group even better, with a wider portfolio of products that can also contribute to simplifying how customers deal with the IP-related issues associated with these highly innovative products.
This sounds like a good collaboration, but a problem may occur when a smaller customer gets developed so well by FLS, that it becomes bigger and wants to be served directly by Philips... or maybe Philips prefers to serve them directly. Of course, the decision between being served by FLS or Philips lies ultimately with the customer, whose choice is always respected, however unless such an topic is foreseen and a the appropriate procedure for handling it has been agreed with the partner, such a situation may become a demotivator for the partner, and a landmine under the alliance. You have to pinpoint such cases in advance and devise a solution that is beneficial for both.”
In alliances devoted to product development, Philips sets out milestones together with the partner. At each of these milestones the partners have the option of quitting the alliance or investing further. In case one of the partners chooses to throw in the towel, an arrangement should be in place regarding the intellectual property that has been created. Who is allowed to use it and for what purposes? If one partner wants to sell it, then the other could for example have the right of first refusal. And what to do with intellectual property rights that have been contributed by one of the partners, and that the other one still needs after the alliance has been broken up? During the alliance license agreements were in place to enable such use, and an arrangement has to be made – beforehand- that organizes the situation should a break-up occur( e. g. a right to license of( some of) the IP, at some pre-agreed or market compatible fee, or perhaps a cross license).
When partners act in different industries, they may have different business dynamics. Electrical appliances are generally bought for multiple-year use, so the market penetration of a new product tends to proceed relatively slowly. In the food industry and personal care, on the other hand, a product needs to be successful within a few months, if not weeks, or otherwise the supermarkets will take it off their shelves. It is easy to imagine what a challenge it is to build up a big enough installed base of the appliances( such as Senseo coffee machines), while at the same time introducing the corresponding consumable( the coffee pad) to the supermarkets and make it interesting for them to keep it on the shelves until the installed base of appliances is big enough to generate large and sustained demand!
Would the concept of a virtual alliance work here as well, or is such cross-subsidy limited to one-company solutions? Ivo Rutten:“ If you share costs and revenues but do not bring the assets into the alliance, it is always difficult to determine the proper cost for certain non-tangible efforts, for example the sales effort. If we were to say that our cost of sales for a certain product amount to 20 %, then you need open book calculations to show your partner that this is really the case. And even if he believes you, he can disagree with you about the way you organise your sales or award bonuses. This is a complication when it comes to determining how much profit each partner made, and how to split it fairly between the partners. Generally it is wise to find an as-simple-as-possible mechanism that needs no complex bookkeeping, even if that simple approach is perhaps a little coarse or not entirely fair: better simple and pragmatic than complex and a potential source of conflict.
Sharing profits however, is of course the eventual driver for the alliance. Without that most alliances would not materialize. Besides sharing profit an Alliance may also be built on sharing risk, however.
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