Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 44: innovative business development and the tools that drive it 14

Posted in business and convergent technologies, macroeconomics by Timothy Platt on November 16, 2018

This is my 44th posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business, posting 173 and loosely following for Parts 1-5 and Macroeconomics and Business 2, posting 203 and loosely following for Parts 6-43.)

I have been discussing the costs and benefits of innovation in a business in this series, focusing in large part on individual innovation development scenarios, while noting in passing at least, the more realistic prospect of developing and maintaining ongoing innovation pipelines. And I began taking this narrative at least somewhat out of the abstract in Part 43, with a very specific, real world example: the potential for developing, marketing and selling a new outdoor paint with a novel polymer base that would at least potentially challenge all current market offerings in use.

• The polymer base and its chemistry was developed in a university research lab, with that innovation offered to market in a business-to-business context through their university innovation development office as set up to manage all patent and licensing agreements that would arise there.
• And at least one paint company has shown a significant level of interest in buying exclusive use rights to this patent pending protected innovation as it seeks to remain innovatively competitive in its business sector and industry.

My goal here is to at least begin to discuss the decision making processes that would be carried out by a business developing and offering such an innovation, and a business that would consider tapping into and benefiting from such an innovation. And more specifically, I plan on discussing how these two businesses and their decision making processes, impact upon and shape the decisions and actions of each other. For purposes of this posting, I will reframe my Part 43 example to consider innovation developing and providing businesses in general, and not just restrict myself to the particulars of university research labs and their school-to-business innovation offering offices.

I organize this line of discussion in terms of two separate businesses: one an innovator and the other a business that seeks to access and make use of innovative potential, and that is comfortable looking outside of its own walls for sources of that. Though I note here that when a single business has a more separately run and managed research and development facility within its overall system, as well as maintaining and running separate production facilities, the dynamics and the decision making processes that I will discuss here in this context, apply there too and with what can become a remarkable level of fidelity for the “us versus them” that can arise.

The primary focus in this series is on the innovation developing business, but for purposes of this discussion I will begin with the innovation acquiring one (or with the innovation acquiring facilities within a larger organization if you will, when negotiating with and working with an organizationally separate and distinct research and development facility in the same business, with its own management structure and ways and its own separately managed budget.) Think of that as offering a smooth continuation here from the narrative thread developed and offered in Part 43, where I ended that with a focus on the innovation acquiring business perspective too.

Why would I do this? Both of the businesses involved in this, have to meet their own needs and achieve their own costs and benefits financial management goals and their own risk management goals, while understanding and realistically accommodating the needs of the businesses that they might enter into these transactions with, if those agreements are to come to positive fruition. If they make unrealistic demands there, the transactions involved might fall through, or alternatively they might be completed but with money avoidably left on the table. So this is all about achieving a best possible trade-off resolution that both sides can accept and benefit from.

Note that I am writing here in terms of win-win solutions, as I presume that both enterprises that enter into such a transaction here will persist, and that both would see ongoing positive value for themselves in making further business deals and transactions possible too, moving forward.

I wrote of uncertainties in Part 43, and of both sides having to make their decisions in the face of limited, at least partly outdated and perhaps even error-prone data. So I explicitly repeat that point here when turning to consider the acquiring business side of these business-to-business dealings. Information availability and quality issues and communications limitations: business systems friction, can always be expected as a source of ongoing, if at least somewhat manageable friction in any business and in any business dealings. And with these opening, orienting notes offered here, I turn to consider the paint company of my Part 43 example, and its decision making processes.

• Let’s assume that a deal is reached with the innovation offering business, and this company does offer the buyer exclusive rights to this new polymer chemistry and to the specific products that it can lead to. If this polymer chemistry breakthrough is as disruptively novel an innovation as I have presented it to be, the acquiring business is going to have to set up a new facility for producing this paint base, and either from scratch or by retrofitting and rebuilding an already existing, but less cost-effectively productive facility that it already has in place, or that it can acquire for this purpose. Where and how would they do this, and at what costs? That question in fact hides a multitude of more specific and focused questions within it and the devil as they say, is in the details.
• If for example this business has an already existing production line that is manufacturing a different, older technology paint base that they might not be gaining any real profits from now, what parts of this older system would still be usable in this new context? What would have to be done to prepare these perhaps upgradable resources in place for this new task and at what costs and over what timelines? What would they have to develop and put in place from scratch and at what costs and along what timelines? And what of the employee training and learning curve issues that actually running this new production line would require? What would their new hire requirements be to make this work for them and cost-effectively and profitably? Timing is crucial in all of this, as an agreement to buy use of this innovation is going to mean accepting negative cash flow payments that would start the moment that this business signs its agreement with the innovation-sourcing business. But actually ramping up to produce these new paints, and marketing and initially selling them can be expected to take time, and even a significant measure of it.
• I have not raised the possibility yet, but should this paint company license use of this innovation in some way or should it make the perhaps larger up-front investment of purchasing it outright, and of their pursuing full patent protection for it themselves and at their added cost? I am at least attempting to restrict this narrative to big issue considerations and to a broad brushstroke view of the issues raised here, but even with that, I am only pursuing one of several or even may possible decision and action paths here.
• Returning to the decision and action flow that I have been focusing on here, simply establishing and preparing a pace to produce these new paints, and preparing in broad outline to staff this facility, is only one part of that larger picture. Setting up supply chain support for this new venture: producing and selling this new paint line, becomes essential and certainly for bringing in reliable sources of necessary raw materials, and on time and at sufficiently high quality and at acceptable cost.
• That adds another block of puzzle pieces to what is hopefully emerging as an at least relatively complete full cycle analysis of possible costs and risks points for actually carrying out this new paint initiative. But even here and with relevant production phase considerations added in, this still leaves some real gaps and ones that have to be included here too. I initially presented this scenario as one in which a research lab develops a new polymer base that can be used in creating and manufacturing an entirely new type of outdoor, weather resistant paint. So let’s assume that even the initial developers of this starting point polymer base for these paints, saw their innovation in those terms. And let’s assume that their in-house lab testing of their new chemical compound included stress resistance testing to determine at least something as to how well this new material stands up to environmental challenge. The innovation acquiring company is still going to have to do at least some new product testing too, in order to verify how this polymer base works when combined with its range of color-providing stains if nothing else. And they might very well have to carry out at least some environmental exposure tests too, to verify how well these new paints stand up to the stresses they would face when used by real world customers. This all takes time and costs money too.
• And once you know the potential and likely costs involved in pursuing this action, and at least something of the timeline that would be called for here, that would be compared against market analysis-based calculations of price point that this new paint could realistically be marketed and sold at.
• How big is the market for this new paint type likely to be, given available market analysis data, and how big a profit margin might be possible if that market can be effectively reached? And how long a delay would the producing company expect for that to happen, with more customers buying in on this than just their early adaptors when their overall market is parsed out according to an innovation acceptance curve?

These and other calculations collectively lead to this paint company’s determination of how cost-effective and how profitable it might be for them to enter this venture, and what they could realistically afford to spend, and over what timeframes for acquiring usage rights to this innovation in making that happen. I will have more to add to this innovation acquiring side to these transactions in what follows. But I will turn in my next installment to this series, to consider the innovation developer business and its costs and benefits calculations, where they only begin with recouping their research and development costs per se, that led to their marketable breakthrough in the first place. Then after completing that side to this at least potential business-to-business transaction, I will connect the dots between them, laying out how an awareness of the decision making on the other side of a negotiating table here, would influence how those negotiations would proceed for both sides, and what might be arrived at as a transaction agreement. And then after that, I will return again to consider innovation pipelines, this time pursuing a scenario in which innovation source and innovation user are separate organizational units within a single business.

Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation. And also see Ubiquitous Computing and Communications – everywhere all the time 3 and that directory’s Page 1 and Page 2.

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