Commercialization strategies for start-ups

By 8 November 2012 31

In a paper published in Research Policy in 2003 (Vol 32, pp. 333-350, click here for the working paper version), Joshua Gans and Scott Stern propose a typology of commercialization strategies for technology start-ups.

They start from the observation that “the main problem [for start-ups] is not so much invention but commercialization.” This is because these firms are young and small. As a result, they only know imperfectly the markets on which their innovations could be successful.

One commercialization option is then to cooperate with some established firm that knows the product market and owns useful complementary assets. However, the authors identify a key problem with this strategy:

“Those firms that control key complementary assets are precisely those that are the most likely and/or most effective potential product market imitators.”

This is the lesson that Robert Kearns dearly learned when he tried to sell his patented invention of the intermittent windshield wiper to Ford Motor Company and Chrysler Corporation in the 1960s. Not only did licensing negotiations quickly broke down but worse, Ford and Chrysler started to produce their own, almost identical, intermittent wipers a few years later. (This story inspired a movie called Flash of Genius in 2008; you can watch the trailer here.)

This story illustrates the so-called “paradox of disclosure” that plagues the negotiation process between a start-up and a potential commercialization partner: the more you disclose your invention, the more you make it attractive for a potential partner but also the more you undermine your own bargaining position, as disclosure facilitates imitation.

Clearly, the balance between the two latter forces depends on the strength of IP rights (and on the cost of enforcing them), as illustrated again by Robert Kearns’ story:

“He sued Ford for patent infringement in 1978 and Chrysler in 1982. The companies argued that the intermittent wiper was not novel because it had no new components and therefore didn’t meet the standards of being a patentable invention. Robert Kearns spent nearly 15 years and more than $10 million in legal fees in his fight to be compensated. The courts agreed with Robert Kearns and he eventually settled out of court with Ford for $10 million. The Chrysler lawsuit became a high profile case, which Robert Kearns won in 1995 for $30 million in overdue compensation.” (Click here for the full story.)

Given the risks involved in the cooperation strategy, start-ups may then prefer to try and enter the product market on their own. The basic choice is thus between the product market (commercialize your invention yourself) and the “market for ideas” (sell your invention to a partner that will commercialize it for, or with, you).

According to Gans and Stern, to choose between these two options, start-ups have first to assess the excludability and the complementary assets environments:

  • The excludability environment refers to the extent to which successful technological innovation by the start-up precludes effective development by an incumbent with knowledge of the innovation.
  • The complementary asset environment is about the extent to which the incumbent’s complementary assets contribute to the value proposition of the new technology.

Crossing these two dimensions, the authors identify the four generic strategies depicted in the following table.

(Source: Gans & Stern, 2003)

What I propose you to do is first to look at the details of these strategies in the paper by Gans and Stern and second, to find real-life applications of these strategies (one example for one strategy is more than enough, but you’re welcome to do more if you feel inspired).

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31 Responses to Commercialization strategies for start-ups

  1. Valentine SIraut 22 November 2012 at 11:10 #

    Commercialization strategies for start-ups
    Gans and Stern identified four main strategies for start-ups to enter into a market depending on the excludability and the complementary assets environments. A subject that has lead to many very interesting reactions and illustrations.Through this comment, I would like to list all the examples cited before by my classmate.
    Firstly, Gans and Stern (1) describes the « attackers advantages » strategy as an environment with low intellectual property protection, and thus a risk of imitation which leads to a constant and strong competition. The start-ups succeeding to enter the market are those who find a niche market so called the « blind spot » with a new innovative technologies. Here followed are the different illustrations:
    - The entrance of Toyota and Honda, two Japanese auto companies in US automobile market exploiting the production cost, the reliability and the fuel efficiency
    - In the industry of social networks, new firms are constantly entering the market by adding technological features such as Yahoo, Facebook , MySpace, LinkedIn ect.
    - In the portable music industry, the innovation of the Ipod by Apple upstages the Walkman invented by Sony.
    - Google imitated by Bing
    - In the mobile telecommunication market Ericson and Nokia entred the market when Motorola was considered as leader
    - In the video industry, Nintendo” – from 1995 up to 2007 – was continuously present in the market while its competitors changed continuously, due to creative destruction.
    - In the watch industry, Seiko, a Japanese company exploited the niche market of the electronic watches in a market leading by the Swiss watch industry.
    Secondly, the “ideas factory” is characterised by a situation where imitation is avoided by the existence of strong intellectual properties and incumbents control the complementary assets required for commercialization. In this environment cooperation agreements (e.g., licensing, royalty, profit sharing arrangements) are likely to occur between firms to focus on researches and bring new technology into the market. Regarding the different example, we can say that this strategy generally occurs in pharmaceutical and computer industry:
    - In biotechnology and pharmaceutical market where pharmaceutical company in biotechnology encourages innovation.
    - Outsourcing of R&D, for instance, the commercialisation by US Pharma counterparts of ideas developed by India firms.
    - Salesforce reinforced its competitive advantage by establishing AppExchange platform.
    - The strategy of 3M, a company that commercialized technology, that encourages innovation by making the result of researches and technology resources accessible and profitable to every division inside the company.

    Reputation-base idea trading
    In an environment where the incumbent controls the complementary assets necessary for effective commercialization and where the technology innovator could lead to disclosure problem, the strategy of reputation-base idea trading is recommended, an effective agreement or/and commitment from parties to star a partnership
    - The commercialization by Lotus of the speculoos recipe of Els Scheppers after the competition “ De Bedenkers”.
    - Few firms are leading the market in the agriculture industry such as the dominante Monsanto Company therefore start-ups are unlikely to enter the market due to the fact that farmers are depended on the leading firms.
    - The’Startup America” initiative where different private sectors are committed to support and engage researchers, start-ups for more dynamic and coefficient innovation ecosystems.
    - The invention of Band-Aid by Earle Dickinson which was bring into the market thanks to the industrial equipment of Johnson& Johnson
    Greenfield Competition
    The last but not least environment is the strategy of Greenfield Competition, in an environment where imitation is difficult, the start-up can decide the commercialization strategy for being the most efficient. According to the examples collected, we can conclude that the “Greenfield Competition is more likely to appear in the software market but also in the chemical industry and other sectors as follow:
    - Wilbert Gore tried first to cooperate with the American chemical company to use his invention of polytetrafluoroethylene without success and then starts his own company and set up Gore-T ex which is today a very successful company and Union Carbide and Montecatini have actively licensed their polyethylene and polypropylene technology on their own.
    - In the video game sector, cooperation between Nintendo and software that controls Nintendo’s platform is efficient.
    - However the result of the strategy of Xerox, controlling on their own without any cooperation results being beneficial.
    - The agreements between Sun Microsystem and HP
    sources
    1. Gans, S. & Stern, S. (2002) The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs
    2. All the interesting ideas, illustration and opinion of the previous comments

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    • Paul Belleflamme 22 November 2012 at 11:11 #

      Same reply as for Derrick: thank you for your summary (although it was posted after the deadline).

  2. Van Frausum Derrick 22 November 2012 at 09:55 #

    The Attacker’s Advantage

    - In the US automobile market: back in time, Japanese auto companies such as Toyota and Honda exploited blind spots of the established Big 3 companies: cheap cars, reliability, fuel efficiency

    - In the social network industry: each successive social network found its own niche that were previously blind spots (twitter for short messages, Facebook for keeping in touch, MySpace for bands and artists, Google reader for sharing of information, etc).
    - In the music distribution industry:
    o The upstaging of the portable music market leader Sony (with its Walkman) by Apple’s entry to the market (with its iPod).
    o With the launch of a digital music player and distribution system, Apple has exploited the blind spot (facilitating music portability and legal distribution)

    - The social network industry, characterized by a constant race of beating each other by adding technological features that outsmart your competitors:
    o The market leader Facebook took the advantage on other social networks (MySpace, LinkedIn) thanks to their innovative features.

    - Google: with their effective algorithms, it outsmarted the period’s market leader Altavista and now, has such a strong brand and fast web search engine, that an incremental improvement in web searches is unlikely to change the leader of the industry

    - In the mobile telecommunications market:
    o In 2006, Ericsson and Nokia could catch up with the market leader at this time.
    o Then Samsung and Apple become now market leaders

    - The GSM operators: can guarantee difference performances, but they cannot be easily patented, working in a network field. So the leadership in this kind of performances can address to capture the market.
    -

    - The volatile and fragmented nature in the video game industry (handheld game consoles, home video game, computer based video games, etc):
    o Nintendo from 1995 up to 2007: was continuously present in the market while its competitors changed continuously, due to creative destruction

    - The growth of electronic watches in the 80’s: Japanese companies such as Seiko surpassed the mechanical devices of the Swiss watch industry by exploiting their blind spots (resistance to change and underestimating potential of new innovations).

    Ideas factories

    - In the biotechnology and pharmaceutical market: pharmaceutical companies encouraged innovation in biotechnology.
    o As the competitive race to develop synthetic insulin: in order to earn gains in the market for ideas, the market leader of beef and pig insulin Eli Lilly encouraged external research of biotechnology teams.
    o The biosensor commercialization: biotechnological start-ups firms can coordinate the commercialization of their discovery with an incumbent pharmaceutical firm.

    - The outsourcing of many US pharm R&D to India: The India companies work as idea factories and their ideas are commercialized by their US Big Pharma counterparts.

    - Saleforce (a well-established firm supplying cloud based Sales Management and CRM solutions): its competitive advantage is reinforced by its AppExchange platform where new innovative services of start-ups are made available to Salesforce clients.

    - 3M, an idea factory itself: one of the most innovative companies concerning achieved patents, keeping in mind that they commercialize technology in rapidly changing environments

    - Market for ideas prevalent in the large services industries, where innovations are based on software and the manufacturing industries, which relies on electronics:
    o The example of Dell, company renowned by outsourcing innovation: purchases its innovation software from outside suppliers

    - In the car industry: start-ups prefer to sell their innovation on the market for ideas because the market entry is very costly (requires high investments in facilities and equipment).

    Reputation-based idea trading

    - The automobile market: where innovations come only from the established firms’ R&D

    - The windshield wiper case: Ford and Chrysler imitate the patented invention of Robert Kearns without giving him any reward.

    - The home appliance – like the refrigerator market: incremental innovations that are not differentiated technologically

    - Lotus Speculoos Spread: during a program of Flemish public broadcasting company “één”, the finalists had presented their invention of Speculoos spread which was commercialized after a year by Lotus, the market leader in speculoos biscuits.

    - Agribusinesses for genetically engineered seeds, dominated by only a few big companies, Monsanto Company being the leading producer:
    o New market entrances are humble due to the fact that farmers are forced to buy new seeds every year, establishing a dependence on the big producers.

    - “Startup America” initiative of USA government: where different private sectors (top entrepreneurs, venture capitalists, angel investors, corporations, etc) are committed to support and engage researchers, start-ups for more dynamic and coefficient innovation ecosystems.

    - The win-win relationship between nanotechnology firms and universities:
    o For firms: By allowing access to university networks and facilities, such a partnership is a great opportunity for firms to start their activities or to develop capabilities and knowledge.
    o For universities: the advantages are promoting commercialization of technology and having access to firm technologies.

    - The creation of Band-Aid by Earle Dickinson in 1920
    o the self-adhesive bandage was very easy to imitate and he couldn’t bring the product on the market without the industrial equipment of Johnson & Johnson (which is now used to partnership with innovators)

    Green Competition

    - Nintendo: since the sales of their hardware depend on software (games), Nintendo chose a cooperation strategy as it will give them more revenue than controlling their platform.

    - Android: seek the cooperation to bring innovation to its product.

    - Xerox: adopted a control everything policy as cooperation seemed it wouldn’t have given them any substantial benefits.

    - iOS: chose also the competition strategy as their products are enough to succeed on their own.

    - Greenfield Competition is very likely to appear in the software industry where the entry costs are low but imitation is costly and takes time:
    o The invention of the first modern firewall by Gil Shwed. Together with two friends he founded Check Point in 1993 and could enter the market very successfully. Agreements with Sun Microsystem (1994) and HP (1995) resulted in the worldwide market leadership for firewall in 1996 and revenue of 34.6 million US$.

    - In chemicals, Union Carbide and Montecatini have actively licensed their polyethylene and polypropylene technology.

    - Merck & Co: partnerships to bring its leading drugs on the market (Fosamax – for osteoporosis and Cozaar/Hyzaar – for hypertension), although they are one of the largest firms in the industry and thus could have had the capacity to put the drugs on the market by themselves.

    - The same path was followed by two of the most known and largest biotech companies, Amgen and Genentech.

    - The market for tap

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    • Paul Belleflamme 22 November 2012 at 10:00 #

      As I replied to Nissa, thanks for the summary (which you did without seeing Missa’s… too many comments came at the same time and it took me some time to approve them all). Anyway, as many of you wrote, collaboration in research is fruitful, and the two summaries surely complement each other.

  3. Nissa Merckx 22 November 2012 at 03:53 #

    As already mentioned many times, there are four different types of environment for commercialization strategies: Attacker’s Advantage; Ideas Factory’s, Reputation-Based ideas trading; and Greenfield competition.

    Many good examples have been given in the comments below; I will thus try to summarize them as well as I can, under their respective strategies, and hope I don’t misinterpreted these strategies (and the comments).

    I. Attacker’s advantage
    Main elements defining this strategy environment: Tight competition between start-up firms and incumbent firms who compete for technological leaderships in “niche” markets. Incumbent firms do not control complementary assets. Thus, Start-up firms in this environment have the opportunity to acquire a leading position by “smartly” using the existing “blind spots”. For an incumbent firm to avoid any use of “blind spot”, he must be continuously present on the market and thus practice continual reinvention while anticipating new behaviors.

    1.Swiss watch industry: Used to be leader in mechanical watches – area in which it specialized–, it didn’t anticipate technological development and new possibilities of innovation. This enabled the “attackers” (the new entrants), such as a Seiko, a Japanese company, to take advantage of that “blind spot” and innovate by producing electronic watches. (Cf. Laura Ioana Bidea)
    2. Mobile telecommunication industry /Gsm operator: Ericson and Nokia, when they where start-ups firms, where able to develop rapidly – thanks to knowledge spillover by the existing leader firm, Motorola –. This gave them the opportunity to compete with Motorola and gain market shares. ; Today, Samsung and Apple are continuously innovating, allowing them to keep a leadership position on the market. (Cf. Adriana Guth; Cf. Marta Ripamonti)
    3. Internet: On this type of market, imitation while improving existing technologies is common and possible (i.e. due to weak IP protection).
    a. Search engines: Altavista, Google: In this illustration: Google – now holding the leadership in the industry – was developed by imitating and improving AltaVista’s algorithms, the leader in search engine at the time. (Cf. Johan Fredrik Hillveg).
    b. Social Network: Myspace, Yahoo, Facebook, LinkedIn, Twitter,… In this industry, while imitation is inevitable, there is a constant race toward technological innovations (adding new features, new applications). Facebook is the current leader in social networks and for the new competitors to be able to compete and surpass it, they must look for its “blind spot”. (Cf. Emil Bjornstad). We can observe that all these social networks were able to survive by positioning themselves and occupying niche markets (previously “blind spots”). (i.e: twitter: short messages, facebook: keeping in touch, Myspace: bands & artists, Google reader: sharing information.) (Cf: Anand Rajkumar).
    4. Portable Music Industry: Apple was able to enter the market through existing “blind spots” on the industry (i.e: by launching a digital music player and distribution system) and gain technological leadership against Sony who was the first market leader and inventor of “walkman”. (Cf. Shoira Mukhsinova)
    5. Video game industry: Nintendo (1997-2007) was able to keep its position as an incumbent by being continuously present on the market while new competitors weren’t able to sustain their development. (Cf. Ieva Jurgalane)
    6. US automobile market: Toyota and Honda were able to take advantage of the “blind spots” available on the US automobile market (namely those from the Big 3 companies). (Cf. Anand Rajkumar)
    7. Hard disk drive Industry (Cf. paper by J. S. Gans and S. Stern on “The Product Market and the Market for ‘ideas’: Commercialization Strategies for Technology Entrepreneurs”, p. 15).

    II. Ideas factories

    Start-up product entry on the market is costly, so if they want to realize their innovation potential, they will have to compete with each other in order to secure themselves a partnership with an incumbent firm. This practice will enable the latter to make use of the external start-up innovation that will be positive for its development and allow successful technology innovation.
    1. Biotechnology and pharmaceutical industries: Most of the time there will be coordination between an incumbent firm and a new discovery from a start-up firm. (Cf. Anand Rajkumar; Marta Ripamonti; Laura Ioana Bidea; Ieva Jurgalane; Cf. J. S. Gans and S. Stern, op.cit., p. 17.)
    2. Large services industries: which outsource new innovative services, such as Software applications, provided by new start-ups.
    a. Salesforce (Cf. Shoira Mukhsinova)
    b. 3M (Cf. Adriana Guth)
    c. Dell (Cf. Laura Ioana Bidea)
    3. Car Industry: Due to high market entrance cost, start-ups will favor the option of selling their innovation on the “market for ideas”. I.e: better battery of improved motor (Cf. Laura Iona Bidea)

    III. Reputation-based idea trading
    All the following examples show that the idea and patent inventions of start-up firms have been ‘stolen’ and imitated by incumbent firms. Since start-up firms don’t have the necessary resources knowledge to protect their ideas and, they are easily stolen. In this environment, strat-ups don’t represent much competition for the incumbent. Examples of Ideas reproduced almost identically to the original idea:
    1. Band-Aid idea “stolen by” J&J: (Cf. Laura Ioana Bidea)
    2. Automobile industry: i.e: Windshield wiper idea “stolen by” Ford : (Cf. Anand Rajkumar and Cf. J. S. Gans and S. Stern, op.cit., p. 18).
    3. Speculoos paste idea “stolen by” Lotus (Cf. Shoira Mukhsinova)
    Other cases of Reputation-based trading imply the choice of the incumbent to trade ideas with start-ups. For example: Collaboration between University and start-up Industries: Universities constitute reliable partners (reputation and knowledge) for start-up industries, mainly in emerging fields and high technology. (Cf. Hecq Elise)
    Other examples:
    4. Agribusiness for genetically engineered seeds (Cf. Adriana Guth)
    5. Market for tap(Cf. Marta Ripamonti)

    IV. Greenfield competition
    In this strategy environment, start-up can choose whether to compete or to cooperate with an Incumbent firm. They are able to protect their own innovations from possible imitations and thus don’t need the complementary assets of incumbents. With the following examples we observe this strategy can also be used by “large established companies” (Cf. Ieva Jurgalane):
    1. Cooperation
    a. in the biotechnology industry(Cf. Laura Ioana Bidea); 1) Merck & Co who – through partnerships – brought two of its leading drugs on the market; 2) Amgen and Genentech
    b. in chemical industry (Cf. Ieva Jurgalane): Union Carbide and Montecatini
    c. Other examples include: Agreements by the first modern firewall by Gil Shwed and two friends (Check Point) with HP and the Sun Microsystem, maked it possible for them to become worldwide leaders on the market of firewall. (Cf. Adriana Guth)
    d. Nintendo chose a cooperative strategy since it would be more beneficial as it always requires innovation. (Cf. Anand Rajkumar)
    2. Compete: i.e: Xerox chose a competitive strategy because “their product was good enough to succeed on its own”. (Cf. Anand Rajkumar)

    In the end, we cannot really identify one particular sector to one commercialization strategy. Indeed the strategy chosen will mostly depend on the relationship, on the market, between start-up firms and incumbent and on the opportunities for the former to enter the market.

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    • Paul Belleflamme 22 November 2012 at 09:29 #

      Thanks for this excellent summary. I’ll add myself the examples that others provided before you could read their comment, and I’ll write a new post on this basis. This is an excellent example of crowdsourcing!

  4. Jerielle Akoto 22 November 2012 at 00:46 #

    The Attacker’s Advantage:

    In an environment with high imitability and low dependence on the existing complementary assets, start-ups have an opportunity to capture market leadership by developing and diffusing competence-destroying technology.

    An example of that strategy would be, Apple who has developed his products (i-pod, i-mac, i-pad…) on a niche segment. The design and the capability of its product were hard to copy for its competitors. Moreover, Apple’s innovations are highly protected by patents that make it more difficult to imitate. Furthermore the image of the brand gave her a competitive advantage over its competitors.

    Ideas Factories:

    In an environment where successful innovation precludes effective development by the established firms and where the incumbent control the complementary assets required for the commercialization, the leading firms try to reinforce partnerships with more downstream players.

    An example of that strategy would be the “race” to develop synthetic insulin in the early years of biotechnology. Indeed, Eli Lilly, a dominant incumbent specialized in the supply of beef and pig insulin, encouraged three teams to undertake research to express the insulin gene. Two of those teams were university-based and the third one was Genentech, a venture-backed start-up biotechnology firm.

    Reputation-Based Ideas Trading:

    In an environment where the disclosure problem is severe but incumbents possess the complementary assets necessary for effective commercialization, established firms have an incentive to invest in mechanisms to enable a market for ideas.

    An example of that strategy would be the firm Dickson.
    In 1920, Earle Dickson fashioned a self-adhesive bandage for his wife. Dickson’s invention was to become the “Band-Aid”. However, he faced a disclosure problem (weak IP rights, the high level of imitability and the market incumbents owned at least some of the critical complimentary assets required to commercialise the Band-Aid). Therefore, an independent innovation was really difficult to do.
    By 1920 J&J had developed a good reputation in terms of product innovation. J&J had also developed products in partnership with other innovators and owned a well-publicised corporate priority “credo” : consumer first, employees second, community and environment third and stockholders fourth. Thus, J&J was less likely than other incumbents to treat Dickson unfairly. Similarly, given the potential competitive strength of J&J, the “contracting strategy” benefited Dickson by “softening” the product market competition. Thus, by 1924 it was clear that the Band-Aid was a huge commercial success.

    Greenfield Competition:

    In an environment where incumbent’s complementary assets are unimportant and start-up innovators can preclude effective imitation, both competition and cooperation strategies may be effective.

    An example of that strategy would be Nintendo’s game platform that has based his business on the widespread of the license of its software development tools to independent game developers. By encouraging high-quality video game development, Nintendo earned a lot of profits. It had the choice to cooperate or not and it chose to do it. As a result, it earned a lot of profits.

    Source: http://www.mbs.edu/home/jgans/papers/ideasmkt.pdf

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  5. LOUIS Pauline 21 November 2012 at 23:53 #

    First of all, I agree with Joshua Gans and Scott Stern whose say that the main issue for start-ups is not really the innovation but rather the commercialization. I think that a small innovative firm has to take more risk to launch a new product than a dominant firm that develops many new product lines. This risk is due to the lack of experience from the entrant. The latter is undeveloped, so it hasn’t known the specific features of the market yet. Therefore, it is more difficult for a new firm to anticipate properly the future market trends.
    One solution is to cooperate with an established firm but the danger is to be very dependent of this incumbent firm. Indeed, the dominant firm owns specific assets and thus an inimitable market power. According to the “paradox of disclosure”, when a firm decides to disclose its remarkable discovery, it creates an incentive for a potential partnership. But on the other hand, it damages its competitive advantage because imitation becomes easier. As a result of this risk, start-ups hesitate to enter in competition with an existing product market and to commercialize their invention themself. In fact, it seems to be sometimes more profitable to develop their own markets and then to look for a partner who would like to buy their inventions or wants to collaborate with the start-up. This dilemma depends on two valuations. Firstly, the excludability environment is a good thing for the new firm because this prevents an incumbent to develop a knowledge which is the result of a technological innovation by the start-up. Secondly, the complementary asset environment is significant to determine the contribution of the partner’s complementary assets in the value of the innovation.

    Following this theory, the authors identify four strategies. In my comment, I would like to develop two opposite strategies.

    The first one is the “Attacker’s advantage” which is characterized by a small start-up power in the guarding of their innovations. In this kind of environment, the property protection is lower and the competition is higher. Given that, it is very risky to launch a product on this market because it is easy for competitors to imitate the start-up innovation. Moreover the efficiency of the incumbent’s complementary assets does not depend on the start-up’s productivity. In conclusion this market is more appropriate for competition than for cooperation. So, the firm must be innovative or invest in a market niche if it wants to survive. A real-life application of this strategy occurs in the fishing companies. Indeed there aren’t many patent for the products of the sea. However the abilities are not the same between a big fishery and a small fisherman. I think there is a critical problem in this sector with regard to the survival of small local producers. The asymmetries of capacities are so huge that this leads to a leadership from the giants of the sea. Moreover, some companies pay for a sustainability certificates in order to sell certified products. In my opinion it is not a proof of quality because fresh fish from the small fisherman (who cannot afford high investment) is probably as durable as those from big industries.

    The opposite strategy is the “Ideas Factories” where invention can be patented. However, the incumbents have got a market power because their complementary assets are required for the commercialization. Therefore, the cooperation is more probable than the competition in this situation. To take a practical example, tire companies are strongly related to car manufacturers. If demand of cars increases, the tires demand will also grow. The costs of production for car manufacturers depend on the tire prices. But on the other hand the demand of tire manufacturers is mainly defined by the demand of cars. The cooperation between the two firms is almost inevitable. If a start-up wants to enter into the market for cars producers, it had better to coordinate its invention with existing tire producers. Indeed to offer a high quality car, the start-up needs the expertise of tire producers. The success of the “idea factories” is determined by the strength of the partnership.

    In the end, it is the company’s responsibility to choose the suitable strategy. Each strategy has its advantages and disadvantages so it is necessary to weigh the pros and cons before making a choice. Companies try to maximize their profit but they must remain vigilant with respect to externalities they impose on the welfare of the population.

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  6. Philipp Alexander Rathjen 21 November 2012 at 23:47 #

    The Paper on commercialisation strategies for start-ups by Gans and Stern reveals a comprehensive approach for market analysis.
    Before elaborating on examples for each particular commercialisation environement, it has to be pointed out that even though the two aforementioned concepts excludability and asset complementarity provide a powerful framework, in real life cases it may be difficult to draw the line as to whether a certain characteristic is given or not. For example, whether or not an incumbent’s complementary assets contribute to the value proposition may vary according to industry. This is because these assets should not only include investments in machinery are infrastructure, but also distribution mechanisms and marketing which depending on the industry may be hard to wrestle with, in spite of being easy to imitate due to Lock-In effects. This would shed a new light on the validity of the “Attackers Advantage” Strategy and the “Reputation based Ideas Trading”. As an example Google Maps has recently witnessed two new formerly unknown competitors, who in spite of heavy advertising, could not compete simply because everyone uses Google maps. This is what makes the Attacker’s Advantage environment so fierce but not unpredictable in some cases. In spite of careful product positioning and smart attacks, challenging incumbents may still prove borderline impossible. In terms of the “Reputation based Ideas Trading” environment, Google Ventures is a magnificent example. They support you in your venture, get invested in it, and equip you with a team of Google professionals who can relay on remarkable both famous and infamous reputation. This kind of bond building captures innovative minds. Although it is not an environment as capital intensive as the automobile industry, Google’s arguable dominance still merits the label. In those markets where entrepreneurs are protected from imitation, Gans and Stern define two environments. As an example for the ideas factory environment, I would like to draw awareness to Mr. Brenmiller’s former Start-up Solel Systems. In 2006 everything was looking. Gas pries were on the rise, Governments around the globe were increasing their alternative energy portfolios, and Solel manufactured a new kind of parabolic trough technology for Concentrated Solar Power generation. The key to the innovation was the receiver, which increased the efficiency of this technology so it could compete with the formerly more expensive photovoltaic technology. At first it looked like Brennmiller was to take on the world all by his own. But eventually a fierce bargaining began between Siemens, Areva and Allstorm for Solel, which ended with Siemens paying an, in retrospect, exaggerated amount for the company. The Energy market was too big for Solel. This is precisely what what the authors meant with the “Ideas Factory” environment. The innovator was absorbed, and his return was entirely dependent on his bargaining power.
    Greenfield competition is a miraculous breeding ground for great ideas. There is no better example than the development Silicon Valley has undergone ever since William Hewlett and David Packard pieced together their first computer.
    However, even though this framework is really handy for picking out strategies, it may still be a little vague. Though not in terms if the points is comprises, but in terms of precision. I believe it shouldn’t be a 2×2 but a higher dimensional matrix so type’s of appropriability and of IP protection, as well as different classes of assets can be distinguished.

    Sources:
    1. J.S Gans and S. Stern, *The Product Market and the Market for “Ideas: Commercialization Strategies for Technology Entrepreneurs*, Working Paper
    2. http://www.ft.com/intl/cms/s/0/3e256794-b9a2-11de-a747-00144feab49a.html
    3. http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201210231534KRTRIB__BUSNEWS_59843_23497-1&params=timestamp%7C%7C10/23/2012%203:34%20PM%20ET%7C%7Cheadline%7C%7CSolel%20Solar%20seller%20wants%20to%20buy%20back%20co%20from%20Siemens%20%5BGlobes%2C%20Tel%20Aviv%2C%20Israel%5D%7C%7CdocSource%7C%7CKnight%20Ridder/Tribune%7C%7Cprovider%7C%7CACQUIREMEDIA%7C%7Crealtedsyms%7C%7C%7CUS%3BSI%7C&ticker=SIN:SW
    4. http://www.crunchbase.com/financial-organization/google-ventures
    5. http://www.forbes.com/sites/tomtaulli/2012/11/16/google-ventures-what-it-looks-for-in-an-enterprise-deal/
    6. http://developer.mapquest.com/
    7. http://en.wikipedia.org/wiki/Hewlett-Packard

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  7. Yousra Ebrahmi 21 November 2012 at 23:29 #

    Gans and Stern offer a synthetic framework identifying the drivers of start-up commercialization strategy; they identify two dimensions in the choice of strategy for start-ups:

    • The excludability environment describes the extent “to which a firm can exclude an incumbent with knowledge of the innovation form imitation and competing with the new firms”. (1)
    • The complementary asset environment describes the extent to which “an incumbent’s complementary assets contribute to the value proposition” from the innovation. (2)

    By crossing these two dimensions, Gans and Stern highlight four strategies:

    1. Low importance of complementary assets and low excludability : the Attacker’s Advantage
    In this configuration, competition is likely to be intense: start-ups have the opportunity to overturn the established positions of existing firms but the innovation is easy to imitate and is lowly protected. And therefore start-ups will not be profitable in the long run. The solution is here to adopt a disruptive innovation strategy. Skype can be considered as a disruptive firm. Indeed its industry presents a low excludability environment (easy to imitate and impossible to protect the idea) moreover no complementary assets were needed. Instead of directly competing with phone provider companies (that control the network) Skype decided to change the way people phone.

    2. High importance of complementary assets and high excludability : Ideas Factory
    This situation is the complete opposite of the previous one. In here, the only solution for start-ups is to cooperate with established firms that control the complementary assets required for effective commercialization. Some industries are more designed for this type of collaboration than others and that is typically the case for pharmaceuticals and biotechnology. In the 90s, Trimeris Inc., a small biotech company (the start-up) decided to cooperate with Hoffman-La Roche (Swiss pharmaceutical giant, the established firm) to commercialize its AIDS drug, Fuzeon. (3)

    3. High importance of complementary assets and low excludability: Reputation-based Ideas Trading.
    With such a configuration, established firms must develop a reputation of fairness to appear approachable, they will therefore benefit from the commercialization of new technologies (provided by the start-up) at a higher rate than their competitors. In Belgium, a well-known example is the speculoos spread. Indeed it was developed by Els Scheppers during a Flemish start-up competition. She was later on contacted by Lotus to commercialize this idea. (4)

    4. Low importance of complementary assets and high excludability : Greenfield competition
    In this situation, the starter has the upper hand, indeed, it can exclude the incumbent and it does not need complementary assets. The choice to compete or to cooperate will be assessed by the start-up. An example of this situation is the applications available on the AppStore. Indeed, other software firms can develop their applications and use the AppleStore platform to sell them to Apple users.(5)

    (1),(2) http://acawiki.org/The_product_market_and_the_market_for_%22ideas%22:_Commercialization_strategies_for_technology_entrepreneurs
    (3) http://knowledge.wharton.upenn.edu/article.cfm?articleid=961
    (4), (5) http://lib.ugent.be/fulltxt/RUG01/001/392/230/RUG01-001392230_2010_0001_AC.pdf

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  8. Andreas P. Engstrand 21 November 2012 at 21:32 #

    I will present my opinion on commercialization strategies for start-up companies with an example of the attacker’s advantage. Gans and Stern present two ways to commercialize an innovation. The start-up can enter the product market and compete against established firms. This option requires sunk investments and the start-up has to compete with existing players in the market with the fear of their innovation being imitated.

    In the second option, the innovator does not enter the market itself. The innovation can be either licensed or acquired by other companies. If the start-up manages to clearly communicate the value of their product and make it attractive, it may license the product to several producers and gain bargaining power by setting the companies against each other in a bidding war. (Gans, Stern, 2002).

    Based on the latter strategies, Gans and Stern further included two other factors which influences the innovator’s optimal strategy: excludability and complementary. This means the optimal strategies depend on whether the start-up has strong IP rights or not, and whether the existing companies control key complementary assets. If this is the case, probability of imitation is higher. The resulting four strategies are the attacker’s advantage, Ideas factories, Reputation based ideas trading and Greenfield competition.

    The attacker’s advantage describes an environment with intense competition. In this case, incumbents do not have complementary resources to make commercialization effective, and IP protection is weak. Therefore, firms can easily imitate new technology. The situation makes it tough for start-ups to stay in the long-run since their idea is easily adopted by the competitors. It may seem the only opportunity for start-ups is to identify niche-markets, or “blind-spots” (Gans, Stern 2002) in the current market. Christensen finds that successful commercialization of innovation products take place in markets where innovators identify underserved customer groups (Christensen, 2007). With the popularity of today’s social media sites, we can draw an example for the attacker’s advantage.

    One of the key factors defining a social network is the network effect. People will only be on the networks where “everyone else” is. Several social networking sites have emerged since the release of Facebook in 2004, but few of them have managed to get popular because of the network effect of the established networks. The entry cost is relatively low, but network effect creates a barrier to entry. Pinterest is a relatively new image-sharing social network first established in 2010 and released for the public in 2011. The site allows users to share and collect their interests, hobbies and events on a pinboard. Users can browse other users’ pinboards and the whole idea is to connect users with other users who have the same interests. In December 2011, the site was among the 10 largest social network sites with over 11 million visits per week and is still the fastest growing social network site. The functionality in the site proved to be different from the existing solutions, and attracted users. The site connects people through equal interests or hobbies, instead of the through actual friendships.

    One interesting point is the reason behind their impressing growth. Because of other social network competitors, it can take advantage of their user database to attract users to its own platform. Users on Pinterest share their Pinterest content on Facebook, which attract “Facebook friends” of this user to Pinterest. The network effect, which is one of the greatest barriers to entry for start-ups, may at the same time be their catalyst for attracting users.

    Gans, J., Stern, S. (2002): The product market and the Market for “ideas”: Commercialization strategies for technology entrepreneurs

    Christensen, C.M. (1997), The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, Boston, MA: Harvard Business School Press.

    DuVander, A, 2012: http://blog.programmableweb.com/2012/02/15/facebook-takes-credit-for-pinterest-growth/

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  9. Malgaud Quentin 21 November 2012 at 21:10 #

    I would like to introduce the Kitesurf example.
    Kitesurfing is a rather new fashion in the world of surface water sport. Depending on the sources, there are around 1.5 M kite surfers around the world today, and more and more windsurfers are switching to this sport.
    The history started around 1984 when two french brothers (Dominique et Bruno Legaignoux) tried to invent a new type of kite that would be usable on water. Once they improved their prototypes enough they went to big windsurf manufacturers but nobody was interested as it was the golden age of windsurf. The two french brothers now earn 12€ on every kite sold around the world.

    This is a good example of Greenfield Competition.
    From the startups point of view, they first wanted to sell the patented technology to windsurf manufacturers. After that the Legaignoux brothers launched their first brand called wipika and released licenses to other new manufacturers.
    From the incumbent point of view now, we see that the competitive advantage of the innovation comes from the product itself and that despite the great reputation of the windsurf manufacturer kitesurf was a success. They might have had good R&D policies by the time they got proposed the idea of kite surf but their R&D plans were probably too narrow to enhance real innovations. It might be exactly one of the reason why the inventors of kite surf are now in talks to sell their patent: “The patent can be questioned by counterfeiters at any moment and a new type of more-advanced sail can be invented from one day to the next,”
    The resulting dynamic is an important competition for technological priority.

    Kite Surf history was not an Idea Factory because the technology was disruptive enough and also because incumbents did not take it seriously into account.
    The fact that the technology was disruptive is not sufficient to not let it “Reinforce Incumbent Complementary Assets” but it amplified the importance and the issue of the second argument.
    The second argument -incumbents opinion about the innovation- made the difference between the Idea Factory model and the Greenfield Competition. Kite surf did not “Reinforce Incumbent Complementary Assets” because incumbent did not want it. If one of them had seen the idea as a possible diversification and had bought the patent then it would have fit in the Idea Factory model. This means that the potential impact on the incumbent assets also depends on the incumbent mentality.
    To clarify my idea let’s imagine a world where there is no other mean of transportation than cars. Then an inventor creates the motorcycle. This technology is disruptive but in the real world some brands manufacture both like Honda or Suzuki. The inventor brings it to big car brands and to know wether this idea is able to impact incumbent assets depends on the incumbents opinion.

    Source: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aJYcNdn2B270&refer=europe

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  10. Anand Rajkumar 21 November 2012 at 19:22 #

    The four commercialization strategies represent different ways by which a start-up can translate their innovation to profits. This possibility is the reason why start-ups innovate in the first place and the innovation finding its way to the consumer will help increase social welfare. Hence, from both the startup and the consumer point of view, it is very important that they select the right strategy. I will detail out all four strategies and give examples below.

    Attacker’s advantage

    In this case, the innovations are easily imitable, and the currently established firms dont possess any assets that aid in the commercialization of an innovation. Hence startups and established firms start off on the same playing field and the only way to gain an advantage is through heavy investment in R&D and innovations. Startups can also enter such a market by targeting a blind spot, or an area that hasnt been subject to investment by the established firms. Such a market is the easiest to enter into and entrepreneurial activity will be very high. Leadership of such a market is temporary, and the next leader will be the firm with the next big innovation (and it doesnt matter whether the firm is an established player or a startup). Examples include the US automobile market sometime back, when the blind spots of the established Big 3 companies (namely cheap cars, reliability, fuel efficiency) were exploited by the Japanese auto companies such as Toyota and Honda. Another example (and this I admit is a bit of a stretch) would be the social media (for lack of a better word) market, where each successive social network found its own niche that were previously blind spots (twitter for short messages, facebook for keeping in touch, myspace for bands and artists, Google reader for sharing of information, etc).

    Ideas factories

    In this case, the innovations are not easily imitable, but the established firms have advantages that lend it to commercialize an innovation better. Hence, any startup in such a market must seek to cooperate with an established firm, as otherwise, the startups will not be able to realize the potential of their innovation on their own. For the startup to go out on their own will require a lot of investment, and from a social point of view, this is wasted investment, as cooperation would have enabled the startups to avoid this expenditure completely. In this case cooperation is a no-brainer choice, and companies have little to fear from startups (other than the startups cooperating with a competitor_. They must instead go out of their way to encourage innovation, for the innovation can only succeed with the help of the company itself (such as the insulin race mentioned in the paper). An example would be the biotechnology and pharmaceutical market. The pharmaceutical companies encouraged innovation in biotechnology, because the biotechnology firms would have to come back to the pharmaceutical company to commercialize their idea – a sorta win-win really. Another example is the outsourcing of a lot of US pharma R&D to India. The India companies work as idea factories, and their ideas are commercialized by their US Big Pharma counterparts. Most companies that outsource their R&D are doing something similar: The companies to which the R&D is outsourced to know that they cannot commercialize their innovation without the help of the company outsourcing, and the company outsourcing has this security always and is hence not threatened.

    Reputation-based idea trading

    In this case, because the technology is easily appropriable (Similar to the windshield wiper case), startups aren’t likely to go to an established firm for support. However, paradoxically, the assets possessed by the established firm are necessary for the commercialization of the idea, hence, the startup going out on its own will not be able to realize the profits from its innovation. What this leads to a stagnation of entrepreneurial activity, as there is no incentive to enter the market, and this leads to a stagnation of the market itself, with the only innovations coming from the established firm’s R&D stables. This means that the market is not prone to being shook up, as it were. An example of such a market is the automobile market (the why being illustrated by the windshield wiper case above). Hence the established firms need to set forth a reputation for fairness when dealing with ideas. They should show themselves to be above the kind of behaviour chrysler and ford showed above. In such a case, a startup can innovate, because they know that they will get their just rewards from the ‘fair’ established company. The companies also benefit, because they get new ideas. Of course, this requires that the company take a long term view, which is rare in most industries. Of course, they benefit even more if the new alliance they form gives them access to newer ideas down the road, or even to new personnel. This will be the case with most markets that are driven by incremental innovations that are not differentiated technologically (the automobile market, or the home appliance – like the refrigerator market).

    Greenfield Competition

    In this case, the established firm has very little to offer the startup – their products are inimitable, and the assets of the established firm hold very little value. Hence the terms of commercialization are dictated by the startup. The startup can decide whether they should cooperate or compete, with very little possibility of their product being imitated. A long term view is required to decide which strategy they should finally adopt, as illustrated by the examples given in the paper. Nintendo took the long term view that cooperation will give them more revenue than controlling their platform, as the sales of their hardware is dependent on software (games). Xerox on the other hand adopted a control everything policy as they did not foresee cooperation giving them any substantial benefits. Thus you could say that if the product is good enough to succeed on its own (such as the Xerox machine), you should compete, while if the product requires further innovation (such as Nintendo and games), then you should spread the burden of innovating across companies and seek to cooperate, while still protecting your innovation. This is also illustrated by iOS and Android respectively, and both approaches have been successful so far.

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    • Paul Belleflamme 21 November 2012 at 19:27 #

      Another series of excellent examples, thanks! Anyone interested in summarizing the previous comments by just listing the examples under the four generic strategies?

  11. Shoira Mukhsinova 21 November 2012 at 17:49 #

    According to Gans and Stem (2002) the main problem for start-ups is commercialization of their inventions when there are strong incumbent firms in the product market. Start-ups would want to cooperate with established firms who know the product market or/and if they own complementary assets needed for successful commercialization. In this case, Paradox of disclosure, can cause expropriation of the innovator’s technology. On the other hand, when start-ups choose not to cooperate, they have to evaluate tradeoffs between establishing a new value chain and competing against incumbent firms versus leveraging an existing value chain and earning returns through the market for ideas.

    Four generic strategies can be applied by start-ups depending on two dimensions: excludability and complementary asset environment. Further, I summerize each generic startegy based on ( Gans 7 Stems, 2002, http://www.mbs.edu/home/jgans/papers/ideasmkt.pdf) and present an example.

    The attacker’s advantage – is applied in the environment with poor intellectual property protection and where incumbents do not control the complementary assets necessary for effective commercialization. The start-up positions the technology in the market in a such a way that it exploits blind spots of current market leaders. In the portable music industry, Sony, the first market leader and inventor of Walkman, was upstaged by Apple’s entrance to the market (Ansari & Krop, 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2034266)
    Content digitization and rapid growth of Internet use had caused exponential growth in piracy and declined music industry profits. The reaction of the music industry was suing the Napster and other file sharing service companies resulting in their closure (Burgelman & Grove , 2007, https://gsbapps.stanford.edu/researchpapers/library/RP1978.pdf).
    The launch of a digital music player and distribution system by Apple has exploited the ‘‘blind spot’ (facilitating music portability and legal distribution) in the music distribution industry.

    Ideas factory strategy is applied in the environment where successful invention precludes development of incumbent firms and where they (incumbents) control the complementary assets required for effective commercialization.
    Salesforce is a well established firm supplying cloud based Sales Management and CRM solutions. Its competitive advantage is reinforced by establishing AppExchange platform where new innovative services provided by new start-ups are made available to Salesforce customers. Marketo, for example, builds marketing automation software enabling lead generation by, for instance, analyzing prospect’s website browsing behavior. Marketo App for Salesforce complements the exsting value porposition by Salesforce for Sales Management services (http://www.marketo.com/small-medium-business/instant-crm-integration/salesforce-crm.php).

    Under Greenfield Competition strategy imitation by incumbent stays difficult although and it (incumbent) does not control the complementary assets required for effective commercialization. Start-ups can evaluate various competition options in the absence of the risk of expropriation, such as tight control over the technology which may ensure compatibility with future generations of the technology. I agree with Adriana Guth, that this has high chances to appear in the software industry where the entry costs are low but imitation is costly and takes time.

    Reputation based ideas training is applied when imitation is easy and the incumbents possess complementary assets. In capital intensive industries incumbents are tempted to expropriate disclosed technology. This discourages start-ups from pursuing collaboration as a strategy, additionally, competition is also likely to be unprofitable since the industry requires high entry costs. Reputation can serve in reinforcing incumbent’s competitive advantage and its access to external technologies, encouraging future start-ups to approach them with promising new technologies in ideas market.
    In 2007, two independent inventors of speculoos spread have presented their invention during the De Bedenkers (The inventors) program of Flemish public broadcasting company één. The recipe of Els Scheppers, also the program finalist, was commercialized after a year by Lotus, the market leader in production of speculoos biscuits, as Lotus Speculoos Spread (http://nl.wikipedia.org/wiki/Speculaaspasta, http://www.test-achats.be/alimentation/aliments/en-direct/le-speculoos-comme-vous-ne-l-avez-jamais-vu)

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  12. Emil Bjornstad 21 November 2012 at 15:07 #

    I will in the following comment try to highlight how the social network industry may be applied to the framework of Gans and Stern (1).

    The decision of what kind of commercialization strategy a start-up company should engage in is a vital one, and will in turn form the company’s future. According to Gans and Stern (1), what commercialization strategy the firms should adopt is a question of the innovation’s value and its imitability. Should you integrate the innovation in to an existing value chain, or does the innovation offer such value that it should be established through a stand-alone firm by building its own value chain? In other words, should you co-operate or compete? In their framework, Gans and Stern (1) present two vital factors a start-up needs to consider when deciding what commercialization to follow. Their two-by-two matrix presents four generic strategy environments defined by the two yes-or-no-questions of if an incumbent firm is able to imitate the innovators idea, and if the existent firms’ assets can add value to the innovation. One important note is, however, that the framework looks more into the ‹‹type›› of appropriability, rather than the level of it. This means that if the innovator controls some formal intellectual property rights, the potential for the innovation to be expropriated by incumbent firms is reduced.

    The attacker’s advantage is one of the four strategy environments described in Gans and Stern’s framework, and is characterized by a market with little intellectual property protection, where the firms compete fiercely. In this type of industry it is fairly easy for the firms to imitate others, and therefore there is a continued technological race in order to beat each other to become the market leader. The start-ups that are challenging existing firms will have little opportunity to partner with them, and the market leader will in turn have little to offer the start-up. The technological leadership that firms may obtain will only result in temporary market leadership, as other firms constantly will be challenging the market leader with new innovative technologies. In such an environment it is fairly easy for the firms to imitate others,

    The example of the booming industry of social networks is an interesting one to apply to this framework. You would imagine the industry of social networks is characterized by having poor intellectual property protection, as it is hard to patent the software technologies they adopt. However, the last year we have seen Yahoo suing Facebook for several patent infringements (2). I think you could still say that the technologies used by social network are easy to imitate, and that the patent system in theory is overprotective of what is now seen as common knowledge. The industry is characterized by a constant race of beating each other by adding technological features that outsmart your competitors. Facebook, the current market leader, was not the first social network out there, but their new and innovative features saw them race to the top ahead of other social networks like MySpace and LinkedIn. You could argue that a new start-up in the social network industry will have some value of co-operating with existing firms as existing firms may have assets that create value for the start-up, but if you want to be a successful social network you need to compete rather than co-operate, as the products are substitutes. So applying this to the framework, a start-up in the social network industry would fit into the attacker’s advantage environment.

    New developers of social networks must now try to exploit the blind spot of Facebook, in order to be in contention of becoming the new market leader. We continually ask ourselves ‹‹what will be the new Facebook?››, and I think there is only a matter of time before someone successfully exploits the part of social networks that Facebook does not cover, and we may have ourselves a new market leading social network.

    Sources:

    1. Gans, S. & Stern, S. (2002) The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs

    2. ArsTechnica (http://arstechnica.com/tech-policy/2012/03/yahoo-patent-lawsuit-we-invented-facebooks-entire-social-network-model/)

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  13. Johan Fredrik Hilveg 21 November 2012 at 13:52 #

    The prototype works – congratulations! Now, would you like to take the safe road of cooperation or the long and perilous lone road to the mass market? Oh, and I forgot to mention, but taking the lone road can in fact unleash the Gale of Creative Destruction…

    In essence, this crossroad sets the premise for the ground breaking paper of Gans and Stern (1) when they sought to find out what commercialisation strategy a start-up company ideally should apply. In short, Gans and Stern proclaim that the external environment to a great extent decides whether competition or collaboration is the preferred path to the mass market. More exactly, cooperation can provide more profits, and thus be preferable if:

    1) The innovation is secured by at least one efficient type of intellectual property.
    2) The innovator is backed by a venture company (lower transaction costs).
    3) Incumbent firms have any value-added complementary assets (distribution or brand reputation) critical to the success of the innovation.

    If none of the above factors are apparent, then the innovator should indeed play solo, exploiting what is namely called the attacker’s advantage. In their analysis of the biotech industry (2), Gans and Stern describe this environment as a field of immense rivalry, as entrants are able to efficiently play on the same level as incumbent firms and imitation is easy. This was clearly the case for Larry Page and Sergey Brin, who founded Google in a garage (very low sunk costs) and easily imitated (due to weak IP protection) that period’s dominant search engine and market leader, AltaVista, by improving the algorithms that made up their business model (3). Today, Google has such a strong brand and fast web search engine, that an incremental improvement in web searches is unlikely to change the leader of the industry like Google once did. However, IP protection is still very weak, something Microsoft discovered when they made Bing. In fact, it was so similar to Google, that Google claimed it to be an upfront copy (4).

    In general, Gans and Stern claim that an innovator should play solo as long as the incumbent firms do not have any complimentary assets that influence the success of the innovator. If the innovator has strong IP protection, this would imply the application of the Green Field Competition-strategy. If the incumbent firm does have complimentary activities however, cooperation should be considered. With weak IP-protection this would imply the innovator to use the strategy called Reputation-Based Ideas Trading. The final strategy, the ideas factory, should be deployed when all cooperative factors are apparent. In that case, the innovator should certainly join one of the major players of the game in order to capture most profits possible.

    However, Kira Fabrizio and Aaron Chatterji (5) point out an important problem with the model of Gans and Stern that they fail to address. Even though the external environment tends to favour cooperation, it is not certain that incumbent firms would choose to do so. For instance, when Wilbert Gore discovered polytetrafluoroethylene (PTFE) for DuPont in 1957, he tried to convince the American chemical company to use the newly discovered substance to improve insulation of wires. However, the fascination for his product was not mutual. So Gore quit the company he had been working in for 16 years and started his own company with his wife in the basement, to develop the substance even further. Today, this company is best known as Gore-Tex with revenues of $3 billion a year (6).

    So even though cooperation may be the best solution based on the framework of Gans and Stern, the problem of persuasion makes real life application a bit more troublesome.

    (1) Gans and Stern, a,
    http://www.mbs.edu/home/jgans/papers/ideasmkt.pdf

    (2) Gans and Stern, b
    http://www.kellogg.northwestern.edu/biotech/faculty/articles/managing_ideas.pdf

    (3) The history of Google by Heinz Duthel:
    http://books.google.be/books?id=gQXKaf8azXQC&pg=PA27&lpg=PA27&dq=google+altavista+imitated&source=bl&ots=O6Ed0fs0Yb&sig=da12bLpdqvGMKH5NfGmFoae7lLA&hl=en&sa=X&ei=ZMmsUOfqA8OR0AXWnYGoCg&ved=0CEoQ6AEwBQ#v=onepage&q=google%20altavista%20imitated&f=false

    (4) BBC News
    http://www.bbc.co.uk/news/technology-12343597

    (5) Do the Costs of Cooperation Drive the Gale of Creative Destruction? : Commercialization Strategies in the Medical Device Industry by Kira Fabrizio and Aaron Chatterji.
    https://www.google.be/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&cad=rja&ved=0CDIQFjAB&url=https%3A%2F2Fwww.mccombs.utexas.edu%2FDepartments%2FBGS%2F~%2Fmedia%2FD4FE701EBDFB4C4A9F9F025B9B0F7154.ashx&ei=dNOsUKN3yOzSBe33gCg&usg=AFQjCNEFRJ6c8sroGIUipNhYt9BJElCNcg

    (6) http://www.gore-tex.com/remote/Satellite/content/sponsorships/brand-heritage

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  14. Adriana Guth 19 November 2012 at 20:51 #

    I´d like to share my opinion on commercializing strategies for start-ups where the main challenge of entrepreneurs is to transfer an idea into a value proposition for costumers.
    As an inevitable effect of entering a market as a new start-up, there is a lack of experience and market knowledge which impedes the decision where to place best your idea and start with commercialization. There are two options, either to enter the market with your product having sunk investments hampering the cooperation with established firms or selling the idea by making an agreement.
    As a result the strategy decision for each single start-up is very important and has to be made in advance.
    Gans and Stern (1) identified excludability and complementary assets as main influential factors resulting in four generic strategies, which I will try to precise by giving examples.

    The first strategy “attackers advantages” deals with a market situation where incumbents do not control complementary assets and therefore market leadership is determined by technological leadership. This enables the entrance of start-ups in niche markets which can threaten established firms.
    The paper “Entry and competitive dynamics in the mobile telecommunications market” by He et al 2006 (2) examines investigates how several telecommunication firms, naming Ericson and Nokia, could catch up with the market leader at this time, Motorola. Motorola initially had important patents and possessed the necessary complementary assets.
    Nevertheless, the competitors could gain market shares, even though they relied heavily on knowledge spillovers from the leader to gain own patented innovations. Only when they had achieved the new leadership, their dependence on the former leader decreased.
    New leadership can only be reached by developing rapidly a sustainable business based on patented innovated technologies. The entrance to the market could be realized by leveraging new customers, branding and marketing.
    Technological leadership results in temporary market leadership. Concerning the telecommunication market Samsung and Apple (3) can be regarded as market leaders.
    The paper (2) extends the framework of Gans and Stern (1), and if the incumbent is strong in both intellectual property and complementary assets it will lead to a new entry in form of de alio entry.

    The second strategy, “idea factories” is when technological leaders focus on research and commercialization through reinforcing partnerships with more downstream players.
    It might seem controversial, but I will argue why 3M is an idea factory itself, reinforcing relationships with their own employees.
    3M is one of the most innovative companies concerning achieved patents, keeping in mind that they commercialize technology in rapidly changing environments. The case study “Innovative science and technology commercialization strategies at 3M” (4) tries to identify the core sources of this success which is based on the entrepreneurial spirit. To encourage innovative spirit people in the research department can spend 15% of the time researching on private topics, no matter if these are linked to the company strategy. Technologies are shared throughout the company. Each division has access to the technology resources of the entire company and therefore technologies can be combined. At the same time they are concerned with a strong intellectual property protection.

    The third strategy is named “reputation based ideas trading” where the disclosure problem is severe but incumbents have assets for commercialization. For start-ups it is very difficult to enter these markets due to high costs and imitation risks. The markets and technologies are considered to be relatively stable.
    I regard agribusinesses for genetically engineered seeds as such a kind of market, which is dominated by only a few big companies, identifying Monsanto Company as the leading producer(5).
    Even though public research institutions are highly interested in genetic engineering and the potential consequences of consuming genetically modified food, it is very unlikely that they will enter the market.
    New market entrances are humble due to the fact that farmers are forced to buy new seeds every year, establishing a dependence on the big producers.

    The forth strategy where startups can preclude effective imitation and therefore have the freedom to choose a competition or cooperation strategy, named “greenfield competition”, is most likely to appear in the software market.
    One example is the invention of the first modern firewall by Gil Shwed. Together with two friends he founded Check Point in 1993 and could enter the market very successfully. Agreements with Sun Microsystem (1994) and HP (1995) resulted in the worldwide market leadership for firewall in 1996 and revenue of 34.6 million US$ (6).

    It has to be mentioned, that the decision to go for collaboration or competition has to be made by the entrepreneurs themselves, who will not only regard rational and logical arguments. To many of them, entrepreneur means to have the freedom of leading their own companies. Therefore they are not just driven by the money and are regard cooperation with other companies critically.

    (1) Joshua S. Gans & Scott Stern: The product market and the market for “ideas”: commercialization strategies for technology entrepreneurs; Research Policy 32 (2003) 333–350
    (2) Zi-Lin Hea, Kwanghui Limb, Poh-Kam Wong: Entry and competitive dynamics in the mobile
    telecommunications market; Research Policy 35 (2006) 1147–1165
    (3) http://www.idc.com/getdoc.jsp?containerId=prUS23753512
    (4) Pedro Conceição, Dennis Hamill, Pedro Pinheiro: Innovative science and technology commercialization strategies at 3M: a case study; J. Eng. Technol. Manage. 19 (2002) 25–38
    (5) http://www.monsanto.com/whoweare/Pages/default.aspx
    (6) http://www.checkpoint.com/corporate/facts@a-glance/index.html

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  15. Ieva Jurgalane 18 November 2012 at 20:50 #

    The main idea of Joshua Gant and Scott Stern’s paper is to illustrate the options available to the innovator and analyze the appeal of partnership with incumbent. Two key elements of the commercialization environment – the intellectual property regime (strengths of the innovator’s IPR position) and established firm ownership over complementary assets (the necessity for innovator to acquire the complementary assets) such as manufacturing expertise or distribution channels – drive the choices and strategies of effective start-up innovators. The four distinct commercialization environments defined by these factors then are related to the likelihood an innovator will commercialize an invention through cooperation or competition.

    1) The Attackers Advantage
    In the environment where rival firms may successfully imitate the invention developed by start-up inventor, due to weak intellectual property protection, and where there exists a low dependence on existing complementary assets, hinders the possible cooperation between the start-ups and already well established market players. Such setting results in tight competition and the proposed commercialization stratgey by Joshua Gant and Scott Stern is to use the competition strategy. Such strategy results, that more investment is designated into researching and developing new technologies which would address user needs in different, emerging value networks (entering new market niches – „the blind spot” of incumbent). As for the example, the volatile and fragmented nature in the video game industry (handheld game consoles, (immobile) home video game, computer based video games, etc) is where such strategy implication exists in reality. In the paper by Jörg Claussen, Tobias Kretschmer and Thomas Spengler, authors state that „Nintendo” – from 1995 up to 2007 – was continuously present in the market while its competitors changed continuously, due to creative destruction. As suggested by Richard N. Foster in his book „The Attacker’s Advantage” , he states that it is necessary to make the new product competitive, to pursue innovation on new technology or enter new market niche, because it will directly impact the Attacker’s performance in the market and his fortune.

    2) Ideas Factories
    The opposite of the „The Attackers Advantage” environment mentioned, is the “Ideas Factories”, where innovation can be protected, but the incumbents do control the complementary assets required for effective commercialization. Therefore, making it possible for technological leaders to focus on research and commercializing by establishing successful partnerships and cooperating with more downstream players. Regarding the real-life application on such strategy, I can agree with Joshua Gant, Scott Stern, and also mentioned in the comment by Marta Ripamonti, that such examples exist between research oriented biotechnology firms/biotechnology innovators and incumbent pharmaceutical firms, where commercialization occurs through cooperation. For instance, established pharmaceutical companies can market new drugs through sophisticated distribution networks, often at a fraction of the cost that a biotechnology firm would face developing these capabilities from scratch.

    3) Reputation-Based Ideas Trading
    This particular environment can be seen, when the incumbent controls the complementary assets necessary for effective commercialization and when the technology innovator could possibly be victim of disclosure problem (possibility of imitating the innovation). In such risky setting, the optimal commercialization strategy is to come up with an effective agreement (usually the incumbent sets the terms), and commitment from parties to enter such partnership. Such strategy has been widely supported by USA government by launching “startup America” initiative (www.startupamericapartnership.org), where different private sectors (top entrepreneurs, venture capitalists, angel investors, corporations, etc) are committed to support and engage researchers, start-ups for more dynamic and coefficient innovation ecosystems.

    4) Greenfield Competition
    The last but not least environment is the Greenfield Competition, where imitation is difficult and the incumbent’s control over complementary assets is irrelevant. In such environment, the innovator by oneself can decide the commercialization strategy, which he assumes to be the most effective (both – competition and cooperation strategies may be possible). In such environment, start-up innovators can enjoy multiple strategies for earning returns from innovation, and one such example is to license their technology to other firms. Nevertheless, by such approach the innovator has to decide what magnitude possess the revenue effect and the rent dissipation effect, which results from increased competition in the product market. And even if the technology entrepreneurs lack the adequate downstream commercialization (production and marketing) capabilities, still the option to license may seem relevant. Furthermore, such strategy is also incorporated by large established companies. For instance, in chemicals, Union Carbide and Montecatini have actively licensed their polyethylene and polypropylene technology.

    Sources:
    1) Richard N. Foster “Innovation: The Attacker’s Advantage”. Summit Books,1986. 316.
    2) Jörg Claussen & Tobias Kretschmer & Thomas Spengler, 2012. “Market Leadership Through Technology – Backward Compatibility in the U.S. Handheld Video Game Industry,” CEP Discussion Papers dp1124, Centre for Economic Performance, LSE.
    3) Ashish Arora, Andrea Fosfuri, „Licensing the market for technology”. Journal of Economic Behaviour &Organization, Vol.52 (2003) 277- 295.

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  16. Hecq Elise 17 November 2012 at 16:53 #

    I will talk about the « reputation-based ideas trading ». The two dimensions of the strategy are: Incumbent’s complementary assets contribute to the value proposition from the new technology and the innovation by the start-up can’t preclude effective development from the incumbent. About reputation, the start-up must be careful in its evaluation of the different established players in the industry. But it can also be difficult to observe the reputation of a possible partner.
    I found an article “Partnering with universities: a good choice for nanotechnology start-up firms?”. It’s true that an university is a reliable source of reputation and knowledge and can contribute to firm partnerships. It has been shown that collaboration between universities and industry are well promoted particularly in emerging fields and in the high-technology industry.
    From the university’s point of view, the advantages of such cooperation are promoting commercialization of technology and having access to firm technologies, for example. With emerging technologies, they take opportunities to develop capabilities. For firms, this partnership includes among others things outsourcing R&D activities, obtaining solution to technical problems and the university facilities. Thanks to this cooperation, firms can ben embedded into scientific community, have additional network linkages and information channels. They also can enhance their credentials thanks to prominent scientists or professionals and the prestige of the university. When firms are associated with university, they benefit from 3 types of spillovers: intellectual capital, social capital and positional capital. The last one is related to the standing and reputation of the scientists’ institutions.
    The article confirm that academia play a positive role in the development of technology industries because it helps firms to enhance their technology potential by increasing the efficiency of knowledge sharing. It might be interesting for new investors. In addition, by giving access to complementary resources to firms, academia partnership is especially beneficial to small and young firms. It enhances their research capabilities.

    In conclusion, this relationship leads to economic benefits, for firms, universities but also consumers. It’s important to continue supporting research partnership programs, in particular for emerging fields. The article talks especially about the nanotechnology because it’s an interdisciplinary science and so a partnership with universities is very useful by allowing access to university networks. Moreover, it offers a platform for university and firms to develop connections and launch new research.

    In my opinion, university is a great opportunity for firms to start their activities or to develop capabilities and knowledge. It’s a win-win relationship.

    Sources:
    Joshua S. Gans and Scott Stern, 2002, “The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs »
    Jue Wang & Philip Shapira, 2012. “Partnering with universities: a good choice for nanotechnology start-up firms?,” Small Business Economics, Springer, vol. 38(2), pages 197-215, February.

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  17. Laura Ioana Bidea 17 November 2012 at 09:52 #

    Attacker’s advantage

    This commercialization strategy finds itself depicted in the Swiss watch industry. Until the ‘70s, the worldwide watch demand was mainly for mechanical devices, area in which the Swiss makers became specialized. However, by the early 80’s, demand shifted towards the electronic watches (almost 80% of the total demand), making the market share of the Swiss producers collapse from 40% to 10%. This happened because the power Swiss makers previously enjoyed made them overlook or underestimate the disruptions caused by the inflow of new technology and become vulnerable in front of their competitors. Illustrative of the paper by Gans and Stern (2000), Swiss makers dismissed the potential of new innovations, displaying resistance to change, which in the end was costly for them. By the time Swiss producers had adjusted to the new market demand and developed a quartz watch, they were already lagging two years behind Japanese companies such as Seiko.

    In this situation, Seiko successfully exploited the “blind spot” of the incumbents and had an advantage in meeting consumer demands earlier, illustrating the mechanisms that are at play depicted in Gans and Stern (2000).

    Ideas factories

    As well as being an advantage, technology can be a “bottleneck asset” (Teece, 2006). For established companies that may have a groundbreaking idea, their products cannot be put on the market until all the pieces come together and sometimes it is more profitable for an incumbent to outsource the R&D activity. In return, the innovator commits to delivering a valuable product or innovation, since this will also increase his bargaining power, while keeping an eye on the excludability aspect while revealing the prototype (as plastically defined in Teece, 2006, “strong intellectual property rights lubricate the market for know-how and facilitate transactions).

    My understanding of this commercialization strategy is that of an “outsourcing of R&D” (the only difference being that in the case of the outsourcing, the expropriability problem is not so severe as in the case when technology entrepreneurs offer their innovations voluntarily to the incumbents, without having a guarantee that they will be given credit). For instance, James Brian Quinn in MIT Sloan Management Review (http://sloanreview.mit.edu/the-magazine/2000-summer/4141/outsourcing-innovation-the-new-engine-of-growth/ ), argues that the market for ideas will be prevalent in the large services industries, where innovations are based on software and the manufacturing industries, which relies on electronics. According to him, only 15 pieces of software can be combined in trillion ways (admittedly, not all creating a distinct product, but the amplitude remains dazzling). It would be inefficient for a R&D department of an established firm to try to tackle all these unexplored paths and it would be better to make use of external innovators. Additionally, one company renowned by outsourcing innovation is Dell, which purchases its innovation software from outside suppliers (http://sloanreview.mit.edu/the-magazine/1999-summer/4041/strategic-outsourcing-leveraging-knowledge-capabilities/). Also, as argued by David Hsu (http://knowledge.wharton.upenn.edu/article.cfm?articleid=961) , the biotechnology industry will often employ this strategy, since the patents are quite effective in protecting the innovations, but the entry in the industry requires significant sunk investment costs and the car industry, when a start-up develops, for instance, a better battery or an improved motor which economizes on fuel consumption, but since a car plant is very expensive, the startups will prefer to sell their innovation on the market for ideas.

    Reputation-based idea trading

    One classical example of reputation-based idea trading is the coming into existence of the famous by now Band-Aid. It was invented in 1920 by Earle Dickinson, who was a cotton buyer for Johnson & Johnson at the time. Dickinson came up with the idea of the self-adhesive bandage in order to meet the need of his accident-prone wife. Dickinson’s situation perfectly illustrates the characteristics of the reputation-based idea trading, although he did it somehow unconsciously. He faced a disclosure problem (he had sought no legal protection before disclosing his innovation), the product was very easy to imitate once the basic concept had been revealed and he definitely couldn’t bring the product on the market without the industrial equipment of J&J, since he was a simple cotton buyer. Alternatively, Dickinson could have also started a “bidding war” between J&J and its competitors, selling the Band-Aid “prototype” to the highest bidder. However, this would have implied higher risks, given that any of the competitors could have expropriated him of his idea. We do not know if this played a role in Dickinson’s commercialization strategy, but J&J had been already involved in partnerships with innovators prior to the Band-Aid appearance. Additionally, the motto of the company was “consumers first, employees second, community third and stockholders fourth” (http://www.mbs.edu/home/jgans/tech/bandaid.pdf). Out of the four cases, this commercialization strategy fits best the innovations for which imitation is fairly simple and that need the complementary assets of the incumbents.

    Greenfield Competition

    The last commercialization possibility offers the innovators the greatest leeway and elbow room, since they can protect their innovations, precluding the incumbents from expropriating them and at the same time, they do not necessarily need the complementary assets of the incumbents. Thus, entrepreneurs can opt for cooperation, but also for competition. Two examples of companies that could have prevented access to their innovations and had at their disposal the complementary assets to bring them to the market, but preferred to establish a partnership instead are: Merck & Co, who used partnerships to bring at least two of its leading drugs on the market (Fosamax – for osteoporosis and Cozaar/Hyzaar – for hypertension), although they are one of the largest firms in the industry and thus could have had the capacity to put the drugs on the market by themselves. The same path was followed by two of the most known and largest biotech companies, Amgen and Genentech.

    Other Sources:
    David J. Teece, Reflections on “Profiting from innovation”, 2006, available at http://www.loc.gov/crb/proceedings/2006-3/riaa-ex-o-104-dp.pdf
    http://knowledge.wharton.upenn.edu/article.cfm?articleid=961

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  18. Marta Ripamonti 12 November 2012 at 13:29 #

    Before reasoning on possible application of the strategies related to the commercialization for the start-ups, in my opinion it’s important having in mind the main features of this kind of innovations’ commercialization, offered by the literature.
    Especially, it’s useful recalling the study of the Professor Jolly – from Harvard University – who proposed, in the last years of ‘90s, the main stages of commercialization process, that can be listed, summing up, as: imagining, incubating, demonstrating, promoting, and sustaining. Identifying them, leads to recognize these stages as fundamental for the commercialization of start-ups, because they stimulate the interests in new technology and the raising of the market technology demand, “mobilizing complementary assets that coordinate the promotion of commercialization for market entry”[…]. This help has been taken into account by Joshua Gant and Scott Stern’s paper, in which they recognize as key factors of commercialization strategy: the excludability – more the technology is easier to be copied, less is its value on the market – and the complementary assets – technology essential both to develop and commercialize the product: a good commercialization arises from the coordination of this two aspects -.

    From the interaction of these two factors the authors have recognized, four different environments for the commercialization, that provide different outcome; generally speaking they can lead to the firm’s entry or in a Product Market or in a Market of Ideas.

    The first strategy, so called the Attacker’s Advantage, is characterized by an environment with low intellectual property protection, that leads to reach a common ground, where the existent firm and the start-ups one live together – Competition commercialization is preferred in this perspective rather than the cooperation -. Thanks to this feature, in my opinion, a real-life application of this strategy is in the GSM operators, that can guarantee difference performances, but they cannot be easily patented, working in a network field. A leadership in this kind of performances can address to capture the market.

    Ideas Factories, the second strategy outlined by the authors, considers very successful technology invention that exclude probably the new entrant in the market, and consequently imposes a cooperation between the incumbent firm and the start-ups. A market with this features in the real world can be identified as the one that treats biomedical and pharmaceutical products, as the biosensor commercialization. Here biotechnological start-ups firms can coordinate the commercialization of their discovery with an existent/incumbent pharmaceutical firm.

    The third strategy – Reputation-based Idea Trading – is based on the idea that a Product market entry is risky, due to the high costs of barriers and even cooperation is risky, unless there is a commitment between the start-ups firm and the incumbent. In this case the strategy of the entrant firm is to try to avoid the imitation of the innovation. Starting from the example done by the authors – the case of Robert Kearns – in my opinion – coming from my own work experience – the same strategies may be present in the market for tap, for instance, as the tap is made up of many components (e.g mixer tap), and the proposal of a new component to an incumbent could lead to the same outcome of the example expressed above. Generally speaking, In my opinion it is possible to conclude that markets characterized by product with little technologic component are the most affected by Reputation-based Idea Trading strategy.

    Finally, under the Greenfield Competition, the start-ups innovator has the power to determine the commercialization strategy because it has the possibility to prevent its innovation from imitation risk; this perspective gives to the innovator the possibility to choose between competition and coordination. In real life this can be seen as the fact that a firm can decide for how long maintain a monopoly power for reaching market power.

    Sources:
    “Biosensor Commercialization Strategy – A theoretical approach” Su-Man Wang, Chin-Tsai Lin, Frontiers in Bioscience 10, 99-106, January 1, 2005

    “The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs” Joshua S. Gans and Scott Stern 22nd June, 2002

    “Attacker’s Advantages in a Homogeneous Market: The Case of GSM” by Dodo zu Knyphausen-Aufseß, University of Bamberg, Germany, The International Journal on Media Management

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