Entrepreneurship 101 - Building A Business Model

Three Key Features   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 ©2010 Ajay Agrawal

The Team

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 •  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. ©2010 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 1.  the excludability environment 2.  the specialized complementary asset environment ©2010 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? ©2010 Ajay Agrawal

Benefits from Selling Idea Rather than Selling Product   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 ©2010 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 ©2010 Ajay Agrawal

Importance of Complementary Assets Low High Compete Cooperate? Low (stealth strategy, (strategy: invest in reputation for Christensen, disk drives; disrupts trading in ideas; e.g., Cisco; formal Excludability existing industry leadership) organizations, e.g., ASCAP in music, TLOs in universities, VCs; reinforces existing industry leadership) Either Strategy Cooperate High (strategy: entrepreneur’s choice, (strategy: demonstrate value, attract relative returns from competition v. multiple bidders; biotech/pharma; cooperation?; e.g., Xerox developed reinforces existing industry complete vertical chain versus leadership) Nintendo’s widespread licensing of software development tools) ©2010 Ajay Agrawal

Incentives •  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? ©2010 Ajay Agrawal

Capture •  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 ©2010 Ajay Agrawal

Entrepreneurship 101 - Building A Business Model

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