How do we determine who will win in the battle for supremacy during a digital transition. Well, the first observation is those who invent or those who pioneer a market, are not always the ones who win a digital transition position. In fact, the ones who create innovative disruptive technology is not as important of who actually appropriates value from them. So let's discuss this in more detail, consider the following pie. Imagine the area of the pie represents the total value created by the innovation. Now that value is shared by a number of different stakeholders, of course the innovator, but also hopefully their customers creating new value for them. Perhaps their suppliers upstream, and also very importantly other imitators and competitors who might copy the innovation, might also capture some of that value from that innovation. So the big question is, how big is the slice of the pie that each of these stakeholders end up capturing especially the innovator. The reason this is important, its because timing is everything. And there are different strategies that different firms might pursue based on their certain capabilities or the nature of the market. And some instances being a fast mover matters being a pioneer to the market. Think about Amazon and online retail, being an early mover allowed them to learn a lot about online retail. Build up infrastructure associated with that and become the juggernaut that they are today. In some instances being a second mover can be advantageous, basically let others advanced the technology and then come in as a quick imitator, advanced the technology further and dominate the marketplace. Microsoft over the years has been very successful with this type of strategy in particular with their office suite. They were not necessarily they weren't the pioneer in terms of spreadsheets or word processing, but they were able to take advances and incorporate them into their own products and become the market leader. This brings to mind a classic debate in the innovation literature between exploitation and exploration. Exploitation refers to investing in research and development to incrementally improve existing products and services. Exploration on the other hand refers to investments to try to advance the technology significantly, bring about these disruptions that we've been talking about. And so a critical question for a lot of organizations is how much effort to spend on exploitation versus how much effort is spent on exploration. And it's a balancing act for many companies. You can imagine if you spend too much time just exploiting existing technology, you might miss a disruption, and therefore find yourself disadvantaged as the market evolves. On the other hand, if you spend too much on exploration, you might not be able to be profitable in the existing world and then you never survive to the new technologies you're trying to advance. So the question of exploration and exploitation, is involved in part by the nature of the market conditions and also the nature of the specific company, that you're talking about. So what are some things to think about in terms of who appropriates value? Well two main areas I'd like to talk about. First is the strength of intellectual property protection. This is, for example the nature of the legal system, do you have a patent on your technology or copyright on something you've written? It can be more than that though, it can be something about the underlying nature of the technology in the market. The reason this is so important is that if you have strong IP, strong Intellectual Pride Property protection. This tends to favor innovators. If you have weak IP, this might favor others, these second movers, these fast imitators who can come in and be very successful. The second thing we're going to discuss are complimentary assets. These are the other things necessary to exploit and innovation, maybe it's marketing or distribution or some other supporting technology like hardware and software. So let's dive a little deeper into intellectual property protection, when is intellectual property protection strong. Well, the first obvious case is when you have these legal protections, patents copyrights trademarks. These might vary by the way over various countries and various geographies, some countries are more strict enforcing patents and copyrights than others. It's important to recognize that simply having a patent or copyright, does not necessarily mean you have unassailable rights to it. At the end of the day you have to be able to fight for it in a court of law. There have been many entrepreneurial firms who've struggled when faced with a patent that they believe is giving them rights to produce something, and it is infringed by others. But the person who is infringing, has more resources to fight them in the court of law and as a result, the entrepreneurial company cannot enforce their patent rights that they have. Another way intellectual property can be strong, is if there's some form of first mover advantage. This could be things like learning curves, if you get out ahead of the technology, you're innovating it you move down that learning curve. Perhaps you're lowering costs, perhaps your property more quality or value. Things that can some instances provide substantial competitive advantage. Things like loyalty and branding also are examples where in some cases being an early mover into a new technology or industry, can provide you an advantage that sustains itself moving forward. Not always the case though, as I gave examples like the Apple iPad, which was a later adopter in the industry, yet was able to come to dominate the market place. A third thing to think about is standardization, this relates some things we've talked about before about network externalities and winner take all markets. Into some markets here, being the standard bearer, being the one who basically establishes the dominant design can lock you in to being a strong competitor, that makes it very hard for others to compete with you. This is in essence, another form of intellectual property, that gives you a competitive advantage. Fourth thing you want to think about, how easy is it for others to imitate you? If that imitation is slow, that is in essence another form of tight intellectual property protection. Many companies forego patents and other types of public types of intellectual property, and instead use things like trade secrets. Those trade secrets to the extent they are hard for others to imitate, can be a source of competitive advantage here. Maybe it's because your technology is so complex that others just can't backward engineer it, maybe it's socially complex the way you put things together that even when observed others can't figure out how you did it. So these would be examples again, where there might be not legal protection, but yet you're still able to defend an innovation that you have because others just can't figure out how to do that for themselves. Last but not least, in some markets and this is fairly rare diffusion among customers may be so fast that even if others can imitate you, you can still capture a large lucrative market and do quite well for yourself. Even though you're likely to be imitated as an innovator. My favorite example of this was a fad during the mid nineties called the big mouth Billy bass. This was a novelty product in which we had a plastic fish mounted on a board. And when you walk by it, it would turn and sing a song to you, height of entertainment. The Big Mouth Billy Bass was easily imitated and was by many others. However, for whatever reason being a fad, it diffused quite quickly and the person who innovated the Big Mouth Belly Bass actually made quite a bit of money. So again, vast diffusion in a large lucrative early market may allow you to gain from being an early innovator within an industry. So once again, overall value appropriation, we want to think about the strength of the intellectual property protection. And then the second thing we want to think about is this idea again of controlling complementary assets, so let's talk about that in a little more detail. The first question we want to ask is how important are these complementary assets? And the reason we would like to know that, is because we want to know how tightly held they are. So what do we mean by this? For example, if it's a product perhaps everyone needs manufacturing, but there is one company who is the best in manufacturing or perhaps has the only certain manufacturing technology necessary to bring this product to market. That would provide them a competitive advantage that even if they're not the innovator, they still may capture a lot of value of that innovation. Maybe it's something about distribution or service that allows them to capture a lot of value from the innovation you even if they weren't the ones who innovated themselves. A classic example of this is the CAT scan market, the market for health indicators that use CAT scan technology. EMI was the pioneer of this technology in the first market and they had intellectual property protection around some pieces of this. However, it was General Electric GE who later entered the market, who ended up dominating it. Why was that so, well, one of the things GE had as his advantage is that it was already a well established seller of healthcare equipment. And therefore, had relationships with distributors and with hospitals that allowed them once they entered to do very well. Despite not being the initial innovator within the technology. So again, they leverage their complementary assets to succeed in a marketplace, where they weren't the first innovator. So overall when we think about these competitive forces and when you time entry into a market, we want to think about these two forces. The strengthening intellectual property protection and the role of complementary assets, and reflect where we as a company have those various strengths or weaknesses. And that might determine how we went compete in a digital transformation.
