Sustaining competitive advantage in a high-technology environment: a strategic marketing...

ABSTRACT

The fortunes of high-technology firms depend on investments in intangible capital, which is comprised of intellectual capital as well as marketing capital. While the importance of intellectual capital--R&D capability, human capital, and the like--has been well established,

the central role of complementary marketing capital--in the form of brand name and other marketing assets--in the process of innovation nerds greater understanding. The inability of high-technology firms to increase the appropriability of the fruits of their innovative efforts--because of imitation--is a particularly difficult problem in turning their technological competencies into sustainable competitive advantages. The paper examines this issue conceptually and, drawing upon the evidence from pharmaceutical and software industries, provides managerial implications from a marketing strategy perspective.

INTRODUCTION

The fortunes of U.S. companies and the new economy are increasingly dependent on intangible capital, which is comprised of two main components: intellectual capital and marketing capital. Intellectual capital includes research and development capability, human resources, and organizational practices. Marketing capital encompasses the reputation associated with brand name and other marketing assets. Both are essential to the new economy. The information and communication technology (ICT) sector, the power behind the new economy, epitomizes the growth and importance of intangible capital. It has been estimated that roughly one-third of the growth in gross domestic product (GDP) since 1995 has come from the ICT sector, although that sector's share of GDP is only 8 percent (Economic Report of the President, ERP, 2001).

Another indicator of the growing importance of intangible capital to the U.S. economy is the trend in Tobin's q, the ratio of a firm's market value to the cost of replacing its underlying tangible assets. According to recently published data (ERP 2001), Tobin's q more than doubled in the nonfinancial corporate sector of the economy during the late 1990s. One interpretation of a high and rising q is that a large part of the firm's value derives from its intangible capital--intellectual as well as marketing capital and the importance of that intangible capital's growth.

This paper argues that marketing capital is a necessary complement to the intellectual capital--or intellectual property (IP) as it is often referred to--of a firm. A shift towards intangible capital increases the importance of marketing strategies because intellectual capital is expensive to produce, but cheap to copy. This is the classic problem of appropriability noted by Arrow (1962). Legal protection of intellectual capital by means of patents, copyrights, and trade secrets does not work well in practice. "Inventing around" patents is a common practice that often can be accomplished at relatively modest cost. Pioneering studies by Mansfield (1985) and other scholars suggest that strategic information about product development usually lands in the hands of competitors within 12 to 18 months of introduction, and 60 percent of patented innovations are imitated within four years. Classic examples of innovators losing to imitators include the EMI cat scanner, the Bowmar pocket calculator, and the Xerox office computer (Teece, 2000).

Creating and sustaining a brand name and other difficult-to-imitate marketing strategies is the chief means by which successful innovators protect themselves against imitation. In 1999, economy-wide expenditures on advertising-but one component of total promotional expenditures--reached $215 billion or 2.3 percent of GDP compared with expenditures of $169 billion, representing 1.8 percent of GDP, on industry-funded R&D. The ratio of advertising to R&D expenditures fluctuated within a narrow range of 1.3 to 1.6 during the 1990s (U.S. Census Bureau, USCB, 1999 and 2000).

The fundamental marketing-strategy issue for a high-technology firm is how to minimize the appropriability problem. Only when a firm is able to minimize this problem can it turn its technological competencies into a sustainable competitive advantage (SCA). Despite the growing recognition of this issue by many industrial organization and marketing scholars (Ghemawat, 1986; Teece, 1987, 2000; Levin, Klevorick, Nelson, and Winter, 1987; Capon and Glazer, 1987; Glazer, 1991; Davies and Brush, 1997; Teece and Pisano, 1994; Aaker, 1998; John, Weiss, and Dutta, 1999; Granstrand, 1999; Vinod and Rao, 2000; Mohr, 2001), it has yet to take a central place in the strategic marketing literature. Although other authors have written about high-technology marketing (Rexroad, 1983; Shankin and Ryans, 1987; Moriarty and Kosnik, 1989), their focus is not the problem of appropriability.

The purpose of this paper is to examine conceptually and, drawing upon the evidence from pharmaceutical and software industries, the central role played by complementary marketing assets in sustaining the competitive advantage of high-technology firms and provide managerial implications from a marketing strategy perspective. The second section presents the conceptual context and the third section a discussion focused on the key determinants of appropriability. The fourth section presents a description of appropriability regimes and the fifth and final section presents managerial implications.

Definition of Terms

While it is not the purpose of this paper to resolve the many definitional issues in the business and economic literature concerning technology, some key terms used need to be defined at the outset. Although, the term intellectual property can be defined to include a wide range of intangible assets, for purposes of this paper, it refers to all technology-based intangible assets of a firm--an idea or a design for a new product or a process, a computer software package, and the like that may be protected as a property right under the legal framework that includes patents, copyrights, trademarks, or trade secrets (Ran and Klein, 1994).

The term high-technology firm refers generally to a company with a relatively high level of R&D intensity (the ratio of R&D expenditures of a firm to sales) or simply a high level of R&D. One of the well-known shortcomings of this definition is that R&D expenditures represent inputs to the innovation process of a firm, not outputs of that process. Other limitations concerning applications of the definition to particular industries have been noted by Mohr (2001). Still, R&D is one of the widely used indices of innovative activity of a firm in the business and economics literature (Griliches 1984). Moreover, it is particularly appropriate for this paper because increasing the returns on R&D through marketing strategies is the central issue addressed here.

The term high technology products and processes refers to products and processes that require, for their production, significant investments in R&D. The U.S. Department of Justice makes a distinction between markets for technologies and markets for innovations (USDOJ, 1995). Markets for technologies refer to existing markets for licensed intellectual property. Markets for innovation, on the other hand, are markets for future technologies, which include contract research, R&D joint ventures, technology alliances, and technical services. For purposes of this paper, the market for technologies includes market for innovations and conclusions.

CONCEPTUAL CONTEXT

Characteristics of Technological Innovation

High-technology firms present special problems for marketing strategy because of certain unique features associated with technological innovation. The three classic characteristics of technological innovation--sometimes referred to as sources of "market failure"--observed by Arrow (1962) are appropriability, uncertainty, and indivisibility.

Appropriability

As noted earlier, appropriability arises because innovation, which is often costly to produce, is imitated cheaply. As a result, firms operating in competitive market structures have difficulty realizing the full benefits of their innovative efforts and thus maximizing returns on R&D investments. It is part of the general problem of externalities or spillovers (not to be confused with network externalities) associated with knowledge assets. The appropriability problem poses the greatest challenge and opportunity for marketing strategy. It affects virtually all aspects of a firm's marketing strategy, including that firm's global strategy. Appropriability is the focus of this study and will be examined at length.

Uncertainty

Although uncertainty is a characteristic of all economic activity, it is so severe in the early stages of innovative effort, that it is impossible to write enforceable contracts. As a result, the functioning of the markets for technologies and innovations is severely impaired and the problem of tradability arises. However, greater and better integration of marketing with R&D can reduce what Koopmans (1957) calls secondary uncertainty, which arises from lack of communication between decisionmakers about concurrent decisions and plans (primary uncertainty has to do with the state-contingent kind of uncertainty such as random acts of nature). Moreover, strategic and timely information about customers, competitors, and suppliers can improve the prediction of outcomes. John, Weiss, and Dutta (1999) suggest that greater uncertainty about the evolution of technology favors short-term licensing over outright sales of technology. This is because estimating the net present value of the former is easier. They further suggest that such an uncertainty favors modular designs over optimized designs, because the former allow advances in one part of the system to be incorporated without abandoning the whole system.

Indivisibility

Indivisibility arises when economies of scale due to lumpiness of R&D projects (this is part of the phenomenon of high fixed costs and zero marginal cost--sometimes referred to as unit-one costs associated with the creation of high-technology products) and economies of scope or economies of joint production and marketing due to technical and marketing interconnectedness between various subsystems are present in the innovation process. While both scale and scope economies present problems for normal market transactions, technical interconnectedness requires close and continuous communication and coordination between R&D, manufacturing, and marketing (Teece 2000). Lumpiness, on the other hand, could result in the average size of the R&D projects being too large for many firms to undertake without joint ventures or alliances. Teece (2000) notes four more characteristics of technological innovation as representing an emerging consensus among scholars: path dependency, tacitness, cumulative nature, and irreversibilities.

Path Dependency

Path dependency refers to the idea that a firm's new product and process developments are likely to be determined by the technological competencies of its past. This limits the firm's ability to venture into new trajectories of research without resorting to acquisitions, contract R&D, alliances, or other forms of external technology partnering.

Tacitness

Tacitness has to do with the fact that some knowledge created in the innovation process is not articulable and codifiable. Such knowledge is generally firm-specific and resides in the organization's ways of coordinating and managing tasks and cannot be seen in blueprints or manuals (Winter, 1987). This makes transfer of technology to external organizations and tradability difficult, but at the same time makes imitation costly. John, Weiss, and Dutta (1999) posit that greater tacitness favors optimized designs over modular designs--the latter assumes easy transferability of know-how--and that it favors the sale of systems and subsystems over the sate of a license of know-how.

Cumulative Nature

Cumulative nature means that a firm's technological innovation builds on what went before and that much of it is tacit and firm-specific. While tacitness and firm specificity of technology protect it from easy imitation, they also create difficulties for market transactions involving transfer of technology.

Irreversibilities

Irreversibilities in technological innovation occur when R&D expenditures are specific to the firm and have no alternative uses. They are sunk costs. Therefore, expenditures on R&D, especially money spent in the early stages of the innovation process, are best viewed as providing valuable information and creating options concerning further investments in production and marketing (Dixit and Pindyck, 1995).

Some authors (John, Weiss, and Dutta, 1999; Molar, 2001) include network externalities--sometimes referred to as demand-side increasing returns--as a special characteristic of technological innovation. Network alternatives arise when the value of a product or service to an individual user rises as the number of users increases (e.g., telephone networks, compatible computer networks which can share data and software). Teece (2000) refers to them as direct network effects. Indirect effects occur when the value of network products is increased by the creation of large complementary markets (the larger the installed base of computers, the greater the volume and variety of software produced by third parties) and by the availability of large numbers of people trained to service it (the larger the installed base, the lower the cost of service). Network products have important implications for marketing decisions concerning pricing, industry standards, and more. However, it should be noted that while externalities or spillovers are a central feature of technological innovation, not all innovation leads to network externalities.

DETERMINANTS OF APPROPRIABILITY

Of all the characteristics of technological innovation discussed above, appropriability is the only one that affects virtually all aspects of a firm's marketing strategy. This section examines the key determinants of appropriability, drawing roughly and broadly upon the conceptual frameworks developed by Teece (1987, 2000), Teece and Pisano (1994), and Winter (1987). The importance of the appropriability problem for innovator firms cannot be overstated. David Teece (1987, p.185) put it best:

   The message is particularly pertinent to those science and
   engineering-driven companies that labor under the mistaken
   illusion that developing new products that meet customer
   needs will ensure success. It may possibly do so for the
   product but not for the innovator.

Modern technological innovation is R&D intensive. While economy-wide company-funded R&D, as noted earlier, accounts for about 1.8 percent of GDP, the ratios of R&D to sales in some high-technology sectors such as drugs and medicines, computers, communication equipment, and software average seven to eleven times the U.S. average (National Science Foundation NSF, 2000). Moreover, many companies in the biotechnology field, where R&D is often the firm's raison d'etre, spend well over 50 percent of their sales on R&D (Disclosure, 2001).

The process of innovation entails both technical and commercial risks. Empirical evidence suggests that commercial risks are far greater than technical risks. Although most R&D projects reach completion, only about a quarter of them ever achieve commercial success (Mansfield et al., 1997). With the firm's large investments in R&D--and sometimes its very existence--at risk, such as in the biotechnology field, how does a firm deal with the problem of imitation by competitors? This question is discussed below.

Intellectual Property Rights

In the United States the legal framework for protecting intellectual property consists of four major instruments: patents, copyrights, trademarks, and trade secrets (Bensen and Raskind, 1991). Both patents and copyrights, because of their foundation in the U.S. Constitution and in various federal statues, constitute the highest form of legal protection. Semiconductor protection, derived from the Semiconductor Chip Act of 1984, is closer to the copyright regime.

A product technology is protected by patents (for a period of 20 years) and nonpatentable production/process technology is protected by trade secrets. Software is now protected by copyrights as well as patents. Software patenting is a relatively new phenomenon and it has grown rapidly in the past decade and a half. Company names, logos, slogans, symbols, and brand names are covered by trademarks and copyrights.

Different instruments of legal protection can substitute for each other (e.g., patents and trade secrets) as well as complement or reinforce one another, as is the case more often. As Granstrand (1999) suggests, it is useful to look at different business elements or components that comprise a business system in a product area in relation to legal instrument(s) applicable to each element or component. Thus, the development of a new generation of mainframe computers would most likely involve virtually all of the business elements (i.e., product technology, process technology, software, and brand name) and hence all legal instruments. Even when the issue is legal protection for a single business element such as software, firms use all available legal instruments--patents, copyrights, and trade secrets. However, patents remain the dominant legal instrument by which technological innovation is protected.

The traditional argument for legal protection of innovation through patents has to do with providing incentives to innovate by increasing the appropriability of the fruits of R&D efforts. Put differently, patents are intended to provide a temporary monopoly to the innovator. However, firms have come to use patents to gain competitive advantage in a variety of ways. They include: licensing in geographic markets or applications where the company is not present; cross-licensing; identifying and attracting partners for technology alliances; and various patenting strategies (e.g., "blanketing" or "flooding") intended to limit competitive entry into a given field of technology (Granstrand, 1999).

Survey Findings on the Effectiveness of Patents

Despite some advantages patents confer on innovating firms, survey findings by Levin et al. (1987) and Granstrand (1999) shown in Table 1 indicate that firms in the United States and Sweden do not consider patents an effective tool for preventing imitation.

Managements consider creating superior marketing and creating market lead times to be more effective than patents. Although Japanese firms place high value on "taking out patents to deter imitators (or to collect royalties)," when asked about various limitations, of patents for technology protection, the same firms placed the statement "competitors can legally circumvent patent rights or invent ways around them" at the top of the list (Granstrand 1999, p. 190). Thus even the Japanese firms appear to view patenting, at best, as a defensive move against potential imitators. The findings for the U.S. and Sweden are corroborated by Harabi 0995), who replicated the classic Levin et al. U.S. survey for Swiss companies. When managements of these companies were asked about the effectiveness of various means of appropriability of the results of product and process innovations, patents are considered to be least effective. Superior sales and service efforts received the highest score followed by lead time. And for process innovations, lead time, followed by superior sales, received the highest scores. Note that lead time is related to superior sales and service efforts. Lead time helps build a whole new range of marketing assets including superior sales and service infrastructure well before competitors enter the market. Indeed, lead time gained in creating marketing infrastructure may well discourage competitive entry into the market.

The Case of Software

Among the high-technology sectors, nowhere is appropriability a greater problem than in the software sector, which is the backbone of the new economy. As noted earlier, software is protected by patents as well as copyrights. The problem goes beyond software piracy, which is estimated--bearing in mind that such estimates generally carry a high margin of error--at about 46 percent of worldwide sales (Granstrand, 1999).

The real source of the problem is changing technology and customer demands, which make appropriability difficult. They include development of industry standards (standards based upon operating systems that permit portability of specific customer applications from one computing environment to another and provide customers the flexibility to "mix and match" hardware and software from different vendors); customer demand for greater control of software in order to create, manipulate, and manage applications to their own specifications; and modularizations of software development that make customer control of applications and common interfaces among systems from multiple vendors easier. In short, these trends have the effect of making legal restrictions imposed by software vendors on customers' use of their products untenable and appropriability difficult (Rao and Klein, 1994).

The changing scope of copyright protection is yet another trend accentuating the appropriability problem in the software sector. The European Union (EU) allows a person to freely reproduce or translate the form of another's program code for the specific purpose of facilitating interoperability with an independently developed system. In the United States, while reverse engineering is not exempt from copyright protection, the case law appears to be moving closer to the EU position. Moreover, copyright protection for user and system interfaces is ambiguous (Rao and Klein, 1994).

Replicability of Innovation

Appropriability of technological innovation depends on the strength of intellectual property rights (IPRs) as well as the degree to which innovation is inherently replicable by competitors. As Teece (2000, p. 18) put it, "Imitation is simply replication performed by a competitor." It is easier to replicate codified knowledge embodied in an innovation than tacit knowledge. Winter (1987) examines the relationship in terms of technology being: tacit vs. articulable (or codifiable); not observable in use vs. observable in use; complex vs. simple; and an element of a system vs. independent. Note that the right end of each of the above taxonomic dimensions--articulable, observable in use, simple, and independent--indicates that replicability is easier and, ceteris paribus, appropriability lower. Technological innovations embodied in packaged software fit the dimensions of low appropriability.

However, it is important to note that codified knowledge by itself does not necessarily diminish appropriability. For example, patented drugs in the U.S. and in other industrialized countries enjoy a high degree of appropriability, even though the knowledge embodied in the chemical compound is not only codified but known to everyone by the time the drug is approved. This is because IPRs are strong and patent enforceability with respect to drugs is high. It is the absence of these conditions, which makes software less appropriable.

It should be noted that while IPRs and replicability jointly determine the degree of appropriability, as the above discussion suggests, both are largely exogenous variables and therefore the firm has limited control over them. This is notwithstanding the benefits that could be derived from an aggressive policy of securing and enforcing IPRs and implementing a variety of secrecy measures internally.

Complementary Marketing Assets

This paper argues that complementary marketing assets are central to increasing the appropriability of the fruits of investments in R&D. Such assets comprise a whole range of cumulative investments: a well-trained sales force; superior after-sales service; promotion to create and sustain a brand name; channel development; carefully developed relationships along the entire spectrum of the supply chain; superior information systems concerning markets, customers, competitors, and more. In short, they include all marketing activities that help create and sustain what Porter (1985) calls reputation of the first-mover. The essence of marketing strategy is the creation of competitive advantages--the more the better--with investments in difficult-to-imitate marketing assets. However, marketing assets, like many other assets, fall on a continuum that ranges from highly tacit (e.g., the process of creating a successful channel relationship or a brand name) to highly codified (e.g., a detailed after-sales-service manual).

Winter's (1987) taxonomic dimensions concerning technology apply equally well for marketing assets. The greater the tacit component in a firm's marketing assets, the less observable they are in use, and the more complex they are, the smaller the chance of imitation and the greater the effectiveness of marketing strategy in increasing the appropriability of innovations. Imitating a successful brand strategy combined with relationship marketing is a lot more difficult than imitating a product design. One need only consider the $151 billion total value in 1995 of the eight highest valued brands (bearing in mind, again, the generally high margin of error associated with such estimates) reported by Granstrand (1999). The two top brands alone--Marlboro and Coca-Cola--were valued at $45 billion and $43 billion, respectively. Day (1997) has noted five conditions that make an asset a source of sustainable advantage: it is valuable in that it produces superior customer value; it is durable; there is causal ambiguity (i.e., competitors cannot figure out how the source of advantage works); competitors find it difficult to duplicate even if they understand the source of advantage; and an innovator firm will deter efforts at imitation with a threat of retaliation. Others have suggested that skills or distinctive competences in the form of a focus on total customer satisfaction, a focus on continuous innovation combined with "an all-hands effort" to achieve them, would be virtually impossible to imitate (Peters, 1984).

It should be noted that in contrast to IPRs and replicability, a firm's marketing assets are endogenously determined and therefore are entirely within its control. Thus, once the innovation is under way, complementary marketing assets become an intervening variable--which is largely within the firm's control--in determining the appropriability of technological innovation. The creation and development of complementary marketing assets mitigates the problem of loose IPRs and easy replicability.

However, the real task lies in convening these assets into superior positions of competitive advantage. What Day and Wensley (1988) call drivers of differentiation are particularly important. According to Day and Wensley, many of these drivers, which are policy choices about features, performance, level of advertising expenditures and the like, are mediating events that determine the leverage an investment in a skill or resource has on differentiation rather than sources of advantage. Other important drivers of differentiation include linkage within the value chain (e.g., coordination between sales and service to improve the speed of order handling), timing which gives first-mover advantages, interrelationships with other business and learning.

Few, if any, of these drivers of differentiation would be effective without the aid of information and communications technology, which itself can be thought of as a driver of differentiation as well as a source of competitive advantage. Porter and Miller (1998) provide numerous examples of how ICT has permeated the value chain and transformed the way value-creating activities are performed and the linkage among them; transformed the product by vastly increasing the information component relative to the physical component of the product (e.g., electronic control of the automobile); changed the competitive scope by increasing a firm's ability to coordinate its regional, national, and global activities (e.g., coordination of the Asian, European, and U.S. editions of the Wall Street Journal by Dow Jones and Company); spawned new businesses (e.g., Western Union Easy Link service); lowered cost (e.g., the software behind Canon's successful low-cost copier assembly process); and enhanced differentiation (e.g., myriad travel services offered by American Express).

However, it is important to note that ICT is a two-edged sword. While it is a driver of differentiation and a source of competitive advantage, it can mitigate the appropriability problem (through encryptions and "fire walls," for example) or accentuate it through free flow of information, a feature inherent in its design. It was even argued elsewhere that in this age of supply-chain management--in which information sharing with suppliers, customers, and other external partners is central to the innovation process--ICT is more likely to accentuate the appropriability problem than mitigate it (Rao, 2001a).

APPROPRIABILITY REGIMES

Although Teece (2000) recognizes the importance of specialized complementary assets, including marketing assets, for commercialization of innovations, his focus is on predicting the outcomes of the interdependence between the innovator (and the imitators) and the owners of such assets. Teece views the appropriability regime as a function of IPRs and inherent replicability. Figure 1 adds complementary marketing assets as a third, albeit an intervening, variable in the determination of appropriability.

[FIGURE 1 OMITTED]

Note that Figure 1 provides a highly stylized partial mapping of appropriability regimes that would result from all possible combinations of the three determinants. Moreover, the discussion of Figure 1 below assumes that the innovator firm has the greatest degree of control over the creation and deployment of marketing assets, some control over IPRs, at least in terms of aggressive enforcement policy, and little or no control over replicability.

Strong Appropriability Regime

The upper left quadrant in Figure I, with tight IPRs and hard replicability complemented by strong marketing assets, represents a strong appropriability regime. This is generally a winning combination for the firm. It keeps the potential imitators at bay and gives the firm a strong competitive advantage to start with. Moreover, a strong appropriability regime always offers the innovator firm an opportunity to increase the primary demand for the product through promotion. The burden of sustaining this initial advantage falls largely on successful implementation, over time, of the strategic marketing decisions associated with the creation and deployment of marketing assets. To be sure, strategy as well as implementation are product/market specific and need to be adapted to the changing technologies and customer needs. For example, a pharmaceutical firm specializing in patented prescription drugs would emphasize promotional strategy more than a software firm whose concern was product strategy in the context of rapidly changing technologies and customer demands.

Benefits of a Strong Regime

An innovative product in a strong appropriability regime, which the firm itself helps to create, could experience a textbook S-shaped product life cycle (PLC) under the usual assumptions. The firm has a temporary monopoly over its innovation by virtue of a strong patent or other forms of tight IPRs. Under these conditions, the innovator firm has a strong incentive to invest in complementary promotion as a barrier against competition during the post-patent period. Moreover, as suggested earlier, investment in promotion in the early stage of the PLC would have the effect of increasing the primary demand for the product.

A strong appropriability regime combined with heavy up-front investment in promotion could give the innovator firm greater flexibility in pricing. The expectation of a longer S-shaped PLC favors a strategy of skimming pricing, which can be viewed as price discrimination across different stages of the PLC. Note that price discrimination is generally more profitable than nondiscriminatory pricing.

With respect to product strategy, a strong appropriability regime favors radical innovation. The large fixed development costs or unit-one costs associated with such innovation favor platform design, which offers several variants of a core design to each market segment (John, Weiss, and Dutta, 1999). The firm has a strong incentive to invest in long-term R&D including basic research and undertake large projects. The S-shaped PLC the firm faces is consistent with skimming pricing. The firm follows a distribution strategy that starts with selective distribution in the introductory stage of the PLC and moves gradually to intensive distribution in the later stages. This is consistent with skimming pricing. A strong appropriability regime confers several other advantages on the innovative firm. The threat of new entrants is likely to be low, at least in the near term. Therefore, the firm has some latitude with respect to innovation time span and speed to market.

Moderate, Weak-to-Moderate, and Weak Appropriability Regimes

Moderate Regime

The upper right quadrant in Figure 1 presents the most interesting case. A regime of moderate appropriability is characterized by tight IPRs and hard replicability complemented by weak marketing assets. It is within the control of an innovator firm to move to a strong appropriability regime (the upper left quadrant) by moving to a position of strong marketing assets by making additional investments in them. The return on this additional investment (e.g., promotional expenditures aimed at creating a brand value and/or channel development) is likely to be particularly large during the postpatent period when imitators enter the market. Not investing in such marketing assets increases the likelihood that the innovator will lose to imitators.

Weak-to-Moderate Regime

A combination of loose IPRs and easy replicability complemented by strong marketing assets produces a weak-to-moderate appropriability regime (lower left quadrant in Figure I). Given the presence of strong marketing assets (e.g., a strong brand name and distribution system), aggressive litigation and secrecy strategies could move the innovator firm from a weak-to-moderate to a moderate-to-strong position. Thus marketing assets can mitigate the weaknesses present in the IPRs and replicability.

Weak Regime

A combination of loose IPRs and easy replicability complemented by weak marketing assets (lower right quadrant in Figure 1) produces a weak appropriability regime. Loose IPRs combined with easy replicability are a strong disincentive to invest in R&D, much less in complementary marketing assets. Aggressive and often costly litigation and secrecy strategies could overcome some of the problems associated with loose IPRs, but their effectiveness is uncertain. To the extent innovation takes place, the winning factor, in general, is the strength of innovators' marketing assets relative to those of imitators.

Regardless of the appropriability regime with which a firm is faced, the central role of complementary marketing assets in overcoming the problem of imitation is clear. However, the issue is devising an implementation strategy--bearing in mind that marketing assets constitute but one component of the firm's capabilities--that would create and sustain competitive advantages. Day and Wensley (1988) and Day (1994 and 1997) have addressed this difficult issue from a marketing strategy perspective. First, competitive advantage needs to be examined in terms of its three components, namely, sources, positions, and performance outcomes--the SPP framework. Note that this framework emphasizes integration of the capabilities approach (Teece, 2000) and the strategic positioning view (Porter, 1991) in a manner that the choice of capabilities to develop and investment commitments to make must be guided by the positional advantages being sought, given the competitive forces in the industry, the needs of the target segments, and the environmental trends (Day and Wensley, 1988). Second, Day (1994) suggests that the design of effective programs to create and sustain competitive advantage by delivering superior customer value comes from combining the capabilities approach to strategy with Total Quality Management (TQM). Central to a successful implementation strategy are market-sensing capability and customer-linking capability.

Market sensing allows firms to identify the changing requirements of the customer early and respond with a continuous stream of innovative products and services. Customer linking has to do with interlinked skills, abilities, processes, and procedures needed to respond to customer needs quickly and with minimum overhead and internal transaction costs. Note that investments in ICT are critical to developing both market-sensing and customer-linking capabilities.

Finally, the special problems of high-technology firms require that intellectual property protection must become an integral part of corporate and marketing strategies. Intellectual property issues are too important to be left to the legal departments. High-technology firms need multiprotection systems (patents, trademarks, and trade secrets) and total IP strategies which include technology acquisition strategies (e.g., internal R&D vs. external acquisitions), technology exploitation strategies (e.g., production and marketing of products vs. technologies), commercialization strategies (e.g., patenting, superior marketing, and market lead times), and patenting strategies (Granstrand, 1999). Also needed is a corporate-wide education of IP issues down to the level of accounting for IP, project evaluation, and pricing.

MANAGERIAL IMPLICATIONS AND CONCLUSION

Managerial Implications

Managers of high-technology firms must recognize the unique characteristics of technological innovation in formulating marketing strategy. This paper has focused on the appropriability problem--a particularly important problem facing high-technology firms--and suggested the importance of investing in complementary marketing assets to mitigate this problem. However, complementary marketing assets take different forms in different industries.

In the patented and branded segment of the pharmaceutical industry, which combines tight IPRs (at least in industrialized countries) with easy replicability, the emphasis is on heavy complementary promotion during the patent life of a drug. The complementary relationship between R&D and promotion in the pharmaceutical industry has been well established in an econometric study by Vinod and Rao (2000). Moreover, the data produced by the authors strongly suggest that a firm that recognizes the strategic importance of complementarity between R&D and promotion has a greater chance of survival than a firm that does not. The objective of such a strategy is to increase the primary demand for the product as well as build a brand name, which will help sustain the competitive advantage during the postpatent period when price competition from the producers of generic drugs is intense.

The software industry has different characteristics and requires a different approach. In general, the software industry is characterized by a low degree of appropriability due to inherent difficulties in separating innovative and protectable expressions of original ideas, such as a "user graphic interface" from unprotectable ideas such as an algorithm (Grimaldi and Torrisi, 2001). Although software now has copyright as well as patent protection in the U.S. because of the uncertainty surrounding the legal protection, the strategic emphasis is on the product itself. Complementary marketing assets take the form of significant investments made by the firm to achieve the optimal level of codification in order to enhance appropriability. Note that, as with prescription drugs, codification, while it makes imitation easier, results in greater enforceability of copyrights and patents and therefore greater appropriability. Thus, packaged software, which is highly codified and growing in importance, has greater appropriability than custom software. Moreover, firms producing software products for PCs and the Internet have the opportunity to increase appropriability by exploiting network externalities through a pricing mechanism, which recognizes that the value of a product or service to an individual user rises with the number of users.

The market for technologies (e.g., licensed intellectual property, technology joint ventures, and alliances), which has been growing rapidly, presents even greater challenges and opportunities than the market for high-technology products. According to rough estimates by Arora, Fosfuri, and Gambardella (2001), the worldwide market in 1996 for sale or licensing of technologies alone amounted to just over $53 billion. The U.S. market was estimated to be in the order of $32 billion or 60 percent of the world market. Arora et al. also reported that IBM's patent licensing revenues reached $1 billion in 1998, accounting for 10 percent of IBM's net profit or an equivalent of $20 billion in revenue from goods and services.

It is important to recognize the risks and opportunities present in the licensing of technologies. While licensing contributes to the current and future revenue stream of the firm, it also increases the risk--notwithstanding the legal protection written into contracts--of cannibalizing future profits due to the licensee competing in the product market. Sometimes this issue could go to the heart of a firm's strategy. Microsoft, with its PC-based software, generally follows the traditional approach to licensing, which gives the licensee access to executable code, but not the source code. By contrast, Linux vendors agree to license any line of source code--known as a "general public license"--which they produce against full access to the source code the licensee may develop. The Linux model gives each customer unrestricted access to the source code to make improvements and customize it to meet each customer's unique requirements (Grimaldi and Torrisi, 2001). Microsoft and Linux vendors operate on different business models and cater to different segments of the market--Microsoft to the desktop operating systems' segment and Linux vendors to the server operating systems' segment.

The rapid growth of technology alliances since the early 1980s, which has been well documented (Duysters, 1996; Rao, 1999, 2001b), represents yet another indicator of the emerging market for technologies. Note that the notion of the market for technologies presents something of an anomaly for some celebrated theories of "market failure" in the production of technological innovation (Arrow, 1962; Williamson, 1975). Technology alliances, which represent a trend towards unbundling and outsourcing of corporate R&D, present risks and opportunities like any other form of technology trading. The gains from technology alliances are market access, technological complementarity, and reduction in innovation time span. The risks involve potential loss of control over critical technologies and, hence, low appropriability of innovations. Given the uncertainty and irreversibility associated with most R&D investments, technology alliances are best viewed as value-creating options. That is, alliances give a company the option but not the obligation to make additional investments in the future.

Innovative firms' global entry decisions are influenced by the relative strength of a country's IPRs. This is true notwithstanding the significant degree of harmonization of IPRs, which has been taking place under the World Trade Organization (WTO) system. Ceteris paribus, countries with tight IPRs are attractive candidates for technology transfer through foreign direct investment (FDI)--including FDI in R&D, joint ventures (JVs), strategic alliances, and licensing. Countries with loose IPRs are poor candidates for such transfers. When countries have poor IPRs, the transfer of the newest and most effective technology through licensing is least favored (this is because of the fear that the know-how will fall into potential competitors' hands), followed by FDI and joint ventures (Mansfield, 1995). However, judging from evidence on the pharmaceutical industry (Rao, 1998), a regime of tight IPRs alone would not do the job for the developed world's multinational firms. Global marketing strategies--e.g., segment-specific pricing, creative branding strategies and direct involvement with local partners are likely to play a greater role in the decisions concerning technology transfer to countries with poor IPRs. Finally, it is impossible to create and sustain competitive advantages without an implementation strategy. What Day and Wensley (1988) and Day (1994 and 1997) suggested, is still a good starting point. Central to a successful implementation strategy, especially marketing strategy, are market sensing capability and customer-linking capability. Market sensing allows firms to identify the changing requirements of the customer early and respond with a continuous stream of innovative products and services. Customer linking has to do with interlinked skills, abilities, processes, and procedures needed to respond to customer needs quickly and with minimum overhead and internal transaction costs. Investments in ICT are critical to developing both market-sensing and customer-linking capabilities.

CONCLUSION

The fundamental issue in marketing strategy is how to create sustainable competitive advantage for the firm. From a marketing strategy perspective, SCA rests on three rather obvious but important strategic imperatives. First, a firm's activities must meet users' needs. Second, a firm's product or service must be unique and the firm must leverage that uniqueness. Differentiation allows the firm to become a price-setter rather than a price-taker. Third, a strategy of differentiation must be difficult to replicate so that profits won't be competed away. The last point is particularly important for high-technology firms because, often, competitors can imitate easily and inexpensively. Still, increasingly, high-technology products and services define the modern economies. Indeed, there is an emergence of the market for technologies themselves in the form of licensing, cross-licensing, alliances, and the like. All of them face the problem of spillovers that often benefit the competitors more than they benefit the innovator. The arguments presented in this paper strongly suggest the importance of investing in difficult-to-imitate complementary marketing assets that will increase appropriability and returns on R&D investments. Replicating a successful brand strategy is lot more difficult than replicating a product design. The importance of marketing strategy in protecting intellectual capital cannot be overstated.

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P.M. Ran (Ph.D., Stern School of Business, New York University) is a Professor and Chair of the Marketing Department, College of Management, Long Island University / C.W. Post Campus, Brookville, NY 11548, (e-mail: pmrao@liu.edu, fax: 212-473-3420, telephone: 516-299-1543). Dr. Rao has had extensive telecommunications industry experience, and has published in such journals as Journal of Marketing Theory and Practice, International Business Review, Industrial Marketing Management, Economics of Innovation and New Technology, Telecommunications Policy, and R&D Management, and in such proceedings as those of the Academy of Marketing Science, the Association of Marketing Theory and Practice, the International Telecommunications Society, and the Decision Sciences Institute. His research focus is on marketing strategy issues concerning firms in high-technology industries. The author thanks Deval Soparkar for her excellent research work and Svetlana Yurkina for her assistance in the production of this paper. Partial support of this research by the C.W. Post Research Committee is gratefully acknowledged.

TABLE 1

Means for Protecting New Product Technologies:
United States, Sweden and Japan

Means                       United States   Sweden   Japan

Creating superior
marketing                        3.1         3.0      2.9

Creating market lead
times                            2.9         2.4      2.9

Creating production
cost reductions                  2.7         2.7      3.1

Taking out patents to
deter imitators
(or to collect royalties)        2.0         1.9      3.4

Exercising secrecy               1.7         2.0      2.4

Creating switching
costs at user end                NA          1.7      2.3

Source: Granstrand (1999). Data for the United States are as reported
in Levin et al. (1987) rescaled by Granstrand to be consistent with
his 1999 study of Sweden and Japan. Scale: 0 to 4 from no importance
to major importance in that order.