Joint Venture

Sometimes it is apparent that opportunities arising from the results of R&D work, especially those related to new business ventures or from research of a more strategic nature cannot be exploited effectively by the company on its own. In these cases it may be that the innovation can be introduced to the market by jointly working with another partner. This is the joint venture route to exploitation. Having the right partner is of crucial importance, the wrong choice being the cause of most failures in joint ventures.

The reasons why a company could decide that in house exploitation is not the right route to follow typically include the following.

• High capital requirements

• Inadequate plant

• Outside the core competencies

• Lack of market knowledge

• Sales too small to justify development

There is often an overlap between one or more of the reasons and this is especially true of high capital requirements and inadequate plant.

As an example, a new product has arisen from research, which is exciting but is one that would require an investment of capital way beyond the means of the company. The capital required is for the construction of a suitable plant and also for the extra staff needed to develop the product to a state ready for launch into the market.

This example is quite common in smaller companies, especially those whose research is based on a specific technology, such as biotechnology or materials chemistry. If the decision taken by the company is to exploit the technology, rather than license, one way to obtain the necessary capital is to seek funding from a venture capital organisation. This gives the company the opportunity to grow but clearly with some loss of independence, as a stake in the equity is usually the price for the support. Another option is to find a company that is already operating in the area and to suggest joint exploitation of the new product. It is unlikely that a Research Manager in a medium to large company would initiate such contacts; this is normally done by Marketing or a New Business Manager. R&D will be expected to supply the necessary technical input to the negotiating team. In small companies the role of R&D is much more integral in the process.

In another example, a new catalyst has been discovered which is ideal for use in the catalytic hydrogenation of nitrohydrocarbons by a continuous process. It has an enormous potential for increasing the business of the company. Unfortunately, the current plant was designed to handle batch processes and is unsuitable for modification. The generation of capital to construct the plant is a problem for the company.

Seeking support from a venture capital company might once again be the answer. However, in this case there are alternatives worth consideration. It is possible to outsource, rather than joint venture, the manufacture to a company who already has a suitable plant, something that is also common in the early stages of new product development (see Section D). Alternatively a joint venture could be arranged with another company, where there is a sharing of the capital investment, in return for an equitable share of the profits from the products made in the plant by the new process technology.

An interesting combination occurs when exploitation is beyond the core competencies of the company and the sales of a particular product would be small. A theoretical example of such an occurrence in the electronic materials for displays area is illustrated below.

A major electronics company is carrying out research into multi colour pixels for light emitting diodes. R&D has discovered, during random screening, that the wavelength of the light that is emitted can be varied by doping the normal inorganic solid-state materials with an organic compound. Variations on the structures of the organic compounds, which produce this effect, are difficult for them to make, as knowledge of the synthetic methodology is outside their core skills. They find, by searching the literature that similar compounds are used in the protection of a variety of metals from corrosion and are sold for such outlets by a number of speciality chemical companies. They approach one such company to see if they will supply a range of both existing and new materials for test in this new outlet. The speciality chemical company discovers that, even if they are successful in providing materials that meet the target, the level at which the dopants are used would mean that the income from the sales of the chemicals could not justify spending the money on the research. The electronics company accepts this and an agreement is struck whereby the research costs of the speciality company will be covered up to the point when a decision is made on the development of a particular product. If the decision is to proceed then the chemical company will receive a percentage of the sales of the device instead of payment for the chemicals supplied. Joint research is then carried out, the necessary joint patents filed; the device is developed and successfully launched. Everybody is happy.

These different cases illustrate that the exploitation of the results of R&D work by forming joint ventures is a valuable way forward for a company. The joint venture and partnership mode of working is an increasingly attractive option for companies to follow especially since the globalisation of the markets and companies has increased.

The successful outcome from a joint venture in a technological development is not guaranteed but there are ways in which the path can be made smooth. A study of a range of technology partnerships or joint ventures has identified ten factors that appear to be critical to the success of such ventures [C-29, C-30]. Five of these apply during the setting up the relationship and the other five operate during the relationship. These are eminently sensible and simple rules and are ones that fit in with the experience of the author when working within such joint ventures.

Setting up the relationship

• Senior managers should define clearly the goals tied to each partner's business strategy.

• Each partner must understand the other's strengths and weaknesses.

• Before commencing the work all staff must be made aware of the value of the partnership to the company.

• Ownership of the intellectual property must be defined clearly.

• The legal agreement must contain fair and equitable exit clauses.

During the relationship

• The process must be continuously managed.

• The partnership is between people, good relationships are critical to its success and must be maintained.

• Loss of a key person can be traumatic, confidence in the relationship is needed to deal with this if it happens.

• Each partner needs to adapt to the other's operating style.

• Senior management must show commitment and involvement at key steps.

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