Innovation and technology commercialization are the buzzwords of today. Companies, big and small, proclaim their commitment to innovation, and the popular media are full with examples of technological breakthroughs changing our lives for the better and bestowing fortunes on the companies that brought them to the market. Yet, underneath all of this excitement is the assumption that all technologies developed by companies are the result of a focused effort, and all fit one way or another with the technological expertise and business models that the companies pursue.
This, of course, is naïve, suggests Entrepreneurship Professor from Kent State University Sergey Anokhin. Companies are swamped with technological know-how they don’t know what to do with, and the estimates of unused commercial assets, mostly patents, have exceeded $100 billion two decades ago. Think, for instance, of Honeywell, the company that discovered in the mid-nineties that it owned but never used a patent for the autofocus technology feature on cameras – all because the technology did not fit with the company’s technological base and business model. Upon the discovery, Honeywell’s bottom line improved to the tune of $350 million a year in licensing fees from camera manufacturers who previously infringed on its patent. Or think about the now-classic example of Raytheon’s finding a novel use for its magnetron technology that used to be employed for the needs of the industrial-military complex but was successfully redeployed in the consumer electronics market when the company pioneered the microwave oven product category. Or remember the G.D. Searle’s accidental discovery of aspartame (trade name Nutrasweet) made when the company was searching for a new gastric ulcer treatment that gave rise to the whole new industry of sugar substitutes. While all these are well-known, successful examples of commercializing misfit technologies, the problem is much bigger than many acknowledge, and companies stand to gain much if they find a way to commercialize such misfits, says Dr. Anokhin. Rather than leaving money on the table, companies should consider different ways of commercializing their misfit technologies.
The Origins Matter
It is a good idea to keep in mind the source of the misfit technology when considering a commercialization strategy. In principle, explains Professor Anokhin, misfits may originate from three distinct sources: M&A externality, hiring externality, and R&D externality. M&A externalities have to do with the fact that when two companies merge, or when one company acquires another, some parts of the newly formed entity will be outside of the focus area. When Monsanto acquired G.D. Searle, its Nutrasweet product became the new company’s step-child, and was eventually spun-off since it did not fit its strategic focus. Hiring externalities result from hiring well-qualified personnel to perform a certain group of functions when the newly hired individuals (think star scientists) possess expertise in other areas that are not of the immediate use to the new employer. Finally, R&D externalities result from own internal R&D but have to do with the fact that when a new research project is started, it is often impossible to predict accurately the outcomes of a particular initiative. When 3M came up with a glue that did not bond properly – what later was used in Post-it Notes, one of the most successful company’s products – it was not a matter of design but rather a (lucky) accident. It turns out, however, that the origin of misfit technology has implications for the choice of the commercialization strategy.
When misfit technologies originate from M&A externalities, the most logical commercialization mode is spin-off. Rather than trying to fully absorb the ill-fitting product line into the confines of a newly defined business, it is better to concentrate on the core and spin-off the misfits as fully controlled subsidiaries. If the circumstances warrant, those may be further sold to strategic buyers, or perhaps a leveraged buyout may be arranged. The key idea is that it makes little sense for the corporation to invest in internalizing the misfit when it can profit from the peripheral product while allowing those with the expertise to develop it separately.
When misfits come from hiring externalities, the situation is very different. The company that now employs the individuals with potentially valuable but misfit expertise – such as star scientists it hired from competitors who may have deep knowledge in the area that is not of immediate interest or relevance to the new employer – does not have complementary assets required to bring the technology to the market. At the same time, the previous employer that may have the assets now lacks the expertise required to commercialize new ideas. This calls for a flexible partnership arrangement between the new and the old employers. Although the relationships between the companies may be marred by mistrust, safe and mutually beneficial partnership arrangements can be devised. Such was the case, for instance, for General Motors Defense and General Dynamics, two competitors that found a way to jointly design a proposal for the new medium-weight armored vehicle for the U.S. Army.
Finally, misfit technologies often originate from the company’s own R&D efforts. When starting a new research project, it is virtually impossible to guarantee the exact shape the new technology will take. As a result, companies often end up with inventions that are distant from the business models they pursue. Such was the case, for instance, for G.D. Searle’s Nutrasweet or 3M’s Post-it Notes. In this case, the preferred mode of commercialization – be that internal development, partnering or externalization through licensing or even technology donation – will depend on other factors such as industry appropriability regime, technological complexity, and the availability of organizational slack. High uncertainty suggests partnering arrangements. Low environmental uncertainty and weak appropriability regime in the industry call for internal development. The same goes true for the organizational slack: When organizations have freely available resources, internal development is the most logical choice.
Looking forward
Of course, admits Sergey Anokhin, these recommendations on the best mode of misfit technology commercialization are tentative, and many factors may affect what the organization should consider. The important thing, however, is not to ignore the portfolio of misfit technologies that the company might possess. IBM, for instance, claimed more than $1 billion in licensing revenues every year between 2008 and 2012, a substantial portion of it coming from misfit technologies. While this level of success is hard to guarantee, it underscores the importance of taking misfit technologies seriously.