Invention Model

In the Invention Model, we attempt to predict the unit growth and returns on capital (ROIC) that will be achieved by a company commercializing an invention. We do this by comparing the invention to the incumbent technology in terms of performance, market price and unit cost.

1. Differences in performance are determined by measuring the two technologies head-to-head on the performance dimensions that are relevant to the buyer.

2. Differences in market price are predicted by measuring the barriers to market entry that are faced by the invention’s prospective buyers and sellers:

If entry barriers for prospective buyers are low – say because they are not bound by contracts with sellers of the incumbent and they don’t have to invest in new equipment and training – we should expect their willingness to pay for a superior invention to be at least high as the market price of the incumbent.
If entry barriers for prospective sellers are high – say because they face patents and trade secrets – we should expect the market price of the invention to be equal to the buyers’ willingness to pay for the invention (i.e. buyers will be unable to bargain by threatening to switch to another seller).

3. Differences in unit cost are determined by measuring the resources consumed in producing the two technologies.

If the invention has higher performance and is offered at market price, it will unlock unit growth for the invention’s seller by incenting the incumbent’s buyers to transition to the invention; and if it has a higher or equivalent market price and a lower unit cost, it will unlock higher returns on capital (ROIC):

In short, the invention must have:

A performance advantage over the incumbent technology
A unit cost advantage over the incumbent technology
Low entry barriers for prospective buyers
High entry barriers for prospective sellers