Situation Analysis
MST is a small bio-defense company with an exceptional product that is patented in the U.S. They are looking for second round financing, a source of cash, in order to fulfill their goal of going public. At this time there is an unsolicited sales call from Japan, which would mean a great deal of money, but they do not know how to address it. This sale would mean probably hundreds, maybe even thousands of units, plus training. It is in MST’s knowledge that their product is one of a kind right now, but their competitors are working fiercely to come up with a similar item. Therefore, they need to make the deal quickly, before the Japanese buyer has other choices. Losing the market-leading position might lead the company into bankruptcy. However, there are several risks that must be considered while considering this deal. The most important one is that they might lose the technology due to either licensing or to reverse engineering, which will probably also mean the end of the company, because of its small size. It is common knowledge that American patents do not protect companies in Japan, so that is a considerable risk. It is also important to mention that such a sale would help them launch a second product to the market, solidifying their position. Given the situation, we should analyze what MST should do, close the sale, keep its market-leading position or protect its intellectual property?
Analysis of Alternatives
There are a number of alternatives available to solve this problem; we’re going to consider three of them. The first is for MST to export the product by itself (without mediators), and sell it to the Japanese. The second alternative might be to contract with a Japanese trading company, and finally, the third alternative is to license the technology to a Japanese manufacturer. All of these alternatives will be evaluated according to the intellectual property risk, reverse engineering risk, costs and implications on profit, MST’s competitive and market leading position, time-to-market, and the concerns and implications of export licensing.
The first alternative, for MST to export to the final consumer themselves, while it can seem to be a good one at the beginning for its obvious advantages, has a few disadvantages as well. The most obvious advantage this option has is that all of the profits from the sale will be translated in pure benefits to MST. However, due to the age and size of the company, getting an exporting license for a product such as this may prove to be difficult and time consuming. I assume that a bio-defense product might probably be a dual use product, adding to the difficulty of getting the exporting license. Another disadvantage that this choice may have is that since this is the first time MST has attempted to export anything, problems will arise, taking time to solve, meaning that the time to market will not be what they aim for. This is more important considering that the competition is already creating a similar product: if they take too long to export it, they might lose their market leader position. There are other less risks when considering loss of intellectual property and the product. The reverse engineering by the end user cannot be avoided, but if they buy lots of units, one can assume that they are not doing so just to reverse engineer them. The same happens with loss of intellectual property: there is no way for MST to guarantee that it won’t happen, but a big enough sale means that they intend to use it rather than try and produce a knock off. The main problem with Japan is that American patents do not apply over there, so it the scenario that someone patents the product there is possible. Although this is the choice with the highest benefits, it is also the one with the highest costs. Finally, some of them depend on the terms of sales and shipping, but no matter what they are, costs will surely be lower if they were using a trading company, or license the product.
The second alternative is to contract with a Japanese trading company. There are many ways of negotiating this, the option of changing trading companies if the targets are not met, specifying the number of units to be sold and the amount of time the license is granted for. There are little advantages of using a trading company. The main one is that the risk of losing intellectual property is minimized when they are used, because a copy of the product will hurt their reputation very badly, and might lead to future loss of business. When considering the protection of intellectual property, this is the best choice. Also, costs would be a lot lower if this choice were to be selected, mainly because the shipping would be to the U.S. instead of Japan. Another great advantage of using a trading company is that they have lots of experience in specific countries and products. This experience will facilitate obtaining the exporting license, and the negotiations with the Japanese as well. These companies do just these, so they have contacts in the Department of Commerce to help make the process quicker. The time to market, because of their experience and the technology they already have established there, is very important in this alternative. The speed with which a license could be obtained and the contracts drafted will get the product to the Japanese market faster than other way. The risk of reverse engineering is the same, there is no way that anyone can stop an end user of taking the product apart and trying to understand how it works. The fact that American patents do not apply could mean that someone could patent a similar product once MST’s product damages the Japanese market, as I have already said. The main disadvantage of using such a company is that they take part of the sales, meaning that the profits MST will see if they choose this alternative will not be as high as they could.
The final choice available is to license the product to a Japanese manufacturer. Royalties can be negotiated it this case, but that is all MST can do. In this special case, MST has an advantage being the only supplier of such an item. Because of this, their demand can be greater than if they had competitors. The main disadvantage of licensing is that profits will be greatly reduced, since the company who buys the license will do most of the work. On the other hand, costs will also be lowest: there is no manufacturing, shipping or anything, only the know-how and the plans. Of course, this means losing the intellectual property altogether, and considering that MST is the only one who produces it, that is a huge disadvantage. This does not mean that MST will lose its position as market leader today, but they definitely will when the license period ends. The exporting license will be easier to get, with the Japanese’s help, but not as easy as the previous option. Finally, the time to market depends on how much work the Japanese need to make to the plant before they can start producing, but it definitely will not be as bad as exporting by themselves.
Recommendation
Given an analysis of all the alternatives available, it is recommended to use the second one, because it addresses most of the needs of the strategic question in the best way, although it also has a few disadvantages as well. I have analyzed this alternative as the best because it takes a short period of time, helping MST to keep their position as market leader, as well as protecting its intellectual property due to the fact that trading companies have a reputation to maintain. Also, their experience in the field would be helpfull for MST, that is absolutely new in the business of exporting, both to close the sale and to obtain an exporting license that might prove to be difficult to get. The main disadvantage of this choice is that the amount of money obtained from the deal will not be as sizeable as they expected as far outweighed by all the risk that MST avoids by using a trading company. They must wait for longer before going public, to be sure of their possibilities.
