"Monopoly Thinking" Can Make Your R&D More Effective: Situational Monopolies Rely on Changing Customer Needs and Competitor Inertia to Generate Superior Growth and Profits, Often in Mature, "Commodity" Industries

Article excerpt

Economists will tell you that "(only) monopoly assets create monopoly profits." In other words, if (and only if) a company has a monopoly of some sort--a unique product, unique production capabilities, a patented technology, trade secrets, an exclusive distribution channel or something else--can it generate above-average ("monopoly") profits. The monopoly may last for a long time, as in the case of a drug patent, or it may be transient, e.g., a fad like Cabbage Patch dolls. It might be global, like Microsoft's Windows, or it might be very local, as in the case of the only drugstore open 24 hours in a neighborhood with lots of small children. Regardless, it is the underlying monopoly that creates high profits.

Viewed in this light, the goal of corporate R&D is clear (1): R&D efforts should focus on creating viable, profitable monopolies through unique, preferably patentable, features, products, processes, or technologies; i.e.,--the job of R&D is to create monopoly assets. The larger this monopoly--i.e., the greater the number of customers it attracts the better. Similarly, the longer this monopoly lasts, the better.

Please note: I am talking throughout this article about perfectly legal monopolies, such as patents, brands and trade secrets; I am not talking about illegal, collusive monopolies or price-fixing.

Product and technology innovation have created powerful and highly lucrative monopolies since the late 19th century (2). Edison's patents made him a wealthy man; Edwin Land's patents on polarization were the foundation of Polaroid, while Chester Carlson's patents created Xerox. Patents are the foundation of most large drug companies. Coca Cola's trade secret has created a major global beverage empire. UOP has an extensive business based on licensing its production processes and patents.

However, patent and product-based monopolies are becoming less and less effective, for a number of reasons. Some of the reasons are external: In parts of the world, a cavalier attitude about intellectual property is creating many "unauthorized" (to put it diplomatically) knockoffs--witness the large numbers of "Rolexes" available in the Asia-Pacific region--which are eroding the profits from, and incentive for, innovation. The rapid diffusion of technologies, along with production capabilities/know-how, is increasing competition and reducing how long you can keep a feature, a product or a process exclusively to yourself. Finally, it is becoming increasingly difficult to "own" or control all aspects of a particular technology or process. In the early 1950s, Pilkington Glass was able to perfect and license the float glass process because it effectively controlled all the relevant technologies; today, it would be difficult for any company, however large, to control all the technologies involved in a particular product or process.

In addition, internal pressures for short-term results, reduced investment in long-term, "risky" projects and weaker pricing power, are decreasing the effectiveness of monopolies based on product and process innovation. Senior managers seem increasingly reluctant to bet on breakthrough products or radical innovations.

Bottom line: CEOs (and financial markets) want growth that is "real, profitable, sustainable and organic." At the same time, CEOs are finding that conventional means of achieving these objectives--raising prices, gaining account share or increasing market share--are simply not feasible in today's intensely competitive environment. Consequently, they are trying to sell new products to existing customers or existing products to new customers. However, in many cases that approach isn't working; either the products aren't all that new, or the existing products don't meet the needs of the new customers all that well, and so forth.

Net result: R&D and product development managers are under pressure to develop new monopolies in an increasingly difficult environment, with fewer resources, and in a far shorter time frame. …