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Thinking carefully about economics and business strategy can mean the difference between having great technology and having a great company. This lecture focuses on clearly defining your business model, including how you’re going to make money with your product or service. Case studies are used to test concepts against a specific business. For more information including video, visit: http://www.marsdd.com/events/details.html?uuid=00529d2c-acfd-4248-bad9-efe866917fe9
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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
©2010 Ajay Agrawal
Business Models
Three Key Features
©2010 Ajay Agrawal
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
©2010 Ajay Agrawal
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
©2010 Ajay Agrawal
• 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
©2010 Ajay Agrawal
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
©2010 Ajay Agrawal
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
©2010 Ajay Agrawal
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
©2010 Ajay Agrawal
Incentives
©2010 Ajay Agrawal
• 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
©2010 Ajay Agrawal
• 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