Profit from innovation with David Teece

First-Mover Advantage: A Double-Edged Sword in Innovation

Being first to market with a new product is often seen as a crucial advantage. However, this early lead doesn't always translate into long-term success. Competitors can be quick to recognize a good idea and replicate it, potentially overtaking the original innovator.

In 1986, economist David Teece published a seminal article titled Profiting From Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy through the University of California’s School of Business Administration. In it, Teece introduced a framework for turning innovations into profits, providing valuable insights that still resonate today.

Winners and Losers in the Innovation Game

Teece explains that in the world of innovation, there are both winners and losers. Companies like Pilkington, with its float glass technology, and GD Searle, with its artificial sweetener, successfully capitalised on being first to market and reaped significant rewards.

But Teece also reminds us that being an innovator doesn’t always guarantee success. Consider the case of RC Cola, a brand that once competed fiercely with Coca-Cola and Pepsi. In 1962, RC Cola became the first to introduce a diet soda, a significant innovation at the time. However, Coca-Cola and Pepsi quickly imitated the product and, leveraging their extensive distribution networks and strong brand recognition, captured the market share that could have belonged to RC Cola.

Similarly, Xerox, once at the forefront of technological innovation, including the development of early personal computers, eventually lost its lead as other companies like IBM focused on and dominated the personal computing market.

Teece’s Three-Stage Framework for Profiting from Innovation

Teece’s framework for monetising innovation consists of three key stages:

1. The Regime of Appropriability: This initial stage involves protecting the innovation from competitors. While patents are a common method, Teece notes that they aren’t always foolproof. Other strategies might include making the technology difficult to replicate due to its complexity.

2. The Dominant Design Paradigm: Once the innovation is secured, the next challenge is to establish it in the market, ideally to the point where it can be produced on a large scale. This stage is about achieving the benefits of scale. Teece highlights that the best product doesn’t always win—sometimes, alternatives with different advantages can gain the upper hand, as was the case with VHS overtaking Betamax due to its lower cost.

3. Complementary Assets: In this final stage, Teece emphasises that having a superior product isn’t enough. Success also depends on complementary assets such as strong marketing, efficient distribution channels, reliable suppliers, and strategic partnerships. These elements are crucial not only for capturing market share but also for maintaining a competitive edge.

Reflecting on Teece’s Insights: Strategic Considerations for Managers

Teece's framework provides a strategic roadmap for managers looking to profit from innovation. Here are some questions to consider as you evaluate your company's innovation strategy:

• How adaptable is your organisation to shifts in the market, technological advancements, and competitive dynamics?

• Are you fully leveraging your intellectual property to drive innovation?

• What unique resources and capabilities does your company possess that set you apart from competitors? How are you capitalizing on these advantages?

• Does your company foster an entrepreneurial spirit and a willingness to take calculated risks in pursuit of new opportunities?

• How effectively are you building and nurturing networks and partnerships to complement your existing resources?

• Do you have robust feedback loops to understand and respond to customer needs, improving your products and services?

• Are you exploring global opportunities as part of your long-term strategy?

In later work, Teece acknowledged that his original framework didn’t address how to generate great innovations in the first place. For this, he recommended other methodologies such as the Stage-Gate process for new product development, Blue Ocean Strategy, or Edward de Bono’s Six Thinking Hats.

By integrating these approaches, managers can not only develop breakthrough innovations but also navigate the complex process of bringing them to market successfully.