To understand innovation according to Teece, it is necessary to understand where he comes from. David J. Teece has strong roots in Silicon Valley, particularly in its early influencual period in the 1980s. His thinking is therefore influenced by the Bay Area ecosystem. Technique is not his starting point as Teece is an economist, who initially focused on transaction costs, taking place while transfers and changes.
At the beginning of his career, he took a great interest in transaction costs, especially the hidden costs when using someone else’s technology, digging deeper into practicality of technology tranfer, not only monetary terms such as royalties.
In this sense, he shows that technology transfer involves costs, and that it is not a simple transaction. Even if the technology is available, one has to be able to integrate it.
Tacit knowledge
Tacit knowledge is that which is not immediately usable, in the sense that the person having such knowledge must explain it to you in person so that you can acquire it. This knowledge is hidden in the routines. To integrate it, it must be explained to you and you must have the ability to understand, to integrate it. A successful technology transfer depends on one’s ability to integrate it.
Teece helps us anwer a very important question in business : should I develop the technology myself or should I integrate an external technology (buy or licence)? Teece conceptualized in the company as a space, where the crucial question of boundaries (closed or permissive).
In 1986, Teece takes a step back with respect to this question whether or not a technology should be develop internally or externally. He addresses the ability of a company to capture the profits of an innovation.
Tacit knowledge complicates a possible transfer, favours the one who creates, handicaps the one who wishes to acquire it. Teece is therefore a fervent advocate of the knowledge economy, where every asset is linked to knowledge.
Strategy as a compass
In most cases, the company’s organisation with respect to technology acquisition will change depending on the targeted innovation. There is often a “mix” of technology purchases, licences or alliances.This organisation become more complex when highly strategic technologies are at stake.
To answer the exciting question “When to innovate?”, Teece develops a model called PFI (profit from innovation), the success of which depends on 2 factors:
— appropriability regime: to what extent the technology is legally and/or in its very nature protectable ?
— complementary assets of the company: meaning the technology can be used by the company. Teece had 3 distinctive categories : “generic, specialized or co-specialised” assets
When evaluating an innovation, an order of thoughts has to be respected: if we cannot appropriate it, the complementary assets will not be of much help.
When innovation is mentionned, Teece put himself into the boots of a pioneer, who brings a new product to the market.
The concept of actions has been linked by Teece to the concept of complementary resource. Such actions are undertaken when an actor may counter-intuitively, or under some other motivation, voluntarily weaken the appropriability of an innovation because this actor has complementary assets. For instance, one may wonder which motivation Tesla had to put its patents in the public domain, apart to accelerate the adoption of electric cars, but above all to create a standard to benefit from, as Tesla would have the productive capacities and tacit knowledge to profit from this standard.
One may wonder which motivation Tesla had to put its patents in the public domain, apart to accelerate the adoption of electric cars, but above all to create a standard to benefit from
Teece makes it possible to highlight these two concepts, the combination of which makes it possible to know whether “to do yourself” or to “have it done”. Teece also develops a third path: the alliance.
In short, if there is a high degree of appropriability, one could think of making links to those who have complementary generic assets (which could therefore exploit this innovation).
On the other hand, as soon as appropriability is not strong, one must focus on the complementary assets one holds. When a technology transfer happens, it is necessary to evaluate the costs involved and also the compatibility between corporate cultures.
Teece stressed the risks of alliances, but he realized that this could be indispensable for some innovations.
When it comes to open innovation, Teece is close to Chesbrough, underlining the same need to create ties with other economic players, especially to improve technology. Teece distinguishes good will to be open and this openness implementation, with its famous “Not invented here” syndrome. Being open in innovation means creating an openness culture so that technical teams embrace what is done outside the organization as of it was theirs.
Intellectual property as a transfer tool
Teece pays a great interest in Intellectual Property (IP) as a formal tool for the legal transfer of innovations. It is used to valorise the innovation itself, but it is also used to valorise the complementary assets. Putting one’s IP rights in the public domain allows competing players to adopt a technology and thus value one’s complementary assets allowing this innovation to be commercialized. This practice is interesting in complex innovations (collaboration and inputs from others is very helpful) or sectors where a standard can be created (heavy industry or programming languages [including blockchains technologies]).
In short, there are 3 main IP strategies: a proprietary strategy, a defensive strategy and a leverage strategy. Depending on whether the company has an integration strategy or not on a technology (to what extent do you need to own the technology you want to use), the IP strategy will have to be adapted.
Teece also mentions how to acquire capabilities. Depending on the type, there are capabilities to integrate, build and reconfigure according to the evolution of the environment.
Open innovation relies on ownership as to share, one needs to own in the first place. An economic actor always seems to share in its own interest (to profit form this openness either in a monetary or non-monetary way [reputation for instance]).
Finally, pursuant to Teece, strategy has to be thought of before business model. Business modeling has to be made through the prism of one’s dynamic capabilities. Some innovative business models seem to be easy to replicate: the description is simple but the implementation is much more complicated. The strategy is about choosing its business model according to one’s dynamic capabilities.
Be aware of your assets before innovating
As a conclusion, Teece answers a fundamental question about innovation. By reading business papers, EVERY company should innovate in the “hot” topics of the moment but Teece tells us otherwise. Your innovation strategy should not be based on trends but it must be built upon the degree of innovation appropriability and the available assets you have for this innovation.
