Platt Perspective on Business and Technology

Innovators, innovation teams and the innovation process 9 – acquiring innovation from outside of the organization 3

Posted in HR and personnel, strategy and planning by Timothy Platt on June 19, 2013

This is my ninth installment in a series on innovators and the process of innovation (see HR and Personnel, postings 154 and following for Parts 1-8.)

I have written repeatedly about in-house sourced innovation, and about developing operational and strategic systems and a corporate culture that supports both the development of innovation potential, and its mainstreaming into production of marketable products and services. Much of the earlier half of this series up to here fits into that, as does, for example, the entire earlier series: Keeping Innovation Fresh (see Business Strategy and Operations – 2, postings 241 and loosely following for Parts 1-16.)

I began, at least in this series, discussing third party sourcing of innovation with Part 7 and Part 8 where I focused on innovation acquisitions from university-based and similar research facilities, and from startups and early stage companies respectively – and for Part8 with that including a discussion of innovation acquisition through complete business buy-out.

I turn here to consider outright controlling acquisition and licensing of specific sources of innovative value from larger, established businesses. And I begin this by clearing away some critically irrelevant distractions.

• An in-house developed source of innovative value can in fact represent that developing organization’s future, and be a strong and even essential asset for it developing its own strategic and operational next step forward. But sometimes a process or methodology or a product or service principle is developed and proved to be of value, but the leadership of this innovating business cannot find a convincingly business-effective way to incorporate it into their own systems and their own day-to-day operations or product and service offerings. Those innovations, to follow up on this scenario, might offer the appeal of potential value and they probably do. But they might only offer a value that falls so far outside of the scope of the core business and its defining markets, that it would not make sense to develop and exploit them there. IBM, as a case in point, continuously and actively develops new innovations and insights in-house and has a very active office and system in place for securing patent protection over the fruits of this invention development investment. And on several occasions this company has sold off huge numbers of patents that they hold, but that fall far enough outside of their core business and their defining sources of unique value as a business, so that it would not make sense to build into exploiting them in-house.
• Alternatively, businesses sometimes sell off marginally connected or even significant-to-them innovations and other resources in order to increase available liquidity and as a survival move. I have seen businesses do this when entering into and pursuing change management processes in an effort to become effective and even just viable again, long-term.
• And closely related to that, businesses that are reorganizing and moving in new directions and taking more disruptively innovative evolutionary steps forward can sometimes sell off old business model oriented assets, novel innovations held in-house included, that are now viewed as representing their past and not their future.
• I have only briefly noted three scenario possibilities here out of what could potentially be a much longer list. But this should be enough to indicate that a selling business can find itself selling and seeking to sell off, from its inventory of in-house developed innovation, for a wide variety of reasons – and so far I have mostly just considered outright sales as a simplest case.
• From the perspective of the acquiring business, the Why for this innovation going on the market may be important at the level of negotiating best terms of acquisition from the seller. But bottom line, the acquiring business should be driven in its decision making processes here, with its own systems and issues and needs in mind. And it should evaluate and determine fair valuation of this innovation as a possible acquisition strictly in terms of how it would fit into their own operational and strategic systems, and into their system of assessed priorities and needs.

They need to know what this innovation actually is for them, and what short and long-term value potential it holds for them. And continuing here with the perhaps cleaner and simpler case of outright acquisition from the seller, I note some of the issues that would enter into a prudent buyer’s analysis and internal discussions:

• Is this potential acquisition held by the seller as a trade secret, and if so how securely?
• Do they have a patent in place that covers it and if so how much longer will this patent protection last? Have they filed for patent protection and if so do they have patent pending protection coverage?
• In either case would this innovation acquisition mean gaining exclusive ownership and control over a broadly based source of value defining difference, or are there other and perhaps very similar competing alternatives in the marketplace that would dilute any value from acquiring this one?
• Here is a complex and potentially multi-part point, but is this an innovation that would be essentially impossible to cost-effectively replicate in-house and in such a way as to bypass any patent rights or other barriers, or is this something that could perhaps more cost-effectively be developed in-house instead? If the later, realistic assessments of the cost for doing so would set an upper limit as to the price that a prudent buyer would pay to third-party acquire this instead, where the full range of factors that would enter into determining in-house development costs would have to be taken into account here.
• And of course, underlying all of these considerations, assuming long enough term exclusivity of ownership and control of this innovation if acquired as a baseline point of analysis, what is the maximum point of defining value that this innovation could bring in, in rounding out and completing the unique value propositions that define the acquiring business as an effective participant in its marketplaces? If a potential acquisition is essential for maintaining current market position in the face of competitive pressures and change, or if this could significantly facilitate breaking into new blue ocean strategy opportunity, the value of this innovation to an acquiring business is going to be very different that would be the case if prudent business case analysis suggested that acquiring it could at best only offer marginal incremental value in a small-step evolution of the business.
• Most of this analysis would apply with equal force and importance for any innovation acquisitions and regardless of source. So I finish this list by noting that ultimately, any such decision should be made on the basis of how this acquisition would, or would not add value to the acquiring business.

I focused on outright acquisition of innovations and rights to them from the seller in this discussion, simply noting that licensing adds special complications to the acquisition process, and to the determination of value of acquisition for the buyer. I am going to more explicitly discuss licensing arrangements in my next series installment. Meanwhile, you can find this and related postings at HR and Personnel and also at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.

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