The Teece model is a framework that enables competitive advantage to be gained through innovation. The Teece model was named after economist David Teece who created a framework for building profit through innovation in 1986. Teece noted that being first to market with a new product was no guarantee of success. He also argued that in the history of innovation, some companies were winners and some were losers. Ultimately, whether a company wins or loses is a result of how easily its innovation is replicated.
Understanding the Teece Model
Royal Crown Cola is an example of a loser. After being the first to introduce diet cola in 1962, the company quickly lost market share to Coca-Cola and Pepsi with their superior branding and distribution channels. Conversely, glass manufacturer Pilkington was able to revolutionize the flat glass industry through first-to-market innovations that were difficult to replicate.
The three stages of the Teece model
Fundamentally, the Teece model aims to help businesses maintain a competitive advantage by preventing rival companies from replicating (and then benefitting from) their innovation.
Three stages guide making money from innovation.
Stage 1 – The Regime of Appropriability
Initially, the innovator must secure the innovation from its competitors. Patents are a good place to start, but Teece notes that they cannot always be relied upon.
Securing the innovation may also involve intellectual property rights, tacit knowledge, or complex internal systems that make replication difficult.
Stage 2 – Dominant Design Paradigm
The next step is to gain benefits of scale as quickly as possible. Innovative products are commonly popular products, so the organization must be able to meet demand by scaling production.
Scaling can be performed internally, but not without a significant investment of capital. Alternatively, a third-party can be utilized to outsource some or all the process.
Stage 3 – Complimentary Assets
Teece notes that simply possessing an innovative product is not a one-way ticket to profitability. Good marketing combined with a suitable market to channel is a complementary asset crucial to increasing awareness and driving sales.
Suppliers, licensing agreements, customer relationships, and distribution channels also play an important role in creating and then maintaining market dominance.
The Teece model matrix
In a different interpretation of the Teece model, businesses can use a matrix to compare two factors:
- Imitability (low or high) – or how easily a competitor can replicate the innovation, and
- Complementary assets (freely available or tightly held) – noted above as any factor that supports or maintains profitability in an innovation.
Comparing each factor against the other allows the business to make four predictions about innovation profitability.
These predictions are listed below:
- High imitability/freely available complementary assets – innovation will find it difficult to make a profit.
- Low imitability/freely available complementary assets – the innovator has a higher likelihood of making a profit.
- High imitability/tightly held complementary assets – the company that owns the assets will most likely profit.
- Low imitability/tightly held complementary assets – the company with the highest bargaining power in a negotiation will be the one that profits the most.
- The Teece Model is a framework that analyzes and predicts competitive advantage gained through innovation.
- The Teece Model argues that successfully profiting from innovation involves a combination of reducing replicability and scaling production as quickly as possible. Complimentary assets that support the core innovation are also crucial.
- The Teece Model can also be represented by a matrix that compares imitability and complementary assets to gauge profitability.
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