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Developing An IP Strategy For Your Company

Can a company use intellectual property rights and develope an IP Strategy to gain and sustain competitive advantage? How the production and exchange of technology differs from more traditional economic goods? What options do intellectual property rights offer as against the advantages enjoyed by the competitors? How can we get an early warning of potential IP conflicts?

Do we have the tools and IP strategies for creating and leveraging our IP Portfolio and also assess the impact of global competition on our IP strategy? Do employer policies and IP strategy affect incentives to discover new commercially valuable technologies?

Companies can reap the benefits of smart intellectual property strategies as it competes in a global market. There are many things we can't control in a business but we can control intellectual property.

Success has been driven by the development of intellectual property for a large number of companies. A company must invest resources in intellectual property because the industry has become IP-intensive. Information dissemination is rapid today calling for greater protection of ideas. People are now aware of the importance of intellectual property and trade secrets. A company should not fear that its competitors will have access to the information and copy it. Managing IP is absolutely important for a company's growth and development.

For example, we can carry out extensive patent searches in other countries so we don't reinvent the wheel and waste valuable time and money developing something on which someone else has already spent a huge sum of money and also time. We don't need to copy patents that already exist. We can learn and improve on what is already there. Competitors' patents also provides invaluable marketing knowledge. The market is becoming more global and everyone is starting to compete.

IP includes intangible assets of a company. People become fixated on the tangibles and forget to look at the larger picture. IP is one of the strong driving forces behind the successful growth of a company.

That IP is costly is a short-term view. A company could register a patent only in the specific countries where it will be doing business. Registering it around the world because it may be a complete waste of money. We have to be realistic about where the future of the product lies.

Knowledge is now the principal economic asset and its management and protection have become the key areas of corporate strategy.

IP management is becoming an integral part of a company's competitive strategies. The use of IPRs and strategies in the US, EU, Japan and China and the protection of IP in specific industry groups provides the strategy perspective in a globalized world.

A managerial perspective of strategies to protect a firm's inventions and the role of patents is important. An “Yale” survey of experts from US manufacturing industries found that firms typically trust and use alternative strategies such as lead time and secrecy instead of IPRs to appropriate innovation-related benefits.

Accounting and integration of the value of IP portfolios into corporate financial strategies is gaining importance.

Patenting and use of other IP instruments has more to do with their usefulness in corporate strategies, blocking competition and providing bargaining chips for cross-licensing.

IP practices and strategies used in information technologies and communications, including computers, software, business methods and Internet applications.

Strategies of saturation patenting designed to slow down or prevent competition from exploiting alternative technological trajectories that are certainly anti-competitive.

In addition to the conventional trade-off between the presumed stronger incentives for innovation and the disclosure of inventions,
stronger patents may inspire strategic patenting for the purpose of cross-licensing and thereby facilitate the exchange and diffusion of new technologies (Hall and Ham-Ziedonis, 2001).

Strategic patenting thus may be socially beneficial in encouraging the disclosure of information to other firms and in averting costly litigation. However, the strategic accumulation of patents in patent pools creates high barriers to entry (Barton, 1998).

New semiconductor firms must spend $100–$200 million in licensing fees for basic technologies that may not be all that useful (Hall and Ham-Ziedonis, 2001).

The discussion of various examples of strategies used in different industries shows, however, that while strong patents may facilitate the transfer of technology, they also may facilitate anticompetitive behavior (Anderson and Gallini, 1998).

There is, however, strong evidence that licensing increased significantly in recent years (Goldscheider, 2002, Chapter 1 by Manfroy).

One of the most recent and interesting accounts of patenting strategies comes from the Stanford Workshop on Intellectual Property and Industry Competitive Standards, 1998. The debates were based on the model of innovation that involves a set of incremental and often quite different contributions by different firms, each building upon the work of the others. By the time an idea becomes a commercial product, it has had many owners, each contributing special skills and, in the aggregate, hastening the rate of innovation (Scotchmer, 1996 and Scotchmer, 1991).

Patenting is driven by strategic reasons and not by the desire to protect one's invention against imitation. Rivette and Klein (2000) and other authors of recent popular books on IP strategies urge managers to apply for patents and use them more aggressively.
Cohen et al. (2000) caution managers about the possible risks and costs related to relying too heavily on patenting strategies when alternative methods such as being first in the market may be less costly and more effective.

Many firms use alternative strategies such as increasing the complexity of product design to fend off imitation or being first in the market to appropriate benefits from their innovations. These strategies are judged to be more effective in appropriating benefits from innovation than a reliance on statutory IPRs.

A British study estimated separately the effect of R&D and IPRs on the productivity of a firm. Firms in high technology industries register larger returns on R&D while those in low technology sectors show more significant returns on IPRs (Greenhalgh and Longland, 2002).

Pitkethly (2001) comparing the British and Japanese IP strategies.

The perception that Europe is lagging behind the US in IPR systems led to the establishment of the European Technology Assessment Network (ETAN, 1999) whose Working Group produced the report “Strategic dimensions of IP rights (IPRs) in the context of science and technology policy.”

Other sources of information on IPR in Europe include, the proceedings of the conference “PATINNOVA ’ 90, Strategies for the protection of innovation” Tager and von Witzleben (1991) should be mentioned. They provide detailed accounts of IPR protection in several European countries’ industries and major as well as small and medium-sized firms.

Granstrand's comprehensive study examining IP use, management and strategies in general, and in Japan in particular, is Economics and Management of Intellectual Property (Granstrand, 1999b). In addition to the detailed account and analysis of the results of his own survey of large Japanese corporations, the author compares the Japanese situation and the strategies of large corporations in Sweden and also occasionally in the US.

Granstrand's historical overview of Japanese patenting provides an enlightening introduction to the subject. The Meiji dynasty opened Japan to the world in 1868 and introduced a patent system inspired by the US and Europe 3 years later. The Tokugawa dynasty introduced the ‘Ordinance Prohibiting Innovations’ in 1718 in order to prohibit ‘new things’.

Granstrand reminds the reader that with regard to the monopoly power conferred by patents, an important distinction to be made is that a patent provides first of all a monopoly on an input: (1) many other costly complimentary inputs may be needed before monopoly profits are gained and (2) as with many inputs, a patent may be substituted by other patented or nonprotected
solutions.

The evolution of R&D spending and patenting in industrial countries is compared up to 1991, followed by the survey data on R&D and patenting in large Japanese firms (chemical, electrical and mechanical).

After the presentation of the Japanese patent system, the remainder of the book is dedicated to a discussion of patenting practices and strategies by Japanese corporations, based on the author's survey and interviews he has conducted.

That is followed by an insightful description of Japanese technology and commercialization strategies, and a comparison of means for the commercialization of new product technologies in Japan, Sweden and US. These strategies include patents, secrecy, lead time, switching costs and superior marketing.

The author discusses strategies related to the use of IPRs in standardization, IP policies and strategies, and the advantages and disadvantages of patenting in general and specifically in Japan.

His survey shows that “the status of patent activities within the firm” as well as the “strategic role of patents,” “licenses” and “top
management's attention to patenting” all increased in Japan over 1987–1992. He stresses that unlike the European and US corporations, Japanese corporations considered patents as the most effective means of capturing profits by restricting competition.

One of the specific features in Japanese strategy was the propensity to engage in technology-related product diversification in co-evolution with product-related technology diversification, thereby benefiting from economies of scale, scope and speed (as exemplified by the case of Canon).

The chapter on patent strategies is particularly interesting and informative. The presentation of various strategies (patenting, trademark, secrecy, licensing and litigation strategies) is completed and illustrated with survey results detailed for the three industry sectors.

His discussion of the analysis of patent information as a source of technical information is complemented by a warning regarding the use of patent statistics. The Appendix presents the methodology and research tools (the description of the survey, the sample and the questionnaire) used for corporate benchmarking and a comparison of corporate patenting in Sweden and Japan which may be a valuable source of information for similar studies.

The motivation of patenting strategies in ‘discrete technologies’, is to build patent fences around a core invention patent to foreclose patenting of substitutes by rivals. Typically, in these industries patents are rarely used for cross-licensing (Cohen et al., 2000).

According to innovation surveys (Levin et al., 1987; Cohen et al., 2000) R&D managers in semiconductor firms considered patents among the least effective mechanisms for appropriating results of R&D investments. They were considered less effective than alternative strategies such as being first in the market, secrecy, short product life cycles, etc.

Hall and Ham-Ziedonis (2001) explore the reasons pushing semiconductor firms to patent aggressively. They also address the question as to what effect the stronger patent rights have on patenting by firms engaged in rapidly advancing cumulative
technologies (such as multimedia or computer and semiconductors). Firms in these fields often require access to a ‘thicket’ of IP rights in order to advance technology or to legally sell or produce their product.

The authors present a summary of interviews with industry representatives and an econometric analysis of the patenting data. The authors start with the hypothesis that the surge in semiconductor patenting is a consequence of the pro-patenting shift in the US legal environment.

They examine the following “operational” hypotheses:

Do firms most vulnerable to “hold-up” in the new patent regime (i.e. firms with large sunk costs in complex manufacturing facilities) respond “strategically” to the institutional shift by expanding their patent portfolios with which to trade?

Did the strengthening of US patent rights facilitate vertical integration and emergence of “technology specialists”, i.e. more patent intensive design-firms, as suggested by Arora and Merges (2004)?

The findings of Hall and Ham-Ziedonis (2001) suggest that:

1. The large manufacturers have indeed invested more heavily in the “pro-patent” period and appear to be engaged in “patent portfolio races” aimed at reducing concerns about being held up by external patent owners and at negotiating access to external technologies on more favorable terms. Stronger patent rights are particularly important in attracting venture capital funds and in securing proprietary rights in niche markets. Thus the paper confirms the validity of the “strategic patenting response” by capital-intensive firms. The authors find little support for the regulatory capture hypothesis (also rejected by Kortum and Lerner (1997), i.e. the view that the surge in semiconductor patenting is driven by the scale effects alone or by aggressive post 1982 patenting by Texas Instruments, the firm with the largest patent portfolio. With regard to the alternative hypothesis that the surge in patenting is driven by the unrelated improvements in management and productivity of R&D (hypothesis accepted by Kortum and Lerner as the explanation of the overall increase in US post-1982 patenting), the authors too find evidence of managerial improvements, primarily in how semiconductor firms manage their IPRs rather than their R&D.

2. As for the emergence of technology specialist design firms, the “bargaining chip use of patents” appeared less prominent in the interviews with firms specializing in the design of semiconductor products. Unlike the manufacturers, the design firms seem to seek to secure strong “bullet proof” IPRs to technologies in their niche.

Thus patents appear to be an imperfect but quantifiable measure of technology that enabled technology-based trades to be made in external markets, both in financial markets for venture capital and with suppliers and owners of complementary technologies.

Stronger patent rights may have facilitated entry by specialized firms and contributed to vertical disintegration in the semiconductor industry (Merges, 1997; Arora and Fosfuri, 2000).

But these positive effects coincide with a trend to accumulate large patent portfolios in order to use patents as bargaining chips leading to patent portfolio races. This trend was greatly helped by the apparent lowering of standards of “non-obviousness,” “usefulness” and “novelty” after 1982. (Grindley and Teece, 1997).

On patent pools, cross-licenses and standard setting and related business strategies in general and on semiconductors in particular. Shapiro (2001).

For detailed observations on the semiconductor industry's IP management and strategies in consortia - Tilton (1973), Ham et al. (1998), Grindley and Teece (1997) and Headley (1998).

Grindley and Teece (1997) provide a detailed account of the pro-active approach to IPR management in Semiconductors and Electronics and specifically linking IPR to core business, developing patent portfolios and the licensing practices of leading firms (RCA, ATT&T, IBM, Intel, Hitachi, Hewlett-Packard, etc.). The article offers examples of how leading companies managed IP and created patent portfolios, and how these were generating royalty revenues from firms that had less to offer in exchange. The licensing strategies were shaped by public policies. This was notably the case for ATT which was until 1984 a regulated
monopoly and was obliged by the antitrust consent degree to license its IP to everyone for minimal fees. The competitive strategies and IP practices of telecommunication firms are also discussed by Kefauver (1993). Similarly, IBM was covered by the consent decree and practised licensing “to ensure” the right to manufacture and market products protected by patents belonging to other firms.

The article discusses the types of cross-licensing used and royalties paid in relation to a firm's strategies and the life-cycle of their products. The practice of cross-licensing has a double positive effect on innovation:
(1) it provides firms with a return on innovation thus helping them to fund further R&D while
(2) allowing them to concentrate their innovation and patenting activities according to their comparative advantage.

Interesting points brought forward by industry experts are integrated in the Barton's synthesis. (Barton, 1998). Even though not belonging to ITC industries, the introduction of the Advanced Photographic System is a very interesting recent example of various IP strategies in the field of consumer products.

Important recent contributions to the growing literature that deals with the management of and strategies for IP protection.

Assessing, measuring and auditing IP portfolios
The growing interest in the management of IP has resulted in efforts to improve its measurement. IP performance is now measured in ways other than simple patent counts. The emerging measures combine quantitative and qualitative aspects and enable organizations to better evaluate and manage their patent portfolios Bratic et al. (2002).

Firms are performing IP “business” audits of their IP in order to assess the commercial value and competitive use of IP for their business. The audit classifies IP into several groups. It is the first step to creating an IP portfolio for strategic purposes. For example, Dow Chemical, which has 29,000 patents, required each business unit to classify its patents under three groups:

(1) most valuable patents related to high growth business,
(2) patents that had no present or planned use but are still of value to others and
(3) patents unlikely to be used.

The first group was left for business unit competitive purposes, the second offered for licensing and the third donated or abandoned (Nermien Al-Ali, 2003).

Valuation of IP
One of the most important steps in managing IP is to establish its value. Valuation is the process of ascribing value to technology. Valuation is particularly crucial for the commercialization of early technologies, for licensing and for mergers and acquisitions (M&A).

Probably the best sources on the valuation of IP in general are Razgaitis (2002), Smith and Parr (1998) and Lamb in Simensky et al. (1999, Chapter 5) and Damodoran (1994).

According to Razgaitis, the basis of valuation is recognition that there are two concepts involved: Technology and Right. When these change, the value changes as well. The principle valuation methods are:
1. Industry standards
2. Rules of thumb
3. Rating-Ranking.
4. Discounted cash flow.
5. Advanced methods
6. Auctions.

Razgaitis recommends using multiple methods of valuation. Multiple methods produce value or a coherent range of values that make sense from those multiple perspectives.

The valuation of early technologies presents specific challenges as evidenced by the dot.com and telecom bubble of the late 1990s. This lends a special interest to the book on valuation of early technologies published at the peak of the stock market frenzy (Razgaitis, 1999; Smith and Parr, 1998, Chapter 10).

The study of a sample of 127 semiconductor patents suggests that, for patents used as “bargaining chips,” novelty and inventive activity are the most important determinants of the value of patent rights. In a series of related papers, Reitzig, 2004a, Reitzig, 2004b and Reitzig, 2003 estimated the value of patent ‘pools’, patent ‘fences’ and patent ‘thickets’ of a sample of 612 European patents and found that the value depends on the type of patented technology (discrete or complex).

The valuation of IP is also particularly important in M&A. The role of IP in M&A is especially important in information technologies (Rivette and Klein, 2000). A comprehensive treatment of IP in M&A is presented by Bryer and Lebson on the WIPO (2003) Internet site.

The valuation of patents, when included in an industry standard, should take into account the value conferred by the patented invention and the value attributable to the standard (Patterson, 2002). Smith (1997) treats valuation of trademarks.

Intellectual property protection is also a significant factor in strategic alliances. Firms adopt more hierarchical governance modes when protection is weak (Oxley, 1999).

Patent citation data are used to measure ‘technological overlap’ between firms before and after alliance formation. Partner selection can be predicted by measures of technological overlap and, once formed, alliances appear to affect the technological portfolios of firms in ways predicted by the resource-based view (Mowery et al., 1998).

Under some circumstances, the value of corporations’ intellectual capital (protected or not) is maximized by the strategy of corporate “carve-outs.” A corporate carve-out occurs when a company itself desires to hold the intellectual assets of its business in two or more sister companies.

In contrast to a corporate spin-out (or spin-off) whose shares are distributed to existing shareholders, a carve-out establishes a new set of shareholders. The chapter by Malackowski and Harrison in Goldscheider (2002, Chapter 13), describes in detail the reasons for carve-outs, the criteria to be used in evaluating the intellectual capital for carve-outs, the selection of potential partners and how the carve-out should be structured.

The joint venture IP strategies and special problems with Strategic Alliances are described by Smith and Parr (1998, Chapters 13 and 14).

Managing of IP assets
The evidence of corporations being increasingly capable of extracting value from intellectual assets is provided by the growing importance of licensing. This increase in importance had, according to Manfroy (2002), the following consequences:

(1) Corporate vision changed and many corporations created the position of Chief Technology Officer.

(2) Emergence of the Intellectual Capital Model. A model of a company from the intellectual assets perspective that explains how the different pieces of a corporation fall together, how they interrelate and their impact on a corporation's intellectual assets and profitability.

(3) Attention is given to intellectual assets management.

(4) With the increasing importance of intellectual assets licensing professionals are demanding increased remuneration.

The various aspects of best licensing practices are presented in a collective volume edited by Goldscheider (2002), in Goldscheider (1998) and UNIDO (1996).

Although the present survey does not provide an over view of the legal aspects of IP management, I wish to draw attention to the chapter on the ‘Dos and Don’ts of licensing agreements. It is a very useful guide that should help managers and legal councils interact better in their endeavors to write precise but comprehensive legal agreements (Ramsay, 2002).

Licensing increasingly involves a combination of patents, trade secrets and copyrights in the realm of software and the Internet. Trademark protection and licensing from the US and Canadian perspectives are treated in Small and McKay's Chapter 8.

Positioning IP for share holder's value through “Patent Brands” is discussed by Berman and Woods in Berman (2001, Chapter 10). One of the companies whose value is based on several world's most valuable brands is Proctor & Gamble. Weedman in Berman (2001, Chapter 11) describes how the IP portfolio is managed and exploited by Proctor & Gamble.

Smith and Parr (1998) present a Strategic IP plan and Gap analysis, illustrated by case studies of Merck and Dupont.

The best intellectual capital management practices of a group of about 30 leading companies are the raw material from which Davis and Harrison (2001) distilled the patterns that characterize some of the activities leading-edge companies use to realize value from their intellectual capital and property.

Rivette and Klein's (2000) book is full of examples of how the high tech firms in information technology industries extract value from their knowledge assets. They propose a three-pronged patent strategy for large R&D projects (Knight, 2001).

Accounting and IP
The American Institute of Certified Public Accountants (AICPA) has been requiring all companies, private and public, to disclose certain risks and uncertainties that could affect their financial performance, effective for fiscal years ending after December 15, 1995.

The new requirement, known as Statement of Position (SOP) 94-6, “Disclosure of Certain Significant Risks and Uncertainties,” challenges senior managers of businesses to find an appropriate balance between complying with new disclosure guidelines and guarding their own competitive positions and trade secrets (Kwestel and Nusbaum, 1996). However, this measure did not prevent the financial scandals that marked the end of the 1990s.

In June 2001, the Financial Accounting Standards Board of the US introduced new Financial Accounting Standards (FAS #142) Goodwill and Other IA that required significant changes in how companies record the value of their IP. As stated by Baruch (2001) who was on the committee, “For the most successful companies patents, copyrights, brands and other IA trump physical assets, such as factories, offices and even product inventory, hands down.”

In May 2001, the Securities and Exchange Commission Chairman recommended that the SEC encourage supplemental reporting by corporations on such assets.

Kossovsky and Brandegee (Goldscheider, 2002, Chapter 12) show how firms respond to these new rules by integrating IP management strategies into corporate financial strategy.

IP as financial asset
IP assets are increasingly integrated into a corporation's financial strategy. IP is leveraged in investment banking transactions.

As IP assets are used increasingly by corporations as financial assets, their value is also assessed by rating agencies.

The patenting strategy in ‘discrete technologies’ is to build patent fences around a core invention patent to foreclose patenting by rivals. In these industries, patented inventions are easily licensed but rarely cross-licensed.

In contrast, cross-licensing is characteristic of complex technologies (e.g. semiconductors, information and telecommunication technologies). In these industries, patents are not considered to provide effective protection against imitation. They are increasingly used as part of a business strategy based on an accumulation of large patent portfolios used as bargaining chips in cross-licensing to protect innovative firms against infringement suits and generate royalty revenues.

The effective use of IPRs requires that they be well incorporated into a firm's overall strategy. This is more often the case with large than with small firms. Small firms often lack or cannot afford to build up specific competencies. They also lack the financial capability to defend the infringed IPRs. The cost of obtaining a patent and the prospect of even larger litigation costs often discourages small firms from patenting, especially abroad. Thus, although small firms are often at the origin of the most revolutionary innovations, in many countries like Japan, Europe and Canada, they use IPRs less frequently than the large ones.

Rajrathnam V P, Attorney/Advocate and IPR Consultant - rajrathnamvp@yahoo.co.in