Comprehensive intellectual capital management phần 6 doc

In cases in which theorganization competes through using more than one form of IP e.g., some software and con-sumer products organization that focus on both patents and copyrights, a sha

The IP Audit and Portfolio Creation—Not a Legal IP Audit

IP legal audits have been used for decades by organizations for a multitude of reasons, for ple, due diligence, to check legal compliance, to discard unused IP, and as a form of stock takingfor mergers and acquisitions The difference of an IP audit performed for business, rather thanlegal, purposes is that the audit (or stock taking) is performed to assess the commercial value andcompetitive use of the IP by respective businesses Another difference is that while an IP audit forlegal purposes lists all forms of IP owned by an organization, a business-oriented IP audit collectsinformation about the primary form of IP and is therefore patent, trademark, or copyright spe-cific A legal audit lists all forms of IP and considers their legal status (e.g., expiration, licensed

exam-or not, registration and maintenance dates and fees, etc.) A business-exam-oriented audit focuses onhow the primary IP form is being used in relation to products, services, market segments, its con-nection to sales, whether used in a strategic alliance, and its expected (business) life cycle Wedeal here with the business IP audit only

The audit is the preparatory step to creating the IP portfolio It should reveal the potential uses

of the IP for strategic purposes, whether to generate revenue or to strengthen a competitive tion To do that, information should be gathered from the various businesses regarding the use of

posi-IP in business, its current and planned use, and possible commercialization opportunities as well

as threats from IP owned by others that may undermine its value This data should then be used

by the auditing group to create a portfolio that presents a bird’s-eye view of the strengths, nesses, opportunities, and threats associated with the primary form of IP In cases in which theorganization competes through using more than one form of IP (e.g., some software and con-sumer products organization that focus on both patents and copyrights), a shadow portfolioshould be created for the other primary IP forms, again with reference to their use in business.Chapter 13 provides guidance as to undertaking the audit and creating a patent, trademark(brand), or copyright portfolio It should be mentioned here, however, that every portfolio,regardless of the primary form of IP, should include reference to trade secrets, that is, know-howrelated to the various IP in the portfolio

weak-An IP portfolio provides insight in two major ways that are crucial for any IPM program underthe CICM approach First, they reveal the strengths and weaknesses of the current IP base of anorganization, and hence provide a sketch of the organization’s competitive prowess Second, theyprovide a preliminary assessment of the opportunities and threats that the IP portfolio poses forbusiness management and growth These two purposes should be kept in mind in creating the IPportfolio, and well before that, in designing the audit exercise To that effect, the audit questionsshould uncover the current and expected uses that IP is being put to by the various businesses.This provides a preliminary assessment of its value for business and guides future plans DowChemical followed this methodology in its audit of its 29,000 patents The auditing team requiredevery business to classify the patents they have under three groups: most valuable patents related

to high growth business, patents that had no current or planned use but are still of value to others,and patents that are unlikely to be used The first group was left for the business unit competitivepurposes, the second group offered for licensing, and the last either donated or abandoned.The purpose of these and similar classifications is to facilitate IP portfolio management Ingeneral, there are a number of guiding rules for portfolio management:

• Leveraging strong IP

• Combining weak IP with strong ones

• Divesting low-performing IP, or donating it for nonprofit organizations to claim taxdeductions20

The same rules apply to managing any IP portfolio regardless of the form of the primary IP ter & Gamble’s (P&G) trademark/brand portfolio can be used for illustration Following an audit

Proc-of its brands, P&G leveraged strong brands like Crest and Tide by introducing a number Proc-of brandextensions, combined weak brands with strong ones (e.g., White Cloud and Charmin), and soldlow-performing brands (e.g., Lava Soap)

In addition to the general rules of portfolio management, there are a number of IP strategiesthat an organization can devise to utilize IP for competitive positioning and commercializationpurposes

IP Strategies Defining the Focus of IPM

Armed with the knowledge gleaned from the IP portfolio, top management should then late the IP strategies to strengthen the organization’s IP portfolio in a way that enhances its com-petitive position and revenue-generation ability Though there is some literature on the use ofpatent and branding strategies, there is no work that discusses the use of IP strategies for the dis-tinct purposes of competitive positioning and commercialization Most of the literature on patentstrategies focuses on whether to patent or trade secret and the countries in which to patent.Despite a number of recent books on the use of IP (meaning patents) strategies21

formu-for competitivepurposes, only slight mention was made of trademark strategies and none of copyright strategies

It is important for IP strategies to distinguish between the uses of IP for competitive as opposed

to commercialization purposes, since the two are based on conflicting contentions For tive purposes, IP is used to gain entry into a market and prevent competition from securing astronghold in a particular market segment, where exclusivity of use is the main enabler Manag-ing IP for commercialization purposes, however, aims at offering it for use by others as widely aspossible to generate revenue, hence the importance of providing guidance from the top on whenand how to use IP for the conflicting purposes, and which purpose should be the strategic focus

competi-of the business unit and why

The CICM model incorporates the two types of IP strategies, referred to as competitive andcommercialization IP strategies The main goal of IP competitive strategies is to block competi-tion from undermining the organization’s competitive position, and from gaining a strong com-petitive position themselves, as well as to deactivate the competition’s IP-related competitivetactics They are also used to carve new competitive positions where the organization can set newmarket standards, and thus mark out the rules of the game While competitive strategies look at

IP as a competitive weapon, commercialization strategies look at it as a business asset, and henceaim at investing in it to use it for revenue generation How to cultivate and exploit IP as a busi-ness asset is the concern of IP commercialization strategies It should be mentioned that althoughlicensing is used as a tactical tool under competitive strategies (i.e., to create a specific effect), it

is used more as a strategic tool under commercialization strategies, as will be explained below

IP strategies, whether competitive or commercialization, mean different things to differentorganizations, depending on the primary form of IP and the respective industry Patenting strate-gies are intrinsically different from trademark/branding strategies, and both are different fromcopyright strategies While patent strategies focus on technological wars, brand strategies focus

on winning consumers through making promises, and copyright strategies focus on capitalizing

on popularity of authored works The same goes for commercialization strategies Though allcommercialization strategies are based on level of resource invested in pursing deals and oppor-tunities, they are operationalized differently, depending on the primary form of IP That beingsaid, I developed two blueprints that are used as the basis for competitive and commercializationstrategies related to the primary IP form—be it patent, trademark, or copyright

A BLUEPRINT FOR COMPETITIVE IP STRATEGIES—OF WAR

Competitive strategies comprise the following:

• “Design around” strategies create a number of IP rights around a major IP of the

com-petition, in order to weaken the competition’s ability to use the IP as a competitiveweapon Also used to strengthen the organization’s bargaining power in cross-licensing

or other IP-based transactions

• “Build a fortress” strategies acquire a number of IP rights around one’s own IP to create

a strong competitive position and build a fortress that is hard for the competition to etrate, hence preempting the competition’s use of “design around” strategies Thesestrategies always involve the aggressive use of litigation to deter competition from com-ing close to the “fortress.”

pen-• “Mapping” strategies map all IP activity in a certain market segment or field to map a

road for developing new IP in a new area to secure market leadership These strategiesinvolve heavy reliance on competitive intelligence and overlap to a certain extent withthe organization’s innovation strategies

As shown in Exhibit 8.1, while “design around” and “build a fortress” strategies are used in ily protected areas and market segments, “mapping” strategies are used to find undiscovered ter-ritories where market leadership can be established Below is a detailed account of how thisblueprint can be used with patenting, branding, and copyright strategies In addition, there is acompetitive strategy that applies to all forms of IP:

heav-• “Value Transference” strategies are used to augment the competitive position or marketshare of the primary form of IP through the use of secondary forms of IP This strategy

EXHIBIT 8.1 Blueprint of IP Competitive Strategies

AA

AAA

leverages the competitive power of the various forms where value of the primary form istransferred to another secondary form to lengthen the business life cycle of the product.

Patent Strategies—Of Technological Wars

If patents are the “smart bombs” of tomorrow’s business wars, then companies that fail to develop offensive and defensive strategies for their use will do so only at their peril.

—Kevin Rivette and David Kline 22

Technological wars turned organizational patenting into a frenzy, with the most successful filing

up to 5,000 patent applications23

and receiving over 3,000 a year.24

In 2001, the U.S Patent andTrademark Office (USPTO) received a record 344,717 patent applications, a 21.4 percentincrease over applications filed in 2000.25

A war it is, where patents are the most powerful petitive weapons “What to patent” forms the core of the organization’s competitive strategysince it determines not only the areas in which the organization competes, but “how.” In the

com-“how” lies the key to using patenting as a war strategy by deciding whether to design around, tobuild a fortress, or to map a technological road

Under “design around” strategies, patents are used to barricade the technological field covered

by another The key to these strategies is to spot the competition’s domineering patents and filefor patents on improvements to it The competition will soon discover that though it owns thedomineering patent it cannot introduce desired improvements that are already patented byanother The competitive force of this strategy is that the owner of the improvement patentsenhances its bargaining power and can force its entry into the market by forging an IP-basedtransaction with the market leader for a cross-license or a joint venture Japanese companies used

“design around” strategies in the 1970s to catch up with U.S companies in certain technologicalareas, with demonstrable success.26

“Build a fortress” strategies can be used defensively to disarm the competition’s designaround strategy by feverishly patenting around one’s own domineering patents Offensively,these strategies are used to force competition out of the area by keeping ahead of the competi-tion in patenting improvement to one’s own domineering patents Under this strategy an organ-ization should patent very heavily in the targeted technological area, making it nearlyimpossible for the competition to infiltrate the fortress This not only secures its competitiveposition but also opens gates of opportunity where the IP can be leveraged to enhance a com-petitive position even further An example is Dell Company, which obtained 42 patents to coverits business method of providing custom-built computers while keeping its inventory at a mini-mum Dell leveraged this strong position in cross-licenses with IBM, giving IBM access to itsmethod, while freeing itself from paying tens of millions in royalties for using IBM’s compo-nents27

—a move that would have been impossible if Dell did not own every patent that can beowned to cover the business method

“Mapping” strategies are used in searching for the “largest” patent territory in an existing ornew technological field away from all the patent empires and territories This strategy is usedwhen the organization wants to create another battleground (platform innovations) where it setsthe rules of the game and defines standards The use of patent intelligence tools are essential here

as well as future scenario planning to enable the organization to anticipate future needs andtrends But beware of vanity—any technological position no matter how superior can be defeated

if the owner does not succeed in making it a market standard While ahead, the organizationshould license the technology widely to establish it as a market standard Indeed, licensing to anetwork of suppliers and distributors should be part of the investment plan, under this strategy

An example is Sun Micro Systems’ offer of Java script for free, despite the hefty development

cost, to establish a network of users A lucid demonstration of this also is the case of VHS andBetamax While Betamax had a more superior technology for videotapes, it had a strict policyagainst broad licensing VHS licensed its technology widely to manufacturers and had a widermarket presence, which later facilitated the market’s adoption of VHS technology as the marketstandard.28

Savvy IP organizations use the three mentioned strategies in various combinations to create aset of defensive and offensive competitive tools An outstanding example are the patent strategiesdeveloped by Ronald Myrick, General Electric Chief IP Counsel, as a guide for the patent depart-ments and attorneys at GE to strategize the use of patents both defensively and offensively.Myrick defined four patenting strategies29

for GE where patenting strategies are utilized as ness strategies for patent-intensive businesses These four strategies are

busi-1 Benign neglect

2 Live and Let Live

3 Freedom of action

4 Exclusion

Benign neglect strategies are based on an assumption that the technology can be licensed in, if

and when needed They are used in cases where the prospective invention is of no strategicimportance for the concerned business Under these strategies, however, patents may be filed forsuch inventions to avoid a turn of luck, lest unexpected market changes give the invention added

significance Live and let live are largely defensive strategies where patents are “secured to be

placed on the shelf” just in case they are needed They can be used defensively whenever thecompetition poses a threat to the business’s competitive position, by threatening one of its patents

or products

Freedom of action strategies, in contrast, involve broad patenting activity in many

technolog-ical areas, in order to license them out or use them to leverage the position of the business incross-licensing or joint venture transactions As such these strategies use patents as competitivetools to force entry into new markets The use of these strategies requires strong competitive

intelligence to assess the direction of the competition Exclusion strategies are purely offensive

and are used to secure strong competitive positions in defined market segments Under thesestrategies, licensing the technology out is discouraged, at least until a strong competitive position

is established in the market The main motivation for this strict exclusion is to provide price port to the products of the business, or at least add cost to competitors

sup-Myrick explains that patents should be managed as a business, and hence the patent strategychosen should both support and be aligned with the competitive strategy of each business unit.Thus, variations and combinations of the four and other strategies are to be used in devising thecompetitive strategy according to business needs

Now let’s see how the competitive IP strategies blueprint translates into branding strategies

Trademark/Branding30Strategies—Of Wars Over Consumers’ Hearts

Fighting brands can be meant as warnings or deterrents or as shock troops to absorb the brunt

of a competitive attack They are also often introduced with little push or support before any serious attack occurs, thereby serving as a warning.

—Michael Porter 31

Equally effective in competitive wars are branding strategies, but the war is of a completely ferent nature It is not about technological supremacy and patent “lands,” but about promises and

dif-winning consumers’ hearts Brand loyalty commands higher market share and enables the brandowner to maintain strong entry barriers for the competition, to have higher immunity to marketchanges, to protect against price erosion and hence to sustain a competitive advantage The basis

of competition here is not the tangible features of the product nor its technological superiority,but rather the promise and emotional value of the brand, which influences first and repeat pur-chase decisions This is of particular importance in the knowledge economy, where the erosion ofproduct superiority—now that most products are very close in terms of functionality, quality, andprice—intensified the effect of brands on purchasing decisions, and hence became recognized as

an important source of competitive advantage The emotional value conveyed by the brand’sidentity became the final focal point to win the customer As a result, branding strategies gainedmore prominence in the knowledge economy even for industries that don’t deal directly with theconsumers, as seen in the increasing use of ingredient branding.32

Using the IP strategies blueprint identified above, branding strategies for competitive ing include “design around,” “build a fortress,” and “value mapping.” “Design around” brandingstrategies involve the introduction of brands to counteract the competitive moves by producing aduplicate in terms of the value proposition (not the trademark, of course) To avoid creating con-fusion in the minds of consumers as to the origin of the product—which is the gist of trademarkinfringement—the house mark can be used in conjunction with the new brand An example isMaxwell House’s introduction of Horizon, in similar packaging to that of Folgers in marketswhere Folgers started to gain a stronger position.33

position-This strategy is also used by Cadbury, Mars,and Nestlé to compete in the confectionary market where they match each other brand for brand.34

“Building a fortress” brand strategies involve investing heavily in building a brand by ing the line of products horizontally across product categories In addition the brand is aug-mented by other supporting brands to extend it vertically along different market segments on thevalue hierarchy, as shown in Exhibit 8.2 This strategy also entails reinforcing the main brandwith a number of slogans, aggressive marketing campaigns, trade dress, and licensing widely to

extend-a network of pextend-artners (customers, suppliers, extend-and distributors) to mextend-aximize the penetrextend-ation of theconsumer attention zone An example of the use of this strategy is Coca-Cola’s defense of the

EXHIBIT 8.2 Use of “Build a Fortress” Branding Strategy

Watches Sunglasses Apparel Jewelry Luxury brand

(Lassale)High priced brand (Seiko Credor)Mid price brand (Seiko Pulsar)Low price—entry level brand(Pulsar Lorus)

fortress it built around the Coca-Cola brand First, the brand is supported by a close web of gans, designs, color schemes, and advertising campaigns Second, litigation is used as a tool toaggressively deter the slightest competitive maneuvers as shown by its major suit to stop PepsiCola’s subsidiaries from offering Pepsi Cola under the term “Coke”!

slo-“Value mapping” strategies are used to build a new strong brand or to revitalize an old brand,

by mapping the competitive landscape to uncover brand personalities and value propositionsavailable in the market, in search of the brand promise with the strongest emotional impact.Research has shown that the most valuable brands are those that are rich in the emotional pack-age they deliver and invoke in the receiver and have a defined personality that is conveyed con-sistently With the saturation of the market with brands, and the multiplication of commoncommunication channels, the brands that have the most “loved” personality are the ones thatcommand larger market shares Branding specialists argue that the most successful brands arethose that are loved rather than respected, because the consumers identify with the brands at apersonal level

Value mapping is aimed at discovering a unique brand promise that will enable the tion to set itself ahead of the rest, one that builds on the organizational history, identity, and corevalues, and hence can hardly be imitated by the competition Mapping strategies involve search-ing for and devising the brand promise and value that set the organization ahead of the rest bybuilding on its core ideologies and avoiding those projected by others if not rooted in the organi-zation’s culture Value mapping is essential in revitalizing old brands as well For example, toovercome its brand personality as being “cold and aloof,” IBM undertook extensive consumersurveys, consulted its history and culture, and mapped advertising promises in the market to revi-talize its brand’s image These efforts resulted in new advertising campaigns portraying IBM’sinternational reputation with the “Solutions for a Small Planet” campaign showing people in dif-ferent parts of the world discussing IBM computers in their own language

organiza-Copyright Strategies—Of Soft Wars and the Next Hit

In copyright industries, the war is over creative content—the organization with the most creativepeople and content has the biggest chances of introducing a hit The creativity of the developmentteam (whether working on a software program or a motion picture) is the key determinant of suc-cess It’s a war over talent and over taking a good idea and expressing it in the most creative way.The key to using copyrights as competitive weapons lies in the fact that copyrights protectexpressions and not ideas Using the blueprint of IP strategies, copyright strategies for competi-tive positioning include “design around,” “build a fortress,” and “creativity mapping” strategies

“Design around” copyright strategies involve creating works similar to those of the tion, based on the same idea but expressed differently to prevent the competition from securing astronghold in the market It is based on using the unprotectable elements of the competition’spopular work This strategy is based on appreciating that copyrights protect only expressions andnot the underlying ideas To use this strategy, therefore, the ideas (plots, functions, themes, etc.)should be distilled from the competition’s work and then used to create new works around thecompetition’s successful work This strategy is used by the most successful organizations in boththe entertainment and software industries In the software industry, for example, Borland Inter-national Inc copied the Lotus program commands menu and provided it as part of its softwareprogram Ruling that the commands menu is a functional feature, the court denied it copyrightprotection.35

competi-The strategy is of equal force in the entertainment industry as well, where it isrepeatedly used Once a work hits the jackpot, many works are produced based on a similar the-matic plot to the successful work (e.g., the range of vampire movies)

“Build a fortress” copyright strategies are based on leveraging existing creative content of acopyrighted work by surrounding it with multiple reproductions in varied media, strong brands,and adding more creative content to it by producing a number of versions and hence making it asimmune as possible to competition’s imitation That is achieved by rendering the competition’simitation works useless through augmenting the core idea(s) with very highly expressive content,and forging a web of networks around the work—hence creating a fortress As a result, competi-tion will be disabled from reproducing a similar work as the risk of infringing becomes higher,and the cost of replicating the supporting networks prohibitive Microsoft uses this strategy vehe-mently A number of networks with PC manufacturers, a number of versions, adaptations for per-sonal devices, Internet updates, and strong customer service support the sale of its Windowsprograms Again, litigation is used as an aggressive tool to deter competition from coming close

to the fortress

“Creativity mapping” strategies depend on the way that the organization develops its creativecontent, that is, whether it is developed in-house or licensed in from outside sources In the for-mer case, the use of this strategy entails mapping the talent base to assess the level of creativity,compared to successful works in the market, and adopting the creative practices necessary to acti-vate the talent base Disney and Microsoft use this strategy for the development of new copy-righted works where the focus is on the creativity of their in-house talent In the latter case,organizations need to map talent agencies, and keep close watch of the market to spot any risingtalent In both instances, the use of this strategy entails the mapping of talent, popularity trends,creative content quality, and the reasons for success of popular works Distilling reasons for suc-cess and tying that to consumers’ tastes would enable the organization to create a work that can

set a new standard in the respective industry An example of this is Disney’s Lion King, which

created a new standard for animated films in adult entertainment, to the extent of being called the

“Lion King mini-industry,” which alone generated around $1 billion in merchandise.36

VALUE TRANSFERENCE STRATEGIES

Value transference strategies can be used in conjunction with “build a fortress” strategies tolengthen the business life cycle of a primary form of IP, and hence preserve as long as possiblethe competitive position It involves investment in secondary forms of IP near the end of the busi-ness life cycle of the primary form, as shown in Exhibit 8.3 The detailed use of this strategy isoutlined in Chapter 13, but for now two illustrations are used For pharmaceutical companies, theexpiry of a patent is followed by a major drop in the sales of the patented product, sometimes

EXHIBIT 8.3 Value Transference Between IPs

Maturity

AgingGrowth

Maturity

AgingGrowth

reaching 80 percent Investing heavily in a trademark/brand, however, near the end of the patentlife cycle (whether legal or business) can save a considerable market share (e.g., in the case ofZantac) Another example for brands is the use of the right of publicity (IP) to revitalize a brand’spopularity by seeking celebrity endorsement (e.g., Nike’s Michael Jordan campaigns).

BLUEPRINT FOR COMMERCIALIZATION

• Passive commercialization strategies can be used with IP for which competitive valuecannot be ascertained, particularly at the early stage of the business IP life cycle Such IP

is kept and developed on a wait-and-see basis to see how it will venture in the market.Under this strategy, it still may be commercialized following offers from noncompetitors

or under a joint venture for their further development with a competitor

• Reactive commercialization strategies can be used with IP that is of more ascertainablevalue as a competitive weapon Opportunities for commercialization of these IPs should

be pursued only after the organization has secured the targeted competitive position,where commercialization poses no competitive harm Ford Global Technologies, forexample, calls this strategy “Ford First,” which means that Ford should establish its posi-tion in the market before the IP can be offered for commercialization, a period estimated

to be three years on average.38

Reactive strategies are also used to commercialize IP topartners (customers, suppliers, and distributors) to create synergy and reduce costs Anexample is Toyota’s offering of its patents to its original equipment manufacturer (OEM)manufacturers to increase their productivity, and hence improve Toyota’s overall com-petitive ability These strategies enable the use of IP to augment the competitive impact

of a chain or a network of partners, and in that case should not be offered to competitors

• Proactive commercialization strategies are used when it is clear that the IP concerned is

of no competitive or strategic use for the organization but is of value to others Proactivecommercialization entails the active pursuit of opportunities through industry liaisons,contacts, agents, and any channel possible to generate revenue from the IP portfolio.These IP can be freely offered to competitors Organizations like IBM that have a liberalpatenting philosophy, encouraging innovation in noncore areas, multiply their chances ofbuilding an IP portfolio that can be offered in the great part for commercialization Underthis strategy all forms of IP, not only the primary forms, are used to create the best deal.Exhibit 8.4 shows the various forms of IP used for different types of licensing

The choice of one commercialization strategy over the other depends on striking a balancebetween the use of IP as a competitive weapon and as a business asset A proactive commercial-ization strategy can be used only when the IP can be used dominantly as a business asset Cau-tion always must be used not to undermine the competitive position by commercializingparticular IPs (e.g., by diluting a brand in a franchise, or producing an overkill by overmerchan-dising) Striking that balance in brand licensing can be achieved by maintaining close control ofthe use of the brand by the licensees Striking such balance, however, when it comes to commer-cializing patents, can be achieved by limiting the transfer of trade secrets (know-how), that is,focusing on the licensing of the patent without the technological know-how Achieving that bal-ance is more challenging when it comes to patents compared to trademarks and copyrights.Business based on brand developments always views trademarks as commercial tools thatconvey the brand promise to the consuming public Commercialization of the trademark, there-fore, is realized as the main object at the preliminary stages of brand development and invest-ment, provided close control is kept on the use of the trademark A similar trend can be seen when

it comes to copyrights as commercialization of the work is actively pursued, being a (if not theonly) motivating force behind investing in creativity At an early time, organizations in all indus-tries capitalized on their strong trademarks and copyrights, exploiting them through multiplecommercial transactions and distribution channels Once established as a strong IP right, themarket will be flooded with consumer products and merchandise that revolve around these rights.This, however, was not the case with the commercialization of patents Patents were traditionallyviewed as a way to secure the right to use certain inventions or compositions in production and/or

to obstruct competition’s activity in a certain field Many patents were left on the shelves to lect dust A survey of U.S companies found that “more than 35 percent of patented technologiesare orphans that fell by the wayside after a merger because they were not part of the combinedentity’s core business.”39

col-Such orphan patents were estimated to have commercial value in excess

portfolio Some estimates report that corporate America, not to mention universities’ labs, losetrillions annually for keeping patents on the shelves.41

It was not until recently that organizations in this area, being alerted to the value of patents

as commercial business tools, started to change their patents’ commercialization strategy tomore proactive ones Thus, while proactive commercialization strategies have been used in con-nection with trademarks and copyrights, they are still in the experimentation phase when itcomes to patents Chapter 13 provides more guidance on the situations under which each of thecommercialization strategies can be used Shifting to proactive commercialization strategies,however, is not sufficient to deal with the IP portfolio as a business asset Without IPM infiltrat-ing into the business management function and becoming the job of everyone in the organiza-tion it is hard to see how every business unit, department, and team can be tuned to pursuecommercialization opportunities That involves, besides the adoption of commercializationstrategies, effecting the necessary structural and cultural changes to take IPM to the operationallevel To that we now turn

OPERATIONALIZING IPM—WITH ALL DUE RESPECT

TO THE LEGAL DEPARTMENT

Under the CICM, IPM is the stage where the value of an organization’s intellectual capital (IC)

is leveraged and maximized to the full by realizing that the intellectual property underlying a tain product or a process can now be used on its own as a competitive weapon and a businessasset This understanding has to be infiltrated at all levels of the organization Just like the inno-vation process being liberated from the confines of the R&D department, IPM too needs to be lib-erated from the confines of the legal department The legal department may act as the processowner, but without a shift in how IP lawyers see themselves, it is hard to see how they can facil-itate infiltrating IPM in the whole organization That being said, IP lawyers whether in patent-,trademark- or copyright-intensive industries are the best equipped as IP managers given theirknowledge about the complex anatomy of the various IP animals Indeed, IP lawyers in the best-performing organizations join top management in forging and aligning IP strategies with theoverall business strategies and needs

cer-To effectively take IPM to the operational level, a number of changes are required to thestructure, culture, and systems of the organization When it comes to structure, two majorchanges are required: (1) forming units at the business unit level, reporting to a central strategicplanning or business development department, to define which IPs will be used as the basis ofthe business unit’s (or SBU) core competence or competitive advantage These units, called IPStrategy Units, oversee operationalizing the competitive IP strategies; and (2) forming cross-functional/divisional teams responsible for leveraging various IP inside and outside the organi-zation, called IP Synergy Teams

It is essential as with any of the other stages of CICM to have a culture that supports the agement and leveraging of the IC in question For the IPM stage, the organizational culture has

man-to incorporate values that discourage infringing the IP of others, and promote the preservation ofthe organization’s IP The definition of the culture for IPM is one of the main tasks of the legaldepartment as cultural change needs to be effected by developing the systems and procedures thatengrain an IP-oriented culture in the daily operations of the organization

Finally, the organization should provide a number of tools and methods to enable effectivedecision making pertaining to IPM, particularly valuation and assessment tools

Structural Changes—Of Strategic Focus and Synergy Teams

Structural changes mainly relate to the formation of IP strategy units and the business unit level,and IP synergy cross-functional teams The two groups will be directly responsible for leverag-ing IP across the whole organization, for competitive and commercialization purposes

The IP Strategy Unit—IP and the Business Plan. IP strategy units (IPSUs) participate in theformulation of IP strategies and oversee their operationalization by aligning IP strategies with theoverall business plan The focus of IPSUs is to take strategy from the top to the frontline levels asshown in Exhibit 8.5 below They are responsible for operationalizing competitive IP strategies

by focusing on the part of the IP portfolio that is the basis of the business unit’s core competency

or competitive advantage Though the same group of IP may be of strategic relevance to morethan one business unit, an SBU or a division, the primary responsibility for developing this group

of IP should be entrusted to one business unit as the focal point In other words, every businessunit should build a fortress around the part of the IP portfolio that is the basis of its core compet-itive advantage IPSUs should report to a central strategic planning or business development andgrowth department to ensure coordination between the various business units and overall align-ment with the organizational vision and overall strategy

IP Synergy Teams or Licensing Units. IP synergy teams (IPSTs) are cross-functional teams, asshown in Exhibit 8.5, with the primary responsibility of operationalizing the commercialization IPstrategies of the organization The main task of IPSTs is to explore and pursue commercialization andleveraging opportunities for IPs internally by offering it to business units other than the one where the

IP first originated For patents, this means the business units other than the one where the technologydeveloped and the patents were acquired and initially used For brands and copyrights, this meansproduct divisions or market segments other than the one where the brand of the copyright was firstdeveloped and launched Exhausting internal opportunities, IPSTs should explore opportunities forcommercializing the IP to partners, then to any other interested party over the globe

EXHIBIT 8.5 IP Strategy Units and IP Synergy Teams

IPStrategy Units

IP Synergy Teams Business Units

The task of IPSTs may also be carried by:

• Small focus groups like Dow Chemical’s Intellectual Asset Management teams42

• An independent business unit like DuPont’s Intellectual Asset Management Business

• An independent company like Bell South’s, AT&T’s Intellectual Property Company, andFord Global Technologies

Regardless of the organizational form used, IPSTs should be treated as profit and not cost ters In all cases, their focus should be cross-functional and multidivisional, market oriented andnetwork based

cen-In addition to the structural changes, the culture of the organization needs to change as cussed next

dis-Cultural Changes

To effect cultural changes, the legal department should design an IP guide for use by everyone inthe organization The IP guide should have the following sections, each designed to incorporate

a certain set of values in the organization’s culture as follows:

• IP Literacy Guide—To raise awareness about what IP is and prevent the loss of the nization’s IP through leakages and unfair competitive practices

orga-• Detection program—To promote a culture protective of IP rights by being alert to theinfringing activities of third parties

• Clearance procedures—To create a culture that is preventive of infringing the IP of others

The IP Literacy Guide. IP cannot be used to maximize value without a minimum level ofknowledge about what it is, what makes it stronger, and what dissipates it Specialized knowledgecan always be gained on a needs basis, but a level of IP literacy should be maintained at all times.The IP literacy level required for each organization depends on the organization’s industry, hencethe primary IP and its IP business strategy In all cases, however, the IP Literacy Guide shouldcontain guidelines for the various departments, business units, and individual employees on theproper use of IP and the risks that need to be managed in relation to its use In particular, theGuide should address the following (outlined in detail in Chapter 13):

• Security and confidentiality measures to prevent leakages and misappropriation of tradesecrets Loss of trade secrets cost corporate America $45 billion in 1999 alone.43

Theproblem of trade secret misappropriation posed an economic threat that moved the U.S.government to enact the Economic Espionage Act in 1996 criminalizing trade secret mis-appropriation

• Proper advertising and marketing procedures to avoid the loss of trademarks through theoveruse of the trademark as a generic term An example is DuPont’s loss of the mark Cel-lophane, and Xerox’s coming very close to losing its trademark through the “Don’t Copy

It, Xerox It” ad campaign

• Merchandizing and franchising relations to ensure that there is actual supervision of thelicensee to avoid loss of trademarks through what is known as naked licensing

• Clean procedures for development of copyright works to defend against infringementclaims by proving that there was no access This, of course, is not observed where thedeveloping team is trying to design around the work of the competition, but should bekept as a general rule

• Digital rights management and cyber security systems to protect against copyright piracyand hackers having access to the organization’s databases.

• Proper marketing and sales procedures to avoid tying the sales of unpatented to patentedproducts and hence constitute patent misuse Patent misuse may subject the organization

to antitrust proceedings and disable it from claiming damages for patent infringementuntil the misuse is purged

• Reporting suspected infringement of any form of IP to the legal department as soon aspossible to prevent the loss of the IP right concerned through lack of policing or acqui-escence and mitigate losses This constitutes passive monitoring of the infringing activ-ity, which is pursued more actively under the Detection Program

Detection Program—Of Competitive Intelligence and Reverse Engineering. IPs are negativerights that entitle the owner to exclude others from using and commercially benefiting from theuse of IP in any manner The onus is therefore on the owner to protect the exclusive territory con-ferred by the IP right, detect unlawful violations of this right, and take appropriate enforcementaction This forms an integral part of the ability to preserve the right and enhance its effective-ness Though the organization should entrust the task of monitoring infringing activities either to

an internal unit or to a specialized outside third party, some organizations do neither and insteadrely on their customers’ feedback to detect infringement of their IP rights The latter approach isrisky as it usually results in delayed detection of infringement, if any

Overall, the detection program should be entrusted to a unit in the legal department in eration with the R&D department44

coop-for patents and copyrights, and marketing and sales ments for brands The detection unit should cooperate with the licensing department inrecommending the most appropriate enforcement action The level of aggressiveness of theresponse depends on whether the infringed IP is predominantly used for competitive or commer-cialization purposes In the former case, the IP should be protected fiercely through litigation,while in the latter an offer of a license should be the first resort If the IP is used merely for FTOpurposes, however, then the decision to litigate should be based on a cost–benefit analysis In allcases, a letter should be sent to the infringing party informing it of the violation and requestingthat the situation be remedied In many cases, the threat of litigation suffices to keep the compe-tition away or at least safely far from the organization’s competitive territory

depart-In making litigation decisions, the organization needs to balance between sending a strong sage to the market that infringement of its IP will not be taken lightly, and not committing extensiveresources to a suit where costs far exceed expected awards The organization should take into con-sideration other factors like the breaking of the business relation and the infringing party’s possibleretaliatory action For example, in 1989, Motorola sued Hitachi for infringing a number of itspatents, moving Hitachi to countersue Motorola As a result, the court stopped the sales of the cor-responding suspected products of both companies subject to resolution Both companies, particu-larly Motorola, suffered losses exceeding the damages awarded.45

mes-It seems that this case was aperfect one for cross-licenses if both Motorola and Hitachi had sought a more conciliatory approach.Recently, the use of insurance to transfer litigation risks has grown Historically, some of theserisks were arguably covered under the comprehensive or commercial general liability policies,but only to the extent that they relate to advertising injury relating to trademark and copyrightinfringements.46

Now there are policies that specifically deal with both infringement and ment risks and the associated legal expenses, covering patents, copyrights, and trademarks.47

enforce-Todate, there is no insurance policy that covers the risk of misappropriation of trade secrets, whichmay result in very high losses But as the business service sector’s (insurance, banking, andinvestment) ability to treat IP rights as business assets develops, things may change.48

As important as detecting infringement and taking appropriate action is avoiding infringingthe IP rights of others This is what the clearance procedures aim to prevent or minimize.

Clearance Procedures—Treading Around Dangerous Waters. Clearance procedures are morethan IP searches In addition to searching registries, they include procedures for the assessment

of the scope and strength of the IP of others Following that assessment, the clearance proceduresassist the department concerned in making decisions on whether to proceed with product devel-opment plans (patents and copyrights), with marketing and advertising campaigns (trademarks),and with using a particular process developed by a former employee of the competition (tradesecrets) In cases in which the IP owned by another is very strong and wide in scope, to the effect

of blocking the business plan, a license should be actively pursued Failing that, management, inconjunction with the legal department, need to assess the risks involved in designing around theblocking IP, and whether the business plan should be changed Using the clearance procedures at

an early stage of the business plan avoids the possibility of having to divest later and lose therelated investment, as well as instill a culture that is preventive of infringing the IP of others

Enabling Tools and Practices—IP Valuation

As real estate title may cover a square inch of Arctic tundra or a square mile of Manhattan, intellectual property protection may be broad or narrow, cover various kinds of products or processes, and have widely varying value.

—Thomas Field, Franklin Pierce Law Center Professor of Law 49

Not all IPs are born equal; some are much more valuable than others A domineering patent, ahighly distinctive trademark with growing brand equity, and a strong rather than a thin copyrightare all terms used to distinguish between the value of various IPs There are two facets to thevalue of IP—legal and commercial Legally, the value of IP lies in its scope of coverage, and thestrength of the right (i.e., whether it will be afforded strong protection by the courts) Commer-cially, the value of IP depends on how customers will react to it In particular, it depends onwhether customers will embrace a new technology (patents), relate to a brand and be loyal to it,and receive the copyrighted work with enthusiasm The fact that the value of IP depends on com-mercial and legal considerations makes valuation of IP a very complex exercise This is particu-larly true at the early development stages of the life of IP wherein customer reaction and hencecommercial value cannot be accurately ascertained

There are a number of methods for the valuation of IP based on accounting methods, ing cost, income and market based While cost methods look at historical values relating to the IPdevelopment costs (past-oriented), income methods estimate the expected royalty streams that an

includ-IP may generate in the future and discount the cash flow to the present Market-based methodsrely on data on IP royalties in various industries and make a valuation based on what IP will gen-erate in an arm’s-length transaction.50

Valuation of IP is used widely in cases of mergers andacquisitions, litigation for estimation of losses and awards, major licensing transactions, patentdonations, and whenever an IP is used as a collateral security However, the fact that valuation ofany single IP may cost between $25 and $50,000 makes its use for IP portfolio management pur-poses prohibitive, particularly where the organization owns tens of thousands of IPs

It is crucial that an organization develop a methodology that includes qualitative and tive methods to roughly estimate the value of IP, for IPM to be engrained in business manage-ment A study by the Danish Patent and Trademark Office (DPTO)51

quantita-found that the lack ofvaluation tools that an organization may use in relation to IPM is one of the main problems ham-pering management of IP as business assets The DPTO discovered that though most Danish

companies develop IP strategies, they fail to link it to business strategy, mainly because they lacksystematic tools and methods to assess the value of their IP portfolios To promote economicdevelopment by unlocking the value of IP portfolios, the DPTO developed the IPScore tool forbusinesses to systematically assess the value of their IP The IPScore uses mainly qualitativemeasures and criteria to assess the significance of individual IPs The IPScore measures represent

a guide to the minimum criteria that an organization should apply to value an IP for IPM poses They include:

pur-• Technical status of the IP (relates to patents and software)

• Market-related utilization potential

• The company’s mission and resources relating to the utilization of the right

CONCLUSION

The goal of IPM is to cultivate the organization’s ability to use IC both for competitive ing and revenue generation, by unleashing the power of IP The optimal benefit of IPM is capi-talizing on what may otherwise remain a dormant IP portfolio, and hence maximize theorganization’s competitive performance and profit-making ability For that to happen, IPMshould be transformed from being a function of the legal department to becoming a part of thebusiness management function of the whole organization This involves effecting a number ofchanges on the strategic and operational levels, including undertaking an IP audit of the primaryform of IP, creating IP portfolios, adopting the appropriate competitive and commercialization IPstrategies to mine the portfolios, and effecting necessary structural and cultural changes This isfurther enabled by the development of systematic tools for the valuation and assessment of IPvalue Chapter 13 outlines the implementation of the IPM stage step by step

position-But before we proceed to that, it is important to see how the CICM approach exists in realbusiness life, by exploring the comprehensive ICM systems of two pioneers—Skandia and DowChemical

2

It is hard to imagine an industry in which there is not at least one form of IP that is the source

of competitive performance It is a common belief that professional service businesses (e.g.,