Transcript Imitators and innovators - Northwestern University

Topic 6: Capturing value in
competitive markets
• A. Conventional view of imitator/innovator
– Reverse engineering & imitation
– Competitive tactics
• B. Capturing value as an innovator or imitator
– Co-specialized assets
– The evolving perspective on the use of secrecy, patents,
lead-time
• C. Sell-out to an incumbent or commercialize?
– Capturing value in markets for ideas or organizations
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A. Strategies about imitation:
Reverse Engineering
• Two different examples
– Wrebbit: the inventor out-smarts the imitators
– Compaq: the imitator out-smarts the innovator
• Not a tale where good guy always wins
– Sometimes imitators win, sometimes innovators
– “It depends.” It depends on what? Luck, strategy, etc.
– Must always go through calculations about when
imitation is worthwhile, about likelihood of being
imitated, market conditions, etc.
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A. Wrebbit: an example where
the innovator wins
• The idea for the 3-d puzzle
– What is the scarce resource? The ideas or the knowhow to implement?
– What precedent did the players have to use?
• How easy is it for an established player to imitate
the basic elements of the idea?
• What kind of deal can Wrebbit make?
– What assets do they bring to the table?
– What assets does Milton Bradley bring to the table?
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A. Compaq: An example where
the imitator wins
• The idea for the Compaq computer
– What is the scarce resource? The idea or the resources
to implement?
– What precedent did the players use?
• How easy was it for the player to imitate the basic
elements of the IBM computer?
• Compaq had to solve one problem to realize their
goal. Was it easy/hard to do?
– Did their solution influence/inspire others to pursue
related ideas?
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A. The basics behind the
innovator/imitator situation
• The costs of imitating an innovation
– What is in the public domain? What is privately held?
– Tacit/codified knowledge hard/easy to acquire or imitate
– Easy/hard to hire necessary talent or acquire key assets
• Speed and order of entry
– One strategy: First, fast and in front (also free?)
– The strategy of the “fast second”
• Situation happening once? Are events regularly
happening as part of product/technology cycle?
– Featuritis among long time rivals
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A. Basic and obvious tactics
• Innovators try to raise the costs to imitators
– Keep knowledge out of public domain
– Keep knowledge tacit, not codified
– Keep talented individuals away from rivals
• Innovators identify the sources of rivalry
– Where do potential imitators come from?
– How to soberly evaluate ability of imitator to succeed?
• Imitators use assets/technical talent to move quickly
– The hard part: knowing when & what to imitate
– How to be a fast-second? Who can do this? Why?
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A. More tactics: It depends on
industry/market situation
• Large variation across industries
– Imitation usually costs a fraction of invention costs
– Imitation arrives quickly in most markets, not always. Why?
– Why is imitation so hard in some markets? What is so special
about those situations?
• What firms use to protect their innovations
– Patents/copyright, secrecy, first to market or first
mover/complementary assets
– Effectiveness differs across industries
– More on this later
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B. What is missing from simple
tactics? Who captures value?
• Teece’s framework emphasizes complementary
assets set inside the dominant design paradigm
• Appropriability conditions
– Tight: Patents work, can keep secrets, tacit knowledge
– Loose: Mostly public and codified knowledge
• Pre and post paradigmatic industries
– Are consumer tastes known?
– Are assets and modes of business established?
– How firms make investments in anticipation of
emergence of dominant design
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B. Co-specialized assets
• What is a co-specialized asset?
– It is complementary to commercializing technology
– All commercialization used in conjunction with business
assets and market focus
– Assets which lose substantial value in other use
– The “hold-up” problem
• Teece: Own co-specialized assets at the outset
– If not, then build new division in firm
– Or contract for them
– The many hazards of developing new assets (more later)
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B. The framework in tight regime
• Capturing value in tight appropriability regime
– Innovator wins most of the time
– May share profits with co-specialized asset owners if
innovator in poor bargaining position (but this depends on
bargaining abilities of parties involved, so unpredictable)
• Examples
– Pharmaceuticals is strong, classic example
– Biotech is becoming example where bargains are made and
profits are typically shared (similar to Wrebbit)
– Note: a bit vague on the contractual & bargaining details
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B. The framework in loose
regime
• Who is positioned to strike a tough bargain?
– If both or neither is in good position
• If innovator better than imitator
– Innovator wins, but makes contracts or builds own assets
– Consumer electronics, “building own web page”
• If innovator worse than imitator
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–
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If both strong, then either could win, depends on bargain
Microsoft today, IBM in the past
If both weak, then innovator should give up
Wrebbit w/o patent protection
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B. Implications now a routine
part of strategy curriculum
• A likely loser: Good technology alone
– Building or contracting for co-specialized assets essential
• A winner: Control co-specialized assets
– Example: Cable co. & the pipe bottleneck for ISPs, Local
telephone firms & DSL after-sale service/quality assurance
– Strategy: Identify co-specialized assets, but how do you
know which assets these are? And which will be valuable?
• Predicting winners/losers on the basis of uniquely
situated co-specialized assets
– Example: IBM and its marketing contact
– Example: Microsoft and API protocols
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B. What’s missing from Teece?
Firm strategy contains nuance
• Surveys show that there are three “types” of
appropriation strategies
–
–
–
–
Secrecy (includes non-disclosure, non-compete)
Patenting/copyright & other IP tends to be enforceable
Complementary assets/first to market works sometimes
Not mutually exclusive strategies: Often used together
• The limits/benefits to contracting not articulated
– How firms use hold-up ability in bargains.
– The key differences between facing a bottleneck when
innovating and not facing a bottleneck.
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C. Selling out to an incumbent or
commercialize on own
• G&S: Focus on decision by small firm to compete in
output mrkt or sell “ideas market”
– Note: Small firms usually choose one or other, not both
– Note: Small = approx 50 employees or less.
• Cooperating w/incumbent takes many forms
– Marketing/distribution agreement (e.g., biotech/pharma)
– Outright sale of unit (to e.g., Cisco)
• Commercialization on own takes many forms
– Build all dimensions of the business in dist, brand, manu…
– Then compete with incumbent in output market
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C. The “drivers”: Excluding
others, complementary assets
• Can the inventor/start-up preclude effective
development by incumbent?
– If any of three types of appropriation strategies are effective
• Would agreement with incumbent for use of their
complementary assets enhance value proposition?
• Bargaining problems that make agreement difficult
– Disclosure: Price depends on revelation of info, but
revelation makes owner of idea too exploitable
– Contingency: Value depends on future (e.g., demand)
– Perception: Value debatable prior to market experience
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C: A synopsis of the framework
Do the incumbent’s complementary
assets have value?
No
Can the start- No Head-to-head
up exclude
competition
development
Disk drives
by the
Yes Green-field market
incumbent?
development
Transistors
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Yes
Incumbent sets the
bargaining tone
AOL, Yahoo, MS
Market & contracts
for ideas
Biotechnology
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C: When complementary assets
have little value
• No strong IP (or its equivalent)
– Intensely competitive product market w/no sustainable
leads except through renewal of inventiveness
– Effective bargain b/w entrant & incumbent unlikely
– Entrants look for novel value proposition & aspire to
rebuild many existing assets under own roof
– Ex: Disk drives & other electronic component markets
• Strong IP (rare: almost greenfield development)
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–
–
–
Possibility for licensing an upstream “architecture”
Ex: Transistors, Qualcom & wireless?
Patent about basic science: DNA or university discovery
Too many firms wrongly think they live in this situation
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C: When complementary assets
have value
• No strong IP gives incumbent many choices
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–
–
–
Incumbent has ability to exploit bargaining
Product market competition risky for small firm
Low incentives for innovative entrant – why bother?
E.g., the new windshield wiper & auto firms
• Might be in incumbent’s interest to develop
reputation for not exploiting bargaining power
– Possibility for cherry picking external R&D development
– Use of contract intermediaries, such as VCs, mkt-makers
– Incumbent sets the tone: E.g., Brass-knuckle bargains
w/Microsoft, few w/AOL, Yahoo
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C: Outcomes when
complementary assets have value
• W/strong IP
– Incumbents look to coopt potential entrants
– Entrants deliberately establish firm to sell-out (but price
depends critically on bargaining power)
– Entrants compete for priority w/incumbent
– Frequent source of innovativeness, not market leadership
– E.g., Biotechnology
• New invention reinforces extant platform
– Tend not to see challenges to existing platform
– Except if “perception” of incumbent/entrant wildly differ
about value of invention, which interferes w/bargain
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C: Implications from this
approach
• Ability to hold strong IP makes contracting feasible
– Issue is often “when”, not “if. Waiting for prototype…
– W/o explicit contracting  commercialize on own
– W/o right tone from incumbent  small firm may avoid
a deal and develop on own
• Incumbent firms can influence direction of entrant
– Committing to a path (MS announces ahead of time)
– Commitment to soft bargain (Cisco’s purchase pattern)
• Existing assets have value b/c alter bargain price
– Shadow cast by “potential product competition”
– Shadow cast by “potential R&D productivity”
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Learning Points
• Understanding the innovator/imitator
– Often incumbent/entrant, though not always
• Capturing value from innovation
– The importance of complementary assets
– Bargaining for co-specialized assets
• The option to sell-out instead of compete
– Bargaining for ideas
– Value of assets arises from their use in a bargain as well
as in direct product market competition
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