by kevin g. rivette and david kline harvard business review (jan...

By Kevin G. Rivette and David Kline

Harvard Business Review (Jan – Feb 2000)

INTELLECTUAL PROPERTY

  Intellectual Property Legally protected intellectual assets

  Trade secrets   Trademarks   Copyrights   Patents

PATENTS

 Most tangible form of IP  Strongest legal protection  Greatest effect on commercial success and

market value  Patent databases are powerful sources of rich

competitive intelligence

COMPANY’S SUCCESS  Quality products  Excellent operations  Effective marketing

1.  Establish a Proprietary Market Advantage 2.  Improve Financial Performance 3.  Enhancing Overall Competitiveness

ESTABLISH A PROPRIETARY MARKET ADVANTAGE

 Defend a proprietary market advantage  Translate into

  Category-leading products   Enhanced market share   High margins   Foundations for new industry

 Use of internet   Collapse of competitive barriers   Blurring of industry boundaries

 Patents may become one of the most effective means of creating a proprietary, defensible market advantage

CASE STUDIES

  Lacked proprietary advantage against online rivals   Market share reduced

  1-Click buying system   Filed infringement suit against B&N

  Name-your-own-price (NYOP) reverse auction patents

  Filed infringement suit against Microsoft (Expedia – Online travel site)

ESTABLISH A PROPRIETARY MARKET ADVANTAGE

1.  Protect core technologies and Business methods

2.  Boost R&D and branding effectiveness 3.  Anticipate market and technology shifts

PROTECT CORE TECHNOLOGIES AND BUSINESS METHODS

Core Technologies  Focus patent strategy on proprietary technologies

which gives competitive advantage  Monopolize market

  Xerography patents   Allowed monopoly in copier market

 Forced to license copier patents under terms of a federal consent

Business Methods  Competitive advantage not in the products and

services   Innovative business methods

PROTECTING BUSINESS METHODS

 Direct-sales business model

 Build-to-order  Selling, distributing

and after-sales support

 Sophisticated purchasing, marketing and distribution systems

 Higher efficiency, Lower prices, Higher rates of customer satisfaction

DELL WALMART

PROTECTING BUSINESS METHODS

 Secured 42 patents  Customer-

configurable online ordering system

 Leveraged on use of patent with IBM   Lower cost

components   Freed from royalties

 Price competitive

 No patent on business systems

  Ineffective protection of trade secret law

 Unable to prevent key employees from transferring knowledge of Wal-mart’s proprietary systems

DELL WALMART

BOOST R&D AND BRANDING EFFECTIVENESS

 Build category-leading products  Enhance the branding efforts  Develop products which patents can help to

establish dominant share

Hitachi - Automotive airflow sensor  Effective patent wall  Rivals are forced to look at more complex and

expensive alternatives  Less competitive

BOOST R&D AND BRANDING EFFECTIVENESS

 Biotechnology & Pharmaceutical companies   Think about the potential strength of patents   Research and Development priorities   Best results in clinical trials   Strongest clinical trials

BOOST R&D AND BRANDING EFFECTIVENESS

Gilette’s Sensor Shaver  Challenge in mapping out the patent landscape

  Determine keyDeliver a closer and more comfortable shave

  Twin/ Triple independently moving blades   Floated –angle geometry technology blades   Cartridge   Springs

  performance attributes  Full patent analysis  Examine strengths and weaknesses  Choose design that is difficult for competitors to

duplicate

ANTICIPATE MARKET AND TECHNOLOGY SHIFTS

Texas Instruments (TI)  High demand for higher speed internet

communications (1997)  Digital Subscriber Line (DSL)  Acquire Amati Communications  Patents for DSL  Develop favourable partnerships and licensing

relationships

ESTABLISH A PROPRIETARY MARKET ADVANTAGE

1.  Protect core technologies and Business methods 2.  Boost R&D and branding effectiveness 3.  Anticipate market and technology shifts

1.  Establish a Proprietary Market Advantage

2.  Improve Financial Performance 3.  Enhancing Overall Competitiveness

IMPROVE FINANCIAL PERFORMANCE

1980s

• Physical Assets: >60%

2000s

• Physical Assets: <30%

• Technology-intensive industries • Manufacturing industries

TAP PATENTS FOR NEW REVENUES

 From licensing patent rights

 Texas Instruments (TI)   Earned $4billion in patent royalties   $800million per year

1990s

• $15 billion

Today

• $110 billion

10 years later

• $0.5 trillion dollars

TAP PATENTS FOR NEW REVENUES

Xerox  New business unit   “If you only use your patents to protect your

products, which is the old paradigm, you’re missing all manner of revenue-generating and other opportinities.” – VP of Intellectual Property (Xerox)

Alcatel-Lucent   266-person business unit   12% of $30billion in annual revenues in R&D

REDUCE COSTS

 Reduced portfolio maintenance costs and taxes  Review patent activity

Dow Chemical   Identify licensing, commercialization, and joint

venture opportunities   Immediate savings: $50 million  Match technology assets with business goals

ATTRACT NEW CAPITAL AND ENHANCE CORPORATE VALUE

Lockheed Martin (Aerospace)  Patented 3D flight simulator  Unused technology  Later used as a foundation to a new venture:

Real3D PC graphics and video game business  Success in transforming unused patents into a

strategic presence in a lucrative new market

AUDITING YOUR PATENT PORTFOLIO

o  Task: Assessing financial value of patent& assessing business& commercial business

o  No easy task: best rudimentary& little help in providing reliable valuation benchmarks.

o  Core patents – presently used technologies o  Evaluated by how much contribution to commercial

value

o  Non-core – not used currently or planned products

o  Easier, focus of IP licensing efforts o  Rates usually 1%-5% of gross sales or 25% rule

AUDITING YOUR PATENT PORTFOLIO

o  Rather than divide value of each patents, some portion is assigned of total market capitalisation.

o  Market value – Book value = value of knowledge assets.

o  Limitations of stock market  Alternate:

  (tangible/financial asset earnings –annual normalised earnings.)

  With this, ready to consider means of tapping their value for investments.

ASSESSING BUSINESS/COMMERCIAL VALUE

Valuable

Abandoned

 To assess best commercial use: example Dow Chemicals

Many Business units

Low Business units

Usage of patent

Use in present operation

Future plan

No Plan

ENHANCE COMPETITIVENESS

 Value of patents as competitive weapons& intelligence tool

 Blocking competitor’s product development plan

 Gain entry into new market

 Acquisition opportunity

 Reduce risks involved

1. OUTFLANK COMPETITORS

 Example S3  Faced with Intel Patents  Outbid Intel for patents of

bankrupt chip maker ‘Exponential Technology’ for $10 million.

 Obtained predated Intel’s Merced chip patents, holding them ‘hostage’

 Forced Intel to cross-license for exchange of rights

1. OUTFLANK COMPETITION

 Quickturn sued Mentor Graphic for patent infringement and had injunction, blocking sales of Mentor products.

 Mentor want to acquire Quickturn but Quickturn resisted

 Sell off its intellectual property to White-Knight Cadence Design Systems

 Hence no longer exposed to M&A actions, continued its infringement case until Mentor withdraw its Simexpress product,

2. EXPLOIT NEW MARKET OPPORTUNITIES

 Patents gives patent-protected entry to new markets

 Example: Avery Dennison Corporation developed new film

 Dow chemical also started to move into it

 With Avery having more fundamental patents and strengthened with extra patent filings

 Making Dow Chemical to withdraw

2. EXPLOIT NEW MARKET OPPORTUNITIES - MACHIAVELLIAN M&A MANEUVERINGS

 Example: The Stent business worth 41.3 billion per year market, shared with 3 companies

 All changed when Guidant Corporation had FDA approval for new Multi-link stent.

 Johnson& Johnson filed infringement suit  Guidant bought EndoVascular Technologies  Having an unused Stent patent, result in

paidoff of $350million worth of devices sold.

-MACHIAVELLIAN M&A MANEUVERINGS

 Example : IBM  Chosen a slightly different approach  Due to user’s needs for routers&

networking equipment  Instead of huge spendings or slashing

prices, IBM uses its patents  Had deal with Cisco  Guarantee sales of IBM’s component for 2

years and to gain foothold into the new market.

3. REDUCE RISK

 Information in patents can also help steer companies’ R&D & M&A programs around infringement& due diligence potholes.

 Example of Eastman Kodak& Polaroid on instant camera& films

 Kodak had infringed on Kodak’s patent and suffered huge losses as a result.

OTHER EXAMPLES

 Minolta and Honeywell, over auto camera patents

 Fonar Corporation vs General Electric over patented MRI technology

ENHANCE COMPETITIVENESS

 Many Executives think is unnecessary to spend time& money.

 Life span of products being shorter than time required to obtain patent

 Risky thinking  Patent suits duration and having to

abandon R&D upon infringements.  Emerging threat of board liability and

shareholder lawsuits regarding patents.

ENHANCE COMPETITIVENESS

 Reduce risk of merger & acquisitions  Patent portfolios not closely looked at

either for valuation issues or exploitation possibilities

 For drug company, life or die on strength of their patent holdings

 Companies just want buy all wonderful patents

 Acquisition patents also seen as less innovative and slow

IN A NUTSHELL

 Patent not just as a legal tool  Power of influence & determine outcome

only grow especially in e-commerce industries

 Winner determined by patent shoot-out  Wars over e-commerce patents getting

common  Example Priceline.com ,Amazon etc

 Financial& competitive rewards require top-level involvement and enterprise wide organisational muscle.

IN A NUTSHELL

 Companies treating patent portfolio as strategic asset& core competences have big advantage.

 Made easier by technological advantages- automated systems.

 Lesser time taken for patent mapping  Can be presented in 3D reports  Hence if patents are ‘smart bombs’, the

companies tat fails in developing strategies for their own use will do so only at their peril.

THE END

THAT’S ALL FOLKS