Toothbrush with Unique Double-Lock Mechanism - Case Study Example

Toothbrush with Unique Double-lock Mechanism: An Innovation by Alpha Personal Dental Care System An Enterpreneurship Case Study Table of Contents Introduction3 Concept and Technological Development....3 Addressing Issues4 The Process..5 Patenting5 Ownership..6 The Shareholders and the Agreement..7 The Strategy..8 Conclusion and Recommendations.10 Introduction Peter Butler, along with his partner Brian Williams and Julie McBride, has acquired and established many business ventures in the past. In 1986, Butler discussed business with his friend of 20 years, a dentist who practiced in London and Ontario, Don Thomas. Thomas told Butler of his worry that his patients do not seem to be replacing their toothbrushes regularly, and that this could then lead to periodental disease or systemic health problems, aside from many other health concerns. Thomas also felt that the use of dry instead of wet toothbrushes would result to achieve the maximum benefits of toothbrushing. Thomas also believed that by replacing toothbrushes regularly, patients could save more money in dental work and would then decrease their chances of needing dentures, and that improved oral hygiene could increase a person's life expectancy to four years, as his studies showed. Thus, Butler and Thomas then agreed that a market existed for a toothbrush that could attend to these issues and decided to follow through with their idea. Concept and Technological Development Butler and Thomas wanted to produce a toothbrush, which was similar to the safety razor, which was at the time, very widely used. They wanted it to have two separate sections: a re-usable handle, and a disposable head. The disposable heads would be in multi-unit packages to encourage customers to frequently change the toothbrush and to lower the costs of packaging as well, since they have discovered that the packaging costs were around 50 percent of the total toothbrush price. Butler and Thomas also felt that the retainable handle would then elevate the concept of toothbrushing to something of a higher value personal possession instead of just the regular disposable one. Thus, they came up with the idea that the handles could be personalized using a variety of materials like plastic, brass, or stainless steel. It could also have floss holders, mirrors, interproximal brushes, or gum massagers. In addition to this, they thought of marketing bathrrom holders or travel cases. However, Butler and Thomas then discovered that there were already a number of toothbrushes out in the market that catered to the needs they wanted to attack. But they found out that these toothbrushes had disadvantages when it comes to the locking of the head to the handle. As a result, they concentrated their efforts on developing a better locking mechanism. Butler tried a lot of approaches but they all posed different disadvatages: they were either too weak, too difficult to attach, or too expensive. But in May 1987, while travelling with Julie McBride, Butler suddenly thought of the idea of the double-locking mechanism, which consisted of two locking mechanisms that would make the head stick to the handle safely. This design also enabled the consumers to constantly check if the lock was in place. Butler then took his rough sketch of the design to an engineering firm in London, which then produced a prototype for him. Addressing Issues Despite his success in coming up with the double-lock mechanism idea, he was confronted with several issues that he needed to address. With regards to the feasibility of manufacturing the product, they had to consider the following: product style, types of models required, engineering specifications, collapsibility, and tolerances in tool requirements, and aesthetic appeal of the product to the consumers. These were the aspects of the concept of the product that they have yet to resolve. The Process Butler knew that after the prototype has been made, that there were still a lot of steps for him to do, to ensure that the product would safely be in the market and that his idea would stay 'his', since he felt that his idea of a double-locking head mechanism was unique. However, he also knew that there were already a lot of similar products out in the market at the time. Patenting The first step that Butler pursued was the patenting of his invention. He then went to a top patent attorney in Toronto, Canada who was also an engineer, and requested him to conduct a preliminary patent search. The lawyer, on the other hand, explained to Butler that he had a reasonable doubt that the double-locking connector could be patented because there were already a lot of connectors out in the marketed that were patented. However, he agreed to do a patent search. Later in the summer, Butler was informed that there was a possibility of obtaining a patent. They then acquired the services of an industrial engineer to make drawings of the connector without any text explanation, which was challenging in itself. They were required to draw the unique product characteristics and design. Due to the issues and the requirements needed, Butler and Thomas flew to Montreal to get the needed expertise of a famous industrial designer. But there were differences in the concepts of Butler and the industrial designer, thus, they found another highly qualified industrial designer in Toronto. This designer made a few alterations in the connection mechanism and came up with a new prototype to be provided to the attorney and others so that they could clearly see how the product would function. In the autumn of 1987, the application process for obtaining the patent was started. By July 1988, the application was already filed in the United States. The lawyer believed that if a U.S. patent was approved, it was highly likely that a similar mechanism did not exist yet in other countries. Hence, an application was filed in Canada and other countries the following year. In discussing the patent acquisition of Butler for his double-lock connector, it is important to discuss the three essential components of a patent application. First is the patent drawings that are accomplished by a registered patent artist, next is the patent claims that provide an intricate description of the product and its functions, and last is the patent itself, which is a document that lays out the details that the applicant will use as protection against those who will attempt to copy the invention. Since Butler's lawyer is a patent specialist, he was able to provide all those requirements within his firm. Ownership The patent attorney of Butler referred him to a corporate lawyer. Upon this corporate lawyer's advice, Click Conections Corporation (Click), 90 percent of which was owned by Butler, and 10 percent belonged to McBride, and Alpha Personal Dental Care Systems Inc. (Alpha) were incorporated. The corporate lawyer suggested that the double-lock connector patent ownership be placed under Click to avoid patent and application disputes. Alpha, on the other hand, was established to handle dental applications only. Despite the ownership being given to Click alone, Click authorized Alpha to exclusively use and market the patent worldwide, which was effective for the life of the patent. It also covered all improvements made by either Click or Alpha. In addition to this, Alpha was not required to pay any royalties to Click in exchange for the license agreement sicne it was given in consideration of monies and efforts contributed by Alpha's shareholders. Alpha was also entitled to sublicense the patent to third parties like manufacturers. However, they will only be allowed to use the invention within the field of dental care. The Shareholders and the Agreement While the patent appllication was ongoing, Butler and Mcbride began bringing people together who could put in their respective expertise to help in the success of the invention. These people would then be part of the advisory council. It comprised of four dentists including Dr. Don Thomas, however, advises were gathered from several professionals like an experienced manager in a manufacturing corporation who had a number of contacts with industrial designers and raw material suppliers and a senior financial manager. As compensation for their "sweat equity" as Alpha likes to call each contribution, Alpha provided these adivisors with common shares. Funds amounting to $47,000 were contributed by individuals in exchange for additional shares. Butler was among these people who contributed funds, in addition to his everyday efforts to the project. Thus, he was given with a number of shares. A shareholders' agreement was documented on April 1988, which needs to be revised if shareholders who wanted to invest in the company would be added, apart from those who were already included in the shareholders' agreement at the time of the documentation. Lastly, Butler granted one percent of the profits of Click to be divided among the original investors or shareholders in Alpha. In total, there were 10 original shareholders amounting to 1,000,315 common shares held. With the most number of shares is Peter Butler (424,000), followed by Julie McBride with 195,000 shares, and then Dr. Ron Thomas with 111,000 shares. Aside from these key players in the company, there were seven other shareholders. As per the Shareholders' Agreement, the officers were elected by the board of members. Butler was elected Chairman of the Board, Chief Executive Officer, and President of the company (Alpha), while Thomas was elected Vice-President and McBride as the Secretary-Treasurer. These officers, along with the rest of the shareholders, have rights to vote during meetings on resolutions to develop and uphold management, and operation and control of the company. The Strategy While it seems that the team has already been formed, there were still a lot of details that needed attention. Butler hired Woods Gordon to do a business plan for the concept, and he discovered that there was a study conducted which found that total retail sales of oral hygiene products in the U.S. through drug, food and chain merchandisers reached about US$3 billion in 1987, while toothbrush sales alone were about US$245 million in the same year. They approximated the Canadian market to be about 10 percent of that in the U.S. It was also discovered that dentists represented a large part of the market share because they give toothbrushes to clients during visits and examinations. Other markets were institutions and corporations. Meanwhile, Butler and Mcbride conducted a survey at three dental clinics to asses the buying behavior of clients and whether or not they would be responsive to the product concept. Fortunately, all 400 responses were positive. However, Butler never had any intention to manufacture the product himself. He felt that there were a lot of already established competitors in the dental hygiene market in the U.S. and Canada that directly competed with Alpha's new product concept. Butler and his team were also aware that these are multinational companies that were already agressively ahead in marketing and promoting their dental care products. Hence, the group felt that the product would be better off marketed and distributed under these companies since they have more resources necessary to successfully market to a wider range of clientele. The strategy agreed upon was to license the double-lock connector to one, or a few of these existing manufacturers, and Butler believed that they can sell the rights for four to seven percent of the revenue. Although the concept, the patent, and the team have already been put together, there were still a number of challenges regarding the actual manufacturing of the product. Butler knew that they have spent a relatively big amount of money in the planning process, yet additional funds were still needed. As it is, they have already spent a total of US$50,091, where a big amount went to the industrial design ($14,121) and the business plan ($10,756). Three prototypes were made and they cost a total of $10,298, while the patent and legal services cost up to $14,916. At the time, he has already shelled out a considerable amount from his personal funds and assets, so he thought it best to secure investors from outside the company. In addition to the funds necessary to proceed, the manufacturability of the product needed to be tested to make sure that a toothbrush with a collapsible moulding tool can be produced and to test the production cycle time. Apart from this, other aspects of the product woul dhave to be tested like the material quality, the structural analysis, and the opening and closing process itself. To be able to accomplish all these tests, a testing brief would have to be performed by a firm in Toronto that has an expertise in prototype design. This 'testing brief' would also be presented in the future to solicit from potential investors, manufacturers, or multinational corporations. Butler estimated that all of these would cost at least US$50,000. After all these aspects and necessities were considered, Butler's lawyer advised him to do a private placement, because he believed that funds could be solicited from private individual investors. Butler, on the other hand, had reasonable doubt that hisproduct would attract investors this early in the process of development. His lawyer, however, stressed that it would have a high probability of success. Among the things that they needed to decide upon were: (1) who are to be approached; (2) the type of instrument to be offered; (3) the offering memorandum and its contents; and (3) the price of the instrument. Conclusion and Recommendations The concept of the toothbrush with the unique double-lock mechanism was, at the time, a good concept. Its main objective was to encourage consumers to change their toothbrushes regularly. The personalization and variety of designs of the toothbrush would also attract the attention of consumers, and hopefully, elevate the level of the toothbrush to a personal hygienic property of higher importance. Different colors would be appealing to consumers of different age groups, gender, and personal style, while different accessories like carrying cases and bathroom holders would cater to the different needs of consumers. For instance, middle-aged men may prefer the brass or stainless steel handle while women may prefer theirs in a different color or in white plastic. People who travel a lot may be interested in the carrying case while housewives would be interested in the bathroom holder to help organize the bathroom products. The affordability and cost -efficiency of the concept is also a big factor in its saleability. Instead of buying new toothbrushes everytime they need to change, all consumers need to do is change the head of the toothbrush. As Butler and Thomas have discovered, the packaging of the toothbrush costs about 50 percent of the total price. Thus, their idea of packaging multiple heads with the toothbrush is more cost-efficient. The main challenge was that, there were already a lot of companies that market toothbrushes that cater to the same needs of the consumers. It was this double-lock connector however, that made their concept unique from the products already out in the market, since the head is more secure to the handle and it prevents the consumers from experienceing the extra hassle of re-attaching the head everytime they brush their teeth. To cover ownership legalities, Click and Alpha were incorporated to minimize disputes regarding the patent. This was a brilliant suggestion by Butler's lawyer and a smart manouver for Butler. The ownership of the patent was given to Click, while Click, fully licensed Alpha to use and develop the patented product. Alpha was also licensed to sublicense, manufacture and market this patent. In effect, Alpha could do everything they wanted to do with it. This type of license is smart strategy, given that Butler owned 90 percent of Click, and was also President and CEO of Alpha. Butler also owned the most number of shares in Alpha. The double-lock connector may have been created for the specific use of an oral hygiene device, but in granting the ownership of the patent to Click, the double-lock mechanism may be developed in the future for products other than toothbrushes, while Alpha may concentrate on its dental care use. To put it simply, Click may further develop the innovation to a wider spectrum, while Alpha would focus on all dental applications only. The deal structure that Butler has developed with the shareholders was perceptive and efficient because the shareholders he picked were people who could contribute their own expertise in the innovation's study, manufacturing, and marketing. However, as was pointed out earlier, multinational corporations that were already marketing this similar oral hygiene product are tough competitions. Thus, Butler's idea of just offering licenses to these corporations and manufacturers of manufacturing and marketing the product was in essence, better than having to manufacture and market it by Alpha. This way, all the licensee has to do is incorporate the double-lock mechanism into their products and market it the way they usually does. In effect, they would not have to compete with multinational products like Oral-B or Colgate. This is also a more efficient strategy because these companies already have a wide range of customers, which Alpha currently lacked. In exchange for the license, Alpha would just get around four to seven percent of the revenue. At such an early stage in the process, Alpha does not yet have enough resources to manufacture and market their own line of toothbrush. Hence, it is recommended that they offer their patent to another multinational company. It is, however, necessary that they carefully study and decide which company to offer their patent to. It is further recommended that this license be first offered to just one company or two, but not more. Another concern would be the needed funds for the testing brief. Butler's lawyer proposed that they offer shares to private investors. This private placement has both an advantage and a disadvantage. A disadvatage would be that they would have to add further shareholders apart from the ten people, while the advantage would be the acquisition of the needed funds. On the other hand, the challenge would be how to convince investors, since the project is at such a young phase. Although its success is very much feasible, there is also a thin chance of failure. It would be best for the company to get an investor who has full trust and faith in the success of the project. Hence, it is recommended that the current shareholders be offered more shares first, and that their opinion be obtained. Read More