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What is a good business strategy to

commercialize your technology?

Turning Technology into Business 2.0


17 December 2010

Daniel Kapitan (daniel.kapitan@t-mobile.nl)


The product market and the market for “ideas”:
commercialization strategies for technology entrepreneurs
Joshua S. Gans, Scott Stern

“This paper presents a synthetic framework identifying the central drivers of


start-up commercialization strategy and the implications of these drivers for
industrial dynamics. We link strategy to the commercialization
environment—the microeconomic and strategic conditions facing a firm that
is translating an „idea‟ into a value proposition for customers. The
framework addresses why technology entrepreneurs in some environments
undermine established firms, while others cooperate with incumbents and
reinforce existing market power. Our analysis suggests that competitive
interaction between start-up innovators and established firms depends on the
presence or absence of a „market for ideas‟. By focusing on the operating
requirements, efficiency, and institutions associated with markets for ideas,
this framework holds several implications for the management of high-
technology entrepreneurial firms.”
Product Market

vs.

Market for Ideas


Who is more successful in commercializing
technologies: David or Goliath?

• Factor A: can the start-up


effectively keep incumbent* from
imitating?

• Factor B: does the incumbent have


assets that are valuable to the
value proposition?

Incumbent: the market leader c.q. dominant player in the market

Source: Joshua S. Gans & Scott Stern (2003)


„The product market and the market for “ideas”: commercialization
strategies for technology entrepreneurs
A simple strategy matrix to help out …

Does the incumbent have assets that are


essential to the value proposition?
No Yes

Can the start-up The Attacker‟s Reputation-based Ideas


No
effectively keep Advantage Trading
incumbent from
Greenfield
imitating? Yes Market for ideas
Competition
A simple strategy matrix to help out …
Typical examples of industries

Does the incumbent have assets that are


essential to the value proposition?
No Yes

Can the start-up No Hard-disks Automotive, Intel/Cisco


effectively keep
incumbent from
imitating? Yes Segway Biotech & Pharma

Attacker‟s Advantage Reputation-Based Ideas Trading

Greenfield Competition Market for Ideas


The Attacker‟s Advantage
in the hard-disk industry

• New technology is disruptive i.e.


it will (eventually!) surpass
performance of current standard
• Incumbents are faced with the
„innovator‟s dilemma‟
• Start-ups have good chance to
become market leader of new
technology standard (but with
very risky R&D!)

Source:
Clayton M. Christensen (1995), Explaining the
attacker‟s advantage: technological
paradigms, organizational dynamics and
value networks
Disruptive Technology
Typical issues in the case of
Attacker‟s Advantage
Incumbent Issues & Strategies Start-up Issues & Strategies
• Basis of Competitive Advantage is based on • Opportunity to capture market leadership by
products not competencies effective development of competence-destroying
• Sustainable market position requires constant technology
reinvention and preemption • Few opportunities to contract with market leader
• Organisation is subject to S-curve “blind spots” -- subject to the “disclosure” effect
and inertia • Effective strategies involve “stealth” (choosing
• Effective strategies require constant niche customers, reconfiguring the architecture,
monitoring; integration of market and etc…)
technical knowledge bases

Expected Competitive Dynamics


• Market leadership determined by technological leadership
• High Levels of very risky R&D Investment
• Established firms may fall into “competency traps” and be subject to the Attacker‟s Advantage
• Start-up entrants will engage in seemingly duplicative investments in manufacturing, marketing, etc…,
as a part of establishing novel value proposition
Market for ideas in biotech & pharma:
David and Goliath co-operate

Biotechnology
Benefits of trading in
the market for ideas
Industrial
Equipment
Avoiding Duplicative Investments
Electronics
• Costly Marketing & Manufacturing Assets
• Imitative R&D Programs

Instruments
Taking advantage of “High-Powered”
Research Incentives in Small Firms
Computer
Software • Product Market Assets v. Entrepreneurship

0 0.1 0.2 0.3 0.4 0.5 0.6


Softening product market competition
level of co-operation
• Extending product market franchises
… and as a result, Goliath stays Goliath

Sales Rank, Company Date Sales Rank,


1997 Established 1973

1 Merck 17th century 2


2 Bristol-Myers Squibb 1887, 1856 9
3 American Home Products 1926 6
4 Pfizer 1848 7
5 Abbott Labs 1900 21
6 Eli Lilly 1876 11
7 Warner Lambert 1852 3
8 Baxter 1931 79
9 Schering-Plough 1851 15
10 SmithKline Beecham 1830 31

Sources: Various corporate web sites; BioWorld 1998; Adams, 1977.


Typical issues in the case of market for ideas

Incumbent Issues & Strategies Start-up Issues & Strategies


• Start-up technology can serve as a critical • Question is not if but when to contract with more
source of improvement to the current product established firms
set • Performance will depend critically on ability to
• Sustainable market position requires co-opting secure and use bargaining power (playing off
potential competitors through participation in incumbents against one another, etc…)
the “ideas” market • Product market strategy would be both costly and
• Challenge is to balance internally developed less profitable than partnering with incumbent
and externally available technologies in PD
process

Expected Competitive Dynamics


• Frequent changes in technology leadership and the sources of innovation, potentially few changes in
market leadership
• Start-up firms compete with each other for priority in negotiations with market leader
• New technologies tends to build upon and reinforce existing platforms rather than challenge the
platform itself
Reputation-based Ideas Trading
in the automotive industry
The „paradox of disclosure‟
• When trading in ideas, the willingness-to-pay of potential buyers depends
on knowledge of that idea
• Yet, that knowledge implies that the buyer need not pay at all

Intellectual property protection (patents) is far from perfect

Other ways to defend your intellectual capital


• „Threaten‟ to partner with other companies (e.g. Audi vs. Porsche vs. Ferrari)
• Trade secrets
• Not only R&D, design and engineering but also production of (smaller) key
components
Typical issues in
Reputation-based Ideas Trading
Incumbent Issues & Strategies Start-up Issues & Strategies
• Opportunity for sustainable positioning • In the absence of a “reputation”-based ideas
• Difficult to “encourage” external innovation market by the incumbent, few incentives for
without reputation for providing windfalls for R&D effort
cherry-picked ideas • Head-to-head product market competition is
• Pervasive strategy is to focus on internal particularly risky because of imitability of
development of technology, despite incentives technology
for encouraging externally sourced ideas • Make sure partnerships with incumbent are
not only completed but are worthwhile for
the R&D firm

Expected Competitive Dynamics


• Relative market and technological stability
• In most cases, lion‟s share of innovation is result of internal development
• But opportunity to encourage external innovation by providing rewards and incentives despite lack
of property rights
All options are open in the case of
Greenfield Competition

Incumbent Strategies Start-up Strategies


• Basis of Competitive Advantage is based • Ideal opportunity for entrant to choose between
on products not competencies partnering (with strong bargaining power) or
• Low bargaining power vis-à-vis entrant establishing product market position
technologies • Favourable environment for introducing integrative
• Sustainable market position often involves standard product architectures
sharing profits to upstream technology
providers

Expected Competitive Dynamics


• Changes in market leadership are less important than changes in the distribution of power in the
value chain
• Technology providers can use their strong bargaining position to “buy” the incumbent
So, typically, what position would start-ups
take in the value chain in each case?

Design & Inbound Operations & Outbound Marketing After-sales


R&D
engineering logistics production logistics & sales service

Attacker’s advantage

Market for ideas

Reputation-based …key …licensed


trading components ? partner ?

Greenfield competition

start-up incumbent
Some data:
The MIT Commercialization Strategies Survey

(Figures represent the Does the incumbent have assets that are
rate of cooperation essential to the value proposition?
within each cell) No Yes

Can the start-up No 14% 30%


effectively keep
incumbent from
imitating? Yes 34% 56%

Attacker‟s Advantage Reputation-Based Ideas Trading

Greenfield Competition Market for Ideas


Possible start-up strategies in a nutshell

Does the incumbent have assets that are


essential to the value proposition?
No Yes
Only invest if established
Can the start-up „Stealth‟ value
No firm is stable & has good
effectively keep proposition
reputation
incumbent from
imitating? Many strategies Focused research,
Yes
(few examples) identify strongest partner

Attacker‟s Advantage Reputation-Based Ideas Trading

Greenfield Competition Market for Ideas


Possible incumbent strategies in a nutshell

Does the incumbent have assets that are


essential to the value proposition?
No Yes

Focus on internal
Pre-emption & development OR build
No
Can the reinvention are key! reputation & technology
start-up platform for ideas trading
effectively
keep Encourage technical
incumbent Avoid early
dynamics & market
from cannibalization;
stability; downstream
imitating? Yes attempt to
and upstream assets are
differentiate & build
complementary to one
value chain
another
Balance between doing too little vs. too much

Realize profit from innovation


through contracting Intellectual property protection is
•The advantages of licensing far from ideal in real life

Contracting is often not a Not all industries/markets allow


question of if…but WHEN? role of pure R&D company
Early on…small investments in IP and
uncertainty reduction increase financial
return substantially Think under what conditions an
external investor (venture capital)
•Later on…avoid empire-building and may be interested to invest
over-enthusiasm
Don‟t be afraid to partner with
your worst nightmare competitor

DO MORE
DO LESS
Some pointers on planning of your R&D,
engineering and design activities

Define strategic commercial targets:


• (Rough) estimate commercial price-points per unit
• (Rough) estimate of target cost per unit
• (Rough) estimate of revenues = p * q (be aware of unrealistic hockey-sticks!)

Define development plan to R&D, design and engineer the unit


• Stage-gates (www.stage-gate.com)
• Decision criteria when you are successful (and when to abandon the project)

Plan the work and activities:


• it is quite tricky to guess the amount of time it takes
• try to calculate an integral hourly cost rate for development activities
• You can use template of www.senternovem.nl/uitdagerskrediet as a guideline
Guideline of financial project plan
Type of # people Milestone1 Milestone 2 Milestone 3 Milestone 4
function involved TOTAL
HOURS
1. …

2…

3…

TOTAL
HOURS

• Total project size based on man hours of different function types


• Average cost per man hour = total cost of wages + total indirect cost) / total
hours available
• Account for other costs specifically, e.g. machines, 3rd parties, licensing/patents,
travel cost, general overhead
Some basic finance

Profit & Loss Cashflow


(Dutch: (Dutch:
exploitatierekening) liquiditeitsrekening)

Total cash in:


sales, licences, contract
Revenues research, subsidies,
-/- Cost of Goods Sold credit facilities from
banks etc.
= Gross Margin
Development -/- Operational cost minus
projects
(gates, = EBITDA Total cash out:
-/- Depreciation same as in P&L but also
activities) -/- Tax pre-financing of working
capital, capital
= Net profit investments in projects

= Net cashflow
… now go do it yourself!

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