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Commercialisation: making it happen.



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Commercialisation: making it happen Alexander Gosling Connecting Research and innovation - Key policy issues

Summary points • Invetech has a history of generating business success stories from research outcomes through the execution of commercially focused world class product design, development and engineering.

• Australia is globally competitive as a place to undertake such product development and commercialisation.

• There is a good supply of ‘raw material’ coming out of Australian research work.

• This is a partnership process. Vision Systems Limited is a living example: market capitalisation from $10 million to Top 200 in ten years through product innovation based on technology platforms generated by CSIRO and others.

��It is well accepted that Australia performs well in public sector research. ��It is a less well recognised fact that Australia is highly competitive in global terms as a place to undertake the key commercialisation phases of product development, engineering, and manufacturing implementation, for global markets.

��Typically, this involves a good working partnership between the research team and the commercialisation team. ��The benefits of successful partnership are significant.

The story of Invetech and Vision Systems Ltd clearly illustrates these points.

Basic assumptions

I will take it as generally agreed that Australia has a public sector research capability that is of world class and scale; I will also take it as generally agreed that Australia’s future wealth depends at least in part on effectively commercialising the outcomes of this research. I will finally take it as agreed, or at least self-evident, that products that are high unit value, highly differentiated so as to enable premium pricing, and aimed at world markets, are most beneficial and best suited to us Australia with our small domestic markets, relatively remote location, and relatively uncompetitive manufacturing cost base.

This is the focus of my paper: the process and mechanisms whereby a potentially valuable research outcome is realised as a saleable product, which is in turn embedded in a business that can take it to market. My comments relate to products which are of an engineered nature and fit the profile mentioned above.

The “Idea to Market” process

While it is outside the scope of this paper to explore in any depth the theory and practice of getting from IP to profitable sales revenue, in order to provide a setting for the case example that follows I will briefly outline the principles and methodology that we have used at

Invetech. The key development stages of the Idea to Market (ITM) product development

process are as follow.

��Planning - to determine the “value proposition” inherent in the technology, the target market, the market success factors and route-to-market options, and the potential worth of the business if realised (see figure 1); this stage is of paramount importance to set the directions and specific objectives for all the following stages

��Concept generation - to create and prove product concepts that can meet the market success requirements determined during the planning stage (see figure 2 for this and the next two steps)

��Engineering - to convert the concepts into market-ready, proven and validated, manufacturable product designs ��Implementation - to initiate production and launch.

Figure 1

Product and/or Technology Profile

Profile of product/ technology features and capabilities

Market Profile

Understanding of market needs, structures and current offerings

Route to Market

Preferred options to access the market in terms of offering and route to market

Financial Analysis

Financial justification for taking the product/ technology to the market

Commercialisation Implementation Plan

Detailed plans which enable the commercialisation strategy to be implemented

Value Proposition

Market positioning which could provide greatest value to customers and to client

Figure 2

Planning &

Concept Development

Product Engineering

Process Development

Manufacturing Technology Development

Implementation

• Product innovation strategy • New product concepts • IP evaluation/

valuation • Commercialisation planning • Modelling and

prototyping • Proof of principle

• Scale-up strategy • Scale-up feasibility

• New product development - Software - Mechanical - Electronics - Industrial design

• Product cost estimates

• Process definition & layout • Manufacturing cost estimates

- Capital investment - Throughput - Yield - Labour

• Validation • Regulatory testing • Field trials • Product re-

engineering for cost/function

• In-principle machine prototypes

• Equipment specification & sourcing

• Detail design

• Procure/build equipment • Installation & commissioning • System integration • Production systems

establishment • Pilot production • Scale up

• Component sourcing • Raw material sourcing • Tooling sourcing &

management

The Product

The manufacturing process and equipment

In parallel with this product and manufacturing focussed programme is the process of establishing distribution, marketing and sales; and of course company formation and build-out in the case of a start-up.

The Invetech story

Invetech is a company that has been providing the ITM process to a wide range of clients since 1976. Products that Invetech has developed and have become market leaders and success stories will be familiar items to most Australians and in niche world markets. Examples range from the Safe-n-Sound “Baby Capsule” car cradle for infants around 1980, to the Vesda world leading aspirating smoke detector system (discussed further below).

In early days Invetech clients were largely blue chip Australian manufacturers; that is a period of only peripheral relevance to the topic of this paper. More recently however, the mix has shifted and now Invetech’s client base falls largely into two groups, each of which is an important illustration of the points I aim to make in this paper.

In the first place, about half our product development business is now with major global companies in the biomedical instruments sector. Here, Invetech’s clients are mostly based in the US, and a few in Europe. Abbott Diagnostics is a typical example; and the projects are substantial, involving development teams of up to 50 over a period of 1-2 years. Over the past ten years, we have completed over a dozen project of this type each culminating in the launch of a product that was market leader or close to that in its segment, in world markets.

It is also significant that Invetech has a number of mostly US based direct specialist competitors for such projects. The point I emphasise is that Invetech was able to win these contracts from very professional and sophisticated clients against competition from these local US specialists as well as in many cases the client’s in-house R&D/design team.

Australian capability is world class and excellent value for money.

Secondly, the other major group of ITM clients comprises Australian start up companies, typically aiming to exploit new technological IP spun out from CSIRO and other such national institutions. Current examples of such technology spin-outs among our clients include ��cap-XX ��Ambri ��Australian Wool Innovation ��Polartechnics ��X-Ray Technologies ��Thrombogenix. Invetech also regularly acts for CSIRO and other researchers in the initial planning and evaluation stage of the ITM process, to help them attract investor and route -to-market partners and set up the spin-out entity.

Here, my point is that we are marrying the researchers, who represent depth of expertise in the science and core technology, with an immediately available, experienced, commercially focussed, world class, substantial, multi-disciplinary and comprehensively resourced ITM team, one indeed which has demonstrated itself as the preferred choice of major multi-nationals for product development. By this means, successful launch of market leading products can be attained rapidly and effectively.

The Vision Systems story

Invetech has been providing these ITM services to external clients for over 25 years. Ten years ago, the company realised a concept that had always been its strategic goal, by establishing under the same ownership a select group of companies to manufacture, and market internationally, products conceived and developed by Invetech. The strategic purpose was to enable it to share in the wealth creation resulting from successful product creation, that in other cases accrues wholly to its clients. This is the Vision Systems Ltd (VSL) group (see figure 3).

Figure 3

International Clients

Innovation Engine

Invetech

High value manufacturing & distribution:

• Biomedical Instruments

• Site Protection • Fire detection • Security • Surveillance

International Clients

The majority (70%) of VSL’s trading revenue ($152 million last year) now comes from the international sales of its own products, ie products developed by Invetech and marketed by a VSL subsidiary under one of the group’s own brand names. Let me now make another point of key relevance to the my theme: each of the major product ranges that VSL has launched under its own brands was based on core technology and IP spun out from CSIRO or some other such Australian research institution.

��Vesda, the world leading early -warning smoke detector, was derived from air quality monitoring technology developed by CSIRO. ��LADS, the world leading airborne depth sounder (for oceanographic charting) was based on technology licensed from DSTO. (This company was sold to Tenix last year, to assist

in the early realisation of the value VSL had created in the LADS product.) ��Adpro, a range of video security products with video motion detection as a key feature and again one of the most advanced in its field, started as a CSIRO spin out before being

acquired and developed by the group ��Several of the Vision BioSystems instruments are based on research outcomes from Australian hospitals or universities.

There are several other examples being developed towards launch, particularly in the biomedical sector under the Vision BioSystems brand, and VSL is one of Australia’s top league R&D investors ($15M as stated in FY 2001 Annual Report).

Since its formation in 1992, VSL has been satisfactorily profitable every year, has grown

revenue at a compound rate of over 25% per annum (see figure 4), and has grown market capitalisation from around $10M at formation to over $500M at the end of FY 2001. This commercial success has been vitally underpinned by VSL’s continuing investment in the commercialisation of Australian research outcomes.

Figure 4

‘96

Millions of Aus Dollars

‘94

$41m

‘95

$63m

‘97

$87m $86m

‘98

$109m

‘99

$130m

Vision Systems operating revenue

2000 1993

$20m

$144m

Europe

US

Asia

Aust/NZ

1993 - 2000 includes revenue from Defence business which was sold at the end of 2000

$152m

2001

The success factors

The factors that have contributed to the success of VSL in commercialising technology have been in particular the following.

��Product focus - selecting products that have high value, high margins, and global markets and that fit the engineering skill base available to VSL ��Research partnerships - recognising that research and engineering are very different domains; VSL does not involve itself in any sort of basic research, but concentrates on

having links with research groups that can generate the science and core technology platforms for future pr oducts ��Market focus - sticking to markets that are familiar or relatively easy to become familiar with ��Marketing partnerships - recognising that as a relatively small company it is essential

to partner with established players in the target markets in orde r to achieve penetration and minimise initial fixed costs, and accordingly giving priority to identifying, securing and working very closely with these partners

��Product excellence - being satisfied with nothing less than “best in class” products, to

facilitate such partnerships and to support market entry and growth; this requires intimate understanding of what customers and users want, what competitors offer, and the pace and directions of product and market change ��Speed and commitment - putting a large enough engineering team onto the product development task and backing it strongly to deliver such product outcomes in the minimum timescales ��Relentless R&D investment - giving top priority today to generating the products that will provide tomorrow’s revenues; “someone is going to make our current product obsolete, and we have to make sure it will be ourselves”, and VSL does not compromise on this.

So what?

VSL has as a core element of its business model that its (relatively small by world standards) manufacturing subsidiaries shall outsource their R&D and product engineering to an organisation specialist in providing such services on a commercial competitive basis, to ensure they get this crucial task undertaken to world’s best practice and standards. VSL also has as a key element of its model that this specialist organisation, Invetech, shall derive the majority of its revenue from selling such services to sophisticated external clients in the world market, thus ensuring its breadth, depth and world class quality.

The competence that is core to VSL’s success may be summarised as innovative engineering, coupled with the fact that VSL’s business model allows it to maintain and benefit in product terms from an engineering resource with a size and range that normally only a company ten or a hundred times bigger could support.

Australia is a “friendly” environment in which to develop such a capability: it has good engineering education and a good pool of engineering and technical talent, Australians tend to be at ease with the demands of technical innovation, and the wired and webbed world has largely eliminated any disadvantages of remoteness. Moreover for this activity the undervalued A$ is an advantage, enabling a much lower cost base than in USA or Europe. For that reason, VSL continues to focus this ITM part of its business in Melbourne despite the fact that Australia represents less than 5% of its market for product sales

What does this mean on the broader front - how can this model be usefully applie d beyond VSL?

Such ITM capabilities complement the excellent research infrastructure and programmes that Australia in general has. At the same time, it is essential to recognise that the skill base, the cultures and systems, the nature of the technical staff, the organisational focus of the ITM process are all different from those of a research group. Each takes time and significant investment to set up; they do not easily coexist in one organisation. And it is at best inefficient and often disastrous for either to try and operate in the domain of the other.

So, we should be focussing on finding ways to get these two complementary types of

organisation working together, properly funded and focussed on commercial objectives, as illustrated above or as in the CRC programme. The partnership, in the Australian context aimed at the right commercial objectives, can be very powerful. It is arguable that today the main deficiency is the availability in Australia of enough ITM capability to match what our research institutes can produce; if so, the emphasis should be on firstly making use of whatever ITM capability does exist, and secondly ensuring that the environment is supportive of the development of that sector.

In the particular case of start-ups, where these have come out of a research environment and will in general be competent in that domain, the above model emphasises the pivotal importance of accessing excellence in the ITM process, and points strongly to the benefits of initially outsourcing this activity. Development of in -house ITM capability is best undertaken when the organisation is grown and matured to the point where it can carry the investment and overhead.

Products of the type I have been focussing on in this paper have high gross margins, typically in excess of 50%, and employ skilled people in satisfying careers on good salaries; these products are virtually all exported. The impact on the Australian economy (balance of trade, skilled employment, per capita GNP, etc) of a few dozen more companies such as VSL makes it in my view a priority to help such start ups form and succeed.