Key Concept

Conventional wisdom has it that technology based entrepreneurs are better off commercializing their product by contracting with an incumbent (i.e. licensing). But this trade-off may not always be optimal, because if the innovator can learn from its own commercialization experience, albeit losing some profit initially, it could avoid making the same trade-off with future innovations, thus securing long-term profitability. Alternatively, joint commercialization may be the best approach.

Idea Summary

Entrepreneurs innovating in the technology space often lack the know-how or “specialized complementary assets” within their companies to successfully commercialize their innovations. Consequently, to date, the academic literature on this subject has advised them to contract with or license the commercialization to incumbent companies that already have an established market presence.

In the short term this may seem to make sense, but it means sharing in the commercial proceeds, and in the medium to long term a wiser strategy may be to participate in the commercialization process and thus capture more value from innovation. 

In this study, researchers Simon Wakeman from ESMT and David H. Hsu from the Wharton School, argue the case for entrepreneurs developing their own “specialized complementary assets” and entering the commercialization fray themselves. They advise that, if the innovator entrepreneur can learn from his or her experience in product commercialization and use this to build commercialization capabilities in their own company, the benefits downstream may outweigh the opportunity costs of learning and foregone profits in the short term. 

Alternatively, by adopting an intermediate strategy and engaging in joint commercialization the innovator may be able to avoid some of the opportunity costs and still benefit from the expertise they will pick up from the experience of participating in the commercialization process, albeit at the expense of higher inter-organizational governance costs. 

The researchers illustrate the relationship between the choice of commercialization mode, commercialization experience, and performance in the context of the pharmaceutical industry, and specifically how this affects the likelihood of drug approval. In this industry they found that when innovators lacking commercialization experience participate in the commercialization process though either joint commercialization or by commercializing alone, the product is less likely to be approved. However, innovators that have participated in the commercialization process in the past are more likely to successfully commercialize subsequent innovations under joint commercialization than those which have only contracted the commercialization to an incumbent. 

The results of this research suggest that in some circumstances participating in the process of commercializing innovations may be the optimal strategy for technology based entrepreneurs, even if their companies do not possess the necessary complementary assets. There is then a decision to make whether to do this either through self-commercialization or by engaging in joint commercialization, in which the innovator contracts with an incumbent to perform the commercialization but remains involved in the commercialization process. 

Business Application

Motivations and outcomes of technology commercialization strategy will vary, but this study highlights the advantages of participating in the commercialization process, either through joint commercialization with an industry incumbent or by commercializing alone. 

The choice between the three alternative strategies will depend on:

• The expected benefits the innovator will receive by building specialized commercialization capabilities through joint commercialization or self-commercialization; relative to remaining without specialized capabilities
• The opportunity costs that the innovator will incur in order to acquire those commercialization capabilities; relative to simply contracting an incumbent
• The innovator’s ability to sustain the short-run opportunity costs and forgos some short term profitability
• The likelihood that the innovator will utilize the specialized commercialization capabilities in the future
• The relative bargaining power of the innovator when negotiating a commercialization contract with an incumbent