Global Innovation Management

cottonseedfearnotElectronics - Devices

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


Global Innovation Management

Global Innovation

Assessing the
Potential of a

Global Innovation Management


Two assets are complementary

if the consumer usually purchases them

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

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


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

Vendor lock
in (a.k.a.
proprietary lock
, or

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

usually prevents customers from using another vendor without
substantial switching costs

in costs which create barriers to market entry are

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


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

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 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

Global Innovation Management


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


The Filofax brand of personal filing and diary

is not compatible with standard paper and
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 presented the first significant model for understanding of how lock
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
nothing situation

customers often felt that lock
in was an acceptable price

Global Innovation Management


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's application software also exhibits lock
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


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

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


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

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


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

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

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


Can you make a case for the new tool in its

the direct
advertising that had been allowed by the

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

How then would you market drugs?