Profit Chain

PROFIT CHAIN

INNOVATION MANAGEMENT
 Profit Chain
Profit chain

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT
 Profit Chain

What is the innovation?

INNOVATION MANAGEMENT
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Definition of innovation

INNOVATION = INVENTATION + COMMERCIALIZATION

Innovation is the use of new knowledge to offered a new product or service

that customers want (Afuah).

IDEA MARKET

INNOVATION MANAGEMENT
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How can a firm make profit from innovation?

INNOVATION MANAGEMENT
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Profit

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT
 Profit Chain
Profit

A firm makes profit from selling a product or service when the revenues
are greater than the cost of offering it.

Profits = Revenues – Cost = P(z,q) . q(z) – C(q,z)

P(z,q) = Price
z = attributes of the product
Q= quantity
q(z)= quantity that are sold
C(q,z)= cost

INNOVATION MANAGEMENT
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Innovation and profit

Innovation is use of technological and market knowledge to offer a new product or service
that customer will want (low cost, improved attributes, new attributes) and increase the
profit through selling of it.

Process NEW PRODUCT

innovation • Low cost
Low cost for a given • Improved attributes
price
• New attributes

MORE PROFITS COMPETENCES AND

ASSETS

New or better attributes

(price premium) for a
given cost NEW
TECHNOLOGICAL NEW MARKET
KNOWLEDGE
Product KNOWLEDGE

innovation

INNOVATION MANAGEMENT
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Assets and competences

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT
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Assets

They are the resources that a firm needs to exploit the innovation.

TANGIBLE, physical and financial resources

(plants, equipment and cash reserves).

INTANGIBLE, nonphysical and nonfinancial assets

ASSETS CAN BE (patents, copyrights, reputation, brands, trade
GROUPED INTO secrets, relations with customers, employees and
knowledge embedded in different forms).

HUMAN, skills and knowledge of the employees.

INNOVATION MANAGEMENT
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Attributes of the assets

For example, in investment banking,

client relationship are core. Role that assets can play in
ability of a firm to make profit.

How central assets

CORENESS are to a firm’s
business.
Negligible Long – term
Low profits profits

Imitability
Dipend of the type of
Short – term
assets: High No profits
profits
IMITABILITY • legally protection;
• uncertainty and
complexity. Noncore Core

Coreness

INNOVATION MANAGEMENT
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Relationship between competences and assets

Competences
• Design engines
• Negotiate contracts
- NO PROFIT 
competences and assets
Products or services non core
• Low cost - MAKE PROFITS 
• Differentiated competences and assets
core

Assets
• Intellectual property
Source of assets is competence
• Skilled personnel
• Brand names Assets help to build competences
• Reputation
• Client relations Assets have on the effectiveness of
competences a leveraging effect in delivering
low - cost or differentiated products

INNOVATION MANAGEMENT
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Knowledge

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT
 Profit Chain
Knowledge

Innovation is the use of new technological and market knowledge to

offer a new product or service that customers will want.

It is knowledge of components, linkages

Technological between components, methods,
knowledge processes and techniques that go into a
product or service.

It is knowledge of distribution channels,

Market knowledge product applications and customer
expectations, preferences, needs and
wants.

INNOVATION MANAGEMENT
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How well does a firm perform the activities that rest

on the knowledge?

INNOVATION MANAGEMENT
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Properties of the knowledge

How new the knowledge is to the function or

organization performing the activity, so:
if it is very different from existing knowledge, it is
Newness said RADICAL (competences destroying);
if it is builds on existing knowledge, it is said
INCREMENTAL (competences enhancing).

It is a function of the complexity of the activities that go

Quantity into the product, which may or may not result in a
complex product.

Knowledge can be:

Tacitness EXPLICIT if it is spelled out in writing, verbalized or
coded in drawings, computer programs, or other
products;
TACIT if it is uncoded and nonverbalized.

INNOVATION MANAGEMENT
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Nature of innovation

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT
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Type of innovation

Degree of Technical Innovation’s Newness

Incrementally New Architecturally New Radically New

Relatively Minor Changes
Exploits potential of existing design
Often reinforces the dominance of
existing firms
Numerous incremental changes
over time very valuable
change relationship New set of engineering principles
between components
Often opens new markets/potential
Often causes difficulties for
established firms

Different competitive consequences

because they require different
organizational capabilities which
are difficult to create/adjust.

INNOVATION MANAGEMENT
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Environment and internals

NATURE OF INNOVATION
• Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase COMPETENCES
PROFIT
Ability to design engines,
From innovation that
ENVIROMENT integrate different function,
leads to low – cost or
• Competitive build logistic, market, new
differentiad products
• Macro ideas, manufacture
INTERNALS KNOWLEDGE
• Strategy
• Structure
• Systems ASSETS
• People Size, patents, copyrights,
location, skilled scientists,
reputation, sponsor, licenses
NATURE OF INNOVATION
•Incremental, radical,
architectural
• Complexity, tacitness
• Life cycle phase

INNOVATION MANAGEMENT