How Executives Can Enhance IP Strategy and Performance

At many companies, intellectual property has become an area of focus. Research shows that top-management involvement in IP strategy is associated with better IP performance.

Five to 10 years ago, the strategic management of codified intellectual property rights — that is, patents, trademarks, copyrights and designs — was still a relatively exotic topic. More recently, the subject has received considerable attention in the business literature. Empirically speaking, however, we still know very little about the importance companies place on IP as a component of business and corporate strategy. Although business-unit managers surely find frameworks that align business strategy with IP1 helpful, and though top corporate executives are inspired by anecdotal evidence of selected colleagues’ commitment to patents2, these executives also need more data on several important topics relating IP to company strategy.3

To properly assess their competitive situation, these decision makers must first know:

  • What does the competitive landscape with respect to IP rights look like? In addition to responsibly implementing IP strategy, managers should know:
  • What are proven, successful strategies for using intellectual property at the corporate and business-unit level? What is the role of the executive committee and the board in IP strategy?
  • What organizational structures support IP-related strategies the most? What pitfalls need to be avoided?
  • How do successful organizations manage the “dos and don’ts” of working with intellectual property, both at the business-unit and the corporate level?

To gain insights into these questions, my research team and I analyzed original questionnaire data from a comprehensive survey of senior IP executives at 34 major industrial corporations, among them industry leaders.

About the Research »

These survey data reveal the substantial importance that senior IP managers attribute to top management’s direct engagement in IP-related strategic decision making. In addition, to supplement the survey data, I conducted in-depth interviews with leaders from two of the companies surveyed: Lars Rebien Sørensen, CEO of Novo Nordisk A/S, a healthcare company with a specialty in diabetes care based near Copenhagen, Denmark; and Dr. Gottlieb Keller, a member of the corporate executive committee and secretary to the board of directors of F. Hoffmann-La Roche Ltd., a global healthcare company headquartered in Basel, Switzerland. The interviews provide illustrations of how corporate leaders actually engage with issues surrounding IP strategy.(see “The Role of Corporate Leaders in IP Strategy,” p. 38)

The Role of Corporate Leaders in IP Strategy »

IP-Related Strategy

What are the links between a company’s strategy and intellectual property rights? As with many other strategic issues, the strategic management of intellectual property spans different domains along an organization’s internal value chain. An integrated IP strategy should theoretically span the entire “IP value chain” — from the generation of intangible assets in departments such as research and development to the protection of intellectual property in patent and legal departments and finally to its use by enforcement lawyers, branding specialists and licensing professionals.4 Moreover, IP strategies can be crafted at different levels within the organization. There is a need for IP management at the functional, the business-unit and the top-management level5; this article focuses on the latter two aspects of IP management. Theoretically, strategic IP tasks at the business-unit level should involve the integration of patent- and trademark-related considerations in decisions that involve creating competitive advantage, choosing the scope of strategy, differentiating products, setting barriers to entry and managing vertical competition.6 At the top-management level, overarching and long-term considerations such as the choice of future R&D trajectories, the management of corporate reputation and the coordination of cross-area tasks related to IP should be addressed. (See “Crafting An Integrated IP Strategy.”)

Crafting An Integrated IP Strategy

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The IP Competitive Landscape

But what do we know about what current practice looks like when measured against these yardsticks? Do IP strategies really span the IP value chain that ranges from generating intellectual property to protecting and exploiting it, or are companies still following a more traditional pattern of treating those three aspects of intellectual property separately? And how involved are corporate and business-unit managers when it comes to patents and trademarks? In other words, how sophisticated is the IP competitive landscape at present?

The results of our survey provide an interesting picture that challenges the small amount of empirically established wisdom on this subject. In the companies studied for this article, IP-related tasks often involve cooperation among different functional areas within the company. (see “Cross-Functional Involvement in IP Strategy.”) Arguably, the data document a shift in the perception of the importance of IP rights compared to studies carried out on European companies several years ago.7 More specifically, these data suggest that the days may be gone when researchers and developers would autonomously follow their interests without paying attention to the future appropriability of their inventions. The survey results indicate that even the marketing and promotional staff, traditionally rather independent from the technical and legal units, accept the necessity to work more closely together with those groups than in the past. These trends at the functional level are likely a reflection of the growing diversity and importance of IP strategies at the business level.

Cross-Functional Involvement in IP Strategy

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To explore this issue in the survey, we asked the companies’ representatives, in a series of 10 questions, to describe the purposes that IP rights serve for their business-area strategies.8 Using a statistical technique called factor analysis, we then identified five major “IP strategy scopes” from the survey data. These five strategy scopes are not mutually exclusive; in other words, a company could have more than one focus.

Scope 1: Full-fledged IP protection.

Technical and nontechnical IP protection is sought for every possible minor invention in order to block entire technology spaces.

Scope 2: Patent and trademark control.

In addition to patents for core technology, trademark-protected brands (but not designs) are registered for many product differentiations.

Scope 3: Trade. IP is mainly to be licensed out or sold off.

Requires moderate patent, trademark and design protection but aims at creating large IP portfolios.

Scope 4: Pure branding.

Every potential product differentiation is trademarked; some are also design-protected but not primarily patented.

Scope 5: Support core R&D.

Patents, trademarks and designs are supposed to protect products that build on substantially sophisticated inventions.

In addition to the identification of these different strategy scopes in the sample of organizations we studied, our data analysis revealed something even more interesting about the nature of the competitive IP landscape and the opportunities companies have to change the game as it is played in their fields. It turns out that though almost all the companies surveyed protect core or breakthrough R&D through patents, most of the variation among the companies’ strategic approaches to IP is explained by whether or not a company practices “full-fledged IP protection.” Strategically speaking, this suggests that business managers are unlikely to be able to change the nature of the IP-related competition they face if they concentrate solely on using patents to protect core inventions, as it appears very difficult to differentiate their companies from others in this way. Among the companies surveyed, “full-fledged IP protection” — which includes the use of IP to “pack” technology product spaces with IP claims — is what truly separates some players from the rest. However, companies engaging in full-fledged IP are — at least for this sample — not the exception to the rule any more. Irrespective of potential sample biases,9 this finding is intriguing. It means that the active use of legal rights to seek protection for seemingly every piece of knowledge is becoming dominant practice for quite a few leading companies and, in all probability, changing the nature of the competitive IP game.10 At least in some industries (though not all), the active use of patents to pack entire technology spaces — the nurturing ground that product development needs in order to blossom — moves the competition from the “real” world of products to an earlier “virtual” or “potential” battleground where patent holders decide if technological features will ever make it to the market. It is this possibility of foreclosing players from the market that renders “patent packing” of entire technology spaces such an important strategic scope — and one that might eventually dethrone the classic strategy of “core R&D supporting IP strategy.”

Thus, it is not surprising that among the companies surveyed, top-level management involvement in IP-related topics is also significant. According to the survey respondents, in most of the companies IP has become a focus area for the executive committee and the board. In particular, top-level managers include IP-related considerations when judging the attractiveness of new markets; the board also becomes involved when the corporate reputation is at stake in IP-related litigation. (See “Corporate Management’s Role in IP Strategy.”)

Corporate Management's Role in IP Strategy

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Effective Approaches to IP Management

Overall, the study’s results indicate that an increasingly strategic use of intellectual property can be observed among the major industry players surveyed for this research. What then are successful IP-related strategies, and which organizational structures are suited to support these strategies? In order to address these questions, some kind of IP-specific performance measure must be linked to the corporations’ chosen strategies and their organizational designs. To do this, we first used the respondent group’s expertise to assess their companies’ IP-related overall performance and condensed that information into a composite index. We then used a technique known as performance driver analysis11 to analyze the relationship between organizations’ assessments of their IP-specific performance and strategic and organizational approaches to working with intellectual property.

The performance driver analysis yielded three key insights:

No Single Optimal Approach.

At the business-unit level, the study results suggest that there is no one optimal strategic approach to dealing with intellectual property. Across the sample of 34 different companies from eight different industries, it appears difficult to find a one-size-fits-all strategy for intellectual property at the business-unit level. This finding indicates the importance of applying business frameworks12 for each different business unit in a custom-tailored fashion. In line with earlier findings,13 the effectiveness of these strategic scopes is likely to depend on the companies’ particular industry environments, and more research is needed to give industry-specific answers.

A Common Strategic Success Factor.

There is, however, a common strategic success factor that seems to hold for all the companies in this study, regardless of the specific businesses in which they operate: corporate management’s genuine involvement in top-level IP-related projects/discussions. As a matter of fact, in the size of its effect, involvement by top executives is the major success factor driving IP performance, according to the respondents in this study. Looking at the microresults of the findings, one C-level executive activity in particular stands out as having a strong relationship to effectiveness in IP management: corporate management assessing the attractiveness of the companies’ future markets from an IP perspective.

This finding has important implications for corporate management. As the nature of the strategic “IP game” in some industries changes from product protection to preemptive technology space appropriation, so the importance of intellectual property changes for top management and the board. Although business managers will usually have enough authority to use patents, designs and trademarks in their existing product spaces, choices of future markets and decisions on acquisitions are normally made by the companies’ most senior executives. But if the attractiveness of markets, more than ever, depends on the ability to appropriate returns from technological innovation, then failures in assessing this dimension can have devastating results and may be irreversible.

A Correlation Between IP Rules and IP Performance.

Organizational arrangements can make it easier for companies to meet these challenges. The analysis suggested a correlation between overall IP performance and clearcut rules about intellectual property at the functional level; such rules may save time for functional managers and allow them to operate efficiently. At the same time, the results indicate that companies tend to do better at IP management when corporate management actively dedicates time to listening to its most senior IP officers (that is, heads of patent or trademark departments or R&D vice presidents) and, to some extent, even includes them in top-level management decision making.14 In order to complement the exploratory findings from the performance driver analysis with a more theoretically driven view, we applied a technique known as extreme misfit analysis to the data.15 In this case, the misfit analysis suggested that certain IP-related strategies (both at the corporate and the business-unit level) may be bad responses to the companies’ competitive environments, leading to so-called “situational misfits” and reductions in IP performance. In addition, certain organizational arrangements within the companies may be bad fits for the chosen IP-related strategies (leading to so-called “contingency misfits” that lower performance).16 Using a custom-tailored framework, we tested a set of 15 such “extreme misfit” hypotheses.17 This test related established measures of companies’ environments with their IP-specific strategic actions and organizational responses.18

The data analysis revealed that IP performance is significantly reduced if companies fail to trade (that is, sell or license out) their intellectual property when the industrial environment facilitates or even necessitates such a trade. More important, however, the misfit analysis underscored that corporate-level management must not fall into the trap of confusing “involvement” with “lack of delegation.” Corporate managers reduce their organization’s IP-related performance despite their commitment to it when they fail to delegate data collection or interpretation exercises and do not focus on decision making.

Implications of This Research

Overall, this study conveys three clear messages. First, the alignment between intellectual property and company strategy has become sophisticated and differentiated among the corporations studied. This suggests that in the future, strategies for IP-based competition will require management attention at all levels — functional, business unit and corporate. Second, involving the corporate top-level management early in the IP-planning process appears to be a key success factor in obtaining high returns from innovation. Third, organizational designs that foster frequent and informal information exchange among senior IP executives, the management committee and the board lead to higher performance.

What are the implications of these findings? Surely, companies will have to dedicate enough resources to playing the IP game successfully in the near future. But top executives should also be aware of the challenges implicit in the changing mores regarding IP strategy. It is not clear, for example, that the long-term implications of a system where companies use patents to more aggressively claim new technology spaces is wholly beneficial to businesses. As Lars Rebien Sørensen, CEO of Novo Nordisk, puts it: “Much about the strategic management of IP is actually ‘cultural’ in the sense there is a shared understatement about what IP should or should not be used for — both inside the company and in the marketplace. But I also perceive that this understatement is currently being diluted, and — as the study results in this article suggest — some competitors try to stretch the use of patents and trademarks to an extent that we’re putting the acceptance of these systems at risk. I guess the corporate world as a whole is well-advised to consider the consequences of these games.” This indeed, may be another top-level management challenge for the longer-term future.

References

1. M. Reitzig, “Strategic Management of Intellectual Property,” MIT Sloan Management Review 45, no. 3 (spring 2004): 35–40.

2. K. Rivette and D. Kline, “Rembrandts in the Attic” (Boston: Harvard Business School Press, 1999).

3. At this time, there is hardly any large-scale, empirical data on the strategic importance of creating, protecting and exploiting IP rights at the business and corporate level. Earlier contributions by W.M. Cohen, R. R. Nelson and J.P. Walsh, “Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or not),” Cambridge, NBER Working Paper 7552, Cambridge, Massachusetts, 2000 or R.H. Pitkethly, “Intellectual Property Strategy in Japanese and UK Companies: Patent Licensing Decisions and Learning Opportunities,” Research Policy 30, no. 3 (2001): 425–442, are important; however, they mainly address functional management issues.

4. See H. Nystrøm, “Product Development Strategy: An Integration of Technology and Marketing,” Journal of Product Innovation Management 2, no. 1 (1985): 25–33. This thought elaborates on Nystrøm’s rationale on the interlocking between technology and marketing strategy.

5. See M. Porter, “Competitive Advantage” (New York: Free Press, 1980) and R. Grant, “Contemporary Strategy Analysis” (Oxford: Blackwell Publishers, 2002) for fundamental thoughts on the layered structures of strategies. See P.R. Varadarajan and T. Clark, “Delineating the Scope of Corporate, Business, and Marketing Strategy,” Journal of Business Research 31, no. 2–3 (1994): 93–105, for a detailed discussion about the layered structure of the marketing-related aspects of strategy. See M. Reitzig, “A Comprehensive View on Corporations’ Intellectual Property: Towards a Specific Strategy-Structure Contingency Framework” (paper presented at the Strategic Management Society Conference, San Juan, Puerto Rico, November 1, 2004) for an extension of Varadarajan and Clark’s rationale to other areas of intangibles.

6. Reitzig, “Strategic Management of Intellectual Property.”

7. O. Granstrand, “The Economics and Management of Intellectual Property Towards Intellectual Capitalism” (Cheltenham: Edward Elgar, 1999).

8. These questions tried to discriminate between various IP-related strategic scopes reported in the literature: namely, to protect radical inventions from being copied using patents/trademarks/designs; to block entire product spaces by seeking patent and trademark protection for every possible marginal invention; and to generate intellectual property for in-/out- and cross-licensing purposes. For multibusiness corporations, we asked the respondents to focus on their corporation’s major business line. Given the relatively small ratio of cases per factor (and questionnaire items), we confirmed satisfactory sampling adequacy using Kaiser-Meyer-Olkin’s criterion.

9. Sample biases may arise due to the stratification criteria (company size >250 employees) and the possibly higher willingness of respondents to participate in the survey if intellectual property was already a focus area within their organizations. As this study does not aim at representativeness, however, these effects were not studied in further depth.

10. See, for example, J. Liebeskind, “Knowledge, Strategy, and the Theory of the Firm,” Strategic Management Journal 17 (winter special issue 1996): 93–107, for a perspective from the mid-1990s.

11. The senior IP executives were asked to assess their corporations’ IP-related performance along five dimensions: their companies’ choice of the correct R&D trajectories; the efficacy of their R&D and IP-protection mechanisms; the quality of their existing IP portfolio; the efficacy of their use of their IPRs at the corporate and business-unit level; and the efficacy of their IPR use at the functional level. Their ratings were factorized into a composite “IP performance” index. Using multivariate regression techniques, the IP performance index was explained through the strategy and organizational variables from the questionnaire. Both factorized items and individual items were tested as regressors. Standard robustness checks were carried out.

12. See Reitzig, “Strategic Management of Intellectual Property.”

13. See, for example, Cohen et al., ”Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or not).”

14. When relating the organizational data to patent-specific performance measures at the project level (rather than overall IP performance measures at the firm level), coordination between R&D and IP protection also emerges as an important performance driver. See M. Reitzig and P. Puranam, “Value Appropriation as an Organizational Capability — The Case of IP Protection Through Patents,” SSRN Working Paper 957335, 2007.

15. For a description of the “extreme misfit” test approach, see R. Burton, J. Lauridsen and B. Obel, “Return on Asset Loss from Situational and Contingency Misfits,” Management Science 48, no. 11 (2002): 1461–1485.

16. For a comprehensive description of the “contingency theory of organizations,” see L. Donaldson, “The Contingency Theory of Organizations” (London: Sage, 2001).

17. See Reitzig, “A Comprehensive View on Corporations’ Intellectual Property: Towards a Specific Strategy-Structure Contingency Framework.”

18. See Burton et al., “Return on Asset Loss from Situational and Contingency Misfits” for a description of the parameters describing competitive environments. The hypotheses that were tested on our survey data were derived from classic organizational design theory — for example, P. Lawrence and J. Lorsch, “Organization and Its Environment” (Cambridge, Massachusetts: Harvard University Press, 1967) and P. Kandwhalla, “The Design of Organizations” (New York: Harcourt Brace Jovanovic, 1977) and were adjusted to the specific context of this on IP-related activities within the company.