The underpinnings for Entrepreneurial Strategy derive from an active research agenda centered around the decisions high-growth entrepreneurs face. Working papers and published articles are shared below. We welcome your feedback.
Foundations of Entrepreneurial Strategy
Joshua Gans, Scott Stern, and Jane Wu
Motivated by a significant disconnect between research, teaching and practice regarding the role of strategy in entrepreneurial ventures, this paper develops an integrated framework that defines and delineates the scope of entrepreneurial strategy, clarifies the choices and complementarities that shape entrepreneurial strategy, and proposes a choice-oriented process for implementing entrepreneurial strategy. We take an axiomatic approach, highlighting four interrelated premises: (i) Freedom: there is more than one alternative path by which value can be created and captured from a given idea; (ii) Constraint: resource and strategic constraints prevent the entrepreneur from pursuing more than one of these alternatives at once; (iii) Uncertainty: even after undertaking cost-benefit analysis to deselect some alternatives, there is unresolved uncertainty preventing a ranking of at least two alternatives, and (iv) Learning by Commitment: partial movement down a path to learn more about an option changes both the value of and the information available about alternative paths. Together, these conditions give rise to our central organizing insight, the paradox of entrepreneurship: choosing between equally viable alternative strategic commitments requires knowledge that can only be gained through experimentation and learning of the type that inevitably results in (at least some level) of commitment that forecloses particular strategic options. Entrepreneurial strategy is a choice-oriented approach to overcoming the paradox of entrepreneurship. Specifically, entrepreneurial strategy is the set (or sequence) of choices founders (and their teams) make in order to test a value creation and value capture hypothesis when entrepreneurial experimentation requires partial commitment. This approach yields three principles of entrepreneurial strategy. First, Choice Matters: when learning requires partial commitment, start-ups will not simply be able to optimize by identifying a best approach, but will instead be required to select an alternative that results in leaving equally viable yet conflicting alternatives behind. Second, These Choice Matter: there are specific choices start-ups face – Customers, Technology, Identity, and Competition – where the interplay between experimentation and commitment are salient; a choice-oriented approach yields a reconceptualization of traditional frameworks endemic to teaching and research in these domains. Finally, These Choices Matter Together: structured complementarities and interdependencies among these choices results in the identification of four alternative strategic directions for a given idea. Together, these principles motivate a new class of choice-oriented decision-making tools for entrepreneurs. We highlight one new tool – Test Two, Choose One – that offers a novel approach for how to undertake entrepreneurial decision-making under uncertainty.
Citation: Gans, Joshua S., Stern, Scott, and Wu, Jane, Foundations of Entrepreneurial Strategy (September 28, 2016). Working Paper. Available at SSRN: https://ssrn.com/abstract=2844843
Control versus Execution: Endogenous Appropriability and Entrepreneurial Strategy
Kenny Ching, Joshua Gans, and Scott Stern
This paper considers how Rosenbergian uncertainty (i.e., economic uncertainties that arise after successful invention) shapes appropriability for start-up innovations. While most prior research assumes that the appropriability regime surrounding an innovation is exogenous (i.e., that the potential for capturing value from innovation is largely determined by external factors), we focus on the endogenous choice entrepreneurs face between investing their time and scarce resources in ensuring control-based appropriability versus investing in the execution of their fledgling businesses. Investment in execution allows entrepreneurs to advance more quickly than competitors, while control requires delays in commercialization. Control and execution are substitutes as they represent distinct paths to earning future rents. Uncertainty about the size and likelihood of these rents is uncertain, and so entrepreneurs may be unable to rank long-term rents from these alternative paths in advance; instead, their choice will be shaped by individual preferences, resource constraints, and interdependencies with their overall entrepreneurial strategy. The resulting appropriability regime will reflect the endogenous choices of the entrepreneur rather than more traditional environmental factors. Motivated by notable historical examples such as the invention and early commercialization of the telephone, we explore these ideas empirically by considering the choice of appropriability regime among a sample of academic entrepreneurs: within a sample of ventures that could have been developed by either faculty or students (or both), we find that faculty-led ventures are much more closely associated with formal intellectual property, but are less agile in terms of start-up and commercialization activities.
Multiple Paths to Value: Test Two, Choose One
Joshua Gans and Scott Stern
IESE Insight (Non-Refereed)
You have an idea for a new business, but there are multiple paths to create and capture value. To choose a path, you have to experiment, but experiments are costly and require at least a partial commitment, which consequently alters the nature of the path, precludes other paths, or worse, takes you down a path of no return. This article describes this entrepreneurial paradox and summarizes the key factors that need to be weighed at every step to hone and optimize make-or-break choices. Although the strategic considerations presented in this article are common to any competitive strategy, the authors discuss the specific ways in which entrepreneurial strategy is different. Rather than using experiments to justify a particular choice, the goal is to whittle down choice sets until you are faced with two equally viable alternatives. That is when to "test two, choose one," which is the recommended approach for decision-making under conditions of uncertainty.
Citation: Gans, Joshua S. and Scott Stern, "Multiple Paths to Value: Test Two, Choose One: For Entrepreneurs, Choice Matters", IESE Insight, No. 33, Second Quarter 2017, pp 54 - 61.
Joshua Gans and Scott Stern
AER Papers & Proceedings
Most approaches to entrepreneurship assume that entrepreneurial control over their inventions is critical for success and, in turn, for incentives. Such control is usually supported by regulations that protect intellectual property including patents, copyrights, and trade secrets. Each give the entrepreneurs control over who can appropriate value from their activities. However, we note that another, distinct path exists for appropriation by entrepreneurs' execution. Execution forgoes the formal protection from control instead of a more rapid approach to market in the pursuit of capabilities that will allow entrepreneurs to compete with others in the future rather than block their activities per se. We characterize the conditions under which one path is preferred to another and present evidence from university startups delineating the tradeoffs at the heart of our theoretical approach.
Citation: Gans, Joshua S. and Scott Stern. 2017. "Endogenous Appropriability." American Economic Review Papers & Proceedings, 107(5): 317-21.
Is there a Market for Ideas?
Joshua Gans and Scott Stern
Industrial and Corporate Change
This article draws on recent work in market design to evaluate the conditions under which a market for ideas or technology (MfTs) will emerge and operate efficiently. As highlighted by Roth (2007), effective market design must ensure three basic principles: market thickness, lack of congestion, and market safety. Roth also highlights the importance of dealing with “repugnance.” Our analysis identifies the factors that are, in most circumstances, likely to inhibit the allocative efficiency of MfT. We show that key institutional developments such as the development of formalized IP exchanges suggest that effective market design may be possible for some innovation markets. Finally, our analysis suggests that markets for ideas are beset by the “repugnance” problem: from the perspective of market design, Open Science is an institution that places normative value on “free” disclosure and so undermines the ability of ideas producers to earn market-based returns for producing even very valuable “pure” knowledge.
Citation: Gans, Joshua S. and Scott Stern. 2010. "Is there a market for ideas?" Industrial and Corporate Change, Volume 19, Issue 3, 1 June 2010, Pages 805–837.
The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays
Joshua Gans, David Hsu, and Scott Stern
This paper considers the impact of the intellectual property (IP) system on the timing of cooperation/licensing by start-up technology entrepreneurs. If the market for technology licenses is efficient, the timing of licensing is independent of whether IP has already been granted. In contrast, the need to disclose complementary (yet unprotected) knowledge, asymmetric information or search costs may retard efficient technology transfer. In these cases, reductions in uncertainty surrounding the scope and extent of IP rights may facilitate trade in the market for ideas. We employ a data set combining information about cooperative licensing and the timing of patent allowances (the administrative event when patent rights are clarified). Although preallowance licensing does occur, the hazard rate for achieving a cooperative licensing agreement significantly increases after patent allowance. Moreover, the impact of the patent system depends on the strategic and institutional environment in which firms operate. Patent allowance plays a particularly important role for technologies with longer technology life cycles or that lack alternative appropriation mechanisms such as copyright, reputation, or brokers. The findings suggest that imperfections in the market for ideas may be important, and that formal IP rights may facilitate gains from technological trade.
Citation: Gans, J.S., Hsu, D., and Stern, S. 2008. "The Impact of Uncertain Intellectual Property Rights on the Market for Ideas: Evidence from Patent Grant Delays" Management Science Volume 54, Issue 5, Pages 982-997.
Economic Experiments: The Role of Entrepreneurship in Economic Prosperity
Melbourne Review: A Journal of Business and Public Policy (Non-Refereed)
Academic researchers are developing a more rigorous approach to evaluating the role of entrepreneurship in the process of economic growth and prosperity. This emerging perspective provides useful guidance for both policy makers and practitioners.
Citation: Stern, Scott. Economic Experiments: The Role of Entrepreneurship in Economic Prosperity [online]. Melbourne Review: A Journal of Business and Public Policy, The, Vol. 2, No. 2, Nov 2006: 53-56.
The Product Market and the Market for “Ideas”: Commercialization Strategies for Technology Entrepreneurs
Joshua Gans and Scott Stern
This paper presents a synthetic framework identifying the central drivers of start-up commercialization strategy and the implications of these drivers for industrial dynamics. We link strategy to the commercialization environment—the microeconomic and strategic conditions facing a firm that is translating an “idea” into a value proposition for customers. The framework addresses why technology entrepreneurs in some environments undermine established firms, while others cooperate with incumbents and reinforce existing market power. Our analysis suggests that competitive interaction between start-up innovators and established firms depends on the presence or absence of a “market for ideas”. By focusing on the operating requirements, efficiency, and institutions associated with markets for ideas, this framework holds several implications for the management of high-technology entrepreneurial firms.
Citation: Gans, Joshua S. and Scott Stern. 2003. "The product market and the market for “ideas”: commercialization strategies for technology entrepreneurs" Research Policy Volume 32, Issue 2, February 2003, Pages 333-350.
When Does Start-Up Innovation Spur the Gale of Creative Destruction?
Joshua Gans, David Hsu, and Scott Stern
The RAND Journal of Economics
This article studies the determinants of commercialization strategy for start-up innovators. We examine whether the returns on innovation are earned through product market competition or through cooperation with established firms (through licensing, alliances, or acquisition). Our hypotheses are that the relative returns to cooperation are increasing in (i) control over intellectual property rights, (ii) low transaction costs, and (iii) sunk costs associated with product market entry. Using a novel dataset of the commercialization strategies of start-up innovators, our results suggest that the procompetitive impact of start-up innovation-the gale of creative destruction-depends on imperfections in the market for ideas.
Citation: Gans, J.S., Hsu, D., and Stern, S. 2002. "When Does Start-Up Innovation Spur the Gale of Creative Destruction?" The RAND Journal of Economics: Vol. 33, No. 4 (Winter, 2002), pp. 571-586.
Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction
Joshua Gans and Scott Stern
Journal of Economics & Management Strategy
This paper analyzes the relationship between incumbency and R&D incentives in the context of a model of technological competition in which technologically successful entrants are able to license their innovation to (or be acquired by) an incumbent. That such a sale should take place is natural, since postinnovation monopoly profits are greater than the sum of duopoly profits. We identify three key findings about how innovative activity is shaped by licensing. First, since an incumbent's threat to engage in imitative R&D during negotiations increases its bargaining power, there is a purely strategic incentive for incumbents to develop an R&D capability. Second, incumbents research more intensively than entrants as long as (and only if) their willingness to pay for the innovation exceeds that of the entrant, a condition that depends critically on the expected licensing fee. Third, when the expected licensing fee is sufficiently low, the incumbent considers entrant R&D a strategic substitute for in-house research. This prediction about the market for ideas stands in contrast to predictions of strategic complementarity in patent races where licensing is not allowed.
Citation: Gans, J. S. and Stern, S. 2000. "Incumbency and R&D Incentives: Licensing the Gale of Creative Destruction." Journal of Economics & Management Strategy, 9: 485–511.