Appropriating the Benefits from Innovation

Technological leadership in firms does not necessarily translate itself into economic benefits. Table reproduces some examples of technology leaders and followers, some of which in each category turned out to be competitive winners and others losers. David Teece argues that the capacity of the firm to appropriate the benefits of its investment in technology depends on two factors: (1) the firm’s capacity to translate its technological advantage into commercially viable products or processes; (2) the firm’s capacity to defend its advantage against initiators. Thus, effective patent protection enabled Pilkington to defend its technological breakthrough in glass making and stopped Kodak imitating Polaroid’s instant photography. Lack of commitment of complementary assets in production and marketing resulted in the failure of EMI and Xerox to reap commercial benefits from their breakthroughs in medical scanning and personal computing technologies. De Havilland’s pioneering Comet jet passenger aircraft paid the price of revealing the effects of mental fatigue on high altitude flight, the details of which were immediately available to all competitors. In video reorders Matsushita succeeded against the more innovative Sony in imposing its standard in part because of a more Liberal licensing policy towards competitors.

Some of the factors that enable a firm to benefit commercially from its own technological lead can be strongly shaped by its management: for example the provision of complementary assets to exploit the lead. Other factors can be influenced only slightly by the firm’s management and depend much more on the general nature of the technology, the product market and the regime of intellectual property rights for example, the strength of patent protection. We identify below nine factors which influence the firm’s capacity to benefit commercially from its technology.

(1) Secrecy (2) Accumulated tacit knowledge (3) Lead times and after sales service (4) The learning curve (5) commentary assets (6) Product complexity (7) Standards (8) Pioneering radical new products (9) Strength of patent protection.

Technological leaders and followers competitive outcomes

Technology leaders Technology followers

Competitive winners  Pilkington (Float glass)  Matsushita (VHS)

Competitive losers  EMI (scanner)  Xerox (PC)  De Havilland (Comet)  IBM (personal computer)  Kodak (instant photos)

We begin with those over which management has some degree of discretion for action and move on to those where its range of choices is more limited.

Secrecy is considered an effective form of protection by industrial managers especially for process innovations. However, it is likely to provide absolute protection because some process characteristics can be identified from an analysis of the final product, and because process engineers are a professional community, who talk to each other and move from one firm to another so that information and knowledge inevitably leaks out. Moreover there is evidence that in some sectors, firms that share their knowledge with their national system of innovation out perform those that do not and that those that interact most with global innovation systems have the highest innovative performance. Specifically firms that regularly have their research (publications and patents) cited by foreign competitors are rated more innovative than others, after controlling for the level of R&D. In some cases this is because sharing knowledge with the global systems of innovation may influence standards and dominant designs and can help attract and maintain research staff, alliance partners ad other critical resources.

Accumulated tacit knowledge can be long and difficult to imitate especially when it is closely integrated in specific firms and region. Examples include product design skills, ranging from those of Benetton and similar Italian firms in clothing design, to those of Rolls Royce in aircraft engines.

Source: Managing Innovation