Apple’s co-founder Steve Wozniak has suggested that the company’s initial plan was to sell circuit boards incorporating its microprocessor chips. However, that ambition took a turn when Steve Jobs and Wozniak created the first personal computer in 1976, the Apple I. With its successor, Apple II, Apple became the pioneer in the personal computer industry. 

Plenty of research has focused on the new product development process and commercialization. However, one fundamental decision regarding technology commercialization remains relatively unexplored: In what form do we sell the innovation in the market? A examines the need for electric vehicle companies to reassess their designs and consider whether the battery should be modularized. These companies are rethinking their designs to reduce the wasted space and weight created by modularized batteries. To alleviate this issue, companies like BYD develop and sell batteries and vehicle components as well as cars, while CATL, BYD’s biggest competitor, sells batteries integrated into the vehicle chassis.

In a , we explore the “what to sell” question that companies and investors need to answer regularly. For example, when entrepreneurs pitch their ideas on the popular television series Shark Tank, both Sharks (the investors) and entrepreneurs must identify and agree on what the venture is trying to sell. Before they decide how to position products or services relative to competitors, developers at both established firms and new ventures must consider whether their innovations should be sold as:

1. know-how (i.e., intellectual property),
2. components (i.e., intermediate goods), or
3. a system (i.e., final goods).

This product-form strategy, or PFS, decision is deeply embedded within many firms’ product development and commercialization processes. For instance, when ventures seek funding from investors or when firms go public through an initial public offering, they must show their revenue model (i.e., the market, the customers, the offering), which reflects the PFS. The PFS decision is linked to other fundamental questions of interest to marketers, including “Who is our direct customer?” and “Who are our direct competitors?”

For instance, for a company selling baseball bats embedded with sensor technology—with the customers being players, coaches, and clubs—branded bat manufacturers (e.g., Louisville Slugger) are the direct competitors. In contrast, if the firm sells the know-how or a component device, branded bat manufacturers could be the customers. For early-stage ventures seeking to enter a market for the first time, getting their go-to-market strategy “right” in terms of the product-form and the associated revenue model may be critical for their survival.

How Firms Make the Product-Form Decision

Using data from the following sources:

• interviews with entrepreneurs and angel investors,
• investment proposals from angel networks,
• pitch transcripts from the U.S.-based version of Shark Tank, and
• experimental scenarios of investment proposals,

we find that the resulting choice of PFS is due to three primary drivers:

• the difficulty of technology mix-and-match,
• the availability of marketing capabilities to sell the technology to end users, and
• the difficulty of safeguarding the know-how against imitation.

Our research discovers that when technology is difficult to mix-and-match and safeguard, decision makers will choose to sell systems over components and components over know-how. Marketing capabilities will also increase the likelihood of marketing systems over components and components over know-how. We also find key interactions among these drivers on the product-form decision.

These findings suggest that considering the technology market and the firm’s ability to protect its technology (against theft by supply chain members and competitors) is critical and that strategic deliberations about what to sell include examinations of the environment and the firm’s own capabilities. Unlike much of the literature about business models that often conflates the “what to sell” and “how to sell” questions for business strategy, we find that PFS is a unique decision that comes before the “how to sell” question is answered.

Product managers, entrepreneurs, and angel investors need to consider how these alternative product forms may increase the costs associated with selling one product form over another. Entrepreneurs need to assess the value angel investors bring and leverage these resources into their product-form options. Additionally, managers at established firms that already have multiple product lines and who are mulling a market entry decision for a new technology may need to consider their commercialization deliberations at the technology level and choose the product-form that is the most desired for that technology, regardless of how their other product lines are strategically positioned.

Thinking back to the initial example, if Apple had decided to sell its microprocessor chips (a component) before settling on marketing its iconic Apple 1 (a system), the evolution of its development and marketing would have changed its customers and competitors as well as its potential to change the industry structure.

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From: Kellilynn M. Frias, Mrinal Ghosh, Narayan Janakiraman, Dale F. Duhan, and Robert F. Lusch, “” Journal of Marketing

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IPOs based in the U.S. raised over $155 billion in 2021, a record year for IPO valuations. At the same time, insiders sold $35.5 billion in shares of companies that went public in 2021 in the U.S., . These insider sales are a negative signal of quality and typically reduce the value of IPOs.

In a , we focus on the role of innovation potential as a credible signal that reduces the adverse selection present in IPO deals with insider sales. Prior research shows that the managers of IPO firms have a strong tendency to remove information about future innovation from IPO prospectuses to prevent competitors from learning about their plans. In 40% of IPOs, managers seek to protect their competitive advantage by redacting information about upcoming products and what markets they are considering entering.

Our research, however, documents a positive effect on IPO valuation from informing investors of future innovation plans. It allows managers to reduce information asymmetry, offers background information that helps investors better gauge the impact of insider sales, and ultimately increases the value of the IPO.

To establish that innovation potential is a true signal of firm quality, which is unobservable to investors, we document its indirect effect on IPO valuation through the sale of insider shares at the time of an IPO. Sales of insider shares have been extensively shown to have a negative effect on IPO performance. We find that firms with higher innovation potential have lower sales of insider shares, and when these sales occur, firms incur a relatively lower stock price penalty.

Direct and Indirect Effects of Innovation Potential

Innovation potential not only impacts IPO first-day returns directly but also has an indirect effect of reducing the impact of insider sales on IPO valuation. We test these relationships using data from 370 IPOs from the consumer-packaged goods and pharmaceutical industries, where innovation potential is measured using patents, new product preannouncements, and generic references to future innovation in the IPO prospectus. Even if companies choose not to reveal any specifics about new products, generic mentions of future innovation alone can serve as credible signals of firm quality.

Some innovation potential proxies work better than others in terms of signaling the true quality of the firm. We find that patents have a stronger impact on insider sales than preannouncements and generic references of future innovation. This suggests that insiders appear to put more stock into technological innovation—which perhaps they perceive as more tangible—than in strategic actions or corporate communications that reflect a focus on market-based innovations. Also, preannouncements have the strongest impact on first-day IPO returns, suggesting that retail investors focus on the measure of innovation potential that is closest to commercialization.

Our results help investors better understand the conditions under which insider sales occur: on average, insiders are less likely to sell their holdings if the firm has a rich innovation pipeline. Insiders can sell either because they want to cash in for liquidity reasons or because they expect the value of the firm to drop in the future. The significant information asymmetry present at the time of the IPO may not allow investors to determine the motives behind insiders’ actions. If investors assume the latter reason underlies the sale, they will be inclined to pay a lower price for the IPO shares: Our model suggests that a change in insider sales from 0 to 1% decreases IPO first-day returns by 0.95%, on average.

Managerial Implications

Managers seeking to take their firms public can keep in mind the following:

1. New product preannouncements may be the strongest signal of innovation potential, and the total effect of preannouncements on IPO first-day returns is higher than that of patents and generic references of innovation. Investors appear to view preannouncements as the clearest indication that the IPO firm will be competitive. Preannouncing an additional new product increases the IPO value by $34.88 million, although in the pharmaceutical industry the value of preannouncements may be driven by the longer life cycle that characterizes products.
2. Should the managers of IPO firms not have a new product that is sufficiently developed, or if they are not comfortable preannouncing it, generic references of future innovation can also grab the attention of both underwriters and retail investors, and the direct positive effect on IPO first-day returns is higher than patents. Communicating the general direction of future innovation plans is itself sufficient to increase the valuation of an IPO firm, although not as much as product preannouncements.

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From: Zixia Cao, Reo Song, Alina Sorescu, and Ansley Chua, “,” Journal of Marketing.

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