Competitive Dynamics

1

BADM 551, MT1Law, Technology and Intellectual
Property
Paul M. Vaaler Associate Professor of
International Business Department of Business
Administration College of Business University of
Illinois at Urbana-Champaign
Sessions 8-9 Learning and IPM
2
Presentation Plan
50-Minute In-Class Examination Recap
1
DuPont Case Intro Learning and IPM I
2
3
DuPont Case Conclusion Learning and IPM II
3
Administrative Matters
1

• 50- (not 30-) Minute Quiz Worth 15 Points.
• True-False, Multiple Choice, Fill-In-Blank
  Answers.
• Closed Book, Closed Notes, Closed Everything.
• Do Your Own Work. Finish Your Quiz and Sit
  Quietly (Read Your DuPont Case Materials) Until
  The End of the Quiz Period
• Good Luck!!

4
Introducing Module 2 Learning and IPM
2

• Special Topics in IPM Learning, Competition,
  Social Responsibility
• Common Linkage Knowledge Creation,
  Exploitation, Stewardship
• IPM and Learning Both About Knowledge Creation
• How Firms Use Learning to Jump Out (and Stay)
  Ahead of Rivals
• What Learning Curves Are and How They Are Used
  Competitively
• Licensing Regimes where Learning Is Important
• The Role of IP
• DuPont and Titanium Dioxide
• A Case from the 1960s and 1970s
• With Implications for the 2000sHuh?

5
2
DuPont and Ti02
Whats the Situation Facing DuPont Top
Management Regarding Titanium Dioxide in the
1970s?
6
2
DuPont and Ti02
Whats the Situation Facing DuPont Top
Management Regarding Titanium Dioxide in the
1970s? -Expand or Maintain TiO Production
Facilities? -What Is Cost of Each? -What Is
Likely Competitive Reaction? -How Best to Exploit
Temporally-Based Cost Advantages -What Is a
Temporal (First-Mover) (Dis)Advantage?
-
7
Titanium Dioxide Mfgring Processes Whats
the Science and History Behind This Situation?
2
Developed by DuPont in the 1950s
Used by Others Since The 1930s
8
Titanium Dioxide Mfgring Processes Whats
the Initial Luck Behind This Situation?
2
DuPont Had Head- Start on Preferred Mfgring
Process
The Problem in the 1960s
9
First Mover and Late Mover Advantages A
Conceptual Map
2
Environmental Opportunity
10
First Mover and Late Mover Advantages A
Conceptual Map
2
Environmental Opportunity

• First Mover
• Resources
• Capabilities

Competitive Strategy
11
First Mover and Late Mover Advantages A
Conceptual Map
2
Environmental Opportunity

• First Mover
• Resources
• Capabilities

Competitive Strategy





12
First Mover and Late Mover Advantages A
Conceptual Map
2

• Late Entrant Advantages
• Imitation Costs
• Free-rider Effects
• Shifting Industrial and Techno-
• Logical Factors
• Learning From First Mover

-





-
13
First Mover and Late Mover Advantages A
Conceptual Map
2

• Late Entrant Advantages
• Imitation Costs
• Free-rider Effects
• Shifting Industrial and Techno-
• Logical Factors
• Learning From First Mover

-




Overall Magnitude of Competitive
Advantage First Mover Performance
-Profits -Market Share -Pricing -Other

-
14
Understanding First Mover AdvantagesEconomies of
Scale vrs. Economies of Time(Learning Curve)
2
Scale Economies
Costs () Per Unit
Volume of Production at One Time Period
15
Understanding First Mover AdvantagesEconomies of
Scale vrs. Economies of Time(Learning Curve)
2
Scale Economies
Learning Curve Economies
Learning Curve Equation
Y ax-?
Costs () Per Unit (Assume Costs are Related
to Time to Produce Each Unit)
a time spent producing first unit x total
number of units produced ? coefficient
describing rate of learning Y average time to
produce all x units
Costs () Per Unit
Cumulative Volume of Production Over Several Time
Periods
Volume of Production at One Time Period
If it averages 20 minutes to produce six units
and if it averages 16 minutes to produce twelve
units then the manufacturing process is said to
have an 80 learning curve (16/20) .80. ?
.3219 for 80 curve.
16
Understanding First Mover AdvantagesEconomies of
Scale vrs. Economies of Time(Learning Curve)
2
An Envelope of Scale Economy Cost Curves Makes Up
the Learning Cost Curve.
Costs () Per Unit (Assume Costs are Related
to Time to Produce Each Unit)
17
Understanding First Mover AdvantagesEconomies of
Scale vrs. Economies of Time(Learning Curve)
2
An Envelope of Scale Economy Cost Curves Makes Up
the Learning Cost Curve.
Costs () Per Unit (Assume Costs are Related
to Time to Produce Each Unit)
In Any Statistical Analysis of the Data (e.g.,
Regression), You Would Try to Separate Out the
Two Effects. You Can If You Have More Than
One Period of Data to Examine.
Cost/Unit T Units ProducedT Cumulative
Units Produced1-T (Unit Costs (Scale Effects
For (Cumulative Learning Effects of
Production) This Time Period) Across All Time
Periods)
18
DuPont and Ti02
2
So, Should DuPont Expand or Maintain in the
mid-1970s?
Lets Break for 10 Minutes
19
DuPont and Ti02
2

• So, Should DuPont Expand or Maintain?
• At First Glance, Maintain Looks Like a More
• Prudent Strategy for DuPont
• Comfortably Profitable Business Now
• Less Capital Expense (New Plants, Shakedown)
• Avoid Battles for Market Share with Competitors

• But DuPonts Top Management Were Thinking About
  the Strategic Impact of a Learning Curve
  Advantage. Their Decision Would Be a Signal to
  Competitors of DuPonts Intent to Dominate (Not
  Just Profitably Compete in a Niche of) the TiO
  Market. DuPont Expanded
• Announced Expansion Would Drive Out Competitors
• Might Not Need to Incur All Capital Expense
• If Competitors Couldnt Catch Up on the TiO
  Learning Curve, What Else Could They Do?

20
DuPont and Ti02
2
DuPonts Competitors Tried to Negotiate Licenses
to Produce TiO Based on DuPonts Process, and
Then Sued DuPont for the Same. The US Federal
Trade Commission Joined Suit for Consumer
Interests. What Did the FTC Think of DuPonts
Expand Strategy? What Licensing Rule Should the
Parties or the FTC Use? Willing Seller-Willing
Buyer? (Are There Similar Deals to Use As
Guides?) Alternative Efficient Component
Pricing (ECP)
21
Concepts of Compelled Licensing and Patent
Holder Neutrality Under ECP
4
Access Price Incremental Cost of Providing
Access Opportunity Cost of Providing Access
Example Think of DuPont Pre-TiO Dispute Serving
a Business Customers Monthly Titanium Dioxide
(TiO) Needs Let P0 Monopoly (Patent) Price of
Service (TiO) 150/ton Let c Patent Holders
(DuPont) Unit Cost of Service (TiO)
50/ton Let b Patent Holders Unit Cost of Mfgr
(TiO Plant) 50/ton Let D(P0) Demand (Q0)
at Monopoly Price P0 5000 tons Let k Sunk
Cost of Mfgr et al (TiO Plant)
250,000 Then DuPont Will Break Even Under This
Monopoly Regime If (P0 c b)D(P0) k
0 (150 50 50)5000 250,000 0
22
Concepts of Compelled Licensing and Patent
Holder Neutrality Under ECP
4
Example Think of DuPont Pre-TiO Dispute Serving
a Business Customers Monthly Titanium Dioxide
(TiO) Needs Let P0 Monopoly (Patent) Price of
Service (TiO) 150/ton Let c Patent Holders
(DuPont) Unit Cost of Service (TiO)
50/ton Let b Patent Holders Unit Cost of Mfgr
(TiO Plant) 50/ton Let D(P0) Demand (Q0)
at Monopoly Price P0 5000 tons Let k Sunk
Cost of Mfgr et al (TiO Plant)
250,000 Then DuPont Will Break Even Under This
Monopoly Regime If (P0 c b)D(P0) k
0 (150 50 50)5000 250,000 0
New Example Think of DuPont After Compelled
Licensing Serving a Business Customers
Monthly Titanium Dioxide (TiO) Needs, But
Considering a Licensee (Kerr-McGee) as an
Alternative Let X Licensee Partys (Ls)
Supply 1000 tons Let g Ls Cost of TiO
30/ton Let P New Competitive Price for DuPont
(and Others) 120/ton Let Q1 New
Deregulated DuPont Demand 4000 tons Let A
Per Unit Price of Access to DuPonts TiO
50/ton Then DuPonts Lost Net Earning Under
Licensing Loss (P0 c b)Q0 (P c
b)Q1 (150 50 50)5000 (120 50 50)4000
170,000 ECPR A b Loss/X 50
170000/1000 220/ton (Price DuPont Would Permit
L to License). gImplies that L Has Lower
Cost of Service Than DuPont
23
DuPont and Ti02
2
FTCs Judgment of Expand Strategys Consumer
Disadvantage (DuPonts Advantage) Over Maintain
Strategy...
60
Total Consumer Gain of 185.8 million
Consumer Gains ( millions)
0
1972
1976 1982 1992
Total Consumer Loss of 573.2 million (to 1992)
-60
24
DuPont and Ti02
2
Postscript DuPont Eventually Signed a Consent
Decree Committing it to License Ti02 to Industry
Competitors. But DuPont Still Commands Largest
Share in US and OUS of Ti02 (2000). Perhaps the
Learning Curve Advantage Is Difficult to Overcome
Even With Compelled Licensing.
Think About What DuPonts Story Implies For A
Firms Ability to Use Competitive Resource/Compet
ence. The Firm Exists Within a Politically-Competi
tive and Economically-Competitive System, Too.
60
Total Consumer Gain of 185.8 million
Customer Gains ( millions)
0
1972
1976 1982 1992
Total Consumer Loss of 573.2 million (to 1992)
-60
25
DuPont and Ti02
2

• IPM Is the Handmaid of Learning More Generally
  in the Firm
• IP Is a Means of Pre-Empting Others and Gaining
  First-Mover Advantages
• IP Is a Means to Getting a Head Start Down the
  Learning Curve
• IP Is a Means of Setting Up Behavioral
  (Differentiation) Sources of Advantage Even After
  Competitors Enter and Move Catch Up Learning-Wise
• IP Is a Means of Converting Actual Production
  Into Licensing Royalties (or Infringement
  Damages)
• But IP and Complex Learning May Contradict Each
  Other
• IP Is Articulated-Codified Learning (e.g.,
  Whitneys Cotton Gin)
• Learning Is Not Necessarily So (e.g., DuPonts
  TiO Mfgring Process)
• In Reducing the Complex to the Simple and
  Codifiable, Do We Undermine the Value of the
  Learning for the Firm?
• Managing IP and Firm-Specific, Industry-Specific
  Learning

26
Looking Ahead to Module 3 and IPM and
Competition Policy
3

• Does DuPont Teach Us That You Should Be Good,
  But Not Too?
• Balancing Innovator and Consumer Expectations
• A Changed Technological Landscape Requiring
  Changed IP Regime?
• US versus Microsoft