Situation: A company is facing the expiration of the principal patent for its main product. There are subsidiary patents which still have life. Currently, there are no competing products, but several companies understand the technology. How do you plan for patent expiration?
Advice from the CEOs:
Think of this as a two-step process:
Step 1 – Step back and look at what the company has:
Patents – including the claims that have been awarded on all company patents.
Facilities – capable of manufacturing current products, but also additional products, perhaps with a minimum of additional equipment.
People – competent staff running manufacturing operations, and tight office operations.
Step 2 – Loot at where the company could go and evaluate the markets where the existing technology is applicable:
Work with outside, imaginative people who can take a fresh look at the options.
Looks carefully at the claims in all the company’s patents.
What do they cover?
Is there an opportunity to extend current claims through process patents?
Caveat: a company can file for a process patent on anything that has been for sale on the market for less than a year. However, if they have been selling a product covered by this application for more than a year, they cannot.
Look at other markets – companies that could license the company’s technology, or with whom the company could partner to provide new consumer-oriented products:
Is there inexpensive, affordable equipment that would enable the company to produce additional products in the current location?
Think outside the box: what business is the company in? Think more broadly than the current market about where high value opportunities exist. These can be low to medium volume, high price/margin or high-volume lower price/margin.
Patents are not the only protection – trade secrets also work. 3M’s primary IP strategy, particularly on their adhesives, etc. is through trade secret – both for low and high-volume products.
“Product” patent extensions have limited utility. They are easy to design around. “Process” patents have more utility. These can be licensed at low cost per application in high volume applications and provide a nice royalty reserve stream.
Situation: The CEO of a company is wrestling with issues concerning change orders and high labor and materials cost. To get back into good financial shape, they are considering options including reduction in estimator time and selling equipment; however, either of these could gut the business. How do you manage through a difficult period?
Advice from the CEOs:
It is critical to get on top of change orders. This is potentially a big profit-loss swing for the business.
Does everyone understand what’s happening?
If the answer is yes, teach them more about the business nuts and bolts so that they can help develop solutions? Share a portion of the savings in the form of spot bonuses for those who develop solutions.
Take a lesson from The Great Game of Business. Let employees know about the challenges and challenge them to help develop solutions.
As an example, look at change orders and the percent of change orders that are not correctly completed, approved and invoiced as a critical number. Let’s say that 50% of change orders are not completed, approved and/or invoiced correctly. The objective for the year is to reduce this to 25%. Calculate the value of lost billings from the past year. If this can be reduced by half, the value will be $X. If the company can meet this objective, consider making half of $X available for distribution as gifts or prizes.
To support this, allow each new project to design its own minigame to reduce the number of incomplete and uninvoiced change orders.
The idea is to have the project and inside teams design the minigames and come up with ways to reduce incomplete and uninvoiced change orders. They will learn new ways of being more efficient from this process. This is the long-term benefit to the company.
If it is necessary to reduce staff, cut early instead of later. This is painful but laid-off employees can be hired back on a contract basis as necessary.
A common solution during a difficult period is to cut back to core, reducing overhead as a survival strategy, and focus on winning as may bids as possible to rebuild the business.
Look at all departments and the gross margin that each produces minus the overhead that each requires. Focus cutbacks on those that are not positive.
Increase annuity contracts – contracts with major companies that are growing and frequently require the company’s services.
Transfer equipment to a separate corporation. Lease it back as business requires. This increases cash flow flexibility – for example, don’t make lease payments when cash is tight.
Situation: A small company sells consumables as its primary source of revenue and profit, and produces equipment associated with these consumables. Their challenge is that designing and producing equipment is beyond their financial capacity. They have a small, loyal staff engaged in equipment production. This is a critical trade-off that must be resolved. Where should the company focus – people or cash?
Advice from the CEOs:
This product/profit combination is common. HP sells printers and ink, as well as other products, but ink cartridges have long been their primary source of corporate profit. The question is how to produce the associated equipment at the lowest cost?
Given the shortage of financial resources, why not asks a company with expertise in equipment to build the equipment on a contract basis?
Offer the outsource company the designs and expertise to support the project. That company may even hire your employees who have developed expertise in this area.
In return for providing design and guidance, ask the contract company for a percentage of the revenue or profit on equipment that they sell. This relieves you of the payroll and cash obligations for the equipment, and provides you with a modest income stream from equipment sales.
There is an obvious question of how the small company retains its intellectual property position. Is it possible to look at critical sub-assemblies and retain the expertise within the smaller company to complete and install some of these?
If so, this will boost annual revenue. The contract partner completes all but the most critical pieces, and the small company finishes the product with its technology.
The small company, through its sales and marketing efforts, should maintain control of leads and sales of both equipment and consumables.
Situation: A company has developed and shipped equipment that puts it into a new market. They can continue to pursue this direction or make a significant shift that will open up a larger opportunity. What are the most important considerations to this decision?
Advice from the CEOs:
There are a number of points that you need to clarify before making this decision:
What is the magnitude of difference between the two opportunities?
How much of a shift in technology is required to make the jump to the larger segment?
How much of the expertise to make this shift do you have in-house, and how much must you bring in, acquire or develop through partnerships?
What is your most likely exit strategy and how will each opportunity impact it?
Are you being realistic in your ability to meet development timelines?
If you don’t have deep expertise in the area that you want to develop, the answer is most likely yes. If you do you can often beat your initial estimates.
If the shift includes both there is risk that you will underestimate the time required to develop both the prototype and to turn the prototype into production quality technology.
If your ultimate objective is to sell the company, be aware that selling any company can be tricky, and you may not be able to sell the company for the value that you need to support yourself after the sale.
Study other companies in your geography and market, and determine both the price that they received for their companies and how they positioned their companies for sale.
As an alternative to selling, consider hiring a general manager to run the company. This can free you to concentrate on your passion and also increase the value of the company if you decide to sell at a future date.