3.
The Age of Imitation
Inexpensive labor enables developing countries to reduce their technological backwardness by imitating products even if their initial level of technology is far behind.
—Hitoshi Tanaka, 2006
Jared Diamond writes that societies tend to imitate when they feel they are at a disadvantage but can afford to stay out of the fray where competition is lacking. Japan, for instance, was able to reject the crucial military technology of firearms several hundred years ago because it was then isolated from the rest of the world.1
No nation and no company enjoys that luxury now. Globalization means that no one is immune to competitive pressure and that firms that fail to either invent or adopt (and I argue, both) risk being left out of the game. Rapid technological changes bring about obsolescence of products and models, making inventors and first movers vulnerable to newer mousetraps or their improved variants. Legal protections have weakened at the same time that codification, standardization, new manufacturing techniques, and growing employee mobility make copying easier. Tastes are converging, driven by the likes of best-seller lists that prompt people to read what millions of others have chosen to read before them, and authors replicate successful themes in the hope that their books, too, will sell well.2
With development of a new drug costing a billion dollars and a new car model twice that, the temptation has grown to appropriate know-how without paying its full price, investing its entire cost, or taking the time to wait for internal efforts to yield results, not to mention assuming the risk of a negative outcome. Even the venture capital industry, a stalwart of innovation, often backs projects based on imitation as a way to lower the overall risk of its portfolio; for instance, dozens of YouTube imitators in China were funded by venture capital. As James J. O’Brien, Ashland’s chairman and CEO, observes, “Anything that has a size and scale as far as market and has various channels of distribution where you can get product or serve whatever the consumer is looking for, will be imitated.”3
The confluence of many factors, from globalization to the codification of knowledge, is still playing out, and that is what makes the current period the age of imitation. An additional impetus comes from the broadening of channels, and the addition of new ones, through which knowledge has become transferable to others. At this unprecedented junction, imitation, widespread as it has always been, is becoming even more feasible for a wider array of products, services, processes, and business models, as well as more attractive in costs, benefits, and potential return. This emerging reality, in turn, positions imitation as an essential strategic component that firms neglect at their peril. As Steve Dunfield, a former HP executive who now heads his own start-up, puts it, “The days of the great mind thinking are gone, and clever imitation is called for as an effective strategy.”4
In this chapter, I explain why imitation has been on the rise and why it is likely to become more widespread and cost effective in the future. I begin by analyzing the main drivers of imitation and then discuss some of the main channels through which it occurs. I conclude by discussing the weakening of the traditional defenses that have kept imitation at bay but are now fraying (you will find more on imitation defenses in chapter 7). This review prepares the ground for chapter 4, where we turn to a number of major business imitation cases.
Globalization and the New Imitation Playing Field
As world population continues to grow, it generates “more potential inventors, more competing societies, more innovations available to adopt—and more pressure to adopt and retain innovations, because societies failing to do so will tend to be eliminated by competing societies.”5 By bringing more players into the fold, globalization produces a similar effect: it vastly increases the number and diversity of market participants, reversing oligopolies that were created over decades.
To see this trend, all you have to do is take a look at the U.S. auto market, which was once dominated by the domestic Big Three but is now a fragmented picture of dozens of makers, with more to come. Initially confined to the lower end, Japanese manufacturers are now firmly established in the luxury segment while retaining strong positions in the entry and middle levels, with South Korean brands coveting the same route. New entrants (e.g., China’s Chery) and old (e.g., France’s Peugeot) are waiting in the wings for the opportunity to jump in, adding to a bewildering lineup of competitors.
A similar picture emerges in other industries. In pharmaceuticals, China and India boast between them more than twenty thousand firms, a few of which are destined to become major players. With the skills and equipment to make generics more widely available, these newcomers will drive down prices, threatening both innovators and leading generic makers. In the toy industry, Mattel and Hasbro may still hold a dominant market share (7.8 and 5.3 percent, respectively, in 2007, per Data Monitor), but it may be only a matter of time before one of the thousands of Chinese players, which make 80 percent of the world’s toys, joins the ranks of global branded firms.6
Even the manufacturing of commercial jets—a capital-and technology-intensive industry that has been dominated by two players (Boeing and Airbus)—is feeling the pressure from new entrants such as Brazil’s Embraer and Canada’s Bombardier, makers of business and regional jets whose large models compete with the Boeing and Airbus offerings. They will soon be joined by a Chinese regional jet manufacturer whose product is about to make its maiden flight, and a Chinese consortium is intent on building a large commercial aircraft from the favorable berth of the world’s most lucrative market. Unlike the ill-fated Y-10, a Chinese copy of the Boeing 707, this one might make it to market.
New entrants from emerging markets rely heavily on imitation to compensate for their lack of capital and know-how, and the cost saving they reap—by skipping R&D while adopting preexisting but new-to-the-market or new-to-the firm technologies—is crucial to their competitive advantage. Over the past twenty years, East Asian economies have more than quadrupled their share of manufacturing value added, and this number does not include India and Brazil, among others; with their economies growing, such players are more prominent than ever.
It helps that the infrastructure for new technologies (such as mobile phones, computers, and the Internet) is less expensive to maintain and is easily combined with older technologies.7 Once a technology has been obtained, newcomers overcome entry barriers by leveraging low wages, lax regulation, a growing and protected domestic market, and the tendency of local authorities to turn a blind eye to intellectual property rights (IPR) violation. A few of these firms eventually will become at least incremental innovators, but most of them will continue to rely on imitation as a core strategy. Whatever they lack in experience and skill, they will replace with persistence and relentless trial and error. As Carl Kohrt, Battelle’s president and CEO, tells it, these firms turn the famous 80/20 equation on its head: they might get things wrong 80 percent of the time but will try eighty times to get it right.8
It took Stone Age farmers thousands of years of experimentation with softer metals and with simple pottery furnaces before they learned to work with iron.9 Now vital knowledge can be transferred, and often absorbed, in a matter of years. World Trade Organization (WTO) rules notwithstanding, the governments of high-growth emerging economies are in a position to demand technology transfer to domestic firms: between 1999 and 2004, the average R&D intensity of multinational affiliates rose from 2.5 to 3.6 percent. In China, the R&D intensity of U.S. affiliates exceeds 9 percent, and indications are that the trend will accelerate.10
At the same time, emerging market firms are venturing abroad to gain technology assets by way of acquisitions and tie-ins. The global financial crisis has greatly accelerated this trend. In the auto industry alone, Chinese companies are bidding to acquire a number of well-known makes, including Hummer and Volvo. Emerging market economies are also ramping up their scientific and technological education at home, and they send their best and brightest to the developed world, where they are exposed to the knowledge and practices of leading firms and the behavior of rich country customers.
Chinese and Indians now make up the two largest contingents of foreign students in the United States, and they are especially visible in U.S. graduate engineering programs, where international students are often the majority. These students, many of whom stay for a few years to gain practical experience, are increasingly likely to return home, induced by growth opportunities and encouraged by dedicated government incentives. The return rate for Chinese graduates is greater than 30 percent and rising, whereas that for South Koreans already exceeds 90 percent. The influx further enhances the ability of emerging economies to absorb, rather than merely obtain, new technologies and product ideas and to engage in creative imitation that is based on strong differentiating features rather than price alone.
The Modularization of the Value Chain
Value chain modularization lowers the threshold for new entrants that previously had to pay billions of dollars, accumulate decades of experience, and build solid reputations before they could venture into a technology- and capital-intensive market. For instance, the modularization of mobile phone technology into radio frequency circuits, RISC chips, and application software permitted Chinese newcomers (such as Ningbo Bird and Amoy) to combine third-party modules with Korean design expertise to capture more than half of the Chinese market.11
Spreadtrum, a company headquartered in Shanghai and in Silicon Valley, combines semiconductor, software, multimedia, and power expertise to offer a complete wireless solution on a single chip. The platform enables mobile phone providers to enter the market quickly and cheaply with a standard package differentiated by external appearance and services. This makes the job of would-be imitators much easier as well as faster and cheaper.
The same phenomenon can be seen in other product segments: Vizio, a vendor of low-price flat panel television sets, was established with a mere $600,000 investment. The company, which now commands 12.4 percent of the U.S. market—about the same as venerable Sony—refrains from investing in R&D or in manufacturing. It contracts with one of its part owners, a Taiwanese OEM, and sells via large retailers such as Costco and Wal-Mart’s Sam’s Club, which provide it with market knowledge, packaging, and distribution. This makes it possible for Vizio to undercut competitor prices and rapidly build scale that generates further price advantages. 12
The entry of firms like Vizio into a crowded field that once required billions of dollars in investment and the development of a solid technological base is facilitated by a wave of outsourcing that disperses knowledge and resources that were once contained within a single company. The dispersion is accompanied by agglomerations of suppliers whose flexible systems permit profitable small-batch production and whose ready availability makes things still easier for incoming players. “There are places in China where you have city blocks made up of nothing but makers of shoe material,” says a U.S. shoe factory owner who has moved its operations there. “You can buy 10,000 laces or 10 laces.”13
The suppliers themselves typically start by filling orders placed by others, but eventually they turn to imitation to develop stand-alone businesses. Initially, they simply replicate the goods they make for the end-product firm, but then they gradually vary the product or undercut the pricing by teaming directly with large retailers. Should they lack key, high-end inputs, such players can outsource from players in developed countries that are eager to maximize the return from their intellectual assets, as Samsung did before becoming an innovator in its own right and as Chinese and Russian aircraft makers do now when sourcing in the United States and Europe. Aided by the reluctance of many buyers to sign exclusive supply agreements, OEMs often transfer their acquired know-how to another buyer or appropriate it, especially where legal protections are weak. As a result, capability barriers to imitation crumble, especially (though not only) for commoditized products.
The Codification of Knowledge
A major factor in the enhanced feasibility and lower cost of imitation is codification: the transformation of haphazard, ill-structured knowledge into a structured, unified codex. The spread of low-cost automation makes it possible to codify and quantify vast tracks of information and transforms knowledge into a commodity that can be bought, sold, and replicated.
Codified information is represented in blueprints or formulas that are easily stored, retrieved, used, and transferred at a fraction of the cost of producing it and with greater speed, accuracy, and consistency. With advances in electronic communication, even the variable cost of codification has declined, so profitability increases with use, creating an incentive to codify even more.
This is especially true in large systems needing “recombination, reuse and cumulativeness” and in dealing with complex problems.14 And, thanks to simulation techniques and artificial intelligence, even previously tacit knowledge can be codified. 15 A final impetus for codification comes from the spread of universal standard certification, benchmarks, best practices, and the consultancies that disseminate them. When you hire a consultant, says Clayton C. Daley Jr., former vice chair and CFO of Procter & Gamble, “you’re hiring somebody that’s going to tell you in so many words generally what somebody else does.”16
Codification transforms knowledge into a commodity that can be bought (or appropriated) and sold and, of course, replicated. As biologists observe, common coding facilitates imitation because it avoids the need for sensory to motor translation.17 Global standards such as ISO create a universal language that permit codification and enhance operational transparency.18
Once the “language of the model” has been developed and fixed costs have been sunk, it becomes cost prohibitive to develop private knowledge, that is, a protected language that only a focal player can use.19 Having a protected language also impedes learning from others, as Procter & Gamble has found in interchanging teams with Google.20 With the cost of codification falling, the value of codified knowledge rises and the overall cost of knowledge declines.21
In very large systems that coordinate the complementary activities of many agents, the efficiency gains from codification are especially large.22 The same is true when a process requires recombination, reuse, and cumulativeness, when extensive memory and retrieval are necessary, and when agent work requires detailed description. Improved storage efficiencies and reduced cost are especially important when it comes to complex problems that require substantial memory capacity, the codification of which also benefits from improvements in modeling and simulation techniques. By developing programs that can uncover critical characteristics of stimuli on their own, artificial intelligence has made possible the codification of previously tacit knowledge.23 This is at odds with strategy’s dominant paradigm, which assumes that tacit knowledge, which is difficult to untangle and decipher by others, is a foolproof deterrent to would-be imitators.
The same codification that makes it easier for a firm to coordinate its various divisions, monitor its activities, and study and improve its internal processes makes reproduction and copying by others easier, more accurate, and much less costly. As a result, the more codified and standardized a system is, the easier it is for others to decipher and eventually replicate it. As Tom Ludlam of Prologue observes, it is little wonder that the prescription drugs that are the most consistent in production are also those that are likely to be imitated.24
Imitation Channels
A number of channels exist that facilitate imitation. In the following sections, I take a look at each in turn. While distinct in nature, they all serve to diffuse knowledge to would-be imitators, and all see their scope widened, providing ever more imitation opportunities.
Partners Beware
When knowledge is not amenable to codification, nor easily accessible, firms look to others to supply what they lack. Alliances, whose numbers have risen dramatically in recent decades, are touted as the most effective learning vehicles, especially for the absorption of tacit knowledge. This is especially true for equity joint ventures because they permit cohabitation, wherein experts and executives on both sides spend a long time together, sharing oversight of operations and working together to resolve complex problems.
Yet it is precisely this advantage that renders the knowledge owner vulnerable. Strategic alliance partners that are not current competitors may become ones, or they may transfer the knowledge to third parties that then imitate the product, service, or business model. And even though some consultants argue that the way to prevent technology leakage is to simply avoid alliances, unfortunately this tactic is not always feasible. Even if they are formally committed to a level playing field, governments often provide incentives to tip the scale in favor of an alliance, and the growing complexity of global business implies that cooperation cannot always be ruled out.
Take the Knowledge and Run
The art of papermaking, which imitators unsuccessfully tried to decipher for centuries, was transferred out of China when an Arab army defeated the Chinese in a battle dating to 751. Upon learning that papermakers were among the war captives, the victors brought them to Samarkand to set up a paper manufacturing operation.25 In the late nineteenth century, Meiji Japan employed more than twenty-four hundred individuals from twenty-three countries as a way to transfer desirable organizational models; a century later, South Korean returnees from the United States brought with them the knowledge that enabled Samsung and LG to compete with U.S. semiconductor makers.26
In the United States, turnover levels are high and rising. In 1983, the average job tenure for managerial and professional employees was 4.8 years; from 1983 to 1998, the average tenure for engineers declined by 16 percent.27 Noncompete clauses notwithstanding, examples abound of staff who have left to start a competing business or to join the ranks of a competitor, taking with them critical know-how. Bray, an early animation studio, lost its edge when its animators left to start their own studios or join competitors. Fairchild saw three of its best scientists leave to form Intel, as did the National Center for Super-computing Applications at the University of Illinois when Marc Andreessen left to cofound Netscape.28
Despite assertions by strategy scholars that complex and tacit knowledge resides in “bundled” routines and practices that cannot be transferred, turnover facilitates knowledge transfer and hence imitation. Evidence shows that even a single staff member may be in a position to transfer complex, advanced capabilities. For instance, all the teams that managed to build a working laser included at least one member of a laboratory where such a device was first developed and operated.29 Bundling also fails to prevent knowledge loss when an entire team is poached or recruited, an increasingly common practice in the financial and technology sectors. Both Apple and Yahoo!, for instance, have recruited in recent years entire Motorola teams when the latter company exited businesses in which they were interested.
The Rise of Imitation Clusters
The idea of industrial clusters has been popularized by Harvard’s Michael Porter, who argued that the concentration of industry players and their supporting industries provides a competitive edge. Clusters have been commended for their power to support innovation by providing the infrastructure, knowledge, and intellectual exchange that are helpful for the incubation of new ideas. Examples include Silicon Valley, Route 128 in Boston, Cambridge in the United Kingdom, and Herzliya-on-the-Sea in Israel.
Imitation clusters also consist of a large number of industry competitors in close proximity; however, unlike innovation clusters, imitation clusters do not form around first-rate research universities but rather around technical schools and applied research centers. Most are organized in industry groupings, such as cell phones in Shenzhen or string instruments in Donggaocun, both in China. (Clusters specializing in fake goods—which are widespread in China and Vietnam, among other nations—are outside the scope of this book, although they, too, facilitate imitation.)
Although the idea of innovation clusters has taken hold, the emergence of what I would call imitation clusters has, by and large, gone unnoticed. As with their innovation counterparts, imitation clusters provide an agglomeration of benefits, ranging from saving on search costs and access to complementary knowledge to the lowering of production costs and the realization of scale economies. Firms profit from observing each other, peer pressure and rivalry promote the sharing of information, and weak players are weeded out. Scale advantages are more meaningful for imitators than for innovators, because imitators rely on codified systems that are easily multiplied and can quickly ramp up production to gain scale.
The price pressures that force members to cut costs by increasing productivity are especially valuable when one competes on price and must respond quickly to deterrence. For instance, garment clusters in China’s Guangdong Province benefit from having nearby textile producers and dye makers, something that enables rapid reproduction of “borrowed” designs as soon as they are spotted.
Weakening Imitation Defenses
Organizations that own valuable intellectual property have developed ways and means to defend themselves against imitation. But over time these defenses have been weakened by various factors. In the following sections, I take a look at these factors and the erosion in their ability to protect the pioneers and innovators from would-be followers.
The Porosity of the Brand Shield
Brand equity may be all the rage, but a brand is not the foolproof barrier to imitation it is often thought to be. As Sony executives can tell you, a brand can lose its luster, and in sectors such as automotive, brands have been on the decline for some time. Increasingly, customers are looking for value, and they tend to associate it with unbranded products. For one thing, brands can be acquired, and there is a long list—from Schneider to GE and RCA TVs to ThinkPad—that have either been acquired or licensed for use following an acquisition.
Nor have powerful brands protected pharmaceutical companies from the onslaught of generics. The fastest-growing drug segment is that of unbranded generics, which by 2005 accounted for more than half the prescriptions written in the United States, versus one-third six years earlier; the big losers were brand name drugs, although branded generics also showed a modest decline.30
In the meantime, generic makers have gone beyond mere copying and have tweaked the original formulas. Some, like Israel’s Teva, use profits generated by generics to expand into innovative drugs; at the same time, some pharmaceutical makers, such as Sandoz, have expanded into generics. Generic makers have also expanded into so-called biosimilars, which mimic newer biotechnology drugs.31 In many other product and service categories, nonbrand substitutes are mushrooming, and during economic declines, as in 2008–2009, their share is likely to go still higher.
The decline of the brand can be seen in the rise of private label products. ACNielsen reports that between 2007 and 2008, private label sales grew 10 percent as compared with 2.8 percent for branded products. In the United States, store brands account for 22 percent of supermarket sales, and in some product categories they have one-third of the market.32
Private label products still have room to grow, especially in Asia and in markets such as China, where brand loyalty is notoriously weak, but also in developed markets, where a pinched consumer is increasingly willing to forgo the safety and comfort that come with a familiar brand. Many private label goods are made by branded manufacturers: according to Chris Connor, chairman and CEO of Sherwin-Williams, only one company in the paint industry, Benjamin Moore, does not produce for the private label market. However, much private label merchandise is made by imitators as a way to get on the shelf without investing the time and money to develop a reputation, set up a supply chain, and provide distribution, service, and support.
The Erosion of Legal Protection
Patent protection generally increases the cost and time of imitation, though not by much. In one often cited study, the increased cost varied from 7 percent for electronics to 20 percent for chemicals and 30 percent for pharmaceuticals. The average delay varied from 6 to 11 percent; delays of four years or more were reported in only 15 percent of the cases examined.33 To the extent that a product or process is patentable in the first place, the patent may be challenged or circumvented (“invented around”). In addition, registration cost can be prohibitive—especially for worldwide (Patent Cooperative Treaty) coverage—or enforcement might be lacking.
Imitators can legally copy a product or process, tinker with it, and apply for a patent based on the marginally different version, whereas patent holders seldom can extend coverage to related products. In many countries, patents and trademarks are awarded on a first-to-file (rather than first-to-invent) basis, providing legal cover for copying, and courts often side with domestic players. For example, Chinese judges have overturned Pfizer’s domestic patent for the main ingredient in Viagra on the argument that a local competitor registered it first in China; another Chinese firm is suing Google for using the Chinese version of the name, for which the plaintiff claims to have filed first. Applying for local listing can be counterproductive; a study of Japanese foreign direct investment in China concluded that patent and trademark registration actually facilitated copying by passing on product information to competitors.34
Intellectual property rights have also come under assault from a coalition ranging from emerging market governments to NGOs and influential opponents such as economist Joseph Stiglitz. Governments in developing countries have unilaterally appropriated patent rights for certain prescription drugs, imposing mandatory licensing and “permissible use.” Court decisions have questioned the validity of the doctrine of equivalents, which granted patent holders protection beyond the literal domain of their patent, and such court decisions have facilitated inventing around.
Antitrust legislation has contributed its share: the numerous imitators of Xerox copiers would not be there had the U.S. government not forced the company to share its technology. Some things cannot be protected. For instance, unless the Design Piracy Prohibition Act is ratified, U.S. law does not protect design except where it has a secondary meaning—that is, if consumers view it as the brand’s marker.
The Supreme Court also is considering a rollback of the protection accorded to business method patents, an action that should open such methods to broader imitation. In June 2008, the Court rejected a suit by Korean electronics maker LG over the use of a patent previously licensed by Intel to a Taiwanese firm, further limiting the scope of patent protection when it comes to third parties. Another House bill would ease access to orphan works (for which an owner cannot be located). All these developments erode the power of legal protection without even getting into the rampant infringement that can be found in many parts of the world and now finds itself in export markets as well.
Takeaways
- Globalization and outsourcing increase the number and diversity of competitors while at the same time knowledge is becoming more codified and transferable.
- Alliances, employee turnover, and imitation clusters are the main channels enabling massive imitation.
- Traditional defenses against imitation, including branding and legal remedies, are weakening.