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ThePersonalComputingIndustryCenterissupportedbygrantsfromtheAlfredP.SloanFoundation,theU.S.NationalScienceFoundation,industrysponsors,andUniversityofCalifornia,Irvine(CaliforniaInstituteofInformationTechnologyandTelecommunications,ThePaulMerageSchoolofBusiness,andtheViceChancellorforResearch).Onlineat(949/824-2863)orKennethL.Kraemer(949/824-5246).WhoCapturesValueinaGlobalInnovationSystem?ThecaseofApple'siPodGregLinden,KennethL.Kraemer,JasonDedrickglinden@berkeley.edu,kkraemer@uci.edu,jdedrick@uci.eduPersonalComputingIndustryCenter(PCIC)Suite3200,BerkeleyPlaceNorthIrvine,California92697June20072IntroductionInnovationisheldtobethekeytoU.S.competitiveness,butthereislittleunderstandingofwhocapturesthevaluefromasuccessfulinnovation.Thispaperisapreliminaryreportonastudythatwillanswerthequestionforspecificexamplesofinnovation.Here,wepresentaframeworkforanalysisandusethatframeworktolookatonememberofApple’siPodfamily,partofathrivingecosystemthathasupendedbusinessmodelsacrosstheconsumerelectronics,computer,andentertainmentindustries.TheiPodisaperfectexampleofagloballyinnovatedproduct,combiningtechnologiesfromtheU.S.,JapanandanumberofAsiancountries.Inthepast,largeelectronicscompaniesdesignedanddevelopedtheirownproducts,oftenusinginternally-producedcomponents.Suchhighlyintegratedcompaniescreatedandcapturedalargeshareofthevalueofinnovation,mostlyintheirhomecountries.Sincethen,supplychainsintheglobalelectronicsindustryhavesteadilydisaggregatedacrosscorporateandnationalboundaries(Sturgeon,2002;DedrickandKraemer,1998).Companiesthatformerlymanufacturedmostproductsin-house,suchasIBMandHP,aswellasstart-upsthatneverhadmanufacturingcapabilities,haveoutsourcedproductionandevenproductdevelopmenttoglobalnetworksofcontractmanufacturers(CMs)andoriginaldesignmanufacturers(ODMs).EvenverticallyintegratedJapaneseandKoreancompaniesrelyonoutsidesuppliersforkeyparts,equipmentandsomefinalassembly.Todaythecreationofasuccessfulproductintheglobalelectronicsindustryspreadswealthfarbeyondtheleadfirm,i.e.thecompanywhosebrandappearsontheproduct,andwhobearsprimaryresponsibilityforconceiving,coordinating,andmarketingnewproducts.Whiletheleadfirmanditsshareholdersarethemainintendedbeneficiariesofthefirm’sstrategicplanning,otherbeneficiariesincludepartnersinthefirm’ssupplychainandfirmsthatoffercomplementaryproductsorservicesmayalsobenefit.Theleadfirmsrecognizehowtheirproductscreatepotentialvalueandtheynegotiateoveritsdivisionwiththeirpartners.Asuccessfulfirmunderstandsthatthecreationofvaluethroughinnovationisnotazero-sumgame,andprofitsareneededallalongthesupplychaintosustaininnovationbyallparticipants.Inthispaper,webuildaframeworkformeasuringandmappingthevaluecreatedalongasupplychainandshowpreliminaryresultsfromananalysisofonemodeloftheAppleiPodline.ConceptualframeworkWithinasupplychain,eachproducerpurchasesinputsandthenaddsvalue,whichthenbecomespartofthecostofthenextstageofproduction.Thesumofthevalueaddedbyeveryoneinthechainequalsthefinalproductprice.Thenaturalstartingpointforestimatingthesevaluesisamapofasupplychainshowingtheactivitiesinvolvedinpassingfromrawmaterialtotheconsumer.AstylizedsupplychainforagenericelectronicproductisshowninFigure1.3Figure1.GenericelectronicssupplychainEachproducthasalargenumberoflow-valuecomponents,suchascapacitorsandresistorsthatcostonlypennieseach.Althoughthemanufacturersofthesecomponentsearnprofits,theyaccountforasmallshareofthetotalvalueaddedalongthesupplychain,andcontributerelativelylittleinnovation.Weexpectsuppliersofthesegenericinputstoearnthinprofitmarginsbecausetheycompetewithclosesubstitutes.Mostelectronicsproductsalsocontainafewhigh-valuecomponents,suchasavisualdisplay,harddriveorkeyintegratedcircuits.Thesecomponents,whicharethemselvescomplicatedsystems,arethemostlikelytoembodyproprietaryknowledgethathelpstodifferentiatethefinalproductandtocommandacommensuratelyhighmargin.Byvirtueoftheirhighcost,theseinputswillusuallyaccountforarelativelylargeshareoftotalvalueadded.Innovationisrapidinthesecomponents,andaccountsformuchoftherapidinnovationinfinalproductssuchastheiPod.Thesecomplexcomponentsmayhavetheirownmultinationalsupplychains.Forexample,anintegratedcircuitmightbesoldbyaU.S.companybutfabricatedbyacontractorinTaiwanandencasedinitsfinalpackageinKoreabeforebeingshippedtoaproductassemblyplant.Fortheassemblyofthesecomponentsintothefinalproduct,anumberoflargemultinationals,suchasFlextronics,Solectron,Foxconn,Quanta,andCompalprovideassemblyservices.Theseassemblerscompetefiercelyforhigh-volumeopportunities,limitingtheirmargins.EvenlargeverticallyintegratedmanufacturerssuchasSonyandToshibanowoutsourcepartoftheirproductiontotheseCMsandODMs.Finally,attheapexofthesupplychain,theleadfirmcontributesitsmarketknowledge,intellectualproperty,systemintegrationandcostmanagementskills,andabrandnamewhosevaluereflectsitsreputationforquality,innovation,andcustomerservice.Leadfirmscancreatevaluebytransformingtheinnovationsofothersintoproductsthatconsumersfindusefulandusable.