Wharton Chapter 11

Appropriating the gains from innovation.

I was surprised to see that the author considered patents to be overemphasized when it comes to securing returns from an innovation. The argument that the patent comes from an intellectual property industry "promoting its wares" was kind of odd. In addition, the complaint that patents only tends to focus on the duration of the period of security seemed counterintuitive. That is indeed the purpose of a patent; to allow the innovator time to recoup expenses and appropriate value.

It was interesting that the effectiveness of patents varies greatly from industry to industry, something I had never thought of. The author states that "patents are unambiguously the least central of the major appropriability mechanisms", but do many business know this? Is the the author suggesting that firms should change their strategy away from patents and more toward the other 3 mechanisms for approriability?

One of the 3 other mechanisms besides patents and legal protection is secrecy. I found this section to be in direct contrast to chapter 15's discussion of knowledge networks and how individuals from firms share information that benefits both. Many firms prohibit loose talkign from certain employees with specific company knowledge that provides some kind of competitive advantage. Similar to patents and legal protection, secrecy has more value to some industries and firms than others. A good example is the recipe for Coca-Cola. At this point, even if the recipe was released, what company could market it and chip away at Coca-Cola's market share? I think secrecy is becoming more and more difficult for firms to manage, and secrecy is not where the value is generated. Time to market or lead time can often be more important than having a competitor discover secrets by way of espionage or simply reverse engineering a prototype. Reverse engineering is becoming a bigger and bigger problem out of China recently and patents and secrecy seem to not stand a chance against it:

http://www.thestandard.com/news/2008/02/29/us-canadian-agencies-seize-counterfeit-cisco-gear

Just recently, US and Canadian agencies seized over $78mil worth of counterfeit Cisco Systems networking equipment that were shipping to North America from China. They are becoming very adept at reverse engineering to make identical products that most people wouldn't be able to tell the difference. In this case, had Cisco had a secret process in designing or manufacturing the items, they might be more difficult to reverse engineer. As the author suggest, secrecy concerning processes is becoming more effective than secrecy about production or design.

Complementary assets have made another appearance in this class in Chapter 11. A firms access to distribution, service capability, customer relationships, and supplier relationships is something that can not be easily copied and that is also usually not any secret. Relationships can not be counterfeited.

Lead Time can make or break a firm's introduction of an emerging technology to the market. In the event that patents and secrecy have proved inadequate, lead-time can be the key to competitive advantage, especially if your product creates a standard that drives additional business back to your firm and also creates an environment where switching costs are high. A good example contradicting this example is the HD-DVD vs. Blu-Ray standard war that recently ended. HD-DVD was 1st to market but Blu-Ray had strategic alliances with Sony and the new PS3 game console that stripped 1st mover advantages away from HD-DVD and eventually Blu-Ray prevailed. This standard war was over before there was an extremely high cost of switching for customers (except those that bought HD-DVD players and lots of movies).