Commercialisation of product innovations


It has been observed that the innovating firms, being first to commercialise a new product or process in the market, after certain period of time often find themselves profiting less from their innovations than competitors/imitators. This phenomenon might appear strange at the first look, as it is often held that being first to market is the source of competitive advantage. In this section a framework [1] is described, which identifies the factors that determine who wins from innovation: the firm that is first to market, follower firms, or firms that have related capabilities needed by the innovator to successfully commercialise the innovation.


The dominant design paradigm

In an early stage of new technology development (called a pre-paradigmatic design phase) product designs are fluid, while manufacturing processes are loosely and adaptively organised. At this stage the competition amongst firms concerns mostly innovative designs, which are markedly different from each other. At some point in time, after gaining considerable experience in the marketplace, one design or a narrow class of designs, begins to emerge as the most promising and being able to meet a whole set of user needs in a relatively complete fashion (this is called a paradigmatic design phase). Then a dominant design becomes widely accepted as the correct combination of features and benefits that it becomes a standard in the marketplace [2].

Once a dominant design emerges, the focus of competition shifts from the product itself to the production and distribution by which it is made and delivered to the market, in other words from design to price. Organisation learning capability and economies of scale becomes much more important, as the competitors seek to decrease unit costs. Reduced uncertainty over product design provides an opportunity to amortise specialised long-term investments.

Dominant design framework does not characterise all industries, being more suited to mass markets where consumer tastes are relatively homogeneous. It would appear to be less characteristic for small niche markets where the absence of scale and learning economies does not result in a penalty to multiple designs.

The existence of a dominant design turning point has significant influence to the distribution of profits between innovator and followers. The innovator may have been responsible for the fundamental scientific breakthrough as well as the fundamental design of the new product. However, if imitation is relatively easy, imitators may enter competition, modifying the product in more or less important ways, yet relying on pioneer work of the innovator. When the dominant design emerges, the innovator may end up positioned unfavourably as compared to a follower. Moreover, when successful imitation occurs before the emergence of a dominant design, followers have an opportunity of having their modified product accepted as the industry standard, often to the great disadvantage of the innovator [3].


Complementary assets

Innovation consists of certain technical knowledge describing how to do things better than the current state of the art. This know-how may be partially codified and partially tacit. Such know-how must be sold or utilised in some way in order to generate profits.

In virtually all cases, the successful commercialisation of an innovation requires that the know-how involved is utilised in conjunction with other capabilities or assets. The examples include: marketing, efficient manufacturing and after sales support. These capabilities are often obtained from specialised complementary assets. In some cases, for instance when the information is systemic, the complementary assets may be other parts of the system. This can be illustrated by the relation between computer hardware and software. Three types of complementary assets can be identified [3]:

  • “generic assets” are general purpose assets that do not need to be tailored to the related innovation,
  • “specialised assets” are those where there is unilateral (one-sided) dependence between the innovation and the asset, e.g. a special device allows the traditional car engine to be propelled by a compressed natural gas, on the other hand the natural gas can be used also for central heating;
  • “cospecialised assets” where there exist a bilateral (mutual) dependence between the innovation an the asset, e.g. jet engines require a special kind of fuel, which cannot be used for another type of engine.


Implications for profitability – tight appropriability regimes

In those cases where the innovation is protected using patent or copyright, or when the nature of the product is such that trade secrets effectively prevent imitators from accessing the relevant knowledge, the innovator has almost a guarantee that that his innovation can be translated into market value for some period of time [3].

Even if the innovator does not possess the necessary complementary assets, the effective protection of IP gives the innovator the time required to access these assets. If the assets are generic, a contractual relation would be sufficient and the innovator may license its technology. However, if the complementary assets are specialised or cospecialised, the contractual relations involve additional risks, as one or both parties have to make specific and irreversible capital investments, which might appear valueless if the licensing relationship breaks down. Another approach for the innovator is to expand and integrate the (co-)specialised assets. Because imitation is difficult in this case, those assets can be built or acquired without competing for their control.

Similarly, if the innovator comes to the market in the pre-paradigmatic phase with a good concept but the wrong design, a tight appropriability regime would allow the innovator to correct the design before being attacked by imitators.


Implications for profitability – weak appropriability regimes

The weak appropriability regime is much more common situation than the previous one. The innovator must make careful decisions in order to prevent imitators/followers from threatening its interests. The nature of competition may vary in this case according to whether the industry is in the paradigmatic or pre-paradigmatic phase [3].

In the pre-paradigmatic stage, the innovator must carefully control the forming process of the basic design so that a design is delivered, which is likely to become the industry standard. As a general rule, it seems that the innovators in weak appropriability regimes need to be close to prospective customers and to the market so that user needs fully impact new designs. Therefore, the situation that an innovator – a firm that is first to the market with a new product design concept – enters the paradigmatic phase having the dominant design is difficult to guarantee. The likelihood would be higher the lower the relative cost of multiple prototyping and the more tightly the innovator is coupled to the market. The former is related to the technology involved and can not be radically changed by managerial decisions. On the other hand, the latter condition is dependent on the organisational design and can be influenced by management. Hence, it can be concluded that in industries characterised by large development and prototyping costs and where the idea of new product concept is easy, the probability that the innovator will emerge as the winner at the end of the pre-paradigmatic phase is low.

As in the pre-paradigmatic phase rivalry is concentrated on the choice of the dominant design, complementary assets do not weight much. Production volumes are low, and there is little to be achieved by deploying specialised assets, as economies of scale are unavailable and price is not a primary competitive factor. However, as the leading design starts to emerge from the interaction between new products and the market, volumes increase and the need for reducing unit costs will stimulate firms to acquire specialised tools, equipment and distribution channels. Since these significant investments may appear irreversible, producers are likely to proceed with caution.

However, as the areas of competition change, and prices become increasingly important, access to complementary assets becomes critical. Since for the considered case the core technology is easy to imitate, commercial success depends on the terms and conditions upon which the required (specialised or cospecialised) complementary assets can be accessed. The firms controlling the cospecialised assets, for instance specialised manufacturing capabilities or distribution channels, are advantageously positioned relative to the innovator. In fact, in an extreme case where incumbent firms possess a monopoly over specialised assets and the innovator is in the weak appropriability regime, all of the profits to the innovation could accrue to the firms controlling those assets. Even if this is not direct competitors, who has the monopoly over specialised assets, the position of the innovator may be still disadvantageous, because the success would be determined by who has the easiest access to those assets.


Strategic options for complementary assets

The presented model indicates that the access to complementary assets, such as manufacturing or distribution, critically impacts the innovating firm ability to profit from its innovations. In order to establish necessary control over complementary assets the innovator can must follow a suitable strategy.

Two extreme approaches can be indicated [3]: integration into all of the necessary complementary assets or accessing all the assets through simple contractual relations. It is clear that any of these two cases can be suggested as an optimum or even good solution in general. The complete integration approach would be the most expensive one and is rather unlikely to be necessary. Even for modestly complex technologies the variety of assets that need to be accessed can be so large that no company could keep pace in all the necessary areas by itself. On the other hand, although in many cases the contractual relation may be a sufficient solution, sometimes it may expose the innovator to various risks and dependencies that it may rather wish to avoid.


Contracting complementary assets

The contractual solution offers many clear advantages [3]. In this case the innovator can avoid making big capital investments that may be necessary in order to build or buy new capabilities, which reduces both: risks and cash requirements. Contractual relationships can offer an additional credibility to the innovator, especially when the firm is relatively unknown, while the contractual partner is established and well known.

It must be also recognised, however, that contractual relations are exposed to certain hazards, especially when the innovator uses contracts to access specialised capabilities. First, it might be difficult for the innovator to convince its partner to make costly and irreversible investments, which success depends on the success of the innovation. This problem is similar to attracting venture capital. The innovator must persuade other firm to share the risks involved with the innovation. Even if it succeeds, there is another hazard for the innovator that the partner will not perform according to the innovator's perception of the contract. Moreover, the partner may imitate the new technology and attempt to compete with the innovator, which is likely to happen when the provider of the asset has a unique position with respect to the asset and has the capacity to imitate the technology that cannot be effectively protected by the innovator.    Therefore, contracting is likely to be the optimum strategy when the innovation appropriability regime is tight and the specialised assets are available on a competitive basis – i.e. there exist an adequate capacity and more than a single source of the asset.


Integration of complementary assets

Integration of an asset by definition involves its ownership [3]. Because in this case the innovator owns rather than rents the complementary assets needed to commercialise a new idea, it is in a position to capture all the benefits related to the increased demand for the asset caused by the idea. The innovator has an unquestionable advantage being able to buy out the capability in the complementary asset before the innovation is announced and the increased demand becomes obvious to others. If future market exists, taking advantageous position in complementary capacities may suffice to capture much of benefits from the innovation.

Moreover, if the innovation is not well protected and easy to imitate, then securing assess and control over complementary assets is likely to be the key success factor, especially if those capacities are in fixed supply, which is very common situation with distribution and specialised manufacturing competences. In weak appropriability regimes, however, the innovating firm may not have time or sufficient financial resources to acquire or build the required capabilities that ideally it may want to control. In this case the innovator needs to rank complementary assets with respect to their importance and to pursue those critical to success.


Mixed modes

Decisions to integrate or contract involve trade-offs, compromises, and mixed approaches. Organisations being built in order to successfully commercialise new ideas in real world often combine integration and contracting. Sometimes mixed modes represent transitional phases that balance current advantages and disadvantages of different both solutions.

(MS, 2008)

References


[1] D.J. Teece: Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. In: R.A. Burgelman, C.M. Christensen, S.C. Wheelwright: Strategic management of technology and innovation, McGraw-Hill/Irwin, New York, NY, 2004

[2] W.L. Miller, L. Morris: Fourth generation R&D. Managing knowledge, technology and innovation, John Wiley & Sons, Inc., New York, NY, 1999

[3] M.A. Schilling: Strategic management of technological innovation, McGraw-Hill/Irwin, New York, NY, 2008