Maryland Smith Research / May 14, 2018

Understanding Industry Incubation

Why Some of the Most Important Work Happens Below Surface Level

Understanding Industry Incubation

A new product coming to market is like a seedling emerging above ground. Like germination sows and nourishes a seed, a product’s underlying technology has to be discovered and developed beforehand.

This analogy can be drawn from a recent “Incubation of an Industry” study by professors Rajshree Agarwal at the University of Maryland's Robert H. Smith School of Business and Mahka Moeen, a Smith School PhD alumna now teaching at the University of North Carolina.

A new industry gets heralded with its first product commercialization — but this process doesn’t happen overnight. Existing firms or startups typically invest in developing and understanding the underlying technology, experimenting with alternative trajectories and transforming the technological opportunities to commercial value.

Therefore, it’s significant for managers “to think about ‘success’ and ‘failure’ across multiple yardsticks of performance, rather than only as product commercialization as the sole goal,” Agarwal and Moeen write. 

Likewise, for academics, the findings show that studying new industries by beginning at first product commercialization “ignores how different knowledge bases, multivalue capture and cooperative and competitive strategies play out during incubation,” the researchers add.

Agarwal and Moeen say six findings from their study can guide the strategic decisions of managers, while pointing to fertile ground for further academic research:

1) It took 18 years for the scientific breakthrough that led to the first sales of genetically modified seeds in 1995. During this incubation period, knowledge evolved rapidly as firms laid groundwork for later commercialization. Seeds do similarly when they grow their own systems before sending up roots.

2) Industry incubation is marked by vibrant investment in technology. Though farmland might appear fallowed during germination, this is actually when entrepreneurial activity peaks in terms of diversity and magnitude. As any farmer knows, some of the most exciting activity happens under the earth’s surface. Similarly, firms involved in tech investments outnumber commercializing firms and represent more diverse knowledge sources.

3) Knowledge underlying a new industry comes from three primary sources: 1) University spinoffs often founded by researchers contribute core scientific knowledge. 2) Conventional agriculture firms bring complementary knowledge such as plant breeding and access to elite germplasm. 3) Diversifying entrants such as chemical and pharmaceutical firms bring tech capabilities from related fields. 

4) Successful commercialization entails mixing knowledge from the aforementioned sources — similar to a plant’s root system benefiting from various nutrient types in the soil. Product commercialization efforts are visible to anybody. But below the surface, knowledge comes not only from the commercializing firm itself, but also from exchange of knowledge and acquisitions and licensing arrangements.

5) Alternate paths to profit exist apart from commercialization. Some firms that fail to commercialize lose everything. But some continue to operate by licensing their technology. And many others attract huge premiums as the targets of acquisitions. Thus, what appears to be unfruitful experimentation on the surface can actually be significant in the root system. Firms not bringing any product to market may still contribute knowledge to the industry and capture value. Investors thinking the only winning strategy is being first to market need to rethink how they define success and failure.

6) Not all types of investing firms are equally likely to bring a product to market. Knowledge possessed by each firm type may equip them for a particular value-capture mode. In this study, diversifying entrants such as Dow Chemical and Monsanto dominated the commercialization process. But university spinoffs still found payoffs — usually by selling their firms or by licensing their know-how. Conventional incumbents were also attractive as targets of acquisition. 

Read more: Incubation of an Industry: Heterogeneous Knowledge Bases and Modes of Value Capture is featured in Strategic Management Journal.

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