PROFIT CHAIN

Profit chain KNOWLEDGE ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products

What is the innovation?

INNOVATION = INVENTATION + COMMERCIALIZATION Definition of innovation INNOVATION = INVENTATION + COMMERCIALIZATION Innovation is the use of new knowledge to offered a new product or service that customers want (Afuah). IDEA MARKET

How can a firm make profit from innovation?

Profit KNOWLEDGE ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products

Profits = Revenues – Cost = P(z,q) . q(z) – C(q,z) A firm makes profit from selling a product or service when the revenues are greater than the cost of offering it. P(z,q) = Price z = attributes of the product Q= quantity q(z)= quantity that are sold C(q,z)= cost Profits = Revenues – Cost = P(z,q) . q(z) – C(q,z)

Innovation and profit MORE PROFITS Innovation is use of technological and market knowledge to offer a new product or service that customer will want (low cost, improved attributes, new attributes) and increase the profit through selling of it. Process innovation NEW TECHNOLOGICAL KNOWLEDGE NEW PRODUCT Low cost Improved attributes New attributes COMPETENCES AND ASSETS NEW MARKET KNOWLEDGE Low cost for a given price New or better attributes (price premium) for a given cost MORE PROFITS Product innovation

Assets and competences ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products

ASSETS CAN BE GROUPED INTO They are the resources that a firm needs to exploit the innovation. TANGIBLE, physical and financial resources (plants, equipment and cash reserves). INTANGIBLE, nonphysical and nonfinancial assets (patents, copyrights, reputation, brands, trade secrets, relations with customers, employees and knowledge embedded in different forms). ASSETS CAN BE GROUPED INTO HUMAN, skills and knowledge of the employees.

Attributes of the assets For example, in investment banking, client relationship are core. Role that assets can play in ability of a firm to make profit. How central assets are to a firm’s business. CORENESS Negligible profits Long – term profits No profits Short – term profits Coreness Noncore Core Imitability High Low Dipend of the type of assets: legally protection; uncertainty and complexity. IMITABILITY

Relationship between competences and assets - NO PROFIT  competences and assets non core - MAKE PROFITS  competences and assets core Competences Design engines Negotiate contracts Products or services Low cost Differentiated Assets Intellectual property Skilled personnel Brand names Reputation Client relations Source of assets is competence Assets help to build competences Assets have on the effectiveness of competences a leveraging effect in delivering low - cost or differentiated products

Knowledge KNOWLEDGE ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products

Technological knowledge Innovation is the use of new technological and market knowledge to offer a new product or service that customers will want. It is knowledge of components, linkages between components, methods, processes and techniques that go into a product or service. Technological knowledge It is knowledge of distribution channels, product applications and customer expectations, preferences, needs and wants. Market knowledge

How well does a firm perform the activities that rest on the knowledge?

Properties of the knowledge How new the knowledge is to the function or organization performing the activity, so: if it is very different from existing knowledge, it is said RADICAL (competences destroying); if it is builds on existing knowledge, it is said INCREMENTAL (competences enhancing). Newness Quantity It is a function of the complexity of the activities that go into the product, which may or may not result in a complex product. Knowledge can be: EXPLICIT if it is spelled out in writing, verbalized or coded in drawings, computer programs, or other products; TACIT if it is uncoded and nonverbalized. Tacitness

Nature of innovation KNOWLEDGE ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products

Degree of Technical Innovation’s Newness Type of innovation Degree of Technical Innovation’s Newness Exploits potential of existing design Incrementally New Relatively Minor Changes Often reinforces the dominance of existing firms Numerous incremental changes over time very valuable Architecturally New change relationship between components Radically New New set of engineering principles Often opens new markets/potential Often causes difficulties for established firms Different competitive consequences because they require different organizational capabilities which are difficult to create/adjust.

Environment and internals ENVIROMENT Competitive Macro INTERNALS Strategy Structure Systems People NATURE OF INNOVATION Incremental, radical, architectural Complexity, tacitness Life cycle phase KNOWLEDGE COMPETENCES Ability to design engines, integrate different function, build logistic, market, new ideas, manufacture ASSETS Size, patents, copyrights, location, skilled scientists, reputation, sponsor, licenses PROFIT From innovation that leads to low – cost or differentiad products