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March, 2004 © LINEN 1
A Model to Extract, Capture and Protect Value coming from Innovations of Small &/or New Innovative Companies (SNIC)
HEC LINEN – INPI
M. Santi (HEC) in partnership with H. Gasiglia, S. Reboud, A. Sabouret and with the support of A. Bachani
March, 2004 © LINEN 2
Introduction: objectives, founding concepts, methodology & mode of operation of the model
March, 2004 © LINEN 3
Objectives and Subjects dealt with
This model was developed to:• allow Small or/and New Innovative Companies (SNIC) • to extract maximum value/profit from the innovations that
they engender• by adopting a development mode (internal or external) which
is most appropriate for them• and to anticipate and define the best Intellectual Protection
(IP) strategy
However, this model can easily be extended and applied to other situations: innovations of large companies, valuation of a patents/innovations portfolio…
March, 2004 © LINEN 4
Directions for use of this Model
Acronym, Action buttons, Help….or how to use the model and navigate within it :
• Use the “Note“ function to find detailed explanations and comments of each slide
• this button enables the user to access a detailed content of the slide in action
• Glossary provides the user, through an internet link, the definition - and sometimes the illustration - of the underlined word
• this button should be clicked to follow a pre-defined path either related to the configuration of the innovation or in case of junction
• this action button allows, after the use of one of the 3 previous buttons, to return to the original slide
• signals the existence of a mini case which illustrates the concept or approach used in the slide
March, 2004 © LINEN 5
At the heart of the model: The Concept of Rent
• Rent: a super-profit linked to an abnormal competitive situation (market or asset monopoly) that a company enjoys in a sustainable way
• Rent and innovation– The innovation allows the creation of a competitive advantage
which generates a rate of potential profit > the industry norm– Only the innovation can benefit from a strong and lasting legal protection, creating a sustainable monopoly
– Depending on the nature and type of innovation, the magnitude and the value of the rent will differ
Rent Innovation
March, 2004 © LINEN 6
- - - + ++Volume of the rent
Profit Rate of the rent
Duration of the rent
The 3 Components of Rent
Rent Configuration on Vol / Rate / Duration
Magnitude of the rent= Vol x Rate x Duration
March, 2004 © LINEN 7
Typology: Rent configurations of an innovation
duration
rate
volume
++– –
duration
rate
volume
++– –
– – ++volume
rate
duration
duration
rate
volume
++– –
duration
rate
volume
++– –
1. Dwarf
3. Gadget
6. Optical Trap
2. King of petrol
4. Joker
duration
rate
volume
++– –
5. Oasis
March, 2004 © LINEN 8
Gradual Erosion of the rent
Type of innovation
Insertion of the innovation in its environment, which generates friction effects due to the competitive context
Insertion of the innovation within the business and of the innovator
characteristics
Potential Rent of the innovation
Appropriable Rent for the innovator
Residual Rent of the innovation
March, 2004 © LINEN 9
Approach and a Generic Model
1 – The innovation & its characteristics
Type, magnitude & characteristics of the innovation & their effects on the rent: its volume its profit rate its duration
3 – Insertion of the innovation within a business
Risk analysis, friction & capturing effects on the rent of: attractiveness of the business 3.2 competitors reaction 3.3 competitive situation of the innovator 3.4
2 – Insertion of the innovation within its environment
Risk analysis and friction effects on the rent of: demand-client (volume effect) 2.1 business chain (profitability effect) 2.2 substitutes (duration effect) 2.3 complementors (global effect) 2.4 regulations and lobbying forces 2.5
Variables of the model Magnitude & configuration of the rent
- +
- +
- +
3 – appropriable rent that may be captured by the innovator
3
12
2 – residual rent, after the friction effects due to the economic context
3
1
2
1 – potential rent that the innovation is able to generate
1
2
3
Development (valorization) &
protection strategies(4)
The analysis should be “dynamic”
Autonomous development
Abandon
License-out
Co-operative development
Protection
Sell-out
March, 2004 © LINEN 10
Part One: Assess the potential rent
Analysis of the components of the potential rent in order to assess its
magnitude and to spot its configuration
Potential Rent
Binem, IRSE300, OpenVox et PAC,
March, 2004 © LINEN 11
Assessment and Classification of the potential rent
This first step of the model must be carried out whatever the innovation:
• first estimate the potential rent of the innovation thanks to the assessment - volume / rate / duration - tables that follow
• then take care to clearly identify 2 characteristics of the innovation that will have an impact on the whole analysis:
• the standalone standalone or system nature of the innovation (effects on recommendations)• the existence of one or multiple business application domains for the innovation
• and finally come up with the configuration of the innovation potential rent that will structure the future path to be followed within the generic model
Potential Rent
March, 2004 © LINEN 12
What is the nature of the innovation?
Innovation Type
Isolated or solo STANDALONESTANDALONE
Component within a system, SYSTEMSYSTEM
Substitution in an existing market
It improves without significantly changing…
and integrates
in…
….a system &
a network
the dominant standard the existing system: substitution of the existing component without
changing the others (the architecture may possibly be modified)
1 – Harder & Better 2 – Meccano
It creates a new standard…
andrebuilds
that eliminates the dominant standard
that disqualifies the existing system and replaces it with a new one
3 – New Player 4 – New Deal
Creation of a market
It creates a new market / business…
…or constructs
by introducing a new standard by offering a new system
5 – New Frontier 6 – Full Monty
Potential Rent
Back to: Profit rate assessment Sacrifices CPUV substitution Complementors unavoidability
The IP claims about the innovation may facilitate the
identification of its type
March, 2004 © LINEN 13
Estimate the volume of the potential rent
Potential Turnover (Volume)
Very weak Weak Medium Strong Very High
Business diffusion potential : the spectrum of potential applications is…
Very limited(1 niche)
Limited(2 or 3 niches)
Medium (more than 1
large application)
Large (several
applications)
Very large (multiple
applications)
Geographic diffusion potential: the natural market of the innovation is…
Purelynational
European or regional
Developed countries
Developed countries + some developing ones
Worldwide
Potential size of the client-markets: the size of the addressable market of the innovation, once in a mature phase, annually amounts to…
< 50 million €
50–200 millions € 0.5 billion € 1–2 billion d'€ > 3 billion €
Exploitation Limitation:The claims of the existing patents prohibit…
All zones & application domains
The key zones &
application domains
Certain application domains or
zones
Very few elements
IP not existing /
maintained. Freedom to
operate
Summary Value - - ++
Reboud:
Éviter les valeurs moyenne en synthèse
Reboud:
Éviter les valeurs moyenne en synthèse Potential RentA solid IP policy can help extend the
spectrum of application domains
March, 2004 © LINEN 14
Estimate the profit rate of the potential rent
Profit Rate Very weak weak Medium Strong Very strong
Mode of generation of the innovation: innovation was developed…
In isolation from the market
(except nuggets)
With suppliers
With Research Centers
With clientsWith a large
& diverse network
Type of innovation: the innovation type is …
Harder& Better
Meccano
New Player
New Frontier
New Deal
Full Monty
Nature of previous protections possibly limiting the profit rate potential …
Disclosed, the innovation is
public
Negotiation with the
patent holder is possible
An improved patent is
possible to be filed
The innovation is free from any existing (or pending)
form of protection.Freedom to operate
Summary Value - - ++
Potential Rent
For more details on the type, click
Upstream protection of innovation is a sine qua non condition
March, 2004 © LINEN 15
Potential duration of exploitation
Very weak Weak Medium Strong Very strong
Technological foundation of the innovation: the technological bases of the innovation are…
Applied research & sciences Fundamental research & sciences
SimpleProcess
Original combination
of techniques
New dominant
design
New technological
platform
New scientific paradigm
Innovation intensity of the application domain: the frequency of innovations & patents in the industry is…
Very high High Medium Low Very Low
Technical imitability of the innovation: the natural base of the innovation makes copying…
Very easy Easy Not very easy Difficult Very difficult
Legal imitability: the value of the protection makes copying… Very easy Easy Not very easy Difficult Very difficult
Summary Value - - ++
Estimate the duration of the potential rentPotential Rent
March, 2004 © LINEN 16
Position the innovation on the potential rent components: Summary
Potential Rent
- - - + ++Volume of the rent
Profit Rate of the rent
Duration of the rent
March, 2004 © LINEN 17
Potential rent of the innovation: Which Configuration?
duration
rate
volume
++– –
duration
rate
volume
++– –
Potential Rent
Dwarf: Don’t keep on running the analysis, go directly to the recommendations & come to the conclusion that this innovation presents no possible development (valorization).
…and which path to follow within the model
Dwarf Path - always click on this button
Gadget: Make sure that the profit rate stay significant (Part 2.2, & possibly 2.4 & 2.5 of the model, then 3.2) before analyzing the capability of the SNIC to capture this rent quickly (Parts 3.3 to 3.5 dealing with competition)
Gadget Path – always click on this button
duration
rate
volume
++– – Oasis: First ascertain the true duration of the potential rent (Part 2.3 & possibly 2.4 & 2.5) then its profit rate (gadget approach) before possibly continuing with the rest of Part 3 once these hypotheses have been checked out
Oasis Path - always click on this button
March, 2004 © LINEN 18
Potential rent of the innovation: Which Configuration?
duration
rate
volume
++– –
duration
rate
volume
++– –
Potential Rent
…and which path to follow within the model
If necessary, click on this button
If necessary, click on this button
Joker: Run the entire model
King of Petrol: Run the entire model
duration
rate
volume
++– – Optical Trap: First ascertain the consistency of the potential rent volume (Part 2.1, and possibly 2.4 & 2.5) then of its profit rate (see the gadget approach) and, if necessary, study the competitive position of the SNIC (Part 3)Optical Trap Path – always click on this button
If If the rent volume is linked to the existence of several application domains, click click here in a first here in a first instanceinstance
!
March, 2004 © LINEN 19
In Case: High volume – Multiple applications
Potential Business Volume (revenue)
Very low Low medium High Very high
Business diffusion potential : the spectrum of the potential applications of the innovation is…
Very limited
(1 niche)
Limited(2 or 3 niches)
Medium(more than 1
large application)
Large (several
applications)
Very large (multiple
applications)
Summary Value - - ++
If the innovation fits to one of these 3 cases, then analyze each of the different application domains (markets or industries) that it covers on the 3 rent dimensions, determine the rent configuration for each and pursue an individual analysis for each configuration in Parts 2 & 3, in accordance with the indicated paths.
“We are looking for an attractive niche that the SNIC may exploit in an autonomous way”
Click here to move on
Potential Rent
PACPAC
March, 2004 © LINEN 20
Part 2: Assess the Residual Rent
Analysis of the erosion or amplification effects on the potential rent since the
innovation is inserted in its environment.
Residual Rent
March, 2004 © LINEN 21
Insertion in the environment: the risksResidual Rent
Upstream Downstream
Substitutes Substitutes (2.3)(2.3)Possible effects on the rent duration
Client-Markets Client-Markets (2.1)(2.1) Possible effects on the rent volume
Business
Pressure, Pressure, regulations, regulations, lobbying lobbying (2.5)(2.5)
Possible effects on the 3 components of the rent
Complementors Complementors (2.4)(2.4)
Possible effect on the rent volume and profit rate
Business ChainBusiness Chain (2.2)Possible effects on the rent profit rate
Innovation
March, 2004 © LINEN 22
2.1.a Client-Market: Its Adoption Propensity face to innovations
Usual adoption rate of an innovation within the client-market
Usual adoption speed of an innovation within the client-market
Marginal Normal All or nothing
Slow
Bad OptionEliminate this
application domain and find other applications.
If not freeze all expenses…
Exhaustion
Particularly unfavorable for a
SNIC
Roulette
Favorable but requires resources while waiting for results; not the best
case for a SNIC
Fast
WastedExploit quickly on
condition that massive investments are not
required; if not move to Bad Option
Gestation
At first glance, the most favorable situation for a
SNIC
Money-Spinner
Favorable, but the volume and growth are often difficult for a SNIC
to handle alone
Residual Rent
March, 2004 © LINEN 23
2.1.b A Key concept: The CPUV
• To find its place within a market, any innovation must bring the customer a significant “advantage”, so that he adheres to it and buys it; it should “create value” for the customer
• And this value should be sufficiently perceptible & useful for the client(s); we shall speak of Customer Perceived Utility Value (CPUV)
• We can “estimate” the CPUV as a trade off between what the innovation is likely to bring the client and what he is required to give-up or sacrifice in order to adopt it
CPUV = Perceived Benefits – Perceived Sacrifices• Differentiate the analysis depending on whether the innovation is
– A substitution-innovation, in which case the CPUV is relative and “measured” against the current reference offering in the market
– A market creation-innovation, without any possible reference and so “measured” in absolute terms
Residual Rent
OpenVox, Glacé, OpenVox, Glacé, PACPAC
March, 2004 © LINEN 24
2.1.c CPUV of the innovation – in case of substitution-innovation: Benefits
low HIGH
value / price Low Relative Advantage
>>1 : High Relative Advantage
Simplicity,visibility, “testability” Not very Transparent Highly Transparent
Innovation Type, hence compatibility with
what exits
Low : New Deal orNew Player
High :Harder & Better andcompatible Meccano
Summary of perceived benefits low HIGH
Residual Rent
March, 2004 © LINEN 25
2.1.c CPUV of the innovation – in case of substitution-innovation: Sacrifices
Low Perceived Risk HIGH Perceived Risk
Type of innovation, hence effect on the
standard
Standard unaffected: Harder & Better and compatible Meccano
Standard affected: New Deal
or New Player
Transfer Costs low HIGH
Summary of perceived sacrifices low HIGH
Residual Rent
To continue the session, click here
For a refresher on the “types”, click
March, 2004 © LINEN 26
2.1.d CPUV of the innovation – in case of market creation-innovations: Benefits
low HIGH
Resolution of an unsatisfaction (time, task,
possibilities offered)
LowRelative
Advantage
HighRelative
Advantage
Simplicity, visibility, testability Not very Transparent
Highly Transparent
Compatibility of the know-how Low High
Summary of perceived benefits low HIGH
Residual Rent
March, 2004 © LINEN 27
2.1.d CPUV of the innovation – in case of market creation-innovations: Sacrifices
low HIGH
Adoption perceived risk low High
Anticipated price (minimum level price) low High
Summary perceived sacrifices low HIGH
Residual Rent
March, 2004 © LINEN 28
2.1.e Summary: CPUV & the Friction effects on the rent volume
Perceived Sacrifices
HIGH
“No Way”Very important frictions,
almost no rent volume can be captured
No point in getting in?
“Infatuation”High level of friction, uncertain rent volume
Rework the innovation to diminish the sacrifice levelDanger for a SNIC
Low
“Wet Firecracker”High level of friction,
low level of rent volume to capture
Keep on working the innovation to improve its performance, else
drop it
“My Way”Allows to quickly capture the
maximum rent volume
Favorable
Low HIGH
Perceived Benefits
!
z
Residual Rent
OpenVox, Glacé,OpenVox, Glacé,PACPAC
March, 2004 © LINEN 29
2.1.f Client-market: Effects on the rent configuration Residual Rent
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Potential Rent
Residual Rent
March, 2004 © LINEN 30
2.2.a Balance of power within the Business Chain
UPSTREAM LINK BUSINESS DOWNSTREAM LINK
Impact of upstream link on cost & quality of the downstream link offering
high low high low
Transfer cost/ Cost of changing suppliers high low high low
Relative Concentration + upstream + business + business +downstream
Relative Value of the IP portfolio + upstream + business + business + downstream
Capability to integrate Upstream / Downstream + upstream + business + business + downstream
Impact of Sale/Purchase Volume + upstream + business + business + downstream
Summary: Balance of power in favor of…
upstream business business downstream
Residual RentBactiSTOP, BinemBactiSTOP, BinemGlacé, PACGlacé, PAC
March, 2004 © LINEN 31
2.2.b Summary: Business Chain & Friction effects on the rent profit rate
Balance of Power
UPSTREAM LINK /
business in favor of…
UP
STREAM
+/–Strong dependence/suppliersMedium-Strong Friction: suppliers capture margin
Recommendation: Partner with a SUPPLIER
– –Sandwiched Business
Maximum friction on the margin rate
Abandon this application or find another position
within the chain
Business
++Position of Strength
Little friction effect on margin
Area of strategic autonomy, margin may be kept
+/–Strong dependence/clientsMedium-Strong Friction: clients capture margin
Recommendation : Partner with a CLIENT
Business DOWNSTREAM
Balance of Power DOWNSTREAM LINK/ business in favor of…
Residual Rent
Protecting an innovation upstream is a sine qua non condition
March, 2004 © LINEN 32
2.2.c Business Chain: Effects on the rent configuration
Residual Rent
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the Rent
Profit rate of the rent
Duration of the rent
Potential Rent
Residual Rent
March, 2004 © LINEN 33
2.3.a Substitution risk: technological dimension
Technological risk of substitution
Spectrum of alternative paths & options
narrow Very broad
Predictable Lead time of the innovation v/v the alternatives
HIGH Very low technological risk
++
Low technological risk
+
low
Medium-Strong technological risk
–
Major technological risk
– –
Residual Rent
GlacéGlacé
March, 2004 © LINEN 34
2.3.b Substitution risk: business dimension
Residual Rent
Usual Adoption Rate of an innovation within a Client-market
Usual Adoption Speed of an innovation within the
Client-market
Marginal Normal “All or nothing”
SlowBad Option
Zero Risk
Exhaustion
Medium Risk
Roulette
High Risk
FastWaste
Very Low Risk
Gestation
High Risk
Money-spinner
Very High Risk
See 2.1.a
March, 2004 © LINEN 35
2.3.c Summary: Substitutes & Friction effects on the rent duration
Risk & Friction effects related to substitution
Technological Risk: spectrum & level of advancement of the alternative technological options & paths
low HIGH
Business Risk: adoption propensity
of innovation by clients
HIGH
Low risk & friction effects
+
Robinson Crusoe
Very high risk & friction effects
– –
Overcrowded
low
Very low risk & friction effects
++
Hermit
Medium risk & friction effects
–
Bottleneck
Residual Rent
March, 2004 © LINEN 36
2.3.d Substitution: Effects on the rent configuration
Residual Rent
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Potential Rent
Residual Rent
March, 2004 © LINEN 37
2.4.a “Complementors”: How needful?Degree of requirement & difficulty in “gathering”
partners
low
HIGH
Harder & Better New Player
New Frontier
Meccano
New Deal
Full Monty
Zero need
Low need for complementors, possibly for distribution
Need to be accepted by the existing complementors
Strong need for existing & new complementors
Complementors are required,
essentially new one’s
Residual Rent
Go directly to pressure (2.5)
For a refresher on the ”types”, click
Protecting an innovation upstream is a sine qua non condition
PAC, OpenVoxPAC, OpenVox
March, 2004 © LINEN 38
2.4. The complementors: What power?Residual Rent
Degree of complexity of the partnership network to build or integrate (mayonnaise effect)
Very few different partners(1 ou 2)
Lot of partners(more than 6)
Impact of the complementors face to the innovator within the total value creation
Low Impact High Impact
Degree of power of the complementors, linked to their position of strength (size difference, damaging power, IP portfolio, monopoly position,…) compared to that of the innovator
Small, dispersed,without power
Big & Sturdy
Summary:
Degree of dependence vis à vis the complementors
Low High
March, 2004 © LINEN 39
2.4.c Summary: Complementors & Friction effects on the rent
Complementors
risk & friction effects
Degree of dependence vis à vis the complementors
low HIGH
Degree of requirement & difficulty in developing
partnerships
HIGH
Imperative need, butlow risk & friction effects
Divide to rule
Dangerous Position with strong friction effects
Amateur
lowPosition without any friction
effect on the rent
Egoist
Relatively weak position with unavoidable friction
effects
Caudine Forks
!
z
Residual Rent
March, 2004 © LINEN 40
2.4.d Complementors: Effects on the rent configuration
Residual Rent
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Potential Rent
Residual Rent
March, 2004 © LINEN 41
2.5.a 2.5.a Pressure, Regulation, Lobbying InstitutionalInstitutional risk &risk & possiblepossible effects on the 3 rent componentseffects on the 3 rent components
Type of effect on the rent
- The existing regulations or those likely to be put in place by the authorities under the pressure of the consumers & professionals lobbying will have a
Strong friction Effect
Non-existent or without any effect here
Strong amplification effect
- The official approvals (defined by regulation & controlled by professionals bodies) needed to run the business & market the innovation, have a
Strong friction Effect
Non-existent or without any effect here
Strong amplification effect
- The norms, fixed during special proceedings by key players of the industry and which are compulsory for all, have a
Strong friction Effect
Non-existent or without any effect here
Strong amplification effect
- The standard(s), which rule certain industries and are imperative for all irrespective of their wish, have a
Strong friction Effect
Non-existent or without any effect here
Strong amplification effect
Summary
Effect on the Rent volume
Effect on the Rent profit rate
Effect on the Rent duration
Strong friction Effect
Strong friction Effect
Strong friction Effect
Non-existent or without any effect
Non-existent or without any effect
Non-existent or without any effect
Strong amplification effect
Strong amplification effect
Strong amplification effect
Residual Rent
PAC, Bio-Rad, PAC, Bio-Rad, BactistopBactistop
March, 2004 © LINEN 42
2.5.b Institutional Risk: Effects on the rent configuration
Residual Rent
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Potential Rent
Residual Rent
March, 2004 © LINEN 43
Residual rent of the innovation: Which configuration?
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
Dwarf
Gadget
King of Petrol
Joker
OasisOptical Trap
Residual Rent
March, 2004 © LINEN 44
Part 3: Assess the appropriable rent
Analysis of the erosion effects on the residual rent since the innovation is inserted in its
competitive context & taking into account the competition position of the innovator
Appropriable Rent
March, 2004 © LINEN 45
Insertion in the direct competitive context:risks, frictions & rent capturing
• Attractiveness of the business (3.2):– Maturity stages and life cycle– Type of industry– Intensity of competition
friction effects on & possible capture of the residual rent
• The reaction of the competitors (3.3):– Occurrence and foreseeable intensity– Nature of the reaction friction effects on & possible capture of the residual rent
• The competitive situation of the innovator (3.4):– Scientific & business legitimacy of the innovator– Diagnosis of the innovator’s resources & competencies friction effects on & possible capture of the residual rent
• Appropriable Rent & Development/Valorization (3.5)
Appropriable Rent
March, 2004 © LINEN 46
3.2.a Maturity Stages: businesses are different in term of attractiveness Appropriable Rent
The business life cycle conceptWindow
of opportunity
Phases
IndicatorsGrowth RateGrowth PotentialNo. of CompetitorsCompetition TypeTechnology
Entry Barriers
Attractiveness
Emergence
Unstable GoodStrong
FragmentedFaltering
Weak, technological
High but danger
Start-up
StrongVery goodIncreasing
Not clear/visibleEvolving
Average, marketing is key
Very high
Growth
Very strongStill good
DiminishingConcentrationCrystallization
Strong & diverse
High
Maturity
Weak/stableZeroFew
CrystallizationFrozen
Very strong & complex
Limited
Decline
Zero or negativeNegative
FewOligopolyFrozen
Uninteresting
Zero
Large external players appear on the scene through the external growth route (acquisition) and begin to dominate the business
A standard or dominant design appears
March, 2004 © LINEN 47
3.2.b Industry Types: businesses are different
Sensitivity of the business to differentiation
(existence of “niches”, groups of competitors,varied solutions/offerings…
)
HIGH
Fragmentation
Numerous small competitors continuously entering & exiting Changing competitive positions Local markets, customized offers
Specialization
Very diverse offeringsDifferent groups of specialized
competitorsSeveral standards can coexist
low
Dead-end
Strong barriers to entry & exit Structural overcapacityNo player is profitable
Volume
Very similar offeringsEconomies of scale &
experienceA dominant design exists
low HIGH
Sensitivity of the business to volume(existence of economies of scale, volume effect and experience curve)
Appropriable Rent
The different possible The different possible application domains may belong application domains may belong to different industry typesto different industry types
GlacéGlacé
March, 2004 © LINEN 48
3.2.c Industry types: businesses are different in term of value & entry barriers
Sensitivity to differentiation
HIGH
Fragmentation Value: –Value: –
Entry and Development barriers areEntry and Development barriers are
weakweak
Specialization Value : + +Value : + +
Entry and Development barriers areEntry and Development barriers are
MEDIUM-STRONGMEDIUM-STRONG
Nature of the entry barriers•Access to distribution•Costs to acquire access to clients
Nature of the entry barriers• Transfer Cost• Access to specific resources• Patents, Brands
low
Dead end Value : – –Value : – –
STRONG entry barriers but the STRONG entry barriers but the business is not profitablebusiness is not profitable
Volume Value : +Value : +Entry and Development Barriers are Entry and Development Barriers are
STRONGSTRONG
Unattractive Nature of the entry barriers• Economies of scale & experience• Access to distribution• Norms, approvals, regulation
low HIGHSensitivity to volume
Appropriable Rent
March, 2004 © LINEN 49
3.2.d Rivalry & Intensity of competition:general attractiveness of a business
HIGH 1. Growth of the business low
HIGH 2. Concentration/distribution of market share
low
HIGH 3. Diversity of competitors / Differentiation low
HIGH 4. Perceived transfer costs low
low 5. Ratio fixed costs/variable costs HIGH
low6. Exit barriers & costs
HIGH
lowlow Intensity of Competition Intensity of Competition HIGHHIGH
Appropriable Rent
The present & potential degree of direct competition (players of the business) can be measured with the help of the following 6 criteria:
March, 2004 © LINEN 50
3.2.e Summary: Competitive Context, Attractiveness & Erosion effects
Intensity of competition:
- current (if the market exists) - or “ future” (in the case of a creation - innovation)
HIGH
FAR WESTStrong but unlikely to appear
friction effects
Better not fighting in such a highly competitive activity
BATTLE FOR THE FUTURE PARADISE
Strong and likely to appear friction effects
Better not fighting unless one masters the key success factors
(KSF) and has sufficient resources
low
AFTER THE BATTLEWeak and unlikely to appear
friction effects
Make the best of the present without betting on an interesting future
“PAX ROMANA”Weak-Medium and likely to appear
friction effects
The ideal situation for the innovation / innovator
low (Fragmented / Dead end) HIGH (Specialized/ Volume)
Value of the industry type
!
Appropriable Rent
This table allows the user to select the This table allows the user to select the most attractive segments and applicationsmost attractive segments and applications
March, 2004 © LINEN 51
3.2.f Competitive Context: Effects on the rent configuration
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Residual Rent
Appropriable Rent
Appropriable Rent
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3.3.a Competitor’s Reaction: occurrence & predictable intensity
Value & attractiveness of the business (substitution & market creation)
Type: Dead-end/ Fragmented
Type: Volume or Specialization
low High
Existing Actors
(substitution only)
It’s a core business for the actor High
Strong and
probable reaction
Very strong &
highly probable reaction
It’s a marginal business for him low Unlikely weak / No
reaction Very limited reaction
Potential New entrants (substitution & creation)
Substitution risk: Overcrowded &
BottleneckHigh
Weak & probable reaction
Very strong and likely reaction
Substitution risk: Robinson Crusoe &
Hermitlow Unlikely weak / No
reactionStrong but unlikely
reaction
Appropriable Rent
See 2.3.c
Within the same application sector, if the Within the same application sector, if the competitors react differently, it means that competitors react differently, it means that this sector consists of several different this sector consists of several different
businesses/segments/marketsbusinesses/segments/markets
IRSE300IRSE300
See 3.2.b
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3.3.b. Competitor’s reaction: of what kind?
Value of the Residual Rent
low Strong
Existing Actors
(substitution
only)
Exit barriers / Costs
High Block1) Block2) Copy or Imitate
low Uninteresting (no cause for alarm)
Creative imitation or Disqualify
Potential New Entrants
(substitution & creation)
Entry barriers / costs
HighUnattractive(contempt)
Disqualifying Innovation
low Creative imitation Pure copy imitation
Appropriable Rent
See 3.2.cIRSE300IRSE300
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Appropriable Rent
3.3.c Competitor’s reaction, Friction effects and recommended development strategy
Nature of the competitor’s reaction
Unattractive/ Uninteresting
Block Pure Copy Creative ImitationDisqualifying Innovation
Latent time before a reaction = Time available to the innovator low HIGH
Command over resources from identified competitors
F (financial)
T (technological)
L(legal)
HIGH
No friction hence no risk
Very high risk of friction
Find a white knight or sell out
Very high friction risk Reaction is a function of the competitor’s profile
F +T –J +
License-out / Share
F +T +J –
Block
F –T +J +
Find a sponsor/patron to
beat the competitor
low
Friction possible but limited risk
Overcome obstacles if enough means
Case of innovations with limited rent duration (dwarf, gadget, optical trap)
"Don't protect, take the money and run"
F +T –J –
The competitor is a possible
sponsor/benefactor
F –T –J +
Strengthen the technology & attack legally
F –T +J –
Minefield, game of go? => IP strategy
IRSE300IRSE300
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3.3.d Competitor’s reaction: Effects on the rent configuration
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Residual rent
Appropriable rent
Appropriable Rent
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3.4.a Competitive Situation of the innovator: Scientific and Business legitimacy
LEGITIMACY
BUSINESS (growth, reputation and command by the company of the business
in question)
low HIGH
SCIENTIFIC (academic
reputation and the precedence of the R&D team in the
concerned scientific domain)
low
Red SignalUnable to valorize its innovation autonomously, the SNIC has to license or sell out its innovation.
Move to 3.5
Orange Signalthe weak scientific legitimacy
leads to an in-depth diagnosis of the company’s position on the 1st part of the 2 tables that follow.
HIGH
Orange Signalthe weak business legitimacy leads to
an in-depth diagnosis of the company’s position on the 2nd part of
the 2 tables that follow.
Green SignalGreen Signalthe strong scientific & business
legitimacy leads to a diagnostic of the company’s position only on the 3rd part of the 2 tables that
follow.
Appropriable Rent
IRSE300IRSE300BinemBinem
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3.4.b Resources & Competencies of the SNIC
Next Step
Does the SNIC hold the technological resources & competencies to get the innovation
defendable & durable?
Yes NoIt doesn’t possess them
They are not sufficient to sustain the innovation
Can it acquire them or develop them internally ?
Yes No
Is a partnership with some technological “complementors”
possible ?
Yes Zone of strategic choice
Partnership necessary
No Inevitably alone External Development
Can it procure them or have access to them ?
Technological entry barriers
Emerging industry
Appropriable Rent
STOP, license STOP, license or sell outor sell out
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3.4.c Resources & Competencies of the SNIC
Next Step
Does the SNIC have the “business” competencies that correspond to the application
domain KSF?
Yes No
Can it acquire them or develop them internally?
yes no
yes Zone of strategic choice
Partnership necessary
Is a partnership with business “complementors”
possible?no Inevitably alone External
Development
Entry & survival business barriers
Industry in a start-up phase
Appropriable Rent
STOP, license STOP, license or sell outor sell out
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3.4.d Resources & Competencies of the SNIC
Next Step
Can the SNIC gather the magnitude of resources required to establish its innovation in a successful and
lasting way?
Yes No
Can it find “investors” to finance the needed resources ?
yes no
Is a partnership with competitors possible ?
yes Zone of strategic choice
Partnership necessary
no Inevitably alone External development
Profitable development barriers
Industry in a growth phase
Appropriable Rent
STOP, license STOP, license or sell outor sell out
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3.4.e Competitive position of the SNIC & Effects on the rent configuration
BEFORE - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
AFTER - - + +
Volume of the rent
Profit rate of the rent
Duration of the rent
Residual Rent
Appropriable Rent
Appropriable Rent
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3.5 Summary: Appropriable Rent & Development/Valorization Strategies
Magnitude of the rent appropriable by the SNIC
HIGH Autonomous, strategically desired and possible, in partnership if
useful
License or sell-out or in cooperation…
depending on the possibilities
low
Autonomous but purely tactical
Abandon, license or sell-out…
depending on the volume of the residual rent
Development StrategyDevelopment Strategy
low High
Relative (for the SNIC) amount of investment needed to industrialize and launch the innovation
in the market
Appropriable Rent
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Rent appropriable by the innovator: which configuration ?
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
duration
rate
volume
++– –
Dwarf
Gadget
King of petrol
Joker
OasisOptical Trap
Appropriable Rent
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Part 4 : Determine the Development & Intellectual protection mode of the SNIC’s innovation
Recommendations for a development/valorization & intellectual protection strategy of the innovation
depending on its rent configuration
Strategic Choice
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Return End Part 1 End Part 2 End Part 3Return End Part 1 End Part 2 End Part 3
For a Dwarf configuration
Stand alone Stand alone Innovation Innovation
Market exists or to be created
Recommendations
Development: possible but not very attractive autonomous development. Abandon
Protection: Without any real interest. However to safeguard against the possible appropriation of the innovation by a third party, it is advisable to: 1) publish the invention (making it non -patentable), 2) in a confidential medium (so that the competitor’s chances of discovering it and exploiting it are weak) and 3) locally or abroad.
Strategic Choice
Attractiveness: zero in absolute terms, very low for a SNICAttractiveness: zero in absolute terms, very low for a SNIC
The innovation is : The innovation is : stand alone stand alone system basedsystem based
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For a Dwarf configuration
System-basedSystem-based
InnovationInnovationExisting markets Markets to be created
Recommendations
Development: Abandon, except for the Meccano type, if the innovation convinces the architect of the system
Protection: General case: In order to avoid all likely appropriation, publish the invention in a confidential medium, locally or abroad. Meccano case: file a national “smoky screen” patent, extend it using the PCT procedure and sell it off to the architect; if not possible, don’t maintain the patent.
Development: Abandon (not worth developing given the risks and chances of success)
Protection: Not worth it at all. However to safeguard the innovation, 1) publish the invention (making it non -patentable), 2) in a confidential medium (so that the competitor’s chances of discovering it and exploiting it are weak) and 3) nationally or abroad.
Strategic Choice
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Return End Part 1 End Part 2 End Part 3Return End Part 1 End Part 2 End Part 3
For a Gadget configuration
Stand alone Stand alone InnovationInnovation
Market exists or to be created
Recommendations
Development : an interesting configuration of a quick & autonomous development for a SNIC
Protection : The natural rent duration being short, only a kind of “smoky screen” protection will be targeted. File a national patent (+ brand & design if possible), geographically extended to attractive countries through the “PCT” (Patent Cooperation Treaty) procedure. Don’t validate the application to most of these countries 30 months after the first legal patent application; possibly forget to maintain the patent.
Strategic Choice
Attractiveness: low in absolute terms, medium for a SNICAttractiveness: low in absolute terms, medium for a SNIC
The innovation is : The innovation is : stand alone stand alone system-based system-based
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Return End Part 1 End Part 2 End Part 3Return End Part 1 End Part 2 End Part 3
For a Gadget configuration
System based System based InnovationInnovation
Market exists or to be created
Recommendations
Development: a difficult configuration for a cooperative development – the rent duration being short, a rapid reaction is needed but quickly creating and running a network is a rather delicate affair.
Protection: The rent duration being weak, only a “smoky screen” kind of patent is sought. File for a national patent (+ design & brand if possible) with extensions suing the PCT procedure for attractive countries. At the end of the 30 months period (before the national procedures) and depending on the existing network, validate or abandon, one by one the “patented” countries and even don’t maintain the patent. Accept the principle to mix/cross licenses with “complementors” to favor the emergence of the new system (dominant design).
Strategic Choice
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Return Return EndEnd PPart 1 art 1 EndEnd PPart 2 art 2 End End PPart 3art 3
For a Oasis configuration
Stand alone Stand alone InnovationInnovation
Market exists or to be created
Recommendations
Development: Ideal configuration for a SNIC autonomous development strategy, but a partnership could be interesting if it is generating an amplification effect.
Protection: Protection is crucial: compulsory patent and/or secret, closely related protection on the basis of codified knowledge, possibly complementary protection (design, brands…). Quickly extend the national patent through the “PCT” procedure to a maximum number of countries; at least to the innovator country, Europe, USA (possibly apply for a direct patent here to avoid interference procedures) and Japan. At the end of the 30 months legal period, validate and reposition only in the countries that are interesting.
Strategic Choice
Attractiveness: medium in absolute terms, high for a SNICAttractiveness: medium in absolute terms, high for a SNIC
The innovation is : The innovation is : stand alone stand alone system-based system-based
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For an Oasis configuration
System-based System-based InnovationInnovation
Market exists or to be created
Recommendations
Development: Ideal configuration for a cooperative development, assuming the system leadership in the case where the degree of dependence vis-à-vis the “complementors” is weak and transferring it to (a) key and dominant partner(s) in the opposite situation.
Protection: It is crucial: compulsory patents and/or secrets, closely related protection on the basis of codified knowledge, possible complementary protection (brands, designs…). Make use of mixed/crossed licenses with complementors to favor the emergence of a new system. Extend the national patent through the PCT procedure to a maximum of countries (118 possible); at least to the innovator country, Europe, the US (possibly apply for a direct patent here to avoid interference procedures) and Japan. At the end of the 30 months period, validate and reposition only in the countries that are interesting.
Strategic Choice
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Return Return End End PPart 1 art 1 EndEnd PPart 2 art 2 End End PPart 3art 3
For an optical trap configuration
Stand alone Stand alone InnovationInnovation
Existing Market Market to be created
Recommendations
Development: Sell out or license out – don’t get involved in this situation
Protection: A “luring” patent with a possible anticipated publication demand, followed by a local real patent application, extended with the PCT procedure to a maximum no. of countries (a direct application for the US). 30 months to negotiate licensing agreements and to protect, in the national phase of the PCT, only the countries to be covered (eventually use a European patent); if no agreement within the 30 months abandon the patent.
Development: In a tactical first phase, autonomous or cooperative development (start, create a niche and develop a brand, prove), then very quickly sell out or license out; if not possible abandon
Protection: A “luring” patent with anticipated publication asked, followed by a local real patent application, extended by the PCT procedure to a maximum no. of countries. At the end of the 30 months period, before the national phase of the PCT, validate only in the countries concerned with licensees; abandon in case of no agreement
Strategic Choice
Attractiveness: medium in absolute terms, low for a SNICAttractiveness: medium in absolute terms, low for a SNICThe innovation is : The innovation is : stand alone stand alone system based system based
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For an optical trap configuration
Stand alone Stand alone InnovationInnovation
Existing Market Market to be created
Recommendations
Development: don’t get involved in this – license or sell out options are compulsory.
Protection: A “luring” patent with anticipated publication asked for; followed by filing a real local patent, extended by the PCT procedure to a maximum number of countries (direct filing for the US). 30 months to negotiate licensing agreements and to protect, in the national phase of the PCT, only the countries to be covered (eventually use a European patent); if no agreement within the 30 months abandon the patent.
Development: Use the cooperative option in the beginning (to set the global offering, create the niche and the standard, prove) and then very quickly license or sell out to a major “complementor” or competitor; else abandon.
Protection: A “luring” patent with anticipated publication asked for, followed by a real local patent application with geographic extension to a maximum no. of countries with the PCT procedure. At the end of the 30 months period (in the PCT national phase) validate only the countries concerned with licensees; abandon in case of no agreement.
Strategic Choice
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Return Return End End PPart 1 art 1 End End PPart 2 art 2 End End PPart 3art 3
For a Joker configuration
Stand alone Stand alone Innovation Innovation
Existing Market Market to be created
Recommendations
Development: Don’t touch…unless evidence is required to be given. Immediately sell out or license out.
Protection: Super protection is compulsory: a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales.
Development: Start alone or with partners to prove and valorize (market share and brand). In case you can’t make it big, license or sell out.
Protection: Super protection is compulsory: a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure. Direct filing in the US. Allocate partial licenses or sales.
Strategic ChoiceAttractiveness: strong in absolute terms, limited for a SNICAttractiveness: strong in absolute terms, limited for a SNIC
The innovation is : The innovation is : standalone standalone system-basedsystem-based
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For a Joker configuration
System based System based Innovation Innovation
Existing Market Market to be created
Recommendations
Development: Stay away…license or sell-out immediately to a “big” player (generally among the complementors)
Protection: Super protection is compulsory: a series of patents (+complementary protection if needed & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales.
Development: At the start, to prove one’s self, develop in a partnership (volume, standard, network of complementors), then license or sell out if one cannot make it “big”. Protection: Super protection is compulsory: a series of patents (+complementary protection if possible & needed)) covering a maximum of applications and countries thanks to the PCT procedure. Direct application for the US. Allocate partial licenses or sales.
Strategic Choice
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Return Return End P End Part 1 art 1 End End PPart 2 art 2 End P End Part 3art 3
For a King of Petrol configuration
Stand alone Stand alone InnovationInnovation
Existing Market Market to be created
Recommendations
Development: Don’t touch…unless evidence is required to be given. Immediately sell out or license out.
Protection: Super protection is compulsory: a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales.
Development: Start alone or with partners to prove and valorize (market share and brand). In case you can’t make it big, license or sell out.
Protection: Super protection is compulsory: a series of patents (& complementary protection if necessary & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure. Direct filing in the US. Allocate partial licenses or sales.
Strategic Choice
The innovation is : The innovation is : stand alone stand alone system based system based
Attractiveness: strong in absolute terms, limited for a SNICAttractiveness: strong in absolute terms, limited for a SNIC
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Return Return End End PPart 1 art 1 End End PPart 2 art 2 End End PPart 3art 3
For a King of Petrol configuration
System based System based InnovationInnovation
Existing Market Market to be created
Recommendations
Development: Stay away…license or sell-out immediately to a “big” player (generally among the complementors)
Protection: Super protection is compulsory: a series of patents (+complementary protection if needed & useful) covering a maximum of applications and a maximum of countries thanks to the PCT procedure (118 countries). Direct filing in the US. Allocate partial licenses or sales.
Development: At the start, to prove one’s self, develop in a partnership (volume, standard, network of complementors), then license or sell out if one cannot make it “big”. Protection: Super protection is compulsory: a series of patents (+complementary protection if possible & needed)) covering a maximum of applications and countries thanks to the PCT procedure. Direct application for the US. Allocate partial licenses or sales.
Strategic Choice
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Development: Confidentiality, Ownership, Protection
During all the development phases of the innovation (conception, prototype, versioning…) & especially if the innovation is developed in cooperation with partners, the management of confidentiality, ownership and protection of the results is crucial for appropriating the maximum rent linked to the innovation.
Legal matters related to IP being outside of the scope of this model , we recommend the user to consult an IP expert, but the following points should be kept in mind:
– Confidentiality: confidentiality agreements, Non Disclosure Agreement (NDA) – Traceability, origin, dating of results
Evidence/Proof : laboratory journal (data processing or classic), registration of the design/source code of a software in a legal office,…. & all other methods of written proof
– Ownership of results: inventions coming from salaried vs independent employees, indications of the inventors, possible co-ownership, contract for cooperative development
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Innovation Intensity & Technical Imitability Innovation intensity of the principal application domain of the innovation:
It is measured on the basis of 2 criteria:• The frequency & (using inverse correlation) the life time (duration) of the innovation
taken in a broad sense (new process, products, formulas,…) • The frequency, relative to other application domains & an “estimated “all businesses”
average, of the patents filed in the concerned application domain
Technical Imitability of the Innovation:Linked to the natural technical characteristics of the innovation (the more “complex” the innovation, the more difficult to copy and hence the longer the duration), it can be estimated using the following 3 criteria: its non-transparency: the innovation will be that much easier to sustain if it is the result of a combination of complex techniques and is based on specific and difficult to identify “competencies” (know how). It will obviously be easier to copy if the resources on which it is based are easy to spot and the competencies on which it rests are public and widely disseminated.
its non-accessibility: the innovation will be less sustainable if it is put in products with very few intangibles that are easily accessible in the market (ease of purchase and reverse engineering) ; it will be easier to sustain if the intangible part (integrated and difficult to access software for example) in the innovative offering is higher and reverse engineering is not possible or not effective.
its technological “lead”: the innovation will be more sustainable if it is genuinely new or a technological breakthrough and if it leaves quite no place for further improvement, to avoid smart copies. On the contrary, it will be so much easier to copy if it is not very “original”, not well mastered and leaves lot of room for improvement.
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Legal Imitability of the Innovation
To judge the legal imitability of an innovation, it is worth to measure the quality of the protection (or non-protection) that the innovation can benefit from in terms of rights (patents in particular). 2 dimensions can be used for this:
• The “patentability” of the innovation which is linked to the fact that the technical phenomenon or object that makes up the innovation should be:– An “invention”, I.e. “that contributes to the technological state of art”– Untouched by any possible exclusion from patenting– Related to an inventive activity (problem/solution, original lay-out, overcoming a
misconception, etc)– Likely to have an industrial application– New at the time of filing the patent– And “clearly and sufficiently described”
• The scope (extent) and validity of the possible claims concerning the innovation that can cover a wide range of dimensions going from :
powder for eyes patent limited limited patent engrossing or princeps patent in applications favoring the duration multiple patent patent
Easy to copy Difficult to copy
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Adoption Propensity of an InnovationThe client-markets enjoy a “natural” receptivity face to an innovation that differs according to 2 criteria:• The frequency of innovation in a client-market or, in academic terms, innovation intensity of a market appear
to be a pertinent indicator to assess the speed and rapidity with which the market-client adopts an innovation. For methodological simplicity, we will distinguish 2 cases of innovation intensity: low (reticent to adopt innovations market) and (rapid to adopt innovations market)• The adoption or penetration rate which illustrates the degree of potential diffusion of the innovation in the
market under consideration and can be represented through an innovation diffusion curve.The normal innovation distribution curve takes the form of a flattened “S”. Right at the beginning, only the “technological innovators” and “early adopters”, who account for a very small portion of a market (1-5%) are seduced. Then the innovation successively gains the “pragmatics” and the “conservators” before it gradually stagnates with the “skepticals” and “laggards”. We can further classify this situation into 2 cases:
– “All or nothing” markets where the innovation is either a complete failure or is quickly capturing the market depending on some recognized opinion leaders
– Markets where innovations can subsist even when remaining marginal (fragmented markets without norms)
The 3 curves can be graphically represented as follows :Diffusion Curve
All or nothing
Normal
Marginal
Rate of penetration
Time
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Assess the Client Perceived Utility Value (CPUV)Perceived benefits: 3 types 1- Relative advantage, directly linked to the level of improvement brought about by the innovation & perceived by the client. In the case of substitution, the potential client will compare the differential of perceived value & the differential of anticipated price between the reference offering & the innovation which aims to replace it. In the case of creation, the value lever is linked to the resolution of a client high unsatisfaction: overcoming a constraint, saving time, simplifying life, offering new options/possibilities2 - Simplicity to understand, ease of use, possibility to test in small quantities and visibility of the results are indicators which are clubbed together under the term transparency3 - Compatibility measures the consistency of the innovation with the existing practices, in terms of competence, equipment, norms and earlier systems.
Perceived sacrifices: 3 types1 - The anticipated price level which measures the financial effort that the consumer estimates to achieve when buying the product. It is always relative to the perceived value or estimated cost. 2 - The perceived risk linked to the adoption of the innovation which corresponds to the risk of making the wrong choice. This risk is particularly high in case of system innovations (modification of the standard, network externalities)3 - If he chooses to adopt the innovation, the potential client may be required to renounce a series of previous choices . These have been clubbed under the name of “transfer costs” and will be take place only in case of a substitution-innovation.
‘
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Life Cycle of a Business
Phase Emergence Start-up Growth Maturity Decline
Strategy
The keyDominantFunction
InnovateTechnology
Improve / targetMarketing
Grow / DominateDevelopment
Make ProfitableManagement accounting
“Milk” Finance
Key Success Factors
- Work out an innovative
offering even if it is imperfect- Succeed in
conducting beta-tests
- Capture the early adopters
-Increase the value of the offering by
continuous improvement
-Target and capture the most receptive
segments - Create a network
and a brand- Finance the growth
- Manage the costs - Cover the market
(segments & countries)
- Invest in marketing & production- Finance the
growth
- Manage the costs & the equipment - Rationalize the
range - Extend the
offering and the geographical reach
- Finance the working capital
- Reduce the range
- Select the clients- Look for exit
options
Entry Barriers
Weak, technology oriented
Medium, stress on marketing
Strong, diverse and high
Very high in quantity/complexity Of no interest
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Entry & Development barriers
This essential concept, which enables to characterize and understand the competition intensity within an industry, is based on the “barriers to entry” concept coming from Industrial Economics. The level of these entry barriers & rights can be assessed by evaluating the business using the 6 criteria that follow:
1. Existence & level of cost and scale economies2. Existence & importance of transfer costs, including those linked to the
existence of differentiated offerings from players of the industry (loyalty effect)3. Difficulties in accessing the distribution network4. Existence of and difficulty to access rare & specific business resources5. Existence and value of patents and brands6. Importance & difficulty in obtaining norms, approvals and regulations
Appropriable Rent
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Rights & Exit Barriers
This notion is key to understand that some industries, though rather unattractive, are nevertheless and perpetually victims of fierce competition. The reason is that irrecoverable costs are very high and it usually costs more to exit than to continue operations. The magnitude of these exit barriers & rights can be estimated by assessing the industry using the following 6 indicators:
1. Existence & importance of business specialized assets2. Level of fixed costs to exit3. Existence & importance of strategic inter-connections between the business
and other businesses within the player portfolio 4. Government restrictions to exit 5. Union restrictions to exit 6. Emotional obstacles (attachment syndrome - initial business difficult to quit)
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GLOSSARY BBarriers to EntryObstacles which limit and/or prohibit access to a particular industry. These barriers may be technological, regulatory (norms…), economic (critical mass…), human (access to rare competencies),… and finally result in the financial “entry ticket”. E.g.: authorization to run a pharmacy, norms for the security equipment industry, critical size in the cement industry…Barriers to ExitObstacles which limit or prohibit a player from exiting a particular industry. When the exit barriers and the level of irrecoverable/sunk costs are very high, it is often less expensive for a player “to stay in the business rather than to quit it”. E.g.: Equipment of a shipyard is almost impossible to convert/transform/reuse, the “this or nothing” dilemma faced by companies operating in only one business…Business (equivalent to the terms - industry, sector or domain of activity)All the products/services - and companies producing these services - that are characterized by the mastering of a specific set of competencies (or Key Success Factors). A business corresponds neither to a sector as defined the SIC (Standard Industrial Classification) code in the US (too broad) nor to market segment (too narrow). E.g.: project management software application packages, aromatic compositions industry, specialized DIY distribution centers. Business ChainAll the economic stages through which raw material is transformed to comer up with an end product/service that is destroyed by a final consumer. All companies fit into a specific business chain in a link surrounded with upstream and downstream links. Some use the words value chain to underline the process of value creation/distribution that characterizes a business chain.E.g.: the wood business chain, food & agribusiness chain
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GLOSSARY C
Competition (internal rivalry)Used in the classical sense of the term, it means the rivalry that exists between players of the same industry or business.Competitive rivalry or intensityIt measures the degree of competition within a sector. E.g.: Competitive rivalry is specially high in case of the industrial cleaning sector, very low in case of aromatic raw materials and normal in the case of beauty products. Competitive AdvantageEnhanced control over one or several Key Success Factors (KSF) of an activity (as compared to the competitors). A competitive advantage should be symbolized by a profit rate superior to the average of the activity under consideration. E.g.: One of the competitive advantages of the fast food chain Mac Donald’s is its capacity to identify and select the best geographic locations for its outlets.Competitive position/situation This indicator evaluates the quantitative and qualitative robustness/strength of a company, as compared to that of competitors, on the KSF of a given business.ComplementorAny player whose offering complements the one of another company that hence may propose a complete/global offering that is valued much higher by final clients than if it were a sole or separate solution. E.g.: CD’s are required complements for a CD player, a computer is a useful complementary object for a digital camera.
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GLOSSARY C
Concentration It is linked to the distribution of market shares between the companies within a same business. Generally, the fewer the players, the greater the concentration. Technically, the level of concentration is measured through an indicator - C2 or C5 for example - that computes the total market shares owned by the - 2 or 5 - main players. E.g.: The C2 of the world’s soft drink industry is greater than 60% (Pepsi & Coke).Concentration (relative) It measures the level of concentration or distribution of market shares between 2 businesses which are adjacent links in the same business chain. E.g.: The number of wine producers are very high and hence diluted when compared to the 5 central purchasing units of the French hypermarket chains. The relative concentration is undoubtedly in favor of the purchasing units of these mega food stores. Configuration It represents the positioning of an innovation on each of our 3 rent components (volume, profit rate and duration).Costs (Fixed)Costs which are independent of the quantity produced and insensitive to the variation of the activity level. E.g.: depreciation costs for an equipment or building, overhead costs.Costs (Variable) Costs which vary in proportion to the level of activity. E.g.: raw materials consumption, remuneration paid to distributors.
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GLOSSARY DDevelopment/ValorizationThe way a company may generate and capture the financial value of the innovation it developed and holds. This valuation may concern:• Internal development (company markets the innovation autonomously)• Cooperative development (development with the help of other companies)• External development (licensing or sell-out to a third party to exploit the innovation).Autonomous DevelopmentThe company develops the innovation itself. E.g.: Polaroid and its instant photo (a well protected innovation).Co-operative DevelopmentThe company exploits the innovation, sharing the rent with one or more partners who support the company in the technical and commercial development of the innovation. E.g.: Sony & Kodak who came together (and share all their patents related to this technology) to develop and launch a new CD format on the market.License out DevelopmentThe owner of the innovation grants a license to one or several parties to exploit it; in return, he receives a remuneration. This license is generally limited in time and space. E.g.: Moreno and his miracle innovation: smart cardsSell-out DevelopmentThe innovation rights are sold to a third party who exploits it against a remuneration.E.g.: The test to detect the Bovine Spongiform Encephalitis (mad cow) was discovered and protected by the French CEA and sold to a major American player within the test industry.
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GLOSSARY D-EDifferentiationThe positioning used in the market to distinguish one’s offering in a significant (perceived in the entire market or in the parts concerned), “valuable” and defendable way from the reference offering, the one proposed by the main players. E.g.: The French internet service provider “Free” (purging differentiation), Hilti the world N°1 company in fastening systems for the construction industry….Diffusion Geographic Diffusion: Assesses the geographic scope in which the innovation may pretend to be spread and possibly marketed.Business Diffusion: Assesses the number of possible application domains that the innovation may concern and invade.Dominant design or Reference offering Standard within an industry that is totally or partially shared by the main players of the business. E.g.: To the detriment of DivX, the DVD has become the dominant media storage solution for individual films.Economies of scaleDecrease of the total unit cost of a product thanks to fact that the total fixed costs can be spread over a larger number of units. The greater the fixed costs, the larger the impact of the scale economies. It is often referred to the “critical size”, the minimum size to be achieved in order to manufacture/sell within competitive costs. E.g. The petrochemical industry is strongly dependant on economies of scale, the automobile and aeronautic industries are other examples.Entrant (New)A new player penetrating an industry that is not its usual business. E.g.: Virgin, which is better known for its record label, launches an airline company called Virgin Atlantic; BIC, the number one pen maker, diversifies into lighters, razor and perfumes.
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GLOSSARY E-I
Environment All the elements and factors that influence the competitive game in a given business (for the experts refer to the revisited Porter’s 5 forces model)Experience curve/effectThe process by which the total unit cost of a product is reduced by a fixed percentage each time its accumulated production is multiplied by two. This results from the learning curve, economies of scale and a constant quest to improve overall costs. E.g.: most electronic and software products witness experience curve effects between 25 and 50%.Friction/Erosion EffectsSimilar to physics and mechanics, this phenomenon represents the loss of financial value a product/service experiences when it passes through the different dimensions of the competitive game (the 2 terms shall be used interchangeably).Game of GO Originally a Chinese strategy game which aims to occupy a territory larger than that of the adversary. In case of intellectual property, this means filing several parents spread over a domain of business in order to enjoy a maximum bussiness coverage.Imitation (Creative)Intelligent copy of an existing innovation which improves certain characteristics of this innovation. E.g.: In the 60-70’s, the Japanese companies were excellent creative copiers that were able to launch electronic products with better technological functionalities/options.
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GLOSSARY IIndustrial/Intellectual Protection (IP)Intellectual protection includes industrial property (patents, brands, designs, models, software applications) and copyrights. These IP rights have to be legally registered within the local (possibly European) IP organization. Industry Type A particular class of competitive system that characterizes an industry. When mixing the sensitivity of a business to both differentiation and volume, 4 industry types appear: fragmented, dead-end, specialize and volume.E.g.: the restaurant business is fragmented, perfumes is a specialized industry and the CD players business is pertains to the volume type.Innovation (Disqualifying)An innovation that put offside, thanks to its new characteristics, the existing products/technologies. E.g.: the innovation of the CD-Rom disqualified the audio cassettes.Innovation (Standalone)A technological innovation that may function autonomously or in isolation. E.g.: An anti-bacteria pillow is a standalone innovation.Innovation (System)A technological innovation that cannot function alone. In order to succeed, it needs complements and/or needs to be inserted in a system. E.g.: a cell phone is are a innovation which require hardware, software, plus operators,etcInnovation IntensityAn industry with a high innovation intensity is one that regularly witnesses the launch of new products, the filing of new patents,….and in which the life span of the products is extremely short. E.g.: the food/agribusiness and the electronic industries have a high innovation intensity.
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GLOSSARY K-L
Key Success Factors (KSF)A specific mix of competencies that any company has to master within a business in order to run it efficiently and be profitable within the competitive context.Lead-time It measures the period during which the innovator will benefit from an exclusive business situation and a technological monopoly in the application domain(s) of the innovation. E.g.: In the case of Internet services, the lead time was ridiculously low because the innovation, characterized by a very low technological level, could easily be copied; on the other hand, the electronics player Sony often benefits from a lead time of over a year for many of the new & original products it launched.Learning CurveThe process of acquiring certain competencies may allow a significant productivity improvement resulting from performing repetitive tasks.LegitimacyBusiness Legitimacy: A company perceived to be legitimate is one that has taken its own place within an industry thanks to the expertise it progressively acquired and accumulated in it.Scientific legitimacy: In this case, the expertise is based on scientific know-how and reputation. Life cycle of a businessJust like a product, a business goes through different phases during its life: emergence, start-up, growth, maturity, decline. Compared to the product life cycle, the maturity phase is much longer for a business. E.g.: The bioinformatics is still in a start-up phase, the automobile industry experiences the maturity stage while digital photograph is booming.
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GLOSSARY M-RMargin rate Profitability indicator of a company over a given period. Different ratios can be used to estimate this margin rate: ROCE, ROI, operating margin… MinefieldAn area that contains explosive mines, beset with hidden problems…In IP strategy it means filing multiple patents to protect an innovation from being copied. E.g.: strategy used in the case of smart cards.Niche A clearly identifiable (thanks to operational criteria) market segment requiring a specific offering. E.g.: designing and selling outfits for the “tall & huge” (plus sizes) persons, a segment for whom ready to wear outfits are not suitable.NormReference, generally measured as figure or rate, usually practiced in an industry; specific rules applying to all the members of the industry. E.g. : The norm for a listed company as far as ROI is concerned is 15%.Portfolio of ActivitiesIt groups and represents all the distinct business activities managed by a company. Rent Periodic and guaranteed revenue (generally) generated by the possession of a good, an asset or capital. Several kinds of rent exist depending on the school of thought (monopoly rent, entrepreneurial rent, scarcity rent…). In our model, the rent is linked to the exclusive ownership and exploitation of an asset that corresponds to the technological innovation.
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GLOSSARY R(Appropriable) Rent (equivalent to net rent) In our model, the value of the rent that a company can capture and keep for itself once all the friction and erosion effects arising due to environment and competition have been accounted for.(Potential) Rent (equivalent to initial rent) Irrespective of the holder of the innovation the “a priori” rent value, which is linked to the nature of the innovation. (Residual) Rent (equivalent to intermediate rent) Value of the potential rent once the friction effects linked to the insertion of the innovation in its environment are taken into account. Replicability / imitability (technical)This indicates the degree of a technical imitation/replication of an innovation. E.g.: The chances of copying the BiNem® technology used in case of LCD flat screens is low since it would require a group of at least 50 highly qualified people to work full time on a similar project for a minimum of 2 years…Risk (Institutional)This represents the potential danger related to regulatory texts, lobbies and professional norms for an innovation. But, reciprocally, these institutional elements can work as a true catalyst for an innovation. E.g.: the regulation/norms about CO2 emission favored the emergence of new combustion processes, new fuels…Risk (Business) In the model, this represents the dangers and/or difficulties associated with the adoption propensity of target clients vis à vis innovations in general. E.g. : Pathology laboratories are very fond of innovation, with an “all or nothing” type of reaction.
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GLOSSARY R-SRisk (Technological) It represents the potential danger that comes from players working on alternative technologies to the one used by the innovator. It can be assessed through the number and the value of the alternative options proposed and their degree of advancement compared to the innovation.Sensitivity to differentiation This measures the magnitude of possibilities for the players of a business to significantly and durably differentiate their offering. The criteria to be taken into account are : existence of different groups of solutions and competitors, existence of protected niche,…E.g.: As opposed to the floor cloths business, that of beauty products and care is very sensitive to differentiation…Sensitivity to volume This is linked to the existence (or absence) of economies of scale and size in an industry. A business is considered sensitive to volume if a strong co-relation between size and profitability of each of the players exits. E.g.: the floor cloths business is extremely sensitive to volume, as that of perfumes and electronic components.(potential) Size of the client-market The turnover that a market may reach when it is fully developed/exploited.(real) Size of the client-marketTurnover currently achieved within this market.SNICSmall and/or New Innovative Companies: all small, medium sized and/or new companies that develop technological innovations and/or are likely to benefit from intellectual property protection (patents, brands, designs, models, copyrights etc.)
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GLOSSARY S-W
Substitute
Product/service which fulfills the same needs and has the same utility functions as the reference offer in a business. E.g.: Digital snaps substitute silver halide photo, camcorders are substitutes for cameras.
Transfer costs
Sum of the costs that are incurred to move from one supplier to another one. These are not just financial costs (time cost, inhabits change cost…) and their perception is more important than their reality. E.g. : changing laboratory equipment which requires drafting a new manual, putting in place a new process, a new training of the staff…
White Knight
This term which has been borrowed from the finance world (used during hostile acquisition bids) and embodies a company which helps SNIC defend itself against a competitor’s attack.