A 2004 Alan Greenspan address to the Institute for Economic Policy Research makes a very clear point. The future of America’s economy (and those of other advanced industrialized nations) is increasingly dependent on the production of new ideas, inventions and other commercially significant innovations that may be secured by intellectual property rights (IPRs).
This commentary is a wake-up call to all business leaders operating in the global marketplace who seek to build and sustain competitive advantage through innovation. If Greenspan’s observations prove true (remember “irrational exuberance”), the strategy and tactics for how global enterprises realize value from investments in innovation are shifting towards the proactive management of IPRs.
Unfortunately, the idiosyncratic lexicon of property law (infringement, disparagement, functionality, invalidity, etc.) is typically the domain of intellectual property (IP) lawyers. Dealing with these talented professionals is expensive. Their opinions are difficult to translate into action. Legal manoeuvres and the associated costs are the epitome of what may be called “frictions” in the engine of commerce. While it is generally agreed these agents are essential to a commercial rule of law, there remains a tendency to delegate complex legal matters to experts somewhere outside of the executive suite.
Our research suggests that effective management of IPRs should be the domain of top management. This is because success with these intangible assets requires more than just knowledge of a particular market and its legal ground rules. Success in IPR management requires an understanding of corporate strategy and/or the logic of a business, local and global. Similarly, microeconomic issues such as pricing and reasonable royalty rates play a key role in keeping the friction forces from slowing commercial progress. Awareness and the ability to opportunistically act on IPR issues transform the playing field to one where the legal ground rules are not necessarily the rules of the game.
Success in IP management practice, therefore, goes to those who can play at the nexus of three traditional fields: strategy, economics and the law.
Practically speaking, firms have two alternatives for responding to the dynamics of innovation and IPR management.
The first alternative for most firms is to do nothing or maintain the status quo. Investments in innovation and new product development, after all, are risky and do little to address the harsh reality of quarterly reporting.
The second alternative is to be proactive about IPR management, preferably with programmes championed by top management. Such initiatives benefit from coordinated, premeditated planning of commercially significant innovation programmes in concert with the various IPR regimes. This is not simply a focus on patentable inventions, but rather an effort to manage all aspects of an offering’s life cycle together with the available methods of IPRs (patents, copyrights, trademarks and secrets) to build a portfolio of monopoly rights.
To address the questions inherent in the second approach, my colleagues and I at the Kellogg Center for Research in Technology & Innovation have undertaken a number of research programmes to create a meaningful knowledge base on IPR management. The research methods are broad, structured surveys of IP practitioners in hundreds of firms together with case-based best practices investigations. We frequently collaborate with professor Holger Ernst and his research group at the WHU in Germany to make sure we capture IPR-specific issues of the European marketplace. An example of one such research endeavour investigating the relationship between patent management and firm performance can be found at the URL: http://www.kellogg.northwestern.edu/faculty/conley/patentresearch/.
Sources of company/ industry-specific information are both primary and secondary. Public-domain information on patents and copyrights (for example USPTO.gov) can be very helpful in observing the innovation- related activities of specific firms.
Using such methods, our research has identified multiple examples of firms that are best in class such as Dolby Laboratories (patents, trademark licensing), TicketMaster (exclusive contracts), Disney (copyrights and merchandising on character rights), Astrazeneca (The Purple Pill!), 3M Espe (IPR portfolio management), Lego and others. Note that not all of these firms are resource giants. Dolby, for example, is a relatively small technology company. We further find that very small and even startup firms can be proactive with IPR management (albeit with limited resources) and occasionally out- manoeuvre industry Goliaths with extensive capital, but limited focus and agility.
In the Dolby case, the company founder, Ray Dolby, has carefully managed the innovations produced by his labs to extract maximum value beyond the life of the related patents. To wit, the licences for the patented Dolby B noise reduction system (analogue) for magnetic tape devices were reasonably priced to avoid competition and allowed quality auditing of the consumer end product. The licences also prescribed the appropriate, subtle use of the Dolby trademark as a sign of internal sound sophistication. A very counterintuitive thing happened when the Dolby B patents expired. Many equipment suppliers (automotive tape decks) were able to use the technology royalty-free, but unfortunately for them, the consumers wanted to see the Dolby name and the noise reduction button on their playback devices. As such, the de facto licensing of the trademark (with proper use, marks can survive indefinitely) become an important, post-patent value capture mechanism and vehicle to move the entire business into digital technologies. This company leader clearly knows how to play at the nexus of strategy, microeconomics/pricing and the law, to the benefit of the customers, employees and shareholders of Dolby Laboratories.
The same research characterizes the practice of value transference, uniquely branded products and other means for securing the differentiation associated with innovative offerings (through patents and copyrights) and building it into the equity of a strong brand. With more influential trademarks, these firms grow and leverage the advantages of powerful brands.
Contemporary power brands that evolved from the limited life patent-protected regimes into infinite asset trademark estates include Dolby in consumer electronics as discussed above, Lego and Barbie in the toy space, The Purple Pill (Prilosec to Nexium) in the pharmaceutical space, Nutrasweet in the food additive space, among many others that we track and document.
Additionally, we see the limited life protection of copyright transferring some value into infinite life trademarked characters such as Disney’s Snow White. In fact, all of the Disney characters (Cinderella, Sleeping Beauty, Alice in Wonderland and Bambi, to name a few) are currently being prosecuted to achieve federal trademark registration at the USPTO. Note that the classes or registration sought are extensive (check out serial # 75543711), essentially protecting all the merchandising lines in the Disney Store business sector and other channels for exploitation of the characters.
In today’s emerging and competitive market, it is axiomatic that where there is commercial significance, there will be legal significance. When proactively managed, IPRs are the legally significant assets that secure investments in commercial innovations. Competitive advantage cedes to firms that are thoughtful in acquiring these rights and executing on their embedded optionality. Those firms that choose the passive approach run the risk of becoming sidelined in the game of innovation and global competitive advantage.
(James G. Conley is the clinical professor of technology industry management, Centre for Research in Technology & Innovation, Kellogg School of Management, Northwestern University, Evanston, Illinois.)
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