WEBVTT

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Prof: All right we have
here forth flown at a relatively

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high altitude with the likes of
Adam Smith, Carl Marx,

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Joseph Schumpeter,
F.A.

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Hayek, and today and continuing
from here to the mid-term,

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we're going to deal with real
businesses.

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And it is our considerable
privilege to have with us Sharon

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Oster,
who is a Harvard PhD in

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Economics, is widely thought to
be the wisest owl on the

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management of non-profit
organizations anywhere in the

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world,
and is the Frederick Wolf

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Professor of Entrepreneurship at
the School of Management,

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and is, in addition to that,
a dean of that school.

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So please help me welcome
Sharon Oster.

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Sharon Oster:
Thank you all.

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In my youth I taught at Yale
College and I taught generations

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of undergrads intermediate
micro,

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so it's nice to be back amongst
you,

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teaching something a little bit
about economics.

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I hope Doug warned you,
but I'm going to treat it like

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a business school class,
which means I'm going to cold

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call on you,
and people in the back should

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know that I especially like
calling on the people in the

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back because they tend to doze
otherwise,

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so you might want to change
your seat.

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So let's think about this case
a little bit.

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So imagine yourself,
you're one of the three

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entrepreneurs Ferrari,
Gold, and Dillon.

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The world is your oyster in
some sense.

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Here you are,
you've founded this firm,

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you've got a product that's
this kit that can be used in

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heart surgery,
big market, there's a million

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people who need heart disease--
who need some kind of heart

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surgery every year;
growing market,

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we're all getting fatter,
we're getting older,

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we're getting weaker,
we're getting less healthy,

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you might think that's a
problem for President Obama and

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the healthcare but it's an
opportunity for our

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entrepreneurs.

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This is a--even in the U.S.

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they could imagine a billion
dollar market in this business,

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not to mention the rest of the
world,

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where people are also
overeating and getting less and

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less healthy over time.

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Yet when the case opens,
they seem like they have some

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worries on their mind.

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So if you were one of those
individuals, guys in this case,

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what are you thinking about?

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Student:  Marketing.

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Sharon Oster:
Okay, so what do you mean

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by marketing?

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What's the issue?

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Student: Well,
the issue is you have this

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product,
which could potentially be made

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into a lot of money and help out
consumers,

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but you have to work through
physicians,

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since they're the ones who were
actually using this device,

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and for them to use the device,
they need training.

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Sharon Oster:
Okay, so one set of

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questions we're going to have
are a set of questions about the

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buyer.

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There are going to be a lot of
questions about the buyer but

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let's just get that up there as
one set of things we're worried

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about.

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What are you worried about?

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Student:  I guess I'd be
worried about the

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competitiveness of my product to
make sure that it can actually

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compete on the market.

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Sharon Oster:  Good.

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So you know at the moment--let
her have it,

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she's doing okay--so at the
moment I only have one

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competitor,
so what would we call that if

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we were in economics class?

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Student:  A duopoly.

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Sharon Oster:
A duopoly okay.

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Now one of the things we know
about duopolies,

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if they're any kind of sensible
duopolies they're probably doing

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pretty well.

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This duopolist,
my competitor,

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what's his price point look
like?

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Student:  Price point?

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Sharon Oster:
Yeah so he--I'm charging

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$1,000 for my thing,
what's he charging?

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Anybody remember the number?

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Student:  $5,000.

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Sharon Oster:
$5,000--they're good they

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know the numbers..

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Prof: I told you they
were good.

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Sharon Oster:
So I'm thinking to myself

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you're worried about the
competition,

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but I got one competitor and
he's charging five times my

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price,
that makes me look like I'm

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pretty good.

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Is there something else you're
worried about?

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Student:  Well it's not
just that one competitor,

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but its other techniques also.

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Sharon Oster:  Good.

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Okay, so one thing I'm worried
about right now is my existing

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competitor,
but Schumpeter doesn't tell me

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that I should only worry about a
static competition,

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does he?

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What is Schumpeter's model
about what's happening with

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competition?

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Student:  Creative
destruction to the other firms

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that went to market and less
successful firms were forced out

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of the market.

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Sharon Oster:
So a thing that I have to

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worry about is not just the
extant competitor's Heartport,

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but I better think a little bit
about who else is coming,

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so I'm going to be thinking a
little bit about what Michael

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Porter,
who you also looked at I guess,

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is new entry and how do I
understand new entry?

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Then if I think about the flip
side of Schumpeter not only am I

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worried about some new guys
coming in and destroying me,

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but as I come in I'm of course
competing against some existing

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players.

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I need to think a little bit
existing players and the way in

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which they are attacking this
market.

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One of the things you're going
to observe about almost every

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new product as it enters the
market,

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even if it thinks of itself as
a new product it has existing

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competitors.

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Many of you may have Kindles,
if you look at Kindles the

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Kindle is obviously also worried
about what's happening with the

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Sony Reader and all the new
things that look like a Kindle,

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but really from the point of
Kindle's--

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from Kindle's point of view its
real job at the moment is

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converting all those people who
are buying hard covered books.

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It is thinking a little bit
about conversion of consumers

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from the way in which they are
currently used to solving a

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problem to your new way of
solving a problem,

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so we're going to have to think
here in competition not only

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about the guys that are doing it
our way,

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but the existing players.

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And we're going to have to
think about these things in the

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context of a set of issues
involving the customers,

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how I connect to the customers,
how I deliver to whoever these

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customers are,
and we'll have to think about

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that,
and a set of different products

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for the needs of our people.

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I'm going to stay with those
two things for awhile and then

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Doug will help me pull down the
slides to get to some other

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questions in the end,
but this is going to take care

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of us for a little while.

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Let's stick with the
competition part of it first.

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Before I came along,
kind of how is it that people

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got their heart problem solved?

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Guy in the back with the pink
shirt in the last row.

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Student:  Either bypass
surgery or the balloon

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procedure.

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Sharon Oster:
Good and do you have a

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vague idea about of these one
million patients,

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about how they divide up?

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Student:  I don't know.

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Sharon Oster:
Anybody else remember

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about the numbers?

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They're not perfect;
so the CABG is about 350,000

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and the angioplasty--
Prof: There is some

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hands up; we got to get them to
where she can see.

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Sharon Oster:
Oh, if it's a number like

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that you can just yell.

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You don't even have to raise
your hand.

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We're a much more casual group
than that in business school.

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I've got two different ways of
doing it;

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let's stick with you,
do you got the mic handy?

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Good.

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Tell me a little bit about my
organization,

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CardioThoracics,
competing against competitors

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in each of those two markets.

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Student:  In the first
model of cardiothoracic systems,

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it only allowed doctors to do
surgery on one or two blood

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vessels,
which would have replaced,

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I believe,
the market for the balloon

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procedure,
angioplasty.

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Whereas, for the bypass
surgery, it was usually,

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in that case,
because they were creating more

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trauma,
they would usually try to

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address as many vessels as
possible.

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Sharon Oster:
Okay so one of the things

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about this particular product is
in its infancy it could only do

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one or two vessels at a time,
and that limited it really

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pretty much to this side of the
picture,

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because most of what we were
doing--

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this side of the picture
involved, as you indicated,

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a little more drastic cutting,
and typically then more

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treatment of multiple vessels.

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Generation 1 sort of focused on
this part of the market.

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Now, as you indicated,
the technological trajectory

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was to more and more vessels,
so we're going to spend a

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little bit of money if we're
this firm and we're going to

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move to not only solving those
problems but solving those

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problems.

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Does that change come without a
cost?

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As I move from Generation 1 to
Generation 2,

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to Generation 3,
I get more and more vessels,

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do I lose anything?

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Student:  You have to
pay for--

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you have to invest in the
product, you have to train and

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retrain doctors,
you have to market it over and

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over again.

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Sharon Oster:
Okay, so one set of

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questions is as I'm doing
anything technological,

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I'm going to have to invest
real cash in this.

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I'm going to have to think a
little bit about that,

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but is there anything else I
lose as I move from one

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generation to another?

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Yeah.

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Student:  Well it's
harder because the whole point

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is to have a beating heart so it
could be longer,

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so it's two different
>

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Sharon Oster:
Okay, well that's true.

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It's harder to do more vessels
because I've got more things I'm

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trying to do as its beating,
but there's something else I'm

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doing as I move from Generation
1 onward.

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Yeah.

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Student:
>

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Sharon Oster:
Great, so if you think

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about this product in the
beginning, it had two kind of

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technological features.

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One was it dealt with the
bleeding heart--

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beating heart,
not bleeding heart--and the

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second one it had a smaller cut,
so you didn't want to cut all

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the way through people,
you actually wanted to have a

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little bitty hole,
so small incision,

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and it turned out that the
beating heart eliminated some of

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the neurological problems,
and the small incision made

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people recover a little bit
faster.

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So they were different elements
of the product that we liked.

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When we moved from the kind of
only a couple vessels to many

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vessels,
we're giving up on some of the

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functionality associated with
the product by cutting up

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patients a little bit more and
that's another feature that

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Schumpeter and others have
talked about,

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including Clay Christensen,
who talks about disruptive

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innovation that when you make a
product change it is often the

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case that you don't just
improve,

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improve, improve, improve.

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You give up things;
there are tradeoffs that you're

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making.

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And the tradeoffs are not just
to cost you more money and you

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get more functionality,
but sometimes you actually push

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along one dimension and you're
drawing back actually in what--

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in the qualities of another
dimension.

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In this situation why put the
money in and give up the small

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incision piece just to enable
yourself to move into this piece

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of the market?

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After all the one or two
vessels market is the biggest

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chunk of the market and it's
pretty darn big,

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I'm just a little guy,
why don't I manage as I am

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focusing on that part of the
market?

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Why is it I have to go--why is
it I decide to transform myself?

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Here in the back,
the woman in the corner?

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Student:  Because you
have

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to-->

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Sharon Oster:
You have to say that

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louder for me or slower,
so I got a piece of it but I

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didn't get it all,
so start again.

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Student:  You need to
think about the preferences of

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your consumers,
the doctor that are going to be

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adopting your technology,
you need a larger incision so

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they can see the heart that
they're working on.

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And so it's not just about
moving from a couple vessels to

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many, it's about catering to
their preferences.

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Sharon Oster:
Okay, so one of the things

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I'm going to be thinking about
here as I'm thinking about

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technologically what to do to my
product,

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is that when I change what I
can do technologically,

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I am picking a different set of
markets that I'm trying to

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compete against.

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And these markets are going to
look very different in terms of

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the kind of buyer issues and the
complimentor,

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and we'll talk about what I
mean by that in a minute,

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for each of these two parts of
the market.

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I am choosing my competition in
some sense by choosing my

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technology.

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I'm choosing to go against here
a set of--who's doing these CABG

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things?

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These are surgeons,
so these are surgeons,

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they're cutting people up.

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Who's doing the angioplasty?

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What looks different about that?

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Student:  Cardiologists.

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Sharon Oster:
These are cardiologists;

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they're being done in a
different kind of an office,

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much less invasive procedure,
very different features

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associated with these two parts
of the market.

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And my ability,
given what I am,

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to compete in each of these two
markets is going to vary much,

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so the technological trajectory
is influenced by the economics

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and the competitive piece of the
story.

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That you are not just imagining
yourself, a bunch of scientists

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in a lab, just trying to make it
better, better,

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better, better.

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You've got a set of managers on
top who are saying,

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"You know what,
we need to have an improvement

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on this dimension,
because otherwise we're never

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going to be anyplace in this
marketplace."

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A decision was made,
and we're going to turn to

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figuring out why this decision
was made,

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that it was going to be
important to be in this part of

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the market and not just this
part of the market to get myself

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some more functionality with
multi vessels.

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Okay, so to think about why I
needed to go that way I want to

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switch over a little bit to this
piece--

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we're going to come back to
this part in a minute as well.

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I want to think a little bit
about the buyer issues.

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The woman in the back said if I
want to do something about

14:58.277 --> 15:02.497
knowing my technology,
I've got to figure out what

15:02.495 --> 15:04.815
does the consumer want.

15:04.820 --> 15:07.610
Is that the relevant decision
maker in this case?

15:07.610 --> 15:13.180
I'll put that here,
I've got a patient,

15:13.177 --> 15:19.327
and I'll call that patient the
consumer.

15:19.330 --> 15:22.740
When people go and they're
trying to have some heart

15:22.740 --> 15:25.680
procedure do they just--
there's something the matter

15:25.684 --> 15:27.524
with your heart,
they just come up to you and

15:27.518 --> 15:29.448
say to you,
"How do you want me to do

15:29.451 --> 15:29.741
that?

15:29.740 --> 15:33.300
How do you think--what
procedure do you think I should

15:33.303 --> 15:34.113
use?"

15:34.110 --> 15:36.380
So who else is a decision maker
in this situation?

15:36.379 --> 15:37.109
Yeah.

15:37.110 --> 15:40.930
Student:  The doctor is
one of the major decision makers

15:40.928 --> 15:44.558
in this process because it's
talking about the whole concept

15:44.562 --> 15:48.132
of having the doctor needing to
be trained, and using their

15:48.134 --> 15:49.124
materials.

15:49.120 --> 15:50.530
Sharon Oster:
In fact,

15:50.525 --> 15:52.995
there are actually three
different doctors you might

15:53.000 --> 15:54.940
think play a role in this
situation.

15:54.940 --> 15:56.620
The one you mentioned is a
surgeon.

15:56.620 --> 15:59.260
Student:  There's also
the referring doctors.

15:59.259 --> 16:00.749
Sharon Oster:
Good, so there's your

16:00.753 --> 16:02.143
basic GP or whatever it is you
have,

16:02.139 --> 16:04.469
some guy you go,
you put on--I've got a pain in

16:04.471 --> 16:07.201
my chest,
he says, "You better do

16:07.202 --> 16:10.692
something about that,"
and then there is a

16:10.692 --> 16:14.592
interventional cardiologist,
who does this piece of the

16:14.586 --> 16:15.146
business.

16:15.149 --> 16:18.999
You--some doctor says,
"Go see somebody,"

16:19.000 --> 16:23.480
and typically he actually says,
"Go see this guy,"

16:23.477 --> 16:27.657
and this guy figures out can he
help you or can she help you,

16:27.658 --> 16:29.738
and if not they send you to a
surgeon.

16:29.740 --> 16:34.780
You've got interveners or
decision makers all along the

16:34.782 --> 16:36.372
doctor element.

16:36.370 --> 16:39.910
Is there anybody else you think
that, if I'm the inventors of

16:39.908 --> 16:42.618
this little kit,
is there anyone else I need to

16:42.624 --> 16:44.634
talk too, need to think about?

16:44.629 --> 16:44.769
Yeah.

16:44.767 --> 16:45.537
Student:  Insurance.

16:45.538 --> 16:46.978
Sharon Oster:
Okay, insurance companies.

16:46.980 --> 16:49.630
So it turns out,
one of the curiosities about

16:49.634 --> 16:51.844
healthcare,
and it's the one that's

16:51.837 --> 16:55.617
bedeviling the Obama team now in
terms of figuring things out,

16:55.620 --> 16:59.860
is we have this breakage of the
link between people who make

16:59.857 --> 17:03.807
decisions about things and the
people who pay for it.

17:03.808 --> 17:07.248
In this situation,
the patients have some stake in

17:07.247 --> 17:11.517
the procedure,
the doctors have a lot to say,

17:11.518 --> 17:15.108
but the poor insurance
companies,

17:15.108 --> 17:19.578
and/or the government are
actually doing a lot of the

17:19.575 --> 17:20.945
paying for it.

17:20.950 --> 17:24.670
Needless to say in that kind of
arrangement, eventually the

17:24.665 --> 17:28.505
insurance company starts having
an opinion too and making its

17:28.509 --> 17:29.599
opinion felt.

17:29.598 --> 17:33.528
If you are in the business of
medical devices or pharma,

17:33.529 --> 17:35.899
in any way at all,
you're going to be thinking a

17:35.895 --> 17:38.565
little bit about how is the
insurance company going to

17:38.565 --> 17:40.525
reimburse for this kind of a
thing?

17:40.529 --> 17:43.089
Is there anybody else that has
an opinion about this?

17:43.089 --> 17:44.219
Yeah.

17:44.220 --> 17:45.230
Student:  Hospitals.

17:45.230 --> 17:45.880
Sharon Oster: Hospitals.

17:45.880 --> 17:47.540
Why do the hospitals care?

17:47.538 --> 17:51.058
Student:  I mean,
just from the insurance

17:51.057 --> 17:55.617
standpoint, and whether or not
they want these technologies to

17:55.624 --> 17:57.874
be used at their hospital.

17:57.869 --> 17:59.899
Sharon Oster:  So--good.

17:59.900 --> 18:03.770
So hospitals actually turn out
to have an interesting set of

18:03.765 --> 18:06.185
issues about this particular
thing.

18:06.190 --> 18:11.150
Hospitals, to the extent that
they are reimbursed by

18:11.153 --> 18:14.753
insurance,
and that's going to be true for

18:14.749 --> 18:17.979
most of the patients in this
environment,

18:17.980 --> 18:22.880
are reimbursed on what's known
as a capitated basis,

18:22.880 --> 18:25.670
which means an insurance
company says to you,

18:25.670 --> 18:28.430
"If you're treating
somebody who has a particular

18:28.432 --> 18:31.042
heart problem,
I'm going to give you a fixed

18:31.041 --> 18:32.291
amount for it."

18:32.288 --> 18:35.218
That's quite a difference from
the way we used to--

18:35.220 --> 18:37.890
insurance used to pay,
which was, "You treated

18:37.888 --> 18:39.718
somebody,
let me see what your bills are,

18:39.717 --> 18:40.787
I'm going to pay you."

18:40.788 --> 18:44.938
In an attempt to get some kind
of efficiency they actually went

18:44.943 --> 18:47.563
to a system,
sometimes called DRGs,

18:47.556 --> 18:50.636
in which they said,
"For an average,

18:50.644 --> 18:54.204
more or less healthy guy who
has this problem,

18:54.200 --> 18:56.670
I'm going to pay you X to treat
him."

18:56.670 --> 19:01.300
If I'm going to pay--if that's
the way I have my hospital

19:01.304 --> 19:05.194
reimbursement happen,
how does the hospital feel

19:05.193 --> 19:07.763
about my particular device?

19:07.759 --> 19:10.639
What do you think?

19:10.640 --> 19:12.900
Student:  Not great,
probably.

19:12.900 --> 19:15.250
Sharon Oster:
Okay, so one thing it

19:15.250 --> 19:18.830
doesn't like is its just costing
them money, so it's kind of just

19:18.834 --> 19:20.294
taking it off the top.

19:20.288 --> 19:25.438
Might there be anything about
it they would like?

19:25.440 --> 19:26.640
Yeah, in the back.

19:26.640 --> 19:29.130
Student:  The device
improves patient recovery time

19:29.126 --> 19:31.176
and reduces mortality,
because that's one of the

19:31.178 --> 19:32.878
things I wanted to try to
quantify.

19:32.880 --> 19:34.730
Sharon Oster:
Yeah, and there could be

19:34.727 --> 19:37.147
other people who care about the
mortality in particular,

19:37.150 --> 19:40.800
but the first thing you said
was about recovery time.

19:40.798 --> 19:42.988
Why might the hospital be
especially interested in that?

19:42.990 --> 19:43.540
Yeah.

19:43.538 --> 19:48.638
Student:  Well because I
know for most of the time it--

19:48.640 --> 19:50.900
the procedure is capitated for
payment,

19:50.900 --> 19:53.280
and a lot of times recovery
time is also going to fall under

19:53.282 --> 19:54.952
that payment,
and the longer you recover

19:54.949 --> 19:56.909
you're not going to get any more
money for that,

19:56.910 --> 19:58.950
so if you have quicker
recoveries you're

19:58.953 --> 20:00.373
>

20:00.368 --> 20:02.058
Sharon Oster:
So it's actually going to

20:02.059 --> 20:04.189
vary for different hospitals
depending on the contract that

20:04.191 --> 20:05.111
they're going to get.

20:05.108 --> 20:08.608
So for some hospitals I just
give you a fee,

20:08.608 --> 20:11.858
and that would mean if I
get--if this procedure gets you

20:11.855 --> 20:14.095
out of your bed and to home
faster,

20:14.098 --> 20:16.858
that's a benefit for the
hospital because they basically

20:16.861 --> 20:18.821
only have to keep you in three
days,

20:18.819 --> 20:21.159
not seven, I save some money.

20:21.160 --> 20:24.910
On the other hand,
what does this device do to the

20:24.914 --> 20:29.134
amount of time I need to use as
an operating surgeon?

20:29.130 --> 20:30.660
Student:
>

20:30.660 --> 20:32.230
Sharon Oster:
Probably increases it.

20:32.230 --> 20:35.420
And from the point of view of
hospitals, most hospitals are

20:35.416 --> 20:38.436
more constrained in operating
room time than they are in

20:38.440 --> 20:39.650
hospital bed time.

20:39.650 --> 20:42.780
Again, it's going to depend a
little bit on the hospital how

20:42.784 --> 20:45.694
they feel about this,
and a little bit on how much

20:45.686 --> 20:48.356
we've pushed down in terms of
the insurance,

20:48.358 --> 20:51.148
but the hospital is definitely
going to have some kind of say.

20:51.150 --> 20:56.180
Now notice something about
these groups,

20:56.180 --> 21:00.580
they all have opinions,
they all have a role to play in

21:00.577 --> 21:05.137
the kind of decision that's
going to affect my ability to

21:05.140 --> 21:08.480
compete in these parts of the
market.

21:08.480 --> 21:13.180
Do they all have the same kinds
of preferences?

21:13.180 --> 21:14.640
Guy in the orange.

21:14.640 --> 21:18.500
Student:
>

21:18.500 --> 21:20.530
Sharon Oster:
Talk to me a little bit

21:20.531 --> 21:24.771
about how each of these players,
or a couple of these players,

21:24.766 --> 21:29.546
might feel about the idea of
introducing this kit that

21:29.548 --> 21:33.428
enables people to operate on
your heart.

21:33.430 --> 21:35.690
Student:  I mean it's
going to have a different

21:35.688 --> 21:37.348
response from each one of the
buyers.

21:37.348 --> 21:39.228
Potentially,
doctors can make more money off

21:39.227 --> 21:41.437
of it,
it's just if it's less

21:41.436 --> 21:44.656
technologically inclined for
example,

21:44.660 --> 21:46.810
so I mean their previous
systems could have made them a

21:46.805 --> 21:48.895
lot more money,
whereas patients could actually

21:48.904 --> 21:51.054
benefit if this system actually
lowered costs,

21:51.048 --> 21:53.918
so each one of the buyers is
going to have different

21:53.916 --> 21:55.376
responses towards costs.

21:55.380 --> 21:56.730
Sharon Oster:
Okay that's a little

21:56.727 --> 21:56.987
vague.

21:56.990 --> 21:58.390
Let's sharpen it up.

21:58.390 --> 22:03.470
You can sharpen it up for us.

22:03.470 --> 22:05.370
It's not wrong,
it's just a little vague.

22:05.368 --> 22:08.558
Student:  Okay so like
sharpening things up.

22:08.558 --> 22:10.488
In terms of the patient and
consumer,

22:10.490 --> 22:14.500
I think what he was trying to
say, was that with these new

22:14.503 --> 22:18.593
technologies it'll require
greater training that the doctor

22:18.587 --> 22:22.177
may or may not be able to afford
or go through.

22:22.180 --> 22:25.930
But it might also benefit a
patient because the technology

22:25.928 --> 22:29.148
would be less invasive,
or something like that.

22:29.150 --> 22:32.580
But there's a higher risk
involved because there weren't

22:32.578 --> 22:35.788
as many testing's that--
as were mentioned before,

22:35.790 --> 22:39.040
so that could offset the
patient preference of going

22:39.038 --> 22:42.538
under the knife of something
that isn't that tested.

22:42.539 --> 22:42.919
Sharon Oster:  Good.

22:42.920 --> 22:44.500
Okay, so a couple of issues
here.

22:44.500 --> 22:47.700
One is there's certainly a
question about the doctor

22:47.696 --> 22:49.726
training,
and one of the things that's

22:49.730 --> 22:52.200
going to keep me awake as an
entrepreneur is thinking a

22:52.202 --> 22:54.082
little bit about the doctor
training,

22:54.078 --> 22:56.338
which we are going to get to in
a couple of minutes.

22:56.338 --> 23:00.188
Certainly the doctors are going
to be right away at me and

23:00.192 --> 23:01.942
saying,
"Okay, how am I going to

23:01.943 --> 23:03.393
get to learn that kind of
thing?"

23:03.390 --> 23:06.430
You can already begin to see
it's not going to be the kind of

23:06.432 --> 23:09.122
thing I'm going to have a course
that I charge for.

23:09.118 --> 23:12.078
It is going to be--I'm going to
have to figure out some way to

23:12.077 --> 23:15.087
incentivize these guys to come
to my particular class and learn

23:15.085 --> 23:17.555
something about it,
and we'll talk about what that

23:17.555 --> 23:17.725
is.

23:17.730 --> 23:21.430
The other thing I heard you say
was something about risk.

23:21.430 --> 23:26.170
Let's think about the risk
issues for the surgeon versus

23:26.174 --> 23:30.234
the patient and how they weight
those things.

23:30.230 --> 23:35.310
Now in theory if we're doing
surgery, what's the medical

23:35.310 --> 23:38.730
benefit of this particular
product?

23:38.730 --> 23:43.110
The guy in the red in the back.

23:43.108 --> 23:45.378
Student:  I think it
reduces the mortality rate of

23:45.375 --> 23:45.815
patients.

23:45.818 --> 23:47.368
Sharon Oster:
Okay so one thing it may

23:47.371 --> 23:49.431
do is reduce mortality rate,
although it's a little bit

23:49.433 --> 23:52.023
tricky in the beginning,
because we don't know how good

23:52.020 --> 23:53.560
the doctors are going to be.

23:53.558 --> 23:57.218
The initial real kind of
consumer sale piece of this,

23:57.221 --> 24:00.391
was less on the mortality and
more on what?

24:00.390 --> 24:01.400
Yeah.

24:01.400 --> 24:04.510
Student:  The recovery
rate is whatever they can get

24:04.513 --> 24:06.343
out of >

24:06.338 --> 24:08.348
Sharon Oster:
Okay so some of it is I

24:08.354 --> 24:09.824
can reduce your recovery rate.

24:09.818 --> 24:13.158
If we think about that,
does the doctor care a lot

24:13.159 --> 24:15.749
about how fast you get back to
work?

24:15.750 --> 24:18.010
Student:  No,
that's the--well I mean--yes I

24:18.005 --> 24:19.715
guess that's when it's your
patient.

24:19.720 --> 24:21.900
Sharon Oster:
Okay, so one of the things

24:21.903 --> 24:24.283
we might think about,
the recovery angle is that the

24:24.275 --> 24:26.595
patient is going to care more
than the doctor.

24:26.598 --> 24:30.428
So that's going to be an
element, recovery time,

24:30.426 --> 24:35.476
in which we've got an asymmetry
in terms of how much the people

24:35.476 --> 24:37.346
value these things.

24:37.349 --> 24:39.119
What's another element?

24:39.119 --> 24:39.789
Yeah.

24:39.789 --> 24:41.809
Student:  The trauma.

24:41.808 --> 24:42.658
Sharon Oster:
The trauma.

24:42.660 --> 24:45.360
Student:  The sudden
neurological complications that

24:45.361 --> 24:46.481
develop after surgery.

24:46.480 --> 24:48.960
Sharon Oster:
Yeah, so another thing

24:48.960 --> 24:52.360
about this surgery is you have
to be on a heart-lung machine

24:52.363 --> 24:54.793
and that actually has
neurological problems

24:54.785 --> 24:56.915
potentially associated with it.

24:56.920 --> 25:00.600
So we've got something that's
actually potentially going to

25:00.595 --> 25:03.315
reduce some of our neurological
problems.

25:03.318 --> 25:06.948
It turns out for various
studies people have done who

25:06.949 --> 25:10.439
study doctors and medical care
kinds of things,

25:10.440 --> 25:15.120
if you thought about the
tradeoff to a patient and asked

25:15.117 --> 25:19.197
the question,
"How much incremental risk

25:19.196 --> 25:24.626
of death would you be willing to
face to avoid the kind of very

25:24.632 --> 25:27.352
serious neurological damage?

25:27.348 --> 25:31.028
The answer to that question is
very different for patients then

25:31.030 --> 25:32.160
it is to doctors.

25:32.160 --> 25:37.110
From the doctors point of view
the danger of having someone die

25:37.114 --> 25:41.674
on the table is enormous
relative to any other problem.

25:41.670 --> 25:44.920
From the patients point of view
there are times in which they

25:44.915 --> 25:49.005
are willing to tradeoff and say,
"There are some conditions

25:49.007 --> 25:52.417
that I could have that,
frankly, I would just as soon

25:52.415 --> 25:54.105
take a chance of dying."

25:54.108 --> 25:57.658
That's been actually a very
complicated set of issues for

25:57.661 --> 26:00.891
doctor/patient relationships
across a whole range of

26:00.894 --> 26:03.944
different operative and surgical
procedures.

26:03.940 --> 26:07.630
It says to me in this
situation, where we are talking

26:07.625 --> 26:10.455
about heart recovery kinds of
issues,

26:10.460 --> 26:13.430
those tradeoffs are going to
become potentially very large.

26:13.430 --> 26:17.780
When we have a risk of death
that's going to be larger for

26:17.780 --> 26:22.230
the doctor,
and the risk of damage is going

26:22.228 --> 26:28.548
to be conversely more important
from the patient's point of

26:28.548 --> 26:29.418
view.

26:29.420 --> 26:34.540
Now let's think a little bit
about these different players

26:34.544 --> 26:38.504
and look at these two parts of
the market.

26:38.500 --> 26:41.770
Because we started this by
saying that these guys did a

26:41.770 --> 26:45.350
whole bunch of technological
things to try to move into this

26:45.345 --> 26:49.125
part of the market,
as opposed to staying in this

26:49.133 --> 26:51.873
rather larger part of the
market.

26:51.868 --> 26:55.718
As we think about these being
the deciders among the things,

26:55.722 --> 26:59.252
why is it technologically
imperative to get out of this

26:59.250 --> 27:01.340
market and into this market?

27:01.339 --> 27:02.169
Yeah.

27:02.170 --> 27:08.370
Student:  Cardiologists
would be the ones who refer you

27:08.366 --> 27:10.726
to surgery,
and if they are the ones who

27:10.726 --> 27:12.816
perform the procedure,
they then benefit being able to

27:12.816 --> 27:14.266
perform the procedure
themselves,

27:14.269 --> 27:17.509
so they have a quasi-monopoly
over the market in some sense.

27:17.509 --> 27:19.549
Sharon Oster:
So some people call this

27:19.545 --> 27:21.215
the "gatekeeper
problem."

27:21.220 --> 27:25.470
It turns out in this particular
market I've got a gatekeeper

27:25.468 --> 27:27.978
problem,
which is my big competition,

27:27.983 --> 27:31.133
are the ones that are going to
basically handle this

27:31.125 --> 27:33.765
themselves,
and their tendency to then say,

27:33.767 --> 27:36.077
"You know,
you've got two vessels,

27:36.075 --> 27:39.095
I could deal with it,
but I think you'd be better off

27:39.103 --> 27:42.273
going here now that we have a
kit," is going to be much

27:42.269 --> 27:42.859
reduced.

27:42.858 --> 27:49.098
So I've got a problem that my
competitor is a gatekeeper for

27:49.101 --> 27:49.631
me.

27:49.630 --> 27:54.600
There's another problem also in
this--attacking this part of the

27:54.598 --> 27:55.308
market.

27:55.308 --> 28:00.138
Let's think about it from the
point of view of the patient.

28:00.140 --> 28:05.730
How does the patient,
who has just one or two vessels

28:05.728 --> 28:10.348
damaged, feel about these two
procedures?

28:10.349 --> 28:13.419
Yeah.

28:13.420 --> 28:17.520
Student:  Angioplasty is
already quite non-intrusive,

28:17.517 --> 28:21.547
so there isn't a huge benefit
gained by trying to--the new,

28:21.545 --> 28:23.415
rather untested method.

28:23.420 --> 28:25.910
Sharon Oster:
If you think about what

28:25.906 --> 28:28.616
this is--
I actually did some work for

28:28.616 --> 28:33.086
Boston Scientific in this market
as an economist and they--

28:33.088 --> 28:36.488
even though I was only an
economist they actually wanted

28:36.486 --> 28:39.636
me to watch one of these
procedures for reasons that

28:39.635 --> 28:41.175
completely escape me.

28:41.180 --> 28:45.480
If you watch one of these
things it's--the patient is

28:45.484 --> 28:47.394
awake the whole time.

28:47.390 --> 28:49.420
There is--basically what they
do is,

28:49.420 --> 28:52.040
there's a little blockage in
one of your arteries,

28:52.038 --> 28:55.018
they put a thing that looks
sort of this,

28:55.019 --> 28:57.829
but a little smaller up your
leg, they weave it up until it

28:57.830 --> 29:00.450
gets to the right part in which
there's a blockage,

29:00.450 --> 29:02.910
they have a balloon at the end
of it,

29:02.910 --> 29:05.000
they have a little machine that
blows up the balloon,

29:05.000 --> 29:07.720
the balloon just presses
against the wall of the artery,

29:07.720 --> 29:11.490
all the junk that was clogging
it up goes whish and kind of

29:11.492 --> 29:15.572
floats away,
we hope to wherever nirvana is,

29:15.574 --> 29:19.784
and then they take it out and
off you go.

29:19.778 --> 29:23.648
It's very non-invasive,
that's very appealing to the

29:23.653 --> 29:28.213
consumer, I've got a gatekeeper
here who's a cardiologist.

29:28.210 --> 29:32.390
What would the insurance
company rather have me do?

29:32.390 --> 29:34.540
Oh, this is way cheaper.

29:34.538 --> 29:38.268
These angioplasty things are
way cheaper than anything in the

29:38.272 --> 29:39.022
CABG side.

29:39.019 --> 29:41.749
So anyone that's an insurer is
going to be thinking,

29:41.750 --> 29:45.340
"You've only got one or
two vessels,

29:45.338 --> 29:50.918
go this way rather than trying
to do a less problematic version

29:50.920 --> 29:52.360
of this."

29:52.358 --> 29:57.948
From the point of view of
solving the needs of these

29:57.954 --> 30:03.664
people, I can't stay in this
part of the business.

30:03.660 --> 30:07.980
I don't have enough value add
to offer in that part of the

30:07.984 --> 30:08.824
business.

30:08.818 --> 30:11.988
I have got to go to the only
part of the business in which I

30:11.992 --> 30:14.632
have potential value add,
which is this part of it,

30:14.625 --> 30:17.445
and for that it says to me,
"Even though I'm going to

30:17.452 --> 30:20.042
give up something in
functionality I'm going to need

30:20.044 --> 30:23.194
to give that up in order to make
myself more attractive in that

30:23.193 --> 30:24.823
part of the business."

30:24.818 --> 30:28.568
Because from the point of view
of everything--pretty much

30:28.570 --> 30:32.590
everything these guys care
about, this thing is dominated.

30:32.588 --> 30:38.978
Now--we'll come to the little
more on the competition in a

30:38.980 --> 30:39.990
minute.

30:39.990 --> 30:44.380
Let me backtrack slightly from
that aggressive comment I just

30:44.384 --> 30:46.474
made,
because there is one problem,

30:46.465 --> 30:48.475
for those of you that read
carefully,

30:48.480 --> 30:53.200
there is one problem that the
angioplasty has that would be

30:53.202 --> 30:58.012
improved by me actually trying
to do this in a less invasive

30:58.008 --> 30:58.658
way.

30:58.660 --> 30:59.620
Yeah.

30:59.618 --> 31:02.848
Student:  Well one of
the problems is that the plaque

31:02.845 --> 31:06.175
often returns because the vessel
is trying to heal itself,

31:06.180 --> 31:08.410
and it can be a bigger problem
and you don't have to do the

31:08.413 --> 31:09.073
procedure then.

31:09.068 --> 31:10.098
Sharon Oster:
Great.

31:10.097 --> 31:12.037
So an issue that we have from
the point of view--

31:12.038 --> 31:15.668
an issue that this competitor
has is something medically,

31:15.670 --> 31:19.810
it's called restenosis,
so that I could have this done,

31:19.808 --> 31:22.398
but I have to do it many times
and then you could think,

31:22.400 --> 31:24.460
now what the patient is
thinking is,

31:24.460 --> 31:27.630
"Do I want to have this
with the kit done once,

31:27.630 --> 31:31.070
or do I want to have this done
every other year,

31:31.068 --> 31:34.338
which sounds a little less
appealing than it sounded a

31:34.338 --> 31:37.858
minute ago when I thought we
could just do it once and for

31:37.855 --> 31:38.715
all."

31:38.720 --> 31:42.620
Initially you might think,
"Well it looks like there

31:42.618 --> 31:46.518
is some advantage I could build
on in my discussions with

31:46.519 --> 31:49.889
patients and doctors,
and frankly even insurers and

31:49.893 --> 31:52.353
hospitals,
that would make me an

31:52.351 --> 31:55.631
attractive alternative to
this."

31:55.630 --> 31:59.550
But if I was thinking in a
Schumpeterian way and going to

31:59.548 --> 32:04.268
build my business around that,
what else would I want to be

32:04.268 --> 32:07.878
thinking about in terms of that
strategy?

32:07.880 --> 32:10.860
So a strategy that says,
"Okay,

32:10.858 --> 32:15.098
I'm looking at what these guys
are like now and I'm thinking

32:15.099 --> 32:17.759
about how I look relative to
them,

32:17.759 --> 32:20.589
and there is something they
don't do very well,

32:20.588 --> 32:24.158
and I'm going to just kind of
hammer in on what they don't do

32:24.164 --> 32:24.944
well."

32:24.940 --> 32:28.210
What's the potential worry that
I might have about that?

32:28.210 --> 32:32.080
Yeah.

32:32.078 --> 32:33.288
Student:  Well,
I think it's just the

32:33.288 --> 32:34.468
gatekeeper problem that you were
saying.

32:34.470 --> 32:38.520
All the people that do that not
that well are the people that

32:38.521 --> 32:42.311
are going to recommend your
patients to the surgeons that

32:42.305 --> 32:45.475
you are ultimately selling your
product to.

32:45.480 --> 32:46.420
So it's really not going to
work out very well.

32:46.420 --> 32:48.150
Sharon Oster:
Okay good,

32:48.153 --> 32:49.163
so keep the mic.

32:49.160 --> 32:53.470
So that tells me if I were
going to go that way,

32:53.472 --> 32:56.412
what would I need to be doing?

32:56.410 --> 33:00.940
Student:  You have to
expand so that interventionist

33:00.940 --> 33:03.830
cardiologists can use the
product,

33:03.828 --> 33:06.718
or eliminate the gatekeeper
problem in some way,

33:06.720 --> 33:07.170
I guess.

33:07.170 --> 33:08.680
Sharon Oster:
Okay, so I've got to

33:08.678 --> 33:10.148
figure out a way to get over the
gate.

33:10.150 --> 33:15.080
What's a way to get over the
gate?

33:15.079 --> 33:16.919
Student:  I have no idea.

33:16.920 --> 33:19.780
Student:  Talking to
patients so that--you can target

33:19.781 --> 33:22.111
the patients so that demand it
from their doctor,

33:22.111 --> 33:23.471
from their cardiologist.

33:23.470 --> 33:24.190
Sharon Oster:
Good.

33:24.192 --> 33:25.922
So we could think a little bit
about what's been happening--

33:25.920 --> 33:27.790
those of you that watch
television,

33:27.788 --> 33:31.488
probably none of you
anymore--one of the things we've

33:31.490 --> 33:35.830
seen in the healthcare area is
much more direct advertising to

33:35.834 --> 33:36.764
patients.

33:36.759 --> 33:39.299
Even for things that you would
think your doctor--

33:39.298 --> 33:42.308
these are things your doctor is
going to prescribe for you or

33:42.306 --> 33:44.156
make you do in one way or
another,

33:44.160 --> 33:48.530
there is an attempt in a lot of
areas to avoid the gatekeeper by

33:48.529 --> 33:50.679
going direct to the patients.

33:50.680 --> 33:55.070
How easy is that to do in this
market as opposed to a market

33:55.071 --> 33:56.711
like allergy relief?

33:56.710 --> 34:00.460
Okay, if there's--there are
markets now for Claritin or one

34:00.459 --> 34:02.979
of these drugs that is
prescription,

34:02.980 --> 34:05.490
so the only way you can get it
is to go to your doctor,

34:05.490 --> 34:08.670
but the line is,
"Go to your doctor and ask

34:08.670 --> 34:11.650
them to prescribe this drug for
you."

34:11.650 --> 34:14.300
Is it going to be easy for me
to have on television something

34:14.304 --> 34:16.334
that says,
"Go to your doctor and

34:16.327 --> 34:18.577
tell them you don't want an
angioplasty,

34:18.579 --> 34:23.359
you want your CABG done with
the beating heart kit?"

34:23.360 --> 34:24.470
So why are you all laughing?

34:24.469 --> 34:27.469
What's ridiculous about this?

34:27.469 --> 34:29.119
Student:  It's
information asymmetry.

34:29.119 --> 34:30.569
Sharon Oster:
Okay, so (a) it's

34:30.568 --> 34:32.628
complicated, information
asymmetry is exactly right.

34:32.630 --> 34:34.700
You could think,
"Okay, I could go to my

34:34.699 --> 34:36.959
doctor with that,
but what the hell do I know?

34:36.960 --> 34:39.200
I mean, really,
I'm not going to trust my own

34:39.199 --> 34:41.849
view of this even if the
television told me so,"

34:41.846 --> 34:44.636
but there's actually another
just sort of business issue

34:44.644 --> 34:46.654
which is,
there, in some sense,

34:46.646 --> 34:49.806
aren't enough people watching
TV for whom that message is

34:49.811 --> 34:50.491
relevant.

34:50.489 --> 34:54.509
Even if I could really focus in
on TV and do it I'm going to

34:54.510 --> 34:56.760
be--it's going to be a problem.

34:56.760 --> 35:00.630
There are some possibilities
maybe on the way.

35:00.630 --> 35:04.440
You could imagine a set of web
advertisements that when you're

35:04.443 --> 35:08.013
clicking on something that says
what do I do about a heart

35:08.009 --> 35:08.759
problem?

35:08.760 --> 35:11.680
It clicks up to me,
"Talk to your doctor about

35:11.675 --> 35:13.655
the beating Heartport kit."

35:13.659 --> 35:17.159
So there are some technological
things directed at marketing

35:17.155 --> 35:20.525
that actually allow us in
various markets to get away from

35:20.532 --> 35:22.312
gatekeepers and go direct.

35:22.309 --> 35:26.359
There's actually another
problem with building a lot on

35:26.360 --> 35:27.560
this strategy.

35:27.559 --> 35:31.939
As I think about building a
strategy to attack an existing

35:31.940 --> 35:34.860
player, any of you have game
theory?

35:34.860 --> 35:38.110
Any of you ever take game
theory?

35:38.110 --> 35:41.750
Did--any of you economics
majors?

35:41.750 --> 35:44.520
Okay, good I'm picking on you
because you should know this as

35:44.521 --> 35:45.261
an econ major.

35:45.260 --> 35:49.880
If you're thinking about
positioning yourself against an

35:49.878 --> 35:53.188
existing competitor,
I'm looking at what this guy is

35:53.186 --> 35:55.966
doing now,
what else should I be looking

35:55.969 --> 35:56.279
at?

35:56.280 --> 35:58.840
Student:  How he's going
to react to my reaction.

35:58.840 --> 35:59.620
Sharon Oster:  Exactly.

35:59.619 --> 36:02.849
I need to be thinking this
guy--what is he going to be

36:02.847 --> 36:06.257
doing, sitting around,
kind of reaping in the profits?

36:06.260 --> 36:11.030
He's going to be thinking about
here you came with this new

36:11.032 --> 36:16.052
business, and you're attacking
me--by virtue of my restenosis,

36:16.050 --> 36:18.190
what am I going to do?

36:18.190 --> 36:21.820
Now I want to think a little
bit about, if I'm the designer

36:21.815 --> 36:24.435
of this thing,
is who are these players?

36:24.440 --> 36:28.320
Anyone have any sense of who
the guys are doing the

36:28.317 --> 36:31.727
angioplasty business,
producing these balloon

36:31.728 --> 36:33.588
catheters and so on?

36:33.590 --> 36:36.280
Well they're big companies,
companies like some of you may

36:36.284 --> 36:39.104
want to work for some day;
Boston Scientific,

36:39.097 --> 36:41.907
Medtronic, Johnson &
Johnson.

36:41.909 --> 36:44.749
What's true about these big
companies?

36:44.750 --> 36:48.890
They spend a lot of money on
R&D because they make a lot

36:48.887 --> 36:49.657
of money.

36:49.659 --> 36:52.979
They have broad product lines,
they have big cash flows,

36:52.978 --> 36:55.028
and they spend a lot on
R&D.

36:55.030 --> 36:58.080
You, some little pip squeak
making Heartport,

36:58.079 --> 37:03.099
are going to rack your whole
business on the idea that you

37:03.097 --> 37:05.507
don't--
you can attack these guys by

37:05.507 --> 37:08.377
saying they're going to have--
you're going back to the

37:08.382 --> 37:10.382
hospital a lot,
you can be sure they know

37:10.375 --> 37:13.065
that's an issue for their
company and they're throwing a

37:13.070 --> 37:14.150
lot of money at it.

37:14.150 --> 37:17.400
In fact, what we see in this
business is actually we get,

37:17.400 --> 37:20.900
very shortly after this
position, a new drug eluding

37:20.902 --> 37:23.722
stint that allows for less
restenosis,

37:23.719 --> 37:27.199
that they have spent many,
many, many millions of dollars

37:27.199 --> 37:27.509
on.

37:27.510 --> 37:31.980
I think it is very dangerous to
stick with the two vessel thing

37:31.983 --> 37:35.883
because you know these guys (a)
in the first place,

37:35.880 --> 37:38.460
you don't have the value
proposition for consumers,

37:38.460 --> 37:41.780
and (b) you've got very strong
competitors who have a lot of

37:41.779 --> 37:44.929
money to throw at a particular
problem that they have.

37:44.929 --> 37:47.619
Just a couple more things we
want to think about.

37:47.619 --> 37:51.319
The training issues;
if I'm actually going to make

37:51.315 --> 37:55.485
this work in this business I
have got what economists would

37:55.487 --> 37:58.077
call a complement--
with an "e",

37:58.079 --> 38:01.519
not an "i."

38:01.518 --> 38:05.738
I've got to somehow--this kit
doesn't do it itself,

38:05.742 --> 38:09.122
this kit is used by doctors,
surgeons;

38:09.119 --> 38:11.809
so I've got to figure out a way
to train those guys.

38:11.809 --> 38:15.839
In the case they talk about
some of the ways they try to

38:15.838 --> 38:17.228
train these guys.

38:17.230 --> 38:19.920
One is they offer them trips to
Hawaii.

38:19.920 --> 38:24.330
What's the problem with the
trips to Hawaii to learn?

38:24.329 --> 38:27.449
Student:  A lot of the
doctors are coming there just to

38:27.452 --> 38:30.322
look at the actual product not
to learn how to use it.

38:30.320 --> 38:32.660
It's like they've heard about
it, they're interested just to

38:32.664 --> 38:34.664
learn more about it,
not actually apply it,

38:34.655 --> 38:37.635
and it turned out that I think
actually only two people stayed

38:37.641 --> 38:40.581
for the surgery on the pig to
see what actually happened.

38:40.579 --> 38:42.139
Sharon Oster:
Good, and since you're an

38:42.139 --> 38:43.969
econ major we'll test you a
little more on the econ.

38:43.969 --> 38:47.509
There's a problem in economics
known as the selection problem,

38:47.510 --> 38:50.470
so how does the selection
problem play into this?

38:50.469 --> 38:53.109
What kind of doctors go to
Hawaii?

38:53.110 --> 38:55.440
Student:  What kind of
doctors go to Hawaii?

38:55.440 --> 38:56.960
Doctors that like beaches.

38:56.960 --> 38:59.570
Sharon Oster:
Okay, they like beaches,

38:59.572 --> 39:02.882
and when they go to Hawaii I'm
paying for their transport,

39:02.880 --> 39:04.680
but what am I not covering?

39:04.679 --> 39:06.289
What's the magic word--there
are only three magic--

39:06.289 --> 39:07.179
Student: Opportunity
costs.

39:07.179 --> 39:08.379
Sharon Oster:
Oh, thank you,

39:08.384 --> 39:09.214
that's the magic word.

39:09.210 --> 39:11.980
Student:  So I guess it
would, if we follow that logic,

39:11.978 --> 39:14.788
it's doctors that go to Hawaii
instead of being paid heftily by

39:14.793 --> 39:15.433
hospitals.

39:15.429 --> 39:16.429
Sharon Oster:
You bet,

39:16.429 --> 39:18.739
so a strategy that says,
"Come to Hawaii,"

39:18.737 --> 39:21.897
attracts a bunch of doctors who
aren't doing many surgeries,

39:21.900 --> 39:24.230
because they've got plenty of
time to come to Hawaii.

39:24.230 --> 39:27.010
The people that I want to
attract are the people that are

39:27.005 --> 39:29.775
doing a lot of surgeries because
they are an annuity,

39:29.780 --> 39:32.060
a word for those of you that
are interested in finance.

39:32.059 --> 39:34.149
Once I teach them,
every year they do more

39:34.146 --> 39:37.046
surgeries, every year I don't
have to keep reteaching them

39:37.048 --> 39:38.728
every year they do something.

39:38.730 --> 39:40.970
Moreover, I want the guys who
are in teaching hospitals like

39:40.974 --> 39:43.414
Yale because they're going to
teach all the guys behind them,

39:43.409 --> 39:45.949
and I want them to be big
users, and that's why most of

39:45.952 --> 39:48.782
the training for these kind of
things actually happens in the

39:48.777 --> 39:49.387
hospital.

39:49.389 --> 39:51.609
It doesn't happen in Hawaii.

39:51.610 --> 39:53.690
Hawaii sounds great to somebody
who doesn't know anything about

39:53.693 --> 39:54.033
doctors.

39:54.030 --> 39:56.660
What you want to do is you want
to go where they are,

39:56.657 --> 39:59.437
train them where they are,
where there's low opportunity

39:59.436 --> 40:01.606
cost of learning as a way to
capturing.

40:01.610 --> 40:07.020
Still it's going to be a tricky
piece to try to do it.

40:07.018 --> 40:12.688
We have a situation in which it
looks like a good idea;

40:12.690 --> 40:17.400
we've got big hurdles to go
over in terms of actually having

40:17.396 --> 40:19.946
a value add that's meaningful.

40:19.949 --> 40:23.619
Suppose I could,
suppose I did have something

40:23.621 --> 40:28.151
that I convinced--
I got enough dotors to know how

40:28.146 --> 40:30.466
to do it,
I got enough stories to

40:30.469 --> 40:33.319
consumers and others that I got
around intervention

40:33.315 --> 40:35.575
cardiologists--
there's a lot of ifs about

40:35.581 --> 40:38.161
this--and I'm getting some
penetration of this thing.

40:38.159 --> 40:42.689
Now what am I worried about?

40:42.690 --> 40:43.520
Yeah.

40:43.518 --> 40:44.838
Student:  Is insurance
going to cover it.

40:44.840 --> 40:46.040
Sharon Oster:
Okay I could worry

40:46.039 --> 40:47.269
about--is insurance going to
cover it?

40:47.268 --> 40:50.118
But suppose I got that,
I've managed to convince those

40:50.115 --> 40:53.445
insurance companies that this is
going to get people out of the

40:53.445 --> 40:56.475
hospital faster;
this is going to be a good deal.

40:56.480 --> 40:59.140
Here I am just starting to make
money.

40:59.139 --> 41:03.879
What do we know when you're
just starting to make money?

41:03.880 --> 41:05.590
What happens to you?

41:05.590 --> 41:09.380
What kind of a science is
economics?

41:09.380 --> 41:13.510
The dismal science;
why is it the dismal science?

41:13.510 --> 41:16.750
Because the minute you start
making money what happens?

41:16.750 --> 41:17.400
Student:  People enter
the market.

41:17.400 --> 41:18.700
Sharon Oster:
People enter the market.

41:18.699 --> 41:21.639
That's the glory of why prices
come down.

41:21.639 --> 41:26.029
In this situation what kind of
a product do we have?

41:26.030 --> 41:30.510
We have a little platform for a
beating heart.

41:30.510 --> 41:35.320
When we convince the doctors to
adapt it,

41:35.320 --> 41:38.900
we want it to have something
that was going to look pretty

41:38.898 --> 41:40.788
generic,
because I wanted to give

41:40.789 --> 41:43.199
doctors some sense of,
"You can learn how to make

41:43.197 --> 41:45.267
this,
and I'm not going to hold you

41:45.268 --> 41:46.568
up eventually."

41:46.570 --> 41:51.190
The easier it is to copy,
however, the more problem I

41:51.186 --> 41:53.136
have from new entry.

41:53.139 --> 41:57.789
Even if I can crack this
problem by attracting the right

41:57.793 --> 42:00.123
buyers,
solving the complimentary

42:00.119 --> 42:03.379
problem, changing myself
technologically to hit the only

42:03.376 --> 42:06.866
part of the market in which I
have a chance to compete,

42:06.869 --> 42:10.189
I'm going to have a problem
that I'm going to have the risk

42:10.193 --> 42:11.573
of new guys coming in.

42:11.570 --> 42:16.580
The more attractive I make this
from a generic point of view in

42:16.583 --> 42:20.883
the beginning of my market,
the more problem I'm going to

42:20.882 --> 42:24.052
have protecting it in a later
part of my market.

42:24.050 --> 42:27.710
That, in some sense,
is really the Schumpeterian

42:27.713 --> 42:32.473
story that says to me the nature
of an innovation is coming in

42:32.471 --> 42:36.921
against existing players with
something you hope will be a

42:36.916 --> 42:38.316
better idea.

42:38.320 --> 42:42.230
Then worrying in the end about
other people who are going to

42:42.233 --> 42:44.963
imitate you,
until finally there are enough

42:44.963 --> 42:48.553
of them until another newcomer
comes in with another disruptive

42:48.545 --> 42:51.835
innovation that looks better
than what you had before.

42:51.840 --> 43:00.890
I have to actually go teach my
MBAs and so your last five

43:00.889 --> 43:08.809
minutes Mr. Rae is going to
complete for you.

43:08.809 --> 43:16.289
Prof: As you can see
she's done that before.

43:16.289 --> 43:25.019
Now the question the syllabus
poses for you is concerned with

43:25.016 --> 43:31.716
social learning,
with whether the market and

43:31.722 --> 43:39.752
companies like this one are
instruments by which society

43:39.751 --> 43:46.031
learns through both success and
failure.

43:46.030 --> 43:51.160
Does anybody see a learning
component to this?

43:51.159 --> 43:54.159
Let's get a mic for somebody.

43:54.159 --> 43:59.379
Let's go to purple shirt right
here.

43:59.380 --> 44:02.210
What's the learning process
here?

44:02.210 --> 44:04.470
Student:  Do you mean
the learning process for the

44:04.467 --> 44:05.837
players in this particular case?

44:05.840 --> 44:09.650
Prof: Well I mean
something more abstract and

44:09.648 --> 44:10.318
bigger.

44:10.320 --> 44:15.880
Is society smarter in any
important way toward the end of

44:15.880 --> 44:20.050
this story than it was at the
beginning?

44:20.050 --> 44:22.590
Student:  I suppose
it--I suppose it depends on

44:22.585 --> 44:24.925
whether the new product ends up
being adapted,

44:24.929 --> 44:28.149
because if it--I mean if it
ends up being sort of accepted,

44:28.150 --> 44:30.630
because then in which case
we've had a technological

44:30.630 --> 44:32.870
innovation that will maybe save
some lives,

44:32.869 --> 44:36.039
reduce some recovery time,
but if the product never enters

44:36.041 --> 44:39.501
the market--
I mean, I guess if there's this

44:39.500 --> 44:42.460
pressure to innovate,
even if it doesn't enter the

44:42.458 --> 44:44.328
market,
maybe the angioplasty guys will

44:44.327 --> 44:47.287
be out there trying to compete
even though it's not really a

44:47.293 --> 44:48.303
major competitor.

44:48.300 --> 44:51.750
Prof: Okay so in actual
fact there's a learning story

44:51.753 --> 44:55.153
with a yes answer and a learning
story with a no answer.

44:55.150 --> 44:59.130
The learning story with the yes
answer is very obvious.

44:59.130 --> 45:03.710
The learning answer with the
failure story is partly that we

45:03.713 --> 45:07.603
know one bad idea so we don't
have to repeat it.

45:07.599 --> 45:10.669
In addition,
it's part of a larger

45:10.666 --> 45:16.056
incentivation process which
compels everyone to be thinking

45:16.059 --> 45:22.009
about the next step beyond what
they already know how to do.

45:22.010 --> 45:28.050
In the case for Monday,
which is its URL is posted on

45:28.045 --> 45:32.195
class as V2;
we have the Polaroid Land

45:32.204 --> 45:35.454
camera, invented by Edwin Land.

45:35.449 --> 45:45.399
It is a less bloody story that
is a little like the one we just

45:45.396 --> 45:46.356
did.

45:46.360 --> 45:52.290
The difference is that it is
closer to the mass consumer and

45:52.289 --> 45:57.819
is in that way a more typical
Schumpeter story about how

45:57.815 --> 46:03.945
innovation in consumer products
disturbs an old equilibrium in

46:03.945 --> 46:09.875
conventional photography and
then becomes a defender against

46:09.875 --> 46:17.005
a new disruptive technology with
the emergence of digitization.

46:17.010 --> 46:18.190
We'll see you on Monday.

46:18.190 --> 46:23.000