Notes on — Teece — Profiting from Technological innovation — 1986

Paper explains why customers and imitators benefit more from innovators then innovators themselves. When imitation is easy — profits accrue to the owners of complementary assets. Key complementary assets include manufacturing.

Easy imitation leads to profits going to the owners of complementary assets.

Complementary assets — Know-how to profit from the invention including marketing, competitive manufacturing, after-sales support, complementary technologies etc.

As in the diagram, often innovations are dependent on the asset or vice versa or even mutually dependent on each other.

For example, RC Cola, a small beverage company was the first to introduce cola in a can but Coca Cola and Pepsi as owners of complementary assets seized competitive advantage.

Bowmar introduced the pocket calculator but was not able to compete against Texas Instruments or Hewlett Packard.

From Anderson and Tushman (1991), dominant design emerge such as the Model T Ford, IBM 360 and the Douglas DC-3.

Abernathy and Utterback (1975) — product innovation leads to dominant design and thereafter process innovation increases.

Design Competition à Dominant Design à Price competition

Tight appropriability regime — easy to protect technology such as Coca Cola

Weak appropriability regime — difficult to protect, must resort to business strategy — Simplex algorithm in linear programming

Tight appropriability regime gives time to obtain complementary assets and to obtain design rights.

Patents can be invented around with moderate costs. Trade secrets work only if firms can put their product to the public and still keep the underlying technology secret.

Firms must innovate to survive — e.g. none of the producers of steam cars survived when the closed body internal combustion engine automobile emerged as the dominant design.

Pre-dominant design — complementary assets are not widely available; competition is focused on finding the dominant design. After dominant design, significant investments in complementary assets. Firms which control these specialised assets such as distribution channels and specialized manufacturing capacity can gain control of the market. Innovators must seek to obtain at least some of these assets to capture at least some of the profits from their invention.

For this reason, innovators partner with established companies for reputation spill-overs. However, there is the risk of opportunistic abuses with the innovator either overstating their invention or the established company running with the technology.

Sometimes governments can lock complementary assets making it impossible for innovators to profit from their invention.

EMI failed to reap returns from its CAT scanner as it did not have capabilities to provide training, support and servicing in hospitals for the technology and thus failed to capture profits from the innovation.

Mature industries raise the barrier to entry as new firms do not have complementary assets. Strategic alliance lowers entry requirements for innovators.

Innovators must continually invest in R&D towards new products and processes which it can commercialize ahead of competitors.

Profits will accrue primarily to low cost manufacturers as they hold complementary assets. American ‘designer role’ may not be a viable long term strategy.