Welcome to Week 3!
This week, we will focus on protecting technological innovations. To do this, we are going to look at why a dominant design emerges and why it is not always the most technologically-superior designs that become dominant.
One of the key terms to focus on is network externalities, which means that the value of a technology increases as the number of other users of the same or similar technology also increases.
Another key focus this week will be on developing an understanding of the mechanisms a firm has available to protect an innovative technology, the means by which the mechanisms can be put into effect, and their limitations.
Good luck! I’ll talk to you all in the discussions.
Given a company situation be able to determine whether and how to protect its technological innovations.
Increase students’ understanding of why a dominant design emerges and why it is not always the most technological superior design that becomes dominant.
Determine the primary sources of increasing returns and network externalities.
Analyze a multidimensional model for assessing the value of a technology to buyers in order to determine the potential demand.
Evaluate if “winner-take-all” markets are good for consumers.
Develop an understanding of the mechanisms a firm has available to protect an innovative technology, the means by which the mechanisms can be put into effect and their limitations.
Network Externalities | Dominant Designs | Protecting Innovation | Absorptive Capacity | Intellectual Property in the Digital Age
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The concept of network externalities is extremely important. Network externalities affect the adoption of a dominant design because a user’s benefit from using a product increases as the installed base increases (e.g. railroads, telecommunications, communities of practice, computer platforms).
For example, many people choose a computer that uses the Windows operating system and an Intel microprocessor because the “Wintel” platform has the largest installed base, thus maximizing the number of people whose user files will be compatible.
Network externalities arise when compatibility (e.g., exchanging computer files) and the availability of complementary goods (e.g., movies for a VCR, film for cameras) are important and when investments in training are high (e.g. the Qwerty keyboard).
Here’s a great example: As Microsoft Windows’ installed base increased, developers became more likely to expend their efforts on developing products compatible with Windows rather than Apple’s Mac. Thus, a virtuous cycle (at least from Microsoft’s perspective) begins. An increasing installed base attracts complementary goods developers, the availability of complementary goods increases the installed base, and so on.
Path dependency means that small historical events may have a large effect on the form of the technology adopted as the dominant design. For example, early entrants and their technology may become so entrenched that subsequent superior technologies are unable to gain a foothold in the market. Similarly, sponsorship by a large, powerful firm can help a technology gain a controlling share of the market, locking out alternative and potentially superior technologies.
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The focus of this week is on identifying the reasons why most industries adopt a dominant design and why a particular firm’s technology is adopted as the dominant design.
The key factors driving industries to adopt a dominant design include increasing returns to adoption, path dependency, and government regulation. However, when you do the reading, think about why some firms learn faster than others. Prior learning and absorptive capacity are found to be large contributors to the variance in learning rates.
Specifically, this class will address:
Sponsorship by a large firm
Investment in training
The question concerning why one firm’s technology is adopted as the dominant design over others could be summarized as depending on
1.the nature of value creation in technology-based products and
2.the specific actions a firm can take to encourage the adoption of its technology as the dominant design.
Value is created in two ways. The first way a technology creates value is in the functionality it provides the customer, and this is referred to as its standalone value. The second way a technology creates value is through the network externalities associated with the technology.
Technologies that are accepted as the dominant design deliver the greatest total value, standalone plus network externalities. This, in part, explains why it is not always the superior product that is adopted as the dominant design. Firms can sponsor their technology with the goal of gaining a controlling share of market and locking out potential competitors, and they can enter early in an effort to become so entrenched that potential competitors are not able to gain a foothold in the industry.
Dominant design is usually the result of:
Increasing returns to adoption of government regulation
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A firm’s ability to generate profits from innovation is a function of the ease with which competitors can copy the innovation.
This factor makes the choice to protect the innovation and the choice of the protection mechanism an important part of the overall strategy. There are four primary mechanisms used to protect innovations in most countries: patents, trademarks, copyrights, and trade secrets.
Choosing whether to aggressively protect an innovation or to disseminate it freely varies with the nature of the innovation and the industry. The choice and ability to protect a technology generates greater profits and enables the firm to maintain architectural control of the development and compatibility with other goods. On the other hand, openly disseminating technology can encourage its widespread adoption by consumers and encourage the development of complementary goods, which may be the most advantageous decision. Choosing to treat a technology in an open manner is an important consideration when the firm is unable to produce quantities sufficient to meet demand or when demand for the item is affected by the availability of complementary goods.
An important term to understand is appropriability. Appropriability is the extent to which a firm is able to capture profits from its innovation and is a function of how easily competitors can imitate the innovation (i.e. whether the underlying knowledge is tacit or socially complex) and the strength of the chosen protective mechanism.
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This TCO addresses the need for organizations to increase their innovation capabilities. The book discusses the use of absorptive capacity as one way to increase innovation. This reading suggests you should increase the variety of an organization’s knowledge as a way to increase innovation.
“Prior-related knowledge confers an ability to recognize the value of new information, assimilate it, and apply it to commercial ends.
An organization’s absorptive capacity will depend on the absorptive capacities of its individual members” (Cohen & Levinthal, 1990).
The ability of a firm to be innovative depends, to a large degree, on its ability to utilize the knowledge that it already possesses. This existing knowledge may include rudimentary capabilities such as a common language or an awareness and understanding of recent developments in science and technology. This previous knowledge strengthens a company’s ability to see the importance of new information, absorb it, and use it in its products.
The greater the amount of knowledge there is, the greater the possibility that new information is learned and applied in new situations. If a wide variety of knowledge already exists, new knowledge has a greater possibility of being related to and incorporated into the existing knowledge base.
Together, these capabilities are referred to as the firm’s absorptive capacity.
A firm’s absorptive capacity is a function of the absorptive capacity of the people who have a relationship with the dynamics of the firm as well those employees within the firm. A difficulty may emerge with a central gatekeeper under conditions of rapid change. A centralized gatekeeper may not provide an effective link.
If communication is valued and open and the individuals communicating have sufficient knowledge, communication among individuals will result in the organization’s capacity to develop new, innovative connections, more connections than may have resulted from one individual’s knowledge.
The critical piece of learning here is that it is up to management to recognize that there is “an organizational trade-off between diversity and commonality of knowledge across individuals” (Cohen & Levinthal, 1990). It is up to the manager to find the right balance between the two for a particular firm at a particular time.
Finally, absorptive capacity is more likely to be developed and maintained as a byproduct of routine activity when the knowledge domain that the firm wishes to exploit is closely related to its current knowledge base.
Ways to increase a firm’s absorptive capacity:
Hiring a diverse group of employees
Learning from a firm’s manufacturing operations
Learning from research and development
Merging with other companies
Acquiring other companies
Intellectual Property in the Digital Age
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The biggest benefit of technology in the digital age is also its biggest headache. Digital technology allows information to be reproduced exactly as it was written. Copies can now be perfect copies. In the old analog days, copies were always of lower quality than the original; today, copies are of exactly the same quality as the original. Hence, protecting information is much more difficult today than ever before.
This week, we will explore the different types of intellectual property (IP) rights and look for solutions to balance content owners’ interests and the public interest.
The reading states that “most industries, particularly high technology and entertainment industries, rely upon IP rights to protect the ‘HUGE’ investments needed to create products, such as software programs, movies, and musical recordings” (Schilling, 2010). Even our founding fathers recognized this need by building IP rights into the Constitution. Specifically, in Article 1, Section 8, Clause 8, the Constitution states,” an IP right of promoting the Progress of Science and Arts, by securing to authors and inventors the exclusive right to their writings and discoveries” (U.S.Constitution).
Article 1, Section 8, Clause 8 of the U.S. Constitution states, “To promote the Progress of Science and useful Arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries” (U.S.Constitution).
There are three types of IP property rights: patents, copyrights, and trademarks. The readings this week will help you determine which one is best for your unique situation.
III. Discussion Grading and Follow-up Topics
Remind students about the Discussion Grading Policy for this class as an announcement or in an early discussion posting.
A. Optimizing New Technology
What factors led to Microsoft’s emergence as the dominant personal computer operating system provider? Is Microsoft’s dominance due to luck, skill, or some combination of both?
What are some examples of industries not mentioned in the chapter that demonstrate increasing returns to adoption?
Are dominant designs good for consumers? Competitors? Complementors? Suppliers?
B. Protecting Innovations
What industry conditions lead to the revolution in audio distribution described in the case “The Digital Music Distribution Revolution”? Which stakeholders stand to benefit most (or least) from this revolution?
Can you identify a situation in which none of the legal protection mechanisms discussed (patents, copyrights, trademarks, trade secrets) will prove useful?
What factors should a firm considering marketing its innovation in multiple countries use in formulating its protection strategy?