Profiting From Innovation

Innovators—firms that are the first to commercialize a new product or process in the market—do not always profit the most from their innovation. Sometimes a fast second entrant or even a slow third will outperform the innovator. The technology behind the computerized axial tomography (CAT) scanner, now a standard medical diagnostic tool, was developed in the late 1960s by a senior engineer at EMI Ltd., a diversified U.K.-headquartered entertainment and electronics conglomerate. Although EMI brought the technology to market fairly quickly, introducing a commercial model in the United States in 1973, 8 years later it had dropped out of the scanner business, leaving the market to later entrants. The EMI story is far from unique. The earliest vendors of microcomputers for home use (R2E, CTC, MITS, Commodore) are all but forgotten today. Xerox (in its PARC laboratory) and Apple invented the graphical user interface, but Microsoft Windows dominates the PC market with its follow-on version. Apple’s iPod was not the first portable digital music player, but it has a commanding position in the category today. Merck was a pioneer in cholesterol-lowering drugs (Zocor), but Pfizer, a late entrant, secured a superior market position with Lipitor. At first glance, it is tempting to say that these examples reflect the result of creative destruction as described by Joseph Schumpeter. But creative destruction results from challenges by disruptive technology, while the cases cited above involved mostly incremental/imitative entrants building on the efforts of the pioneer. This is not to say that there is no such thing as a first-mover advantage. Genentech was a pioneer in using biotechnology to discover and develop drugs, and 30 years later was the second largest biotechnology firm, right up to its acquisition by Hoffmann-La Roche in 2009. Intel co-invented the microprocessor and still has a leading market position 40 years later. Dell pioneered a new distribution system for personal computers and, despite recent challenges and many would-be imitators, remains one of the world’s leading PC vendors. Toyota’s much studied production system has provided the automaker a source of competitive advantage for decades, contributing to the company’s becoming the world’s biggest car manufacturer in 2008. The profiting from innovation (PFI) framework, introduced in a highly cited 1986 article by David J. Teece, provides deep insight into cases where industry pioneers thrived and those where they vanished. This entry explains the fundamental concepts of the theory and how they combine to provide insight for innovators formulating competitive strategies to commercialize their innovations.