Today’s classToday’s class

6. Technological competition6. Technological competition

6.1 Management of innovation/6.1 Management of innovation/

EMI update and takeawaysEMI update and takeaways6.2 Network effects and standards6.2 Network effects and standards

EMI updateEMI update

Powell decided thatPowell decided that

– priority to be given to fan beam technology, US subsidiary to priority to be given to fan beam technology, US subsidiary to

do the R&Ddo the R&D

– US should have fully integrated manufacturing facilitiesUS should have fully integrated manufacturing facilities Market development: demand drops from 470 scanners in 1976 Market development: demand drops from 470 scanners in 1976

toto

– 1977:1977: 350350

– 1978:1978: 230230

– 1979:1979: 175175

– 1980:1980: 185185

(Compare with industry manufacturing capacity of 900/yr.)(Compare with industry manufacturing capacity of 900/yr.) Intense competition; first $99,000 scanners appear on marketIntense competition; first $99,000 scanners appear on market

EMI update (2)EMI update (2)

By 1980, US market has 5.7 scanners per million By 1980, US market has 5.7 scanners per million

population. Maximum potential for developed country population. Maximum potential for developed country

estimated at 6/millionestimated at 6/million Consequences: shakeoutConsequences: shakeout

– 12 companies drop out in 1976-80, including GD, Searle, 12 companies drop out in 1976-80, including GD, Searle,

Pfizer; Technicare sold out to Johnson and JohnsonPfizer; Technicare sold out to Johnson and Johnson EMI Medical division profits fall from EMI Medical division profits fall from ££9.23M in ‘75 to 9.23M in ‘75 to

££(7.5)M in 1978(7.5)M in 1978 US subsidiary has trouble with fan beam technology; in US subsidiary has trouble with fan beam technology; in

1978 Hounsfield and UK team have to come to assist1978 Hounsfield and UK team have to come to assist

EMI update (3)EMI update (3)

US plant commissioned just as demand begins to dropUS plant commissioned just as demand begins to drop In October 1979, Hounsfield receives Nobel Prize in In October 1979, Hounsfield receives Nobel Prize in

MedicineMedicine In same month, problems at EMI Medical force it to In same month, problems at EMI Medical force it to

accept takeover from Thorn Electricaccept takeover from Thorn Electric Thorn divested medical division within months to GE. Thorn divested medical division within months to GE.

US Antitrust forced GE to divest; sold to tiny OMNI US Antitrust forced GE to divest; sold to tiny OMNI

Medical Services.Medical Services.

Profiting from InnovationsProfiting from Innovations

Great Ideas = pots of money? No!Great Ideas = pots of money? No! Four factors determine appropriability of returns to Four factors determine appropriability of returns to

innovation (see Grant chapter):innovation (see Grant chapter):1.1. Property rights in innovation: how effective is protection by Property rights in innovation: how effective is protection by

patents copyrights, trade secrets?patents copyrights, trade secrets?

2.2. Technology: Is it codifiable? How complex is it?Technology: Is it codifiable? How complex is it?

3.3. Lead time: How fast can others catch up if they have access Lead time: How fast can others catch up if they have access

to technology (and innovator doesn’t do anything about it)?to technology (and innovator doesn’t do anything about it)?

4.4. Complementary resources: resources and capabilities to Complementary resources: resources and capabilities to

finance, produce and market the innovationfinance, produce and market the innovation

Strategic optionsStrategic options

Three basic optionsThree basic options1.1. Go alone: success depends on all four factors aboveGo alone: success depends on all four factors above

2.2. Joint venture: good if partner brings in missing complementary Joint venture: good if partner brings in missing complementary

resourcesresources

3.3. License/sell right away: good if innovator has little value to add License/sell right away: good if innovator has little value to add

beyond initial innovationbeyond initial innovation

Problem with 2. and 3.: What prevents partner/licensee Problem with 2. and 3.: What prevents partner/licensee

from walking away with innovation?from walking away with innovation?– Need good protection of intellectual property rights for Need good protection of intellectual property rights for

contractual arrangements to workcontractual arrangements to work

EMI’s choice in (A) caseEMI’s choice in (A) case

Novelty and value of innovation irrelevant!Novelty and value of innovation irrelevant! Appropriability of returns from EMI’s CT scannerAppropriability of returns from EMI’s CT scanner

– Major breakthrough is basic idea, not the detailsMajor breakthrough is basic idea, not the details Patent protection apparently weakPatent protection apparently weak Easy for others in medical equipment industry to imitate or Easy for others in medical equipment industry to imitate or

(GE) even improve technology(GE) even improve technology– EMI lacks manufacturing and marketing capability, has to EMI lacks manufacturing and marketing capability, has to

outsource a lotoutsource a lot But weak patent protection also rules out But weak patent protection also rules out

licensing/selling, even if GE would add greater valuelicensing/selling, even if GE would add greater value In the end, EMI perhaps had little choice but to go aloneIn the end, EMI perhaps had little choice but to go alone

EMI (B): Market analysis/EMI (B): Market analysis/product life cycleproduct life cycle

EMI’s best course of action in 1976 depends on EMI’s best course of action in 1976 depends on

expected market developments and on EMI’s position expected market developments and on EMI’s position

in marketin market With a new durable good, With a new durable good,

– Current demand during initial adoption stage says little about Current demand during initial adoption stage says little about

when saturation stage will be reachedwhen saturation stage will be reached– Look at potential total demand, market history and current Look at potential total demand, market history and current

industry capacity to forecast when market will be saturatedindustry capacity to forecast when market will be saturated If market is expected to shrink, will EMI be among the If market is expected to shrink, will EMI be among the

survivors? survivors? What are appropriate “end game” strategies?What are appropriate “end game” strategies?

EMI (B): Competitive advantageEMI (B): Competitive advantage

Is EMI market leader because others are still catching Is EMI market leader because others are still catching

up or because EMI has a true competitive advantage?up or because EMI has a true competitive advantage? Look at dimensions on which to compete in this Look at dimensions on which to compete in this

industry: Cost, technological leadership, serviceindustry: Cost, technological leadership, service– How is EMI doing on each dimension?How is EMI doing on each dimension?

If EMI has an advantage, is it a sustainable one?If EMI has an advantage, is it a sustainable one?– Go through the usual catalog of factors (impediments to Go through the usual catalog of factors (impediments to

imitation, FMA)imitation, FMA)

– Do any of these apply to EMI in 1976?Do any of these apply to EMI in 1976?

EMI (B): First mover vs. EMI (B): First mover vs. first-mover advantagefirst-mover advantage

Advantages from being the first mover:Advantages from being the first mover:– Short run: enjoy market power until entryShort run: enjoy market power until entry

– Long-run: ability to build strong market position, i.e. real first-Long-run: ability to build strong market position, i.e. real first-

mover advantage. mover advantage.

Often tradeoff between Often tradeoff between 1.1. maximizing value of pre-entry market power and maximizing value of pre-entry market power and

2.2. building long-run advantage.building long-run advantage.

– E.g. how much resources should be allocated to customer E.g. how much resources should be allocated to customer

service, patent protection etc.?service, patent protection etc.?

EMI seems to have focused on 1.EMI seems to have focused on 1.

EMI (B): Organization matters!EMI (B): Organization matters!

EMI’s problems are rooted in organizational structureEMI’s problems are rooted in organizational structure– R&D, production and executive decision making 3000 miles R&D, production and executive decision making 3000 miles

away from main marketaway from main market

– Separation of functions and geographic areas is emphasized Separation of functions and geographic areas is emphasized

by formal structureby formal structure

– Results: bad link of different parts of organization in terms of Results: bad link of different parts of organization in terms of

information, control, and planning; parochial attitudesinformation, control, and planning; parochial attitudes

In fast-moving technology markets, need to sense In fast-moving technology markets, need to sense

changes in environment and respond effectivelychanges in environment and respond effectively