To be able to profit from innovation it is vital for company to ensure that it captures value resulting from it. Not always a company who innovates makes the profit from it. A classic example of it is the invention of personal computer by Xerox, which resulted in no gains for the innovator. According to Teece (1986), there are three main factors which influence whether the innovator could capture value from it namely: appropriability regime, complementary assets & dominant design paradigm.
Appropriability denotes the ability to capture value. It is determined by the nature of technology (e.g. difficulty of imitation) and the efficacy of legal mechanisms of protecting IPR. These factors vary across industries and geographies. Factors which influence appropraiblity also include tacitness and complexity of innovation. The more tacit know-how innovation encompasses the more it gets difficult for imitators to copy or re-engineer the innovation. Apart from tacitness, legal mechanisms like patents, trade secrets and copyrights also strengthen the appropriability of the innovation and increase the likelihood of capturing value from it.
Complementary assets refer to the assets, infrastructure or capabilities required to successfully commercialize and market the technology. Companies which innovate but lack access to the complementary assets are unlikely to profit from innovations.
A dominant design refers to a de facto standard in an industry. When a new industry emerges it struggles with the right product/process initially until it reaches a point where a product/process becomes a de facto standard and gains legitimacy. Emergence of dominant design has implications of dynamics of innovation as illustrated in figure 2-6.
Figure 2?6. Rate of innovation in an industry (Utterback, 1994)
In the pre-dominant design phase (fluid phase) there is great uncertainty as to a company’s product, process, competitive leadership and management structure. As the product is not well defined there is high rate of product innovation. As soon as the dominant design emerges process innovation exceeds that of product innovation and change becomes costly.
Thus, in order to profit from an innovation, a company must clearly understand where its industry is in the industry life cycle as well as how strong is the appropriability regime of the innovation and whether it can have access to complementary assets.
Teece, D.J. (1986). Profiting from technological innovations. Research Policy, 15: 285-305.
Utterback, J. M. (1994). Mastering the dynamics of innovation, Harvard Business School Press, Boston.
(Originally posted at: http://www.vaibmu.com/capturing-value-from-innovation/)