Global Innovation Management

cottonseedfearnotElectronics - Devices

Nov 7, 2013 (3 years and 9 months ago)

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Global Innovation Management

Global Innovation
Management


Assessing the
Potential of a
Business


Global Innovation Management

Definition


Two assets are complementary


if the consumer usually purchases them
separately,


but must use them together to realize their
full value


Classic example



safety razor


Gillette’s patented, high profit
-
margin stamped
steel disposable blade


Urban myth:


the story is told that Gillette gave his razors
away and made his millions by selling the
blades


but this is a myth, as his razor retailed for a
substantial $5


almost $134 in 2006 dollars


half the average
workingman's weekly pay



Still, it sold by the millions, with tens of
millions of blades to follow


Global Innovation Management

New product or service


Investors need to consider that choice of
market in which the product competes


This is nearly always dictated by:


the existing base of complementary assets,


who owns them, and


how complex they are


Global Innovation Management

Pricing


Two main types of pricing strategy exist for
complementary good and its base good:


Pricing the base good at a relatively low price
to the complementary good


this approach allows easy entry by consumers


e.g. consumer printer vs ink jet cartridge


Pricing the base good at a relatively high price
to the complementary good


this approach creates a barrier to entry and exit


e.g. golf club membership vs green fees



Global Innovation Management

Razors and Blades


Bundling (or tying) of the sales of complementary assets


present sellers with unique competitive strategies by which they can profit from
those complementarities


Some kinds of bundling, especially by contract, have historically been
regarded as anti
-
competitive (and thus illegal)


it is implied in this that one or more components of the package are sold
individually by other businesses as their primary product, and thereby this
bundling of goods would hurt their business



Bundling may also be a form of price discrimination:


people who use more blades


pay disproportionately more than those who just need a one
-
time shave



Bundling may be used with patents or copyrights to help protect entry into
a market,


Global Innovation Management

Types of Bundling of
Complementary Assets


Mixed bundling occurs when consumers are offered a
choice between the purchasing the entire bundle or one
of the separate parts of the bundle


Pure bundling occurs when a consumer can only
purchase the entire bundle or nothing


Pure bundling can be further divided into two cases:



Joint bundling: the two products are offered together for
one bundled price


Leader bundling: a leader product is offered for discount
if purchased with a non
-
leader product


Global Innovation Management

Vendor lock
-
in


Vendor lock
-
in (a.k.a.
proprietary lock
-
in
, or
customer
lock
-
in
)


makes a customer dependent on a vendor for products and
services, and


usually prevents customers from using another vendor without
substantial switching costs


Lock
-
in costs which create barriers to market entry are
anti
-
competitive


One way to create artificial lock
-
in for items without it is
to create loyalty schemes


frequent flyer miles


points systems associated with credit card offers


loss or cost when switching to a competitor (telephone)



Global Innovation Management

Durable and Non
-
Durable Parts


King Gillette’s razor and blades business model involves products
which regularly consume some material, part, or supply


A reusable (or durable product) is sold inexpensively, and


the company draws its profits from the sale of consumable parts that
the product uses



To ensure the original company alone receives the profits from the
sales of consumable, they use a proprietary approach to exclude
other companies


Inkjet computer printers are a common example of this model.




Global Innovation Management

Cameras



On many cameras,


the lens can be removed and replaced with a different lens;


this is known as an interchangeable lens system.


The lenses are an important accessory to the camera and a source
of revenue for whoever makes the lens


Since 1989, interchangeable lenses have often had electronics in
them to communicate with the camera body


Manufacturers attempt to create lock
-
in by not disclosing how the lens
communicates;


requiring competitors to either pay licensing fees for the information or
else reverse engineer the system


Consumers wishing to switch brands are thus required to replace
not just the camera, but also the lenses and many accessories,
often a complex and expensive proposition.


Global Innovation Management

Automobiles


Automobiles are often made with certain parts,



such as car stereos,


which might be interchangeable


Manufacturers will attempt to create lock
-
in by


making the stereo unit an unusual size and shape instead of a
standard one, or


creating a unique way for the dashboard part of the stereo to
control a CD Changer in the trunk.


Various standards organizations,


such as the US Department of Transportation


regulate the design of certain automobile components to prevent
vendor lock
-
in.


Global Innovation Management

Furniture



The furniture chain Ikea


sells beds only of European standard sizes in
the UK


where standard sizes are different,


encouraging owners to buy their fitted bed
-
linen from Ikea


Global Innovation Management

Filofax



The Filofax brand of personal filing and diary
products,



is not compatible with standard paper and
ring
-
binder sizes,


so users can buy additional filing supplies only
from Filofax


Costs are several hundred percent above
those of comparable stationery supplies in
standard sizes and formats.


Global Innovation Management

Computer Industry


Vendor lock
-
in is common in the computer and electronics industries


Hardware and software,


create situations in which there is a lack of compatibility or
interoperability between equivalent components


This can make it difficult to switch systems at many levels;



the application program,


the file format,


the operating system,



various pieces of computer hardware


ranging from a video card


to a whole computer or


to an entire network of computers


Global Innovation Management

IBM



IBM presented the first significant model for understanding of how lock
-
in
affected the computer industry


IBM had significant lock
-
in of the punchcard industry from its earliest days;


IBM extended to dominance of the mainframe computer market,


and then to the operating systems and application programs for computers


Third party products existed for some areas,


but customers then faced the prospect


of having to prove which vendor was at fault if, say, a third party printer didn't work
correctly with an IBM computer


And IBM's warranties and service agreements often stipulated that they would
not support systems with non
-
IBM components attached


This put customers into an all
-
or
-
nothing situation



customers often felt that lock
-
in was an acceptable price


Global Innovation Management

Microsoft



Microsoft software carries a high level of vendor lock
-
in, based on its
extensive set of proprietary APIs.


Their degree of lock
-
in combined with their market share has made them
subject to a number of antitrust lawsuits.


The European Commission, in 2004 :


"The Windows API is so broad, so deep, and so functional that most ISVs would be
crazy not to use it. And it is so deeply embedded in the source code of many Windows
apps that there is a huge switching cost to using a different operating system instead...


"It is this switching cost that has given the customers the patience to stick with
Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy
vision at times, and many other difficulties [...] Customers constantly evaluate other
desktop platforms, [but] it would be so much work to move over that they hope we
just improve Windows rather than force them to move.


"In short, without this exclusive franchise called the Windows API, we would have been
dead a long time ago."


Global Innovation Management

Microsoft


Microsoft's application software also exhibits lock
-
in
through the use of proprietary file formats



Microsoft Word and Microsoft Outlook


Both use proprietary datastore files and interfaces


which are impossible to read without being parsed,


and such parsers may in turn not be able to exist legally without
performing reverse engineering


Global Innovation Management

Apple



iPod, iPhone and iTunes products are subject to significant vendor lock
-
in


when you buy an iPod, your only music organization software choice is iTunes,


which only operates if you also install QuickTime,


which only installs in a mode that changes functionality in FireFox


so that when you click on any mp3 file from any website,


Apple's QuickTime will open instead of your web mp3 player technology of choice


Therefore, buying an iPod means that your Firefox choices are taken away,


even though the use case of Firefox is completely unrelated to the use case of an iPod




When digital music files with digital rights management are purchased from the
iTunes music store,


they are encoded in a proprietary derivative of the .AAC format


that is only compatible with Apple's own iPod and iPhone portable digital music players



Global Innovation Management

Sony



Probably Sony's most famous example of lock
-
in was the Betamax VCR system


Since then, Sony has also used lock
-
in as a business tool in many other applications,


and has a long history of engineering proprietary solutions to enforce lock
-
in



Sony is frequently at the heart of Format Wars, in which two or more such cartels
battle to capture a market and win the lock.



Examples of Sony's formats include:


audio Elcaset


audio or computer data Minidisc and the related ATRAC3 encoding system


Betamax, Video
-
8, Hi8, Digital8, and MicroMV videotape formats


PlayStation Portable Universal Media Disc


Memory Sticks, used for a wide variety of applications in Sony products


In contrast, Blu
-
ray Disc was developed by a large group of manufacturers which
includes Sony but in which they do not have a controlling position.


Global Innovation Management

Case Study

Viagra

1.
Some might say that the marketing strategy for
Viagra, no matter how successful it ultimately was,
severely tested some ethical principles. Would you
agree?


If so, what should Pfizer have done differently? How
would they explain this action to their stockholders?

2.
How many drugs or food products can you think of
that might be amenable to Pfizer’s strategy of
asking marketing to ‘find’ a ‘disease’ that regarded
that particular food or drug as a cure?


Global Innovation Management

Case Study

Viagra

3.
Can you make a case for the new tool in its
marketing


the direct
-
to
-
consumer
advertising that had been allowed by the
FDA?

4.
Can you make a case for not allowing
direct
-
to
-
consumer advertising, and letting
drugs only be prescribed under the advice
of physicians?


How then would you market drugs?