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CPET 575 Management Of Technology

Summary & Discussion


Profiting from Technological Innovation:
Implications for Integration, Collaboration, Licensing, and Public
Policy, by David J. Teece (1986)
From the text book: Reading I-1, pp.32-48
Robert A. Burgelman, Clayton M. Christensen, and Steven C.
Wheelwright, Strategic Management of Technology and Innovation,
5th edition, McGraw-Hill, ISBN 0073381543, 2009.

Paul I-Hai Lin, Professor


http://www.ipfw.edu/~lin
M.S. Technology
Purdue University Fort Wayne Campus

CPET 575 Managgement of Technology Paul Lin

Summary & Discussion


Profiting from Technological
Innovation:
Implications for Integration,
Collaboration, Licensing, and
Public Policy, by David J. Teece
(1986)

CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy

Question:
Why innovating firms often fail to obtain significant
economic returns from an innovation while customers,
imitators, and other industry participants benefits?

Executive Summary (Abstract)


Introduction
The Phenomenon
Profiting from Innovation: Basic Building Blocks
Implications for Profitability
Implications for R&D Strategy, Industry
Structure, and Trade Policy
CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy

Main Questions:
What is the value of technological innovation?
Why innovating firms often fail to obtain
significant economic returns from an
innovation while customers, imitators, and
other industry participants benefits?

CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy

Abstract
Business strategy (integrate & collaborate)
When imitation is easy, market dont work well
(complementary assets => profits from innovation;
IP?) ; a need to establish a prior position in these
complementary assets

CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy

Abstract (continue)
Innovators with new products & processes which
provide values to consumers may ill positioned in the
market => fail
Innovating firms without the required manufacturing
and related capacities may die, even though they are
the best at innovation
Examine Implications for trade policy and domestics
economic policy

CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy - INTRODUCTION

Innovation firms
1st to commercialize a new product or process
The clear existence and persistence phenomenon:
competitors/imitators profited more than the
innovation

Question 2
Why a fast 2nd or even a slow 3rd might outperform the
innovator?

CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy - INTRODUCTION

Exhibit 1 Explaining the Distribution of the


profits from Innovation: Customers, Imitators &
followers, Suppliers, Innovator (Pie Chart)
Question 3
How does a firm capture the financial returns from
innovation?
New product/services/Improved process
Commercialization
Joint venture, Co-production agreements, cross
distribution arrangement
Technology licensing (IP)
CPET 575 Managgement of Technology Paul Lin

Profiting from Technological Innovation:


Implications for Integration, Collaboration, Licensing, &
Public Policy - INTRODUCTION

Exhibit 1 Explaining the Distribution of the


profits from Innovation: Customers, Imitators &
followers, Suppliers, Innovator (Pie Chart)
Question 4
What determines the share of profits captured by the
innovator?

CPET 575 Managgement of Technology Paul Lin

THE PHENOMENON
Exhibit 2 Taxonomy of Outcomes from the Innovation Process
Innovator

Win

Lose

Follower-Imitator

Pilkington (Float
Glass)
G.D. Searle
(NutraSweet)
DuPont (Teflon)

RC Cola (diet cola)


EMI (scanner)
Bowmar (pocket
calculator)
Xerox (Office
computer)
De Haviland (Comet)

IBM (personal
computer)
Matsushita (VHS video
recorders)
Seiko (quartz watch)
Kodak (instant
photography)
Northrup (F20)
DEC (personal
computer)

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THE PHENOMENON

Question 5
What are the issues involved in managing
technological innovation? And
Why a fast second or even slow third
outperform the innovator?

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PROFITING FROM INNOVATION:


Basic Building Blocks

A Framework: identifies the factors which


determine who wins from innovation
Three fundamental building blocks
The Appropriability regime
The Dominant Design Paradigm
Complementary Assets

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Exhibit 3. Appropriability Regime:


Key Dimensions

Legal Instruments

Patents
Copyrights
Trade secrets

Nature of technology

Products
Process
Tacit
Codified

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The Dominant Design Paradigm

The
Preparadigmatic
Stage
Trial and error in
market place
Fierce competition
on design
Dominant design
begin to emerge

The Paradigmatic
Stage
Dominant design
meets the needs of
majority of users
Competition shifts to
pricing
Examples

The Model T Ford


IBM 360 mainframe
computer
Douglas DC-3

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Technology Adoption Process/Product Life


Cycle

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Exhibit 4 Innovation over Product/Industry


Life Cycle

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Complementary Assets

Exhibit 5. Complementary Assets Needed to


Commercialize an Innovation

Core Technological Know-How in Innovation (Center)


Competitive manufacturing
Distribution
Service
Complementary Technologies
Others

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Complementary Assets

Exhibit 6. Complementary Assets


Dependence of the Assets on the Innovation
(Vertical Axis)
Dependence of Innovation on Complementary
Assets
Generic
Specialized

Unilateral dependence of assets on the innovation


Unilateral dependence of innovation on the assets

Co-specialized

Bilateral dependence
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IMPLICATION FOR PROFITABILITY

Tight Appropriability Regimes


Iron clad patent or copyright protection, or
The nature of product trade secrets effectively deny
imitators access to the relevant knowledge
Complementary Assets
Generic contractual; licensing its technology
Specialized or Co-Specialized Assets
Investment required
Contractual Relationship (?exposed to hazards?)
Integration (build or acquire?)

Is this a right design, dominant design?


Competitors (muted?)
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IMPLICATION FOR PROFITABILITY

Weak Appropriability Regimes


Innovators must turn to business strategy to keep
imitator/followers at bay
Competitive process: Preparadigmatic Phase
Careful let Basic Design float Design Industry
Standard
Examples:
Microelectronic (IC) Design lock in when the
circuitry is chosen; product modification:
debugging and software modification
New families of microprocessors define a new
industry and software standard: basic design
parameters less well defined, until market
acceptance is apparent
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IMPLICATION FOR PROFITABILITY

Weak Appropriability Regimes


Competitive process: Preparadigmatic Phase
Examples:
Steam cars/Internal combustion engine
De Haviland Comet I (world first commercial jet,
http://en.wikipedia.org/wiki/De_Havilland_Comet )
Boeing 707 (1st) : Douglas (3rd)

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IMPLICATION FOR PROFITABILITY

Exhibit 7 Complementary Assets Internalized


for Innovation: Hypothetical Case #1 (Innovation
Integrated into All Complementary Assets)

Core Technological Know-How in Innovation (center)


Competitive Engineering
Distribution
Service
Complementary Technologies
Others
Personal Computer Example Complementary
Assets needed

Prohibitively Expensive
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IMPLICATION FOR PROFITABILITY

Exhibit 8 Complementary Assets Internalized


for Innovation: Hypothetical Case #2 (Innovation
Subcontracted for Manufacturing and Service)

Core Technological Know-How in Innovation (center)


Distribution
Complementary Technologies
Others

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Contractual/Integration Strategies

Possible Modes acquire needed


complementary assets
Contractual Modes
Integration Modes
Mixed Modes

Decisions to integrate or license


Trade-offs
Compromises
Mixed approached

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Contractual/Integration Strategies

Contractual Modes
Independent suppliers, manufacturers, or distributors
No upfront capital expenditure to build or buy the
assets in need
Reduced risks and cash requirements
Add credibility to the innovator: IBM PC + Microsoft
MS-DOS (contractual/strategic partnering)
Optimal strategy when
Innovators appropriability regime is tight, and
Complementary assets are available in competitive
supply
Integration Modes
Mixed Modes
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Contractual/Integration Strategies

Integration Modes
If the innovation is not tightly protected and once out
is easy to imitate => securing control of
complementary assets (a key success factor)
Integration consider: Time and the amount of
investment needed to acquire needed complementary
assets
See Exhibit 9

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Exhibit 9 Specialized Complementary Assets


and Weak Appropriability: Integration Calculus

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Integration vs. Contract Strategies:


An Analytic Summary

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Further Decision If Specialized Assets in


Question

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Implications for R&D Strategy, Industry


Structure, and Trade Policy (1986)

Allocating R&D Resources


Small-Firm vs. Large Firm Comparisons
Regimes of Appropriablity and Industry Structure
Industry Maturity, New Entry, and History
The Importance of Manufacturing to
International Competitiveness
How Trade and Investment Barriers can Impact
Innovators Profits

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Implications for R&D Strategy, Industry


Structure, and Trade Policy (21st century?)

Are those issues still important?

Allocating R&D Resources


Regimes of Appropriablity and Industry Structure
Industry Maturity, New Entry, and History
The Importance of Manufacturing to International
Competitiveness
How Trade and Investment Barriers can Impact Innovators
Profits

What are Implications of Internet age to innovations in


21st century?

Open Innovation model?


R&D outsourcing
Global Manufacturing
Global distribution, services
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SUMMARY

Question:
Why innovating firms often fail to obtain significant
economic returns from an innovation while customers,
imitators, and other industry participants benefits?

The Phenomenon Lesson learned


How to Profiting from Innovation: Basic Building
Blocks
Use the three building blocks: the appropriability
regimes, the dominant design, complementary
assets
Implications for R&D Strategy, Industry
Structure, and Trade Policy
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