to one or several parties to exploit it; in return, he receives a remuneration. This license is generally limited in time and space. E.g.: Moreno and his miracle innovation: smart cards Sell-out Development The innovation rights are sold to a third party who exploits it against a remuneration. E.g.: The test to detect the Bovine Spongiform Encephalitis (mad cow) was discovered and protected by the French CEA and sold to a major American player within the test industry.
March, 2004 © LINEN 88 GLOSSARY D-E Differentiation The positioning used in the market to distinguish ones offering in a significant (perceived in the entire market or in the parts concerned), valuable and defendable way from the reference offering, the one proposed by the main players. E.g.: The French internet service provider Free (purging differentiation), Hilti the world N°1 company in fastening systems for the construction industry…. Diffusion Geographic Diffusion: Assesses the geographic scope in which the innovation may pretend to be spread and possibly marketed. Business Diffusion: Assesses the number of possible application domains that the innovation may concern and invade. Dominant design or Reference offering Standard within an industry that is totally or partially shared by the main players of the business. E.g.: To the detriment of DivX, the DVD has become the dominant media storage solution for individual films. Economies of scale Decrease of the total unit cost of a product thanks to fact that the total fixed costs can be spread over a larger number of units. The greater the fixed costs, the larger the impact of the scale economies. It is often referred to the critical size, the minimum size to be achieved in order to manufacture/sell within competitive costs. E.g. The petrochemical industry is strongly dependant on economies of scale, the automobile and aeronautic industries are other examples. Entrant (New) A new player penetrating an industry that is not its usual business. E.g.: Virgin, which is better known for its record label, launches an airline company called Virgin Atlantic; BIC, the number one pen maker, diversifies into lighters, razor and perfumes.
March, 2004 © LINEN 89 GLOSSARY E-I Environment All the elements and factors that influence the competitive game in a given business (for the experts refer to the revisited Porters 5 forces model) Experience curve/effect The process by which the total unit cost of a product is reduced by a fixed percentage each time its accumulated production is multiplied by two. This results from the learning curve, economies of scale and a constant quest to improve overall costs. E.g.: most electronic and software products witness experience curve effects between 25 and 50%. Friction/Erosion Effects Similar to physics and mechanics, this phenomenon represents the loss of financial value a product/service experiences when it passes through the different dimensions of the competitive game (the 2 terms shall be used interchangeably). Game of GO Originally a Chinese strategy game which aims to occupy a territory larger than that of the adversary. In case of intellectual property, this means filing several parents spread over a domain of business in order to enjoy a maximum bussiness coverage. Imitation (Creative) Intelligent copy of an existing innovation which improves certain characteristics of this innovation. E.g.: In the 60-70s, the Japanese companies were excellent creative copiers that were able to launch electronic products with better technological functionalities/options.
March, 2004 © LINEN 90 GLOSSARY I Industrial/Intellectual Protection (IP) Intellectual protection includes industrial property (patents, brands, designs, models, software applications) and copyrights. These IP rights have to be legally registered within the local (possibly European) IP organization. Industry Type A particular class of competitive system that characterizes an industry. When mixing the sensitivity of a business to both differentiation and volume, 4 industry types appear: fragmented, dead-end, specialize and volume. E.g.: the restaurant business is fragmented, perfumes is a specialized industry and the CD players business is pertains to the volume type. Innovation (Disqualifying) An innovation that put offside, thanks to its new characteristics, the existing products/technologies. E.g.: the innovation of the CD-Rom disqualified the audio cassettes. Innovation (Standalone) A technological innovation that may function autonomously or in isolation. E.g.: An anti-bacteria pillow is a standalone innovation. Innovation (System) A technological innovation that cannot function alone. In order to succeed, it needs complements and/or needs to be inserted in a system. E.g.: a cell phone is are a innovation which require hardware, software, plus operators,etc Innovation Intensity An industry with a high innovation intensity is one that regularly witnesses the launch of new products, the filing of new patents,….and in which the life span of the products is extremely short. E.g.: the food/agribusiness and the electronic industries have a high innovation intensity.
March, 2004 © LINEN 91 GLOSSARY K-L Key Success Factors (KSF) A specific mix of competencies that any company has to master within a business in order to run it efficiently and be profitable within the competitive context. Lead-time It measures the period during which the innovator will benefit from an exclusive business situation and a technological monopoly in the application domain(s) of the innovation. E.g.: In the case of Internet services, the lead time was ridiculously low because the innovation, characterized by a very low technological level, could easily be copied; on the other hand, the electronics player Sony often benefits from a lead time of over a year for many of the new & original products it launched. Learning Curve The process of acquiring certain competencies may allow a significant productivity improvement resulting from performing repetitive tasks. Legitimacy Business Legitimacy: A company perceived to be legitimate is one that has taken its own place within an industry thanks to the expertise it progressively acquired and accumulated in it. Scientific legitimacy: In this case, the expertise is based on scientific know-how and reputation. Life cycle of a business Just like a product, a business goes through different phases during its life: emergence, start-up, growth, maturity, decline. Compared to the product life cycle, the maturity phase is much longer for a business. E.g.: The bioinformatics is still in a start-up phase, the automobile industry experiences the maturity stage while digital photograph is booming.
March, 2004 © LINEN 92 GLOSSARY M-R Margin rate Profitability indicator of a company over a given period. Different ratios can be used to estimate this margin rate: ROCE, ROI, operating margin… Minefield An area that contains explosive mines, beset with hidden problems…In IP strategy it means filing multiple patents to protect an innovation from being copied. E.g.: strategy used in the case of smart cards. Niche A clearly identifiable (thanks to operational criteria) market segment requiring a specific offering. E.g.: designing and selling outfits for the tall & huge (plus sizes) persons, a segment for whom ready to wear outfits are not suitable. Norm Reference, generally measured as figure or rate, usually practiced in an industry; specific rules applying to all the members of the industry. E.g. : The norm for a listed company as far as ROI is concerned is 15%. Portfolio of Activities It groups and represents all the distinct business activities managed by a company. Rent Periodic and guaranteed revenue (generally) generated by the possession of a good, an asset or capital. Several kinds of rent exist depending on the school of thought (monopoly rent, entrepreneurial rent, scarcity rent…). In our model, the rent is linked to the exclusive ownership and exploitation of an asset that corresponds to the technological innovation.
March, 2004 © LINEN 93 GLOSSARY R (Appropriable) Rent (equivalent to net rent) In our model, the value of the rent that a company can capture and keep for itself once all the friction and erosion effects arising due to environment and competition have been accounted for. (Potential) Rent (equivalent to initial rent) Irrespective of the holder of the innovation the a priori rent value, which is linked to the nature of the innovation. (Residual) Rent (equivalent to intermediate rent) Value of the potential rent once the friction effects linked to the insertion of the innovation in its environment are taken into account. Replicability / imitability (technical) This indicates the degree of a technical imitation/replication of an innovation. E.g.: The chances of copying the BiNem® technology used in case of LCD flat screens is low since it would require a group of at least 50 highly qualified people to work full time on a similar project for a minimum of 2 years… Risk (Institutional) This represents the potential danger related to regulatory texts, lobbies and professional norms for an innovation. But, reciprocally, these institutional elements can work as a true catalyst for an innovation. E.g.: the regulation/norms about CO2 emission favored the emergence of new combustion processes, new fuels… Risk (Business) In the model, this represents the dangers and/or difficulties associated with the adoption propensity of target clients vis à vis innovations in general. E.g. : Pathology laboratories are very fond of innovation, with an all or nothing type of reaction.
March, 2004 © LINEN 94 GLOSSARY R - S Risk (Technological) It represents the potential danger that comes from players working on alternative technologies to the one used by the innovator. It can be assessed through the number and the value of the alternative options proposed and their degree of advancement compared to the innovation. Sensitivity to differentiation This measures the magnitude of possibilities for the players of a business to significantly and durably differentiate their offering. The criteria to be taken into account are : existence of different groups of solutions and competitors, existence of protected niche,… E.g.: As opposed to the floor cloths business, that of beauty products and care is very sensitive to differentiation… Sensitivity to volume This is linked to the existence (or absence) of economies of scale and size in an industry. A business is considered sensitive to volume if a strong co-relation between size and profitability of each of the players exits. E.g.: the floor cloths business is extremely sensitive to volume, as that of perfumes and electronic components. (potential) Size of the client-market The turnover that a market may reach when it is fully developed/exploited. (real) Size of the client-market Turnover currently achieved within this market. SNIC Small and/or New Innovative Companies: all small, medium sized and/or new companies that develop technological innovations and/or are likely to benefit from intellectual property protection (patents, brands, designs, models, copyrights etc.)
March, 2004 © LINEN 95 GLOSSARY S-W Substitute Product/service which fulfills the same needs and has the same utility functions as the reference offer in a business. E.g.: Digital snaps substitute silver halide photo, camcorders are substitutes for cameras. Transfer costs Sum of the costs that are incurred to move from one supplier to another one. These are not just financial costs (time cost, inhabits change cost…) and their perception is more important than their reality. E.g. : changing laboratory equipment which requires drafting a new manual, putting in place a new process, a new training of the staff… White Knight This term which has been borrowed from the finance world (used during hostile acquisition bids) and embodies a company which helps SNIC defend itself against a competitors attack.
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