HOW TO PROFIT FROM INNOVATIONS?

Why do some innovators make money whereas others do not? Why was the iPhone so profitable whereas Tivo made no money? Is it just luck or is there something more to it? Above all, is there a way to predict which innovations will be profitable?

Luckily the answer is yes. There are some structural causes for profits from inventions. The same forces dictate whether an innovator makes money from its inventions or a third party does. These forces explain how to profit from innovations?

The Secret is Innovation Capabilities

Who makes money from innovation depends on the kind of capabilities one has? A capability is an ability to achieve a goal. Just as you have the skills like cooking, playing an instrument, or playing a sport, companies also have skills. But companies are a collection of people, assets, and resources. As a result, their skills are more complex and exist in a distributed manner. A capability for a company is akin to a skill to an individual. A capability allows a company to achieve a goal in a reliable and repeatable manner.

There are some structural causes for profits from inventions

Companies need specialized skills to produce innovations.  Such Innovation capabilities consist of many sub-capabilities due to the complex nature of innovation. These sub-capabilities can be categorized into core and complementary capabilities.

The Two Innovation Capabilities

A core capability is the ability to produce an invention. It involves abilities to envision, design, test and create something new. Design and R&D capabilities fall into this category. Without it, a firm cannot invent something new in a predictable and repeatable manner.

Complementary capabilities enable a firm to take inventions to the market. They allow the prototypes to be delivered and consumed by numerous buyers. They include capabilities such as mass manufacturing, marketing, after sales and others. These capabilities roughly correlate with commercialization capabilities.

How to profit from innovations?

The core capabilities drive invention. But, the gains from innovation arise due to complementary skills.  Often, the firms who own complimentary capabilities make the profit from inventions.

A company that doesn’t control complementary capabilities has to rely on other enterprises. Such third parties expect some degree of profit sharing. How the inventor and commercializer split profits depends on the ease of imitation of the invention. The easier it is to imitate a device, the greater the profits squeezed by the third party. When the ease of copying is almost nil, the inventor makes most of the money.

Patent Regime and Ease of Imitation

How easy it is to imitate an invention depends on the nature of the patent system. It means it depends on how well protected is an inventor’s intellectual property. High protection implies a strong patent regime and vice versa.

How easy it is to imitate an invention depends on the nature of the patent system

In a strong patent system, the commercializer cannot imitate the invention. As a result, it competes with other commercializers for the commercialization services. In such a scenario, it is hard to squeeze substantial profits from the inventor. In a weak patent regime, the inventor is unable to protect the invention. As a result, it has to share a larger part of the profits from the invention.

Apple vs TiVo

Apple had superior core capabilities as seen by its many inventions over the last 20 years. It also built complementary skills. Although it had access to distribution channels, it created its retail footprint. It also possessed the resources to take any patent infringer to court. In fact, it took Samsung to court for patent infringement and prevented imitation. It is no surprise that it received all the profits from the invention of iPhone.

TiVo produced an amazing DVR but had no commercialization capabilities. As a result, it was at the mercy of others to commercialize its invention. As a result, it had to share profits with the commercializers. It ended up giving up most of its profits to companies that sold its invention.

Although TiVo had the patents, it didn’t have the resources to enforce them in a court of law. As a result, when others copied features of its DVR, TiVo just couldn’t enforce the patents. It would have gone bankrupt if it had gone into legal proceedings.

The answer to these questions will determine whether you will make profits form your innovations or not

The Lesson

Core capabilities drive invention, but complementary skills drive profits. If you are the inventor, how are you going to commercialize the invention? If you will rely on third parties, how will the profits be shared? The answer to these questions will determine whether you will make profits from your innovations or not.