Electrolytic Solutions, LLC
George is an independent inventor. His usual manner of operation is to invent some new device, obtain a patent on it, then license out the technology to companies that manufacture it under their own brand name. His income is derived by obtaining royalties on each unit of the devices sold by the licensee.
When George invents a tabletop device that produces large quantities of hydrogen from water, he knows he has a winner and decides to produce the device himself. The demand for cheap and convenient sources of hydrogen is high in all chemistry labs – from high school and college labs to industrial and government labs. So he takes a large portion of his life savings and uses it to create a company called Electrolytic Solutions, LLC. Note that at the time he begins this venture, George has applied for a patent.
Electrolytic Solutions begins assembling the hydrogen-producing devices. While interest in the devices is high among scientists he shows it to, actual sales lag. George decides that he should approach major chemical companies that produce chemical feedstocks to see if they would back his device. Each of the companies he approaches earns substantial revenue providing hydrogen gas to customers in the chemical industry. He is open-minded about how he can work with these companies – he is willing to license his technology to them for their own production of the devices, or to provide them with an equity share in his company in order to obtain investment finance from them, or even to sell the technology to them outright.
George approaches two major producers of commercial hydrogen gas (hydrogen gas is important in producing a whole range of products, and demand for it is high both for small scale production in laboratories, and large scale production in manufacturing). Engineers at both of these large companies are impressed with George’s technological achievement. They see value in having a tabletop hydrogen generating device. The engineers in both these companies report their enthusiasm for the device to higher levels of management, and in one case, they are asked to write a business case to present to a senior level new product selection committee. But in both instances, higher level managers kill the initiative on two grounds: first, their existing customers see no value in the devices; and second, pro forma income projections suggest that sales of the devices will not generate enough revenue to make them worthwhile.
Nine months into the effort, George runs out of cash. He considers declaring bankruptcy when one of his licensees for another product, Salvation Enterprises, offers to buy him out. The buy-out covers George’s start-up costs ($450,000). George considers himself lucky because he is able to recover his investment, although he makes no profit. After three years of operation, Salvation Enterprises makes $10 million in annual profits from the device. Their principal market is high school and college laboratories in the US. They have received inquiries about their products from universities overseas. More interesting, they are conducting discussions about selling their product to the R&D laboratories of major chemical companies in ten countries. If these discussions lead to sales, Salvation’s revenue from these devices can increase five-fold in two years.
Questions
This case study is designed to test your capacity to integrate a wide range of business knowledge and insights. Use whatever resources are at your disposal to answer the following questions. If you need to know more about the industrial uses of hydrogen, check this out on the Internet. If you don’t remember your lessons on patents, trademarks, copyrights, and trade secrets, look these topics up on the Internet.
- Clearly, George is inexperienced in business. While his technical capabilities are solid (he has made a good living inventing new technologies for a number of years), his business skills are weak. What factors should George have considered before deciding to manufacture the hydrogen producing devices himself? (Your answer should be about one page long, single space. Be thorough in your discussion.) [30 points]
- Up until now, George has made a good living licensing out his technology and living off of royalties. If you were a consultant educating him on the technology licensing process, what are risks and opportunities associated with this process that you would explain to him? (Your answer should be 1-2 pages long, single space.) [20 points]
- This case study illustrates the type of phenomenon that Clayton Christensen describes in his book, The Innovator’s Dilemma. This is evident in the last two paragraphs of the case study. [50 points]
- As Salvation Technology’s success ultimately demonstrated, there is a market for the tabletop hydrogen-producing device. Using Christensen’s research findings as the basis of your response, explain why middle and senior level managers are reluctant to adopt disruptive technologies. Show how this reluctance manifests itself in this specific case. (Your response should be at least one page long, single space.)
- Christensen points out that at the earliest stage of the introduction of a disruptive technology, it is difficult to see how it is a threat to a major competitor’s ongoing business. He illustrates this view convincingly with examples from the disk drive, mechanical shovel, and steel industries. Describe briefly (in one page, single space) how the disruptive technology of mini-mills was not viewed as a competitive threat to major US steel producers, and how gradually mini-mills were able to take over high-end, high-margin steel production. Then create a parallel scenario (using Christensen’s theory) showing how Salvation Technology’s production of the tabletop hydrogen device can ultimately present the big hydrogen producers with a competitive threat. (Write this up in an additional page.)
