Nucleon

What should the long-term strategy be?

R&D boutique Vertically integrate into manufacturing R&D boutique with pilot manufacturing facility

Nucleon: Long-term Strategy

R&D Boutique - appropriate if:
n

Unique capabilities in R&D enable Nucleon to command a high royalty There is a need to protect intellectual property Technology does not require any idiosyncratic know-how to manufacture.

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Nucleon: Long-term Strategy

Vertically integrate into Manufacturing appropriate if:
n n n

process technology is idiosyncratic can more wisely select R&D projects patents provide only weak protection of intellectual property

Nucleon: Long-term Strategy

R&D Boutique with Pilot Manufacturing Capabilities appropriate if:
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can benefit by higher royalty rates due to waiting until later in process to bring in a licensee It is important to demonstrate manufacturability It enables a more accelerated transfer of technology from lab to plant It is important to keep intellectual property secret a longer time

n n

Nucleon: The best analyses will consider

n n n n n

Financial returns Impact on options for Phase III trials Technology transfer Required organizational changes Impact on longer-term capabilities of the enterprise

Whether, and how, to vertically integrate

A Spectrum of Governance Structures

Spot market exchange

Long-term contracts

Alliances

Joint Ventures

Corporate hierarchy

How should a firm choose among these alternatives? What factors bear upon the choice?

The Scope of Inter-firm Relationships

Contractual Agreements
Traditional Contracts Nontraditional Contracts No New Firm Minority Equity Investments Equity Swaps

Equity Arrangements
Creation of Entity Nonsubsidiary JV JVs Subsidiaries of MNCs Fifty-fifty Joint Ventures Unequal Equity Joint Ventures Dissolution of Entity Mergers and Acquisitions

Arms-length Joint Research Buy/Sell Contracts -- Franchising Joint Product Development Licensing Long-term Sourcing Agreements

Crosslicensing

Joint Manufacturing Joint Marketing Shared Distribution/ Service Standard Setting/ Research Consortia

Strategic Alliances

Based on: Yoshino and Rangan, 1995

Factor 1: Value of Flexibility

n

Can you place a value on the real options in the various alternatives? Which alternative involves the least commitment?

Financial commitment Ability to switch partners

Which alternative best preserves the ability to grow and expand?

PHASE I/II TRIAL P(Success)= 37.5%

PHASE III CLINICAL TRIAL P(Success)= 66.4% $3,087.0

Success

COMMERCIALIZE Launch Abandon $11,316.9 ($13,177.0)

Nucleon Proceed

66.4%

Launch Licensee ($1,760.4)

Success

$2,159.5 ($4,668.9)

($134.8)
Success

Abandon

66.4% Abandon ($4,668.9) Launch $13,452.3 ($11,041.56)

37.5% Nucleon Nucleon Proceed Contract $375.0

Success

$5,222.4
Success

Abandon

66.4% Launch $2,000.6 $4,294.9 ($2,533.5)

Licensee Abandon ($2,533.5)

Success

Abandon

37.5%

66.4%

Launch License Proceed $3,051.0

Success

$5,292.8 $2,307.7

$4,289.8
Success

Abandon

66.4%

37.5% Abandon $2,307.7

Factor 2: Interdependence of capabilities

n

Is it necessary to simultaneously excel at R&D and new manufacturing processes?*

It may accelerate time-to-market It may provide more rapid ramp-up It may enhance product functionality and customer acceptance It may extend proprietary position

* See Pisano , Gary P. and Wheelwright, Steven C. (1995). The new logic of high-tech R&D. Harvard Business Review, September-October, pp. 93-105.

Factor 3: Importance of alliance capability

n

Is it beneficial to develop or maintain an alliance capability?

How widely dispersed is technical knowledge in industry? If you think you can go it alone in todays global economy, you are highly mistaken (Jack Welch, former CEO of GE) Microsoft cant make it alone, but together anything is possible. (Bill Gates, Chairman of Microsoft) Our approach is to develop long term relationships with companies that offer a unique advantage with General Motors. The Alliance Strategy is our major thrust. (John F. Smith, Jr., Chairman & CE of General Motors)

Current perspectives:

Growth in Mergers & Acquisitions vs. Alliances

14,000 12,000

M&A

10,000

8,000

Alliances
6,000 4,000

2,000

0 1996 1997 1998 M&A Transactions 1999 JV/Alliances 2000

Strategic Alliances are More Important for Growth -Forbes Source: Thomas Financial, reported in Forbes, May 21, 2001, p. 27.

Factor 4: Holdup (i.e, transaction costs)

n

Holdup is the ability of a complementor to expropriate returns. This self-serving behavior is a consequence of

the gap between ownership and control. hidden information. Because owners cannot discern the true quality of the target, the target may misrepresent its own value. This is called adverse selection. hidden action. Because owners do not have complete information about managerial behavior, managers may pursue their own interests. This is called moral hazard.

Holdup is a threat whenever the perpetuation of a superior competitive position depends on the continued cooperation of complementor. Which alternative subjects the firm to the greatest risk of hold-up? Can contracts be written to reduce this risk?

n n

Summary View
Licensing
Most flexibility

Contracting

Internalize

*** * *** *

** ** *** *

* *** * ***

Best ability to benefit from interdependence of capabilities Importance of alliance capability Least threat of holdup

Nucleon
n n n n

About vertical integration About developing capabilities About taking options About managing in an environment of great uncertainty