Page 241 - ENTREPRENEURSHIP Innovation and entrepreneurship

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234 ENTREPRENEURIAL STRATEGIES

oped and patented, it had a “toll-gate” position. No eye surgeon would
do without it. No matter what Alcon charged for the teaspoonful of
enzyme that was needed for each cataract operation, the cost was
insignificant in relation to the total cost of the operation. I doubt that
any eye surgeon or any hospital ever even inquired what the stuff cost.
The total market for this particular preparation was so small—maybe
$50 million dollars a year worldwide—that it clearly would not have
been worth anybody’s while to try to develop a competing product.
There would not have been one additional cataract operation in the
world just because this particular enzyme had become cheaper. All that
potential competitors could possibly do, therefore, would have been to
knock down the price for everybody, without deriving much benefit for
themselves.
A very similar toll-gate position has been occupied for many years
by a medium-sized company which, fifty or sixty years ago, devel-
oped a blowout protector for oil wells. The cost of drilling an oil well
may run into many millions. One blowout will destroy the entire well
and everything that has been invested in it. The blowout protector,
which safeguards the well while being drilled, is thus cheap insur-
ance, no matter what its price. Again, the total market is so limited as
to make it unattractive for any would-be competitor. Lowering the
price of blowout protectors, which constitute maybe 1 percent of the
total cost of a deep well, could not possibly stimulate anyone to drill
more wells. Competition could only degrade the price without
increasing the demand.
Another example of a toll-gate strategy is Dewey & Almy—now
a division of W. R. Grace. This company developed a compound to
seal tin cans in the 1930s. The seal is an essential ingredient of the
can: if a can goes bad, it can cause catastrophic damage. One death
from one case of botulism in a can can easily destroy a food pack-
er. A can-sealing compound that offers protection against spoilage
is therefore cheap at any price. And yet the cost of sealing—a frac-
tion of a cent at best—is so insignificant to both the cost of the total
can and the risk of spoilage that nobody is much concerned about it.
What matters is performance, not cost. Again, the total market,
while larger than that for enzymes in cataract operations or for
blowout protectors, is still a limited one. And lowering the price for
can-sealing compound is quite unlikely to increase the demand by a
single can.
The toll-gate position is thus in many ways the most desirable posi-