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How to Hook Knowledge When Angling for Innovation Premium

Learning Through Licensing

Authors: Moreira, Solon

Date: First Quarter 2018

Tags: alliances, interorganizational collaboration, M&A, licensing, R&D

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Earlier this year at Davos, the CEO of Spain's only remaining department store chain, El Corte Inglés, urged other European retailers to join forces for the sake of their long-term survival, which could include going so far as to collaborate with the very online giants, like Amazon, that were threatening brick-and-mortar stores' existence. Increasingly, we are seeing conventional retailers and distributors forming alliances with tech giants, such as the deal struck last year between Walmart and Google.

In the car industry, incumbent firms are also scrambling to respond to the competitive threat posed by firms like Uber. One solution car manufacturers have come up with is to essentially co-opt their new rivals' business models and launch their own car-sharing services, like BMW did with DriveNow.

These cross-sector alliances present new opportunities for traditional firms. A recent McKinsey study of 300 CEOs representing 37 sectors stated, "As boundaries between industry sectors continue to blur, CEOs -- many of whose companies have long commanded large revenue pools within traditional industry lines -- will face off against companies and industries they never previously viewed as competitors." The issue for these CEOs is knowing when these cross-sector exchanges go from being opportunities to posing existential threats.

Consider this Financial Times quote by Dan Ammann, president of General Motors. In making the case for GM venturing into car-sharing, he undercuts the case for car ownership: "It's the last thing you should do because you buy this asset, it depreciates fairly rapidly, you use it 3 percent of the time, and you pay a vast amount of money to park it for the other 97 percent of the time."

This highlights an emerging quandary: how to tap the new "cross-sector dynamics" without undermining your current business in the process, to the point that a rival firm could end up overtaking you.

Traditional firms recognize that the knowledge that got them to where they are today won't necessarily keep them there or take them to where they need to go next. They don't have all the answers. To keep up with the pace of change, they may have to collaborate with rival companies, sectors and industries. Their knowledge base may have to be combined with somebody else's, or they may need entirely new knowledge that comes from outside the walls of their firm.

But how do you venture outside your firm's boundaries, perhaps even allying with rivals, without giving away your own competitive advantage? In lowering the drawbridge to let new knowledge in, might you also be letting in the enemies at the gate?

These are questions that I have been exploring in my research. To innovate today, there's no escaping the fact that firms will have to learn how to locate and extract valuable knowledge from beyond the boundaries of their own firm, sector or industry. And this, I've found, can be accomplished by forging strategic alliances with other firms. Licensing valuable knowledge is one way to do that. But as I will also share in this article, there are certain preconditions that need to be in place to make such arrangements work.

Licensing Advantages
In simple terms, licensing is a business agreement involving two companies: one gives the other special permissions, such as using patents, trademarks, copyrights, designs and other intellectual property, in exchange for a share of revenues or a fee. As more and more firms are discovering, there can be big mutual gains to be had from licensing knowledge or technologies from other companies.

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