In April 2016 I was invited to speak to the senior IP management of one of the world’s largest companies: a forward-thinking enterprise with a commitment to strategic planning that permeates all levels of the organisation. These managers have thought long and hard about what the future could look like and have understood the pitfalls in doing that – namely, the false comfort in believing that you know what is coming, when in fact you do not. They persist with the process because they have found that the act of thinking and engaging the entire organisation in this exercise breaks down barriers and changes corporate culture and, in doing so, improves outcomes whatever the future holds.
As a framework for this engagement I considered some megatrends that are affecting all businesses and what they means for management. My top five are as follows:
- Transition away from tangibles towards intangibles.
- Open architecture business models.
- Increasing importance of creative people and the challenges of managing them.
- Consolidation and power shifts between producer and distributor.
- 'Long-tail' economics – the death of the Pareto principle.
Tangible to intangible
The importance of intangible assets has increased dramatically over the past 20 years. The balance sheet of most companies is now asset light, and most of the value can therefore be attributed only to intangibles. The outsourcing, sale and leaseback of fixed assets, the use of technology and the focus on innovation to drive margins has effectively turned all companies into IP companies. This has driven value into the brand, know-how and business model. It has also highlighted the importance of data, registered and unregistered intellectual property and human beings in growing shareholder value. The accounting and investment worlds struggle to interpret these intangible assets in terms of company values and often miss the cues that are visible to better-educated eyes. Articulating and educating the market about their intangible value propositions is one of the great challenges facing today's management teams.
One trend that is picking up pace is the spread of open architecture business models from the technology industry (where they have supported ecosystem-based innovation and product development) into other sectors. Pharmaceuticals, film, defence, gaming, oil and gas, fast-moving consumer goods and financial services companies are all realising that the best ideas are not always home grown. Many industries have 'in-licensed' a significant portion of their intellectual property for decades, but there is a real difference in being the off-ramp for independents and cultivating a vibrant two-way conversation with the innovation belt. Convergence between different industries makes this a much more powerful tool than it first appears. The cost and speed of innovation is reduced and you widen your universe of suppliers to non-intuitive partners. In this context, building a platform (and culture) that allows easy docking of external intellectual property is both a challenge and a source of serious competitive advantage.
Rise of humans
High-value service industries have long understood that human beings are their most critical assets. This is a huge problem, as humans leave the office every night. Strategic IP management in these businesses is performed by the human resources (HR) function. Unlike the number of patents filed or R&D budget, HR management affects the stock price, as illustrated by the significant outperformance of the Fortune Top 100 Places to Work. On average, these firms generate more than 3.5% of investment returns above the market. On a compounding basis that is a spectacular result that highlights human resources as a real and measurable value driver for IP management. The way in which the best firms in this area manage an integrated HR/IP management process generates a real, measurable competitive advantage.
Many industries are now dominated by a handful of huge players which are either vertically integrated or effectively controlled industry distribution channels. Google, Amazon, Walmart, Pfizer, Apple, IBM, Shell, Facebook and dozens of other companies have consolidated their universe and maintain this dominance through mergers and acquisitions and vast IP filings. Notwithstanding market share consolidation, the average longevity of companies continues to decrease and even dominant companies fail when their integrated models cannot respond to disruptive change. The impact of regulation cannot be underestimated here, as we live in a world of not only global trade deals and harmonisation, but also antitrust and politicised taxation. The privileged position of multinationals is under constant challenge and their ability to innovate, monetise and articulate their value proposition has never been more important. Reliance on the status quo is not a successful strategy.
Death of the Pareto principle
The Pareto principle has been a mainstay of strategic thinking since the 1940s. Otherwise known as the 80/20 rule, the principle broadly states that 20% of the effort generates 80% of the results. Understanding the Pareto principle helps management to make rational resource allocation decisions and is a basic screen for management consultants. From a strategic perspective, one inevitable by-product of industry consolidation is fragmentation of non-core product markets into thousands of specialist ones. The Pareto principle way of looking at this is that the markets that have not been consolidated are so niche that they have no common denominator, and therefore cannot be profitably scaled. Amazon has taught us that these 'long-tail' markets are accessible; however, the fixed cost of reaching them online is negligible. But even without e-commerce, specialist channels may be found or sales partnerships with local distributors created that allow the targeting of these product markets with specialised products at healthy margins. This may mean licensing value to your distributor or building brand within the channel – but the good news is that these are sticky markets if you get it right.
One of the things that struck me about the way in which multinationals carry out scenario and strategy analysis is the ingrained tendency to extrapolate the status quo. To paraphrase Nassem Taleb, all it takes is one black swan for the statement “all swans are white” to be proved wrong, and the incidence of black swans is increasing. Google’s Ray Kurzweil talks about this often, showing that the frequency of paradigm shifts is exponential – which means that the future is literally closer than we think and, perhaps more importantly, than we can think.
For senior management teams this means that the single most relevant and important piece of IP management is to build the right sort of organisation. It is your corporate DNA – what John Kay of the London School of Economics would call 'organisational architecture' – that will generate outperformance and allow you to manage your intellectual property for maximum effect. This realisation goes a long way to explaining why it is so hard to link company performance to patent metrics, citations or other traditional measures. It turns out that Steve Jobs was right all along: “It's not about money. It's about the people you have, how you're led, and how much you get it.”
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