Analysis of MST - A Small Bio-defense Company

Analysis of MST - A Small Bio-defense Company

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Analysis of MST - A Small Bio-defense Company


EXECUTIVE SUMMARY

MST is a small bio-defense company with an exceptional product that is
patented in the U.S. They are looking for second round financing, a
source of cash, in order to fulfill their goal of going public. At
this time there is an unsolicited sales call from Japan, which would
mean a great amount of money. This sale would mean hundreds, maybe
even thousands of units. MST knows that their product is one of a kind
now, but their competitors are working hardly to come up with a
similar item. They need to make the deal quickly, before the Japanese
buyer has other choices. There are several risks that must be
considered while considering this deal. The most important one is that
they might lose the technology due to either licensing or to reverse
engineering, which will probably also mean the end of the company,
knowing that it is not strong enough. It is also known that American
patents can’t be protected when exported to Japan, that is a big risk.
There are a number of alternatives available to solve this problem.
The first is for MST to export the product by itself, and sell it to
the Japanese. The second alternative might be to contract with a
Japanese trading company, and finally, the third alternative is to
license the technology to a Japanese manufacturer. All of these
alternatives will be evaluated according to the intellectual property
risk, reverse engineering risk, costs and implications on profit,
MST’s competitive and market leading position, time-to-market, and the
concerns and implications of export licensing. Given an analysis of
the alternatives, it is recommended to take the second one I have
analyzed this alternative as the best because it takes a short period
of time, helping MST to keep their position as market leader, as well
as protecting its intellectual property due to the fact that trading
companies have a reputation to maintain.

Situation Analysis

MST is a small bio-defense company with an exceptional product that is
patented in the U.S. They are looking for second round financing, a
source of cash, in order to fulfill their goal of going public. At
this time there is an unsolicited sales call from Japan, which would
mean a great deal of money, but they do not know how to address it.
This sale would mean probably hundreds, maybe even thousands of units,
plus training. It is in MST’s knowledge that their product is one of a
kind right now, but their competitors are working fiercely to come up
with a similar item. Therefore, they need to make the deal quickly,

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before the Japanese buyer has other choices. Losing the market-leading
position might lead the company into bankruptcy. However, there are
several risks that must be considered while considering this deal. The
most important one is that they might lose the technology due to
either licensing or to reverse engineering, which will probably also
mean the end of the company, because of its small size. It is common
knowledge that American patents do not protect companies in Japan, so
that is a considerable risk. It is also important to mention that such
a sale would help them launch a second product to the market,
solidifying their position. Given the situation, we should analyze
what MST should do, close the sale, keep its market-leading position
or protect its intellectual property?

Analysis of Alternatives

There are a number of alternatives available to solve this problem;
we’re going to consider three of them. The first is for MST to export
the product by itself (without mediators), and sell it to the
Japanese. The second alternative might be to contract with a Japanese
trading company, and finally, the third alternative is to license the
technology to a Japanese manufacturer. All of these alternatives will
be evaluated according to the intellectual property risk, reverse
engineering risk, costs and implications on profit, MST’s competitive
and market leading position, time-to-market, and the concerns and
implications of export licensing.

The first alternative, for MST to export to the final consumer
themselves, while it can seem to be a good one at the beginning for
its obvious advantages, has a few disadvantages as well. The most
obvious advantage this option has is that all of the profits from the
sale will be translated in pure benefits to MST. However, due to the
age and size of the company, getting an exporting license for a
product such as this may prove to be difficult and time consuming. I
assume that a bio-defense product might probably be a dual use
product, adding to the difficulty of getting the exporting license.
Another disadvantage that this choice may have is that since this is
the first time MST has attempted to export anything, problems will
arise, taking time to solve, meaning that the time to market will not
be what they aim for. This is more important considering that the
competition is already creating a similar product: if they take too
long to export it, they might lose their market leader position. There
are other less risks when considering loss of intellectual property
and the product. The reverse engineering by the end user cannot be
avoided, but if they buy lots of units, one can assume that they are
not doing so just to reverse engineer them. The same happens with loss
of intellectual property: there is no way for MST to guarantee that it
won’t happen, but a big enough sale means that they intend to use it
rather than try and produce a knock off. The main problem with Japan
is that American patents do not apply over there, so it the scenario
that someone patents the product there is possible. Although this is
the choice with the highest benefits, it is also the one with the
highest costs. Finally, some of them depend on the terms of sales and
shipping, but no matter what they are, costs will surely be lower if
they were using a trading company, or license the product.

The second alternative is to contract with a Japanese trading company.
There are many ways of negotiating this, the option of changing
trading companies if the targets are not met, specifying the number of
units to be sold and the amount of time the license is granted for.
There are little advantages of using a trading company. The main one
is that the risk of losing intellectual property is minimized when
they are used, because a copy of the product will hurt their
reputation very badly, and might lead to future loss of business.
When considering the protection of intellectual property, this is the
best choice. Also, costs would be a lot lower if this choice were to
be selected, mainly because the shipping would be to the U.S. instead
of Japan. Another great advantage of using a trading company is that
they have lots of experience in specific countries and products. This
experience will facilitate obtaining the exporting license, and the
negotiations with the Japanese as well. These companies do just these,
so they have contacts in the Department of Commerce to help make the
process quicker. The time to market, because of their experience and
the technology they already have established there, is very important
in this alternative. The speed with which a license could be obtained
and the contracts drafted will get the product to the Japanese market
faster than other way. The risk of reverse engineering is the same,
there is no way that anyone can stop an end user of taking the product
apart and trying to understand how it works. The fact that American
patents do not apply could mean that someone could patent a similar
product once MST’s product damages the Japanese market, as I have
already said. The main disadvantage of using such a company is that
they take part of the sales, meaning that the profits MST will see if
they choose this alternative will not be as high as they could.

The final choice available is to license the product to a Japanese
manufacturer. Royalties can be negotiated it this case, but that is
all MST can do. In this special case, MST has an advantage being the
only supplier of such an item. Because of this, their demand can be
greater than if they had competitors. The main disadvantage of
licensing is that profits will be greatly reduced, since the company
who buys the license will do most of the work. On the other hand,
costs will also be lowest: there is no manufacturing, shipping or
anything, only the know-how and the plans. Of course, this means
losing the intellectual property altogether, and considering that MST
is the only one who produces it, that is a huge disadvantage. This
does not mean that MST will lose its position as market leader today,
but they definitely will when the license period ends. The exporting
license will be easier to get, with the Japanese’s help, but not as
easy as the previous option. Finally, the time to market depends on
how much work the Japanese need to make to the plant before they can
start producing, but it definitely will not be as bad as exporting by
themselves.

Recommendation

Given an analysis of all the alternatives available, it is
recommended to use the second one, because it addresses most of the
needs of the strategic question in the best way, although it also has
a few disadvantages as well. I have analyzed this alternative as the
best because it takes a short period of time, helping MST to keep
their position as market leader, as well as protecting its
intellectual property due to the fact that trading companies have a
reputation to maintain. Also, their experience in the field would be
helpfull for MST, that is absolutely new in the business of exporting,
both to close the sale and to obtain an exporting license that might
prove to be difficult to get. The main disadvantage of this choice is
that the amount of money obtained from the deal will not be as
sizeable as they expected as far outweighed by all the risk that MST
avoids by using a trading company. They must wait for longer before
going public, to be sure of their possibilities.
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