Abstract
This first part of the book has considered innovation mainly as an economic phenomenon, and has looked at it from the high-level perspective of an industrial sector and of society at large. Later we will enter another level of analysis, in which we “take the driving seat” of a company to define its innovation strategy.
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Notes
- 1.
This approach is typical of highly diversified firms, or conglomerates* and contributes to explaining their existence. In fact, why should an investor prefer buying a share of a conglomerate, and take ownership of the underlying activity portfolio defined by corporate managers, instead of asking an investment fund manager to pick shares and create a financial portfolio of smaller and more focused firms? The standard answer to this question (Kopp 1968; Faulkner and Campbell 2006) is that financial markets are imperfect. Lack of information and a high degree of uncertainty place a corporate manager in a better position to make investment decisions than a fund manager, especially when dealing with emerging business opportunities. A second answer is that there can be synergies between the business units of a conglomerate, together with common assets such as a well-known brand, reputation, and management skills. On the other side, analyzing a conglomerate is difficult for outside investors. Because of this ambiguity, the stock-market valuation of conglomerates is often discounted with respect to the sum of the valuations of their business units.
- 2.
In practice, one must use proxies for cash flow generation and absorption. For the former, it is common to use relative market share (i.e., the market share of the BU divided by the market share of the largest competitor), since this provides a rough indication of profitability. For the latter, sales growth rate is generally used, since a growing business must generally be supported by adequate investment.
- 3.
What constitutes a “balanced” portfolio depends on shareholders’ preferences. A startup company is likely to be made up of a single question mark, and venture capital shareholders will explicitly require this, given the mandate they have received from their own investors (i.e., to look at rapid growth in valuations and not at dividends, and to diversify risk by investing in a number of individually well-focused startups). Conversely, a large conglomerate that has traditionally treated its investors to a steadily rising flow of dividends will need to have many cash cows and just enough question marks and stars to ensure sustainability of the business for the future.
- 4.
By economic value we intend the gap between the price that customers are willing to pay for the firms’ products and the costs required to produce them.
- 5.
Following Grahovac and Miller (2009), competitive advantage is in its stricter sense connected to the above-normal contribution margins (i.e., the difference between unit price and variable cost) the firm earns in its product market. This is a necessary but not a sufficient condition for profitability, since significant profits will arise only if the firm does not spend too much money in factor markets, when acquiring or developing its assets. These assets may in fact be expensive either because they might be inherently costly, or because whoever sold them to the firm (e.g., an equipment maker, or an employee negotiating her salary) might be able to foresee their economic potential and raise prices accordingly.
- 6.
Always following Grahovac and Miller, imitation will be more likely if profitability is very high (i.e., if competitors see very attractive contribution margins and/or believe the cost of observing and replicating the firm’s assets to be comparatively low).
- 7.
For instance, cloud computing dramatically lowered entry barriers in the Internet industry, since it allowed any startup to set up a highly-scalable business, without having to invest in equipment, but simply paying for the capacity used.
- 8.
For example, the changeover that led from analogue to digital photography allowed the successful entry of firms who operated in consumer electronics and had the right competencies in technology and in the related business model.
- 9.
The air transport and railway transport industries were traditionally separate from one another, with the former representing the fast and expensive way to move between two locations and the latter the cheaper and slower one. The roughly simultaneous emergence of low-cost carriers (a business model innovation) and of high-speed trains (a process innovation from the perspective of railway companies), have made the two industries close competitors for short-range trips. In many cases, air transport can be cheaper than train transport and even slower, if one takes into account the trip from cities to airports and back, together with check-in, security clearance, and boarding times.
- 10.
To provide some reference figures, the development and industrialization of a motor car can cost approximately 1 B€. In the case of a commercial airplane, the investment can be in the order of 15 B€. When divided by expected production runs, one can notice that the R&D cost per unit sold often is of the same order of magnitude as contribution margins. So, if a firm is able to spread the same investment over a higher production run, profitability can be substantially increased. Conversely, if demand falls short of forecasts, profitability will be destroyed.
- 11.
For the sake of simplicity, we will only talk about applicants, though patent law makes a distinction between inventors (who are always natural persons) and applicants (which may either be natural persons, or a legal entity, such as inventors’ employers).
- 12.
One can draw an analogy between intellectual property and land, with patents being the equivalent of property deeds, and the claims the equivalent of the topographic description of the land. The analogy between intellectual property and land is not perfect and is often criticized by scholars, but is quite useful to allow a quick understanding of the subject.
- 13.
Some countries, such as the United States, grant a grace period allowing an applicant to file a patent application within a given interval (12 months) after a public disclosure event.
- 14.
In European patent law, this criterion is substituted by the concept of inventive step. This concept requires the patent application to identify a problem that is not adequately solved by prior art, that the invention allows to solve the problem, and that it does so by using means that are not obvious to a person skilled in the art.
- 15.
The exact definition of the rights granted to patent assignees requires a careful balancing between the private interests of the inventor and of society at large, especially when dealing with sensitive matters like health care. One typical issue is the righteousness of allowing patent holders to sell drugs at monopoly prices, which may be prohibitively expensive for poor patients in developing countries. However, while it is reasonable to think of adapting the patent system to these cases, it would be quite questionable to scrap it altogether. It is in fact likely that, if patents did not exist, we would not have “new drugs for all”, but simply “no drugs for anyone”. For a deeper discussion on this topic, one can refer to Schacht and Thomas (2005) and Boldrin and Levine (2013).
- 16.
In general, a precondition for economic development is the existence of a legal framework defining property rights over assets (Claessens et al. 2003). In the case of real assets, such as land and buildings, such a legal framework allows economic development in traditional economies by providing an incentive for saving and investing, reducing the need to spend on security, and allowing trade and financial transactions. Coming back to the analogy between land and intellectual property, one can therefore consider a framework defining intellectual property as a necessary element of economic development in the contemporary knowledge economy.
- 17.
Securitization of IP means generating and selling a financial instrument based on a given pool of IP assets. The buyer of the security pays the asset holder a given sum up front, in exchange for a stream of payments that depends on the revenues generated by the assets themselves (Cohen 2005).
- 18.
In practical terms, worldwide coverage is obtained by using a procedure defined by the so-called Patent Cooperation Treaty (PCT). In a nutshell, within 12 months of the first filing in the initial country, the applicant has the opportunity to file a PCT application expressing interest in international extension of the patent. The PCT application is at first examined at international level and—if the response is positive—the applicant can within 30 months move into the so-called national phase, in which she must decide in which countries the patent should be extended and start the related procedures.
- 19.
As an example, one can observe the introduction of the Wii by Nintendo in 2006. Nintendo aimed at broadening the user base in the games-console industry by making games easier, natural, and fun to play. This went against the prevailing trend followed by the industry, which focused on computing power and visual performance, to cater to the specific needs of a “core” of passionate game players.
- 20.
A “core competency” must not to be confused with the “core products” offered by the firm. On the contrary, firms that define their strategy around core competencies tend to shift quite readily from mature products and markets to emerging ones, in which they feel such competencies might lead to competitive advantage. Not many firms are close followers of this strategic management approach. Well-known examples are Canon (“blending optics and electronics”) and Corning (“amorphous materials technology”, such as glass and ceramics). Both of these companies have progressively entered and exited industries, depending on the degree with which their core competencies were felt to be relevant. If one broadens the concept of competency to the “capability to serve a market”, one can also consider firms such as Sony (“electronics for entertainment”, which is the intersection between a market and a technology) and IBM (“technology for supporting business activities”). By observing the history of these firms, one can notice that these companies tend to have a long lifetime and pass nearly unscathed through the business cycles and the s-curves of the products they produce.
- 21.
For instance, in the ’90s, Canon licensed its technology for laser printers and digital photocopiers to competitors, such as Xerox and HP, possibly giving up the possibility of becoming a near-monopolist player in that market.
- 22.
For instance, in 2011 Netflix had a very successful business in DVD rental, based on postal delivery, with which it has disrupted the traditional outlet-based business model. However, it had to bravely start promoting video-on-demand streaming, with a de facto cannibalization of its original rental model.
- 23.
As an example, one can think of Kodak in the ‘80s. By envisioning that digitalization might revolutionize the field of photography and make film obsolete, the firm decided to invest significant resources in the development of the new technology.
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Cantamessa, M., Montagna, F. (2016). The Many Approaches to Innovation Strategy. In: Management of Innovation and Product Development. Springer, London. https://doi.org/10.1007/978-1-4471-6723-5_6
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