Licensing other companies to manufacture products can create a risk of the licensees becoming competitors, as they may use the licensed technology, know-how, or brand to enter the same or new markets, or to develop similar or improved products12. This can reduce the licensor's market share, profitability, and competitive advantage3.
Detailed Explanation: Licensing is a business arrangement where one party (the licensor) grants another party (the licensee) the right to use its intellectual property (such as patents, trademarks, designs, or trade secrets) in exchange for a fee or royalty4. Licensing can provide various benefits for both parties, such as expanding into new markets, increasing innovation, reducing costs, and generating income. However, licensing also involves some risks, such as losing control over the intellectual property, compromising the quality or reputation of the product, or facing legal disputes or challenges. One of the possible risks of licensing other companies to manufacture products is that the licensees may become competitors of the licensor. This can happen in several ways, such as12:
* The licensees may use the licensed technology, know-how, or brand to enter the same market as the licensor, and compete for the same customers or segments.
* The licensees may use the licensed technology, know-how, or brand to enter new markets that the licensor has not explored or penetrated, and gain a first-mover advantage or a larger market share.
* The licensees may use the licensed technology, know-how, or brand to develop similar or improved products that can substitute or surpass the licensor's products, and offer better features, quality, or price.
* The licensees may use the licensed technology, know-how, or brand to create new products that can complement or enhance the licensor's products, and capture more value or customer loyalty.
The risk of the licensees becoming competitors can reduce the licensor's market share, profitability, and competitive advantage, as well as damage the licensor's relationship and trust with the licensees3. To mitigate this risk, the licensor should carefully select and evaluate the licensees, negotiate and enforce clear and fair licensing terms and conditions, monitor and protect the intellectual property rights, and maintain a good communication and collaboration with the licensees .