Teece's Win-Lose Innovation Model
Launching Your Innovation Without Being Crushed
RC Cola® was a small beverage company in Columbus, Georgia. In 1905, its owner, Claud A. Hatcher, decided to produce his own soft drinks, after a disagreement with a local bottler. RC Cola became the first company to sell cola in a can; it was also the first to produce diet cola.
However, it wasn't long before rival companies Coca-Cola® and Pepsi® followed suit, and they dominated the market almost immediately thanks to their extensive investment in advertising, marketing and distribution. As a result, RC Cola lost any significant competitive advantage from its inventive new ideas.
The story of RC Cola's downfall led organizational theorist and business professor David Teece to ask a fundamental question – how do organizations profit from their own innovation? He discussed his findings in his 1986 paper, "Profiting From Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy," which is still widely influential today.
In this article, we'll examine Teece's theory, and we'll explore how you can use it to capitalize on innovation and get ahead of the competition.
The Formula for Success
Teece described two kinds of organizations – innovators and imitators. Innovators are the first to commercialize a new product or service, like RC Cola in our opening example. Imitators are competitors who copy an aspect of that new product or service, and market it as their own. Imitators often profit more than innovators because they adapt the original design, protect their product, and secure the resources they need to achieve commercial success.
To make sure that you, not an imitator, succeed with your innovation, you need to think about the following three areas:
1. Protecting the Idea ("Appropriability Regime")
Imagine that you have an exciting idea for a new product or design. You've got to protect it before your competitors (the imitators) come along and copy it. Without the proper protection, you won't be able to profit from the innovation that you worked so hard to develop.
At this stage, it may be appropriate to apply for effective intellectual property rights (IPR) protection. For example, and depending on governing law, you should secure patents and register copyrights to prevent your competitors from using your intellectual property.
It's important to lock in your ideas legally as early as you sensibly can, but it's not always easy. You need to do legal work meticulously, to avoid creating loop-holes that allow imitators to move in and take your innovations.
See our article, VRIO Analysis, for other ways to make the most of your resources.
How you protect your IP will depend on national law, so talk to an appropriate lawyer about how to do it. This will be expensive, but the right advice can pay for itself many times over.
2. Finding the Dominant Design ("Dominant Design Paradigm")
Once your product is out in the market, your competitors can deconstruct it to understand what's unique about it, and then launch their own competing, and perhaps improved, variants. You need to respond to this, and this can then lead to competitive cycles of improvement, until one design emerges as a "winner" or "dominant design" by meeting customers' needs most effectively.
Adapting an existing idea is often easier and faster than coming up with a new one, so your competitors may be able to do this quite quickly. They can develop variations of your basic design, analyze how the market responds, and dedicate all of their resources to producing and marketing the version that received the most positive reaction. You need to anticipate their actions, and work fast to ensure that your design comes out as the dominant design.
According to Teece, achieving the dominant design is influenced by collateral assets (such as marketing channels and brand image), government and industry regulations, and technological advances within the industry. At the same time, a dominant design will pay for an organization to invest in the systems and infrastructure that will ensure that its success continues.
3. Reaching Scale Quickly ("Complementary Assets")
Successful innovators know that capturing a niche in the market takes more than coming up with a good design. Even a great technological innovation will be wasted without the ability to scale marketing, production, sales, human resources, customer service, and other parts of an organization's infrastructure aggressively and successfully.
As the market becomes more competitive, you may also require specialized support to help you to commercialize your product successfully. For example, imagine that you've come up with a new engine design. You'll need specially adapted repair facilities and tools to support it.
Some companies may choose to develop all of these services internally, while others might get them from external suppliers. However, many will use a combination of the two.
How to Use the Tool
You can use Teece's model as steps in your business planning process. For example, if you develop a great product but it has design flaws that leave it vulnerable to imitation, solid legal protection will buy you time to create a dominant design and put the necessary support services in place.
In other words, if you've secured solid patents for your product, and put in place the marketing and distribution channels to support it, you'll have more time to find the design that meets your customers' needs most effectively before the competition steps in.
Let's look at how you can apply each factor in more detail.
Protecting the idea – can you patent or protect your product, or do you have some other way of retaining control of it? (For example, if you're using a key resource, have you secured an exclusive supply of it?)
If not, it's important to realize that you may have little power to protect your idea, and that others can easily profit from it.
This is where either you'll need to move very quickly once you've launched, or you'll need to look for alternatives – venture capitalists are unlikely to invest in an idea that they can't either protect or scale quickly, so you need to ask yourself if it's worth investing your own time and money.
Finding the dominant design – is your product's design easy for your competitors to imitate? Can you develop a design that will protect you from duplication? Make sure that you plan how to deal with any dominant competitors – Game Theory can be useful here.
You'll also need to plan how you'll develop your marketing and distribution channels and your brand image before you launch your new design. By doing this, you can strengthen your position when competitors enter the market.
In this stage, you need to gear up to iterate as fast as you can through minimum viable products and build-measure-learn loops, so that it's you who develops and exploits the dominant design, not the competition.
- Reaching scale quickly – do you have the capability to optimize your resources quickly, in the necessary areas? Can you quickly scale up production and put into place the marketing and distribution channels needed to get your product to market in a high-quality way? If not, should you partner with someone who can? Or perhaps license your idea to a major player in the market?
To become more aware of what's happening in your market, see our article on Competitive Intelligence. To learn more about making effective strategic choices, see Lafley and Martin's Five Step Strategy Model. And to find out about another way to approach innovation in products and services, see The Innovation Circle.
Teece's Win-Lose Innovation model was developed by David Teece to ask, and answer, a fundamental question – how do organizations profit from their own innovation? The solution is to develop three cornerstones of capitalizing on creativity – protect your idea, find the dominant design, and reach scale quickly.
When all three of these elements are in place, organizations can develop innovative designs, protect their products, and secure the resources they need to profit from those innovations.
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