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A decade ago, Procter & Gamble’s paper-towel production line in Albany, Georgia, used to jerk to an unexpected stop more than a hundred times daily, costing the company thousands of dollars each time in wasted product and lost production time. To solve the problem, P&G developed a suite of sophisticated technical and statistical tools that not only helped managers predict such assembly line snafus but also prevent them. This “reliability engineering” technology has given the company an important competitive advantage over rivals, as it has helped P&G boost manufacturing efficiency by more than a third and save billions of dollars in the years since it was introduced.
It came as quite a surprise, therefore, when Procter & Gamble announced in the summer of 2000 that it would henceforth license this same technology to any and all bidders — including its own competitors. The company is known, after all, for being fiercely protective of its proprietary innovations (witness the forced bankruptcy of rival diaper-maker Paragon Trade Brands in 1998 after P&G won a patent suit against it). Yet suddenly P&G was offering (for a price) to share with other companies not only its reliability-engineering tools but its entire stock of 28,000 technology patents as well.
Although Procter & Gamble’s decision stumped industry analysts at the time, the company’s move is actually part of a larger trend (see also Henry Chesbrough’s article, “The Era of Open Innovation,” p. 35). P&G, in fact, is only one of a small but growing number of Fortune 500 firms such as IBM, BellSouth, Boeing, Rohm and Haas, and Motorola that are moving away from a strict reliance on the “exclusivity value” of their patents and other intellectual property — that is, their power to exclude or hinder competitors — and are instead seeking to tap the often-enormous financial and strategic value of their core technology assets by licensing them to other companies, including competitors. The practitioners of this strategic licensing, as it is called, are betting that any loss of market exclusivity that may result from making available their “crown jewel” technologies will be more than offset by the financial and strategic benefits gained.
Mining the Value of Intellectual Property
Strategic licensing is emerging against the backdrop of intensified efforts by corporate America to maximize the return on its intellectual property assets, which now account for 50% to 70% of the market value of all public companies.
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1. D. McGavock, “Intangible Assets: A Ticking Time Bomb,” Chief Executive 183 (November 2002), http://www.chiefexecutive.net/depts/chiefconcern/183.htm.
2. J.J. Elton, B.R. Shah and J.N. Voyzey, “Intellectual Property: Partnering for Profit,” McKinsey Quarterly, 2002, no. 4, http://www.mckinseyquarterly.com.
3. D.M. Katz, “A Company’s Mind Is a Terrible Thing To Waste,” CFO.com, July 26, 2001, http://www.cfo.com/article/1,5309,4335|||1,00.html; H. Harreld, “Getting Your Buck’s Worth From Intellectual Property,” CNN.com, October 29, 2001, http://www.cnn.com.
5. B.J. Feder, “Motorola To Sell Inner Workings of Cell Phones to Rivals,” New York Times, Monday, July 23, 2001, http://www.nytimes.com.