The innovation cycle: an IP strategy for sustained business leadership

To a typical C-suite executive, the term ‘intellectual property’ is synonymous with sensational headlines such as “Samsung Pays Microsoft $1 billion in Patent Dispute” or “Court Approves $4.5 Billion Sale of Nortel Patent Portfolio”. However, the phrase ‘IP department’ is likely to evoke a very different image: perhaps a group of executives issuing threats in a desperate attempt to generate some licensing income from a portfolio of slowly dwindling IP assets or, more likely, a group of lawyers slumped over their desks with quill pens in hands and green visors perched on their foreheads as they mutter an incomprehensible stream of technical and legal language.

This article is about neither of those. After all, how many articles about IP licensing have you already decided not to read? Instead, in this article and a series of others to follow, we will discuss something far more valuable: the use of intellectual property as a means to position your company to win in today’s and – more importantly – tomorrow’s marketplace. Our goal is an audacious one, but we think that we are up to the task. We will explain why IP strategy is an essential part of your business strategy which belongs squarely in the boardroom – not something that is relegated to the IP department.

Leadership that lasts

“In order to win, your company needs to harness its innovations.” That is the mantra of every C-level executive. But when you compare the number of companies competing in the market against the few that truly succeed, it becomes plain that a great innovation cannot be the only ingredient required for success. If you remove from that list the one-hit wonders – companies that hit upon a winning product only to be later surpassed by their competitors – the list becomes shorter still. To become one of those remaining companies is the entrepreneur’s holy grail and raison d’etre.

One-hit wonders

There is good reason to focus on innovation as the key to success. After all, it is trite but true that we are in the midst of an era of dynamic changes in innovation. Technological developments such as the creation of global communications networks have enabled new forms of collaboration, spawning innovation on a scale and pace never before contemplated. Innovation spans companies, governments and geography. It is created and shared as quickly as data can traverse a cable or carrier signal. Not since the advent of the printing press has there been such dynamism in the area of innovation.

And yet, clearly, innovation itself is not enough. The best companies understand not only the need to capitalise on innovation to win in the marketplace, but also the need to take a longer-range view. They understand that the key to sustainable advantage is to build a model for successive innovation to ensure that they are continuously a step ahead of their competitors in new markets.

Consider Apple’s ground-breaking iPod and its concomitant leadership in smartphones. Innovations developed for these products turned them into widely popular platforms (for music, application software and new technologies), which in turn enabled Apple’s successful entrance into the tablet computing area (a computing platform where numerous competitors had previously failed to gain traction). Apple’s success in portable music gave it a leading position in smartphones, which in turn helped to enable and strengthen its subsequent success in tablets. Other long-term successful firms have followed a similar pattern. Microsoft’s dominant operating system enabled it to become the dominant application provider for office productivity software, which in turn led it to databases, middleware and beyond. Amazon’s dominance as a bookseller enabled it to become the dominant seller of, well, everything, as well as being a tablet, streaming media and web services leader.

Success begets success. But this does not happen by chance among these most elite and consistent market leaders. Before Google leveraged its internet search engine dominance into markets such as mobile and video, other search engines such as AltaVista and Excite held sway, before eventually being displaced. What separates the companies that dominate a market for a short time from those that dominate for an era is the understanding that winning their current platform is not an end in itself. Leadership in a market must be a path to leadership in successive markets in order to build a company that lasts.

Pictures clockwise from top left: Getty Images, Science & Society Picture Library/Getty Images, Tim Boyle/Getty Images, Justin Sullivan/Getty Images

Picture: John Lamb/Getty Images

Battle for platforms

The battle for IT dominance today is a battle for control of platforms. Facebook is the 800-pound gorilla in social networking, chased by the likes of LinkedIn, Twitter, Google+ and others. But whether Facebook maintains its social hegemony depends on what it can do for an encore. If Facebook does not own the next important social platform that evolves, it risks losing its subscribers to the innovator which does. That is why Facebook has worked to extend its leadership in social media into mobile computing through the acquisition of Instagram, WhatsApp and others, as well as through home-grown initiatives such as Facebook Home.

Picture: Bloomberg/Getty Images

The recent emergence of on-demand transportation provider Uber illustrates the fact that the battle for platform ownership starts when a company is first formed. Uber has quickly grown to dominate the platform for ride sharing, which it helped to create. However, this is just the first chapter of its business plan. Uber intends to leverage its ownership of its taxi service platform to develop a more extensive transit and logistical platform and eventually to own the platform for anything delivered. Once Uber owns the summoning of cars, trucks and aircraft on demand, why would it not then own delivery as well? The fact that Uber has a plan to evolve to successive markets even as it competes to own its first market is a good sign for a company that wants to sustain its leadership.

Visionary companies plan their platform progressions and have a strategy for what those progressions will look like right from the start. As Peter Thiel notes in his ground-breaking book Zero to One: Notes on Startups or How to Build the Future, the founding of a company “lasts as long as a company is creating new things and ends when creation stops. If you get the founding moment right you can do more than create a valuable company, you can steer its distant future toward the creation of new things instead of stewardship of inherited success. You might even extend its founding indefinitely”. We agree, except we believe that you must extend the founding moment indefinitely. A company such as Apple is creating and owning platforms today that its founders could never have envisioned from the confines of their garage start-up. Companies must continuously develop their next platform strategy because it will cement success in their present market and ensure their path to future success.

It is tricky to strike a balance between competing for ownership of a current platform and preparing for the transition to a future platform. This is where IP strategy comes into play. Intellectual property creates the bridge that connects ownership of a current platform to leadership of the next. By choosing which intellectual property to keep as proprietary, which to license and which to give freely to others, a firm with an understanding of its platform strategy can at once establish control of its present platform and ensure that it has a lead in owning the next one. To do this requires an understanding of how innovation evolves.

Visualising innovation

There are many tools offered by many consultants which track the course of an innovation. One of the best-known examples is the Gartner hype cycle. Developed by consulting firm Gartner, Inc, the hype cycle is a graphical representation of the maturity and adoption of a technological innovation over time. It can be used to assess the risk associated with adopting an innovation based on the stage of its evolution, as shown in Figure 1.

The stages represent the typical evolution of a technical innovation. Starting with a technology trigger, which occurs due to a technical breakthrough, there follows a period of inflated expectations, which leads to a period where these unrealistic expectations fail to be realised (the trough of disillusionment). In time, a more modest degree of success is realised by one or a few implementers (the slope of enlightenment). This prompts others to join the market and heralds the arrival of second and third-generation products. Finally, at the plateau of productivity, mainstream adoption takes off, more providers enter the market and the promise of the original innovation begins to approach realisation.

Figure 1. Gartner hype cycle

The hype cycle is a means of visualising an innovation’s progress towards viability. It does not, and is not intended to, directly address innovation from the standpoint of an innovator. Rather, it addresses it from the vantage point of an adopter. To do this, it charts the progress towards market acceptance associated with making an innovative product workable. It is possible and useful to overlay an IP perspective on the hype cycle. We demonstrated how this could be done in an earlier article (“How to value IP portfolios for acquisition”, IAM 63). We illustrated that the tool enables executives to understand the state of their patent portfolio mapped against a specific technology at a given stage of the hype cycle. This provides more insight than simply generating a patent portfolio report tallying patents filed or issued in a technical area. Nonetheless, the hype cycle is limited as an IP strategy tool, as it cannot be used to plan a successive platform control strategy.

In this case study, Rovi shows up with 12 specific technologies indicated by a red dot outlined with a blue circle

The hype cycle is not built with the innovator in mind, so it is unsurprising that it does not chart next-generation innovations. This shortcoming is also present in many other tools for charting the progress of innovations. These tools generally do not see past what is necessary to achieve success on the first platform and so are limited to the evolution of the first innovation. They do not address the innovator’s need to extend the founding moment indefinitely. In fact, because they do not incorporate IP considerations into their models, they tend to offer little more than an observer’s feedback on the evolutionary stage of an innovation. What is really needed is a tool that shows innovators how to achieve ownership of the platform associated with the original innovation and to extend that ownership to the next platform. To do that, a tool must provide IP insight.

Figure 2. Hype cycle - case study

In this case study, Rovi shows up with 12 specific technologies indicated by a red dot outlined with a blue circle.

However, the paucity of such tools reveals a more fundamental issue. Leaders have not yet developed a robust understanding of how intellectual property can be used to achieve ownership of current platforms, let alone extend it to future platforms. In fact, the hype cycle and other tools like it do not actually describe a cycle at all. They are linear models, not cyclical, and their linear character exists because they do not contemplate how current-generation innovations and intellectual property can be used to extend control to future innovations. Because they do not consider its IP aspects, they do not view innovation in a cyclical manner.

Elon Musk, founder of electric car company Tesla, recently declared that he would make all of his company’s patents freely available to any competitor. His premise was to encourage other companies to make the same kind of investment in electric cars that he had. He responded to those questioning the wisdom of such an action by indicating his intention to innovate fast enough to ‘invalidate’ his prior patents in terms of what really matters.

But does this strategy make sense? First, does it not seem plausible that Tesla, while presently very successful, recognised the need for its larger automotive rivals to invest in building out the global infrastructure needed to make its electric car vision a reality (eg, availability of charging stations or repair facilities)? Or, to put it another way, does it seem likely that Tesla might need the investment of others to make the platform viable? The company did receive a one-off government subsidy of nearly half a billion dollars. But as heady as that investment was, it is not nearly enough money to build a national, let alone global, network of charging stations and other infrastructure needed to realise its ultimate vision. Viewed from that perspective, one can see why Musk would want to assure his competitors that their use of Tesla technology when building out the infrastructure would not incur his patent wrath.

In fact, he is wise to encourage his rivals to build out charging stations that are plug compatible with his cars. But does that objective really require that he open his entire portfolio of patents to competitors to get them to act? Is Musk’s attempt to attract competitors to his current platform actually a detriment to his ability to capture the next platform? To address these types of concerns, we have developed an innovation management tool that specifically addresses how companies can use their intellectual property to gain control of a current platform and extend that control to future platforms. We call our tool the innovation cycle.

Understanding the innovation cycle

Several years ago, we developed a model for charting the progress of innovations. Our original objective was to determine whether patents would have any relevance in a world where firms were regularly joining standards bodies with royalty-free patent licensing terms and making use of open source software, which provided a free patent licence. What emerged in response to that inquiry went far beyond the initial question.

To address the question, we created a model for tracking the progress of an innovation from initial discovery to development, commercialisation and, finally, commoditisation. Although we independently developed this model, we subsequently learned that our stages of innovation matched fairly closely with the work of others in fields such as economics (see Abernathy and Utterback http://innovationzen.com/blog/2006/08/29/innovation-management-theory-part-6/ ).
So we felt that we had hit on a workable set of stages for the progress of an innovation. However, since our work was guided by the aforementioned initial inquiry, we spent much of our time focusing on what happens after an innovation becomes broadly adopted, as is the case in both open source and open standards. This focus yielded insights that are unique to our model. The critical difference with our work was that when we tracked the course of innovation in various fields, we discovered that when an innovation passed into common use (ie, when it became a broadly adopted platform), it also became a starting point for a successive innovation that built upon that platform. Our model recognises that the progression of innovation is circular, with one widely adopted innovation serving as a foundation, itself giving rise to a next round of innovation. This was the origin of the innovation cycle.

Figure 3. Innovation exhibits a natural cycle with distinct phases

Figure 3 provides an overview of our innovation cycle model. An innovation progresses through the stages listed along the blue arrow, starting at the research stage and culminating with the infrastructure phase. At each stage a distinct type of innovation predominates, ranging from radical innovation (typical of the scientific exploration undertaken at the research stage) to incremental innovation (common at the commercial stage, where a focus on yield, reliability and scalability predominates). Accordingly, at each stage there is a predominant IP treatment for the innovation associated with that particular period of its progression. For example, at the research stage – where basic scientific research is mostly carried out via public funding – the licensing of resulting discoveries is typically fairly open. By contrast, early protoypes of commercial solutions harnessing discoveries from the research stage are usually the province of private industry and are closely held proprietary IP rights that are not broadly licensed.

The set of red arrows illustrate a feedback loop from the commons stage, pointing back to the prototype stage. These arrows represent our finding that innovations, once broadly adopted (at either the commons or the infrastructure stage), serve as a platform upon which successive innovations are created. In the area of information technology, it is often the case that this common platform is based on an open standard or on open source code, both involving easy or free access to patents required to practise the technology at the heart of the innovation. From an IP perspective, this finding was counterintuitive. Why would an innovator whose innovation has just become a successful commercial product make its valuable patents available broadly, often for free? Is that not like snatching defeat from the jaws of victory?

And yet examples of this kind of platform succession are legion. So common, in fact, that any innovator ought to expect that a next generation of innovations will be built on top of its own. Thiel makes an excellent analogy for this succession. Arguing that the best businesses are those that face little to no competition (ie, they enjoy small, monopolistic markets – as was the case initially for PayPal in the area of electronic payments), he stresses that the market promotes dynamism in monopolies. Real markets are distinguished from the market portrayed in the famous board game, where the board is static and the winner is the player who collects the most rent, because “the history of progress is a history of better monopoly businesses replacing incumbents”. As examples, he cites Apple’s iOS succeeding and reducing Microsoft’s operating system dominance, which in turn overtook IBM’s hardware dominance of the 1960s. So, in the real world, our Monopoly board is constantly being replaced with a newer, better board; thus, merely amassing properties on one board does not win the game. The way to win is to control the succession of boards.

Armed with the knowledge that hegemony is fleeting and that their innovation will be replaced by a next generation of innovations, what can innovators do to own and control that next platform? Our answer, which solved our puzzle regarding the use of patents in a world of open source and open standards, is that they must selectively open up access to their patents in order to shape the future platform.

Think of it this way: if your competitors are looking to replace your Monopoly board with another, better one, part of the reason they are doing so is that they believe you own too much of the first board already. However, if you let them own some of that first board (by sharing access to your patents), you have diminished their incentive to replace it. Of course, you have also cut into your own share of the current market. But now your competitors are following you – as a leader, you are in the best position to focus on what comes next. Additionally, since your competitors are adopting your technological platform, you have a head start in determining what comes next. After all, you created the platform to begin with and likely have some development already underway, if not completed, on the next platform. You also likely have patents filed and issued on this next platform – these are not the patents that you should be openly licensing.

Companies that want the innovation cycle to work to their advantage must openly license patents on their current successful platform. Simultaneously, they must restrict access to the next platform by tightly controlling their patents. Only when the next innovation becomes the newly accepted platform should a company consider broadly opening up those patents for licensing. This is how successful organisations can enable the development of yet another platform and traverse the innovation cycle again.

Metcalfe’s Law holds that the utility of a network is proportional to the square of the number of connected users. For technology companies, this means that there is a strong incentive to build products that work together, which in turn is why standard interfaces and communication protocols pervade the business. Technology is a business of standards.

In The World is Flat, Thomas Friedman describes the emergence of a global communication network that has transformed the way in which businesses operate. This network also fundamentally changed the way that companies use (or ought to use) their intellectual property. The global communications network that Friedman describes enables labour specialisation by permitting companies to interact with one another. Friedman illustrates this transformation by tracking a customer’s order of a Dell laptop computer from website to doorstep. The process involves hundreds of companies in dozens of geographies providing parts, labour, design and logistics support for the finished product. The intricate choreography required to process the order, build the laptop and deliver it within two weeks is repeated thousands of times every day for each of Dell’s products.

The choreography of the ‘flat world’ relies on companies working together across a global network. In order to achieve this separation of labour, standards are required. For example, Dell needs to know how the components it gets from multiple sources will work together, how the delivery systems for multiple suppliers will ensure that the right parts in sufficient numbers will arrive for assembly in time to process orders, how payments will be processed by the time orders ship and how various fulfilment operations will coordinate the shipment of the finished goods. These intercompany operations require common standardised protocols to ensure the seamless operations that Dell depends on to run its business. This is the norm for running business operations in the modern economy, but it is light years from how companies used to operate.

The Ford Motor Company of 1913 is an iconic example of how companies operated in the heyday of the industrial era. Ford produced every component in the Model T. It designed and built the engine, chassis and suspension. Ford even owned rubber tree plantations, which it used to harvest rubber for tyres. Fast forward to 2014 and Ford is as globally integrated as every other successful company. Its supplier network provides most of the components for its modern cars (see boxes).

Ford Model T

Supplier:

Ford Motor Company

Picture: Bloomberg/Getty Images

Ford Fusion

Suppliers:

Air intake manifold – Montaplast

Washer hose assembly – Bowles Fluidics

Side-view mirrors actuator – MCI Mirror Controls

Front windshield direct glazing – Sika

Glove box latch – Southco

HVAC duct- ABC Group

Piston pins – Burgess-Norton

Turbo control valve – KSPG Automotive

Propeller shaft – IFA Rotorion

Wiring clip – TRW Fasteners

Overflow bottle – MPC

Cooling fan module – Johnson Electric

Charge air cooler – Behr

Front bumper mounting components – EFC International

Battery cover assembly – Midway Products

Cockpit and console – IAC

4WD coupling – JTEKT

Clutch hydraulic actuation system – FTE

Torque sensor – Borums

Transmission end covers – Metadyne

Drivetrain components – Automatic Spring Products

Seat adjusters – Brose

Mirror button – 3M

Passive outside door handles – ADAC

Steering wheel – Takata-Petri

Heated seat switch – Omron

2-way lumbar system – Leggett & Platt

Muffler coatings – Magni

Side door locking system – Kiekert

Fuel system – CWC

Cargo floor mat – AGM Automotive

Strut bearings – FAG

Fuel charging assembly – Cooper-Standard

Fuel lines – Fraenkische

Thus, the infrastructure used by companies to create their products has evolved from being completely in-house during the industrial era to largely outsourced in our globally interconnected economy. These changes call for CEOs to make a shift in how they use their intellectual property. In the industrial era, intellectual property could properly be viewed as serving the same function as a moat around a castle. Since a competitor would need to replicate the entire infrastructure to create a competing product, the prohibitively expensive costs were a huge barrier to entry – rubber plantations are not cheap. In this environment, patents were an additional barrier to entry to be used against the few competitors which had the financial means to compete.

In the modern, globally interconnected economy, the infrastructure for building products no longer exists within a single firm; rather, it exists in the form of a network of connections between cooperating firms. That network is held together by standards and standards are shaped by those that hold important intellectual property.

A company that holds pertinent intellectual property can often dictate the direction for standards development. That company’s willingness to allow others to access the intellectual property has a lot to do with the way that the standard will develop. Those that control the development of the standard will have a significant first mover advantage to develop on top of the standard, versus their competitors.

Sound familiar? It should, because it is precisely the mechanism that we have been advocating for using the innovation cycle. The pervasiveness of standards in building critical business infrastructure creates a real opportunity for savvy companies to use their intellectual property to gain market advantage.

New infrastructure

We have briefly described how the innovation cycle was developed and how it can be harnessed to achieve long-term success. In developing this model, we primarily focused on technology sectors such as communications and computers. There is a reason for that. As Clayton Christensen noted in his book The Innovators Dilemma: “Those who study genetics avoid studying humans…because new generations come along only every thirty years or so. Instead they study fruit flies, because they are conceived, born, mature, and die all within a single day.” That is why Christensen studied the market for disk drives and that is why we focused on network intensive industries. In technology sectors where devices must communicate, connect and interoperate, the interdependence of products makes traversal of the innovation cycle faster and more visible.

But wait, there’s more…

Picture: Lionel LOURDEL/Getty Images

We began this article with a bold objective: to convince executives that IP strategy is essential to their company’s success and accordingly that it must be developed at the top of the company. If you agree with this premise now and you did not before you read this article, then we have achieved our goal. However, what we have described here is by no means a complete IP strategy in and of itself.

In order to use the innovation cycle effectively, a firm needs to have a precise picture of its intellectual property, including the characteristics of its global patent portfolio. For example, it would be impossible to gain control of a current platform, let alone use that control to lead the market to a successive platform, without patents covering essential aspects of each platform. Obtaining these patents and understanding how and when to use them requires a deep understanding of your business, your innovation culture and the IP environment in which your business competes, to name a few of the relevant considerations. The innovation cycle is not a tool for beginners. To use it, a firm must be well versed in many more fundamental aspects of a complete IP strategy.

While the benefit of harnessing the power of the innovation cycle is a worthy reason to develop a comprehensive IP strategy, the innovation cycle model is just one of many arrows in the quiver of a firm with a fully integrated IP strategy.

While the development of such a strategy is beyond the scope of this or any single article, we intend to publish further articles which will focus on other tools, as well as some of the more fundamental aspects for developing a fully integrated IP strategy. However, for now, it is sufficient to note that developing a comprehensive IP strategy is not an easy task. Companies need a road map to follow in charting their course. Our preferred approach is through the use of a component business model (CBM) methodology.

Component business model

The CBM is a methodology originally developed by IBM that has proven to be effective in designing/re-designing organisations, making important management decisions and guiding re-engineering processes. It has been successfully deployed within IBM and in Fortune 100 companies worldwide. The CBM methodology enables firms to integrate many IP best practices in a manner that is specifically relevant to each firm. Properly implemented, the methodology can lead to breakthrough results which follow when technology, legal and business processes are seamlessly integrated into the fabric of the business.

The CBM represents the architecture of a business. As seen above, the columns divide the business by capability (they answer the question: “What do we need to be good at?”) and the rows divide the business by operational level (Direct = strategic level; Control = management level; Execute = processing level).

At the intersection of the columns and rows are the components – the building blocks of innovation and IP enterprise. Each component represents a set of best practices and activities which deliver a service within the overall business. Within each component, critical information about operationalising that business competency are captured, including the following:

• business purpose;
• activities;
• resources;
• key performance indicators; and
• performance metrics.

This model delivers the modularity and flexibility required to meet the changing needs of a business. It enables a flexible, real-time and realistic way of implementing business policies, as opposed to merely attempting to adopt wholesale a completely predefined structured IP model.

Flexibility is important because optimal IP strategy depends on the industry, market and innovation itself, as well as the company and its culture. If you review the CBM chart in light of the innovation cycle, you may see many components relevant to your business. Others may see a different set of relevant components, and that makes sense. CBM provides a framework to help deconstruct and reconstruct business processes, enabling incorporation of the insights achieved by the innovation cycle and other IP tools and principles.

The innovation cycle and IP tools discussed earlier are only a sub-set of tools contained in the components above. Thoughtful leading organisations must develop their own CBM not only to track their operational effectiveness, but also to win in the future.