A Model to Extract, Capture and Protect Value coming from Innovations of Small or/and New Innovative Companies (SNIC)

HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 1/61 HEC LINEN – INPI RESEARCH PROJECT A Model to Extract, Capture and Protect Value coming from Innovations of Small or/and New Innovative Companies (SNIC) M. Santi (HEC) in partnership with H. Gasiglia, S. Reboud, A. Sabouret and with the support of A. Bachani HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 2/61 TABLE OF CONTENTS THE METHODOLOGICAL APPROACH: ........................................................................ 3 1. THE INNOVATION: CHARACTERISTICS, TYPE AND POTENTIAL RENT .............. 8 1.1. From Innovation to Rent 8 1.2. Indicators of the potential rent 9 1.3. Summary Tables 15 2. INSERTION OF THE INNOVATION IN ITS ENVIRONMENT.................................... 18 2.1. The Client-Market risk: “friction” effects on the volume of the rent 19 2.1.1. The Absolute Adoption Propensity of the Client-Market .....................................19 2.1.2. Relative receptivity of the market to the studied innovation...............................22 2.1.3. Summary: CPUV and friction effects on the rent volume ...................................27 2.2. The business chain risk: friction effects on the rent rate 28 2.2.1. The concept of “Business Chain”....................................................................28 2.2.2. Assessing the balance of power within the business chain .................................29 2.2.3. Substitution: When innovation can modify the balance of power ........................30 2.2.4. Summary Table: Friction effects on the rent rate .............................................32 2.3. The substitution risk: friction effects on the duration of the rent 33 2.3.1. Analysis of the absolute substitution risk (purely depending on the nature of the innovation)..........................................................................................................33 2.3.2. Analysis of the relative substitution risk (depending on the - others than its nature - specific characteristics of the innovation) .................................................................33 2.4. The complementor’s Risk: friction or amplification effect on the rent 35 2.4.1. Analysis of the “absolute” complementor risk ..................................................35 2.4.2. Analysis of the “relative” complementor risk....................................................35 2.4.3. Table summarizing the “complementor” risk and friction effects analysis .............36 2.5 The institutional risk: erosion or amplification effects on the rent 37 3. INSERTION OF THE INNOVATION/INNOVATOR WITHIN THE BUSINESS........... 38 3.1. A preliminary key concept: entry and development rights 38 3.2. Attractiveness of the business 39 3.2.1. The Business Life Cycle ................................................................................39 3.2.2. Competitive Industry Types ..........................................................................41 3.2.3. Industry types and entry/development rights ..................................................43 3.2.4. Rivalry and competition intensity...................................................................45 3.2.5. Summary: business competition and erosion effects.........................................46 3.3. Competitive Reaction 47 3.3.1. Probability and intensity of the competitor’s reaction ........................................48 3.3.2. Nature of the competitor’s reaction ................................................................48 3.4. Innovator’s competitive situation: resources & competencies of the SNIC 50 3.4.1. Business and Scientific legitimacy of the SNIC.................................................51 3.4.2. Diagnosis of the innovator’s resources and competencies ..................................52 3.4.3. Competitive position, access rights and life cycle .............................................53 3.5. Summary: Appropriable Rent and Development 54 4. RENT CONFIGURATIONS AND INNOVATION DEVELOPMENT AND IP STRATEGIES ................................................................................................................ 55 4.1. The 6 Rent Configurations 55 4.2. Rent configuration & Strategic value 56 4.3. Rent configurations and specific paths 57 4.4. Configuration, Development and Protection 58 HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 3/61 The Methodological Approach: The objective of this research project is to put in place a generic model - i.e.: one that applies whatever the situation/case – about the development (valorization) and intellectual protection of innovations. The specific target population of this research is Small and/or New Innovative Companies (SNIC) and this constitutes a limiting factor of the research study. The natural starting point of this research is the concept of innovation. This concept has already been studied in-depth by both academics and experts in the field of technology and innovation management. We will naturally and heavily rest our model on their findings. However, in order to build our own research methodology, we decided to go back to the very basics of an innovation and its utility value: the notion and key concept of economic rent. For most economists innovation is clearly identified as the potential source in the creation of a competitive advantage. It cannot successfully take its place in the market if it does not produce this characteristic in a significant and durable way. The innovator is one who develops new resources or competencies or finds a new way to combine existing resources and competencies; in all cases he “invents” a new function or a more apt way to do so than the one that currently exists. In the first case, he “builds” and in the second he destroys to rebuild (the “Schumpeterian” approach), generally for his own profit only. A true competitive advantage allows its creator and developer to generate profitability above the average industry profit rate and to sustain this level for a sufficiently long period. But in the case of an innovation, this sustainability is all the more defendable (compared to other sources of competitive advantage) as there exists an additional important specificity: innovation can be protected and patented. The innovator benefits from the exclusive rights to exploit during a long period (20 years in case of a patent) the advantage related to his innovation. He finds himself “de jure” in a true legal monopolistic situation. Will he be able to keep it “de facto”? Hence, revisiting the concept of economic rent (in the Ricardian or monopolistic sense of the term) was imperative. A rent is nothing but the generation of an above average rate of profit over a long period: the characteristics of a competitive advantage (higher profit) that is strategic (defendable and durable). It is this concept of rent, so appropriate for an innovation, which forms the framework of our analytical research methodology. For our research we have chosen the following definition of the rent concept (refer to Part 1): Economic Rent of an Innovation = Volume X Profit Rate X Duration, where the volume represents the activity that may be generated by the innovation (e.g. annual turnover) and where the rate of profit and duration are related to the nature and power/strength of the advantage generated by the innovation. Each innovation can be classified first on the basis of the magnitude of the rent it is likely to generate and secondly, depending on its positioning on our 3 rent dimensions, of its specific rent configuration. These rent configurations are “intermediate variables”, by-products of the analyses undertaken on the explanatory variables. These variables are the foundations of the conclusions and recommendations that we come up with in the model concerning the development - how to extract and capture maximum value from an innovation - and the intellectual property protection strategies (the 2 dependant variables). We have identified 6 standard rent configurations characterized by clearly different advice/recommendations. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 4/61 For the recommendations part that integrates the 2 dependant variables of the research study (development and intellectual property strategies) and represents its successful realization, we suggest: - a development (valorization) and protection model constructed as follows: Once the rent potential (linked to the innovation and the competitive advantage) has been established/created, the innovator will have to “favor” its Exploitation In a durable and defendable way Appropriation To summarize (very simply), an innovation should not be protected unless the rent generated is exploitable and appropriable and this over a sufficiently long period of time; - and a typology of recommendations, in terms of development (valorization) strategies, with 5 possibilities – “autonomously”, “in partnership” (several options possible), “licensing”, “sell out” and “abandon”- which generate very naturally recommendations/advice for protection. The model explained above clearly shows that “protection”, though it is certainly a key element of the development process of an innovation, is nothing but one dependent and minor variable of this process. The methodological approach to the problem using these key variables permits us: - to progressively and more and more accurately - taking into account the frictions and inveigling effects - measure the “realistic” rent linked to the innovation - to type in a more and more realistic way the rent configuration of the innovation - to collect key elements specific to the innovation and its context which allows us to better state the method of development and protection. The approach itself is structured in 3 phases. Each of these 3 phases follows the same methodological course: analysis of specific explanatory variables, effect on the rent and its configuration, recommendations for a development (how to extract and capture) and protection strategy. In fact, these 3 phases, as their explanation which follows shows, are linked and their consecutive analysis allows us to “clarify, specify and refine” the intermediate as well as the dependant variables. Having to completely analyze all 3 phases before coming to a conclusion about the intermediate and dependant variables would mean, in certain cases, depriving oneself of the possibility of coming up quickly in terms of analysis time with an economic conclusion: abandon all hope and any development strategy or protection strategy. The analytical phases and explanatory variables are as follows: ProtectionHEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 5/61 1. Innovation and its normative characteristics Outside of its specific economic and competitive context, an innovation can be characterized by 11 normative features (refer to Part 1) which, acting on one of our 3 rent dimensions, permits us to determine the potential rent that can be generated by the innovation and identify right from the start the rent configuration which allows the user to follow a specific path within the model. Moreover, in the case where the innovation would both generate sufficient volume and have several sectors of application, the same analysis is conducted on the 3 dimensions for each of the application sectors and allows us on the one hand to prioritize them and on the other hand to formulate recommendations in terms of the path to be followed within the development model for each one. 2. Insertion of innovation in its environment By the term “environment” (or economic system), we refer to all the “external” competitive forces (Porter’s 5 forces model) that acts on the business or industry where the innovation may apply. In order to be exploited, the innovation actually has to integrate itself in a business and in this part we shall study the impact of the friction or erosion effects, generated by the different competitive forces of the business, on the potential rent (and its constituents). The 5 external forces are as follows: - Demand/Client: with a possible impact on the volume of the rent - Business Chain and the balance of power within the business (value) chain: with a possible effect on the rate of profitability of the rent - Substitutes: with a possible impact on the duration of the rent - “Complementors”: with a possible effect on the rent in general - Regulations and Institutional Forces (Lobbying): probable impact on the volume and/or the rent margin This analysis allows to: - evaluate the residual rent (potential rent minus environmental friction effects), which the innovator and his competitors are likely to appropriate - possibly revisit the rent configuration - make use of the complementary key analytical elements brought to light by this part of the study to better define the development and protection strategy for the innovation. Furthermore, in case the innovation has multiple application domains, this analysis conducted on the “economic system” of each of these domains, allows us to organize them hierarchically based on this dimension and formulate recommendations for development (to be intersected/crossed over with the conclusions of Phase 3). 3. Insert the Innovator/innovation in a business sector and its competitive universe In this part, we shall analyze the innovator’s capacity to appropriate the residual rent when he is confronted with direct competition (competition in the classic sense of the term – the central “round” shape in Porter’s model) in the business application domain of his innovation. The 2 key concepts that will be used transversally during this phase are first introduced: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 6/61 - the concept of life cycle and maturity stage of the business - the access and development rights in a business, directly linked to “entry barriers” – a concept which is very dear to economists. Next, 3 parts are analyzed consecutively, from the generic to the more specific one, in relation to the holder of the innovation: - The interest and degree of attractiveness of the current or future business (taking into account its industry type and its competition intensity) and its friction effects on the rent rate - The probable and possible reaction of competitors (blocking or rent capturing) and its friction effects on the rent appropriable by the SNIC - The innovator’s competitive situation and his capacity (and willingness) - in terms of resources, competencies and means - to appropriate all or part of the rent which is not captured by the actors and forces previously analyzed. Like the previous phase, this analysis will enable us to: - evaluate the appropriable rent (residual rent minus competitive friction effects), the one the innovator can capture and keep for itself - probably revisit the rent configuration - use the complementary key analytical elements that are highlighted by the study to better define the development and protection strategy for the innovation. Moreover, in case the innovation has multiple business application domains, this analysis conducted on the “competitive context” of each of these domains, allows us to prioritize them and formulate recommendations for the development of each ones (to be crossed/intersected with the conclusions of Phase 2). Nevertheless we would like to draw attention to the fact that our approach, just like in case of all economic models, is based on 2 obvious postulates: markets are “perfect” and “actors” behave rationally. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 7/61 THE METHODOLOGICAL APPROACH Intermediate Variables: Rent & Rent Configuration 1 – The innovation & its characteristics Type, magnitude and characteristics of the innovation & their effects on the rent: • volume • profit rate • duration 3 – Insertion of an innovation in a business Risk analysis, friction and capturing effects on the rent of: • Attractiveness of the business • Competitive reaction • Innovator’s competitive situation 2 –The insertion of innovation in its environment Risk analysis and friction effects on the rent of: • Demand – clients (volume effect) • Business chain (profitability rate effect) • Substitutes (duration effect) • Complementors (global effect) • Regulations and lobbying forces 3 – rent appropriable & “capturable” by the innovator 2 3 1 – potential rent that can be generated by the innovation 2 – residual rent, after the friction effects due to the economic context 2 3 Explanatory Variables Friction Effects Dependant Variables: Development and Protection Strategies The analysis should be “dynamic” Abandon Autonomous development License out Cooperative development P r o t e c t i o n Sell-out HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 8/61 1. The Innovation: characteristics, type and potential rent 1.1. From Innovation to Rent Almost all researchers working on innovation have attempted to characterize and classify innovation. And for a good reason: Innovation is clearly hybrid, multiple and abundant – a “subject” difficult to treat homogeneously. In turn, we too shall not miss this essential phase and propose our typology that has specifically been developed (and adapted) for the research. Firstly, we think it is imperative to take into account characterization criteria which are easy to work on, without having to collect and analyze lots of qualitative and quantitative information and which are specific or relative to: - the innovation itself on one hand - and on the other hand the markets, industries, activities where this innovation can find an application field. Henceforth, all along this document, the term “business” will be used to specify the activity in which the innovation is applied; not the target market but the domain where its competition lies, or the “industry” as defined by the Americans. Moreover, our innovation typology will be characterized by its structuring based on the concept of “economic rent”. What is rent? Irrespective of whether it’s linked to a natural (Ricardian rent) or regulatory (Monopoly rent) non-substitutable scarcity phenomenon, it’s nothing but the generation of a profitability above the normal average profit rate which is sustainable during a sufficiently long period: all characteristics of a competitive advantage (superior profit) which is strategic (long lasting and defendable). Clearly an innovation is a natural source of a potential competitive advantage. Moreover, it alone enjoys a legal and lasting “monopoly” thanks to a system of patents and other forms of protection. Hence, it is this concept of “economic rent “ (without forgetting the concern for protection) that appears to be so appropriate for an innovation that will constitute the backbone of our typology. The indicators that we selected allow, according to us, to structure and validate the analysis and the valuation of any innovation according to a logic of “potential rent estimation”; this translates in a very explicit manner for a standard user: POTENTIAL RENT (or potentially able to be generated by the innovation) = Volume X Profit Rate X Duration where: - the estimated volume depends on the size and spectrum of the potential businesses where the innovation can find an application - and the profit rate and duration of exploitation are the 2 pillars that incorporate the nature and magnitude of the strategic competitive advantage (superior, sustainable and defendable profitability) generated by the innovation. The indicators to estimate the rent are as follows: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 9/61 Potential Rent Volume Potential Rent Profit Rate Potential Rent Duration This potential volume corresponds to the potential turnover achievable in all businesses where the innovation applies (a sum of annual sales). The potential profit rate of the rent is strongly linked to the value and magnitude of the competitive edge created by the innovation. The potential exploitation period of the rent, irrespective of its legal protection mode, depends on the sustainability of the innovation, in itself or relative to the business in which it is commercialized Relevant Indicators (Hypotheses): 3 “economic” criteria - business spreading potential of the innovation (a.1) - geographic spreading potential of the innovation (a.2) - size of client markets (a.3) 1 criteria linked to the protection - limitations in exploitation due to previous patents (a.4) Relevant Indicators (Hypotheses): 2 “economic” criteria - generation mode of the innovation (b.1) - nature and type of the innovation (b.2) 1 criteria linked to the protection - limitations in profitability due to previous protections (b.3) Relevant Indicators (Hypotheses): 3 “economic” criteria - technological foundations of the innovation (c.1) - innovative intensity of the applied business field (c.2) - replicability of the innovation (c.3) 1 criteria linked to the protection - legal imitability of the innovation (c.4) The methodology to follow in order to analyze an innovation is therefore as follows: - The innovation is positioned on each of these criteria according to a specific evaluation mode with a scale from very weak (--) to very strong (++) influence on the rent potential - A synthetic estimation for each of the 3 components of the formula is carried out - A general profile of the innovation is established - And this profile, placed in the synthetic table of the different rent configuration types (refer to Part 4), permits us to come up with recommendations concerning the analytical path to be followed in the rest of the model and finally to formulate the development (how to best extract and capture value from the innovation for the SNIC) and protection strategy. 1.2. Indicators of the potential rent In order to follow the explanations corresponding to each indicator that estimates the potential rent, we advise you to refer to the recapitulative evaluation table that is at the end of this part. CRITERIA TO ESTIMATE THE RENT VOLUME The 3+1 indicators used to estimate the potential volume of the rent don’t have any academic foundation. They are based on “common sense” which has been sparingly practiced in the literature that is so far available on innovation. - Business spreading potential of the innovation This indicator, probably the easiest to understand and the clearest to assess, measures the spectrum of the potential businesses where the innovation can find an application field. However, this indicator should not be considered in isolation to assess the potential size of the rent - imagine an innovation with several application domains but a low volume in each and oppose it to an innovation with one sole application business but of a huge market size - but should be grouped with the 2 other indicators of this category. Furthermore, the practice of “research on intellectual property” favors industrial creativity and generally constitutes a very efficient method to find applications that are not obvious at a first glance. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 10/61 - Geographic spreading potential of the innovation As opposed to the “application” dimension of the innovation, this criterion measures the potential “spatial” dimension of the innovation. All innovations do not have, by default, the same geographic relevancy. In addition to the nature of the innovation, this also depends on the local or global character of the application businesses previously (a.1) identified. - Real or potential markets size The 2 previous dimensions enable us to draw up an interesting profile (in volume terms) of the innovation using 2 important dimensions namely the applications and the geography. This last criterion integrates not only the previous 2 dimensions but also translates them in a quantitative form. It measures: 1) the entire set of potential market clients/application businesses 2) with respect to their natural or pertinent geographic frontiers 3) on an average annual basis A size scale is defined but still needs to be validated (Hypothesis 1). But the greatest risk lies in the difficulty to estimate or in the over-estimation from the assessor (wishful thinking) when relatively new or virgin markets are concerned (Hypothesis 2). - Limitation in possible exploitation due to existence of previous patents This indicator is directly related to the search for existing patents linked to the innovation. This allows the innovator to discover the limitations of exploitation in terms of application sectors and/or geographic areas (certain zones may be inaccessible due to existing protection whereas others maybe unprotected) due to the existing patents. CRITERIA TO ESTIMATE THE RENT PROFIT RATE - Mode of generation of the innovation This criterion partly uses and mostly reengineers the “technological paths” taxonomy that was created by Pavitt. It particularly improves this typology when it distinguishes several situations in the “system” type that clearly have a growing impact on the rent potential rate of profit. Extra care should be taken to secure all potential protections of an innovation which is developed with partners: non disclosure agreements, proof and traceability of results (laboratory journals) and property rights are essential to keep on any chance to be able to “protect” the innovation. The question is to know if this indicator (hypothesis 1 which assumes that the greater the number of players in the conception/establishment of the innovation and the greater the potential for profit: these actors would be interested only if the profit opportunity for them is substantial) as well as the proposed answers (hypothesis 2 which assumes that the greater the actors are numerous, different in nature and linked to the business, the higher will be the rate of profitability) are relevant to contribute to the estimation of the potential rent that the innovation can generate. - Type of Innovation We have begun with collecting and benchmarking the different existing and practiced typologies of innovations: Product vs. Process, Solo vs. System, Radical vs. Incremental, Market Creation vs. Substitution, Absolute vs. Relative, Technology Pushed vs. Market Pulled. And we integrate in our study the most well known work on the theme of innovation typology: Abernathy & Utterback (1978), Durand (1991), Clark & Henderson (1990), Christensen (1997), Rice (2001), Callon (1988). HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 11/61 After having assessed the interest of their work in term of strategic effects and consequences, we finally selected the following 3 classifications, those that appeared as the most relevant for our research: - incremental vs. radical innovation (2 items) - solo vs. system innovation (with system divided in existing vs. new to create) (3 items) - substitution vs. market creation innovation (2 items) Moreover the patent environment will help in a relevant manner the identification of the “type” of innovation. After having crisscrossed/intersected these 3 typologies and eliminated the impossible or improbable situations, we finally find 6 “types” of innovation which we “labeled” using our own naming. SOLO EXISTING SYSTEM SYSTEM TO CREATE Existing Market Market to be created Existing Market Market to be created Existing Market Market to be created INCREMENTAL INNOVATION (1) "Harder & better" (2) "Meccano" RADICAL INNOVATION (3) "New Player" (4) "New Frontiers" (5) "New Deal" (6) "Full Monty" We are convinced that this typology is particularly relevant to measure the rent profit rate that the innovation can potentially generate (hypothesis 1) and that these 6 types can be positioned differently (hypothesis 2) on a rent profit rate scale (we in fact assume that the different types find their place on a regular and continuous spectrum with some overlapping). Favoring both the solo vs. system dichotomy and the substitution vs. creation typology (refer to the summary table which deals with the problem of strategic positioning of the innovation), the positioning scale adopted for the 6 types is directly related to the implementation difficulties and the level of risk that each of the 6 strategic innovation strategies naturally represent. Our hypotheses 1 & 2 appear to be validated by the economic theory that demonstrates that the rates of potential profit on one hand and risk on the other hand are very closely corelated. Two pages down, the reader will find a diagram which enables an expert as well a normal entrepreneur-innovator to identify the type of innovation being analyzed as well as the strategic situation characterizing it. - Limitations in profitability potential due to previous protection mechanisms The rent potential profit rate of the innovation can be particularly affected by the existing science or the patents that are already granted or pending. If the information relating to the innovation is divulged by someone wanting to prevent the innovator from appropriating the rent or by the company itself or one of its partners accidentally, then no rent collection is possible. On the other hand, an innovation can be “free” from all rights and forms of protection. And between these 2 extremes, one can imagine situations where the existing or HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 12/61 pending patents can be “improved/strengthened” or negotiated since they are either not or under exploited. CRITERIA TO ESTIMATE THE RENT DURATION - Technological foundations of the innovation This criteria which is both based on and an improved version of the taxonomy of Freeman & Perez (1988) links the durability of the innovation to its technological foundations – fundamental work based on a “long” period of research (inside and outside the innovating company) vs. applied work with a relatively shorter research time (hypothesis 1) - and offers a spectrum of “cases” which estimates the durability of the potential rent (hypothesis 2). - Innovation intensity in the application business domain This indicator, primarily linked to the works of Callon & J Porter Liebeskind, takes into account the intensity and frequency of innovations (one can also use the number of filed patents) in a business and creates a way of deducing the durable character of the innovation. It estimates the approximate life span of an innovation and gives clear indications concerning the usefulness and nature of an intellectual protection. Hypothesis: the higher the innovation intensity of the application industry, the lower the durability of the innovation (easy possibility of copies, new offers to disqualify the innovation). - Technical replicability/imitability of the innovation This criterion describes the degree of ease with which an innovation can be technically replicated, a different imitation process from the pure and classical patent copy. It strives to measure the capacity of the SNIC to defend its innovation in respect of the natural technological and applicative characteristics of its innovation. Our assumption is that the more complex the technology, the more difficult to replicate the innovation and the longer the duration of the potential rent. This indicator can be estimated from the following 3 characteristics of any innovation: • its technological non-transparency: the innovation will be that much easier to defend 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 transparent and the competencies on which it rests are transparent and widely disseminated. • its non-accessibility: the innovation will be less defendable 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 defend 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 defendable 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 lots of room for improvement. - Legal imitability of the innovation To judge the legal possibility of copying an innovation, it is sufficient 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: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 13/61 • l) The “patentability” of the innovation which is linked to the fact that the phenomenon or technique that makes up the innovation should be: - An “invention”, which “contributes to the technological state” - 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 - “Clearly and sufficiently described” • 2) The (extensive) scope and the validity of claims possible on the innovation that can cover a wide range of dimensions going from: powder for eyes patent patent limited in applications limited patent favoring the duration an all included or multiple patent “essential” patent Easy to copy Difficult to copy It is important to note that in the case where the high volume of the rent is linked to several promising applications, it will be necessary to analyze each of these applications on the 3 rent configuration dimensions and continue to differentiate these applications in the remainder of the analysis (parts 2&3). Thus, this is a model that allows one to screen the possible business applications of an innovation and then position them in a recommendation table in terms of development (extract and capture value) and protection. Some applications will have to be abandoned (a very easy situation to manage when there are interesting possible alternative applications to develop), others will be within the reach of the SNIC, either alone or in partnership, some others will have to be sold or licensed out. But everyone using the model will be able to determine the geographic or business limitations that will restrict the scope of the license (or of the selling) in order to keep free (or not, but it will be a rational decision) the applications that the SNIC is able to implement autonomously or in cooperation. Depending on the rent configuration – “potential” after this phase and “residual” after the innovation has been closely examined for friction effects related to its environment and finally “appropriable” once the “competition” elements have been accounted for - the analysis of the innovation, in order to arrive at the development and protection strategy recommendations, will not follow the same path within the model. Please note that this is an essential element of our model. We have chosen to focus on certain key elements and to prioritize efficiency rather than design a universal and exhaustive model. Hence, the paths (see 4.3) are adapted to each configuration and enable the user to navigate within the model without losing time. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 14/61 STRATEGIC NATURE OF AN INNOVATION: A CLASSIFICATION Existing System Existing market 2) Meccano What protection? Standalone Existing Market The innovation is RADICAL Yes No 5) New Deal What protection? 4) New Frontiers What protection? No 3) New Player What protection? Yes New system to be created Standalone Does the market exist? Does the market exist? RADICAL or INCREMENTAL INNOVATION? The innovation is INCREMENTAL 1) Harder & better What protection? START The innovation is standalone or fits into a system The innovation is standalone or fits into a system 6) Full Monty What protection? HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 15/61 1.3. Summary Tables Innovation Type Standalone, autonomous, self-contained SOLO Component, integrated within a whole SYSTEM Substitution IMPROVE WITHOUT the dominant standard (existing product or process) 1- "Harder & better" (improvement innovation) SIGNIFICANTLY CHANGING the existing system: substitution of the existing component without changing other elements of the system whose architecture can nevertheless be modified (indirect effect) 2- "Meccano" (modulo-architectural innovation) INTEGRATE ITSELF IN in existing markets CREATE A NEW by substituting the domination product or process standard 3-"New player" (new game & player) STANDARD by disqualifying the existing system and replacing it with a new one: new dominant design (or platform) related to a new way / breakthrough in the assembly of the original components 4- "New Deal" (a reconfigured system) Or REBUILD Create markets CREATE A NEW by introducing a new standard 5-"New Frontier" (a new territory) MARKET/BUSINESS by proposing a new system 6-"Full Monty" (everything is new) Or BUILD A SYSTEM AND A NETWORK Key importance of: - adoption increasing returns - network externalities HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 16/61 MAGNITITUDE OF THE POTENTIAL RENT Very weak - - Weak - Medium = Strong + Very strong ++ POTENTIAL RENT VOLUME • Business diffusion potential The spectrum of potential applications is Very limited (1 single niche application) Limited (2-3 niche applications) Medium (more than 1 solid application) Large (several applications possible) Very large (multiple applications possible) • Geographic diffusion potential The natural market is Purely French European Developed countries Developed countries + certain developing countries World-wide • Market size of demand/clients (worldwide annual average revenues) ) < 50 Millions Euros 50-200 Millions Euros 0.5 Billion Euros 1-2 Billion Euros > 3 Billion Euros • Limitation of exploitation The claims of existing patents prohibit All application domains and zones The key application domains and zones Certain application domains or zones Very few things No previous protection Freedom to operate POTENTIAL RENT PROFIT RATE • Mode of generation of the innovation In isolation from the market With suppliers With research centers With clients With a large and diversified network • Type of innovation Harder & Better Meccano? New Player New Frontier New Deal Full Monty • Nature of previous protection The invention is public One can negotiate with the patent holders An improved patent is possible to be filed The innovation is free from any patents or other forms of protection. Freedom to operate HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 17/61 MAGNITUDE OF THE POTENTIAL RENT Very weak - - Weak - Medium = High + Very high ++ POTENTIAL RENT DURATION • Technological foundation of the Innovation Nature of the technological bases and duration / importance of the research underlining the innovation Simple process Research and applied Original combination of techniques sciences New dominant design Research and New technological platform fundamental sciences New scientific paradigm • Innovation intensity in the application domain Rate of renewal in products/innovations = frequency of innovation X product life cycle rapidity = frequency of filing patents Very high Examples: chemical specialties, agribusiness, glues… High Examples: electronic, telecom, materials industry… Medium Examples: automotive equipment, electrical equipment, software… Weak Examples: aerospace, instrumentation, petrol industry Very weak Examples: chemicals, pharmacy, artificial language • Technical imitability/replicability of the innovation The natural characteristics of the innovation make it Very easy to copy Easy to copy/replicate Not very transparent Difficult to copy Very difficult to copy/misappropriate • Legal imitability of the innovation The value and scope extent of the protection used (or available) for the innovation makes copying Very easy Easy Not very easy Difficult Very difficult HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 18/61 2. Insertion of the Innovation in its environment This second part will evaluate the impact - which is almost always negative since there are usually “friction” or “erosion” effects – on the potential rent and its configuration of the external competitive context in which the innovation has to fit in. The “competitive context" refers to the external forces as defined by Porter, forces which have an influence on the competitive game and its rules inside the business. We shall analyze each one of these forces in absolute terms (for any innovation) in the first instance, and then proceed to do so in relative terms (for the particular innovation under consideration): - MARKET-CLIENT RISK and its “friction” effects on the volume of the rent. According to our model, it is directly related to the innovation receptiveness of the studied client-market and to its mode of adoption of innovation. - BUSINESS CHAIN RISK and its “friction” effects on the profit rate of the rent. According to us, this risk is directly related to the balance of power between the business the innovation will insert itself in and the upstream and downstream links of the industry chain it belongs. - SUBSTITION RISK and its “friction” effects on the duration of the rent. This risk is a function of the adoption propensity of the target clients (called “commercial” risk) and the degree of sophistication of the alternative available technologies (called “technological” risk). - “COMPLEMENTATORS” RISK and its “friction” or “amplification” effects on the 3 dimensions of the rent. This risk will be evaluated, as a function of the degree of “requirement” of the “complementors” to succeed commercially but also as a function of the dependence level on the same “complementors”. - INSTITUTIONAL RISK and its “friction” or “amplification” effects on the total value of the potential rent. This risk is linked to the regulatory environment and the level of lobbying prevalent in the application domains of the innovation in question. This could have an impact on not only the volume but also the margin and the duration of the potential rent. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 19/61 2.1. The Client-Market risk: “friction” effects on the volume of the rent Our approach is based on the observation - practical as well as theoretical - that the nature of the client-market has a deciding effect on the manner in which an innovation can fit itself more or less easily in a market and then spread itself more or less quickly and completely. It is these 2 determinants of the adoption process (relatively easily, quick and complete) that we shall attempt to study in the first part which is structured around the concept of market “receptivity” to the innovation or “adoption propensity” of the same. Furthermore, and this has been confirmed by several authors (e.g. Bessant, Tid and Pavitt), certain innovation specific characteristics are likely to affect its spreading/distribution in a market. It is these specific features of the innovation that we shall study in the second part. In other words, once the spreading potential of any innovation has been identified for the considered target market(s) - this will give us an indication of the potential number of clients – we will then assess the “friction effects” due to the specific characteristics of the studied innovation and thereby calculate the volume of its residual rent. As far as the clients will act depending on the value they will assign to the innovation, the concept of “Customer Perceived Utility Value” will form the central concept of the second part. 2.1.1. The Absolute Adoption Propensity of the Client-Market In this first part, we shall attempt to measure the market-clients receptivity to any innovation. It is our belief that the adoption propensity is a combination of 2 elements: the speed and the rate of adoption. 1. We observe that certain markets are more accustomed or exposed to innovations (novelties) and that they are relatively more open to quickly “test” the innovations that are proposed. On the contrary, others that are less exposed to changes and novelties are naturally more reticent to “test” an innovation. More academically speaking, we shall say that habits and paths are strongly impregnated. The frequency of innovation in the client-markets or innovation intensity (in academic terms) appears to be a pertinent indicator to evaluate the speed and rapidity with which the marketclient adopts an innovation. For methodological simplicity, we shall distinguish 2 cases: a market characterized by low innovation intensity and consequently reticent to adopt innovations and a market characterized by a high level of innovation activity which leads it to adopt innovations relatively rapidly. Innovation intensity of the market Low High Innovation adoption speed Slow Fast 2. The other element is the adoption rate or the penetration level of the innovation that represents its degree of distribution in the market under consideration. Although testing novelties frequently is a favorable element for innovations, a complete commercial success is not always assured: convincing the “laggards” to follow the “early adopters” and hence capturing the entire market is not an easy task. This can be represented by the “Innovation Distribution Curve” (Bessant, Tid and Pavitt). HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 20/61 Without getting into the details of the different distribution models, the reader shall note that the normal innovation distribution curve of a client-market 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 the market (2-8%) are seduced. Next the rate of adoption of the innovation grows rapidly when it penetrates the “pragmatic adopters” (first point of inflexion) and the “slow adopters” before it gradually stagnates (2 nd point of inflexion). Finally, only the “skeptical” and “laggards” who are difficult to convince remain. Compared to this “normal” case where an important proportion of the clients adopt the innovation, we can specify 2 other alternative situations: - “All or nothing” client-markets where the innovation either is a complete failure or quickly and completely captures the total potential market (specificity of markets characterized by standards), generally depending on the opinion leaders position - Markets where innovations can exist but remain marginal (applicable in markets which are very fragmented and without norms). The 3 curves can be graphically represented as follows: Usual distribution rate of an innovation in a client-market Marginal Normal All or nothing 3. By intersecting/crisscrossing these 2 elements we come to 6 different cases of client-market. At a first glance, it enables us to have an idea of the conditions that the innovation will have to face in order to fit itself in the client market. We can consider these conditions like the filter through which the potential market adopters will analyze the perceived value of the innovation. These conditions will amplify or diminish, as the case maybe, the “friction” effects generated by the innovation on its rent volume. Certain cases are clearly unfavorable: - The “bad option” – a client-market which is not only reticent to novelties but also where the adoption is confined to a very limited section of the total market - “Wasted”, a situation where, despite a rapid and positive reaction, the innovation generally confines to the premature adopters. In both cases, either the innovation has a single application business domain and we recommend to stop all innovation related effort or there could be multiple application areas and the innovator would favor the business domains which are more attractive from the angle of the “adoption process” and drops the less attractive ones. Distribution Curve All or nothing Normal Marginal Penetration Rate Time HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 21/61 The case of “exhaustion” is more complex. Small companies are advised not to “exhaust” their resources while expecting the results of their efforts. On the other hand, it is a situation favorable to a larger company that is able to sustain efforts over a longer period. The 3 other situations that are potentially more favorable are as follows: - The “gestation”, which combines quick speed and a normal rate of penetration, is particularly adapted for a SNIC - The “roulette” where, although the adoption process is slow, the penetration rate becomes so high that the innovation will come to be successful. This could be the case in a market where standard prevail and in which a small number of very innovative players have sufficient influence in the long run to topple over the rest of the market (e.g.: Foray, 2002). This situation called “Russian roulette” is particularly risky (specifically for a SNIC) since it results in an “all” or “nothing” situation. Aiming to be the new standard is a necessity in this situation. - The “Money spinner”: because all the conditions are favorable, quick speed and maximum rate of penetration (market with standards or norms). It is only in these 3 favorable cases that we shall subsequently attempt to analyze the specific characteristics of the innovation under consideration to estimate the “friction” effects on the rent volume generated by this innovation. All or nothing Roulette: favorable but requires resources while waiting for results; not the best case for a SNIC Money Spinner: favorable but take care to the growth and volume which can rarely be managed by a SNIC alone Normal Exhaustion: particularly unfavorable for a SNIC Gestation: at first instance the most favorable situation for a SNIC Marginal Bad option: eliminate this application domain and find other application areas. If not freeze all expenses… Wasted: exploit quickly on condition that the required extra investment is not very heavy; if not go to “Bad Option” Penetration/ Adoption Rate (Curve) Slow Quick/Fast Adoption Speed (innovation intensity of the client-market) HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 22/61 2.1.2. Relative Receptivity of the market to the studied innovation In this part, we shall consider the characteristics specific of the innovation that are likely to have an impact on its distribution/spreading. As indicated earlier, a potential client will adopt an innovation depending on the estimated value that it is likely to bring him. Hence, we have selected the concept of “Customer Perceived Utility Value” (CPUV) as the structural element to analyze market adoption propensity of the innovation being considered 2.1.2.1. Customer Perceived Utility Value (CPUV) The CPUV is the value (estimated in a first stage, experienced only after use) that a potential client attributes to the innovation that is proposed. To determine this value, he estimates the benefits the innovation is likely to bring to him (perceived benefits) and on the other hand the risks/sacrifices related to adopting the innovation (perceived sacrifices). The CPUV is the difference between perceived benefit and perceived sacrifice as assessed by a potential client: CPUV = estimated benefit – estimated sacrifice We shall first explain the generic terms of the equation before we use them respectively in the case of a substitution-innovation and then of a creation-innovation. 2.1.2.1.1. The perceived benefits In the stream of Bessant, Tid and Pavitt, we propose to spot and analyze 3 value creation levers that increase or decrease the value perceived by the customer for a given innovation. - Relative advantage: This is directly related to the level of improvement brought about by the innovation over the existing solution. By definition, this level will only apply in the case where a reference offering exists i.e. in case of substitution. Relative Advantage Lever A – low + high - Transparency: Ease of understanding and use, testability i.e. possibility to try in a small scale and visibility i.e. capacity to observe the results are composing this second lever. The more simple and visible the innovation the smaller the uncertainty surrounding its adoption and the clearer its benefits to the potential client. Transparency Lever B – low + high - Compatibility: This lever measures the consistency of the innovation with the existing “practices” in terms of competencies, equipment, systems and norms. An innovation incompatible with the existing practices will experience a reduced perceived value and vice-versa. Hence, this criterion is particularly important for “system” innovations or innovations that have to establish themselves in a market were standards are the rule. However, this lever could have a significant impact on other types of innovation including those related to “creation” through the compatibility effect in terms of competencies. Compatibility Lever C – Weak + Strong HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 23/61 2.1.2.1.2. Perceived Sacrifices Just like in the case of benefits, sacrifices are linked to 3 elements: - Anticipated Price: This assesses the financial “effort” that the consumer estimate when purchasing the product. It is always relative, correlated to the perceived value or to the estimated cost. Assuming that the client is rational, we shall reason in terms of cost of ownership including consumables and other accessories necessary for the innovation use. Anticipated price – low + high - Adoption Perceived Risks: This refers to the risk of doing the wrong choice, i.e. choosing the innovation which will not become the industry standard or not choosing what will be the future standard. This risk is higher in cases of an attempt to modify industry standards and especially when network externalities exist as in the case of “system” innovations. Perceived adoption risk – low + high - Transfer costs: Adopting an innovation may require the client to discard old equipment (used with the old technology), to change suppliers and hence loose out on a partnership built over the years, to modify the organization system in place or further still have to reorganize the production system and staff… All these “modifications/adjustments” generate costs and are clubbed together under the concept of “transfer cost” and will be incurred only in the case of innovations that attempt to substitute the existing offering. Transfer Costs – low + high 2.1.2.2. “Substitution-Innovations” When an innovation attempts to substitute an existing product, the client will analyze its additional benefits over the existing one. The key concept in this case is the existing offering, which will act as reference basis. 2.1.2.2.1. Perceived benefits - Relative Advantage (Lever A): In this case the potential client (always assumed to be rational) will compare the differential in terms of perceived value and price between the reference offering and the innovation which aims at substituting. Note that this indicator combines the first lever of both the previously analyzed categories: benefits and sacrifices. For each of these elements, two intensity levels are possible: below the reference offering (negative differential) or above the reference offering (positive differential). Perceived Value differential Price differential – + – Low Indecisiveness Very interesting + Not viable High Indecisiveness HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 24/61 In the 2 extreme cases, it is easy to reach a conclusion (abandon immediately in the case where the situation is not viable). On the other hand, when the price and value differentials move in the same direction, the potential client is confronted with a level of indecisiveness which can be cleared only by examining the proportion between these 2 differentials. All previous research demonstrates (e.g. Stan Liebowitz, Re-Thinking the Network Economy, 2002) that most consumers require that the new offering be a lot better (not just a little better) than the standard it aims to substitute. weak ? value / ? price ? value / ? price >> 1 Relative Advantage - weak + strong - Transparency (Lever B): This involves analyzing the innovation under consideration on 3 consecutive criteria: simplicity, testability and visibility. The more favorable they would be, the stronger the perceived benefit will appear. Simplicity – + Testability – + Results Visibility – + Transparency – low high + - Compatibility (Lever C): As we emphasized earlier, this criteria will play a key role when the innovation has to integrate an existing system (“Meccano”) or in the case where the innovation doesn’t jeopardize the existing market standards (“harder & better”). In both these cases, the compatibility could be strong (it would work as an accelerating lever) or weak (in this case it would be a hurdle resulting in increased frictions). In all other cases, there will be zero compatibility as the innovation will challenge the existing standards or system and will act as an obstacle increasing the frictions. “New Deal” “New Player” “Harder & Better” et "Meccano" incompatible “Harder & Better” et "Meccano" compatible Compatibility – low high+ HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 25/61 Summary: Perceived Benefits in case of a substitution-innovation Lever A: Relative Advantage Increases Interest – + Lever B: Transparency Reduces uncertainity – + Lever C: Compatibility Accelerates adoption – + Value Levers Perceived benefits – Low + High 2.1.2.2.2. Perceived Sacrifices Only 2 sub-categories exist: - Adoption related risk: As seen earlier, this risk concerns the error in anticipating the future market standard (not choosing the future standard or vice-versa). The risk is none when the standard is not affected by the innovation, as in the case of “Harder & Better” and “Meccano”, but is very high for the “New player” or “New Deal” types. Harder & Better Meccano? New Player New Deal Perceived Adoption Risk – low high + - Transfer Costs: If the innovation under consideration requires abandoning of equipment linked with the previous solution, a change in method or organization structure then the perceived sacrifices will appear greater. In order to estimate the transfer costs of the innovation in question, we shall analyze these elements on a scale from low to high. Perceived Transfer Costs – Low + High Summary: Perceived sacrifice in the case of substitution-innovation Perceived Adoption Risk – + Perceived Transfer cost – + Components Perceived Sacrifice – Low + Strong 2.1.2.3. “Creation-Innovations” In this case, the reference offering is no longer relevant and the client estimated value potential will be an absolute calculation. 2.1.2.3.1. Perceived Benefits - In this case, the relative advantage criteria can no longer be used in the same manner. However, the client will estimate what the innovation can bring to him in terms of HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 26/61 improvement and ease of use: i.e. resolving a major hurdle such as a loss of time and/or simplifying life and/or offering a new possibility/opportunity. To simplify, we will conclude that in the case of creation-innovation, the value driver is related to the satisfaction of an up to now unmet need (irrespective of whether it is based on time, use or operational complexity). Anticipated gain of time – + Simplification of the job/task – + New options/opportunities – + Relative Advantage: Resolution of an unmet need – weak + strong - The transparency lever B remains relevant in this case and is measured in the same manner as in the case of a substitution-innovation. Simplicity – + Testability – + Results Visibility – + Transparency – weak strong + - The compatibility lever C is less relevant but still remains interesting to assess in terms of compatibility with the existing know-how already mastered or easy to master (with a linked diversification type reasoning) by the customer. Know-how compatibility – low + high Summary: Perceived benefit in case of a creation-innovation Lever A: Unmet Needs Satisfaction Increases interest – + Lever B: Transparency Reduces uncertainty – + Lever C: Compatibility Accelerates adoption – + Value Drivers Perceived Benefits – Low + High 2.1.2.3.2. Perceived Sacrifices In the case of a “creation-innovation”, the perceived sacrifices have just one common element with substitution-innovations – the adoption risk. The distinguishing factor is the concept of anticipated price, which is measured by the client in terms of what he can shell out for the innovation or his estimate of its production cost. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 27/61 Summary: Perceived Sacrifice in case of a creation-innovation Anticipated price (minimum price) – low high + Adoption risk – low high + Components of the Perceived Sacrifice – low + high 2.1.3. Summary: CPUV and friction effects on the rent volume The 2 cases of innovation analyzed above – substitution and creation - can be summarized in the form of a table with the perceived benefits and perceived sacrifices being the 2 axes. The only difference between creation and substitution are the ways and criteria to be used in order to assess each one of the 2 axes. With the help of this summarized table we can analyze the friction effects likely to block the innovation from being adopted that in turn would impact the rent likely to be generated. High "No Way" unfavorable for adoption very strong friction effects wiping out almost all the volume of potential rent that can be captured Î Stay away! “Infatuation” high level of indecision high level of friction reducing the potential volume (depending on the market propensity and the type of sacrifice involved) Î Rework the innovation to reduce the perceived sacrifices danger for a SNIC Perceived Sacrifice Low “Wet firecracker” low level of indecision high friction effects shrinking the volume of potential rent Î Rework the innovation to improve its performances otherwise stop any investment "My way" favorable for adoption allows to quickly capture a maximum volume of potential rent Î Favorable LOW HIGH Perceived Benefit HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 28/61 2.2. The business chain risk: friction effects on the rent rate 2.2.1. The concept of “Business Chain” An industry is always a part of a business chain. This concept of “business chain” was developed by French economists and popularized by the American professor Michael Porter and his disciples. To simplify matters, the words sector, domain, industry and business shall be treated as equivalent during this section of the document. A business chain can be diagrammatically represented in 3 links: Unless totally integrated, each activity domain is sandwiched between the upstream (suppliers) and downstream (clients) stages. Each of these stages exerts pressures that are likely to impact the intra-business competitive context. The first essential phase is to precisely identify all the upstream and downstream links of the chain in which the business (the one the innovation will create or will be developed within) fits in. A business chain is generally presented in the following manner: Measuring the balance of power within this chain enables us to estimating the potential profitability of the business; this depends on the capacity of the upstream and downstream links to capture the value created by the business. The diagram below explains this: Sector or Business Activity Suppliers Upstream stage Clients Downstream stage Innovation Raw materials Supplier/ Equipment Business Distribution Clients Innovation Raw Materials Supplier/ Equipment Business Distribution Clients Friction Profit rate Friction HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 29/61 2.2.2. Assessing the balance of power within the business chain 2.2.2.1. Criteria to assess the balance of power within the business chain The interest in the concept of “business chain” stems from the analysis of the balance of power that exists within the the concerned chain and in particular the balance between the business and its directly adjacent upstream (suppliers) and downstream (clients) links. A balance of power analysis enables us to deduce the level of competition prevailing in the concerned business and the power of the adjacent links to capture all or a part of the value created by the business. We are able to estimate the impact of the friction effects related to the chain risk on the potential profitability of the business and consequently of the innovation which will fit in (impact on the potential rent rate previously estimated). 6 criteria are used to measure the balance of power of the business with each of the upstream and downstream links: 1) The impact of the supplier link on the cost and quality of the client link offering 2) The perceived transfer costs corresponding to costs incurred to change suppliers (including the elements of differentiation) These are 2 indicators represent the economic concept of “buyers sensitivity to price” 3) The relative concentration, measuring the degree of concentration (N° of companies) of the business compared to the degree of concentration of the link concerned. 4) The relative value of the patents portfolio, the one owned by the players of the business compared to the one of the respective links surrounding it. 5) The relative capacity (and possibility) to integrate: upstream integration for the downstream link and downstream integration for the upstream link. 6) The respective impact of the sale/purchase volumes: impact of the downstream link on the sale volume of the upstream link compared to the impact of the upstream link on the purchase volume of the downstream link. These are 4 indicators which assess the negotiating power of the business in relation to its 2 adjacent links. The first 2 indicators are to be used in a unilateral way and the last 4 in a bilateral direction as shown in the assessment grid that follows and can also be used to estimate the position of the business within the business chain: UPSTREAM LINK BUSINESS DOWNSTREAM LINK Impact of the supplier link on the cost and quality of the downstream link offering Strong Weak Strong Weak Perceived Transfer costs/change of suppliers Strong Weak Strong Weak Relative Concentration + upstream + business + business + downstream Relative value of the patents portfolio + upstream + business + business + downstream Capacity to integrate upstream/downstream + upstream +business + business + downstream Impact of sale/purchase volumes + upstream + business + business + downstream Summary: Balance of power in favor of… upstream business business downstream HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 30/61 2.2.2.2. Balance of Power analysis and Identification of strategic situations Matrix Combining the balance of power analysis of the business with its adjacent upstream and downstream links, we come to a matrix with 4 quadrants, each corresponding to different competitive context of the business in question: STRONG +/- Strong dependence / suppliers capturing the margin - - Sandwiched business without margin potential Balance of Power Upstream link / Business WEAK ++ Favorable Situation, strategic autonomy and margin potential +/- Strong dependence / Clients capturing the margin WEAK STRONG Balance of Power DOWNSTREAM link / Business 2.2.3. Substitution: When innovation can modify the balance of power In certain cases, the “destructive-creative” power of an innovation is so strong that it could modify the balance of power within the business chain (normally in a favorable way, possibly in an unfavorable one). In the case of a creation-innovation this problem doesn’t occur as the innovation creates a new business and fits in a new business chain that has just been analyzed (refer to 2.2.2). On the other hand, a substitution-innovation often doesn’t escape the change in the balance of power within an existing chain due to a reconfiguration of a new one by the innovation. We shall revisit the 6 evaluation criteria to analyze how and in what way a substitutioninnovation modifies the balance of power within the existing or new chain. 1) Impact on the cost and quality 2) Transfer costs including differentiation 3) Relative concentration 4) Relative value of the patents portfolio 5) Capacity to integrate (upstream/downstream) 6) Impact on the sales/purchase volume The diagram below illustrates the pre and post balance of power related to the insertion of a disruptive substitution-innovation, which modifies the rules of the game of the total industry. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 31/61 Thus the substitution-innovation may modify the position of the business to which the SNIC belongs and in which the innovation has to fit in. STRONG +/- High level of dependence / Suppliers capturing margin - - Sandwiched Business, without margin potential Balance of Power Upstream Link / Business WEAK ++ Favorable Situation, strategic autonomy and margin potential +/- Strong Dependence / Clients capturing the margin WEAK STRONG Balance of Power Downstream Link / Business Position of the business itself Position of the business taking into account the “altering” characteristics of the innovation -- -- + + UPSTREAM Suppliers BUSINESS DOWNSTREAM Clients Unilateral Measure Bilateral Measure 4 3 2 1 5 6 + +HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 32/61 2.2.4. Summary Table: Friction effects on the rent rate Irrespective of whether the innovation is of substitution or creation concern, we can summarize its positioning in the following table: - the business situation in terms of the balance of power within the chain - the consequences in terms of the friction effects induced - complementary elements of recommendations FORT +/- Strong Dependence / Suppliers Medium-Strong friction effects on the profit rate of the rent depending on the competitive situation of the key suppliers Collaborate with one upstream player(s) to facilitate the blossom of the rent and guarantee a minimum of friction effect on the rent rate - - Sandwiched business, without margin potential Strong friction effects on the profit rate of the rent, drastically reducing the rent rate Abandon this application domain if others exist… OR Imagine and build another position within the chain Balance of Power UPSTREA M LINK / Business LOW ++ Favorable situation of profitable strategic autonomy Very limited friction effects on the rent profit rate No lucrative alliances and/or partnerships with upstream/downstream players +/- Strong dependence / clients Medium-strong friction effects on the profit rate of the rent depending on the competitive situation of the key clients Collaborate with one downstream player(s) to facilitate the blossom of the rent and guarantee a minimum of friction effect on the rent rate LOW HIGH Balance of Power DOWNSTREAM LINK / Business NOTE 1: In the case the innovation may concern several different application domains, this matrix enables the assessor to “select” the domains (++) which are the most attractive in order to capture the potential rent arising from the innovation and its protection. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 33/61 2.3. The substitution risk: friction effects on the duration of the rent In this part, we shall analyze the risk of indirect competition – substitute products or services based on another technological approach/solution but which cater to the same needs as the innovation for part or total of the market - that may suffer the innovation as soon as it fits into the market. The faster the substitutes come to the market, the more they are likely to erode the potential rent directly on its duration and indirectly on its profit rate and volume. 2.3.1. Analysis of the absolute substitution risk (purely depending on the nature of the innovation) We consider that this part has already been worked on in Part 1, where the duration of the potential rent was estimated on the basis of 2 criteria: technological basis of the innovation and innovation intensity in the application domain. 2.3.2. Analysis of the relative substitution risk (depending on the - others than its nature - specific characteristics of the innovation) This substitute risk that is likely to impact the duration of the potential rent generated by the innovation at stake can be assessed through 2 criteria: - The “commercial” risk of substitution which can be estimated on the basis of the target market “adoption propensity” indicator already developed and used in Part 2.1. Please note that this indicator is not used in the same manner as Part 2.1 – it functions in the reverse order. The greater the natural adoption propensity of target markets, the greater the penetration risk of substitutes. - The other criterion is the “technological” risk of substitution. This is evaluated using another indicator based on alternative potential technological paths and options (as compared to the technology chosen for the innovation). This indicator combines the spectrum and the level of advancement of these alternatives (predictable lead time of the innovation over the alternatives, spotted during the development or test phase or during the market launch). This indicator can be assessed using the following table: « Technological » risk of substitution Spectrum/Range of alternative paths and options narrow broad High Predictable lead time of ++ very low risk + low-medium risk the innovation/its alternatives Low - medium-high risk -- major risk HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 34/61 Combining the 2 indicators, we end up with the following table which allows us to the assess the level of overall risk and, correlatively, the effects of friction and reduction on the duration of the potential rent: Risk and Friction Effects - Substitution Technological Risk: Spectrum and Degree of progress of the alternative paths and technologies Low High Low risk and friction effects + Robinson Crusoe Very high risk and friction effects -- Overcrowded High Commercial Risk: Client Adoption Propensity towards Innovation Low Very low risk and friction effects ++ Hermit Medium risk and Friction effects - Bottleneck HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 35/61 2.4. The complementor’s Risk: friction or amplification effect on the rent The classic Porterian approach lacks the “complementors” dimension that has an important place in modern strategy and takes the form of partnerships, alliances, cooperation and coopetition. Clients generally prefer, and in certain cases demand “complete” or “global” solutions as opposed to products or partial solutions. On the other hand, according to strategy gurus the key to create value is to specialize or focus on one’s core business or competencies. Joining forces with “complementors” and forming partnerships is the only way to resolve this paradox. As a result, this new complementor force has gained tremendous importance. Depending on the specific case, forging “intelligent” relationships within the competitive environment is likely to increase or reduce the potential rent that can be appropriated. If quasi-fixed volume and profit rate have to be shared then it will obviously reduce the innovator earnings, but competitive partnerships are sometimes key to a successful innovation. However, if the partnership allows for an increase in size of the pie/pizza to be shared (new dimension resulting from the adoption increasing returns and the network effects) and doesn’t hamper the individual profit rate, then each actor benefits from his own value creation without eating into its partners margin. 2.4.1. Analysis of the “absolute” complementor risk (a function of the nature of the innovation) It is obvious that the risk/interest of the complementors is all the more important in the case of system innovations as opposed to standalone innovations. We can thus classify the different innovation types on an axis that takes into account both the interest or requirement level of complementors and the degree of difficulty in “locating” and bringing together such partners. Requirement and difficulty degree in assembling such partners Low High Harder & Better + New Player Zero need New Frontier Low demand, possibly a complementor for distribution Meccano Need for agreement with present complementors New Deal Strong need for existing and new complementors Full Monty Very important to find preferably new complementors 2.4.2. Analysis of the “relative” complementor risk (a function of the - others than nature - specific characteristics of the innovation) According to us, this is linked to 3 factors that have a very strong friction effect on the volume and profit rate of the rent: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 36/61 - The degree of complexity of the partner network to integrate or build (mayonnaise effect): it is related to the number of different in nature and specialties complementors Very few different Lot of partners (1 or 2) partners (> 6) - Impact on the total value creation of complementors compared to the innovator Low High impact impact - The degree of power, linked to competitive positions (difference in size, nuisance power, forced monopoly situation), of complementors face to the innovator Small, fragmented, Big and strong without power Summary: Degree of dependence vis-à- vis the complementors Low High 2.4.3. Table summarizing the “complementor” risk analysis and its correlated friction effects Complementor risks and friction effects Degree of dependence vis-à-vis the complementors low high Strong need but low risk and friction effects Divide to rule Dangerous position with very strong friction effects Amateur Strong Requirement level and degree of difficulty in finding complementors Weak Position which has no friction effect on the rent Egoist Relatively weak position with probable friction effects “Caudine Forks”HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 37/61 2.5. The institutional risk: erosion or amplification effects on the rent Certain innovations are required to fit in industries that are “naturally” (human/animal healthcare or business having an important environmental risk) or “artificially” (electronic industries in general) subject to a high level of regulations and/or a strong lobbying from the key stakeholders (government, unions, consumer associations, standardization authorities…) Depending on the specific characteristics of the innovation and/or of the innovator, the very nature of such industries can have an important impact on the potential rent likely to be generated by the innovation. In certain cases, it can destroy all potential (impact on volume due to a virtual or actual ban on sale) or conversely increase it by a large proportion (if it is chosen as standard or it is the only alternative offered it has a positive impact on the profitability). Hence it is imperative to identify the “institutional” risks that an innovation is likely to confront as well as analyze the positive or negative impact they are likely to have on the potential rent of the innovation. This can be done by analyzing whether and how the concerned innovation is affected by the different “institutional” dimensions/factors: Type of impact on the rent - Existing or expected regulations decided by the authorities under pressure of the consumers and professionals lobbying strong friction non-existent strong effect no effect amplification - Necessary regulatory approvals to exercise and market the innovation strong friction non-existent strong effect no effect amplification - Norms fixed during special proceedings by key players of the business and compulsory for all strong friction non-existent strong effect no effect amplification - Standard(s) which rule certain business and are imperative for all irrespective of their wish strong friction non-existent strong effect no effect amplification Summary: Effect on the rent volume Effect on the rent profit rate Effect on the rent duration strong friction non-existent strong effect no effect amplification strong friction non-existent strong effect no effect amplification strong friction non-existent strong effect no effect amplification HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 38/61 3. Insertion of the innovation/innovator within the business Once the erosive effects related to the insertion of the innovation within its environment have been scanned, we assume that it generates a residual rent both the magnitude and configuration of which still remain attractive. What remains to be analyzed now for the innovation and its bearer (the SNIC) is their ability to face the competitive context in the application domains and the direct competitors present or likely to appear in the future. 3.1. A preliminary key concept: entry and development rights This concept that is key to understanding the competitive intensity of a business is based on another concept of industrial economy called “barriers to entry”. These qualitative (difficulties to access) and quantitative (amount of entry ticket) barriers enable us to assess: - the nature and importance of the entry (for a new entrant) or development (for a company already present in the field or having newly entered) rights - the level of protection enjoyed by the existing players in the sector facing the threat of possible new entrants. The importance of these entry or development rights can be estimated by assessing the business on the following 6 indicators: 1. Existence and importance of cost and scale economies 2. Existence and importance of transfer costs including those linked with the presence of differentiated offering from the main market players of the business (loyalty effect) 3. Difficulty in accessing the distribution network 4. Shortage of or difficulty in procuring rare and specific to the business resources 5. Existence and value of brands and patents 6. Importance of and difficulty in coping with approvals, regulations and norms. The rule, coming from the economic logic, is simple: one should attempt to find businesses protected by strong entry and development rights. This would naturally limit the level of competition and would allow for a high profit potential. Obviously, these sectors are the toughest to penetrate. Conversely, an unprotected industry is definitely easy to penetrate but not very lucrative. The ideal scenario: easily penetrate a well defended business thanks to the innovation or be the pioneer of a new business which has low entry barriers at the start-up stage but that the innovator will be easily able to erect and fortify. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 39/61 3.2. Attractiveness of the business 3.2.1. The Business Life Cycle 3.2.1.1. Concept of life cycle /curve A basic concept to analyze and characterize an industry is the life cycle concept. Once established, it allows to identify the stage in which the business concerned with the innovation is located and to reach vital conclusions about the competitive context. This concept is shared equally by both the academic as well as managerial world. It applies at the level of the business as well as the product. The only controversy revolves around its number of phases (four or five). For our study, we have chosen the 5 stages approach - emergence, start-up (very beginning of growth), growth, maturity and decline – more adapted to the case of creation - innovations. To make the connection with the previous part, note that the life cycle concept is naturally linked to that of entry and development rights/barriers. The more advanced the stage of the business, the stronger and more complex these barriers normally are, with the notable exception of the fragmented type businesses as we shall see later on. The different phases of the life cycle can be represented within the following diagram: Phase Emergence Start-up Growth Maturity Decline The appropriate indicators of the following table allow us to spot the life-cycle phase the analyzed business is experiencing and to deduce a set of operational recommendations. Appearance of a standard or a dominant design Large external players appear in the game through the external growth route (acquisition) and begin to dominate the business Window of opportunity Chasm HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 40/61 3.2.1.2. Characteristics, KSF, Entry and Development Rights/Barriers of each of the Life-cycle stages This table enable us to identify the life cycle phase in which the business analyzed finds itself, to list the key strategic management factors of the phase and to estimate the strength of the entry and development rights/barriers. Phase Emergence Start-up Growth Maturity Decline Indicators Growth Rate Growth Potential No of competitors Nature of competition Technology Unstable Important High Volatile and spread out Faltering (very early stage) Very strong Very strong High Leaders appear Still evolving Strong Good Strong decline Consolidation Crystallization in progress Weak to Stable Zero Low Crystallization of frozen positions Negative or Zero Negative Weak Oligopoly Frozen Strategic Recommendations The Key Innovate Improve/Target the Offer Grow & Dominate Make profitable Milk Dominant Function Technology Marketing Development Cost/Management Accounting Finance Key Success Factors - Work out & offer an innovative solution, imperfect but value creating - Succeed in conducting beta-tests - Capture the early adopters (the first 3-8% of the total market) - Increase the value of the offering through continuous improvement (technology, marketing) - Target & capture the most receptive segments - Create a network and a brand - Finance the growth - Manage the costs - Invade the market (segments & countries) - Invest in marketing & production - Finance the growth - Manage the costs & the equipment - Rationalize the range: extension followed by cleaning - Extend the solution (service, additions) and its geographical reach - Finance the WCR - Reduce the range and the no of clients (be selective) - Look for exit options Entry Rights Weak, technology oriented Medium, stress on marketing Strong, diverse and high Very high in quantity/complexity Of no interest HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 41/61 The competitive context of the industry to which the innovation belongs has a determining impact on the possible erosion concerning the profit rate of the residual rent of the innovation. 2 influencing factors could appear on the competitive field: the nature (competitive industry type) and the intensity of the competitive game. We shall analyze them consecutively and then combine them in a table summarizing the positioning and recommendations. 3.2.2. Competitive Industry Types Based on only two criteria, the concept of industry type enables to distinguish businesses pertaining to very different competitive contexts and representing totally different strategic/economic (potential profitability) interest. 3.2.2.1. Matrix of industry types There are 4 types of competitive industries that we can represent within a matrix created through 2 strategic criteria (the foundation of the 2 generic strategies) that are essential: sensitivity of the business to 1) volume and 2) differentiation. HIGH FRAGMENTATION - Examples: catering, software, tailor-made machines… SPECIALISATION + + Examples: software packages, perfumes, scientific instrumentation…. Business sensitivity to differentiation (existence of “niches”, different strategic groups of competitors, varied solutions/offerings..) Low DEAD-END - - Examples: shipyard, Vosgian sandstone quarry VOLUME + Examples: automobiles, sugar, electronic components… LOW HIGH Indicators which facilitate the spotting of the dimensions Business sensitivity to Volume (existence of economies of scale, volume effect and experience curve) The 2 key indicators of sensitivity (to volume and differentiation) which structure this matrix are detailed in the external compartment of this table and enable a novice/beginner to place with ease the business he is analyzing in this table. You probably noticed the positive and negative signs, which appear in each of the boxes. This obviously indicates the strategic (nature and degree of freedom which will be specified in the following table) and economic (profitability potential) interest of each of the 4 industry types. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 42/61 3.2.2.2. Industry Types: distinctive characteristics and strategic recommendations Each competitive industry has specific and distinctive characteristics. All these indications facilitate the positioning of the application business of the innovation within the matrix. Furthermore, depending on the characteristics of each industry in the matrix (volume /differentiation sensitivity), it is possible to recommend a “natural” strategy for each one of the industry types. CHARACTERISTICS STRATEGIC RECOMMENDATIONS VOLUME - Products/offerings very similar (existence of a reference offer) - Very important scale and scope economies + experience effect Î one standard, one dominant design: the reference - Be a major player on the dominant design - Have a large vision of the business (segments, zones) - Gain market share to get costs reduction thanks to volume/experience SPECIALISED - Products/offerings very diverse - Different strategic groups - Specialized competitors Î several standards can durably co-exist - Find one’s niche (differentiation) - Standardize one’s specialization to the maximum possible extent - Stick to one’s specialization and avoid growing out of it - But aim at the segment leadership FRAGMENTED - Several small competitors entering and exiting (weak entry barriers) - Very changing competitive positions Îlocal markets exist and the solutions are generally customized - Capacity to react quickly to market changes/evolutions - Minimize fixed and structural costs - Be nimble and flexible - "Not too much overhead" - Achieve operational excellence DEAD-END - Strong entry barriers, more so at exit - A structural overcapacity face to a declining demand - No one player profitable, the newer and indebted ones are even the less profitable - Implement lobbying strategies - Exit the activity at the lowest possible cost - Stay away if haven’t entered the market already HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 43/61 3.2.3. Industry types and entry/development rights The concept of industry type is closely linked to that of entry and development rights/barriers that were examining earlier on in this section. And this relationship works towards bestowing it a prescriptive power in terms of economic and strategic interest. Each industry is characterized by a mix of specific rights and barriers. By combining both these approaches, we can arrive at the following table: FRAGMENTATION - Weak entry and development rights SPECIALISATION + + Medium-Strong entry and development rights strong Type/Nature of entry rights: 3) Access to the distribution network Cost to access clients Type/nature of entry rights: 2) Transfer costs including differentiation in offerings 4) Access to rare and specific resources 5) Patents, Brands DEAD END - - High entry and development rights but no profitability hope VOLUME + Strong entry and development rights INDUSTRY SENSITIVITY TO DIFFERENTIATION weak Of no interest Type/nature of entry rights: 1) Cost & scale economies 3) Access to distribution 6) Norms, approvals, regulations weak strong INDUSTRY SENSITIVITY TO VOLUME Thus we can summarize in a table all the analytical elements and recommendations that we dealt with in this part (3.2) of the report: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 44/61 Industry Types, Entry and Development Rights, Strategic and Intellectual Property recommendations FRAGMENTATION - Characteristics: - Several small competitors entering and exiting (weak entry barriers) - Changing competitive positions Îlocal markets exist and the solutions are customized SPECIALISATION + + Characteristics: - Products/ offerings very diverse - Different competitive groups - Specialized groups Î several standards can co-exist BUSINESS SENSITIVE TO DIFFERENTIATION Strong WEAK entry & development rights: - Access to distribution - Costs to access clients Natural strategy: Organizational flexibility - Cultivate flexibility - React to market evolution - Minimize fixed costs IP Strategy: Weak potential to valorize the innovation unless it may naturally be adapted to customization MEDIUM-STRONG entry & development rights: - Transfer costs, differentiation offers - Access to specific & rare resources - Patents, brands Natural Strategy: Differentiation - Specialize - Be a leader on a “niche” - "Standardize» the offer - Don’t grow at the expense of the specialization IP Strategy: Strong valuation potential of the innovation which the company can capture in a niche market and even license out DEAD-END Of no interest VOLUME + Characteristics: - Products/ offerings very similar (a reference offering exists) - Strong economies of scale and experience curve Î a dominant design, a standard is the market reference (existence of niches, of different groups of competitors, variety of solutions… Weak STRONG entry & development rights: - Economies of cost and scale - Distribution access - Norms, approvals, regulations Natural strategy: Cost Volume - Be a major player - Have a “global” approach to the market -Gain market share to lower costs PI Strategy: Good valuation potential but impossible to capture it without large means (take it all or give it up) Weak Strong Indicators to spot of the basic dimensions BUSINESS SENSITIVE TO VOLUME (existence of economies of scale, experience and size effect,) HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 45/61 3.2.4. Rivalry and competition intensity Although indirectly the concept of industry type aptly enables us to assess the interest of a business in terms of potential profitability. Hence it is interesting to confront and complete this analysis by evaluating the existing and future competition intensity. In order to do so, we shall use the 6 criteria that Michael Porter proposes in his 5 forces model to analyze internal rivalry in an industry. These 6 criteria allow us to assess and summarize the existing or future intensity of competition in a business and hence the friction effects on the profit rate of the residual rent: Weak Intensity of competition STRONG Weak STRONG 5. Fixed/ variable costs ratio Weak STRONG 6. Exit barriers STRONG Weak 1. Business growth STRONG Weak 2. Concentration/Distribution of market shares STRONG Weak 4. Perceived transfer costs STRONG Weak 3. Diversity / Differentiation of competitors Suppliers Substitutes Potential Entrants Internal Rivalry Clients HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 46/61 3.2.5. Summary: business competition and erosion effects By crossing the industry type (interest and long term profit potential of the business) and the present (if the market exists) or to appear in the near future (market created by innovation) competition intensity, we can build the following matrix which clearly indicates the importance and the probability of friction/erosion effects that the residual rent is likely to encounter concerning its profit rate. STRONG FAR WEST Strong but unlikely to appear friction effects No use fighting in such a highly competitive business BATTLE FOR A FUTURE PARADISE Strong & likely friction effects No use fighting unless mastering the KSF and having sufficient resources Intensity of competition: - present, if the market exists - or future, in the case of a creationinnovation Weak AFTER THE BATTLE Weak and unlikely friction effects Make the most of the current situation without betting on an interesting future “PAX ROMANA” Weak-Medium and likely to appear friction effects Ideal situation for an innovation/innovator Weak STRONG Fragmented Dead-end Specialized Volume Note that each of these situations corresponds to a certain phase of maturity of the activity Value of the competitive industry type HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 47/61 3.3. Competitive Reaction Once the competitive context (present and future competition intensity) of the industry the innovation has to fit in is identified, the concern shifts to the existing players or new possible entrants and their possible reaction. Since the present competitors and the possible new entrants (in case the innovation creates a market, only this segment will be considered) are governed by different analytical criteria and reasoning, we shall systematically distinguish them during the analysis that follows: 1. The probability of occurrence and foreseeable intensity of the main competitors reaction According to us they are linked, on the one hand, to the intrinsic value and the long-term attractiveness of the business (profit potential estimated through the type of the business in question), and on the other hand: - the relative attractiveness of the business which is measured by the importance of the concerned business within the portfolio of the existing players - and the substitution risk in case of possible new entrants (as already assessed in the table of Part 2.3) Although different, both these tables are based on the same methodological approach which enables us to distinguish the possible level of probable reaction of competitors and easily distinguish situations which are not too risky (negligible erosion effects and easily to capture residual rent) from the more fragile cases where it is essential to further pursue the analysis to identify the nature and effects of the possible friction (refer to 2 & 3); 2. The nature of the foreseeable reaction of the main competitors According to us, on the one hand it is linked to the attractiveness of the innovation that is measured by the magnitude of the computable residual rent, and on the other hand: - the risk for existing players: unable to exit at low costs, even if case of necessity, due to the level of exit rights/costs prevailing - the risk for new players: unable to enter and compete with the innovator due to the level of entry costs/rights prevailing With the help of the 2 chosen axis, the table enables us to identify the type of reaction conceivable and possible (the latent hypothesis being the rational behavior of the player). The conceivable reactions are as follows: - no reaction since it is of no interest for the competitor to react - attempt to block the innovation by existing competitors who are looking to defend their territory in a business where exit costs are high - pure or creative (with some improving characteristics) imitation, a trait of new entrants attracted by the “Eldorado” of the innovation - and the “disqualifying innovation” which attempts to totally replace the innovation due to its superior and distinct characteristics 3. The friction effect of such competitive reactions, depending on the profile of these competitors – given the issue at stake, 3 main types of capabilities have been selected: financial (the “mean” impact), technological (capacity to copy and innovate) and legal (capacity to contest and bypass the protection of the innovation) – and the recommendations for a development (valuation) strategy of the innovation. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 48/61 3.3.1. Probability and intensity of the competitor’s reaction Value & attractiveness of the business (Substitution & creation innovation) Dead-end / Fragmented Industry Volume / Specialization Industry weak Strong Core Business S STRONG PROBABLE Reaction VERY STRONG VERY PROBABLE Reaction EXISTING PLAYERS (substitution innovation only) Relative importance of the business in the competitor’s portfolio Marginal Business w WEAK/LOW UNPROBABLE Reaction VERY LIMITED Reaction Too full & bottleneck S WEAK/NONE PROBABLE Reaction VERY STRONG CERTAIN Reaction POTENTIAL NEW ENTRANTS (substitution & creation innovation) Substitution risk Robinson Crusoe & Hermit w WEAK/NONE UNPROBABLE Reaction STRONG UNPROBABLE Reaction w = weak S = Strong 3.3.2. Nature of the competitor’s reaction Value of the Residual rent weak Strong S BLOCK 1) BLOCK 2) Imitate or copy EXISTING PLAYERS (substitution innovation only) Exit rights/costs w OF NO INTEREST Nothing to worry about CREATIVE IMITATION Or disqualify S OF NO INTERST Contempt/Scorn DISQUALIFYING INNOVATION POTENTIAL NEW ENTRANTS (substitution & creation innovation) Entry rights/cots w IMITATION CREATIVE IMITATION PURE COPY The entry rights/costs have already been analyzed and assessed earlier (refer to 3.1.1). Exit rights/costs are barriers that firms encounter to quit a market and can be assessed on the basis of the following criteria: - economic (importance of business specific assets in the business, fixed costs of exit) - strategic (inter-connection and complementarities with others business of the portfolio) - political and social (union and government restrictions concerning exit) - psychological and emotional (trouble in abandoning a historic profession/trade) HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 49/61 3.3.3. Competitor’s reaction, friction risk and development strategy of an innovation NONE or OF NO INTERET BLOCK IMITATION PURE COPY CREATIVE IMITATION DISQUALIFYING INNOVATION F: + T: -/= L: + --> licence/share F: + T: + L: - --> "same as block" F: - T: + L: + --> find a sponsor to beat the competitor F: + T: - L: - -->the competitor is a possible patron/benefactor F: - T: - L: + -->strenghthen the tecjnology and attack legally F: - T: + L: - -->minefield /" go" game I.P. strategy Very high friction risk --> find a white knight otherwise give-up High friction risk Reaction is a function of the competitors profile Limited friction effects Reaction is a function of the competitor's profile Competitor's (actual or future) command over the resources Nature of the competitor's reaction latent time before reaction = time available for the innovator weak STRONG No friction so no risk (go to 3.4) STRONG weak TYPE DE RESOURCE ANALYSED : -Financial (F) -Technological (T) -Legal (L) Innovations with limited durations ( DWARF 1 - GADGET 3 - OPTICAL TRAP 6) --> don't protect instead take the money and run Possible friction but very limited risk --> Overcome obstacle if one has the means (go to 3.4)HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 50/61 3.4. The innovator’s competitive situation: resources and competencies of the SNIC Finally what need to be integrated in the model are characteristics of the innovating company (bearer of the innovation) in terms of legitimacy, resources, capabilities and competencies. Depending on the type of innovation and the specificities of the competitive context and system to which the innovation belongs, it is obvious from our previous analysis that the conditions of success for the establishment and development of every innovation differ. They require certain resources and competencies that differ both in nature and quantity. The question that remains: does the company have the resources needed to succeed? If not, can it acquire them and how so? Our approach will enable us to assess the difference between the necessary conditions for the innovation to succeed and the means available in the company. So as far as the valorization (development) strategies are concerned, this will lead to the following recommendations: Abandon, Develop autonomously, Partner, License out or Sell out. First and foremost, we shall evaluate the scientific and business legitimacy of the company. This indicator which attempts to identify on one hand the SNIC’ scientific credibility in the technological domain of the innovation (“academic” reputation of its research team and its previous track record in the field as compared to a newcomer in the domain) and, on another hand, its knowledge and notoriety in the application business of the innovation (core competency of the company versus total diversification) may appear over simplistic. However, it is systematically used by venture capitalists as the basic criteria for elimination. We shall too use it as a scanning method facilitating and rationalizing the remaining/pending analysis of the company’s competitive position. If the company has no legitimacy, it would be rather difficult for it to successfully market the innovation (leading to a low rent). Conversely, we would be required to verify if the company has the necessary resources and competencies both in sufficient quantity and quality. In our approach, that can be clearly examined in the part 3.4.2 table, we have opted to distinguish 3 types or levels of resource for the analysis: - the technological resources: for us they are the foundations that support and give value to the innovation. Without them, it is impossible to exploit any competitive advantage. They are a necessary but unfortunately insufficient condition for the innovation to establish itself in the market if they are not complemented by - the “business” resources and competencies which are related to the key success factors of the business at stake - and finally, the means and capacity in quantity and volume that are necessary to set-up and develop the innovation in a significant and lasting manner. A company may be equipped with the required competencies and may master the necessary resources but it may be faced with a chronic weakness of means (e.g. financial). This is an extremely frustrating situation but must be identified to avoid failure. At each of the 3 levels of the resources studied, the model enables the user to identify the existence of the differential of capacity and competencies and examine if and in what manner HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 51/61 this could be overcome. Finally, it allows us to make recommendations for a strategic development (valorization) plan. Furthermore, it is important to understand that our approach through the level of resources integrates in a natural and logical fashion the 2 preliminary concepts of part 3 - the access rights and the life cycle - and this will be illustrated in the second table of part 3.4.3: - the technology resources are characteristic of the emerging phase of an activity and are the only entry barriers at the start - the initial growth phase begins with the discovery of the relevant business model - the key economic success factors to be mastered - by at least one of the players - and the development of the business supposes that the players invest heavily in technology, human and financial capital and in the same way fortify the access rights . Finally, depending on the maturity stage of the application business, this table enables us to identify the kind of needed resources that the innovator company must successively master/possess. 3.4.1. Business and Scientific legitimacy of the SNIC We crisscross/intersect the 2 legitimacies to check in a first glance whether it is possible to continue the analysis or whether it should be abandoned or if we need to keep on focus on certain parts of the “diagnostic of resources and competencies flow chart”. BUSINESS (knowledge, reputation and command of the LEGITIMACY… concerned business by the SNIC) Weak STRONG Weak RED SIGNAL Æ unable to valorize its innovation autonomously, it is necessary to license or sell out the innovation. Move to 3.4.5 ORANGE SIGNAL Æ the weak scientific legitimacy leads to an in-depth diagnosis of the company’s position on the 1 st part of the 2 SCIENTIFIC tables that follow. (academic reputation and the precedence of the R&D team in the concerned scientific domain) STRONG ORANGE SIGNAL Æ the weak business legitimacy leads to an in-depth diagnosis of the company’s position on the 2 nd part of the 2 tables that follow GREEN SIGNAL Æ the strong scientific & business legitimacy leads to a diagnostic of the company’s position only on the 3 rd part of the 2 tables that follow. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 52/61 3.4.2. Diagnosis of the innovator’s resources and competencies Does the company hold the technological resources & competencies to get the innovation defendable & durable? Yes No The company doesn’t possess all the needed technological competencies - systematic: system innovation - frequent: stand alone innovation The very nature of the technological competencies makes it impossible to defend innovation (can copy, not rare) Tactical exploitation only Can it access complementary technological competencies? Does the company hold the business competencies that correspond to the business KSF? Yes No YES NO Is it possible to acquire or develop internally these technological resources/competences? Is a partnership with some technological complementors possible? YES NO Zone of strategic liberty and choice Inevitably alone External Development Compulsory partnership YES NO Is it possible to acquire or develop internally these business competences? Is a partnership with business complementors possible? YES NO Zone of strategic liberty and choice Inevitably alone External Development Compulsory partnership Can the company gather the magnitude of resources required to establish its innovation in a successful and lasting way? Yes No YES NO Can it find investors to finance the needed resources? Is a partnership with competitors (current or potential) possible? Industrial & commercial additive alliance YES NO Zone of strategic liberty and choice Inevitably alone External Development Compulsory partnership HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 53/61 3.4.3. Competitive position, access rights and life cycle Does the company hold the technological resources & competencies to get the innovation defendable & durable ? Yes No The company doesn’t possess all the needed technological competencies (TC’s) - systematic: system innovation - frequent: stand alone innovation The very nature of the technological competencies makes it impossible to defend innovation (can copy, not rare) Tactical exploitation only Can it access complementary technological competencies? Does the company have the business competencies (BC’s) that correspond to the business KSF? Yes No YES NO Can these TC’s be developed internally or is it possible to acquire them? Is a partnership with technological complementors possible? YES NO Zone of strategic liberty and choice Alone inevitably External Development Compulsory partnership YES NO Can these BC’s be developed internally or is it possible to acquire them? Is a partnership with business complementors possible? YES NO Zone of strategic liberty / choice Alone inevitably External Development Compulsory partnership Can the company gather the magnitude of resources required to establish its innovation in a successful and lasting way ? Yes No YES NO Can it find investors to finance its resources ? Is a partnership with competitors (current or potential) possible ? Industrial & commercial additive alliance YES NO Zone of strategic liberty and choice Alone inevitably External Development Compulsory partnership Business Entry rights T E C H N O L O G I C A L R I G H T S T O Î He who finds the right business model will be the one to really start up the business growth E M E R G E N C E S T A R T - U P G R O W T H Î He who can « deploy » the resources captures the market (refer: crossing the chasm) Î He who possesses the necessary technological competencies can launch the business R I G H T S T O P R O F I T A B L E D E V E L O P M E N T E C O N O M I C A L R I G H T S T O A C C E S & S U R V I V A L Business Life stage A C C E S & E X I S T E N C E HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 54/61 3.5. Summary: Appropriable Rent and Development Just like we did at the end of Part 2, it is appropriate at this stage: 1. To study the importance of the rent left over (appropriable at this stage of the analysis, residual at the end of part 2) 2. To come up with the final rent configuration for the SNIC (refer to Part 4 which follows) In this paragraph, we shall focus on the importance of the appropriable rent rather than the configuration. Until now we used the simple and easily comprehensible concept of economic and financial rent. However, we had a rather simplistic approach as far as the evaluation method was concerned; we overlooked a key element in calculating profitability: the investments already made and those yet to be made. This was an intentional approach to simplify an already complex process and especially since evaluating the investment linked to the innovation in a small technology company is not very straightforward (will/wish, generally inexistence of an appropriate tool: analytic accounting, relation with subsidizing partners…). Not to mention many French public research institutes who, as part of their policy to work with the industry, practically give away or ask for a symbolic contribution for years of research work. In short, in case of small technology companies, it is often very difficult to estimate the investments made (earlier in time) for an innovation; we are most likely to come up with inaccurate estimations. For this reason, we have chosen to avoid integrate the investments in the rent calculation and have not adopted the NPV method. Moreover, when we analyse the innovation, it could be at different stages of technical and marketing development/progress. In certain cases, the product is ready to market, in other cases a massive technological, industrial, technical and commercial investment (spread over several years) is needed before the product finds its place in the market. An important dimension and a constraint particularly high for a small technology company: Does it have the means to undertake these investments and should it? We are not looking to calculate the exact amount to be invested but make a relative estimation in relation to its own means or those which it can have access to. As shown in the following table, we shall then compare that to the level of rent appropriable by the SNIC; this will lead us to recommendations for a development (valorization) strategy that shall be explained in detail in the next part. Possible and desirable to remain strategically autonomous, partner if useful Sell, license or partner…depending on the opportunities High Level of rent appropriability by the SNIC Low Autonomous but purely tactical Abandon, sell, license…depending on the opportunities Development Strategies Low High Relative (for the company) amount of investment needed to industrialize and launch the innovation in the market HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 55/61 4. Rent configurations and innovation development and IP strategies 4.1. The 6 Rent Configurations On the basis of the 3 composite indicators we use to assess the potential rent of the innovation, it is possible to identify 6 different types of rent configuration: 1- "Dwarf " -- ++ Volume Profit Rate Duration 3- "Gadget" -- ++ Volume Profit Rate Duration 5- "Oasis" -- ++ Volume Profit Rate Duration 2- "King of Petrol " -- ++ Volume Profit Rate Duration 4- "Joker" -- ++ Volume Profit Rate Duration 6- "Optical trap" -- ++ Volume Profit Rate Duration HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 56/61 4.2. Rent configuration & strategic value The 6 rent configurations can easily be classified on a scale of increasing strategic interest using the following diagram: Low 1 Dwarf 3 Gadget 6 Optical Trap 5 Oasis 4 Joker 2 King of Petrol High The strategic interest in turn is linked to the positioning of the rent configuration in a table which is built on the basis of the twofold value represented on one hand by the size of the application markets (rent volume) and on the other hand by the capability of the innovation to create/highlight a competitive advantage (profit rate X duration): Value of the competitive advantage (rate X duration) High Low 2 4 6 High Value & Market Attractiveness (size-volume) Low 5 3 1 But given the fact this research study limits itself to Small and New Innovative Companies (SNIC) and aims to identify the best strategies for development (valorization) and intellectual protection of their innovations, it is appropriate to introduce a criteria of “relative” value in addition to this “absolute” valuation. This “relative” value takes into account the specific and limiting – or positive - characteristics of this particular set of companies. In order to position the 6 rent configurations on this “relative” interest scale, the following factors were taken into consideration: - the greater the market size potential, the more important the “means” required, generally out of reach for SNIC - the shorter the duration of the rent exploitation, the more useful and valued the speedy and reactive characteristics of the SNIC’s Taking this approach, we know that we - more than less – accept to privilege the “normative” characteristics which are generally assigned to the SNIC’s but which are both (too) general and scientifically not validated. But, even if we shall stress on this “caricatural” typology as initially it helps us to “classify” situations, we nevertheless shall question it all the while, as and when the characteristics (innovation, activities, markets, SNIC) of the analyzed cases enable us to be specific rather than generic. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 57/61 Absolute value of the configuration - + - 6- Optical Trap 4- Joker Relative value of the configuration for a SNIC 1- Dwarf King of petrol -2 + Gadget -3 Oasis - 5 4.3. Rent configurations and specific paths Irrespective of the synthesis stage (concerning one of the 3 parts) within the model, the analysis should lead to the (new) rent configuration of the innovation and, based on this configuration, a specific path within the model is defined. The objective is “to go straight to the essential”: take into account the configuration at stake and avoid all unnecessary analyses, move quickly to the recommendations for development and protection strategies. For example, once the potential rent has been estimated, the following paths – and it is at this particular stage that they are the more complex and detailed - are recommended: “Dwarf”: don’t continue the analysis, move immediately to the recommendations and conclude that is impossible to valorize this kind of innovation. Gadget: make sure that the profit rate (the only interesting characteristic of this configuration) will still be important (Part 2.2 and probably 2.4 and 2.5 of the model and then 3.2) before analyzing the capability of the SNIC to quickly capture this rent (competition Part 3.3 to 3.5). Oasis: firstly examine the sustainability of the potential rent duration (Part 2.3 and probably 2.4 and 2.5), then of its profit rate (see gadget path), before possibly continuing with the rest of Part 3 when these hypotheses have been checked out. Optical Trap: firstly determine the sustainability of the potential rent volume (Part 2.1 and probably 2.4 and 2.5), then of its profit rate (see gadget path) and if, necessary, judge the competitive position of the SNIC (Part 3) Joker: Run the entire model. King of petrol: Run the entire model. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 58/61 4.4. Configuration, Development and Protection The different types of development within the model: Firstly we would like to remind that in our report, the term “development” or “valorization” doesn’t only apply to “outsourced” exploitations of the innovation, the classical understanding within the IP specialists’ world. Instead it integrates all the ways and possibilities to “extract value” from an innovation and covers the following 5 development scenarios: • Abandon: In the case where the analysis carried out proves that the “appropriable” rent that may be extracted from the innovation is weak and given the natural failure risk of implementing any innovation, it seems better to stop the “damage” and freeze all current and future investments linked to this innovation. • Autonomous/Independent Development: In such cases, rare for a SNIC but assessed as most interesting by their management, the innovating company is able to get - alone - a good valorization of its innovation. It even has to proceed in such a manner to capture the maximum value. • Cooperative Development: Contrary to the previous case - and for reasons linked either to the nature of the innovation (system innovation) or to the environment structure (strength of suppliers for example) or further to the limited mastering/means of the innovator face to the business KSF - in order to extract value from its innovation the SNIC is condemned to develop and exploit its innovation with partners and complementors. Normally such a situation would reduce the rent it could appropriate but, without these partners, it would not be able to appropriate anything. Better choose a win – win solution and share than get nothing. The nature of such partnerships will vary depending of the situation and the more partners needed, the more difficult it will be to put in place/launch the innovation (mayonnaise effect). • Licensing: In such a case, the exploitation of the innovation is beyond the reach of the SNIC, alone or even in partnership (generally the rent volume is too great for the means of the SNIC). To capture value, one is required to “license” the exploitation of the innovation to other companies (in general the “big” players). The most favorable solution for the licensor – i.e. which permits him to keep some power (divide & rule policy) - is to share the license between several players playing on the dual functions of production and sales, the different possible application fields and the different possible geographic zones. • Sell-out: In this case, the SNIC sells its innovation that means that, like in the previous case, it managed to protect it legally. In fact the choice between sale and licensing is more the outcome of a negotiation (objectives, interest…) between actors rather than a decision of the SNIC. Keeping in mind all the previous analyses, the strategies for development and intellectual protection of our 6 configurations can be presented in the following manner: HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 59/61 Case of “standalone” innovations Existing market Market to be created f 1 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 nonpatentable), 2) in a confidential medium (so that the competitor’s chances of discovering it and exploiting it are weak) and 3) nationally or abroad. 3 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. 5 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. 6 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 F 4 - 2 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 in partnership to prove and valorize (market share and brand), keeping in mind that in case you don’t make it big, you will have to 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 (118 countries). Direct filing in the US. Allocate partial licenses or sales. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 60/61 Case of “system” innovations Existing market Market to be created f 1 Development: abandon, except for Meccano type if the innovation convinces the architect. Protection: General Case: In order to avoid all likely appropriation, publish the invention in a confidential medium, locally or abroad. Meccano case: file a “smoky screen” patent in France, 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 it (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. 3 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). 5 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. 6 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. F 4 - 2 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. HEC-INPI Research Study 23/03/2004 ?HEC-LINEN/INPI 61/61 Complementary elements for innovations the applications of which concern heterogeneous businesses - When an innovation has several application fields, the model enables the user to handle them separately in Part 2 and 3 and thus come with rent configurations which can differ immensely from one application to another. This is a model that enables the user to scan the different possible business applications of an innovation and position them in a table that summarizes recommendations for development and protection. Certain applications will have to be abandoned (a situation which is relatively easy to handle if interesting business alternatives for development exist), some will be within the reach of the STIC, in partnership or independently, and others will have to be licensed or sold out. But, using this analysis, anyone will be able to outline the business and/or geographic limitations of the different applications that could or ought to restrict the coverage/scope of the license (or sale) so as to retain (or not – but this will be a choice) the application domains that the SNIC can be develop autonomously or in cooperation. • When the innovation concerns an interesting industry type (volume or specialization) and the analysis leads to an external development recommendation (license or sell-out), it is important to differentiate the recommendation according to the 2 kinds of industry type: - Volume: The licensee will have to follow the business rules of the industry, i.e.: have a broad vision of the business in terms of geography, segments and aim to capture a maximum market share. In such a situation, it is very unlikely that the SNIC can keep a “little” acceptable bit for itself, an amount that would be excluded from the sale or license transaction; unless the other party has extremely good intentions (but generally it will ask for a financial compensation which will be out of proportion with the reserved “bit” of the SNIC). - Specialization: On the contrary, in this type the industry is not homogeneous and several different positions are possible. A particular positioning for a limited strategic segment could either be excluded from the sale transaction or reserved exclusively for the seller, i.e. the SNIC, without causing any damage for the buyer or license holder.