start-up commercialisation strategy
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8/9/2019 Start-up Commercialisation Strategy
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Start-Up Commercialisation Strategy and theMarket for Ideas
Joshua Gans
Melbourne Business School
Entrepreneurship Boot Camp
30th July 2010
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Source: Thomson Venture/NVCA
Sources of entrepreneurial rents
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Source: Thomson Venture/NVCA
Competition withestablished firms
Sources of entrepreneurial rents
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Source: Thomson Venture/NVCA
Cooperation withestablished firms
Competition withestablished firms
Sources of entrepreneurial rents
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
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Andrew Lacy
$1 million per month40 million users
Exclusive content deals
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Understanding commercialisation decisions
• What determines what type of commercialisation strategythat entrepreneurs choose?
• How does commercialisation choice impact on incentives
to innovate?
• How does intellectual property protection impact oncommercialisation strategy?
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Competitive commercialisation
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Start-Up
Competitive commercialisation
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Start-UpEnter andCompete
Competitive commercialisation
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Start-UpEnter andCompete
Competitive commercialisation
Profit > entry costs
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Start-UpEnter andCompete
Competitive commercialisation
π > f
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Start-Up
Cooperative commercialisation
π < f
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Start-Up Sell or license
Cooperative commercialisation
π < f
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Start-Up Sell or license
Cooperative commercialisation
Earn payment, t
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Compete or cooperate?
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Compete or cooperate?
Simple analysis suggests that the main predictor of commercialisation mode is ...
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Compete or cooperate?
Simple analysis suggests that the main predictor of commercialisation mode is ...
... start-up entry costs
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Compete or cooperate?
Simple analysis suggests that the main predictor of commercialisation mode is ...
... start-up entry costs
Complementary assets held by established firms; Teece(1986)
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Compete or cooperate?
Simple analysis suggests that the main predictor of commercialisation mode is ...
... start-up entry costs
Complementary assets held by established firms; Teece(1986)
If choose cooperation, start-up profits (t ) depend upon
whether complementary assets are loosely or tightly held
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Compete and/or cooperate?
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Compete and/or cooperate?
Start-Up
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Compete and/or cooperate?
Enter andCompete
Start-Up
Sell or license
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Compete and/or cooperate?
Enter andCompete
Start-Up
Sell or license
?
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up π − f
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up π − f t
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up π − f t
Incumbent
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up π − f t
Incumbent π
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Compete and/or cooperate?
Enter andCompete
Sell or license
Start-Up π − f t
Incumbent π Π− t
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Compete and/or cooperate?
Enter andCompete
Sell or license
Total
Surplus
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Compete and/or cooperate?
Enter andCompete
Sell or license
2π − f Π Total
Surplus
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Gains from Trade
2π −
f Π
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Gains from Trade
>2π −
f Π
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Gains from Trade
>
Competitive Commercialisation
2π −
f Π
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Gains from Trade
>
Cooperative Commercialisation
2π −
f Π
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What if entry isn’t feasible?
π < f Threat of competition not credible
Still possible that t > 0(i) multiple incumbents(ii) innovation adds value to
monopoly profits (ΔΠ)
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Drivers of start-up innovation incentives
• Innovation prize = t
• t will be higher if
• Innovation has higher value to a monopolist
• Innovation has higher value if exclusively held under competition• Complementary assets are loosely held
• More established firms as potential partners
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A little bargaining review
• What determines t ?
• Incumbent power
• Start-up forced to accept take it or leave it offer from incumbent
• t = max{π - f , 0}
• Nash bargaining solution
• Each gets the same share of total surplus
• TS = (1+Δ)Π - (2π - f )
• If π > f , (1+Δ)Π - t - π = t - (π - f ) or t = ((1+Δ)Π + f )/2
• If π < f , (1+Δ)Π - t - Π = t or t = ΔΠ /2
• Rubinstein bargaining
• t = max{ΔΠ
/2,π
- f }• Wolinsky bargaining (Gans & Stern, 2000)
• Incumbent can continue to search through negotiations (e.g., find patent workaround)
• t < max{ΔΠ/2, π - f }
• Implication: broader patent protection increases t
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Cooperate Ex Ante? Aghion & Tirole, 1994
• Suppose
• Innovation has value, V
• Innovation generated with probability, p(e, E )
• e: start-up’s (non-contractible) effort & effort cost
• E : incumbent’s effort & effort cost
• Incumbent employs entrepreneur
• e* = 0 while incumbent earns p(0,E *(V ))V - E *(V )
• Independent entrepreneur with ex post licensing
• t = V /2 so both earn (net of effort costs) p(e*(V / 2),E *(V /2))V /2
• Allocation of property rights determined by
• Which party’s effort is more important
• Ex ante bargaining power of both parties as entrepreneur is wealth constrained(leads to too much incumbent ownership)
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Patent races
• What drives innovation incentives when start-ups compete withincumbents?
• Competitive commercialisation
• Incumbent has higher preemption incentives (Gilbert & Newbery, 1981)• WTP depends on credibility of entry (Reinganum, 1982)
• Cooperative commercialisation
• Preemption incentives are equalised (Katz & Shapiro, 1985)
• t < ΔΠ; so in general incumbent has higher incentives unless start-up entry threat
credible
Willingne s to Pay Pree ption
Comp Coop Comp Coop
Start-Up π - f t π - f t
Incumbent ΔΠ ΔΠ Π(1+Δ) - π t
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Impediments to Cooperative Commercialisation
• Static drivers suggest that start-ups will try to engage incooperative commercialisation but when will competition beobserved?
• Inefficiencies in bargaining
• Differences in perceptions (information asymmetries)
• Transaction costs and complexity
• Locating suitable partners (Hellmann, 2007; Hsu, 2007)
• Difficulties in transferring tacit knowledge (Arora, 1995)
• Non-monetary considerations
• Entrepreneur’s desire for control
• Avoiding bargaining altogether
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Incentives to avoid bargaining
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Incentives to avoid bargaining
• Arrow’s disclosure problem
• If want someone to buy an idea, need to disclose the idea to assess quality. Makes
you vulnerable to expropriation.
• Example: Bob Kearns and the intermittent windshield wiper
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Incentives to avoid bargaining
• Arrow’s disclosure problem
• If want someone to buy an idea, need to disclose the idea to assess quality. Makes
you vulnerable to expropriation.
• Example: Bob Kearns and the intermittent windshield wiper
• Disclosures can reduce the licensing payment to start-ups
• Let d be the knowledge disclosed and F ( d ) the probability that the incumbent can
use the knowledge to adopt the innovation with F ’( d ) > 0
• t = (1 - F ( d ))ΔΠ /2
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Incentives to avoid bargaining
• Arrow’s disclosure problem
• If want someone to buy an idea, need to disclose the idea to assess quality. Makes
you vulnerable to expropriation.
• Example: Bob Kearns and the intermittent windshield wiper
• Disclosures can reduce the licensing payment to start-ups
• Let d be the knowledge disclosed and F ( d ) the probability that the incumbent can
use the knowledge to adopt the innovation with F ’( d ) > 0
• t = (1 - F ( d ))ΔΠ /2
• Incumbent competition and the scorched earth threat
• Suppose that there are two (or more) potential buyers of an idea and they competewith one another
• Threaten to give idea to rival firm if buyer does not pay (Anton & Yao, 1994)
• Very act of stealing an idea signals its value to others and creates competition
(Biais & Perotti, RJE, 2008)
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Patents can facilitate disclosure & cooperation
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
• Will only choose to disclose prior to agreement (no profit sharing as it is non-
contractible)
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
• Will only choose to disclose prior to agreement (no profit sharing as it is non-
contractible)
• Let s
be the strength of patent protection (e.g., the probability that theincumbent will be blocked). F is decreasing in s.
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
• Will only choose to disclose prior to agreement (no profit sharing as it is non-
contractible)
• Let s
be the strength of patent protection (e.g., the probability that theincumbent will be blocked). F is decreasing in s.
t = Π(d )− F (d , s)Π(d )
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
• Will only choose to disclose prior to agreement (no profit sharing as it is non-
contractible)
• Let s
be the strength of patent protection (e.g., the probability that theincumbent will be blocked). F is decreasing in s.
t = Π(d )− F (d , s)Π(d )
∂d *
∂s≥ 0
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Patents can facilitate disclosure & cooperation
• Suppose that disclosure requires effort and is also non-contractible (e.g., tacit
knowledge; Arora, 1995) but increases profits, Π’( d ) > 0.
• Will only choose to disclose prior to agreement (no profit sharing as it is non-
contractible)
• Let s
be the strength of patent protection (e.g., the probability that theincumbent will be blocked). F is decreasing in s.
t = Π(d )− F (d , s)Π(d )
−
∂F
∂s′Π (d ) − ∂
2F
∂d ∂s
<0
Π(d ) > 0∂d *
∂s≥ 0
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Dynamic drivers of commercialisation choice
• Cases of start-up choice over commercialisation suggest a dynamic concern
for creation and capture of future innovative rents
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Dynamic drivers of commercialisation choice
• Cases of start-up choice over commercialisation suggest a dynamic concern
for creation and capture of future innovative rents
EMI and the CT Scanner
Powell claimed that the expertise developed by Hounsfield and his team, couplewith protection from patents, would give EMI three or four years, and maybemany more, to establish a solid market position. He argued that investmentsshould be made quickly and boldly to maximize the market share of the EMIscanner before competitors entered. Other options, such as licensing, wouldimpede the development of the scanner. If the licensees were the major X-rayequipment suppliers, they might not promote the scanner aggressively since itwould cannibalize their sales of X-ray equipment and consumables. Smallercompanies would lack EMI’s sense of commitment and urgency. Besides,licensing would not provide EMI with the major strategic diversification it wasseeking. It would be, in Powell’s words, “selling our birthright.”
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Dynamic drivers of commercialisation choice
• Cases of start-up choice over commercialisation suggest a dynamic concern
for creation and capture of future innovative rents
Ecton
With such a clear focus and few distractions, the Ecton developmentteam had met most of their project milestones on schedule, atsignificantly lower cost than they had planned, based upon their pastexperience. The Ecton founders worried that if their company were
absorbed into a larger organization after acquisition, their developmentefforts for next-generation products would get mired … in complexity …Perhaps, they reasoned, their efforts would be more successful in thelong run if they remained independent until they had refined adevelopment process … that might survive acquisition and integration.
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Dynamic drivers of commercialisation choice
• Cases of start-up choice over commercialisation suggest a dynamic concern
for creation and capture of future innovative rents
Palm
Dubinsky and Hawkins believed licensing the Palm OS right away wouldonly stifle Palm’s attempts to be the market leader. Furthermore, by havingmore entrants manufacturing Palm OS devices, Palm’s income would bereduced, thereby stripping away opportunities to invest in future
technologies. As far as Dubinsky was concerned, the timing of licensingthe platform was crucial. She stated, “Licensing will come later. Today itcertainly won’t add value. What will add value today is investing in productdevelopment, getting the next generation and the next generation out,
advancing the category, and building intellectual property.”
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Dynamic drivers of commercialisation choice
• Cases of start-up choice over commercialisation suggest a dynamic concernfor creation and capture of future innovative rents
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Starting point
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Starting point
• Segal & Whinston (2007) model of dynamic technological competition
• SW apply to antitrust practices
• SW consider entrants as competing and displacing incumbents -- on-
going change
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Starting point
• Segal & Whinston (2007) model of dynamic technological competition
• SW apply to antitrust practices
• SW consider entrants as competing and displacing incumbents -- on-
going change
• Here, modifications• Remove static competition effects to focus on dynamics in
Schumpeterian, ‘winner-take-all’ or ‘for the market’ competition.
• Incorporate ideas markets
• Model dynamic capabilities (firms may not be long-lived)
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Firms & Innovations
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Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ
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Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ
• Innovations are sequential
• Innovation yields new product of higher quality than previous generation
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Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ
• Innovations are sequential
• Innovation yields new product of higher quality than previous generation
• Incumbent ( I )
• There is a single producer of the new product who can earn per period monopoly
rents, Π, until displaced.
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Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ
• Innovations are sequential
• Innovation yields new product of higher quality than previous generation
• Incumbent ( I )
• There is a single producer of the new product who can earn per period monopoly
rents, Π, until displaced.
• Ideas are scarce
• For each product generation only one firm conducts R&D
• Innovation leader drawn from pool of firms including the current incumbent
(O’Donoghue, Scotchmer and Thisse, 1998)
• I can be the innovation leader and prolong incumbency
• Otherwise, label leader as ‘entrant’ or E .
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Firms & Innovations
• Discrete time, infinite horizon with common discount factor, δ
• Innovations are sequential
• Innovation yields new product of higher quality than previous generation
• Incumbent ( I )
• There is a single producer of the new product who can earn per period monopoly
rents, Π, until displaced.
• Ideas are scarce
• For each product generation only one firm conducts R&D
• Innovation leader drawn from pool of firms including the current incumbent
(O’Donoghue, Scotchmer and Thisse, 1998)
• I can be the innovation leader and prolong incumbency
• Otherwise, label leader as ‘entrant’ or E .
• Innovation rate:
• Innovation leader generates an innovation immediately
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Timeline
t t + 1t - 1
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Timeline
Selection
t t + 1t - 1
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Timeline
Selection Production
t t + 1t - 1
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Timeline
Selection Production Innovation
t t + 1t - 1
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Timeline
Selection Production Innovation Negotiations
t t + 1t - 1
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Timeline
Selection Production Innovation Negotiations
t t + 1t - 1
Innovationleaderchosen
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Timeline
Selection Production Innovation Negotiations
t t + 1t - 1
Innovationleaderchosen
Capabilities Acquired
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Timeline
Selection Production Innovation Negotiations
t t + 1t - 1
Innovationleaderchosen
Capabilities Acquired Commercialisationchoice
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Negotiations
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Negotiations
EntrantInnovates
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Negotiations
EntrantInnovates
Competition
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Negotiations
EntrantInnovates
I losesmonopoly
profits
Competition
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Negotiations
EntrantInnovates
I losesmonopoly
profits
Competition E
becomes I
(earns Π)
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Negotiations
EntrantInnovates
I losesmonopoly
profits
Competition
Cooperation
E becomes I
(earns Π)
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Negotiations
EntrantInnovates
I losesmonopoly
profits
Competition
Cooperation
E becomes I
(earns Π)
I retains
monopolyprofits
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Negotiations
EntrantInnovates
I losesmonopoly
profits
Competition
Cooperation
E becomes I
(earns Π)
I retains
monopolyprofits
E remains E
(earns τ )
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Selection: Dynamic Capabilities
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Selection: Dynamic Capabilities
Prior Activity
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
S C
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
S l i D i C bili i
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
S l i D i C bili i
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
S l ti D i C biliti
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
Merger or I asinnovation leader
S l ti D i C biliti
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
Merger or I asinnovation leader
Probability of becoming Leader
S l ti D i C biliti
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
Merger or I asinnovation leader
Probability of becoming Leader
σ p∈[0,1]
S l ti D i C biliti
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
Merger or I asinnovation leader
Probability of becoming Leader
σ p∈[0,1]
σ i∈[0,1]
S l ti D i C biliti
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Selection: Dynamic Capabilities
Production
Only
Prior Activity
InnovationOnly
Production & Innovation
Example
I not an
innovation leader
E as innovationleader
Merger or I asinnovation leader
Probability of becoming Leader
σ p∈[0,1]
σ i∈[0,1]
σ ip≥ max{σ
p,σ
i}
C ti ti ff
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Continuation payoffs
Contin ation pa offs
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Continuation payoffs
I Innovation Leader
Continuation payoffs
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Continuation payoffs
I Innovation Leader
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
I Non-Innovator
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
I Non-Innovator
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
I Non-Innovator
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
I Non-Innovator
Cooperation
Continuation payoffs
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Continuation payoffs
I Innovation Leader
E Innovation Leader
I Non-Innovator
Cooperation Competition
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
Cooperation Competition
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Gains from Trade (Licensing)
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Gains from Trade (Licensing)
Cooperation Competition
+ +
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
Cooperation Competition
+ +>
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
Π − τ + δσ pV I + δ (1− σ
p)v
I + τ + δσ
iv E
≥ Π + δσ pv E + δσ
iV I + δ (1− σ
i)v
I
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
(σ
p−σ
i ) V I −v E
−v I ( )
≥0
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
(σ
p−σ
i )(σ
ip−σ
i−σ
p )≥
0
Gains from Trade (Licensing)
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Gains from Trade (Licensing)
(σ
p−σ
i )(σ
ip−σ
i−σ
p )≥
0
Caveat: if incumbents innovate at a slower rate, both will have an interestin choosing a commercialisation mode that maximises the probability that
the incumbent is the innovation leader
Licensing Equilibrium Outcomes
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Licensing Equilibrium Outcomes
σ ip
σ ip
σ p
σ i
Licensing Licensing
Competition
Competition V I ≥ v
I + v
E
V I < v
I + v
E
Licensing Equilibrium Outcomes
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Licensing Equilibrium Outcomes
σ ip
σ ip
σ p
σ i
Licensing Licensing
Competition
Competition V I ≥ v
I + v
E
V I < v
I + v
E
Does high σ i drive
competition?
Gains from Trade (Acquisition)
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http://slidepdf.com/reader/full/start-up-commercialisation-strategy 127/133
Gains from Trade (Acquisition)
Gains from Trade (Acquisition)
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Gains from Trade (Acquisition)
Π− τ +σ ipδ V
I
i+ (1−σ
ip)δ V
I + τ
Joint Payoff from Cooperation
≥ σ pδ V E +Π +σ iδ V I i
+ (1−σ i )δ V I
Joint Payoff from Competition
Gains from Trade (Acquisition)
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Gains from Trade (Acquisition)
(σ
ip−σ
i)δ (V
I − v
I ) ≥ σ
pδ v
E
Gains from Trade (Acquisition)
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Ga s o ade ( cqu s o )
(σ
ip−σ
i)δ (V
I − v
I ) ≥ σ
pδ v
E
1−
σ ip> 1
−σ
i −σ
p
Gains from Trade (Acquisition)
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( q )
(σ
ip−σ
i)δ (V
I − v
I ) ≥ σ
pδ v
E
1−
σ ip> 1
−σ
i −σ
pimplies positive externality
on potential entrants
Acquisition Equilibrium Outcomes
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q q
Acquisition
Competition
V I
i≥V
I +V
E
V I
i<V
I +V
E
Does high σ i drive
competition?
σ ip
σ ip
σ p
σ i
V I ≥ v
I + v
E
V I < v
I + v
E
Conclusions
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• Even in the absence of static rationales, dynamicconsiderations can drive commercialisation choices
• Need to look at relative capabilities
• Capabilities here are based on experience
• Empirically, examine commercialisation choice based on start-upexperience in R&D variables and incumbent experience inproducts and production
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