Profiting from Technological Innovation

Introduction

  • Innovators often lament competitors profiting more from their innovations.
  • Being first to market doesn't guarantee success; a fast second or even a slow third can outperform the innovator.
  • A framework is offered to identify factors determining who wins from innovation: the first-to-market firm, follower firms, or firms with related capabilities the innovator needs.
  • The framework explains the share of profits from innovation accruing to the innovator compared to its followers and suppliers.
  • Implications for strategic management, public policy, and international trade and investment are discussed.

The Phenomenon

  • Figure 2 presents a simplified taxonomy of possible outcomes from innovation.
  • Quadrant 1 represents positive outcomes for the innovator (first-to-market advantage translates into sustained competitive advantage).
  • Quadrant 4 and its corollary quadrant 2 are the focus, representing negative outcomes for the innovator.
  • The EMI CAT scanner is a classic case: EMI lost market leadership within 6 years of its introduction into the US, despite being the innovator.
  • Other examples include:
    • RC Cola: First to introduce cola in a can and diet cola, but Coca Cola and Pepsi quickly followed and deprived RC of any significant advantage.
    • Bowmar: Introduced the pocket calculator but couldn't withstand competition from Texas Instruments, Hewlett Packard, and others.
    • Xerox: Failed with its entry into the office computer business, even though Apple succeeded with the Macintosh, which contained many of Xerox's key product ideas.
    • De Havilland Comet: Introduced the first commercial jet but failed to capitalize on its early advantage.
    • MITS: Introduced the first personal computer, the Altair, but slid into oblivion.
  • If there are innovators who lose, there must be followers/imitators who win.
  • IBM with its PC is a classic example of a successful follower/imitator.
  • Neither the architecture nor components of the IBM PC were considered advanced, but it was fabulously successful and established MS-DOS as the leading operating system for 16-bit PCs.
  • By the end of 1984, IBM had shipped over 500,000 PCs.

Profiting from Innovation: Basic Building Blocks

  • Three fundamental building blocks must be put in place to develop a coherent framework:
    • The appropriability regime.
    • Complementary assets.
    • The dominant design paradigm.

Regimes of Appropriability

  • A regime of appropriability refers to the environmental factors that govern an innovator's ability to capture the profits generated by an innovation.
  • The most important dimensions are the nature of the technology and the efficacy of legal mechanisms of protection (Figure 3).
  • Patents rarely confer perfect appropriability, although they do afford considerable protection on new chemical products and simple mechanical inventions.
  • Many patents can be