Innovation Management 1 (Innovation vs Invention) PDF

## INNOVATION MANAGEMENT 1 (Innovation vs invention) - There is a difference between innovation and invention. - Invention is the change, it is the emergence of something new compared to the past. It is a model or project that describes in detail a product (good, service, process) that is different...

## INNOVATION MANAGEMENT 1 (Innovation vs invention) - There is a difference between innovation and invention. - Invention is the change, it is the emergence of something new compared to the past. It is a model or project that describes in detail a product (good, service, process) that is different and stands out from the existing one for some significant dimension. - Innovation is instead the actual use of the invention to improve a process/product in a way that brings benefits (it must add value to the invention). If we identify the set of all inventions, innovations are a subset of these (they are the ideas that actually transform into new products/processes/solutions capable of bringing value). The concept of innovation is therefore associated with the transformation of new ideas into opportunities, provided that the new ideas are adopted by organizations. It can therefore be defined as the successful application of innovative ideas and is a specific type of change that brings value to the implementer. Innovation occurs continuously in all areas of activity, with more or less intensity. Some examples are: - Tools with computing capabilities (computing devices) - E-commerce (new sales channel to get in touch with the customer) - Photography (continues to experience upheaval from the transition from analog technology to digital) - Pharmaceuticals - We can therefore say that innovation occurs in all sectors: there are also situations in which changes may be less frequent and have a smaller scope. For example, industries that are moving towards more modest changes in terms of technology/business models and the main actors are the textile sector, precious stones and animal farming. They appear in more stable and less innovative contexts, for example, design and textile systems that allow you to produce samples in much faster times compared to the past. ## 10.1. Classification of an innovation Classifications can be classified based on the **object**, the **primary source of innovation**, the **scope of the innovation** and the **overall impact** of it: ### **Object of Innovation** Classifying by object is interesting because it helps to understand the impact of the innovation on the organization. This mainly distinguishes innovation into **product** and **process** innovation. - **Product innovation** consists in the introduction of a product that is better than what already existed. For example, the digital camera is a product innovation compared to the analog one (or the 3D TV). - **Process innovation** concerns a new or better way to carry out the process that allows you to arrive at a given output. An example is the technique that allows hydrocarbons to be extracted from rocks that are impregnated with them. This is an innovative process compared to the more traditional process of pumping hydrocarbons to the surface starting from liquid or gaseous deposits below the surface of the earth. ### **Innovation** - **Organizational innovation** which consists in the adoption of new techniques for managing human resources, or organizing the workflow (e.g., Lean Production, new organizational unit, new ERP, new managerial techniques). - **Commercial/marketing Innovation** which involves the development of new financing methods or new sales techniques (direct sales or social/telephone sales). - **Innovation with respect to the purchase channel**, that is, searching for new sources of input. ### **Impact on Organizational Skills** The difference is the ease of adoption of the innovation. We can identify: - **Competence-enhancing discontinuities** (discontinuities that increase skills), that is, changes that rely on existing skills, further developing them. They are therefore initiated by existing companies and are correlated with a decrease in environmental turbulence. In fact, they are improvements in terms of price/performance that are based on the existing know-how within a product class. These innovations replace older technologies, but do not make obsolete the skills required to master the older technologies. For example, the move from mechanical typewriters to electric typewriters in typing activities. - In addition, there is innovation of the type **competence-destroying discontinuities** (discontinuities that destroy skills), in which case the adoption of the innovation requires you to forget a large part of the skills, making new ones. They are initiated by new companies and are associated with greater environmental turbulence. These obviously meet with greater resistance in organizations and an example is rapid prototyping using 3D printing or from non-programmable CNC machines. ### **Origin of the source** In this case, the source can be **internal** or **external**. - If the source of the innovation is **internal** to the company it means that the person who adopts the innovation coincides with the one who developed it. This may be true in the case of a process developed directly by a company. - If the source of the innovation is **external** to the company it means that the organization that adopts the innovation did not develop it, but buys/adopts/adapts it from an external innovator. This is the most common case. ### **Scope** Here, innovations are classified according to their **effects**. We can find: - **New technological systems**, which indicate sets of innovations correlated in terms of technology and economics that determine significant effects on multiple sectors of activity. For example, discoveries that increase the speed of work of machine tools. - **Incremental innovations**, which concern the improvement of something already existing (both product and process), such as a larger screen for a notebook. These occur more or less continuously in all sectors of activity. They arise from unplanned creative activity and can stem from the proposal/intuition made by those who deal with the production process every day (learning by doing) and have ideas on how to improve the existing technique today. Alternatively, they stem from users (learning by using) because they may have ideas about a new additional functionality. - **Radical innovations**, which concern proposals that are completely new compared to what existed previously. For example, the introduction of tablets vs PCs or the first glass of glass. These more rarely stem from non-systematic observations by the user or those involved in production activities; instead they stem from systematic research and development activities. Often, radical innovation opens the door to incremental innovations that improve the initial idea. In some cases, however, it is not so easy to distinguish between radical and incremental innovation because it also depends on the sector we are referring to. These have a different impact on the economic system: from the lowest to the highest we have incremental, radical, new technological systems. ## 10.2. Relationship between different types of innovation for product classes ### **Abernathy and Utterback Model** This explains in a simple and intuitive way the relationship between product and process innovation within a given product class that allows you to perform a widely defined function. As regards product innovation, **radical innovations** prevail at the beginning and then they gradually decrease because innovations will be increasingly incremental. As regards process innovation, the opposite happens: at the beginning, radical ones are almost non-existent, but they prevail in the maturity stage of the product class. We can therefore identify **3 stages**: 1. **Maximization of performance**. When a class of products appears completely new, the products are poorly defined, not standardised and the processes are approximate. Production capacity is flexible and allows easy variation of production inputs. It is not clear which idea will win, it is not clear what the advantages offered by the new class of product are and therefore the focus is on **maximizing performance**. This is how the pioneering users are convinced first and then the wider public is reached. Here there are different ideas with alternative configurations that fight to impose themselves on the reference model. One configuration of the product then emerges compared to the others (it attracts the attention of both innovators and users), and this is typically referred to as the "dominant design". 2. **Once you overcome the resistance of the large group of consumers**, the **objective** is to **maximize sales**. The emergence of the dominant design reduces the uncertainty in the sector that is being born: the ideas are clearer, it is clearer what the new class of product is for, how it will be used. Furthermore, the **development of learning processes** begins, which begin to create resistance to the proposal of further changes to the product proposed. At this point, the **rate of product innovation** starts to decrease and incremental innovations are more frequent compared to radical ones. This is the moment when the market takes off. The objective is indeed to **maximize sales** because each company wants to impose itself as a leader so as to be in a favorable position to reap the benefits that will emerge in the maturity phase. However, to do this, you need to secure a significant share of the market (investment in research and development is still very important but it becomes increasingly important for companies to compete in terms of price). This leads to investing in process innovations that allow you to streamline and make production processes more efficient., reducing costs. It therefore makes sense to invest in process technologies because when a dominant design emerges, the characteristics of the production system and the value chain become clearer. 3. In the **final phase**, the **objective** becomes to **minimize costs** and the succession of product and process innovations is functional to the achievement of these objectives. As the product lifecycle evolves, the product becomes standardised and the variety of products tends to decrease. In the third stage, however, **process innovations** become **preponderant** to minimize costs. These focus on the manufacturers of technologies used by those who then make the finished product. In this phase, **competition** is reduced to an **oligopoly** and there is an emphasis on **efficiency** and **economies of scale**. Product innovations must take into account well-established habits within the audience of customers. ### Dominant design The dominant design reflects the emergence of standards for a class of products and ends the period of technological ferment. Alternative projects are largely excluded from the product class and technological development focuses on developing a product or process that is widely accepted. The dominant design becomes a reference point for further changes to the product or process. The emergence of the dominant design simplifies the lives of companies that offer innovation because a reference architecture emerges and this results in a significant stabilization of the competitive environment. Events that mark the emergence of a new dominant design are: - **Selection between existing architectures for a product class**. - **Potential buyers / users give up the wait and see approach typical of the era of ferment** - **Reduction of the price/performance ratio**. - **Substitution of previous market leaders**. ## **Discontinuities Technological** Technology evolves through periods of incremental change punctuated by technological discoveries that improve or destroy the skills of companies in a sector. These discoveries, or technological discontinuities, significantly increase both environmental uncertainty and munificence. ### **Tushman-Anderson Model** This is an alternative way of conceiving the lifecycle of a product class and conceptualizes it as a cycle of 4 phases that repeat with different durations over time. There is a phase in which a technological discontinuity occurs (a variation of new possibilities arises here), a phase of strong competition follows the era of ferment (all competitors who have conceived the technological discontinuity compete with each other to impose their own innovation. There is high competition between the actors here). After this phase, there is the selection (the moment in which a dominant design emerges and shapes the new trajectories and technologies and defines who the winners and losers of the era of ferment are). The selected option is then maintained here (incremental innovations that exploit the advantage determined by the dominant design may occur). - Continuous cycles of **variation** - **competition** - **selection** - **maintenance** occur, and after each cycle there will be another technological leap that will open up new opportunities. ## **11.1. INNOVATION MANAGEMENT 2 (The Source of Innovation)** ### **Technology Push and Market Pull** Considering the source of innovation we can have two alternatives: 1. **Technology Push**. This suggests that it is the companies that drive the proposal of innovation: the companies propose to their customers new products/services that can be useful to the customers. The new products and services are therefore born from the explicit effort of research and development. Then the company engineers the new products, presents them to the customers who then adopt them. What makes the difference here is the research capacity (having resources and the ability to carry out research and development activities). Implicitly, users are considered passive. This model is suited to markets that are not saturated, where users are relatively unsophisticated, the way of life of customers is relatively simple, and it is therefore easy for new technologies to succeed because they propose to carry out new functions (and even habits) more efficiently. 2. **Market Pull**. Here, innovation sees the marketing function as the main actor. This is responsible for collecting information on the explicit and latent needs of customers and transforming them into requests capable of directing the activities of the research and development function. Therefore, the products will be successful because marketing gives input for producing products that meet customer needs. Here you need to be able to respond to non-trivial and unpredictable needs from users. In this case, the flow within the company for producing innovation is: marketing, R&D, production and user. These two models, however, present particularly similar aspects (which can be considered criticisms of these two models as well): - These are linear models, where the assumption is that there is a sequential interdependence between the different phases of the new product development process. Generally this is optimistic and in most cases it is naive because innovation is not a linear process. - The entire innovation process is internal to the company (this may be a criticism). This has the capacity and skills to understand innovation opportunities and develop them independently. In general, this is not true even for larger companies. - Push or pull occur in every phase of the value chain, not just at the extremes (R&D and marketing). These are two visions that appear unsatisfactory. Then more up-to-date visions have tended to highlight the fact that push and pull are not independent processes but occur simultaneously and generate cross-flows of information within the organization. We can therefore say that there is a circular relationship between technology push and market pull. The way technology push and market pull see innovation is that they always place the source within the company that offers the innovative idea and the entire innovation process takes place within the same innovation. This is a major limitation of theirs. To overcome these visions, several alternatives have been proposed. ## 11.2 Model of Von Hippel (model of functional sources of innovation) Von Hippel proposes his approach, which is called the **functional sources of innovation** (the functional contribution through which innovators reap benefits from a given product, process or innovation of service) because he observes that there are different actors who bring the information, namely, different classes of actors. His idea is that it is more likely that an innovation takes place among the class of actors for whom the innovation generates the highest level of expected benefits. The innovation processes are distributed among users, producers, suppliers and other actors. The distribution of innovation activities in different classes of actors is not a random process. The concentration of innovation activities in different classes of actors depends on the functional force of innovation for different groups of actors. It is recognized that often the source of innovation arises outside the company. This may therefore be located with those who then develop it (manufacturers who benefit from providing an innovative service), upstream of the value chain (suppliers who benefit from providing input to the producer of innovation, therefore strengthening relationships with customers), downstream of the value chain (customers who benefit from using the innovation) or with other actors. The basic idea is that the innovative idea blossoms in the class of actors who expect the highest profit from the innovation itself. Typically, the benefit that innovators expect is to have a good or service that allows them to perform a new activity or to change the way an activity is performed, making it more effective and efficient. One area where the role of users as innovators is clear is that of sports activities. Often, the technical staff who develop the equipment work closely with the athletes because they are more motivated to improve their performance and also have a strong knowledge of the techniques they use to play their sport. In many cases, it is also the companies (?) to have an interest in proposing an innovation because they are stimulated by the desire to take new market shares and therefore earn more. So that there is a difference in innovative behavior from the players in the chain, there must be obstacles to change from the players in the chain. Firstly, there must be obstacles to **vertical integration** (in an economic way). If a user could “easily” become a producer of innovations, he would have an incentive to vertically integrate, instead of seeking an agreement or expressing his innovative idea to the potential company for the production of the innovation. There must also be **difficulty for the actors** in **turning their innovative idea into something that is easy to sell** (meaning that they must have difficulty in lending out their innovation). An innovator has fundamentally two ways to grant the innovation: exploit the innovation itself preventing others from doing so, or authorize others to use their knowledge relating to the innovation for payment. If the second way is possible, the functional source of innovation ceases to be the greatest incentive to innovate (innovators can license their innovations to players in different phases of the value chain). The **model of functional sources of innovation** (Von Hippel's model) is interesting because it is a whole series of managerial implications, it can help the company understand which category of external actors to look for partners to maximize the probability of collecting innovative ideas that turn into successful innovations. Firstly, by trying to understand how **benefits/profits** are distributed along the value chain, it becomes possible to understand where it is more likely that an innovation occurs. Therefore, **operational indications are that the company says which category of actors it wants to collaborate with to develop innovative ideas**: if we believe that our customers have a significant interest in developing innovative ideas regarding the products that we produce, then it is important to establish partnerships with customers (or, if customers are end consumers, they can be involved in an early product testing program). Secondly, the company, however, can also take a more proactive role. It can plan to act to change the distribution of benefits/profits perceived by specific classes of users. Companies can try to involve directly classes of external actors that are believed to be innovative. ## 11.3. Cohen and Levinthal Model (absorptive capability) Cohen and Levinthal proposed the concept of **absorptive capability**. This is the ability of a company to recognize the value of new information generated outside of it (other countries, other sectors, other companies, other organizational units within the same company). Absorptive capability therefore concerns all of these 3 considerations: recognizing the value of a good idea, assimilating it into the company's internal processes (internalizing it) and transforming it into a new product/good/service (therefore being able to apply it for commercial purposes). To grasp this information from outside, the company must become active, it must be proactive in order to develop the capability of absorption. This requires an explicit effort and the need to have the skills necessary to appreciate the ideas. The **development of skills** is achieved by investing in knowledge. You have to invest in **research and development**. The company accumulates skills relating to technology, materials, relationships between variables, management of processes that implement different technologies and therefore is able to evaluate the value of ideas generated from outside from the point of the *utility of the innovative activity* of the company. These investments therefore have two effects: they generate new knowledge (direct effect) and the research and development activity increases the company's absorptive capability (indirect effect). High or low absorptive capability increases or decreases a company's effort in research and development to exploit technological and market opportunities. The sources of **absorptive capability** are primarily two: - **Direct effort** (investment) in **research and development, and training of personnel**. - **Any activity that has to do with knowledge management within the organization**. Not only research and development, but also production, sales and procurement activities; these, if well-managed, can become very useful channels for conveying information relevant to the company's internal operations. There is, however, a difference between **individual absorptive capability** and **organizational absorptive capability.** At the individual level, it is the capacity that each individual has to recognize the usefulness of new ideas that he comes into contact with, make them his own and use them to conceive new ideas, therefore to generate innovation. The variables that influence the capacity of absorption at the individual level depend on the exposure to learning processes and the diversification of experiences. - The longer and the more intensively an individual is exposed to learning processes, the more his ability to learn improves. The length and intensity are important in the learning process because it is a cumulative process that develops over time. What we can learn today is a function of everything we learned in the past. At the **organizational level**, the **absorptive capacity** of the organization is not simply the sum of the members' capabilities. It is determined by the sum of the capabilities of individual members added to the presence of a series of routines and procedures that facilitate the exchange of knowledge between members of the organization. The organization, therefore, has the additional fact, that these aware and trained people are provided with organizational tools to communicate more easily and exchange knowledge and ideas. It is therefore not enough to hire people from outside with the right individual skills, these must be integrated into the organization and learn to interact with other members. To help this communication, we have key role of gatekeepers (the key role of people who channel information between the outside world and the organization). In managing the flow of information, it is important to ensure that those who manage information exchange between the outside world and the inside are effective in their own activities. Developing your **absorptive capacity** is important to tackle the "**not invented here**" (not invented here). This is the refusal or mistrust towards innovations or ideas that are not born within the organization. This is more likely to happen in organizations where there is a strong company culture. On the one hand, it has benefits because it facilitates communication within the organization, but at the same time it creates resistance to contamination from external information sources. (An example is family routines that we consider to be superior to those that happen in other families because this is how it has always been and it is therefore fair). Distrust towards innovations developed outside has a negative effect associated with it, namely, the deterioration of the company's capacity for absorption because it does not actively seek to assess the useful aspects of ideas developed by other actors. This **closed approach** to the outside world can lead to the **lock-out effect**, i.e. closing off the outside world to innovation because a company (which invests little in absorptive capacity) ends up being less attentive to the opportunities presented by changes because, not having the skills to judge what is being done outside, it tends to believe that the outside world will remain more or less stable (that new opportunities are not emerging). If it is believed that there are no opportunities for innovation in the outside world it also becomes clear that there is no need to invest to develop absorptive capacity. As a result, the company fails, it is unable to recognize new opportunities for innovation and continues to invest even less in absorptive capacity, entering a vicious circle. On the other hand, **justifying investment in absorptive capacity** is not easy for various reasons: - **Absorptive capacity** is an intangible asset and therefore monetizing its value is extremely difficult and this makes it hard to choose to invest. - **Investment** requires sacrifices in current production and specialization paths, but the benefits become evident only in the future. - In the case where the capability of absorption is developed and maintained as a by-product of what we are already doing. It is one thing to go deeper into the absorptive capability because the company already invests in the activities, routine for the development of new products and new processes, in which the company invests also in absorptive capability. It is different when, instead, we have to invest in absorptive capacity to assess options relating to technologies or contexts about which the company does not yet have much competence (in this case, a dedicated investment is needed, it would not be a by-product). ## 11.4. Open Innovation The term **open innovation** refers to the intentional use of knowledge flows in and out to accelerate external innovation and expand the market for selling external innovations developed by the company. Therefore, we resort to knowledge flows going in to accelerate internal innovation, and we resort to knowledge flows going out to expand the revenues that the company can get by selling to others the fruits of its innovative activity. Open organization does not just mean taking from the outside and bringing it inside but also giving more emphasis to the possibility of the company selling to the outside the innovative activity that it develops internally. This approach assumes that companies can and should use both internal and external ideas and that they should use the market both as input and as the destination of innovative processes. - To comment on the following graphs, we assume a linear process of research and development activities (research activities are followed by development activities). Typically what happens in a closed model is that no more than 5/15% of the ideas developed in the research phase make it to the market. - The concept of **open innovation**, instead, is to make the most of the efforts relating to projects that the companies then abandon. Therefore, the company's boundaries are porous, they are open to exchanges with external actors in all phases of the research and development process. Inward flows concern the acquisition of ideas developed by others that help to speed up and reduce the costs of innovative processes inside the company. Outward flows help all those internal stories that have not been successful and that the company does not consider it worthwhile to continue investing in. They look for suppliers/customers/companies in a different/competing sector that are willing to pay for this idea. - For the company, there is therefore a greater interdependence between the company and the external environment as regards research and development activities in the case of an open organization. The open innovation system works if the company manages to cede to the outside rights to use some intermediate innovations and, at the same time, if there are other companies who want to sell inputs that the company finds interesting. The concept of open innovation is therefore closely linked to the concept of alliances, partnerships, collaborations in the field of research and development. Adopting an open innovation model therefore requires a substantial change in the organization of research and development activities and also requires a change in the organization's mentality. ## **12. INNOVATION MANAGEMENT 3 (Strategic Management Model of Innovation, Teece's model)** The Teece Model is used to develop this question: what determines the share of profit, derived from the innovation, that the innovator appropriates? The innovator never gets 100%, often he gets a minority share of the overall profits: often customers, suppliers, or imitators appropriate a larger share compared to the innovator. This is not always good because it is clear that the innovator's activity is also driven by the hope of receiving compensation and therefore, in a situation where the innovator is guaranteed low profits, it generates low innovation incentives, low rates of technological progress and, in general, negative effects on the economy and the general public. The objective of Teece's model is to understand and explain why the innovator appropriates a smaller share of the profits generated by the proposed innovative idea. We can have combinations of 4 situations: - **The innovator wins** and therefore **appropriates most of the profits**. - **The innovator loses**. - **The imitator wins**, i.e. the one who enters the market with a variation built on the innovator's initial idea (IBM personal computer). - **The imitator loses.** The **probability of the innovator winning** is linked to three main drivers (factors that shift the benefits of innovation). 1. **Appropriability Regime**. Defined by the set of factors that guide the innovator's ability to appropriate the economic benefits of the innovation to the exclusion of factors that concern the structure of the company and the market. This regime is therefore guided by **technological characteristics** (tacit knowledge, complex product, strong brand, product lifecycle curve) and by **institutional factors** (effectiveness of legal protections mechanisms such as patents, designs and copyright instruments, or industrial secrecy: the stronger the protection provided by patents, the easier it is to guarantee industrial secrecy, the easier it is to guarantee the appropriability regime). A strong appropriability regime can exist when it is easier to defend one's own innovation. 2. **Dominant Design**. When imitation is possible and occurs alongside the modification of the design, before the emergence of a dominant design, the followers have good chances to see their modified product recognized as the sector standard, often to the great disadvantage of the innovator. 3. **Complementary resources.** In most cases, a good idea is not enough for success in the market, but **complementary resources** are needed, such as production capacity, sales channels, marketing skills to be able to present the innovation to the right customer target. Therefore, the success of the innovator (or his imitators) often depends on their ability to pair innovation with the complementary resources needed for success. When complementary resources are specialized, a large share of the innovation profits can go to their owners. **Technological distinctive capabilities** of the company generate the **innovation** (the innovative idea) and based on the product, we need to have capabilities: if it is a product, we need to have production capabilities, if it is a service, we need to have communication tools and we may also need distribution networks (agents or agreements with distribution chains) and a presence on digital channels. However, it is also necessary to offer not only the innovative product, but also all the products and services that support the proper functioning of the product once it has been purchased by users. ### Complementary Resources (or interdependencies) can be: - **Generic assets**. These exist between the innovation and complementary resources, but require a specific adaptation of complementary resources. Generally, we can say that these resources are those that give less problems; they arise in correspondence with specialized and co-specialized assets. Examples are distribution channels or means of production associated with various production activities. - **Specialized assets**. In this case, the innovation or the complementary asset must be modified to adapt (to realize the complementarity/specific adaptation). There may be specialization of the complementary asset relative to the innovation or vice versa. An example is sea transport by container: the dimensions of the goods contained by the container (which can have many different shapes and sizes) are standardised to the dimensions of the container parallelepiped and the container to be used has led to the modification of the means of transport (the adaptable truck). (The truck makes sense to exist without the container. The container does not make sense to exist without the truck). - **Co-specialized assets**. When both the innovation and the complementary asset must adapt reciprocally. The innovation requires an adaptation of complementary resources and complementary resources appear in response to the appearance of the innovation. The example is a new engine that requires repairs and the creation of workshops to repair this engine. Another example is container ships. Complementary assets are important because they provide a competitive advantage. This is due to: - **Possessing specific resources** (things you own), in cases where assets consist of means of production, brands, patents, distribution channels. - **Skills** (things companies know how to do), such as the ability to manage production systems efficiently, skills in the field of sales and services, the ability to manage relationships with customers. ### Dominant Design The dominant design is imposed when a critical mass of consumers have adopted it or when a critical mass of key actors believes that the standard will be adopted. How a company can leverage to impose its own architecture as a dominant design: - **Being first to market**. - **Building expectations**. - **Very aggressive prices**: "giving away the product" - **Developing or encouraging the development of products or complementary services.** - **Focusing on superior execution or low cost**. - **Leveraging complementary assets**: exploiting resources because you have access to them (because you own them or have access to them) is crucial to the success of innovation and therefore the relationship between the innovator and whoever controls the assets is crucial in order to determine the distribution of the benefits deriving from the innovative product. If it is necessary to make an agreement with those who possess/control complementary resources, then a share of the profits deriving from the innovation will go to those who control these resources. Generally, the more important the complementary resources are, the greater the bargaining power of those who control them. ## 12.1. Decision Process (Flow Chart for Integration vs. Contract Decision) The decision process is carried out in several steps: 1. **Does the innovation need access to complementary assets for commercial success?** - Yes - **Are complementary assets specialized?** - Yes - **Can you commercialize immediately?** - Yes - **Is the appropriability regime weak?** - Yes - **Is there enough time?** - Yes - **Is cash position okay?** - Yes - **Are imitators/competitors better positioned?** - No - **Contract for Access** - Yes - **Contract for Access** - No - **Integrate** - No - **Specialised Contract for Access** - No - **Contract for Access** - No - **Is the specialised contract asset critical for access?** - Yes - **Contract for Access** - No - **Contract for Access** - No - **Contract for Access** - No - **Contract for Access** Every box of "Contract for Access" shows a progressively higher percentage loss of profit as you go down, because the lower you go, the bigger the share of profit you have to leave to those who provide the resources. - **The decision process** takes place in several steps. - **First**, you have a situation in which the inventor has had an idea for a product/service, has developed it, engineered it and is ready to enter the market. **At this point, you need to see if this is a good idea**. If the idea works, we enter the market but we need to ask ourselves if the innovation requires **complementary resources** to achieve commercial success. If the answer is **"NO"**, you can commercialize it immediately. If the answer is **"YES"**, then we need to analyze these resources. **Are they generic or specialized complementary resources?** If they are generic, they are readily accessible resources and it is therefore possible to create competition. In this case, we need to get contracts with the supplier before entering the market. **If the assets are specialized**, we need to ask ourselves if the **appropriability regime** is strong or weak. **If it is strong**, we easily protect the right to benefit from the innovation because it can be protected for example by a patent, but in any case, we have to get contracts with the suppliers. **If the regime is weak**, we must ask ourselves how critical these specialized assets are** (i.e., how much they condition success). If they are critical, we must see what **financial availability** there is. **If it is good**, we invest. **If it is not good**, the small inventor or company that has had the good innovative idea but does not have the resources does not have the financial availability to make the investments and that will be the situation of the small inventor or company. Therefore, the inventor must either give up or make contracts with external suppliers, thus ceding his patent and reaching an agreement with the large company to get a small share of the profits derived from the innovation. - **Now, we need to assess the market position of our competitors** and see if they have a better position than ours. If they do, we risk being cut off from the market because our competitors will be the first to enter the market. In this case, the company's alternative could be to make room for everyone and then be sure to lose all benefits or give up a significant portion of the profits and enter with or before the competitors (this last route I can take by getting contracts with suppliers to get the complementary resources that I need). If competitors are in a worse position, we need to internally develop the complementary resources that we lack because you have the financial availability to do so. However, integrating means losing flexibility because you are burdened with fixed costs, therefore in a more modern perspective, we can add an extension: after seeing that we are in a better position than our competitors, we need to ask ourselves if we have enough time available. **If time is short**, we need to make a contract with the supplier (most of the time). If we have enough time (very rare case), then we integrate. ## 12.2. Relationship between appropriability and complementary assets | Appropriability | Complementary assets easily available | Complementary assets scarce and important | | ------------- |:-------------:|:-------------:| | Weak | Low returns, slow private investment | Returns to holder of complementary asset | | Strong | Returns to innovator | Returns split | - When the appropriability regime is strong and complementary resources are easily available, the innovator wins. - When the regime is strong but the role of complementary resources is critical, both the innovator and those holding the resources have strength and therefore the profits are split between the different sides in line with their respective negotiating power. - When the appropriability regime is weak and resources are critical, the innovator loses because most of the benefits go to those who hold the complementary resources. All three situations described above are favorable for the consumer, both as a private entity and as a company, because in each case there is an incentive to innovate. - **When the regime is weak and the complementary resources are generic, it is the worst situation**. The innovator does not have strong incentives to innovate and resource suppliers do not see any particular advantages. Therefore, this situation presents low profits and low innovation rates. ## 12.3. Managerial Implications - **First mover** is not necessarily the winner of the competition. It may be the **imitator that is more efficient** (meaning that it has better control over complementary resources) or it may be the one who holds the **complementary resources.** - Imitators who have a good **ownership of complementary resources** may be able to overtake the inventor. "**FAST followers**" recalls the concept of **absorptive capacity**, which is important for innovators, but it is even more important for followers. - The company can have a **higher return** (increase its performance) in research and development, adjusting its **R&D investment portfolio** to maximize its success. It seeks to find **technological discoveries** that