Chapter 11
Chapter 11, titled Appropriating the Gains from Innovation, starts off with three pretty good common sense type rules on achieving profitability through innovation. First the technology must work. Second the the technology must create value. And third appropriating the gains from number two. Another way of thinking about that might be capturing as much of the margin that result from the first two rules as possible, because if you don't someone else surely will. Those gains could go to rivals or even your partners. But wouldn't you rather those gains go to you as much as possible?
The author suggests that there is an over emphasis on patent law and intellectual property when trying to secure these gains. They say that this over emphasis distorts analysis in three ways. First this emphasis leads the impression that patents are the dominant way to capture gains. This is not the case in all instances and patents are more important in some industries than in others. Second the emphasis on patents leads to misallocations of resources. Money may be spent on costly legal defenses that could be used someplace else. The third distortion from over emphasis on patents is that this way of thinking leads companies to choose the wrong projects because people think if they don't get a patent it is not worth doing.
Patents are only one of four mechanisms of appropriating gains. The other three are secrecy, control of complementary assets and lead time. Patents are an important means of securing gains. They come in four types - machines, products of manufacture, compositions of matter and processes. To be patentable an invention must be useful, novel and non-obvious. Since 1995 patents last 20 years. Patents have some limitations as well. They are costly to defend and rivals can invent around them. They can also have limited usefulness in some industries.
The next mechanism for securing gains is secrecy. Secrecy is a form of protection that a company can provide to itself without aid from the government and it works best where government protections are the weakest. Once your product goes to market it is very hard to keep your innovations secrete but if you make it that far you should have the benefit of lead time. Companies can make their products harder to reverse engineer. The author also suggests that it is easier to keep secretes about processes than it is about products. Too much secrecy can hinder research and development as well.
Complementary assets are the third mechanism for securing gains. This notion was covered to some extent in chapter 8 and includes things like distribution channels, services, customer/supplier relationships and complementary products. The ability to capture gains through complementary assets is open to anyone that has those assets whether or not they are the innovator. If you don't have the assets and you are the innovator it can be hard to capture the gains. The book uses a post WW II IBM as an example of how complementary assets can be used to secure gains and shows that assets can be used across a wide range of innovations.
Lead time is the last mechanism for securing gains. According to s survey in the book lead time is the most effective way of securing gains but your mileage may vary from industry to industry. Lead time can give you the much talked about 'first mover advantage'. Lead time can give significant advantages to first movers and sometimes prevent competitor from entering the market. Also the more durable a product the more important lead time can be. If switching costs are high lead time is important.
The author then moves on to talk about using these four mechanisms with emerging technology. The book suggests identifying uncertainties like changes to IP laws or dependence on key personnel or how much lead time you actually may have. The book then goes on to suggest asking yourself the following questions: Who are your competitors? Where are the headwaters of the new knowledge that flows in this field? How fast are the rapids? What are the prospects for strong patents?
The author suggests that there is an over emphasis on patent law and intellectual property when trying to secure these gains. They say that this over emphasis distorts analysis in three ways. First this emphasis leads the impression that patents are the dominant way to capture gains. This is not the case in all instances and patents are more important in some industries than in others. Second the emphasis on patents leads to misallocations of resources. Money may be spent on costly legal defenses that could be used someplace else. The third distortion from over emphasis on patents is that this way of thinking leads companies to choose the wrong projects because people think if they don't get a patent it is not worth doing.
Patents are only one of four mechanisms of appropriating gains. The other three are secrecy, control of complementary assets and lead time. Patents are an important means of securing gains. They come in four types - machines, products of manufacture, compositions of matter and processes. To be patentable an invention must be useful, novel and non-obvious. Since 1995 patents last 20 years. Patents have some limitations as well. They are costly to defend and rivals can invent around them. They can also have limited usefulness in some industries.
The next mechanism for securing gains is secrecy. Secrecy is a form of protection that a company can provide to itself without aid from the government and it works best where government protections are the weakest. Once your product goes to market it is very hard to keep your innovations secrete but if you make it that far you should have the benefit of lead time. Companies can make their products harder to reverse engineer. The author also suggests that it is easier to keep secretes about processes than it is about products. Too much secrecy can hinder research and development as well.
Complementary assets are the third mechanism for securing gains. This notion was covered to some extent in chapter 8 and includes things like distribution channels, services, customer/supplier relationships and complementary products. The ability to capture gains through complementary assets is open to anyone that has those assets whether or not they are the innovator. If you don't have the assets and you are the innovator it can be hard to capture the gains. The book uses a post WW II IBM as an example of how complementary assets can be used to secure gains and shows that assets can be used across a wide range of innovations.
Lead time is the last mechanism for securing gains. According to s survey in the book lead time is the most effective way of securing gains but your mileage may vary from industry to industry. Lead time can give you the much talked about 'first mover advantage'. Lead time can give significant advantages to first movers and sometimes prevent competitor from entering the market. Also the more durable a product the more important lead time can be. If switching costs are high lead time is important.
The author then moves on to talk about using these four mechanisms with emerging technology. The book suggests identifying uncertainties like changes to IP laws or dependence on key personnel or how much lead time you actually may have. The book then goes on to suggest asking yourself the following questions: Who are your competitors? Where are the headwaters of the new knowledge that flows in this field? How fast are the rapids? What are the prospects for strong patents?
Chapter 17
Chapter 17 is titles The Design of New Organizational Forms and argues that in the world of emerging technologies new organizational forms are required to succeed. The example of brokerage houses and the change they went through in the 1990's is given. Full service brokerages that were used to charging high fees found themselves being undercut by discount houses. The full service houses found themselves at a disadvantage and needed to change the way in which they were organized in order to compete. There are two capabilities that new organizational forms should focus on. The first is and effective balance between exploration (new things) and exploitation (current things). The second capability is the recombination of existing competencies or finding new ways to do what you already know how to do.
There are six elements to organizational forms. They are; organizational goals, strategies, authority relations, technologies, markets and processes. It can be hard to determine when changing these six elements stops being variations on the old form and become a new type of organization. There are six new organizational forms discussed in this chapter. They are; the virtual organization, the network organization, the spinout, the ambidextrous organization, the front-back organization and the sense and respond organization.
The virtual organization is one in which employees, suppliers and customers are dispersed geographically but united by technology. This new organization is the allowed by technologies like broadband connectivity and video conferencing. The Internet allows new ways to connect with customers no matter where they are. There are challenges with this form though like lack of oversight because workers are not in the same building.
There are two types o network organizations, external and internal. The external form can be thought of as outsourcing to the extreme where one central organization creates ties to outside entities that have the skills and services they need. Ties are created by partnerships and joint ventures. The internal form or network organization is similar to the external but happens all inside one firm. Ties between strategic business units, micro enterprises and autonomous work teams make up this organization.
Spinout Organizations result when a company establishes a new entity that goes out on it's own. The parent company can retain some control but eventually the new company must sink or swim on it's own. These are often used with risky technologies to insulate the parent from potential harm.
The ambidextrous organization can be thought of as a partner for the original company. This is used when there is concern that innovation is being stifled in the original company.
The front-back organization is organized around customers in the front with everything else behind to serve the front. This gives gives customers fast, responsive and customized solutions according to the book.
The last form of organization is the sense and respond type. This form is focused on identifying ever changing customer needs. These are highly adaptable firms that plan from the bottom up and have few long range plans.
I would have to say that my company does not fit into any of these new models. Even though we have been focused on an innovation initiative for over a year now our organizational model has not changed to try and support this initiative. Our relative lack of success in this area could have something to do with organizational model.
Chapter 17 is titles The Design of New Organizational Forms and argues that in the world of emerging technologies new organizational forms are required to succeed. The example of brokerage houses and the change they went through in the 1990's is given. Full service brokerages that were used to charging high fees found themselves being undercut by discount houses. The full service houses found themselves at a disadvantage and needed to change the way in which they were organized in order to compete. There are two capabilities that new organizational forms should focus on. The first is and effective balance between exploration (new things) and exploitation (current things). The second capability is the recombination of existing competencies or finding new ways to do what you already know how to do.
There are six elements to organizational forms. They are; organizational goals, strategies, authority relations, technologies, markets and processes. It can be hard to determine when changing these six elements stops being variations on the old form and become a new type of organization. There are six new organizational forms discussed in this chapter. They are; the virtual organization, the network organization, the spinout, the ambidextrous organization, the front-back organization and the sense and respond organization.
The virtual organization is one in which employees, suppliers and customers are dispersed geographically but united by technology. This new organization is the allowed by technologies like broadband connectivity and video conferencing. The Internet allows new ways to connect with customers no matter where they are. There are challenges with this form though like lack of oversight because workers are not in the same building.
There are two types o network organizations, external and internal. The external form can be thought of as outsourcing to the extreme where one central organization creates ties to outside entities that have the skills and services they need. Ties are created by partnerships and joint ventures. The internal form or network organization is similar to the external but happens all inside one firm. Ties between strategic business units, micro enterprises and autonomous work teams make up this organization.
Spinout Organizations result when a company establishes a new entity that goes out on it's own. The parent company can retain some control but eventually the new company must sink or swim on it's own. These are often used with risky technologies to insulate the parent from potential harm.
The ambidextrous organization can be thought of as a partner for the original company. This is used when there is concern that innovation is being stifled in the original company.
The front-back organization is organized around customers in the front with everything else behind to serve the front. This gives gives customers fast, responsive and customized solutions according to the book.
The last form of organization is the sense and respond type. This form is focused on identifying ever changing customer needs. These are highly adaptable firms that plan from the bottom up and have few long range plans.
I would have to say that my company does not fit into any of these new models. Even though we have been focused on an innovation initiative for over a year now our organizational model has not changed to try and support this initiative. Our relative lack of success in this area could have something to do with organizational model.
I think you bring up a very important point with your company Eric, it is not necessarily what organizational form a company adopts, but more so that a company realizes the need to change and adapt their organizational form when working with emerging technologies. For instance, the Internet has rapidly changed the way we do business today, and companies that have not adopted the Internet as a way to conduct business and changed their organization form to reflect that are probably not still in business today. I think the book just presented basic forms, with the idea that companies need to be prepared to change their form (the six elements authority, customer, etc.) as needed to meet the demands that emerging technologies bring into the business environment. Would you agree?
ReplyDeleteWell said Laura. Sometimes just realizing that you need to do something differently is half the battle.
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