Chapters 11 - Appropriating the Gains from Innovation

This chapter deals with how to extract profits from emerging technologies, and starts off by providing 3 hurdles that must be met in order to create profit: 1) technology must be successful, 2) it must create value, and 3) appropriating gains. This last one is the main focus of the chapter, how to capture the gains from a technology innovation. There are 4 main mechanisms used today to capture these gains:

1. Patents and related legal protections
2. Secrecy
3. Control of complementary assest
4. Lead time

The first, intellectual property and legal protections, are what many people focus on today. Many people think that if they can get a patent for their innovation they will be able to keep competition out and gain huge profits. Which, in some instances is true, but will rarely serve to build a long term successful business strategy. While patents restrict anyone from using or developing like goods for a 20 year period without permission, they do not restrict from developing "around the patent", developing complementary goods and tend to be extremely expensive to defend. This last factor is very important because the whole point of the patent is to get extremely high profit margins through market dominance, but if much of those profits are spent defending the patent then is it really worth it? Instead the author here suggests to invent a better mouse trap not protect the one you already have. Meaning instead of defending an invention/innovation you have developing, try to develop a "solution" that customers value even more than the product on its own.

The second mechanism, secrecy, is another way to deter competitors from knowing about or competing against your product. While this is a good way to protect intellectual property, internal processes or other such intangible trade secrets, it is very difficult to keep product details secret for very long. Once a product is out in the market, it becomes much more difficult to keep its secret. That is competitors are now able to purchase the product and legally can reverse engineer and produce like products of their own. The author further describes that While secrecy keeps your intellectual capital inside your company it also doesn't allow outside information in and further innovation is stifled.

Complementary assets are those tangible and intangible assets that naturally will sell with your product and sometimes better than your product. Being able to wrap your own product or someone elses product with complementary assets can be one of the biggest ways to appropriate gains from e new technology. Here the author talks about IBM's strong sales force and service/support organization as the key to its dominance during the 50s and 60s. While they didn't necessarily invent the major products that it sold, people had to come to them because of their complementary assets.

Finally, Sidney Winter, talks about lead time as the most important mechanism for the appropriation of gains. The concept of lead time is getting the right product to the market first. This is not the same as getting your product to the market first, it has to have the functions that the majority will want, otherwise you were first to market with another useless product. The author gives an example of Nucor and the compact strip production process in steel making. However, I think an even better example would be from earlier in the book. How Palm won the PDA market, they were not necessarily the first to market with their product and they were definitely not the biggest company at the time. They did, however, take the time to figure out what the consumers wanted in a PDA, then they produced what would then be a game changing technology. Apple on the other hand rushed to the market with a prodcut that wasn't what the consumers wanted and it was a huge flop.

I think the main point that shouldbe taken out of this chapter is that the four of these elements should be considered and used together to appropriate gains from emerging technologies. One underlying fact though, is that having a new technology is not enough on its own. The technology may be gre3at, but even more importatn is the application of the technology and how it will be received by consumers. It has been shown time and time again consumers care more about how the technology is used to help them in their lives than just having the technology for technology sake. Futhermore, rushing out to get a patent on your technology or keeping your technology a secret will do very little if there is no inherent value in the technology to consumers. Patents should be used as ways to protect a products uniqueness, not as a way to make money. I think 2 great examples of this are pharmaceutical companies and the iPod.

Pharmaceutical companies rush out to get patents on their latest and greatest drugs, they then exploit the consumers for up to 20 years (usually less), by charging huge margins on their drug. In the process they upset consumers and don't build any future streams of possible revenue for them. As such they go through times of huge profit and times of huge losses.

The other example, more positive, is Apple's creation of the iPod. While there are some trade secrets, I'm sure, and there are definitely patents on the hardware and interface, these are not what is selling the product or what has made the product so popular and successful. Instead Apple took the time to fully develop a user system for their iPods, and they developed the BEST system for this. People are buying it because they are familiar with iTunes and iPods, they are easy to use and for new comers they are easy to learn. Apple is not trying to restrict any companies from producing MP3 or other types of music players, their patents are restricting other companies from producing the exact same systems.



Corcoran, Elizabeth. "Why Apple Won." Forbes.com. 23 October 2006. . 11 February 2009.
http://www.forbes.com/2006/10/20/ipod-itunes-jobs-tech-media-cz_ec_1023valleyletter.html