Accessing Resources For

Growth From External

Sources: Alliances and Partnerships

Lois S Peters BIET Spring 2010

Alliances and Partnerships

Opening up opportunities

For exploring, exploiting and

developing information and

knowledge

Why not do it yourself?

Pressure for Change

• Downsizing

• Diversity – Innovation at the interfaces

• Enabling Technologies

• Internationalization of Technologies,

Organizations & Markets

• Changing Science/Technology System:

increasing requirement for cooperative efforts

Why Partnerships?

• Funding support

• Cost sharing

• Access to scarce resources

• Access to technology

• Access to science and engineering knowledge or experts

• Establishment of standards

• Market learning

• Proving the value of a new technology

• To generate “customer pull”

• Building a supply chain or business infrastructure

• Acquire the technology needed to develop a specific product

• Risk reduction/sharing

• Shorten innovation cycle

• Legitimizing the project

• User-supplier needs

• Strategic needs

• External factors

Motivation for Partnering a Short

List

• Information exchange

• Complementary resources

• Economies of scale

• International expansion

• Connecting to a national innovation system

Partnership Categories

Partnership Created

TechnologyMarketing

Manufacturing

Know-how

R&D Know-

how

Business

Model

Development

Customer

Access

The Scope of Partnering

• Variety of partners : other firms, universities, federal labs: access to expertise

• Variety of configurations: informal/formal

joint venture/ technology exchange, supplier/buyer, vertical/horizontal

• Variety of function: marketing, manufacturing, technology development

• Variety of objectives: tech development, commercialization, financial, logistics, competitive/pre-competitive

• Variety of impacts: adoption, rebirth, procreation, family ties

Broad Categories of Technical

Alliances

• Private Sector alliances

• University-Industry alliances

• Public Private Alliances

– Industrial technology transfer

– Industrial technical cooperation (e.g. Sematec)

– Government to Government Agreements

– Government-Industry-University Agreements

• International Alliances

CATEGORIES OF PRIVATE SECTOR TECHNICAL ALLIANCES: A

WORKING FRAMEWORK

• PHYSICAL EXPANSION

• - FACILITY EXPANSION/MODERNIZATION

• - SUBSIDIARY

• INVESTMENT

• - ACQUISITION

• - EQUITY INVESTMENT

• INTERFIRM AGREEMENTS

• - CO PRODUCTION

• - JOINT VENTURES

• - LICENSES/PATENTS

• - LICENSES/KNOWHOW

• - LICENSING/MARKETING

• - DISTRIBUTION/MARKETING/SALES AGREEMENTS

• - FRANCHISING

• - TECHNOLOGY EXCHANGE

• - PERSONNEL EXCHANGE

• - INFORMAL TECHNOLOGY EXCHANGE

• - INFORMAL PERSONNEL EXCHANGE

• INTRAFIRM AGREEMENTS

• - TECHNOLOGY TRANSFER

• - PERSONNEL EXCHANGE

• - INFORMAL TECHNOLOGY EXCHANGE

• - INFORMAL PERSONNEL EXCHANGE

Licensing & Licensor

Advantages Income

New uses of technology

No capital/No staff

Avoiding legal problems

Expands opportunities

Equity improvement

R&D improvement

Market improvement

Preparation for other markets

Disadvantageo Limit ability of licensor to work with

competitors of licensee

o Limit profit possibilities

o Lack of direct control or participation

o Extra costs

o Improper performances

o Lack of understanding of the

coverage of the agreement

o Improper competition

o Increased exposure to product liability

over which there is inadequate control

or legal defense

o Unforeseen problems: insufficient

testing, insufficient market experience

Licensing & Licensee

Advantages Additional rights

Assistance

Expanded marketing potential

Expanded profits

Disadvantageo Limit ability of licensee to work

with competitors of licensor

o Licensor may give inadequate

service of training

o Licensor may not perform

required services in a timely

manner.

o Lack of understanding of the

coverage of the agreement

o Improper competition

o Unforeseen problems: insufficient

testing, insufficient market

experience

Franchising & Franchisee

Advantages Reduced Risk

Product Acceptance

Mgmt. Expertise

Buying Power

Market Knowledge

Financial Advice

Controls

Disadvantageo High Start-up Costs

o Franchisor Unable To Perform

o Franchisor Failure Or Sale

Franchising & Franchisor

Advantages Quick Expansion & Little Capital

Large Operation Yet Few HQ

Employees

Economies Of Scale

Large Advertising Budget

Disadvantageso Difficult To Find Quality

Franchisees

o Single Franchisee Failure

Reflects On Entire System

o Expansion Creates Loss Of

Control

Joint Ventures

• Types

– Operational

– Nonoperational

• Success

– Assessment &

Management

– Symmetry

– Realistic Expectations

– Timing

Acquisitions

Advantages Established Business

Location

Established Marketing Structure

Cost

Existing Employees

Opportunity For Creativity

Disadvantageso Marginal Success Record

o Overconfidence

o Key Employee Loss

o Over Valued

Merger

A. Motivation

1. Survival

2. Protection

3. Diversification

4. Gain

B. Leveraged Buyout

1. Reasonable Price

2. Debt Capacity

3. Appropriate Financial Package

Structure Joint

Venture

Limited

Partnership

R&D

Partnership

Licensing Mergers/

Acquisitions

Regulatory Uniform Partnership

Act (priv. co.'s) /SEC

(pub. co.'s)

Uniform Partnership &

Uniform Ltd. Part.

Acts/SEC (pub. co.'s)

Uniform Partnership &

Uniform Ltd. Part.

Acts/SEC (pub. co.'s)

SEC (pub. co.'s) Dept.

Commerce (offshore

partner)

SEC (pub. co.'s), state

agencies

Price 20% or less equity

giveup

10 to 20% of amount

raised

25%-45% annual

royalties

$15,000-$100,000

(domestic co.'s)

Up to $200,000 for

legal/acctng.

Time Up to 1 year Up to 1 year 8 months to 1 year 6 months 6 months

Upside Cheap money, fast

growth, bigger market

flexibility

Limited filing, investors

take loss, cheap money

No monetary loss to

small co., less dilution,

tax-driven expenses

Flexible, cheap money,

expanded markets, fast

growth

Cheap growth, taxes

deferred, flexibility

Risks Finding partner,

different goals, offshore

costs, antitrust issue

Late profits, IRS

effects, low risk strategy

Needs 50% gross

margin, hard to go

public

Patent protection,

vague terms, need

IRS problems, stubborn

stockholders, vague

terms

Exits Buyout, merger,

permanent partnership

ROI in 3 to 8 years

from profits

IPO, buyout, merger,

royalty income

Buyout, merger,

partnership

Liquidation, sale

Strategic Alliance Structures

Formal Informal

Equity

Investment

Unwritten

Collaboration

Marketing

Agreements

Joint

Ventures

Types of Strategic Alliances by

Formality

Comparison of the Characteristics of Knowledge Generation & Exchange in

Different Settings

• University

• Multinational Firm

• Federal Laboratories

• Research Institutes

• Independent Research Laboratories

• Research Consortia

• The "High Tech" Entrepreneurial Firm

UniversitiesAnd Partnering

CHARACTERISTICS OF U.S.

UNIVERSITY-INDUSTRY TIES

• Industry support of university research in the U.S. remains a small part of academic R&D expenditures - about 7%

• Interactions go much beyond just direct funding

• Most industry funding goes to professional schools, --over 60% sixty percent to engineering and computer science departments, around 15% to medical schools and 5% to agricultural schools

• For the most part it is Fortune 500 or Large Multinational Companies companies that interact on a significant scale and on a continuing basis

• Over the last twenty years the tempo and variety of interactions has increased

• On a global basis the US except perhaps for Switzerland has the most active cooperation between universities and companies.

Motivations for Research Relations

Industrial

• Access to manpower

• Access to Technology

• Problem solving or

information gathering

• Prestige

University

• Diversity funding sources

• Expose students to

practical research

• Obtain specially

designated government

funds

• Employment for graduates

Key Types of Current

Interactions

• Consulting

• Research grants and contracts

• Centers

• Corporate Partnerships

• Technology Offices

• Incubators

• Research Parks

• Spin off Firms

Universities And Partnering

So What is the Role of the University in

Industrial Innovation?????

Small High Tech FirmsAnd Partnering

What external resources do small "high tech" entrepreneurial firms seek as

they prepare to enter and develop their markets?

• Information and skills– Contacts and ideas on on how to exploit the new venture's technology

– Information on comparative technology

– Foreign technology to meet a market need in the firms home base

– Technical resources to futher develop the firms technolgy

– Complementary technologies to complete a product concept

• Vehicles for market development– Channels for distribution and market development

– Ties to foreign markets

• Facilities– Computer facilties

– Libraries

– Laboratories

– Production capabilities

– Warehouse space

• Capital– Money to further develop a product concept

– Money to further develop a new technology

– Venture capital to explore the market possibles of a new technology

The small new "high tech" venture and alliances

• Proscribe the geographic market or vertical industry in which the partner can sell the product.

• Focus: Does the agreement involve making, using and selling, research and development, just selling or some other combination of activities. Try to hold onto the right to produce and to sell the product to the licensee for additional cash flow.

• Be Specific: To the extent that the agreement involves new technology carefully outline for what types of products and or processes the partner has the right to use the technology and for what fee.

• Set exact minimum annual royalties.

• Set a precise time period for the term of the agreement such as three to five years.

• Type: In the case of licensing determine if this will be an exclusive or non exclusive license.

• Information: Demand and receive a right to audit the licensee's books and records to make sure the royalties paid to you are accurate.

• Payment: Demand an up-front payment equal to one-half of the licensee's estimated first-year royalty payments to the new venture. This may help avoid future disputes.

• Set precise minimum sales targets on which royalties are based, and have the licensee agree to pay the entrepreneurial company the minimum each year ( at some other time period). whether the licensee actually makes the sales or not.

• Exiy/Evolution:: You may want to include a trigger sales point for setting up a joint venture or more comprehensive agreement.

• Default: Clearly delineate events of default. Set these out in writing, and take back the license if the licensee defaults.

• Carefully consider add-ons which you may be able to charge for especially if they restrict your freedom to deal with others. Examples are giving a right of first refusal to the licensee on any and all new or related products or requirements for sharing related R&D data.

Large Firms e.g. MNC’sAnd Partnering

The Corporate View on investment in small new

"high tech" ventures

• Keep an eye out for new technologies that may

affect current or future business

• Watch the development of new markets based on

new technologies

• Be kept informed about new high growth

companies

• Keep an eye out for potential new acquisitions that

are financially and technologically strong

Why corporations Make Venture Capital Investments

or tie up with Small Firms

• To incubate and reduce the cost of acquisition

• Exposure to possible new markets

• To add new products to existing distribution channels

• To participate in a less expensive form of research and development

• To expose middle management to entrepreneurship

• Training for junior management

• Utilize excess plant space, time and people

• To mesh the activities of several departments

• To generate capital gains

• Develop antennae for new technologies

• Income generation

• Provide an outlet for senior management

• Public relations

• Follow the competition

• To keep excellent employees

• To encourage company formation in the community

Radical InnovationAnd Partnering

Who are Suitable Partners for RI?

Technical Source RI

Idea Generation

0

2

4

6

8

10

12

14

Busines

s Uni

t

Corpo

rate

R&D

Busines

s Uni

t R&D

Division

R&D

Unive

rsitie

s

Suppliers

New V

entu

re w

/ R&D

Form

al S

.A.

Corpo

rate

Ven

ture

or N

PD

Labs

of o

ther

Dom

estic

Firm

s

Small H

T Co

Fore

ign

Labs

of F

irm

Subside

s

Labs

of L

arge

FF

Inde

pend

ent R

Lab

Oth

er G

over

nmen

t Lab

Fede

ral L

ab

Corpo

rate

Finan

ce

Oth

er

Fre

quency M

entio

ned

The Importance of Various Types of

Partners over the RI Life Cycle

TECHNOLOGY SOURCE

Average Importance of Organizational Type

Corporate

R&D

Business Unit

R&D

Small High-

Tech Co.

Formal

Strategic

Alliances

Univer-

sities

Idea

Generation 3.8* (13)** 3.8 (9) 2.2 (6) 2.3 (6) 3.3 (7)

Business

Opportunity

Definition 3.2 (13) 3.9 (8) 2.2 (5) 2.8 (5) 2.1 (7)

Early

Development 3.7 (14) 3.1 (9) 2.8 (6) 3.8 (6) 2.6 (7)

Later

Development 3.4 (12) 4.2 (7) 2.2 (5) 3.6 (5) 1.4 (5)

Rump Up/

Commercial-

ization 2.6 (11) 4.0 (4) 2.0 (5) 2.8 (4) 1.3 (4)

* - 1 = of little importance, 5 = extremely important

** - (number of respondents indicating this unit was involved)

The Radical Innovation Process: Building

Legitimacy and Finding a Home

University Contribution ?

Company Perspectives on the University’s Role in RI

• Universities provide the foundation for idea generation

• Universities can be the spark in idea generation

• Universities are used to explore options.

• Universities are used for technology assessment and

evaluation

• Universities have valuable resources that can be

brought to bear on industry problems but they need to

be guided to help companies effectively focus on

industry problems

• Universities Provide Access to Knowledge Networks

Alliance Strategies: A Knowledge

Management Perspective

• Learning ( knowledge acquisition)

• Demonstrating and proving technology value

(knowledge verification)

• Gaining credibility (knowledge demonstration)

• Building infrastructure (contingent knowledge)

• Providing technology to enable development of a

product ( knowledge creation)

The Practice of Partnering

Functions Performed by Alliances

• Provide backup producers for a firm’s critical products

• Spreading risks of system development and market

penetration

• Aiding in reaching common agreements for specifications

and standards for a product, an important tool for

marketing

• Lowering development costs

• Facilitating marketing strategies by providing for lasting

long-term relationships with important customers or with

dissimilar companies servicing the same use (market)

Finding Partners

• Using prior contacts

• Attending industry association meetings

• Attending conferences

• Participating in short courses

• Participation in research consortia or university research centers with multiple company members

• Participating in collective industrial research

• Locating in technology parks or technology clusters

• Participation in standards setting or regulatory committees

• Getting government grants

• Using the library and information data bases

• Conducting industry analyses

Negotiating an Alliance

• Integrating Technology and Strategy

• Searching for Partners

• Determine the Objectives and Type of Relationship

• Building Trust

• Disposition of Intellectual Property Rights

• Writing the Agreement

• Carrying Out and Monitoring the Agreement

Resource Negotiation

• Tasks

– Distribution

– Integration

• Reservation Price- Bargaining Zone

• Assessments

– No Agreement

– Issues- Importance?

Negotiation Strategies

1) Build Trust/Share Information

2) Ask Questions

3) Multiple Offers

4) Mutually Beneficial Trade-Offs

Closing the Deal

• Determine your unique selling point and market it

• Collect data on your potential strategic partners

• Find the gatekeepers and go around them

• Find a champion for your idea

• Leverage others to help close

• Control the conversation and ask direct questions about the potential deale.g. are you looking for this kind of technology at this time?

what is your overall budget for this king of deal?

have your ever done this kind of deal before?

what are your constraints?

will your R&D department be interested in working on this technology

do you have decision making responsibility in this area?

what kind of information do you need to take about this deal to your superiors or committee?

when and where will you present this deal?

can I or a representative of my company attend this presentation?

do you want to meet other member of my team?

• Use third party endorsement and facilitators

Evaluation

• What were the outcomes and their value?

• How did the outcomes match the original objectives of the alliance?

• What learning occurred?

• What was the return on investment?

The Evolution of Partnerships: learning and the

dynamics of knowledge management

• Dissolution

– Learning there is no opportunity

• Refocus technology and or markets

• Building trust

• Team building

– “Yeah, I think things have changed. I think we’ve become much more of

a joint developer together of the technology. “

• Changed objectives and knowledge requirements

• New funding opportunities

Why Strategic Alliances Fail

• Lack of Material/Concrete Objectives

• Change of complementary Needs

• Lack of commitment

• Poor relationship

• Lack of Shared Risks

• Cultural Differences

• Poor Communication

• Sometimes they are initiated out of laziness or

lack of internal strategy

Major challenges to the successful

implementation of strategic alliances

• Overcoming reluctance to give up autonomy

• Achieving operating momentum

• Dealing with the need to maintain focus on the

external environment

• Avoiding unnecessary politicking

• Maintaining organizational energy to continue

cooperation over time

• Increasing one’s willingness to learn

• Keeping particular individual from becoming

bottlenecks in the strategic alliance

Key skills required

• Ability to build trust

• Negotiation

• Communication

Your Turn: Think of Your Projects

• What type of alliances might be appropriate

• What would be their objectives? Functions?

• How would you go about finding a partner?

• What criteria would you put in place for evaluating

the outcome?

Concluding Points

• There are multiple dimensions, perspectives and functions of

partnering and they change over time

• The form, technology and partners of alliances must be viewed in terms of the innovation process and goals

• Alliances can be an efficient mechanism to access a broad variety of knowledge resources, but you have to work hard at making them a “success” – requires more than technical or functional expertise

• The networks formed begin to blur the character of the firms and its operating limits

• Importance of Managing the Network: Individual technical alliances are self-reproducing. There is an expanding network of interactions

• From a strategic point of view you should determine whether it makes sense to negotiate a relational or transactional partnership

• National networks are expanded by international linkages. Corporate policies can confuse government policies

• The U.S. Policy system does not adequately address growing internationalization of innovation as reflected by growing technical and innovation networks.