A business can profitably utilize several alternative approaches as follows:
- Initiate a new business to develop, manufacture and sell products.
- Acquire an existing company with the assets.
- Establish a Joint Venture.
- Forming a Strategic Alliance.
- Selling the IP to a third party.
These alternatives all have a risk and reward trade off. Lets do an overview of each alternative.
Initiate a New Business
The risks are the highest with initiating a new business but it also has the benefit of the highest potential returns. Both manufacturing of products, people, processes and infrastructure must be developed. There will be a considerable upfront cost in time and money. This is all before any business sales and revenues are generated. If successful, significant profits will follow and provide you with the total control of your venture.
Acquisition
Buying a existing business with revenues is less risk because much of the heavy lifting has been completed. The time to market will be much shorter with the existing infrastructure in place. This will require more of an upfront investment, decreasing the potential returns as well. The challenges will be combining a new corporate culture with an existing one. This can be volatile especially if a large established organization buys a smaller, more entrepreneurial company. The buyer will also acquire the undesired assets and potential liabilities as part of the acquisition.
Joint Venture
This is when two or more companies combine forces in a new company to achieve a common objective, sharing risks, rewards, and control of the operation. This has less risk than an acquisition strategy because the risk is mitigate with the combining of forces. The potential of success is also increased if the skills and resources are utilized in an effective manner. Joint Venture's also have their challenges because of differing goals and degrees of control of the partners and the returns are lower than the acquisition strategy because the profits will be divided among the owners.
Strategic Alliance
Two or more businesses can also form a strategic alliance, in which they will work together in a limited capacity in return for a profit share arrangement. They can be either in vertical (different) or horizontal (same) sector. In a vertical alliance business A might agree to market and distribute products developed by company B in return for a profit share. In a horizontal alliance two firms might take advantage of combined balance sheets to aggregate buying power to lower their cost of materials or combine specialized manufacturing skills to more efficiently and competitively penetrate a market. This tends to have lower risk than a Joint Venture because it is limited to the areas of mutual cooperation. This also has less profit potential than JV.
Licensing
Licensing lowers risk even more because there is less investment and fewer resources are needed to implement a licensing than to manufacture your products. Most of the risk is transferred to the licensee, who will be responsible for hiring personnel, developing, manufacturing, and distribution of licensed products. Different levels of risk are for example, large initial payments combined with low royalties or no royalties shift more risk to the licensee, while a low initial payment with a higher royalty is riskier for the licensor.
Sale
IP can be sold outright, which is the least risky approach, but because of the high risk assumed by the acquirer, it offers less reward as well.
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