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Direct investment (doing it yourself)

Competencies required

A business wanting to commercialise an innovation itself, will need access to competitive manufacturing facilities and good distribution channels. Very few businesses will have the necessary manufacturing and distribution capabilities required to commercialise a new product, at least in all possible markets for the product. Those with manufacturing facilities may not have the capacity to supply world demand for the product, or be able to produce it at a cost competitive with foreign manufacturers or substitute products.

Accordingly, strong relationships with external manufacturers and distributors will be required in each region or market for the product.

Resource investment

Serious investment in manufacturing and distribution facilities is required, unless these functions will be sub-contracted. Significant funding will be required (either equity or debt) to finance the purchase of raw materials, manufacturing and packaging costs, and transport to distribution channels.

Coordinating the operations and logistics relating to manufacturing and distribution will require significant human time and effort. It may be necessary to employ a production manager, marketing manager, distribution manager and sales/account managers.

IP protection

Direct investment is suitable for almost any IP portfolio. However, where the IP protection is limited, the risk of a competitor mimicking the innovation and directly competing may make the sizeable investment required for direct investment subject to unacceptable risk.

Competitive landscape

If the innovation is truly new, there may be few if any competitors. This also means there may be few if any potential licensees. Accordingly, the direct investment route may be the only alternative.

If the market for the innovation is littered with potential competitors, then again, the investment required for direct investment may be exposed to unacceptable levels of risk.

Risk and return

The risk associated with direct investment is considerable, due to the significant money and other resource required to execute the strategy. The degree of risk will vary depending on the nature and profile of the business seeking to commercialise the innovation. Direct investment for a multinational in a core market is not necessarily a risky proposition and in fact may be the commercialisation path that leads to greatest returns. A New Zealand based SME looking to set up a manufacturing and distribution subsidiary in Europe, even in its core field, will be a far riskier proposition.

There is the risk the product will fail technically (and cause loss to third parties) and/or fail in the market (due to poor uptake, aggressive competition, regulatory failure, etc).

Following a direct investment strategy, the innovator retains the lion’s share of the return from the innovation. Having said that, if the innovator executes the strategy poorly, it will keep the largest share of a small return, whilst other strategies may have lead to a smaller share of a much larger return – but overall a greater return!

Advantages

  • Strong control over the process, technology and strategy is retained
  • No share of profit or revenue is given away

Disadvantages

  • The innovator bears all risk of failure
  • High capital investment is required
  • Requires access to manufacturing and distribution competencies