Intellectual property may not be glamorous, but it’s essential to future business success. Professor Alberto Galasso explains how the right IP strategy can drive growth — or hold your business back— on the latest Rotman Executive Summary.
Intellectual property may not be glamorous, but it’s essential to future business success. Professor Alberto Galasso explains how the right IP strategy can drive growth — or hold your business back— on the latest Rotman Executive Summary.
Show notes:
[0:00] There are a lot of factors that go into whether a company is innovative or not, so much so that Professor Alberto Galasso wrote a book on the topic.
[1:50] But he warns that people often overlook the importance of IP to the innovation process.
[2:25] Let’s define IP, copyright and patents.
[3:52] The importance and value of IP has ballooned over the past 20 years.
[4:48] Today, it’s something companies big and small are increasingly reliant on.
[6:06] How often do patent applications succeed? How often do they fail?
[6:58] To get your IP and innovation strategy right, you have to know the overall goal of your organization, and you should think about it early and often.
[8:44] Is IP protection even the right approach? Or should you consider trade secrets? What are the trade-offs?
[10:59] How can you use IP data to boost innovation?
[12:31] And how can you use IP protection like patent filings to incentivize workers?
[13:41] What is absorptive capacity, and how does IP protection allow organizations to tap into this critical element of innovation?
[15:18] “So from that perspective, it is a crucial asset to this intellectual property to protect the area that are more valuable of your company, but also to share technology and access technology with other firms for which you want to collaborate.”
Megan Haynes: There’s a lot that goes into a successful innovation strategy. And Alberto Galasso - a professor of strategic management at the Rotman School - has looked at plenty of these factors over the years.
From a company’s location:
Alberto Galasso: For example, you may develop a great new technology, but if there is no investors, in that area that is specialized in that technology, can understand the technology, that is willing to invest in that particular technology area, then you're in trouble.
MH: To the local talent pool:
AG: We're talking about university and presence of specialized labor that is linked to the technology that you're developing.
MH: Even a CEO’s level of overconfidence.
AG: Literature, was able to identify CEOs that were overconfident, and they were doing, for example, excessive mergers acquisition. They were building too many plants, they were expanding the company too much and so on.
We started looking at decision of these companies to invest in R&D, the type of patents that this company were filed, the changes in the type of directional technology they were using. We found that the very same CEO that were on one end, destroying value of the company with some strategies, they were actually very good in innovation. Not only they were just investing more in research, but also way more likely to kind of obtain high-valuable technology, high-valuable patent, were more likely to explore new technology area and so on.
MH: He even wrote a book on the topic.
AG: Yes! The book is called The Management of Innovation. It tries to give an overview, essentially, of research findings that can be useful for managers in organizations and for founders of startups on how to make their organization more innovative, and how to manage the technologies that they generate.
MH: And while a book’s worth of stuff can shape a company’s approach to innovation, for Alberto, there’s one element that’s consistently underappreciated: The IP strategy. So what is an IP strategy? How does it shape innovations? And what should leaders be asking themselves as they consider the best path forward?
Welcome to the Executive Summary, I’m Megan Haynes, editor of the Rotman Insights Hub.
Musical interlude
MH: Let’s start with some high-level terminology. IP stands for intellectual property. And while this is a really theoretical concept or term for what amounts to the protection of ideas; IP really underpins almost all innovation, since at its core, innovation is new ideas.
AG: IP is essentially a set of rights that the government gives you if you develop a new technology or, in general, new creative content
MH: There are a few types of IP, but the important ones to note are patents and copyright.
Patents are a blueprint people file with their local patent offices that protects their invention or discovery. It might be the circuit board design of a new microchip, the mechanisms of how a new tool operates, or the formula for a newly discovered medicine. And once your application is approved...
AG: You get this document that is a patent that, for 20 years, allows you to be the only one to essentially use or sell or produce the technology.
MH: Copyright on the other hand…
AG: That is related to creative work. So if you write a book, the recording of this podcast, music, movies, those are protected by copyright.
MH: Think of copyright protection as the thing that safeguards movies, music and books from being replicated, but also the code that underpins software – particularly relevant in today’s hyper digital business environment.
AG: Companies have been using IP for a long period of time, but they’ve been always seen as something important for lawyers, important to have everything in order in terms of paperwork, something that was considered by managers and executive in some industries, but it was not probably one of the top five things on the minds of CEOs.
MH: But that has really changed over the past 20 years.
AG: In 2004, there was an interview that was done to Bill Gates, and he said, "We need to start changing our approach to IP. It’s not just something important for lawyers. This is really what will drive competition and what will drive growth of companies in the future."
MH: Gates proved to be right. In 2022, the World IP Organization estimates that more than 3.4 million patents were filed globally, with China, the U.S., Japan, Korea and Germany leading the charge. Some of the biggest companies in the world – including Samsung, IBM, Huwei and Apple are among the top patent filers per year. Use of IP protection is particularly strong in certain types of industries, like electronics, telecommunications, pharmaceuticals and medical devices.
AG: So today, if you look at the largest companies in the stock market, estimates are that 80 per cent of their value is driven by intangible assets of, things like IP knowledge that you can protect, rather than their plants, their equipment and so on.
MH: But it’s not just large organizations that derive benefit from a strong patent strategy: IP protection can make or break a startup.
AG: There are several recent studies that have shown that for small firm startup in particular, IP can be really important for the success of your company. If your first patent application is successful, they are 50 per cent more likely to get VC capital. They are more than 100 per cent more likely to grow and end up being publicly traded. So there are huge effects that have been estimated on the success of companies.
Musical interlude
MH: So what does it mean to get your IP strategy right? A 2015 study out of Yale found that 60 per cent of all patent applications in the U.S. are eventually approved – and Canada sees similar numbers.
That sounds like a pretty high success rate, but that same Yale study found that 90 per cent of applications were originally fully or partially rejected, which meant they had to go through a review and resubmission phase.
That’s not great, since patent applications in the U.S. take anywhere from 22 to 48 months to be approved, and it can take up to 6.5 years here in Canada. That’s a long time to sit on a novel new idea or invention.
So with that in mind, Alberto says that to get your IP strategy right, you have to have a plan from the get go.
AG: I'm one of the economists involved with the Creative Destruction Lab. I see several startups that need to really to think through their intellectual property strategy. And it's very easy, sometimes not to consider that a priority. There are so many other things that you need to do as a startup. And you think, okay, we're going to figure out a way to file a patent application. But you need to understand that if you don't file a patent that is well defined, you're gonna then regret and not have the protection that you were hoping to get. Or, even worse, your patent is not granted, or is granted with very long delay and so on.
From a broader perspective, to get the right means to, first of all, have a good understanding of where you're you want your company to go? What is your objective as a manager, to want your company to achieve. And then you want to make sure that the IP strategy aligns with these objectives.
MH: How you approach your strategy for IP will be very dependent on your overall goal for the organization. Is the goal for you to a) be the industry leader, successful because you created and sold something that now dominates the market? Or b), is your goal to be acquired by a bigger company and take the payout?
Both are valid strategies, but you need to be clear on which one is most important because that will change the way you approach your IP protections.
AG: Do you want the intellectual property to protect what you have and make sure nobody else enters that space, so that you can grow and become really the industry leader on that space. Or do you want IP that makes you attractive as a target for an acquisition so that your portfolio should fit very well with the portfolio of these other companies that may attract to you.
MH: And IP protection may not even be the right strategy for you.
AG: A number of start up company that I talk to are struggling between should they file a patent and protect my technology or should I just keep it secret? You know, an alternative to IP strategy is trade secrecy. By just keeping your technology secret, you can protect your technology
MH: Remember, patents only grant the rights holder 20 years of exclusive use.
AG: If you're able to keep something secret for a long time, then you can have protection for much longer than 20 years. For example, Coca-Cola, they've been able to keep their formula secret for decades. If they had a patent on it, then now everybody could use the formula.
MH: And IP protection is also only as strong as the country with which you’ve filed.
So if you’re in a region that doesn’t go after patent infringements harshly, you might be better off with a trade secret strategy.
There is a cost, of course. Trade secrets mean you have to invest in protecting your secrets; and that can mean having to go with multiple vendor partners so that no single one can understand your entire process. It can mean paying a premium for talent so that you know that the secrets won’t leave with them if they pursue better paid work elsewhere. It’s actually harder to share your technology openly with other inventors, which means you’re not able to gain knowledge from those outside your organization about how to improve on your own work.
And other inventors might to your original idea on their own, either by fluke or through reverse engineering; and if you don’t have IP protection then you’re out of luck. But importantly, a trade secret strategy can make it infinitely harder to get funding.
AG: Then it creates a lot of problems for you when you interact with investors or with buyers or with suppliers, for example. You know, sometimes the startup have a great idea, but the investor says, "Look, I'm not investing in your company because I don't understand your technology, and you don't want to tell me about your technology because you're worried about the trade secrecy," and that I saw it happening several times.
Musical interlude
MH: While it’s important to safeguard your intellectual property, Alberto says it’s equally important to think about the role IP plays in boosting organizational innovation.
The first thing he points to is the rich patent databases that exist in the world. They are treasure troves of information that not enough people are mining.
AG: Patent data are free, are available very easily, and these are very useful source of information. Because firm typically first patent their technology and then they sell or use the technology, so it gives you information on the technologies that are going to be sold and used in the future. It tells you what type of technologies are companies working on how are they specializing on something. By looking at their patents, you may understand where they intend to go in the next few years, what type of products they may likely launch and what they don't. It may help you understand things like location decisions — like you want to decide whether to locate your startup here in Toronto or to move somewhere else, by looking at how much innovation activities in a particular area, for example how many patents are filed in a particular geographic area, is there expertise there in that area or not? Are there competitors in that area or not, and so on.
MH: While bigger organizations have plenty of money to do market research on their competitors, smaller startups often lack these resources, so why not take advantage of these free databases?
Secondly, Alberto has found that many successfully innovative companies use patents in their incentive structures.
AG: Several companies have been using patents as a way to design then compensation bonuses for their scientists and engineers. If you file a patent or multiple patent this year, then you're getting a big bonus.
MH: He warns this strategy isn’t without its risks. First, you may end up incentivizing people to chase easy wins — those smaller, but more guaranteed patent filings — rather than bigger risks that may or may not result in anything.
It can also discourage people within organizations from working together, since they may be chasing that same limited reward. But it is a successful approach to encouraging innovation.
AG: The literature seems to show that they tend to work. So usually companies do it, you see that, you know, they tend to generate more patents after they implement in these schemes.
MH: Finally, at its core, patents safeguard the inventor. This can give them — or their organizations — the peace of mind that they are protected, and allows them to continue to invest in more innovations.
But IP protection also allows for greater absorptive capacity, which Alberto says is a critical component of many highly innovative companies.
AG: Several studies have shown is really important is what is called, in a management literature, absorptive capacity, the idea that in order to be very innovative as a company, you need to invest in the ability of your company, of your engineers, of your scientists, to learn. So things like sending your scientists and engineers to conferences, collaborating with universities, sending some of your employee to seminars and courses to be sure that they are of the frontier of the scientific development in your field. Even companies that develop great technologies, they sometimes kind of lose their innovative edge if they become insular, if they say, okay, that's, you know, we're just specializing this thing. We lose track of how the field evolves. We're not really the frontier in terms of research that can create problems.
MH: In effect, IP protection gives you the air cover to go out into the world, share and learn from others — which is possibly one of the most important elements of fostering innovation.
AG: Licensing of patents is the most common way in which firms exchange technology and share technologies. So collaboration in most industry really take place by sharing IP across firms. They allow you to write contracts. They make sure and clear what type of technology you share and what type of technology you don't, and what are the kind of compensation for particular users or technology or not
So from that perspective, it is a crucial asset to this intellectual property to protect the area that are more valuable of your company, but also to share technology and access technology with other firms for which you want to collaborate.
Musical interlude
MH: This has been Rotman Executive Summary, a podcast bringing you the latest insights and innovative thinking from Canada's leading business school.
Special thanks to professor Alberto Galasso. Join us next month as we chat with professor Julie McCarthy about stress, resilience and leadership.
This episode was written and produced by Megan Haynes. It was recorded by Dan Mazzotta, and edited by Avery Moore Kloss. For more innovative thinking, head over to the Rotman Insights Hub, and subscribe to this podcast on Spotify, Apple or Amazon. Thanks for tuning in.