Three factors, namely, regimes of appropriability, the dominant design paradigm, and complimentary assets determine the profit captured by the innovator. Regimes of appropriability are the environmental factors, excluding the firm and the market structure, govern the ability of the innovator to capture profits. Patenting an innovation can help but not useful in the majority of cases. It is ideal only in simple or straightforward innovation but unsuitable for processes. The solution could be using trade secrets in cases where the innovation is embedded into the process. A new product undergoes a series of iteration before a dominant design emerges through trial and error (Teece, 1986). During the early stages of this process, there is no guarantee that the original innovator will develop a winning design because competitors could develop it and capture most of the market share. The process of taking an innovation to the market is costly and requires assets such as capital to fund marketing activities and establishing production lines and other activities related to production. An innovator may not have the finance or even the technical skills required to market. Established companies might take the innovation and gain dominance in a few years precisely because they have the assets.
Codified knowledge is a type of documented knowledge such as the knowledge in patents. With codified knowledge, it is easier to replicate a product design or a process because a patent application has enough details, which allows the imitator to change certain aspects of the designs to avoid violating the patent (Teece, 1986). However, tacit knowledge is not publicly available and it only in the hands of those intimately involved in its use such as those working for a company.
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The movement from pre‐paradigmatic stage to paradigmatic stage is about the development of a proper design. At the lower stage, there may be competing designs but at the paradigmatic stage, a dominant design emerges. The company with the assets and skills to scale production and reach out to customers can dominate the industry (Enkel, 2010). The winner is not necessarily the innovator but the company with the complementary assets.
The three basic building blocks of an innovation are regimes of appropriability, the dominant design paradigm, and complementary assets. Regimes of appropriability means that protecting an innovation is challenging except in certain cases and particularly industrial processes. In this case, an imitator can copy the innovation and succeed by changing a few design aspects. At the dominant design phase, the product is fluid and under active development. The company that produces the dominant design is likely to earn more profits than the innovator. Complementary assets come in handy when a dominant design emerges. The company with the right assets, capital, human resources, and other resources is likely to win in this race (Teece, 1986). The best course of action for the innovator is to collaborate with investors or companies with assets required to the product to the market or scale production if needed.
Tight appropriability is the exception rather than the rule due to the difficulties of protecting innovations. However, for innovators, using business strategies can help them generate profits from their innovations. At the preparadigmatic stage, a design is emerging and business cannot work but at later stage of paradigmatic stage phase, it is easier to win by deploying the right assets.
Processes are the designed around a specific variety of catalysts, which can be kept proprietary. Moreover, the inventor of the catalyst can require licensees not to analyze the catalysts. The product innovations are harder to protect because they also undergoes design changes over time and winning design might come from another company.
Integrated companies are harder to manage and their cost structure is high, making them less responsive to changes. A smaller company in contrast is smaller and agile. Moreover, many products such as computers have thousands of components and no company can maintain an edge in innovating (Enkel, 2010). For a smaller company, it is beneficial to use contractors instead of making everything. Integrated companies might have to use contractors as well but they are big and unwieldy.
Most innovators do not have a finished product in a way the market can consume. More development is often needed to create a usable product and the chances of market success are not guaranteed. Those factors make companies wishing to form a strategic partnership doubt that the partnership can produce success or attract venture capital.
A strategic partner is ideal when the product is at the paradigmatic stage. At this stage, the product is proven but the innovator does not have the resources or complimentary assets required to establish a production line, fund marketing activities, and make other investments necessary to make the product a success (Mcgahan & Silverman, 2006). Strategic partner is also ideal when the innovator wants parts from other companies via contracting.
A venture capitalist can gain too much control on the new business to the detriment of the innovator. Also, if the venture capitalist has invested in other businesses or has interest in them, he can copy the innovation. On the other hand, the innovator can take advantage of venture capitalist by failing to live up to his or her obligations relating to product innovation or design.
References
Enkel, E. (2010). Attributes required for profiting from open innovation in networks. International Journal of Technology Management , 52 (3/4), 344. doi: 10.1504/ijtm.2010.035980
Teece, D. (1986). Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy. School of Business Administration, University of California, Berkeley, CA 94720, U.S.A .
Mcgahan, A. M., & Silverman, B. S. (2006). Profiting from technological innovation by others: The effect of competitor patenting on firm value. Research Policy , 35 (8), 1222–1242. doi: 10.1016/j.respol.2006.09.006
