By Ralph Eckardt
“Over the last 10 years, it has become imperative for CEOs to have not just a general understanding of the intellectual property issues facing their business and their industry, but to have quite a refined expertise relating to those issues… It is no longer simply the legal department’s problem. CEOs must now be able to formulate strategies that capitalize on and maximize the value of their company’s intellectual property assets to drive growth, innovation and cooperative relationships with other companies”
Microsoft Chairman, Bill Gates 2004 i
In recent years, intellectual property has come to play an increasingly important role in the world economy and has risen up to take its place on the agenda of senior executives across a wide variety of companies and in every industry sector. In short, intellectual property has become increasingly strategic. The rising importance of these ‘assets of the mind’ raises questions about how to best employ them to achieve the objectives of the corporations that create, and control them. As the quotation from Mr. Gates above suggests, it has become “imperative” that companies are “able to formulate strategies that capitalize on and maximize the value of their company’s intellectual property assets.”
Like so many things in life, Intellectual Property Strategy is easy to say, but very hard to do. Part of what makes it hard to “do IP strategy” is the lack of clarity about what we mean by IP strategy. In some ways, IP strategy is akin to pornography…it’s hard to define, even though we know it when we see it.ii But this inability to properly articulate what we mean by IP strategy is a problem for its practitioners since it thwarts our ability to properly embed it into the corporate agenda where it rightly belongs.
Having spent a lot of time thinking about and discussing these issues with senior executives in my consulting work over the years, I’ve been forced on numerous occasions to articulate what I mean by IP strategy. Over the next few pages, I’ll describe how I’ve come to think about IP strategy, and perhaps these reflections will provide a useful starting point for other practitioners as they seek to articulate what it is that IP strategists do.
The Objective of IP Strategy
In any discussion of IP strategy, the first thing that we must do is to recognize that IP strategy is a part of corporate strategy.iii To understand the objective of IP strategy then, it is helpful to first discuss the objective of corporate strategy.
As with IP strategists, there is no clear consensus among corporate strategists about the objectives of corporate strategy. That said, most corporate strategists would include among their objectives the phrase “sustainable competitive advantage” or other words that mean approximately the same thing. Whatever words you would use to describe your company’s strategic objectives, we can be pretty confident that they have something to do with sustainability, competition, and advantage.
Stated another way, corporate strategy is the development of a course of actions that will enable the company to generate a sustainable stream of profits. A successful strategy will allow the company to achieve ongoing profits that are greater than their competitors’ profits.
Consider for a moment the basic formula for profit:
π=(P X Q)- C
In words, this reads: Profit (π) equals revenue (Price times Quantity) minus Costs.
Corporate strategy then is the development of a course of actions that enables a company to sustainably realize higher prices than competitors (P), increase its market share (Q) and/or maintain lower costs (C) than the competition. As a contributor to corporate strategy, IP strategy must pursue the same objectives. A successful IP strategy must make a meaningful contribution to corporate profit generation.
IP strategy is the development of a course of actions that utilizes intellectual property to enable a company to sustainably realize higher prices, increase market share, and/or maintain lower costs than the competition.
Realizing higher prices:
One of the hallmarks of a successful IP strategy is the realization of higher prices than the competition. An obvious example comes from the pharmaceutical industry where drugs command adramatic price premium during the time when they are patent protected. When drugs go “off patent”, prices routinely drop by 60-80% or more.
In other markets, products compete on features and performance. Consider the difference in price realization between a fully featured Sony television and one produced by a lesser brand like Vizio. A big part of the difference in price realization is due to differences in performance (clarity, refresh rate, etc.) and features (3D, web enabled, etc.), and many of the technologies underlying the performance and feature differences may be patent protected. By precluding its competitors from adopting its patented technologies, Sony is able to command sustainably higher price realization for its TVs than its competitors.
It will probably have occurred to you that there is another important factor that plays into Sony’s ability to realize higher prices for its TVs than Vizio, and that is brand. Branding is yet another way that intellectual property contributes to higher price realization. Consider the difference in prices between Coke or Pepsi and a generic cola. The contents of the bottle are essentially the same, but consumers are willing to pay a much higher price for branded sodas because those companies have spent many millions of dollars building up the value of their brand and associating it with their name and trademarks.
Capturing market share:
Another important way that IP strategy can contribute to corporate profitability is by enabling the company to maintain and grow its market share. In the section above, we discussed how performance, features, and branding can enable companies to realize higher prices. Those same elements can also help companies to maintain and grow their market share.
When given a choice, customers choose products that deliver the combination of price, features, and performance that meet their needs. Companies that are able to differentiate their products in ways that are important to their customers and difficult or impossible to replicate by their competitors are likely to capture a disproportionate share of the market.
Consider two brief examples, Gillette and Apple. Gillette maintains more than a 70% share of the cartridge razor blade market through constant ongoing innovation, patent protection, and investment in branding. Apple’s iPhone and iPad products maintain ~30% and 50% of the US market for smartphones and tablets respectively. Apple has been extremely aggressive in enforcing its IP rights to maintain its lead in features that it considers to be important to consumers. It also maintains a strong and continuous branding campaign to reinforce its market position.
Maintaining lower costs:
The last way that IP strategy can contribute to corporate profitability is by helping the company to maintain lower costs than its competitors. This can be achieved in two main ways. First, companies can achieve lower costs through production or service delivery technologies that are protected fromthe competition through intellectual property. In some cases, trade secret protection is appropriate, while in others, patent protection is the best strategy.
There are many industries where competition is based on minimizing costs, but it is particularly true in commodity industries where the product is relatively undifferentiated from the competitor’s offering. In these circumstances, product performance, features, and branding tend to be less important in the customers purchase decision. As a result, there is little or no justification to command higher prices, and attempts to do so lead directly to a loss in market share. In these industries, whoever has the lowest cost production or service delivery system will have the highest profit margins. From this advantaged position, the low cost producer can lower price and take market share at will. The proper use of IP strategy can help companies achieve a sustainable cost advantage and contribute directly to corporate profitability.
The second way that IP strategy can lead to lower costs is by maintaining a lower cost of technology than the competition. In many markets, the cost of technology makes up a significant and increasing portion of the total cost of goods sold (COGS). In markets with complex technology, a company’s products inevitably embody both self developed technology and technology borrowed from others. In these instances, companies are forced to trade technology in order to bring their product to market. Access to required technology is obtained through licensing and cross-licensing arrangements. In some industries like consumer electronics, the total cost of technology access (including patent royalties) can make up 20-30% of the selling price of the product, and in some categories like smart-phones it can be even higher. Companies that are able to achieve the lowest ‘cost of technology’ by obtaining a favorable royalty balance of payments can sustain higher profit margins than their competitors. This balance of technology payments includes not only the cost of accessing competitor’s technology, but also technology owned by non-producers. Companies that are best able to manage licensing from NPEs can sustain higher margins and profits as well.
IP strategy should contribute directly to the company’s ability to achieve and sustain competitive advantage and capture superior returns for shareholders. I often hear IP professionals complain that IP doesn’t get the attention it deserves from senior management. But I rarely hear IP professionals articulate how IP contributes to the company’s bottom line. In my experience, the amount of attention given to IP and IP strategy in the senior executive suite is directly related to the impact that IP is having on the company’s profitability. If you want IP to be taken seriously by the CEO and Board of Directors, then demonstrate how IP can help the company achieve sustainable competitive advantage.
The Practice of IP Strategy
In the previous section we defined IP strategy and discussed its objectives. But how is IP strategy developed? How can IP strategists select a course of action that will lead to increased and sustainable profitability? To understand how IP strategy is developed, it is helpful to understand how corporate strategy is (or should be) developed.
Corporate strategists have long understood that strategy development is not a one time or periodic activity, but a continuous process of decision making. Perhaps the best description of this strategy development comes from a military strategist named Colonel John Boyd who developed what he called the OODA Loop to describe how fighter pilots continuously develop and adjust their strategies to an ever-changing situation in the air.iv
“OODA” is an acronym which stands for Observe, Orient, Decide, and Act. Strategy development is a continuous process whereby the strategist observes what is happening in the environment, orients herself to the most critical facts and circumstances, decides on a course of action, and acts upon that decision. The results of those actions are then observed, and the strategist goes through the OODA loop again.
The concept of the OODA loop translates directly to the continuous process of IP strategy development as the diagram below demonstrates.
The development of IP strategy starts with observation of the internal and external environment. Knowledge about what’s going on in the external environment includes information about the technology environment, customer needs, competitor activity, the partner ecosystem, and the legal environment. Internally, observation implies monitoring the performance of the IP organization to stay informed about the results of the various actions it takes.
Perhaps the most important step in the IP strategy development process and one that is often overlooked is the process of orienting the organization to the information observed in the environment. Orienting involves filtering, analysis and dissemination of relevant and timely information to those in the organization who need to know it. Choosing what information is most important, who needs that information, and how best to present it is a big part of what it means to be a competent IP strategist.
With a clear understanding of the environment and proper orientation of the organization, decisions can be made about a course of action that the organization will take with regard to IP. Decision making is at the heart of IP strategy, but decisions can’t happen in a vacuum. They must be properly informed through observation and orientation, and followed by actions in order to have an effect on the organization. Furthermore, they must be properly aligned with the overall strategy set by the corporation. The output of the decision process may be a formal or informal strategic plan, but at a minimum, it should set the priorities and objectives that will guide the actions of the IP organization.
The actions taken to execute an IP strategy include the full range of activity that occurs in an IP department, from the creation of IP-protectable innovation, to the creation of IP assets through formal IP protection mechanisms, to the leveraging of those assets in the marketplace. A full recitation of the range of actions that are part of IP strategy execution are far beyond the scope of this short paper, but a close examination of the diagram above should suggest the kind of actions that are possible.
With the rising importance of intellectual property, the importance of IP strategy is being recognized in an increasing number of industries and companies. IP strategy has the potential to make significant contributions to the competitive advantage of the companies in which we all operate. It is the role of the IP strategist to convert these valuable assets into advantage.
i This quotation appeared in an email from Microsoft Chairman Bill Gates to Chief Executive Magazine published in 2004.
ii In a 1964 U.S. Supreme Court case on public obscenity, Justice Potter Stewart’s opinion included what has become one of the most famous phrases in the history of The Court; “I shall not today attempt further to define the kinds of materials I understand to be embraced within that shorthand description, [pornography]…But I know it when I see it…”
iii In some instances, IP strategy may be so critical that a company’s IP strategy is in effect the same as its corporate strategy, but this is the exception rather than the rule.
iv The OODA Loop was developed by Colonel John Boyd as part of his work for the U.S. Air Force during the 1960s and 1970s. It has since been adopted by many military, governmental, and corporate strategists as a useful tool to guide strategy development across a wide variety of contexts.
[This article originally appeared as an INTIPSA TIP.]