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

©2009 Prentice Hall 10-2 Learning Objectives 1.Define appropriability 2.Explain why most innovations are easy to imitate 3.Understand when and how controlling a key resource will allow you to appropriate the returns to innovation 4.Explain when and how economics of scale allow you to appropriate the returns to innovation 5.Understand when and how moving up the learning curve allows you to appropriate the returns to innovation 6.Explain when and how establishing a reputation will allow you to appropriate the returns to innovation 7.Understand when and how obtaining architectural control will allow you to appropriate the returns to innovation 8.Explain when being a first mover is an advantage and a disadvantage 9.Understand the role of complementary assets in appropriating the returns to innovation

©2009 Prentice Hall 10-3 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

©2009 Prentice Hall 10-4 Effectiveness of Barriers to Imitation

©2009 Prentice Hall 10-5 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)

©2009 Prentice Hall 10-6 Controlling Key Resources

©2009 Prentice Hall 10-7 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

©2009 Prentice Hall 10-8 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

©2009 Prentice Hall 10-9 The Learning Curve

Experience and Learning Curves ©2009 Prentice Hall 10-10

Cost Effects of New vs. Old Technology Old Technology New Technology 1 Million Units 2 Million Units 4 Million Units 8 Million Units Cost per Unit

©2009 Prentice Hall 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

©2009 Prentice Hall 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

©2009 Prentice Hall 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

©2009 Prentice Hall 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

©2009 Prentice Hall 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

©2009 Prentice Hall Successful Companies That Were Not First Movers

©2009 Prentice Hall 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 exist 5.Patents are more effective 6.Economies of scale are very large

©2009 Prentice Hall Mechanisms to Appropriate Returns

©2009 Prentice Hall 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 High Low Available or unimportant Tightly held and important Complimentary Assets Imitability

©2009 Prentice Hall Teece Model

©2009 Prentice Hall Difficult to Imitate In industries in which innovations are difficult to imitate, innovators tend to capture the returns to innovation

©2009 Prentice Hall 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

©2009 Prentice Hall 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

©2009 Prentice Hall Imitator Strategy