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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

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topic 6 capturing value in competitive markets
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

M&S 463, Capturing value

a strategies about imitation reverse engineering
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.

M&S 463, Capturing value

a wrebbit an example where the innovator wins
A. Wrebbit: an example where the innovator wins
  • The idea for the 3-d puzzle
    • What is the scarce resource? The ideas or the know-how 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?

M&S 463, Capturing value

a compaq an example where the imitator wins
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?

M&S 463, Capturing value

a the basics behind the innovator imitator situation
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

M&S 463, Capturing value

a basic and obvious tactics
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?

M&S 463, Capturing value

a more tactics it depends on industry market situation
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

M&S 463, Capturing value

b what is missing from simple tactics who captures value
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

M&S 463, Capturing value

b co specialized assets
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)

M&S 463, Capturing value

b the framework in tight regime
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

M&S 463, Capturing value

b the framework in loose regime
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
    • 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

M&S 463, Capturing value

b implications now a routine part of strategy curriculum
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

M&S 463, Capturing value

b what s missing from teece firm strategy contains nuance
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.

M&S 463, Capturing value

c selling out to an incumbent or commercialize on own
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

M&S 463, Capturing value

c the drivers excluding others complementary assets
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

M&S 463, Capturing value

c a synopsis of the framework
C: A synopsis of the framework

M&S 463, Capturing value

c when complementary assets have little value
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)
    • 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

M&S 463, Capturing value

c when complementary assets have value
C: When complementary assets have value
  • No strong IP gives incumbent many choices
    • 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

M&S 463, Capturing value

c outcomes when complementary assets have value
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

M&S 463, Capturing value

c implications from this approach
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”

M&S 463, Capturing value

learning points
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

M&S 463, Capturing value