Linking IP Strategy and Profitability  

POSTED BY Adam Bulakowski AT 11:45 A.M. Nov 16, 2011

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Business strategy boils down to choices, with the ultimate goal of maximizing firm profits. The firm plans its activities, e.g. operations, marketing, finance, R&D, to support its business strategy. However, few firms use IP strategically by aligning IP activities with their business goals.

Is an IP strategy necessary for all companies? How does a firm’s IP strategy contribute to profitability?

To answer these questions, one should consider the influence of IP on the firm’s competitiveness in its industry. For example, Michael Porter’s “five forces” framework provides a useful tool for analyzing industry structure. The table below depicts each of the five forces, the role of IP in each, and the link to profitability, i.e. revenue less costs.

 

Competitive “force”

Role of IP

Impact on firm’s profitability

Example

Rivalry of incumbents

Protect product & service differentiation

Command price premiums and/or market share

Branded pharmaceuticals

Threat of new entrants

Create legal barrier to entry

Preserve quantity/market share

Qualcomm –CDMA

Threat of substitutes

Broaden protection to overlap with adjacent or emerging technologies

Avoid additional price competition and/or share erosion

P&G - Gillette

Supplier power

Extend protection up the value chain

Lower cost of inputs by reducing supplier leverage

Nestle -nutrition

Buyer power

Protect product & service differentiation

Avoid price erosion by reducing buyer leverage

BASF - chemicals

 

The traditional view of IP focuses on barriers to entry. But this singular advantage has been dulled by rapid innovation, high litigation costs, and evolving business models. Given the other direct links between IP and profitability, more firms should be developing a multi-faceted IP strategy that supports the overall business strategy.

TAGS: Adam Bulakowski | Strategy
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