The Critical Factors Which Determine the Extent to Which Innovators Are Able to Appropriate the Value of Their Innovation

In the context of technology-based industries and the management of innovation, analyze the critical factors which determine the extent to which innovators are able to appropriate the value of their innovation.

In the 21st century where deregulation and internationalization is increasing, it is crucial for firms to identify their distinctive capabilities so that they have a competitive advantage which will give them an edge over competing firms. And in the case of technology-based industries, the principal link between technology and competitive advantage is innovation. Innovation is not to be confused with invention. Invention is merely the creation of a new product or process using knowledge but innovation is achieved when profits are generated by commercialization, production and marketing of the invention. For example, a microchip is an invention but the credit card is the innovation from this. So clearly, invention does not give one a competitive advantage, and it is innovation that does. However, being able to generate profits alone is not sufficient, the profits must be appropriable to the firm itself. In this essay, I shall attempt to examine factors that will determine the extent to which innovators are able to appropriate the value of their innovation.

There are numerous stakeholders – innovator, customers, suppliers and rivals (followers), so what determines the size of the innovation pie each stakeholder gets? An example of the division of the pie can be seen in the personal computer industry. The pioneer of personal computer, Apple, only managed to earn modest profits from their innovation whereas their rival (follower), IBM did slightly better. However, a larger slice of the pie was obtained by the suppliers, Intel in microprocessors, Seagate in disk-drives and Microsoft in operating systems. But the stakeholder who had the largest slice was the customers as intense price competition amongst rivals drove profits down. Why is this so? There are four...