How to profit from innovation?

The most important aspects for successful implementation of innovation are complementary assets. Though, they have to be deployed at a correct time and appropriately protected.

.credits: David J. Teece

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Discovering novel technologies, inventing new products or even obtaining patents may not be sufficient enough. An invention has to be successfully commercialised in order to be beneficial for the company. Even then, companies such as Google or Tesla, which did not invent an online search tool or electric cars, may profit at the expense of the innovator…

So how can companies capture the lion’s share from their innovation?

One of the best answers has been formulated by David J. Teece in 1986. He has introduced the basic building blocks which explain why the second or even third movers can outperform the innovators/inventors. The most important aspects are complementary assets which are crucial for successful implementation of innovation. Though, they have to be deployed at a correct time and appropriately protected. There are of course many additional factors which influence the outcome, though these three principles should help you understand the implementation process of technological innovation.

Appropriability regime

According to David J. Teece there are 2 dimensions for protecting your innovation. Legal instruments and Nature of technology. An appropriate innovation protection method should be selected based on the nature of technology itself. Because some products can be easily copied even with patents and trademarks, while others may not need legal protection whatsoever. So, what is the knowledge/product/technology and is it…?

Nature of technology

• Tacit or codified

• Product or process

• Socially complex

• Causal ambiguity

Legal instruments

• Patents - tldr. They rarely work, but in some cases or industries they might be an efficient tool (i.e. pharmaceutical industry). Otherwise expensive and easy to workaround.

• Copyrights & Trademarks - Easier to register and can be useful for example for creative industries (artwork, distinctive signs and specific words, naming, logos etc.)

• Trade secrets - Protecting the know-how and tacit knowledge could be a viable option, however keeping secrets is especially difficult once the product becomes public.

If you would like to learn more about legal instruments of intellectual protection, please consider joining our network so you don’t miss our upcoming article.

Complementary assets

It is almost impossible to commercialize an innovation without complementary assets or external resources. Activities such as distribution, service or manufacturing are often dependent on strategic partners and third party providers. Also, the technological base has to be available for large-scale and affordable production. Hence, it is necessary to take those factors into consideration and to develop appropriate strategies or business models.

According to Teece, there are 4 main types of complementary assets:

• Generic - widely accessible with no specialisation i.e. raw materials

• Specialised dependence of the Asset (on innovation) i.e. Mobile app on iOS

• Specialised dependence of the innovation (on Asset) - i.e. electric cars on Charging stations

• Cospecialized - bilateral dependence i.e. containers ships and ports

Dominant design

During every product’s life cycle there is a moment in which a dominant design is established. This moment divides the dominant design paradigm into two main phases.

Firstly, it is the preparadigmatic stage during which the innovators may still experiment and the product can evolve a lot. During this stage there is a room for improvements, design changes, even several variations may be considered. Aso the use cases might be explored based on initial feedback and market response. However, once the dominant design has been selected by the users and scientific maturity has been achieved the market “agrees” on standards and norms, which will be broadly utilized.

During the second stage - the paradigmatic phase - most products have common designs, similar functionality and use the same materials etc. (i.e. laptop or smartphone - dominant design with only minor customisation from producers or incremental YoY changes.). During the paradigmatic design phase the focus is shifted towards the process innovation. Higher degree of optimisation is necessary for efficiency, scale and profitability. Also, learning becomes crucial for further product iterations and competitiveness in the market.

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Access to complementary assets and external resources is critical for successful innovation. Control of gate-keepers and high dependence on complementary assets could reduce innovator's profit share.

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If imitation is relatively easy and complementary assets are controlled by gate-keepers, other companies may enter during the latter stage of the innovation process and/or capture the lion’s share of generated value for themselves. Moreover, it might be wise to already start looking for strategic partners and learn more about collaborative business models.

Though this model can be exploited also from the opposite perspective. Perhaps…. Could you benefit from someone else's innovation? Or capture their share of profit??

Conclusion

Companies have to take into consideration several limits for successful innovation and develop strategies and business models accordingly. Otherwise, it may be the competitors who benefit from your innovation and often it’s imitators and second movers who capture the lion’s share. Understanding and effective utilization of introduced concepts - Appropriability regime, Complementary assets and Dominant design - may be the difference between successful innovation and failed invention.

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References

• Teece, D.J. (1986), “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy,” Research Policy, 15(6): 285–305.

• Teece, D.J. (2010), “Business Models, Business Strategy and Innovation,” Long Range Planning, 43(2/3): 172–194.