Role of retail chains in inflation measurement and price dynamics
January 5, 2012
A study by Columbia Business School Professor Emi Nakamura, Chazen Senior Scholar at The Jerome A. Chazen Institute of International Business at Columbia Business School and David W. Zalaznick Associate Professor of Business, Finance and Economics, featured in the Journal of Econometrics, found that retailer characteristics are crucial determinants of heterogeneity in pricing dynamics, in addition to product characteristics. Alongside Alice Nakamura, Professor of Business Economics, School of Business, University of Alberta, and Leonard Nakamura, Vice President and Economist, Federal Reserve Bank of Philadelphia, Professor Nakamura studied grocery price dynamics. Previously, research based on store scanner data emphasized differences in price dynamics across products. Instead the researchers studied differences in price movements across different grocery store chains. A variance decomposition revealed that characteristics at the level of the chains (as opposed to individual stores) explain a large fraction of the total variation in price dynamics. The study is of particular interest to central bankers and macroeconomists as well as price index specialists who analyze price dynamics.
One reason for why previous studies in this area relied on data that focused on heterogeneity in pricing behavior across products is that product category data is more available in broad-based price databases such as in the research database associated with the United States’ Consumer Price Index (CPI). In this new study, the researchers decided to use a dataset consisting of millions of price observations per year at a large number of grocery stores in numerous retail chains to document the nature and dispersion of high frequency price dynamics across stores and chains in addition to products. The researchers constructed weekly average prices (i.e., unit prices) for products defined at the Universal Product Code (UPC) level by dividing store level dollar sales by the sales volumes.
The empirical analysis confirmed that temporary sales, which occur frequently in many stores, are important determinants of price dynamics in the United States. To investigate the implications of this phenomenon, Professor Nakamura and her colleagues compared price index measures calculated using all prices and those calculated using only “regular prices” (i.e., using only prices excluding temporary sales). The study found that a substantial amount of the variation in the prevalence of sales across stores is accounted for by differences among chains.
Another key finding of the study is that the measurement of temporary sales matters for inflation measurement, analysis, and forecasting purposes. The results show that the implications of temporary sales for index number measurement cannot be ignored when constructing price indexes. In addition, the study reveals that retailer characteristics are crucial determinants of heterogeneity in pricing dynamics.
In terms of future implications, conclusions about the importance of chain-level pricing can potentially help improve the efficiency of CPI sampling. The results also imply that the chain drift problem, the possible bias that can arise when separate price indexes are linked, will not be solved solely by averaging data across stores within retail chains.
The study’s analysis is based on proprietary scanner price data, consisting of weekly price and quantity observations for product sales at grocery stores across the United States. The scanner dataset is from a national sample of hundreds of grocery stores belonging to numerous grocery chains. The dataset represents over 20 billion dollars of retail sales annually for thousands of UPCs, with tens of millions of observations per year.
About Columbia Business School
Led by Dean Glenn Hubbard, the Russell L. Carson Professor of Finance and Economics, Columbia Business School is at the forefront of management education for a rapidly changing world. The school’s cutting-edge curriculum bridges academic theory and practice, equipping students with an entrepreneurial mindset to recognize and capture opportunity in a competitive business environment. Beyond academic rigor and teaching excellence, the school offers programs that are designed to give students practical experience making decisions in real-world environments. The school offers MBA and Executive MBA (EMBA) degrees, as well as non-degree Executive Education programs. For more information, visit http://www.gsb.columbia.edu.
About The Jerome A. Chazen Institute of International Business at Columbia Business School
The Jerome A. Chazen Institute of International Business serves as the focal point for Columbia Business School’s major international programs and initiatives, and supports, sponsors and promotes thought leadership and frontier research on topics related to the global economy and business. The Institute provides forums for collaboration and learning among students, faculty members and the global community, connecting these constituencies with experiences, cultures and practices in markets across the globe. The Chazen Institute plays a leading role in shaping international business policy and education through research, symposia and conferences, experiential learning programs, curricular innovation and the creation of intellectual content and its translation to wider international business communities. For more information, visit http://www.gsb.columbia.edu/chazen.
Contact: Sona Rai
sr2763@columbia.edu
212-854-5955
Columbia Business School
Majority of Americans say research and development are key to building US economy
January 5, 2012
The new edition of America Speaks, a compilation of public opinion polls commissioned by Research!America, demonstrates increasing public support for research and innovation to improve health, create jobs and boost the economy. However, nearly 60% of Americans don’t believe we are making enough progress in medical research, and 54% don’t believe the U.S. has the best health care system in the world.
These polls reveal notable themes in Americans’ views on health research and the country’s global competitiveness. For example, 77% agree that the U.S. is losing its competitive edge in science, technology and innovation.
Despite these findings, many Americans (86%) believe that advances in science have benefited society and have helped make life easier for most people. A vast majority (91%) also believe that research and development are important to their state’s economy.
“Americans support further investment in health research and have indicated that the federal government must do more to sustain and build our economy,” said Research!America Chair and former Illinois Congressman John Porter. “Scientific research has proven to be an emerging, economic driver in cities that have committed to building their life sciences industry. To secure our position as a leader in science and innovation, we need to elect officials that will support a robust investment in research. That is why the 2012 elections are critical to our nation’s well-being.”
The majority of Americans also believe that investing in health research is important to job creation, economic recovery and global competitiveness, and they are willing to pay for it. For example, half of those surveyed are willing to pay $1 per week more in taxes if they knew that the money would be allocated for medical research.
“These findings offer an intriguing look at how research impacts so many aspects of our lives and why it must be more of a focal point in the national conversation, particularly during an election year,” said Mary Woolley, president and CEO of Research!America. “Looking at science as a solution to our economic woes and health challenges is a smart strategy for elected officials and candidates. Americans see science as a solution, and our public policy should reflect that.”
Grooming the next generation of scientists is also key to our country’s health and prosperity, Porter added. More than 70% of Americans believe that the federal government should place more emphasis on the number of American students who pursue STEM (science, technology, engineering and mathematics) careers.
The poll data summary also provides a glimpse into some of the top health policy issues for 2012, such as rising obesity rates in this country.
“We need an integrated strategy involving both the public and private sector to address the obesity epidemic,” said Woolley. According to America Speaks!, 52% of Americans say government should play a role in prevention research to help Americans make behavioral changes that can help them overcome obesity, smoking and other hazardous and costly health threats.
Among the most notable poll highlights:
- 54% of Americans believe the U.S. does not have the best health care system in the world;
- 51% of Americans think that more health funding should go toward research;
- 82% of Americans believe it’s important to conduct medical or health research to understand and eliminate health disparities; and
- 87% of Americans think elected officials should listen to health professionals regarding health threats.
To view America Speaks, Volume 12, visit: http://www.researchamerica.org/uploads/AmericaSpeaksV12.pdf
About the Publication: Research!America began commissioning polls in 1992 in an effort to understand public support for medical, health and scientific research. The results of Research!America’s polls have proven invaluable to our alliance of member organizations and, in turn, to the fulfillment of our mission to make research to improve health a higher national priority. In response to growing usage and demand, Research!America has expanded its portfolio, which includes state, national and issue-specific polling. Poll data is available by request or at www.researchamerica.org.
Online polls are conducted with a sample size of 600-1,200 adults (age 18+) and a maximum theoretical sampling error of +/- 4.1%. Data are demographically representative of adult U.S. residents or of the states in which the polls were conducted. Polling in America Speaks was conducted by Charlton Research Company, JZ Analytics and IBOPE Zogby.
About Us: Research!America is the nation’s largest nonprofit public education and advocacy alliance working to make research to improve health a higher national priority. Founded in 1989, Research!America is supported by member organizations representing 125 million Americans. Visit www.researchamerica.org.
Contact: Angie Antonopoulos
aantonopoulos@researchamerica.org
571-482-2737
Research!America
How to break Murphy’s Law
December 23, 2011
Murphy’s Law is a useful scapegoat for human error: “If something can go wrong, it will.” But, a new study by researchers in Canada hopes to put paid to this unscientific excuse for errors by showing that the introduction of verification and checking procedures can improve structural safety and performance and so prevent the application of the “law”.
Engineer Franz Knoll of Nicolet Chartrand Knoll Ltd., based in Montreal, Quebec, writing in the International Journal of Reliability and Safety explains that faults and flaws in any industrial product almost always originate from human error, through lack of attention, communication, or competence. Unfortunately, humans do not like to admit their mistakes and invoke all kinds of spurious excuses to explain a problem: software bugs, computer glitches, acts of God, and, of course, good-old Murphy’s Law.
Knoll points out that scientific testing and analysis are increasingly removing any doubt as to what is to blame for problems and errors that arise. Natural events can be quantified and the probabilities of their occurrence predicted. While early-warning systems for earthquakes, hurricanes, tsunami and volcanic activity are in place, it is often human shortcomings that lead to the worst outcomes during and after such events.
When it comes to the construction of buildings and bridges, human failings are often most apparent. As Knoll says, in the construction industry, and elsewhere, management would like the company to deliver the “Rolls Royce” for the low price of a “Volkswagen Beetle”. From the top down, however, human shortcomings trickle so that inferiority ultimately leaks from the bottom, as workers endeavor to comply with strict budgets under pressure to perform well. Corners are cut and Murphy appears on the scene at the most inopportune moments.
“In the pursuit of quality in building in the sense of an absence of serious flaws, a targeted strategy for the apprehension and correction of human errors is of the essence,” Knoll says. In this context an absolute requirement is that at critical stages during construction, highly qualified and experienced engineers must attend to the task of checking for mistakes so that problems are not buried in concrete or plastered over only to resurface later. Such personnel being in short supply would suggest that directing them towards the details that matter, rather than encumbering them with administrative chores would be appropriate. Unless, their name is Murphy, perhaps.
“Of reality, quality and Murphy’s law: strategies for eliminating human error and mitigating its effects” in Int. J. Reliability and Safety, 2012, 6, 3-14
Contact: Albert Ang
ejournal@inderscience.com
Inderscience Publishers
A new system for forecasting the GDP of autonomous regions
November 29, 2011
This work presents the technical possibility to carry out within a day after the release of new economic data for the Spanish quarterly accounting, quarterly forecasts for GDP economic growth (Gross Domestic Product) for all of the autonomous regions. This forecast has proven to be reliable and consistent with GDP growth in the Spanish economy, according to Antoni Espasa, Full Professor of Econometrics in the UC3M Statistics Department, one of the authors of this study, in which Angel Cuevas and Enrique M. Quilis, from the Ministry of Tourism, Industry and Trade, and the Ministry of Economy and Finance, respectively, have also participated. The study, entitled Combining Benchmarking and Chain-Linking for Short-Term Regional Forecasting, was presented last year at the DIW Econometric Workshop in Berlin (Germany), and this year at the International Symposium on Forecasting, in Prague (The Czech Republic) and the IWH-CIREQ Macroeconometric Workshop, in Halle (Germany).
This line of research could have applications in the current economic context. In this work, for example, the methodology described is applied to give a quarterly profile of economic growth in each autonomous region for the last 16 years, and the forecasts for the rest of 2011. “This allows us to see the differences in the economic cycles particularly in the latest recession and the budding recovery which began in 2010,” Antoni Espasa pointed out. “The application,” he added, “gives forecasts for growth for all of the autonomous regions that should relate them with budget tightening plans and public deficit objectives.” In the current economic context which is marked by uncertainty and volatility, a tool such as the one presented in this work contributes to clearly improving analysis of the current economic situation and corresponding decision making, according to Professor Espasi.
Forecasting economic times
The data necessary to carry out this type of predictions are those related with the Los Contabilidad Nacional Trimestral de España (CNTR) (National Accounts Data), and the Contabilidad Anual Regional de España (Regional Accounts Data), as well as the monthly and quarterly data on main macroeconomic indicators from each Autonomous Region. Next, econometric techniques of time series models are applied to obtain the forecast, seasonally adjusted and interpolation with reference index. With that, a new instrument is obtained for short-term monitoring which allows analysts to quantify the degree of synchronization among regional economic cycles.
This research is within the framework of the commitment made by the UC3M Instituto Flores de Lemus to analysis and diagnosis of the economic reality. The researchers of this center, lead by Professor Espasa, have a great deal of experience, dating back more than 17 years, in monitoring, forecasting and diagnosis of the real economy, with its monthly bilingual publication of Boletín de Inflación y Análisis Macroeconómico.
More information:
Combining Benchmarking and Chain-Linking for Short-Term Regional Forecasting
Authors: Ángel Cuevas, Enrique M. Quilis; Antoni Espasa
Contact: Ana Herrera
oic@uc3m.es
Carlos III University of Madrid
Credit card bill notes curb cardholders’ monthly payments
November 7, 2011
Credit card customers are likely to pay less toward their credit card debt because their monthly bills display information about the minimum required payment amount, American and British researchers report in the Journal of Marketing Research.
For many debt-laden consumers, printing the minimum required payment information on their account statements can reduce the amount they pay each month by as much as 24% – about $120 less on a $2,000 balance – according to the researchers, who conducted surveys of more than 500 U.S. consumers and reviewed anonymous data from more than 100,000 British cardholders.
“The mere presence of minimum payment information acts like an anchor on borrowers’ repayments, pulling them downward,” said co-author Linda Salisbury, an assistant professor of marketing at Boston College’s Carroll School of Management. “This presents a tricky balancing act for lenders: removing the minimum required payment may increase repayments overall, but it would also put lenders at greater risk of increasing default levels.”
With credit card debt hovering at slightly more than $10,000 for the typical American household and regulations mandating a range of debt and repayment information be included in monthly statements, researchers sought to find out if the data actually motivate consumers to pay down their debt.
Increasing the minimum required payment – typically from 2 percent to 5 percent of the loan balance – actually had a positive effect on repayment for most consumers. However, that alone wasn’t enough to overcome the negative effects of posting the minimum required payment, according to the researchers from Boston College and the University of Warwick, University of Essex and University College London, all in the United Kingdom.
In addition, displaying information like payment scenario timelines and potential long-term interest costs – as is now required on US credit card statements – did not encourage increased payments. Disclosing future interest costs significantly increased the likelihood a cardholder would pay only the minimum required.
Borrowers’ credit limit, balance due and propensity to pay the minimum required payment all factored into the influence of statement data on payment behavior, the team found.
For borrowers who typically pay the minimum each month, increasing the minimum required amount has a positive effect, but this is not the case for borrowers who typically pay more than the minimum required; increasing the minimum had no effect for them.
While the U.S. CARD Act of 2009 mandated many of these new information disclosures, researchers point out that disclosure alone is not likely to increase debtors’ monthly repayments to the levels expected.
The researchers urged “clinical trials” to test the impact of debt information disclosure, noting that the U.S. Office of Management and Budget had drawn the same conclusion in their guiding principles for the use of information disclosures in the regulatory process.
“By testing new regulations more thoroughly before implementing them, regulators can avoid unintended consequences such as those identified in this research,” said co-author Katherine Lemon, the Accenture Professor of Marketing in the Carroll School of Management at Boston College.
Contact: Ed Hayward
ed.hayward@bc.edu
617-552-4826
Boston College
Taking steps to prevent ‘going postal’
October 13, 2011
Workplace violence continues to be a topic of great importance to many companies, as tales of extreme cases hit the media. Today’s human resources departments spend a great deal of time preparing for these cases. However, a new study in the journal Advances in Developing Human Resources (ADHR) questions whether time might be better invested in further investigation.
In the article “Workplace Violence: Assessing Organizational Awareness and Planning Interventions,” proposes that using a theory called awareness development to assess employees responses to situations can help HR departments better craft their workplace violence policies and procedures.
“The complexity of workplace violence demands a thoughtful diagnosis that provides a clear assessment of the organization’s current situation so chosen strategies are appropriate,” wrote author Martin B. Kormanik.
Part of that diagnosis process, Kormanik contends, is surveying employees to see where they are in one of the five stages of awareness development. These stages include pre-encounter (having little to no knowledge of workplace violence), intellectualization (having knowledge but no experience with workplace violence), encounter (having experience with workplace violence), empowerment (seeking strategies to adapt or cope after workplace violence), and integration (regaining a sense of control after workplace violence). In this study, most of the participants’ organizations fell into the intellectualization stage.
Participants said “the largest percentage of the organization ‘talks a good game’ but has limited awareness of workplace violence issues,” wrote Kormanik.
The author suggests the use of the awareness development theory to help companies assess their current status and plan initiatives based on awareness level of workplace violence.
The article entitled “Workplace Violence: Assessing Organizational Awareness and Planning Interventions” from Advances in Developing Human Resources is available free for a limited time at: http://adh.sagepub.com/content/13/1/114.full.pdf+html .
Advances in Developing Human Resources (ADHR), published bi-monthly, focuses on the issues that help you work more effectively in human resource development. The journal spans the realms of performance, learning, and integrity within an organizational context. Balancing theory and practice, each issue of the journal is devoted to a different topic central to the development of human resources. http://adh.sagepub.com/
SAGE is a leading international publisher of journals, books, and electronic media for academic, educational, and professional markets. Since 1965, SAGE has helped inform and educate a global community of scholars, practitioners, researchers, and students spanning a wide range of subject areas including business, humanities, social sciences, and science, technology, and medicine. An independent company, SAGE has principal offices in Los Angeles, London, New Delhi, Singapore and Washington DC. www.sagepublications.com
Contact: Ashley Loar
ashley.loar@sagepub.com
805-410-7111
SAGE Publications
What employers look for of those re-entering the workforce
September 25, 2011
Finding a job in today’s economy is difficult in the best of circumstances, but many women are facing an even bigger challenge: returning to the workforce after a long absence. Researchers recently looked at the characteristics on older women’s resumes that received the most success in securing job interviews. The top characteristic that resulted in job interviews for middle-aged women seeking an entry level job was vocational or computer training, according to the study in the Journal of Career Development (JCD), published by SAGE.
In the article “The Resume Characteristics Determining Job Interviews for Middle-Aged Women Seeking Entry-Level Employment,” researchers looked at the effects of age, job-related experience, vocational training, outside activities, and length of gaps in work history. Researchers sent varying resumes to more than 3500 employers in Boston and St. Petersburg, FL, and studied the responses from employers interested in conducting interviews with their “candidates.” Employers represented various fields of industry and the jobs listed were all entry-level positions requiring up to one year of post-high school education and combined work experience.
“Employers focus almost exclusively on educational background in the entry-level jobs studied,” wrote Emily Johnson and Joanna Lahey. “The benefits of adding volunteer experiences, hobbies, or involvement in sports may help in some communities more than others, and while they may not hurt the potential for an interview, these activities do not guarantee an interview for an entry-level job position.”
Some of the findings go directly against what today’s career guides direct job seekers to do, not the authors. The lack of impact of outside activities did not carry the same importance as a lot of today’s job manuals profess. Johnson and Lahey hope their findings will impact the advice to middle-age women by career counselors, and encourage them to seek further education or vocational training to stay current with today’s sought after skills.
“Job seekers may be helped in their decision making processes by knowledge of employer demand and specifically by knowledge of the items employers are looking for that could make employees more attractive,” wrote the authors.
Johnson and Lahey’s results also confirmed a previous study that showed a negative correlation between age and hiring.
The article entitled “The Resume Characteristics Determining Job Interviews for Middle-Aged Women Seeking Entry-Level Employment” from Journal of Career Development (JCD) is available free for a limited time at: http://jcd.sagepub.com/content/38/4/310.full.pdf+html.
The Journal of Career Development (JCD) provides professionals in counseling, psychology, education, student personnel, human resources, and business management with the most up-to-date concepts, ideas, and methodology in career development theory, research, and practice. Topics covered are career education, adult career development, career development of special needs populations, career development and the family, and career and leisure.
Impact Factor: 1.05
Ranked: 41 out of 67 in Psychology, Applied Source: 2010 Journal Citation Reports® (Thomson Reuters, 2011)
SAGE is a leading international publisher of journals, books, and electronic media for academic, educational, and professional markets. Since 1965, SAGE has helped inform and educate a global community of scholars, practitioners, researchers, and students spanning a wide range of subject areas including business, humanities, social sciences, and science, technology, and medicine. An independent company, SAGE has principal offices in Los Angeles, London, New Delhi, Singapore and Washington DC. www.sagepublications.com
All credit ratings not created equal
September 15, 2011
At least one of the “Big Three” credit ratings agencies exaggerated credit scores of private debt compared to public bonds during the last 30 years, according to a new study by researchers from Rice University, American University and Indiana University.
The recent downgrade of U.S. debt by Standard & Poor’s makes the study timely, and the research adds to the current debate surrounding regulatory reliance on credit ratings and the current Securities and Exchange Commission proposal to standardize credit ratings across asset classes.
For the study, “Credit Ratings Across Asset Classes: A ≡ A?,” business professors John Hund of Rice, Jess Cornaggia of Indiana and Kimberly Cornaggia of American examined credit ratings assigned by Moody’s Investors Service from 1980 to 2010. They compared the frequency at which different assets that received the same letter grade defaulted, and they found significant differences. Zero percent of sovereign bonds and .49 percent of municipal bonds that initially received “A” ratings defaulted, compared with 1.83 percent of corporate bonds, 4.9 percent of financial bonds and 27.2 percent of structured bonds.
“Professional investors have been uncertain about the Big Three’s ratings similarities, and our findings show that their hesitation is justified,” Hund said.
The researchers also found a connection between the rate at which different types of assets had their ratings downgraded or upgraded and the different asset classes. After five years, 27.4 percent of A-rated corporate bonds, 17.8 percent of financial bonds and 33.3 percent of structured bonds were downgraded, versus only 3.3 percent of sovereign bonds and 6.1 percent of municipal bonds.
“Contrary to statements by the Big Three credit raters, our research demonstrates that credit scores are not comparable across asset classes,” Hund said. “Debt from different types of issuers with the same ratings has different default rates and different patterns of ratings changes.”
The study also shows that municipal and sovereign bonds have been rated more harshly and structured products more generously when compared with traditional corporate bonds. The authors found an inverse correlation between ratings standards and revenue generation among the asset classes.
“We find ratings optimism (leniency or inflation) increases in the revenue generation by asset class,” the researchers wrote. “Revenues generated from structured finance products are significantly higher than those generated from corporate issuers which are, in turn, higher than those generated from sovereign issuers and municipalities.”
Hund said he hopes that the study will shed new light on the current ratings system and will motivate organizations to do independent research rather than simply rely on what credit agencies are saying.
“In the past several years, some investors have depended on credit agencies to guarantee their decisions as ‘safe,’ and the current ratings system makes it difficult to determine which are the riskier securities,” Hund said. “Ultimately, it’s up to investors to know the difference, but the present system of ratings has left many with a false sense of security.”
Hund said a consistent ratings system is vital to the future financial health of the United States.
“The foundation of our financial system is understanding credit risk, but we need to re-examine the credit ratings process and the ratings agency’s role in that process in order to ensure that the foundation is solid for the future.”
To read the study, visit http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1909091.
To schedule an interview with Hund, contact David Ruth, director of national media relations at Rice, at druth@rice.edu or 713-348-6327.
Located on a 285-acre forested campus in Houston, Rice University is consistently ranked among the nation’s top 20 universities by U.S. News & World Report. Rice has highly respected schools of Architecture, Business, Continuing Studies, Engineering, Humanities, Music, Natural Sciences and Social Sciences and is known for its “unconventional wisdom.” With 3,485 undergraduates and 2,275 graduate students, Rice’s undergraduate student-to-faculty ratio is less than 6-to-1. Its residential college system builds close-knit communities and lifelong friendships, just one reason why Rice has been ranked No. 1 for best quality of life multiple times by the Princeton Review and No. 4 for “best value” among private universities by Kiplinger’s Personal Finance. To read “What they’re saying about Rice,” visit http://www.rice.edu/nationalmedia/Rice.pdf.
Contact: David Ruth
druth@rice.edu
713-348-6327
Rice University
US investment in health research remains stagnant
September 8, 2011
Managing intellectual property a challenge for firms, innovators
September 8, 2011
The increasing complexity of multi-invention technologies such as laptops and smartphones raises serious challenges for firms looking to cash in with the “next big thing,” and points to a need for businesses to integrate their patent and business strategies, according to research published by a University of Illinois patent strategy expert.
Business professor Deepak Somaya says the successful commercialization of patent-based products that draw upon multiple inventions, whose ownership is often spread across a variety of organizations, can be a cumbersome and thorny proposition.
“Companies need to think about their intellectual property strategy along with their strategy and business models,” Somaya said. “Almost every complex electronics product sold to consumers today contains numerous technologies and inventions, most of which are covered by patents and other forms of intellectual property rights. To essentially defer intellectual property strategy until after you’ve become successful is invariably going to be a costly mistake.”
In their paper, Somaya and co-authors David J. Teece, of the University of California at Berkeley, and Simon Wakeman, of the European School of Management and Technology, present a framework for addressing the challenges of commercialization strategies for multi-invention products, as well as strategies for appropriating value from innovation in these contexts.
“A large number of industries and products are now taking a multi-invention form,” Somaya said. “In order to create an innovative product or service, a very large number of inventions have to be brought together. The analytical framework advanced in the paper provides a useful guide for firms and innovators in these multi-invention contexts, and enables them to devise suitable business models and patent strategies.”
According to the paper, to maximize the chances for success in multi-invention contexts, innovators must determine the relative organizational costs and benefits of different business models, and choose the most effective model for the given context.
Somaya and his co-authors provide four case studies to show the application of the key theoretical concepts in real-world situations, and a set of guidelines for choosing from among three types of business models: licensing, componentization and integration. There are also three main strategies for intellectual property – proprietary, defensive and leverage – that firms can use and combine in different ways.
“The paper’s main insight is that innovating companies must choose patent strategies that are well aligned with their business models,” he said. “You simultaneously have to think about your patent strategy and your business strategy. Innovators must combine inventions and complementary assets in ways that maximize their chances of success, and figure out how best to appropriate value from these unique combinations at the same time. For example, if you’re a component manufacturer or licenser of technology, then it becomes much more important for you to use a proprietary strategy for your intellectual property.”
Somaya says Apple and Google provide a good contrast of business models competing in the same market.
“Google is focused on creating a core technology with the Android operating system, but they let other firms develop most of the complementary inventions,” he said.
“Apple also has a lot of technology partners, but they’re much more integrated than Google. With the iPhone, for example, other firms make all of the hardware components, but Apple’s footprint is much wider and it ultimately controls the final product. HTC is a great example of an integrator in the Android ecosystem that builds off Google’s core technology and adds significant value in the process.”
But firms such as HTC are playing defense on the intellectual property front with multiple patent infringement suits from firms such as Apple and Microsoft, and this ultimately hurts Android’s chances of success as well, Somaya said.
“Ideally, Google’s patent strategy for Android should have been developed in parallel with their business model and technology strategy,” he said. “Instead the company has been backfilling with acquisitions like Motorola Mobility, whose primary assets are patents that Google can use to defend its Android franchise. Google has also been lending support to partners like HTC, who has now responded to Apple’s patent suits by suing Apple back using a patent the company acquired from Google.”
And it’s not just consumer electronics. Somaya says a large number of rapidly growing technologies – including biotechnology, semiconductors and nanotechnology – also share in the multi-invention characteristic.
“That raises important strategic challenges about how firms should innovate that are affecting vast swathes of the economy” he said.
The paper, “Innovation in Multi-Invention Contexts: Mapping Solutions to Technological and Intellectual Property Complexity,” is published in the current issue of California Management Review.
Contact: Phil Ciciora
pciciora@illinois.edu
217-333-2177
University of Illinois at Urbana-Champaign