In the autumn of 1945, Hitler was dead and the war in the west was over. The Japanese had retreated from the Asian countries under their occupation and were determined to protect their homeland till the last man. The Kamikaze attacks of the Japanese Air Force and the militarily expensive battle of Okinawa had driven home the message that a military invasion of Japan would be very dear in terms of human life and could take months to achieve. The official estimate of likely casualties was pegged at between 1.4 to 4 million allied soldiers. The Japanese were obdurate in their decision not to surrender.
On August 6, and 9, 1945, the Americans revealed the potential of their weapons technology. Two atom bombs, the “Little Boy” and “Fat Man” were dropped on the Japanese cities of Hiroshima and Nagasaki. The allies did not need to negotiate any further. Emperor Hirohito surrendered within a month. The episode, however ghastly, drives home as nothing else, the tremendous ability of technological innovation to increase bargaining power.
The post war period has seen the emergence of stunning new technological innovations in diverse areas of science and technology. Many of these have arisen in weaponry and space science and effected major changes in power centres and national equations on a global scale. Technological innovations in other areas have given rise to a slew of products, created billions of pounds worth of assets, shaped huge corporations and generated massive economic empires. The names of Sony, Microsoft, Apple, Google and Nokia, to name but a few, flash through the mental landscape when the issue of innovation comes up.
Bargaining power, while being practically tantamount to unionism, is more specifically a tool to enhance control over or influence economic decisions like “the setting of prices or wages, or to restrict the amount of production, sales, or employment, or the quality of a good or a service; and, in the case of monopoly, the ability to exclude competitors from the market.” (Power, 2006)
Technical innovations have been principal drivers of change in human society since prehistory and have often created huge economic advantages for its creators or owners. The principal reason behind this is exclusivity, the owner of the innovation being the sole possessor of a particular technological item that can be used to achieve significant economic returns.
This exclusivity also gives the owners sharply increased bargaining powers through access to a technology outside the reach of others and meant for the possessors’ sole discretionary use. The owners of the innovation are able to use this bargaining power in various ways, which include speed to market, early mover advantage, setting of prices, fixing of terms of credit, negotiating of contracts, asking of advances, obtaining supplier credit, accessing venture capital or institutional funds and organising alliances with large corporates. The ability to innovate technologically has, on many occasions given its owner enormous economic clout and led to the formation of giant mega corporations. It has verily proven to be the biggest leveller in the marketplace, witness the effulgent rocket trail of the growth graphs of Microsoft and Google and the slow decline of numerous economic giants who have not been able to come up with anything new or worthwhile.
When discussing the bargaining power of technological innovation it would be appropriate to refer to Intel Corp and the manner in which it used its technological knowledge of chips to drive home terrific contracts with IBM and other PC manufacturers and thereby transformed itself from a small start up to a successful and respected corporation with an international footprint.
Jane Katz, in a 1996 article called From Market to Market for Regional Review elaborates on the great Intel story. IBM, at one time far behind Apple in the PC race, entered into alliances with Intel and Microsoft for microprocessors and operating systems and also took the decision to go in for open-architecture to allow other firms to develop compatible products and to avoid possible anti trust issues. Intel, at that time was an untested company and IBM, concerned about Intel being unable to meet its supply commitments forced Intel to give up its right to license to others in order to supply to Big Blue. PC sales did very well and Intel grew furiously and fast. In any case, this success led to Intel quickly developing the next generation of chips. The number of new players having grown rapidly, thanks to the open architecture policy of IBM, Intel’s bargaining power grew significantly with all PC makers.
Thus, the balance of power shifted. When it came time to produce the 286 generation of chips, Intel was able to limit licensing to five companies and retain a 75 percent market share. For the 386 chip and beyond, Intel regained most of its monopoly, granting a single license to IBM, good only for internal use. The market for PCs grew, and Intel became fixed as the industry standard. Ultimately, IBM turned to Apple and Motorola in a belated and still struggling effort to create a competitor to Intel chips, the Power PC. (Katz, 1996)
Technological innovation, of course, gives rise to very significant powers in the hands of its owners. It however needs to be remembered that an innovation is no more than another valuable possession, comparable to significant capital, excellent technical skills or valuable confidential information. It needs great commercial acumen, business foresight and knowledge of human psychology to convert this asset into an extremely effective bargaining tool for obtaining a competitive edge or significant economic benefits. All too often, it is squandered away because of an inadequate knowledge of law or business and it is left to others to pick up the pieces and enjoy the benefits.
In most cases, innovation is not restricted to one huge big bang or tremor causing development. It is a series of small innovations in the technological development of a product that at one stage results in the emergence of a product sharply differentiated from the others available in the marketplace; a product impossible to emulate or bring into play within the immediate future. A truly innovative technological development is one that makes a giant leap in the benefits to cost ration in some field of human enterprise. It is this quality that sets up the platform for emergence of big bargaining power.
Another way of putting this is that an innovation lowers the costs and/or increases the benefits of a task. A wildly successful innovation increases the benefits-to-costs ratio to such an extent that it enables you to do something it seemed you couldn’t do at all before or didn’t even know you wanted to do. Think of the following examples in these terms: the printing press, the camera, the telephone, the car, the airplane, the television, the computer, the electrostatic copier, the Macintosh, Federal Express, email, fax and finally the web. (Yost, 1996)
This power that technological innovation gives is used by different people in diverse ways. It often comes the way of young and brilliant techies who decide to sell, using their bargaining power to get the best possible price for their product from available bidders. Sabeer Bhatia and Jack Smith launched Hotmail, a free web based email service accessible from anywhere in the world and designed specifically to give freedom from restricting ISPs. The service notched up subscribers rapidly and Bhatia got a summons from the office of Bill Gates soon after he got his venture capital backing.
When he was only 28, Sabeer Bhatia got the call every Silicon Valley entrepreneur dreams of: Bill Gates wants to buy your company. Bhatia was ushered in. Bill liked his firm. He hoped they could work together. He wished him well. Bhatia was ushered out. “Next thing is we’re taken into a conference room where there are 12 Microsoft negotiators,” Bhatia recalls. “Very intimidating.” Microsoft’s determined dozen put an offer on the table: $160 million. Take it or leave it. Bhatia played it cool. “I’ll get back to you,” he said. Eighteen months later Sabeer Bhatia has taken his place among San Francisco’s ultra-rich. He recently purchased a $2-million apartment in rarified Pacific Heights. Ten floors below, the city slopes away in all directions. The Golden Gate Bridge, and beyond it the Pacific, lie on the horizon. A month after Bhatia walked away from the table, Microsoft ponied up $400 million for his startup. Today Hotmail, the ubiquitous Web-based e-mail service, boasts 50 million subscribers – one quarter of all Internet users. Bhatia is worth $200 million. (Whitmore, 2001)
Sometimes technological innovation does give a person the power to refuse 100 million dollars, confident in the knowledge that he will be able to bargain for more!
While many individual developers or smaller companies favour to take Bhatia’s route, preferring to cash the cheque first, others go for more, develop the product and try to take it to its full economic potential. The biggest hurdle to the exclusivity of a product comes from clandestine copying as Microsoft and the drug majors have found out in South East Asia and China. Rampant piracy and copyright breach lead to a situation where the latest software and drugs are available within weeks of being released in the market.
While this problem is being resolved at the national level with both India and China beginning to take stringent action for IPR protection the lesson to be learnt in direct and oblique ways is that the bargaining power of a technological development will vanish, vaporise into nothingness if its exclusivity can not be maintained. While retaining all of its excellence and potential to effect change and bring about improvement, a technological investment loses all of its economic advantage and bargaining power the moment it loses its exclusivity. Humanity gets to be served, possibly even at a lower price, but the creator, individual or organization ends up unrewarded and short changed for all the sacrifice, talent, expenditure and effort incurred in the development of the product or service.
It thus becomes critical to arrange for the exclusivity of the innovation if it needs to be used for economic advantage. This is generally done in various ways, an important route being to keep on working at further innovations to add value and to ensure that a significant differentiation always exists between it and other similar products in the marketplace. Microsoft and Google are excellent examples of this approach where continuous R & D efforts work towards creating a slew of features which become difficult to emulate and thereby continue to provide the bargaining edge.
In conclusion the importance of hard nosed business acumen to protect the technological innovation needs to be stressed. Measures for this include the arrangement of adequate security to protect the product or service from espionage and cloning, sufficient care in licensing and similar arrangements and the adoption of necessary business and commercial safeguards for appropriate trademark, copyright, patent or IPR protection
Katz, J, (1996), To Market to Market, Regional Review, Retrieved September 28 2006 from www.bos.frb.org/economic/nerr/rr1996/fall/katz96_4.htm
Power, (2006), Wikipedia, Retrieved September 28 2006 from. en.wikipedia.org/wiki/Power
Whitmore, S, (2001), Driving Ambition, Asiaweek.com, Retrieved September 28 2006 from www.asiaweek.com/asiaweek/technology/990625/bhatia.html
Yost, D.A, (1995), What is innovation, Dream host, Retrieved September 28 2006 from yost.com/misc/innovation.html
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