IP+strategy+and+tactics,+building+and+managing+IP+portfolios.

**Module 4**  **IP Strategy and Practice, Managing IP portfolios**

Innovation is change, invented to create value. To reach this goal innovation portfolio has to be managed in way to fit the strategic imperatives of the organization//,// matching the resources and development capacities with the emerging needs of the market. Once introduced, innovation diffuses: On the demand side creating through the customers new goods and services, and on supply side being imitated by the competitors. Knowledge embedded in the innovation does not provide lasting barrier to imitation. However it offers innovator time as a temporary advantage to benefit on its initial advantage. It is the time that followers need to catch up. Returns to innovation depends to great extent on the ability to establish property rights on innovation. In order to capitalize on innovation it has to be valued, protected and exploited. One can distinguish between different types of IP protection like Patent, Trademark, Copyright, and Trade Secret.

**//Patent//** - To be recognized as patent, one invention has to be non-obvious, have threshold of novelty and possibility of industrial application. **//Copyright//** - By copyright is understood expression of an original idea. **//Trademark//** - Trademark cover company name, logo, slogan and other mechanism associated with company corporate identity and branding. **//Trade Secret//** - Good example for Trade Secret is CocaCola formula. It may be classified as an effort of a company to keep its technology out of public eye.

How much the innovator will benefit from the innovation depends of the value created by the innovation and the share of the value that innovator is able to appropriate. The value created by the innovation is distributed among different parties like: Innovator, Customers, Suppliers, Imitators and other followers. The crucial factors that determine the extent to which the innovator will benefit on the innovation are: Property rights, The tacitness and complexity of the technology, Lead time (time needed to followers to catch up) and complementary resources. By complementary resources are understood: Manufacturing, Marketing, Finance, Distribution, Services and other resources required to bring new product on the market.

How effective are those different mechanism in protecting innovation depends of the industry and the nature of innovation; one has to differentiate between product and process innovation. For instance patent is more effective in protecting product innovation than process innovation. It also makes more valuable contribution to pharmaceutical and medical equipment industry than to electronic (semiconductor) industry.

Actually most of the times, patenting is perceived and used as strategic barrier towards the efforts of the competitors to establish property rights of the technology which can be used in bargaining with other companies for access to their proprietary technologies. This is well known as cross-licensing agreement and is widely used method of collaboration in semiconductor (electronic) industry. It is based on the mutual right of the signatories to access their patent portfolio, offering freedom to engineers and scientist to design products based on the knowledge of the other.

An overview of nowadays patent landscape on the following link http://www.nature.com/nmat/journal/v11/n1/pdf/nmat3221.pdf

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 * Exploiting the Innovation**

How a company should maximize its profit/return on innovation depends of the extent to which proprietary rights are established and capabilities and resources of the company. The main strategies of commercializing the innovations are:

Licensing Internal commercialization through creating of new business unit or enterprise (spin-out) Outsourcing certain functions Strategic alliances - Joint ventures Licensing is a proper choice only if the proprietary rights are clearly defined. As a method it requires little involvement from the innovator and thus limited investment. The advantage of licensing is that it does not ask for full range of complimentary resources needed to support commercialization and the commercialization does not take too much time. Similarly outsourcing also asks for limited investment, but as a disadvantage it may create dependence from suppliers/partners. Strategic alliances and/or joint ventures offer comfort to share the cost, the risk and the benefits. Hence they are also not as capital intensive as internal commercialization. Internal commercialization is most expensive way of commercializing the innovation. A company must posses complete range of resources and capabilities to be suitable for internal commercialization. Accordingly only a large enterprises with well developed complimentary resources can afford this strategy. Small start ups are mostly oriented to licensing or alternatively they can access capacities of the larger firms through outsourcing, strategic alliances and/or joint ventures.


 * First mover vs second mover**

Timing the innovation is essential factor in the strategic plan. Depending of circumstances it can give the competitive advantage or take it back. If a company has established a clear ownership on the innovation and the innovation is not resource intensive than the first mover strategy may offer competitive advantage. Otherwise in case of strong reliance on the complementary resources the second mover strategy is more reasonable choice. The pioneering is more risky due to the huge development cost of establishing the facilities for services, recharging and other complimentary resources. As market is becoming more mature specialized firms emerge as suppliers of complementary resources, decreasing the cost and changing the business model for commercializing the innovation. In parallel with risk intensiveness, factors like switching cost and brand loyalty positively contribute to the advantage of being first mover. (Consumers may become reluctant to pay switching cost accepting the offering of the followers and good image of a product creates loyalty and mental barrier toward imitators). However the most important factor is that the first mover has an unique opportunity to establish industry standards.


 * War for standards**

By definition **industry standard** is generally accepted requirement followed by the members of the industry. In more specific terms //"a standard is a format, an interface or a system that allows interoperability"// (Robert M. Grant "Contemporary strategy analysis" 6th edition).

Why do the standards matter? Because they make the life easier when the value of a good to individual user is a greater if the number of other users on the same product is larger. All users are linked to a network and both suppliers and buyers can save the cost and easily rely on standard product. Thus the control over standards offers enormous competitive advantage. The company which can establish standards automatically becomes a market lieder. Good example of winning the war for industry standards is Microsoft. It win the war over Lotus, Netscape, WordPerfect and together with IBM over Apple.

The more important question is how to win the war? The design of successful winning strategy is central to the achievement of being a market leader. However entering the war for standards is only worthy if the market is going to converge around single standard. In that case a company which technology can create positive feedback and attract large number of adopters is on the right track to win the standards war. To succeed in that a company has to (Shapiro and Varian "The arts of standard wars"): //Make alliance with suppliers, compliments, even competitors. No one can win the war alone.// //Accelerate the new product development cycle. Make early deals with key customers and adopt penetration pricing.// //Manage expectation of the other counterparts and convince them that it will be the winner.// The other critical factor in winning the standards' war is compatibility with existing products. For instance Microsoft win the PC war over Apple because its operating system Windows was compatible with DOS unlike Apple Mac which was incompatible with DOS. Nevertheless how much this is true, talking about standards Bill Gates once said: "To create new standards takes not something that is a little bit different, it takes something that's really new and capture people's imagination".

Interested reader can enjoy the original paper from Shapiro and Varian how to win the standards' war.

http://faculty.haas.berkeley.edu/shapiro/wars.pdf


 * Risk associated to innovation**

//"Risk comes from not knowing what you're doing."// - Warren Buffett Innovation management is very risk intensive process. Risk can not be avoided since new technology markets are very volatile and competitive, making hard to exactly know what you are really doing. However risk could be mitigated. One way to control the risk is to involve the customers in the research process and new product development process. This is usually practiced by large B2B oriented corporation with well established network of suppliers and buyers and strong R&D centers. Small start up companies are not placed for such an option. Hence most of the time the people and companies involved in the innovation process have to deal with risk. However one of the demands of contemporary technology markets is quality of the product. Every company wants to create good enough product and avoid warranty claims. This implies request for stable environment and put pressure on the people involved in the development of new product to be responsive to these consideration. That pressure leads to the creation of risk averse organizational culture what is very opposite to the risk intensive culture of fostering innovations. This interesting topic is elaborated by Robert E. Cole and Tsuyoshi Matsumiya in their paper "Quality as impediment to innovation" published by California Management Review vol.50, no.1 fall 2007

Managing innovation portfolios in terms of developing new products based on innovations is dynamic, stage gate driven process. Stage gate is roadmap created to ensure maximum value from the innovation. Passing through every stage innovation project should justify the further investment. The decision is made on pre-determined criteria, based on the available data extracted from risk analysis, business case, financial analysis.

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