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The 5 Levels of Competency
November 2013

Authors

Arvin Patel, LLM Senior VP, WW IP and Licensing Rovi Corporation, Sunnyvale, CA, USA
Paul Germeraad President, Intellectual Assets, Inc., Saratoga, CA
The 5 Levels of Competency

To run a successful business, the first requirement is to avoid any surprises. Surprising your boss, or a corporation's board, is a fast track to the unemployment line. When a business leader puts in place systems that allow the company to operate in a stable, consistent manner, the first level of business success sets in. Intellectual property contributes at this base level by helping to ensure that a company is free to offer its new and profitable products and services.

The patent case of Apple versus Samsung is a prime example of what can go wrong. It shows how devastating a surprise can be to a management team and a company's stock price. When Samsung lost the patent suit with Apple, its stock price dropped 7.5 percent and the CEO was under intense pressure by the corporation's board. Samsung further faces an injunction and exclusion against its key mobile products in the United States.1

Once a business is stable and running smoothly with no surprises, the next challenge for a CEO is to ensure that the company's IP is being used to generate sustained advantaged market positions. This means introduction of new products and services that are superior in cost, performance, or both, compared to the competition. The trick is to accomplish this feat in a manner that will allow that advantaged position to be sustained over time. Intellectual property's contribution to sustaining a market-leading position comes in the strategic acquisition and use of patents, trade secrets, copyrights and trademarks. These, each in their own way, can prohibit a competitor from offering the same product or service. To accomplish this sustained advantage a CEO must ask the right questions and generate the right competencies within the business.

The next level up the business hierarchy, once a company is competent at the first two levels, is to engage in full exploitation of its technology globally. However, there are very few companies in the world that can conduct their business in every country. The company's core competence or sweet spot usually lies in the first or second tier of the hierarchy. When a company is expanding geographically, it builds its regional business into countries in which it knows how to operate. For those countries where it's unfamiliar with doing business, licensing its technology to others who understand the country's nuances, via geographic licensing programs, builds corporate revenues faster than any other method.

Near the top of the pyramid, and only after the other three competencies are mastered, can a company look to put in place business systems that will consistently speed R&D and product development. The role of intellectual property at this level is to integrate business, regulatory, standards, marketing, R&D, and IP activities. Many companies attempt to integrate planning, creation and management strategies and tactics before they've mastered the other levels of the pyramid. But, as Maslow vividly showed us, it's hard to find shelter if you can't breathe.

Finally, at the top of the pyramid, influencing industry adoption is all about maximizing value in the various stages of the company's innovation cycle. As Marc Ehrlich, head of IBM's IP Enforcement and Commercialization business, observed: "In order to control industry adoption of new technologies a CEO must find the proper balance between proprietary protection and open licensing of a technology. To do this requires a deep understanding of the innovation lifecycle for technologies in the company's industry. For example, aggressive IP protection may make sense for early stage technologies whereas a more open licensing model, implemented after market acceptance of a technology, may facilitate industry adoption, thus setting the stage for a next wave of technological innovations for the company."



The 5 Big IP Threats

Consider the financial services sector. An IP executive dashboard should quickly reveal threats and opportunities, which if not managed, can lead to real revenue loss for financial services companies like American Express, Citibank, and TD Waterhouse. A quick look at the patent landscape reveals there are five significant threats that could surprise and upset traditional financial service companies' plans.

First, there is a high patent application backlog that leads to an inability to freely offer new and improved products that consumers demand. This is shown in Figure 3, which plots the patent application count vs. patent grant rate per year. The difference in the two curves tells a CEO many things about the state of the industry; For example, a recent increased focus on patenting which may coincide with important changes in product and service offers such as digital wallets and other e-commerce solutions. As these new product technologies become covered by patents, competing companies will have to withdraw their offerings, or pay the patent owner's demands for royalties.

The second threat comes from the relatively large number of non-practicing entities ("NPEs") that hold patents in this field. Figure 4 lists a number of such organizations. Their holdings are significant and likely to grow. Once the market is generating enough profits from patents they hold, industry leaders can expect to be surprised with lawsuits asking for royalties. What's more, the size of patent holdings and rate of NPE patent acquisitions suggest an expectation that the market is heading toward certain technologies and that the operating companies are generating product and service returns that merit the NPE patent investment in this area.

The third threat comes from foreign inventors and inventive organizations. Figure 5 shows the number of U.S. patents held by foreign entities. U.S. financial organizations can expect that such foreign entities may bargain for significantly different terms and geographic access than traditional U.S. based competitors or non-practicing entities. The unknown elements of such future negotiations represent a significant unknowable risk to U.S. growth and global expansion plans of U.S. and European based financial companies.

The fourth threat comes from the number of applications and patents already filed in foreign countries. Many prime geographic areas for financial services expansion are well covered by patents. Since each foreign jurisdiction has its own rules for patentability, patent enforcement and licensing- financial services companies cannot count on their geographic strategic expansion to proceed without a hiccup, at least not without an integrated IP strategy as part of that expansion. See Figure 6.

The final major threat to the financial services industry comes from the tech sector, especially as banking and e-commerce begin to truly merge. Financial services institutions want to control emerging technologies like e-wallets and near field payment processing, and some are even partnering with the large tech firms to make it happen (one prime example is the partnership between Google and Citibank on the Google Wallet). But tech companies are patent heavy, and this should be deeply worrying to financial services companies.

In conclusion, answers to the key questions at the bottom of the pyramid—questions like, "What is the chance I'll be involved in IP litigation?"—suggest that financial services companies unfortunately have a very uncertain future ahead of them. To mitigate each risk or even turn them into opportcnities requires a thoughtful counter-strategy based on a thorough understanding of the entire IP landscape.cosotf

 



Concept Three: The Right Time for IP

The third concept a CEO needs to understand is that an intellectual property strategy also has a time dependency. This can best be understood via the Scurve most executives became familiar with in business school. This S-curve was a useful tool for simply conveying the best time during a business cycle to invest in the creation of new businesses, grow those businesses, and extract value from mature businesses.

The management techniques appropriate for each portion of the S-curve varied in conjunction with these different objectives. Creation, management, and exploitation of intellectual property also vary along the same curve. However, when it comes to intellectual property management, it is best to extrapolate from the traditional business curve and add two key concepts: The "chasm" made popular by Geoffrey Moore and the "hype cycle" developed by Gartner. See Figures 7 and 8.



Buy, License and Litigate

By combining the three different curves, executives are provided with the best guidance on when to create, buy, license and litigate intellectual property. As a CEO looks at the business environment and starts to understand which technologies a competitor may choose to bring forward, the hype cycle helps to reveal the right time to invest in a developing technology.

Early in the cycle, patenting activity rises as adoption builds. At this point, the price of intellectual property goes above market expectations. As the market begins to grow the technology usually runs into a few hurdles, including Geoffrey Moore's chasm. It's at the trough of the hype cycle that advantageous licensing can be accomplished by a corporation. If the company was not deploying its own technology (developed either internally or via partnership) early in the cycle, licensing technology in the trough is a good business decision for a company with a solid fast-follower strategy.

Needless to say, it's important not to wait too long to engage in licensing transactions because, as the technology starts to emerge on the far side of the chasm, market size builds, as does the market capitalization of participating startup companies. It is at this point a company may be locked out or required to pay dearly for access to a key technology needed to secure an advantaged market position. It's also noteworthy that, as companies start to pull out of the hype cycle, litigation of intellectual property also occurs. A smart CEO will make sure that the intellectual property that was acquired early on has appropriate patent fences built around a strong core position.



Hype Cycle in Action

To best illustrate how the hype cycle allows an executive to understand when to create, buy, license and litigate intellectual property, Rovi Corporation's technologies in its pipeline can be shown in a composite Gartner hype cycle below on top of key technology trends in the entertainment / consumer electronics / television industries. In this case study, Rovi shows up with 12 specific technologies indicated by a gray dot outlined with a blue circle in Figure 9.

Starting at the far right there's a number of technologies that fall into the Gartner "slope of enlightenment." These are technologies headed into commercialization and for which consumer acceptance has been obtained. These markets are predicted to grow rapidly and as such may give Rovi licensing revenues in the process.

Some of these licensing revenues are being reinvested in the early stage (left side) of this cycle at the "peak of inflated expectations." Here Rovi is again wellpositioned with a variety of technologies. Rovi must invest early in a technology to make sure that the intellectual property portfolios are in place and are solid and robust enough to generate good revenues when the technologies emerge and move into the "slope of enlightenment." The core competency for Rovi's management at this point in the hype cycle is to invest in emerging technologies at a realistic price point.

Looking at the center of the graph, at what Gartner calls a "trough of disillusionment," we see that Rovi is positioning itself to invest in technologies that are about to come out of this area and experience growth upon entering the next phase. It is important for a company to invest in technologies and continue their investment in both R&D and IP as these technologies move towards commercialization. Rovi is exhibiting the management perseverance to see such technologies through, and to obtain a return on investment.

The mix of early and late technologies as illustrated on this composite hype cycle shows that Rovi is investing for both current and future revenue streams. Management has the planning skills to know which technologies to invest in early, as well as the discipline to continue to invest in them when others are disillusioned, so that a strong patent portfolio is present when commercialization takes place and increasing revenues are available.

Because Rovi invests along the entire lifecycle, it is expected that the company will obtain a better return on its investment than companies who wait until the last minute to invest, and end up paying above market for the technology they acquire. The recent patent wars occurring in the first and second quarters of 2012 between such players as Google, Facebook, Yahoo, Microsoft, Apple, Samsung, Motorola and others illustrates the point that if one waits until the end to acquire patents, one pays a very high price indeed for acquisition of those assets.



IP: The CEO's Secret Weapon

Managing innovation and IP can indeed lead to sustainable profits. IP that is effectively utilized can provide a powerful competitive advantage in the marketplace. It can also help organizations better understand emerging threats and identify new opportunities. In today's global economy, IP belongs not just in the board room, but in the executive toolkit of every CEO. As the lynchpin of innovation and a gateway to vital new revenue sources, IP is simply too valuable to be outsourced to a patent attorney or outside law firm. By understanding and implementing the three key IP management concepts outlined in this paper, CEOs and their teams can outpace the competition and achieve ground-breaking business results.



Acknowledgement

This article is the first of a les Nouvelles series, planned by the LESI Ad Hoc Committee on Strategy, currently chaired by Subramaniam Vutha. The views expressed herein are those of the authors and should not be attributed to the authors' respective companies.



Sources

http://research.bizreport.com/content24919

  1. "Samsung shares slump after Apple patent ruling." Market-Watch. August 27, 2012.
  2. IBM. "A Global Innovation Outlook 2.0 Report." September 2006.
  3. Andrea Fosfuri. "The Licensing Dilemma: Understanding of the Determinants of the Rate of Technology Licensing." Universidad Carlos III de Madrid, April 2006.
  4. Economics and Statistics Administration and U.S. Patent and Trademark Office. "Intellectual Property and the U.S. Economy: Industries in Focus." March 2012.
  5. "A market for ideas." The Economist. October 20, 2005.


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