N O V E M B E R 1 7 , 2 0 1 0

E N T R E P R E N E U R S H I P 1 0 1 @ M A R S

P R O F E S S O R A J A Y A G R A W A L

U N I V E R S I T Y O F T O R O N T O

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Business Models

Three Key Features

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  Power  Market structure (5 forces)

 Market for ideas (complementary assets, appropriability)

  Incentives  Ecosystem is often complex

  Capture  Primary versus complementary products/services

 Direct versus indirect customers

Professor and Graduate Student

©2010 Ajay Agrawal

The Team

Motion Metrics: Broken Tooth Detection System

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Power

  Market structure

  Professor Michael Porter’s Five Forces  Suppliers – how competitive are the markets for key inputs?

 Buyers – OEMS? Distributors? Mines?

 Substitutes/Complements – do nothing

 Rivals – innovative product, no direct competitors?  New entrants – trade secret or patent?

  (Government) – regulation? customer?

Power – and The Market for Ideas

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•  Most common options –  License technology –  Sell product –  Sell service

•  Key issues –  Who owns key complementary assets? (market power?) –  Appropriability of value? Enforcement of patent protection?

•  Suggested reading: –  David Teece (1986) “Profiting from Technological Innovation,” Research

Policy –  Gans, J. and Stern, S. (2003) "The Product Market and the Market for

‘Ideas’: Commercialization Strategies for Technology Entrepreneurs," Research Policy, 32(2), pp 333-50.

Cooperate or Compete?

©2010 Ajay Agrawal

  Gans and Stern evaluate the commercialization strategy for start-ups:

  Cooperate (sell license)   commercialize by engaging in an intermediate market to sell their intellectual

property to an incumbent

  Compete (sell product)   commercialize by developing the good in-house and competing directly in the

product market

  The decision of whether to license is based primarily on two factors 1.  the excludability environment 2.  the specialized complementary asset environment

Two Elements of the Commercialization Environment

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  The excludability environment   To what extent can successful technological innovation by the start-

up preclude effective development by an incumbent with knowledge of the innovation?

  The specialized complementary asset environment   To what extent does the incumbent’s complementary assets

contribute to the value proposition of the new technology?

Benefits from Selling Idea Rather than Selling Product

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  Savings   If the incumbent firm has already invested in developing the

specialized complementary assets, the entrant can save the costs of duplicating this effort and the savings may be shared between the incumbent and entrant

  Less competition   If the entrant engages the intermediate market with its invention,

that will preclude it from entering the product market. As such, there will be less competition in the product market and so producers will collect a greater surplus

Costs of Engaging the Intermediate Market for R&D

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  The main cost is the potential expropriation of intellectual property secrets and know-how by trading partners arising from the paradox of disclosure

Compete (stealth strategy,

Christensen, disk drives; disrupts existing industry leadership)

Cooperate? (strategy: invest in reputation for

trading in ideas; e.g., Cisco; formal organizations, e.g., ASCAP in

music, TLOs in universities, VCs; reinforces existing industry

leadership)

Either Strategy (strategy: entrepreneur’s choice,

relative returns from competition v. cooperation?; e.g., Xerox developed

complete vertical chain versus Nintendo’s widespread licensing of

software development tools)

Cooperate (strategy: demonstrate value, attract

multiple bidders; biotech/pharma; reinforces existing industry

leadership)

Importance of Complementary Assets E

xclu

dabi

lity

Low Lo

w

High H

igh

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Incentives

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•  Despite value creation •  need to align incentives with all parties involved

•  at the firm level and at the individual level

•  Costs and benefits •  Which division gains from reduced broken teeth? •  Which division in the company bears the cost of broken tooth

detection system malfunctions?

•  Which division pays for purchasing a broken tooth detection system?

•  Which division pays for servicing a broken tooth detection system? •  what if they are different divisions in the same firm?

Capture

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•  Complementary products (integration) –  Razors and blades –  Consoles and games –  System (CPU, accelerometers, cameras) and parts/service/

upgrades

•  Multiple customer-types –  Cable television –  Magazines –  Mobile phones –  Discount travel –  TIFF