5: Profiting from Innovation

Question 1

Who benefits from the value generated by an innovation?

Answer 1

• Customers
• The innovator
• Imitators (Saves R&D costs)
• Suppliers and complementary (Sells larger quantities)

Question 2

What is the customers benefit?

Answer 2

• The Consumer surplus. They pay less than they actually are in condition to pay.

Question 3

What factors does the profitability of an innovation depend on?

Answer 3

1) Appropriability regime
2) Life cycle phase
3) Complementary assets

Question 4

What is the 1) Appropriability regime?

Answer 4

• The “appropriability conditions” denote all factors that influence the possibility of profitable imitation of an innovation.
• Can be tight/Strong or loose/weak.
• Vanskelig for andre å kopiere idéen.

Question 5

What is the 2) Life cycle phase?

Answer 5

• Based on the model by Abernathy/Utterback, Teece distinguishes pre-paradigmatic and paradigmatic design phase.
• Investoren må time investeringen i et produkt riktig. Dersom man investerer for tidlig, kan man risikere å investere i noe som ikke blir det endelige Dominant design, og «backer feil hest», og taper på det, fordi det senere blir utviklet en bedre versjon av produktet.

Question 6

What is 3) Complementary assets?

Answer 6

• Successful innovation requires several complementary assets.
• An asset that is needed along with an innovation to bring it to market.
  Electric cars need charging stations in various places,
  a good distribution system of car sellers,
  a strong brand… etc.

Question 7

Complementary assets can be…

Answer 7

• Specialized: the innovation is absolutely dependent on the complementary asset.
• Co-specialized: the innovation is dependent on the complementary asset, and at the same time, the complementary asset is dependent on the innovation.
• Generic: none of them (the innovation nor the complementary asset) is specialized in any way.

Question 8

What is “hold-up”?

Answer 8

– If one partner to a contract makes specific investments,
a “hold-up problem“ can arise.
1) A supplier invests in machines to manufacture an input for an innovative product. The machines can not be used for any other purpose. The supplier is in a weak negotiation position
2) Once the investment has been made, the buyer could, e.g., complain about specification not being met, request a discount, and threaten to cancel the contract.