07/19/23 1

CAPTURING VALUE FROM

INNOVATION AND
COMPLIMENTARY
RESOURCES
Session 10
07/19/23 2

Innovation- effects
• Diversification, progressive shift of a company’s core
• New ways of satisfying the same/new customer’s better
• Creation of ‘Value’ part of which can be derived by the firm
that is innovating.
07/19/23 3

EMI – CT scanner experience

07/19/23 4

Who benefits from innovation?

07/19/23 5

Gain to innovators or to imitators

Innovator Imitator-follower

IBM PC
G.D Searle-
Matshushita- VHS
Nutrasweet
Video recorder
Win Dupont-Teflon
Seiko – Quartz watch

Kodak- instant
RC Cola (Diet cola)
photography
Lose Xerox (Star)
DEC- PC
07/19/23 6

Factors determining benefits from innovation

• Regimes of appropriability: aspects of the commercial
environment other than firm and market structure, that
govern an innovator’s ability to capture the rents
associated with innovation
• Dominant design paradigm
• Stages of industry development
• Complementary capabilities
07/19/23 7

Regimes of appropriability
• Nature of technology
• Efficacy of IPR mechanisms such as patents, copyrights
• Trade secrets- extent of tacit and codified knowledge
• Lead time and learning advantages for process innovation
• Sales and service efforts for product innovation
• Methods of appropriability may vary between/within industries
• Appropriability is tight or weak, depending on the property rights
environment (nature of technology, efficacy of legal system)
07/19/23 8

Dominant design paradigm

• Paradigm- set of shared beliefs, assumptions
• Emergence of a dominant paradigm- scientific maturity
• Stages of technology development(Abernathy, Utterback)
• Early product stage: Fluid product designs, loosely and adaptively
organized processes, competition between firms on designs which
are very different from one another, use of generalised capital in
production
• Dominant design or a narrow class of designs- that meets a whole
sets of user needs, competition shifts to price and away from
design, importance of scale and learning, specialised capital
deployed which is recovered by economies of scale and learning,
innovation though not halted is relegated lower down in the design
hierarchy
• When imitation is possible, a follower’s modified product may well
become the industry standard
07/19/23 9

Diagrammatic representation of the

Abernathy- Utterback model
07/19/23 10

Is the product complete?

• How tacit is the knowledge that makes the model work?
• Hence how sellable is the technology/product?
• Pre-paradigmic design phase- may have problems in selling a
standard design
• Hence product development choices may be limited- depending on
the stage of product development
• If the firm makes choices such as collaboration that enables it to
quickly arrive at a position for commercialization, it can minimize
the risk of failure in the valley of death
07/19/23 11

Complimentary capabilities
• VRIO- the O Part
• Stretch and leverage- getting into a new business-
acquiring the ‘other’ key resources for running a new
business
07/19/23 12

Complementary assets
• In order to make an innovation useful, it should be sold or
used in the market
• Commercialisation requires use of the knowhow along
with services such as
• Marketing
• Competitive manufacturing
• After-sales support
• Many of these services are also specialised with respect
to the service
• These may typically be in-house, else they may be made
available through acquisition or contract- terms important
07/19/23 13
07/19/23 14
07/19/23 15

Types of complementary assets

• Generic-General purpose assets that need not be tailored
for the innovation
• Specialised-those on which the innovation depends,
tailored to that innovation
• Co-specialized-those for which there is a bilateral
dependence- eg, repair facilities for servicing a particular
type of engine
07/19/23 16

Sharing of value between innovator and

imitator
• If patent protection is iron clad, or trade secrets deter
competitor entry, large share of profits with innovators
• Even if innovator doesn’t have complementary assets, they will get
the time to acquire them
• If these assets are generic, technology licenses may work
• Specialised R&D firms are viable in this environment
• If Complementary assets are specialized or co-specialized-
innovator may wish to integrate by owning these assets
• This may also provide innovators to come up with less than perfect
designs in the initial phase and learn fast to improve the designs
• However, loss of reputation with poor initial designs may not allow
the technology to become a standard
• In the ‘pre-paradigmic’ stage, complementary assets may
not be that important
07/19/23 17

Sharing of value between innovator

and imitator
• As terms of competition change, and price becomes
increasingly important, complementary assets become
critical
• Volumes increase, firms gear up for mass production by
acquiring specialised equipments, and specialised
distribution- islands of asset specificity form in a sea of
generalised assets
• Specialised and co specialised assets become very
important
• For instance if an innovator is weak in appropriability, and if
a owner of speicalised and co-specialised assets enjoys
relative monopoly, they may appropriate most of the profits
07/19/23 18

Choices for accessing complementary

assets
• Integrate into- all the complemntary assets- expensive
and ineffective- constraints of time & resources
• Access competencies through contractual relationships
• Mixed Assets
 07/19/23 19

Choice of
complementary
assets-
Algorithm-
Teece
07/19/23 20

Implications for corporate strategy

• Which business to get into?
• Looking at more than ‘core competencies’
• Operational and corporate relatedness in ‘complementary
capabilities’
• Implications in defining what the ‘heartland’ businesses are
• How to make optimal use of innovations
• Divest, diversify into new business or change the core of the
existing business portfolio?
07/19/23 21

Implications of internally investing in

complementary capabilities
• Implications of creating all complementary capability to a
newly developed or leveraged core competency
• End result of diversification
• Creation of these capabilities enable further growth in the
domain, for instance it becomes easier to launch newer
product
• Makes sense if the firm has long term goals of
diversification
• Decision on whether the new competency can become
part of the firm’s core, hence clarity about the future
course of action is necessary, as also clarity about risk
07/19/23 22

Impact of developing external linkages

• Reduces the chance of failure in the valley of death
• Reduces the risk and get others to bear part of the risk.
07/19/23 23

Using intellectual property rights

• Using the right mix of knowledge forms to achieve long
term inimitability
07/19/23 24

Intangible assets of companies

07/19/23 25

• Intellectual property (IP) is a legal concept which refers

to creations of the mind for which exclusive rights are
recognized. Under intellectual property law, owners are
granted certain exclusive rights to a variety of intangible
assets, such as musical, literary, and artistic works;
discoveries and inventions; and words, phrases, symbols,
and designs. Common types of intellectual property rights
include copyright, trademarks, patents, industrial design
rights, trade dress, and in some jurisdictions trade
secrets.
07/19/23 26

• Copyright is a legal concept, enacted by most

governments, that grants the creator of an original
work exclusive rights to its use and distribution, usually for
a limited time, with the intention of enabling the creator of
intellectual wealth (e.g. the photographer of a photograph
or the author of a book) to receive compensation for their
work and be able to financially support themselves.
• Typically, the duration of copyright is the whole life of the
creator plus fifty to a hundred years from the creator's
death, or a finite period for anonymous or corporate
creations. Some jurisdictions have required formalities to
establishing copyright, but most recognize copyright in any
completed work, without formal registration.
07/19/23 27

• A trademark, trade mark, or trade-mark is a

recognizable sign, design or expression which
identifies products or services of a particular source from
those of others. The trademark owner can be an
individual, business organization, or any legal entity. A
trademark may be located on a package, a label,
a voucher or on the product itself. For the sake
of corporate identity trademarks are also being displayed
on company buildings.
• A trademark is typically a name, word,
phrase, logo, symbol, design, image, or a combination of
these elements
 07/19/23 28

• An industrial design right is an intellectual property right that

protects the visual design of objects that are not purely
utilitarian. An industrial design consists of the creation of a
shape, configuration or composition of pattern or color, or
combination of pattern and color in three dimensional form
containing aesthetic value. An industrial design can be a two-
or three-dimensional pattern used to produce a product,
industrial commodity or handicraft. An industrial design right
can be viewed as an intellectual property right similar
to copyright
• Trade dress is a legal term of art that generally refers to
characteristics of the visual appearance of a product or its
packaging (or even the design of a building) that signify the
source of the product to consumers
07/19/23 29

• A patent is a set of exclusive rights granted by a sovereign

state to an inventor or their assignee for a limited period of
time, in exchange for the public disclosure of the invention. An
invention is a solution to a specific technological problem, and
may be a product or a process
• Under the World Trade Organization's (WTO) Agreement on
Trade-Related Aspects of Intellectual Property Rights, patents
should be available in WTO member states for any invention,
in all fields of technology, and the term of protection available
should be a minimum of twenty years
•  a patent provides the right to exclude others from making,
using, selling, offering for sale, or importing the
patented invention for the term of the patent
07/19/23 30
07/19/23 31

Trade secrets vs patents

• Collection of tacit knowledge related to the processes and
procedures specific to the product line.
07/19/23 32

Conditions for patenting

• Patentable subject matter: for an invention, and not for an
abstract idea or for a previously unknown plant or animal
• Utility- must do what it claims to do, and must be of some
use to society
• Novelty- must be new, scanned through ‘prior art’ to ensure
• Non obviousness- some kind of inventive breakthrough
• Description and enablement- to enable others to replicate
once the patent expires
07/19/23 33

Connecting IPR mgmt with market opportunities

07/19/23 34
07/19/23 35

Strategic disclosure
• Disclosing about patent and their uses to customers and
rivals
• Integrated IP strategy combining patenting with disclosure
07/19/23 36
07/19/23 37

Concept of patent pools

• Pooled patents available to all licensors and external
licensees
• Licensees offered standard licensing terms- simple patent
packages
• Licensing fees allocated to each member as per present
formula
• Independent party involved to assess the essentiality of
each patent before it is included in the pool
• Mechanisms for adding new patents and recaliberating
royalty shares.
07/19/23 38

IP licensing
• Licensing unused internal technologies
• Eg. In pharma- failed drugs can be tested out in other contexts for
other uses
• Development problems in a firm can possibly be solved by other
firms because of its different capabilities
• Abandoned IP getting used for generating revenue- details of
revenue sharing – often a negotiated agreement between the two
parties.
07/19/23 39

Collaborating to set standards

• Risk of manipulation of standards by one or more of the
players in a way that they can benefit from own patents or
other IP
07/19/23 40

Use of patent pools to overcome blocks

07/19/23 41

“Patent holding company”- Patent trolls?

• RIM vs NTP case- RIM ordered to pay $600 million
• Does modern patenting system encourage or discourage
innovation?
07/19/23 42

• Capturing value from innovation

• Complementary capabilities
07/19/23 43
07/19/23 44
07/19/23 45
07/19/23 46
07/19/23 47
07/19/23 48

Some concepts that impact value

capture
07/19/23 49

Commercialization
• When the firm is able to capture value from the innovation
• May require a completed product
• May require the customer ecosystem to be in place
• May require the firms complete business model to be in place
07/19/23 50

Power within the ecosystem

• Bargaining power with distributors and intermediate
customers
• Capabilities of differentiation
• Branding
• Tangible and intangible differentiation
07/19/23 51

Potential of secondary innovation

• Some innovations have the potential to spawn innovation
in different kinds of products

Primary
innovation-
intended

Core Secondary
Basic idea innovation-
innovation
unintended

Tertiary
innovation
07/19/23 52

Access to markets
• Being able to produce and sell products or services
• Additional capabilities for completing a viable business
model
07/19/23 53

Quantum/share of profits
• Depends on the strategic options
• Firms may need to manage the tradeoff between the
volume and share of profits.
• Some options may allow the access to the largest possible extent
of markets- of both primary and secondary innovation
• Other options may allow the access to the largest share of the
markets
07/19/23 54

Strategic options used

• Firms may choose to access the opportunities through
building of own resources, or through inorganic options
like selling off the innovation, or exploring through
partnership options such as licensing or joint ventures
07/19/23 55

Time window of opportunity

• The opportunity for the innovating firm is limited in terms
of the time- it has only a certain lead time before it
becomes possible for the rival firms to either come up with
a viable innovation, or a viable alternative or better
innovation that could make the current innovation
obsolete