3 Profiting from Innovation Flashcards
What is an appropriability regime and why is it important for innovators?
An appropriability regime refers to the set of environmental factors—legal and technical—that determine an innovator’s ability to capture returns from an innovation. A “tight” regime (e.g., strong patents, hard-to-imitate technology) aids innovators in profiting from their work, while a “weak” regime makes it easier for competitors to imitate, potentially allowing others to gain more from the innovation than the original inventor.
How do complementary assets affect who profits from an innovation?
Complementary assets—such as specialized manufacturing, distribution, and service channels—are often required to commercialize a new technology. When imitators or other players own or control these critical assets, they can capture a significant share of the profits, even if they did not originate the innovation. Thus, control or access to complementary assets is crucial for innovators seeking to profit fully from their inventions.
What is the dominant design paradigm, and how does it impact innovators’ profits?
The dominant design paradigm suggests that, after a period of competing product variations, one design emerges as a market standard. Once this occurs, competition shifts from product features to scale, manufacturing efficiency, and complementary services. If the innovator’s initial design is not the one that becomes dominant, or if it cannot quickly scale and align with complementary assets, imitators may outmaneuver the original innovator and claim the majority of profits.
In a weak appropriability regime, what strategic decisions can help an innovator capture more value from their innovation?
In weak appropriability regimes, innovators should focus on securing or controlling specialized and co-specialized complementary assets—through integration, partnerships, or strategic investments—to prevent imitators from leveraging these assets first. Correctly choosing whether to integrate (build or acquire assets) or contract (license or partner) is critical. Owning key complementary assets or aligning with strong partners can help innovators maintain a competitive advantage and capture more of the profits.
How can the appropriability regime affect an innovator’s ability to capture value from innovation?
The appropriability regime, determined by intellectual property rights and technological complexity, shapes how easily innovations can be imitated. In strong regimes, innovators can protect and license their ideas effectively, while in weaker regimes they must rely on strategies like owning complementary assets or shaping the industry context to preserve profits.
What role does industry architecture play in determining who profits from an innovation?
Industry architecture, defined by how value chain activities and components are structured and integrated, influences where in the system profits accrue. In more modular architectures, component-level innovators may capture more value if they hold strong IP. In more integral architectures, system-level integrators have greater leverage to secure profits.
Why might a firm deliberately weaken the appropriability regime surrounding its innovation?
Firms may weaken the appropriability regime (for example, by placing technology in the public domain) to prevent others from blocking their access to key inputs or complementary technologies. By doing so, they ensure freedom to operate and capitalize on their co-specialized assets rather than risk lock-up by patent holders further upstream.
How can shaping industry standards and architecture enhance an innovator’s value capture?
By influencing standards, platforms, or modular interfaces, innovators can tilt the industry architecture in their favor. For example, encouraging open industry standards may broaden adoption of their technology. Aligning these standards with the firm’s IP or capabilities can steer value toward them, make imitation harder, and help them profit more fully from their innovations.
Please mark as True or False the following statements about “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy” (Teece, 1986)
Reducing access to specialized complementary assets is important to avoid giving up profits to imitators
A firm can only profit from an innovation if it is the first to market
The emergence of a dominant design does not affect competition between innovator and followers
The appropriability regime is defined by how easy/hard it is to imitate a technology
Reducing access to specialized complementary assets is important to avoid giving up profits to imitators
True. Teece emphasizes that when an innovator controls critical complementary assets (e.g., manufacturing capabilities, distribution channels), it can protect the rents generated by its innovation from would-be imitators.
A firm can only profit from an innovation if it is the first to market
False. Being first to market helps, but Teece shows that the ability to profit also depends on the strength of the appropriability regime (patents, secrecy, etc.) and control over necessary complementary assets. A later entrant can still profit if they command these assets or operate under a favorable appropriability regime.
The emergence of a dominant design does not affect competition between innovator and followers
False. Once a dominant design emerges, competition often shifts to incremental improvements and cost efficiencies around that design, affecting both the original innovator’s advantage and the strategies available to followers.
The appropriability regime is defined by how easy/hard it is to imitate a technology
True. Teece uses the concept of an “appropriability regime” to describe the set of factors (e.g., patents, trade secrets, ease of reverse engineering) that determine how readily competitors can copy a given innovation.
Please mark as True or False the following statements about “How to Capture Value from Innovation: Shaping Intellectual Property and Industry Architecture” (Pisano and Teece, 2004)
Companies benefit from weakening an appropriability regime if they have existing co-specialized assets to leverage (e.g., Merck and marketing capabilities in selling drugs)
An appropriability regime can be reengineered by filling up multiple patent applications for the same research discovery (e.g., a patent application for each gene of the human genome discovered)
Shaping industry architecture refers to changing the degree of specialization and division of labor of the industry players
An appropriability regime can be reengineered by lobbying for stronger intellectual property enforcement
Companies benefit from weakening an appropriability regime if they have existing co-specialized assets to leverage (e.g., Merck and marketing capabilities in selling drugs)
True
An appropriability regime can be reengineered by filing multiple patent applications for the same research discovery (e.g., a patent application for each gene of the human genome discovered)
False
Shaping industry architecture refers to changing the degree of specialization and division of labor of the industry players
True. “Industry architecture” involves how an industry’s value chain is organized—who does what, how specialized each role is, and how various players (suppliers, producers, distributors) are arranged. By reconfiguring these structures (e.g., integrating or outsourcing certain activities), firms can capture more value from innovation.
An appropriability regime can be reengineered by lobbying for stronger intellectual property enforcement
True. Lobbying for regulatory or legislative changes that strengthen IP protection (e.g., lengthening patent terms, toughening enforcement against infringement) is one way firms seek to reshape the appropriability conditions in their favor.
Profiting from innovation: how big a slice to whom? (3)
Appropriability regime (strong vs weak)
Life cycle phase (pre vs post dominant design)
Complementary assets (generic vs specific)
Appropriability regime (Def and 3 bullets)
Appropriability = the extent to which the innovator can capture the profits generated by the innovation
- Legal instruments
− Patents (e.g. pharma industry)
− Copyrights (e.g. writers, Disney)
− Trademarks (e.g. brands) - Nature of technology
− Product (re-engineering?)
− Process (observable?) - Nature of knowledge
− Tacit (harder to imitate)
− Codified (easier to transmit)
Innovation over the product / industry life cylce
First Product then Process Innovation (Dominant Design)
Generic Complementary Assets (Def + Example)
These are standard resources that can be easily
obtained from the market and are useful across
many industries. They don’t need to be tailored
for the innovation.
Example: In generative AI (genAI), cloud
computing infrastructure (e.g., Amazon Web
Services) is a generic complementary asset since
it’s available to any firm needing computing
power, regardless of their specific AI model.
Specialized Complementary Assets (Def. + Example)
These assets require some level of customization to fit the innovation, but they aren’t exclusively linked to one
innovation.
Example: In genAI, a customized API that integrates the
AI model with a company’s specific software ecosystem is a specialized asset because it’s tailored to work with the AI, but it can be adapted to different AI models.
