© Evanston Photographic Professor Scott Stern

Faculty Research: Scott Stern, M&S
Award-winning professor mines high-tech idea marketplace

By Ed Finkel

Entrepreneurial startups in intellectual property-rich fields such as biotechnology and pharmaceuticals succeed by letting their scientists be scientists and by partnering with established firms to develop and market their brainstorms, says Kellogg School Associate Professor of Management and Strategy Scott Stern, whose research into technology entrepreneurship and innovation has earned him a foundation award.

"All they have going for them is their intellectual property," Stern says. "They let their researchers do active publication in the scientific literature, which, in some sense, is spilling the company's secrets. And, rather than serve as competition for established pharmaceutical companies, biotechnology firms essentially have embedded most of their innovation in the value-chains of larger firms."

These insights and others, garnered through more than a decade of statistical research and case studies, won Stern recognition in January with the Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship. Based on the body of his research, the biennial award will go to a researcher under age 40 who focuses on entrepreneurship and innovation.

"I was delighted to have been selected," Stern says. "The Kauffman Foundation is doing great work in this area and funding a variety of initiatives around entrepreneurship and innovation that are encouraging high-quality research in an area we know too little about."

Stern has focused in that area for his entire career, writing his doctoral dissertation at Stanford University in 1996 on the early commercialization activities of Genentech, which partnered with pharmaceutical giant Eli Lilly to develop synthetic insulin. "That pattern plays out over and over again in the biotech industry," he says.

Such entrepreneurial firms must tackle a basic market failure when it comes to intellectual property. "If I want to sell you an idea, but you don't know what it is, you're unwilling to pay me," Stern explains. "But once I tell you my idea, you no longer need to pay me."

While start-up firms could try to market ideas themselves, "Often you don't have the resources, leverage, distribution channels or brand name to run very far," Stern says. "While established firms will often have access to better resources, those are precisely the firms who are most likely to expropriate your idea, or take advantage of it without full compensation."

But Stern's research has found that some companies, such as Cisco Systems, take a longer view. "To encourage entrepreneurship over time, they choose a more cooperative commercialization strategy with these entrepreneurs."

To encourage a long-term reputation as innovators, startups in fields such as biotechnology must recruit and hire cutting-edge scientists - but to do so, firms must be willing to give such highly talented people leeway that, on the surface, might seem disadvantageous to their companies.

"These firms allow their scientists to be full-fledged members of the scientific community, publishing in the scientific literature, co-authoring with university researchers - and even potentially with researchers from other firms, who might be competitors in other dimensions," Stern says.

The upside, his research has found, is that firms that encourage this kind of scientific environment can pay 15 to 25 percent less and expect productivity gains of similar magnitude - erasing any disadvantage from spilling their secrets. "These are not just profit-maximizing automatons," he says. "These companies are run by and for scientists, and scientists care deeply about their scientific reputation, respecting the rules of scientific inquiry, and participating in scientific debate."

Outside of his core research, Stern, who joined the Kellogg School three years ago from M.I.T., teaches both Management of Technology for MBAs and, this year, began a first-year doctoral course on applied econometrics. He serves as academic director of the Kellogg Biotechnology Center, which hosts conferences and encourages research, and which he says was "one of the great attractions of Kellogg."

Beyond campus, Stern serves as a research associate at the National Bureau of Economic Research and co-organizer of its Innovation Policy and the Economy Program, which provides a forum for researchers in that area.

Looking forward, Stern sees the management of innovation becoming increasingly important, as more traditional sources of advantage erode. "I hope my research and teaching help innovation-driven companies position themselves to protect their ideas and create a foundation for future innovation," he says.