Economics

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INNOVATION
Innovation presents a dilemma for managers. On the one hand, innovation is proffered as an elixir for growth, profitability, and competitive advantage. On the other hand, there are no guarantees that innovators will be rewarded for their efforts. The challenge is not just creating value from innovation, but capturing that value as well. Therefore, the profitability of an innovation to the innovator depends on the value created by the innovation and the share of that value that the innovator is able to appropriate. The value created by an innovation is distributed among a number of different parties. In the case of the personal computer, for example, the innovators – Apple, Xerox, etc. – earned modest profits from their innovation. The imitators – IBM, Dell, Compaq, Toshiba, etc. – earned rather more in total profits. Nevertheless, their returns were overshadowed by the huge profits earned by the suppliers to the industry: Intel, Quantum Corp., etc. However, because of strong competition in the industry, the greatest part of the value created by the personal computer was appropriated by customers, who typically paid prices for their PCs that were far below the value that they derived. The extent to which innovators are able to appropriate the value of their innovation are determined by mainly four factors. Firstly, the ability to establish property rights in the innovation. Secondly, the ease with which the technology can be comprehended and communicated and the complexity of the technology. Thirdly, the time that innovators have to build an advantage before other firms enter the market. And finally, the disposal of complementary resources. However, companies that own and influence industry standards are those capable of earning returns that are unmatched by any other type of competitive advantage. And therefore the existence of Standard Wars, that are the battle for market dominance between incompatible technologies. Virtually every high-tech...
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