Today’s class
6. Technological competition
6.1 Management of innovation/
EMI update and takeaways
6.2 Network effects and standards
EMI update
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Powell decided that
– priority to be given to fan beam technology, US subsidiary to
do the R&D
– US should have fully integrated manufacturing facilities
Market development: demand drops from 470 scanners in 1976 to
– 1977: 350
– 1978: 230
– 1979: 175
– 1980: 185
(Compare with industry manufacturing capacity of 900/yr.)
Intense competition; first $99,000 scanners appear on market
EMI update (2)
 By 1980, US market has 5.7 scanners per million
population. Maximum potential for developed country
estimated at 6/million
 Consequences: shakeout
– 12 companies drop out in 1976-80, including GD, Searle,
Pfizer; Technicare sold out to Johnson and Johnson
 EMI Medical division profits fall from £9.23M in ‘75 to
£(7.5)M in 1978
 US subsidiary has trouble with fan beam technology; in
1978 Hounsfield and UK team have to come to assist
EMI update (3)
 US plant commissioned just as demand begins to drop
 In October 1979, Hounsfield receives Nobel Prize in
Medicine
 In same month, problems at EMI Medical force it to
accept takeover from Thorn Electric
 Thorn divested medical division within months to GE.
US Antitrust forced GE to divest; sold to tiny OMNI
Medical Services.
Profiting from Innovations
 Great Ideas = pots of money? No!
 Four factors determine appropriability of returns to
innovation (see Grant chapter):
1. Property rights in innovation: how effective is protection by
patents copyrights, trade secrets?
2. Technology: Is it codifiable? How complex is it?
3. Lead time: How fast can others catch up if they have access to
technology (and innovator doesn’t do anything about it)?
4. Complementary resources: resources and capabilities to
finance, produce and market the innovation
Strategic options
 Three basic options
1. Go alone: success depends on all four factors above
2. Joint venture: good if partner brings in missing complementary
resources
3. License/sell right away: good if innovator has little value to add
beyond initial innovation
 Problem with 2. and 3.: What prevents partner/licensee
from walking away with innovation?
– Need good protection of intellectual property rights for
contractual arrangements to work
EMI’s choice in (A) case
 Novelty and value of innovation irrelevant!
 Appropriability of returns from EMI’s CT scanner
– Major breakthrough is basic idea, not the details
 Patent protection apparently weak
 Easy for others in medical equipment industry to imitate or
(GE) even improve technology
– EMI lacks manufacturing and marketing capability, has to
outsource a lot
 But weak patent protection also rules out
licensing/selling, even if GE would add greater value
 In the end, EMI perhaps had little choice but to go alone
EMI (B): Market analysis/
product life cycle
 EMI’s best course of action in 1976 depends on
expected market developments and on EMI’s position
in market
 With a new durable good,
– Current demand during initial adoption stage says little about
when saturation stage will be reached
– Look at potential total demand, market history and current
industry capacity to forecast when market will be saturated
 If market is expected to shrink, will EMI be among the
survivors?
 What are appropriate “end game” strategies?
EMI (B): Competitive advantage
 Is EMI market leader because others are still catching
up or because EMI has a true competitive advantage?
 Look at dimensions on which to compete in this
industry: Cost, technological leadership, service
– How is EMI doing on each dimension?
 If EMI has an advantage, is it a sustainable one?
– Go through the usual catalog of factors (impediments to
imitation, FMA)
– Do any of these apply to EMI in 1976?
EMI (B): First mover vs.
first-mover advantage
 Advantages from being the first mover:
– Short run: enjoy market power until entry
– Long-run: ability to build strong market position, i.e. real firstmover advantage.
 Often tradeoff between
1. maximizing value of pre-entry market power and
2. building long-run advantage.
– E.g. how much resources should be allocated to customer
service, patent protection etc.?
 EMI seems to have focused on 1.
EMI (B): Organization matters!
 EMI’s problems are rooted in organizational structure
– R&D, production and executive decision making 3000 miles
away from main market
– Separation of functions and geographic areas is emphasized
by formal structure
– Results: bad link of different parts of organization in terms of
information, control, and planning; parochial attitudes
 In fast-moving technology markets, need to sense
changes in environment and respond effectively