Building a Business Model
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Building a Business Model

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Part of the CIBC Presents Entrepreneurship 101 Series at MaRS. ...

Part of the CIBC Presents Entrepreneurship 101 Series at MaRS.

Speaker: Ajay Agrawal, Peter Munk Professor of Entrepreneurship at the Rotman School of Management.

More information about the event, including video:
http://www.marsdd.com/Events/Event-Calendar/Ent101/2008/building-a-business-moderl-11122008.html

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Building a Business Model Building a Business Model Presentation Transcript

  • NOVEMBER 12, 2008 ENTREPRENEURSHIP 101 @ MARS PROFESSOR AJAY AGRAWAL ROTMAN SCHOOL OF MANAGEMENT & MARTIN PROSPERITY INSTITUTE The Entrepreneur’s Three Key Questions ©2008 Ajay Agrawal
  • Three Key Questions
    • What’s my business?
    • What’s my business model?
    • What’s my pricing strategy?
    ©2008 Ajay Agrawal
  • Motion Metrics: Broken Tooth Detection System
  • Google in Context Originally the Merchant’s Bank of Halifax, renamed the Royal Bank of Canada in 1901 Employees as of September 2008 Market Cap as of today – November 12, 2008 Founding Year No. of Employees Market Cap RBC 1864 66,748 $49.92B RIM 1984 8,387 $30.49B GOOGLE 1998 20,123 $97.15B
  • What’s my business? ©2008 Ajay Agrawal
  • What’s my business?
    • Analytical approach to identifying the choice set
      • Market size
      • Competition
      • Barriers to entry
      • Social relationships
      • Industry knowledge
    • Costs of switching businesses
      • Technical, analytical, marketing, social
    • Suggested reading:
      • Scott Shane (2000) “Prior Knowledge and the Discovery of Entrepreneurial Opportunities,” Organization Science
      • Ed Roberts (1991) “Entrepreneurs in High Technology,” Oxford University Press
    ©2008 Ajay Agrawal
  • What’s my business model? ©2008 Ajay Agrawal
  • What’s my business model?
    • Most common options
      • Sell service
      • License technology
      • Sell product
    • 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
      • Ed Roberts (2003) “The Product Market and the Market for ‘Ideas’: Commercialization Strategies for Technological Entrepreneurs,” Research Policy
    ©2008 Ajay Agrawal
  • Cooperate or Compete?
    • 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
      • the excludability environment
      • the specialized complementary asset environment
    ©2008 Ajay Agrawal
  • Two Elements of the Commercialization Environment
    • 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?
    ©2008 Ajay Agrawal
  • Benefits from Engaging the Intermediate Market for R&D
    • 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
    ©2008 Ajay Agrawal
  • Costs of Engaging the Intermediate Market for R&D
    • The main cost is the potential expropriation of intellectual property secrets and know-how by trading partners arising from the paradox of disclosure
    ©2008 Ajay Agrawal
  • Importance of Complementary Assets Excludability Low Low High High ©2008 Ajay Agrawal 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)
  • What’s my pricing strategy? ©2008 Ajay Agrawal
  • What’s my pricing strategy?
    • Cost-plus VS Value-added
    • High returns to understanding variation in willingness-to-pay across customers
    • Suggested reading
      • Carl Shapiro and Hal Varian (1999) “Information Rules,” Harvard Business School Press
      • Timothy Aeppel (2008) “Changing the Formula: Seeking Perfect Prices, CEO Tears Up the Rules,” Wall Street Journal
    ©2008 Ajay Agrawal
  • Advice
    • Send 1 page summary
      • Problem
      • Solution
      • Competing solutions
      • Team
    • Approximately 4 projects selected
    • 30 minute feedback session
    • Possible MBA business plan project
    • Strategy advisor
    • [email_address]