The Importance of Intellectual Property - Preparing for and Evaluating the Challengr of Growth (Session 21 - 22)
The Importance of Intellectual Property (Session 21)
The Importance of Intellectual Property
• Intellectual Property
- Is any product of human intellect that is intangible but has value in the marketplace.
- It is called “intellectual” property because it is the product of human imagination, creativity, and inventiveness.
• Importance
- Traditionally, businesses have thought of their physical assets, such as land, buildings, and equipment as the most important.
- Increasingly, however, a company’s intellectual assets are the most important.
The Four Key Forms of Intellectual Property
Patents
• Patents
- A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent. (see the next slide for a full explanation)
• Increasing Interest in Patents
- There is increasing interest in patents.
o Since Patent #1 was granted in 1790, the U.S. Patent & Trademark Office has granted over six million patents.
o The patent office is strained. It now takes an average of 32.2 months from the date of first filing to receive a U.S. patent.
Business Method Patent
• A business method patent is a patent that protects an invention that is or facilitates a method of doing business.
• The most notable business method patents that have been awarded:
- Amazon.com’s one click ordering system.
- Priceline.com’s “name-your-price” business model.
- Netflix’s method for allowing customers to set up a rental list of movies to be mailed to them.
Patent Infringement
• Takes place when one party engages in the unauthorized use of another party’s patent.
• The tough part (particularly from a small entrepreneurial firm’s point of view) is that patent infringement cases are costly to litigate.
- A typical patent infringement case costs each side at least $500,000 to litigate.
Trademarks
• Trademark
- A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those product or services from others.
- Trademarks also provide consumers with useful information.
o For example, consumers know what to expect when they see an Abercrombie & Fitch store.
o Think how confusing it would be if any retail store could use the name Abercrombie & Fitch.
Copyrights
• Copyrights
- A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work.
- A work does not have to have artistic merit to be eligible for copyright protection.
o As a result, things such as operating manuals and sales brochures are eligible for copyright protection.
Exclusions From Copyright Protection
• The Idea-Expression Dichotomy
- The main exclusion is that copyright laws cannot protect ideas.
o For example, an entrepreneur may have the idea to open a soccer-themed restaurant. The idea itself is not eligible for copyright protection. However, if the entrepreneur writes down specifically what his or her soccer-themed restaurant will look like and how it will operate, that description is copyrightable.
o The legal principle describing this concept is called the idea-expression dichotomy.
o An idea is not copyrightable, but the specific expression of an idea is.
Obtaining a Copyright
• How to Obtain a Copyright
- Copyright law protects any work of authorship the moment it assumes a tangible form.
- Technically, it is not necessary to provide a copyright notice or register work with the U.S. Copyright Office.
- The following steps can be taken, however, to enhance copyright protection.
o Copyright protection can be enhanced by attaching the copyright notice, or “copyright bug” © to something.
o Further protection can be obtained by registering the work with the U.S. Copyright Office.
Copyright Infringement
• Copyright Infringement
- Copyright infringement occurs when one work derives from another or is an exact copy or shows substantial similarity to the original work.
- To prove infringement, a copyright owner is required to show that the alleged infringer had prior access to the copyrighted work and that the work is substantially similar to the owner’s.
• The illegal downloading of music is an example of copyright infringement.
• Copyright infringement costs the owners of copyrighted material as estimated $20 billion per year in the U.S. alone.
Trade Secrets
Trade Secrets
• A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace.
• Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar types of proprietary information.
• The Federal Economic Espionage Act, passed in 1996, criminalizes the theft of trade secrets.
Physical Measures for Protecting Trade Secrets
- Restricting access
- Password protecting computer files
- Maintaining logbooks for access to sensitive material
- Labelling documents
- Maintaining logbook for visitors
- Maintaining adequate overall security measures
Conducting an Intellectual Property Audit
• Intellectual Property Audit
- The first step a firm should take to protect its intellectual property is to complete an intellectual property audit.
- An intellectual property audit is conducted to determine the intellectual property a firm owns.
- There are two reasons for conducting an intellectual property audit:
o First, it is prudent for a company to periodically determine whether its intellectual property is being properly protected.
o Second, it is important for a firm to remain prepared to justify its valuation in the event of a merger or acquisition.
• The Process of Conducting an Intellectual Property Audit
- The first step is to develop an inventory of a firm’s existing intellectual property. The inventory should include the firm’s present registrations of patents, trademarks, and copyrights.
- The second step is to identify works in progress to ensure that they are being documented and protected in a systematic, orderly manner.
Preparing for and Evaluating the Challenge of Growth (Session 22)
Three Things a Business Can Do to Prepare
1. Appreciate the Nature of Business Growth
Important Realities
• Not all businesses have the potential to be aggressive growth firms.
• A business can grow too fast.
• Business success doesn’t always scale.
2. Stay Committed to a Core Strategy
• It is important that a business not lose sight of its core strategy as it prepares to grow.
• If a business becomes distracted or starts pursuing every opportunity for growth that’s its presented, it can easily stray into areas where its at a disadvantage.
3. Plan for Growth
• A firm should establish growth-related plans.
• Writing a business plan greatly assists in preparing growth plans.
• It’s also important for a firm to determine, as soon as possible, what its growth strategies will be.
Stages of Growth
• Introduction
- Start-up phase where a business determines what its core strengths and capabilities are.
- The main challenge is to make sure the initial product or service is right.
- It’s important to document what works and what doesn’t work during this stage.
• Early Growth
- Generally characterized by increasing sales and heightened complexity.
- Two important things must happen for a business to be successful in this stage.
- The founder must start working “on the business” rather “in the business.”
- Increased formalization must take place, and the business has to start developing policies and procedures.
• Continuous Growth
- The need for structure and formalization increases.
- Often the business will start developing related products and services.
- The toughest decisions take place in this stage.
- One tough decision is whether the owner of the business and the current management team has the experience and the ability to take the business further.
• Maturity
- A business enters the maturity stage when its growth stalls.
- At this point, a firm is typically more intently focused on managing efficiently than developing new products.
- Well-managed firms often look for partnering opportunities or opportunities for acquisitions or licensing deals to breath new life into the firm.
- If new growth cannot be achieved through a firm’s existing product mix, the “next generation” of products should be developed.
• Decline
- It is not inevitable that a business enter the decline stage.
- Many American businesses have long histories and have adapted and survived over time.
• A business’s ability to avoid decline hinges on the strength of its leadership and its ability to adapt over time.
Managerial Capacity Problem
• Managerial Capacity
- Firms are collections of productive resources that are organized in an administrative framework.
- As a firm goes about its routine activities, it recognizes opportunities to grow.
- The problem with this scenario is that firm’s are not always prepared or able to grow, because of limited “managerial capacity."
• A Firm’s Administrative Framework
- A firm’s administrative framework consists of two kinds of services that are important to firm growth.
o Entrepreneurial services generate new market, product, and service ideas, while managerial services administer the routine functions of the firm and facilitate the xprofitable execution of new opportunities.
o New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented.
o This is a complex problem because if a firm has insufficient managerial services to properly implement its new product and service ideas, it can’t grow.
o The reason a firm can’t quickly increase its managerial services (to take advantage of new product or service ideas) is that it is expensive to hire new employees, it takes time for new hires to be socialized into the culture of a firm, and it takes time for new employees to acquire firm-specific skills and establish trusting relationships with other members of the firm.
o When a firm’s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.
• Additional Challenges
- As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.
o Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for the firm to find the right employees, place them in appropriate positions, and provide adequate supervision.
o Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hard work.
The Importance of Intellectual Property
• Intellectual Property
- Is any product of human intellect that is intangible but has value in the marketplace.
- It is called “intellectual” property because it is the product of human imagination, creativity, and inventiveness.
• Importance
- Traditionally, businesses have thought of their physical assets, such as land, buildings, and equipment as the most important.
- Increasingly, however, a company’s intellectual assets are the most important.
The Four Key Forms of Intellectual Property
Patents
• Patents
- A patent is a grant from the federal government conferring the rights to exclude others from making, selling, or using an invention for the term of the patent. (see the next slide for a full explanation)
• Increasing Interest in Patents
- There is increasing interest in patents.
o Since Patent #1 was granted in 1790, the U.S. Patent & Trademark Office has granted over six million patents.
o The patent office is strained. It now takes an average of 32.2 months from the date of first filing to receive a U.S. patent.
Business Method Patent
• A business method patent is a patent that protects an invention that is or facilitates a method of doing business.
• The most notable business method patents that have been awarded:
- Amazon.com’s one click ordering system.
- Priceline.com’s “name-your-price” business model.
- Netflix’s method for allowing customers to set up a rental list of movies to be mailed to them.
Patent Infringement
• Takes place when one party engages in the unauthorized use of another party’s patent.
• The tough part (particularly from a small entrepreneurial firm’s point of view) is that patent infringement cases are costly to litigate.
- A typical patent infringement case costs each side at least $500,000 to litigate.
Trademarks
• Trademark
- A trademark is any word, name, symbol, or device used to identify the source or origin of products or services and to distinguish those product or services from others.
- Trademarks also provide consumers with useful information.
o For example, consumers know what to expect when they see an Abercrombie & Fitch store.
o Think how confusing it would be if any retail store could use the name Abercrombie & Fitch.
Copyrights
• Copyrights
- A copyright is a form of intellectual property protection that grants to the owner of a work of authorship the legal right to determine how the work is used and to obtain the economic benefits from the work.
- A work does not have to have artistic merit to be eligible for copyright protection.
o As a result, things such as operating manuals and sales brochures are eligible for copyright protection.
Exclusions From Copyright Protection
• The Idea-Expression Dichotomy
- The main exclusion is that copyright laws cannot protect ideas.
o For example, an entrepreneur may have the idea to open a soccer-themed restaurant. The idea itself is not eligible for copyright protection. However, if the entrepreneur writes down specifically what his or her soccer-themed restaurant will look like and how it will operate, that description is copyrightable.
o The legal principle describing this concept is called the idea-expression dichotomy.
o An idea is not copyrightable, but the specific expression of an idea is.
Obtaining a Copyright
• How to Obtain a Copyright
- Copyright law protects any work of authorship the moment it assumes a tangible form.
- Technically, it is not necessary to provide a copyright notice or register work with the U.S. Copyright Office.
- The following steps can be taken, however, to enhance copyright protection.
o Copyright protection can be enhanced by attaching the copyright notice, or “copyright bug” © to something.
o Further protection can be obtained by registering the work with the U.S. Copyright Office.
Copyright Infringement
• Copyright Infringement
- Copyright infringement occurs when one work derives from another or is an exact copy or shows substantial similarity to the original work.
- To prove infringement, a copyright owner is required to show that the alleged infringer had prior access to the copyrighted work and that the work is substantially similar to the owner’s.
• The illegal downloading of music is an example of copyright infringement.
• Copyright infringement costs the owners of copyrighted material as estimated $20 billion per year in the U.S. alone.
Trade Secrets
Trade Secrets
• A trade secret is any formula, pattern, physical device, idea, process, or other information that provides the owner of the information with a competitive advantage in the marketplace.
• Trade secrets include marketing plans, product formulas, financial forecasts, employee rosters, logs of sales calls, and similar types of proprietary information.
• The Federal Economic Espionage Act, passed in 1996, criminalizes the theft of trade secrets.
Physical Measures for Protecting Trade Secrets
- Restricting access
- Password protecting computer files
- Maintaining logbooks for access to sensitive material
- Labelling documents
- Maintaining logbook for visitors
- Maintaining adequate overall security measures
Conducting an Intellectual Property Audit
• Intellectual Property Audit
- The first step a firm should take to protect its intellectual property is to complete an intellectual property audit.
- An intellectual property audit is conducted to determine the intellectual property a firm owns.
- There are two reasons for conducting an intellectual property audit:
o First, it is prudent for a company to periodically determine whether its intellectual property is being properly protected.
o Second, it is important for a firm to remain prepared to justify its valuation in the event of a merger or acquisition.
• The Process of Conducting an Intellectual Property Audit
- The first step is to develop an inventory of a firm’s existing intellectual property. The inventory should include the firm’s present registrations of patents, trademarks, and copyrights.
- The second step is to identify works in progress to ensure that they are being documented and protected in a systematic, orderly manner.
Preparing for and Evaluating the Challenge of Growth (Session 22)
Three Things a Business Can Do to Prepare
1. Appreciate the Nature of Business Growth
Important Realities
• Not all businesses have the potential to be aggressive growth firms.
• A business can grow too fast.
• Business success doesn’t always scale.
2. Stay Committed to a Core Strategy
• It is important that a business not lose sight of its core strategy as it prepares to grow.
• If a business becomes distracted or starts pursuing every opportunity for growth that’s its presented, it can easily stray into areas where its at a disadvantage.
3. Plan for Growth
• A firm should establish growth-related plans.
• Writing a business plan greatly assists in preparing growth plans.
• It’s also important for a firm to determine, as soon as possible, what its growth strategies will be.
Stages of Growth
• Introduction
- Start-up phase where a business determines what its core strengths and capabilities are.
- The main challenge is to make sure the initial product or service is right.
- It’s important to document what works and what doesn’t work during this stage.
• Early Growth
- Generally characterized by increasing sales and heightened complexity.
- Two important things must happen for a business to be successful in this stage.
- The founder must start working “on the business” rather “in the business.”
- Increased formalization must take place, and the business has to start developing policies and procedures.
• Continuous Growth
- The need for structure and formalization increases.
- Often the business will start developing related products and services.
- The toughest decisions take place in this stage.
- One tough decision is whether the owner of the business and the current management team has the experience and the ability to take the business further.
• Maturity
- A business enters the maturity stage when its growth stalls.
- At this point, a firm is typically more intently focused on managing efficiently than developing new products.
- Well-managed firms often look for partnering opportunities or opportunities for acquisitions or licensing deals to breath new life into the firm.
- If new growth cannot be achieved through a firm’s existing product mix, the “next generation” of products should be developed.
• Decline
- It is not inevitable that a business enter the decline stage.
- Many American businesses have long histories and have adapted and survived over time.
• A business’s ability to avoid decline hinges on the strength of its leadership and its ability to adapt over time.
Managerial Capacity Problem
• Managerial Capacity
- Firms are collections of productive resources that are organized in an administrative framework.
- As a firm goes about its routine activities, it recognizes opportunities to grow.
- The problem with this scenario is that firm’s are not always prepared or able to grow, because of limited “managerial capacity."
• A Firm’s Administrative Framework
- A firm’s administrative framework consists of two kinds of services that are important to firm growth.
o Entrepreneurial services generate new market, product, and service ideas, while managerial services administer the routine functions of the firm and facilitate the xprofitable execution of new opportunities.
o New product and service ideas require substantial managerial services (or managerial capacity) to be successfully implemented.
o This is a complex problem because if a firm has insufficient managerial services to properly implement its new product and service ideas, it can’t grow.
o The reason a firm can’t quickly increase its managerial services (to take advantage of new product or service ideas) is that it is expensive to hire new employees, it takes time for new hires to be socialized into the culture of a firm, and it takes time for new employees to acquire firm-specific skills and establish trusting relationships with other members of the firm.
o When a firm’s managerial resources are insufficient to take advantage of its new product and service opportunities, the subsequent bottleneck is referred to as the managerial capacity problem.
• Additional Challenges
- As a firm grows, it is faced with the dual challenges of adverse selection and moral hazard.
o Adverse selection means that as the number of employees a firm needs increases, it becomes increasingly difficult for the firm to find the right employees, place them in appropriate positions, and provide adequate supervision.
o Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours and may even try to avoid hard work.
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