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Market for Ideas Tech Entrepreneurs

Market for Ideas Tech Entrepreneurs

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Published by Joshua Gans
Joshua Gans and Scott Stern, "The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs", 22 June 2002
Joshua Gans and Scott Stern, "The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs", 22 June 2002

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Published by: Joshua Gans on Dec 08, 2009
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07/15/2010

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 The Product Market and the Market for “Ideas”:Commercialization Strategies for Technology Entrepreneurs
by
Joshua S. Gans and Scott Stern
*
 
First Draft: 2
nd
August, 2000This Version: 22
nd
June, 2002
This paper presents a synthetic framework identifying the central drivers of start-up commercialization strategy and the implications of these drivers for industrialdynamics. We link strategy to the
commercialization environment 
– themicroeconomic and strategic conditions facing a firm that is translating an “idea”into a value proposition for customers. The framework addresses why technologyentrepreneurs in some environments undermine established firms, while otherscooperate with incumbents and reinforce existing market power. Our analysissuggests that competitive interaction between start-up innovators and establishedfirms depends on the presence or absence of a “market for ideas.” By focusing onthe operating requirements, efficiency, and institutions associated with marketsfor ideas, this framework holds several implications for the management of high-technology entrepreneurial firms.
*
Melbourne Business School and Intellectual Property Research Institute of Australia, University of Melbourne (Gans), and Northwestern University, NBER, and Brookings Institution (Stern). We would liketo thank the firms who participate in the MIT Commercialization Strategies survey for their time and effort.Rebecca Henderson, David Hsu, Pierre Azoulay, Scott Shane, two anonymous referees and conference participants at the University of Maryland Technology Entrepreneurship conference provided valuablecomments and suggestions. We also acknowledge funding from the MIT Center for Innovation in ProductDevelopment under NSF Cooperative Agreement EEC-9529140 and from an Australian Research CouncilLarge Grant. Stern completed this paper while a Visiting Fellow at the Brookings Institution, whosehospitality is gratefully acknowledged. Finally, we thank Mercedes Delgado for outstanding researchassistance. Contact author: Scott Stern, Kellogg School of Management, Northwestern University,Evanston, IL, 60208. E-mail:s-stern2@northwestern.edu. The latest version of this paper is available at:www.mbs.edu/home/jgans/research.htm.
 
 2
1. Introduction
The past two decades have witnessed a dramatic increase in investment intechnology entrepreneurship – the founding of small, start-up firms developinginventions and technology with significant potential commercial application. Because of their youth and small size, start-up innovators usually have little experience in themarkets for which their innovations are most appropriate, and they have at most two or three technologies at the stage of potential market introduction. For these firms, a keymanagement challenge is how to translate promising technologies into a stream of economic returns for their founders, investors and employees. In other words, the main problem is not so much invention but
commercialization
.Effective commercialization strategies seem to differ across industrial sectors. For example, in the early 1980’s computer industry, Sun Microsystems’ commercializationstrategy involved direct entry into the workstation market. Sun’s entry was mostlydiscounted by established firms such as Digital, IBM, and Apollo Systems, giving Sunthe time to translate its overall technological vision (“the network is the computer”) into aconcrete series of technological, organizational, and market-positioning choices. As adisruptive entrant, Sun emerged as a leading computer hardware firm by building a novelvalue chain for high-end computer purchasers (Baldwin and Clark, 1997).On the other hand, many technology entrepreneurs have secured extraordinaryreturns by integrating their innovations into an existing value chain, often involvingintimate cooperation with established industry players. For example, in theinterconnection technology segment, the profits earned by companies such as AmericanInternet Corporation and Growth Networks are the result of an alliance strategy (andultimately an acquisition) by the industry market leader, Cisco Systems. In the case of the20-month-old closely-held Growth Networks, the $355 million acquisition in 1999secured a return for Growth Networks’ stakeholders valued at over 
$5 million per employee
(New York Times, 2000). From the perspective of the established firm, Ciscohas retained market leadership over several generations of novel technology and despite aturbulent industry slowdown in 2000 and 2001.
 
 3
This objective of this paper is to offer a synthetic framework identifying thedrivers of start-up commercialization strategy and the implications of these drivers onindustrial dynamics. This framework links strategy to the
commercialization environment 
  – the microeconomic and strategic conditions facing a firm translating an “idea” into avaluable proposition for customers. By focusing on the commercialization environment,we can assess why companies like Sun exploit technological leadership to construct anovel value proposition and compete against incumbents, while companies such asGrowth Networks work with established firms and leverage the
existing 
value proposition. Our analysis suggests that the crucial factor determining patterns of competitive interaction between start-up innovators and established firms is the presenceor absence of a “market for ideas.” By focusing on the operating requirements, efficiency,and institutions associated with markets for ideas, we offer a framework isolating howstart-up commercialization strategy depends on the economic environment.
1
 To understand the role of markets for ideas, consider the experience of RobertKearns, the independent inventor of the intermittent windshield wiper in the early 1960s.Unable to commercialize on his own, Kearns approached senior engineers at the FordMotor Company, disclosing both the operating principles and functionality of hisinvention. After some negotiation, Ford rejected a licensing agreement with Kearns, butintroduced a similar technology to the market shortly thereafter. For over 20 years, Fordand other automakers declined to pay Kearns royalties on this invention; it was not untilthe 1990s that Kearns successfully upheld his patent and extracted a portion of theeconomic returns (Seabrook, 1994). In this case, the absence of a market for ideasreduced Kearns’ ability to earn returns on his invention and, by setting a precedent,eliminated the incentives for start-up innovation in the automotive technology sector.Markets for ideas play a crucial role in shaping commercialization strategy andindustrial dynamics. In order to understand that role, we build upon and advance theagenda laid out in Teece (1986), emphasizing two central elements of thecommercialization environment: the nature of the appropriability environment, and the
1
This framework builds upon and complement our theoretical and empirical research examining incentivesand equilibrium commercialization strategy for start-up firms (Gans and Stern, 2000a; 2000b; Gans, Hsu,and Stern 2002). In contrast to this earlier research, here we attempt to combine a rich phenomenological

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