1 The scientists in the research laboratories of Swan Hill Company (SHC, a public listed c

1 The scientists in the research laboratories of Swan Hill Company (SHC, a public listed company) recently made a very

important discovery about the process that manufactured its major product. The scientific director, Dr Sonja Rainbow,

informed the board that the breakthrough was called the ‘sink method’. She explained that the sink method would

enable SHC to produce its major product at a lower unit cost and in much higher volumes than the current process.

It would also produce lower unit environmental emissions and would substantially improve product quality compared

to its current process and indeed compared to all of the other competitors in the industry.

SHC currently has 30% of the global market with its nearest competitor having 25% and the other twelve producers

sharing the remainder. The company, based in the town of Swan Hill, has a paternalistic management approach and

has always valued its relationship with the local community. Its website says that SHC has always sought to maximise

the benefit to the workforce and community in all of its business decisions and feels a great sense of loyalty to the

Swan Hill locality which is where it started in 1900 and has been based ever since.

As the board considered the implications of the discovery of the sink method, chief executive Nelson Cobar asked

whether Sonja Rainbow was certain that SHC was the only company in the industry that had made the discovery and

she said that she was. She also said that she was certain that the competitors were ‘some years’ behind SHC in their

research.

It quickly became clear that the discovery of the sink method was so important and far reaching that it had the

potential to give SHC an unassailable competitive advantage in its industry. Chief executive Nelson Cobar told board

colleagues that they should clearly understand that the discovery had the potential to put all of SHC’s competitors out

of business and make SHC the single global supplier. He said that as the board considered the options, members

should bear in mind the seriousness of the implications upon the rest of the industry.

Mr Cobar said there were two strategic options. Option one was to press ahead with the huge investment of new plant

necessary to introduce the sink method into the factory whilst, as far as possible, keeping the nature of the sink

technology secret from competitors (the ‘secrecy option’). A patent disclosing the nature of the technology would not

be filed so as to keep the technology secret within SHC. Option two was to file a patent and then offer the use of the

discovery to competitors under a licensing arrangement where SHC would receive substantial royalties for the twentyyear

legal lifetime of the patent (the ‘licensing option’). This would also involve new investment but at a slower pace

in line with competitors. The licence contract would, Mr Cobar explained, include an ‘improvement sharing’

requirement where licensees would be required to inform. SHC of any improvements discovered that made the sink

method more efficient or effective.

The sales director, Edwin Kiama, argued strongly in favour of the secrecy option. He said that the board owed it to

SHC’s shareholders to take the option that would maximise shareholder value. He argued that business strategy was

all about gaining competitive advantage and this was a chance to do exactly that. Accordingly, he argued, the sink

method should not be licensed to competitors and should be pursued as fast as possible. The operations director said

that to gain the full benefits of the sink method with either option would require a complete refitting of the factory and

the largest capital investment that SHC had ever undertaken.

The financial director, Sean Nyngan, advised the board that pressing ahead with investment under the secrecy option

was not without risks. First, he said, he would have to finance the investment, probably initially through debt, and

second, there were risks associated with any large investment. He also informed the board that the licensing option

would, over many years, involve the inflow of ‘massive’ funds in royalty payments from competitors using the SHC’s

patented sink method. By pursuing the licensing option, Sean Nyngan said that they could retain their market

leadership in the short term without incurring risk, whilst increasing their industry dominance in the future through

careful investment of the royalty payments.

The non-executive chairman, Alison Manilla, said that she was looking at the issue from an ethical perspective. She

asked whether SHC had the right, even if it had the ability, to put competitors out of business.

Required:

(a) Assess the secrecy option using Tucker’s model for decision-making. (10 marks)