Reitzig, Marcus, Strategic Management of Intellectual Property, MIT Sloan Management Review, Spring 2004.

Strategic Management
of Intellectual Property
I

Intellectual property
now makes up a large
proportion of many
companies market value,
and IP management
can no longer be left
to technology or legal
departments alone.
Markus Reitzig

n recent years, the primary locus of value for many corporations has been found in their intellectual property rights. By
one informed estimate from the late 1990s, some three-quarters
of the Fortune 100s total market capitalization was represented
by intangible assets, such as patents, copyrights and trademarks.1 In this environment, IP management cannot be left to
technology managers or corporate legal staff alone. Given that
the generation of returns from IP rights is a capital-intensive,
long-term activity and that decisions affecting intellectual property are usually irreversible at low cost, IP management must be
a matter of concern for functional and business-unit leaders as
well as a corporations most senior officers.
Little of the writing on the subject of intellectual property
rights, however, has been directed at top-level executives; instead
it has frequently been done by specialists, for specialists. And
senior managers, in order to effectively govern and exploit their
often huge IP assets, need help to answer these specific questions:2 How can the company use intellectual property rights to
gain and sustain competitive advantage? How do IP rights affect
the industrys structure? What options do IP rights offer vis-vis competitors? How can IP rights grant incumbency advantage
and establish barriers to entry? How can IP rights help the company gain vertical power along the value chain? What organizational design accommodates an intellectual property strategy most effectively?
Enormous knowledge is hidden in the economics literature and in the heads of corporate IP managers about the way companies have developed answers to these questions.3
Making such information available to top-level management will help lead intellectual
property rights out of their shadowy existence in patent and legal departments and enable
companies to tap into their strategic value. (See About the Research.)

Creating and Sustaining Competitive Advantage

Intellectual property rights can help a company gain competitive advantage in various
ways, but three are paramount: They can provide a temporary technological lead (incumbency), protect brand names and help form an industry standard. Combinations of
patents and trademarks can help to sustain IP-based competitive advantages.
Markus Reitzig is an assistant professor at Copenhagen Business School in Denmark. He can be
reached at reitzig@cbs.dk.

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The use of patents to enjoy a short-term technological lead is

the best-known way to create competitive advantage with IP
rights, but it is fading in importance in many industries. The
pharmaceutical industry is an exception.
Denmark-based healthcare company Novo Nordisk A/S, for
example, built a dominant market position in Europe with diabetes drugs as the result of its license on a technology for manufacturing insulin from animal sources.4 But cases like this are
rare, even in pharmaceuticals, says Lars Kellberg, Novo Nordisks
vice president of business development and patents. With modern high-throughput technology, screening methods and the
wide availability of compound libraries, its usually just a matter
of time until competitors find an alternative target molecule that
offers a different route to the treatment of a disease from the
patent-protected innovation of the first mover. According to
Kellberg, Dominant market positions due to the patenting of
one unique pharmacological solution are most likely to occur
today in the field of naturally occurring hormones; for example,
proteins derived from genome-based research.
A second way to create competitive advantage with IP rights
involves their relationship to standards. In the mid-1990s,
Motorola Inc. had exclusive control of certain technologies that
gave it a lead in the field of GSM (Groupe Spciale Mobile) technology.5 Other players participating in the market at the time,
including Nokia, Alcatel and Philips, held significant shares of

About the Research

The article presents first-phase findings of a larger
research study on the managerial use of intellectual property rights that is currently being conducted at the Copenhagen Business School. Primary data were collected
through in-depth interviews with senior corporate representatives responsible for IP matters. Secondary sources
include both scientific publications and publicly available
information about companies as well as information from
patent and trademark databases.
At first, a broad synopsis of the scientific literature was
carried out. Its essence is a distillation of managerially
relevant insights from various sources encompassing theoretical and empirical economics as well as applied management. Classic strategic aspects were then buttressed by
IP-related findings from these earlier scientific studies,
preferably from large-scale empirical studies. Remaining
strategic aspects not touched upon in prior studies on IP
were addressed by providing real-world examples. A test of
the emerging IP strategys comprehensibility for future
managers with other than technical or legal backgrounds
was carried out in a teaching experiment with students at
the Copenhagen Business School.

the patents for such technologies as switching technology,

speech coding, radio transmission and encryption. Motorola,
however, built a superior position in Europe with a threepronged IP-strategy approach.
First, the company supported the establishment of a common
mobile-telephony standard in Europe from the initial meeting of
the Groupe Spciale Mobile in 1982, and it has continued to do
so since 13 mobile-phone operators agreed to accept GSM as the
international standard. Second, before and after the establishment of the GSM standard, Motorola pushed its IP activities and
secured patent ownership of various essential technologies that
GSM would depend on. Third, in 1988 Motorola refused to sacrifice its exclusive IP rights in phone-procurement negotiations
with operators. This combination of patenting parts of the technology used in a standard, engaging in a hard-nosed licensing
policy, and making farsighted investments allowed Motorola to
create a competitive advantage in technologies that would usually
be too complex for a single player to dominate.6
Sustaining the kind of advantage that Motorola created with
its focus on GSM is difficult because, after all, technologies
change and patents expire. (Patents usually expire 20 years after
application; in certain specific cases in Europe, after 25 years.) In
the pharmaceutical industry, it is not uncommon for a target
molecule in the form of a commercialized drug to begin earning
profits a decade after the patent was applied for. One way to mitigate this limitation is by developing an effective combination of
intellectual property rights.
Leo Pharma A/S, a Denmark-based drug company, follows
this approach with certain skin medications. The patents protecting the companys blockbuster drug, Daivonex, will expire in
three to four years. Whereas the application of Daivonex is recommended for the steady treatment of psoriasis, Leo Pharma has
developed a second drug, Daivobet, for the treatment of acute
attacks of the disease. The two drugs are therapeutic complements, but the patents for Daivobet will last another 17 years. Leo
Pharma is bundling the two products into one therapeutic
approach; joint branding of the products to physicians and
patients assures that sales of Daivonex will benefit from the
remaining patent lifetime of its acute-treatment complement.
The Daivonex-Daivobet example illustrates the complementary use of identical types of IP rights: two patents. A patent and
a trademark can also be used complementarily, as Bayer AG has
done with aspirin. Bayers first patent on aspirin expired at the
beginning of the last century, but the company still earns enormous revenues as a result of the strong brand value. As trademarks can, in principle, be renewed indefinitely, managers should
be prepared to shift their focus from patents to trademarks as the
former expire. Recent studies show that the postexpiration patent
value of a drug is enormously affected by the products marketing during the patents life. The returns from originally branded
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In the semiconductor industry, patenting is not necessarily used to deter entry but to create
a market for know-how exchange and to obviate the threat of established competitors.

drugs can be significantly higher than expected after patent expiration, despite competition from generic products.7
Finally, substitute patents can be used to sustain a competitive
advantage in certain industries, such as basic chemicals. Companies can build a patent fence; that is, they protect not only a
products core invention but also easy-to-build substitutes.8

Patents That Shape Industry Structure

Going back to the 19th century, when international dyestuff
manufacturers used patent rights to form cartels in certain market segments (such as alkali), IP rights have been used to shape
the structure of various industries. In 1933, DuPont licensed its
cellophane to Sylvania (a U.S. subsidiary of a Belgian company).
The contract specified that DuPont would earn a 2% royalty on
Sylvanias sales of cellophane when Sylvania had 20% or less of
the markets share. But DuPont would earn royalties of 30% on
any sales over that market-share figure, rendering it unprofitable
for Sylvania to exceed its quota.9
In the semiconductor industry today, patents are also licensed
but not primarily for reasons of market sharing. Patent-protected
technology is exchanged mutually between a larger number of
players in the market. The exchanged technology is highly complementary and enters the products of many players. Since daily production costs in the industry are enormous, however, one of the
most dangerous threats for a firm arising from this mutual
dependence is to have its production facility closed if only for a
few days as the result of an injunction in the case of pending
patent litigation. The losses can be so severe as to drive a company
out of business. To pose a credible counterthreat, companies seek
to hold patents that are also used by their competitors. Thus the
main purposes of patenting in this industry are not necessarily to
deter entry but to create a market for know-how exchange and to
obviate the threat of being shut down by established competitors.10

Vertical and Horizontal Differentiation

In cases of head-to-head competition with core products, senior
managers must consider such issues as product design, information and timing as they relate to IP rights. Competition along the
dimension of technical IP rights has long been thought of as a matter of protecting major technological breakthroughs that would
lead to radical innovations in the market (that is, competition with
vertically differentiated products). This perspective is still legiti37

MIT SLOAN MANAGEMENT REVIEW

SPRING 2004

mate in some industries (pharmaceuticals, for example) but not

all. According to a top IP manager at Nokia, one of the companys
most precious assets is a multiple patent, design and trademark
combination covering Nokias unique user interfaces for cellular
phones. A cellphone interface is rarely a radical innovation driving
down the opportunity costs of production. (Competition on this
feature comes much closer to horizontal than to vertical differentiation, well known from the field of branding but almost
unknown in the patent sector.) User surveys confirm, however,
that Nokias interface is valued highly by a large share of customers.
Companies can also outwit competitors by conveying IP
information strategically. They may, for example, disclose information in legal bulletins about IP rights that confuses competitors about potential technology trajectories they are pursuing.
German companies in the 19th and 20th centuries issued misleading evasion patents to render it difficult for competitors to
establish a clear link between dyestuff patents and the dyestuff
products actually sold in the market.11
The timing of IP rights decisions is also important. The key
trade-off lies between the disclosure of technical knowledge and
the assurance of early protection through patents.12 Products
with short life cycles may generate most of their returns before a
patent is granted. If such products are illegitimately imitated during this period, patent holders face difficulties in claiming their
real economic losses in courts as opposed to patent infringement
occurring after a patents grant.13 For that reason, secrecy may be
more effective than the patent process for technology products
with short life cycles.

Incumbency Advantages
Incumbency advantages can result from economies of scale,
cumulative investment in a technology, consumer loyalty and
switching costs. Companies can often use intellectual property
rights to obtain incumbency advantages.
Incumbent biotechnology companies in Canada have successfully employed cumulative investment. Increases in the level and
concentration of incumbents patenting appear to discourage the
founding of new businesses and to enhance incumbency advantages, particularly in human application sectors (such as diagnostics, therapeutics and vaccines) of the industry where development
and approval processes are more costly and time-consuming.14
Companies can also use IP rights to increase switching costs.

One effect of established standards is that subsequently developed

complementary technology is often designed to be standard-compatible. Switching costs for users changing from Microsoft desktops
to Linux do not solely depend on the features of the Microsoft and
the Linux operating system but also on complementary software.

And standards are not the only way to create switching costs.
Novo Nordisk has a trademark-protected insulin-delivery device
called NovoPen. As Lars Kellberg notes, The most profitable part
of the business in this sector is the refill business selling insulin
cartridges that fit the base delivery device. To make sure that

The Fundamentals of an IP Rights Strategy

Top-level managers need to answer six pressing questions if they are to turn the use of intellectual property rights (IPRs) into a
strategic weapon.

Strategic
Aspect

Strategic
Question

Definition of
competitive strategy

How do IPRs help

companies gain
and sustain competitive advantage?

Examples

Create IPR-based technological incumbency

Novo Nordisk (insulin)

Create brand name

U.K. industrial product manufacturers*

Create IPR-protected installed base/

de facto standard

Motorola (GSM standard)

Sustain competitive advantage through

IPR combination

LeoPharma (psoriasis drugs complementary patents)

Horizontal competition

Industry
structure

Bayer (aspirin complementary patent

and trademark)

Vertical
competition

External context
Internal
context

IPRs Options

How do IPRs affect

the structure of an
industry?

Use IPRs to amass market share in technologically discrete industries

Dyestuff industry in the 19th century

Use IPRs as bargaining chips in technologically complex industries

U.S. semiconductor industry

Which options do
IPRs offer in the
competition with
other industry
players?

Use IPRs to differentiate vertically

Numerous luxury brands

How do IPRs relate

to incumbency
advantage and
entry barriers?

Create advantages through cumulative

patenting

Canadian biotech industry

Create advantages by combining brands

and patents

Geox (footwear)

Create learning economies by identifying and binding elite scientists

German chemical, electronic and engineering corporations

Support product-space packing with

trademarks and patents

Henkel KGaA (detergents)

How can IPRs

help companies
gain vertical power
along the value
chain?

Use IPRs to increase power in a different

segment of the value chain

Nokia (loudspeakers)

Which organizational design

is necessary to
accommodate an
IP strategy?

Create IP functions at the corporate and

the business-unit level

Toshiba

Patents protecting radical innovations

Use IPRs to differentiate horizontally

Kellogg (cereals trademarks)

Nokia (mobile phone interfaces
trademark, patent and design
combinations)

* See P. Michell, J. King and J. Reast, Brand Values Related to Industrial Products, Industrial Marketing Management 30, no. 5 (2001): 415-425.

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Nokia keeps a handle on its suppliers by maintaining control of key IP rights in different segments
of the value chain to forearm against price increases in an upstream segment.

competitors cannot enter this market at low cost, the corporation

has taken sophisticated IP countermeasures. We patent-protected the cartridge-pen interface, says Kellberg, rendering it difficult for rivals to offer cartridges that go with NovoPen.
Consumers face full switching costs including the purchase of
a new base delivery device if they want to choose cheaper cartridges from another supplier.
IP rights are not solely a matter of technical advantages. Promotional advantages are created through the existence of strong,
trademark-protected brands. And some companies recognize the
value of patents for branding. At least three large shoe manufacturers, Teva, New Balance, and Geox, incorporate (pending)
patents directly or indirectly into their marketing by making the
information visible to the customers. Geox even has a top-level
Web site category called Patents.
Binding human resources to a corporation is also important
for companies seeking to maintain incumbency advantages with
IP rights. Recent studies show that a small elite of inventors
accounts for the major part of a firms patented output.15 Identifying and binding such people to the corporation is essential for
building up learning economics in high-tech corporations.
Attracting top scientists from competitors can accelerate the
learning process. And IP rights information services, found in
many large companies today, can help to complete these tasks.

Raising Entry Barriers

Optimally, an incumbency advantage can be turned into an entry
barrier for followers. Companies have long used trademarks as
one of several legitimate ways to pack a product space to reduce
the number of profitable niches for competitors.
Henkel KGaA Germany, a laundry and home-care company,
has protected a wide variety of laundry detergents with trademarks, capturing many preferences consumers may have.16 By
doing so, the company makes further horizontal product differentiation more difficult for its competitors. While the practice of differentiating products horizontally and protecting them with
trademarks is well-known (Kelloggs approach with breakfast
cereal is another example), Henkels laundry-product portfolio is
differentiated vertically as well. Several of the detergents exist both
in traditional and advanced patent-protected fast-solubility forms
(which are also protected by trademarks). The goal is to support
every delivery form and any reasonable concentration range of
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innovative active ingredients, notes Thomas Mueller-Kirschbaum,

CTO of Henkel KGaAs Laundry and Home Care. Aside from
patents, a lot of our products and packagings are protected by utility models, design patents, and trademarks, he says. The strategy
has paid off: Henkel has been ranked among the European market
leaders for detergents for many decades now.
The same rationale explains why Novo Nordisk brings out
patent-protected one-way insulin-delivery devices and partly
cannibalizes its own business of NovoPen. The one-way devices
(not refillable) patent block another niche in the product space
for insulin-delivery devices.

Creating Power With Suppliers

Even among sophisticated IP managers today, it is commonly
assumed that the use of IP rights is restricted to horizontal competition. But there is little theoretical reason to stick with this
premise, and the real world provides some contradictory evidence.
Consider the effects of Nokias patents on loudspeakers. Even
though the company does not engage in the production of cellphone components, it keeps a handle on its suppliers by maintaining control of key IP rights in different segments of the value chain.
Nokia has such patents not in order to squeeze suppliers but to
forearm against price increases in an upstream segment where
competition is not too high as there is only a handful of suppliers,
according to senior IP manager Peter Halkjr. In more competitive
areas involving, for example, antenna technology, where Nokia can
choose from dozens of suppliers, it is not as important to buttress
its supply chain management by leveraging IP rights. Still, the
company plays it safe, taking out patents in other technologies, and
because of its strong position on the value chain, it can influence
disputes between suppliers and operators of Nokia equipment.

Organizational Design
Since the tasks associated with the execution of a proper IP strategy are many, labor has to be divided and hierarchy and control
have to be established. In addition to filing for and enforcing IP
rights, companies must attend to licensing, technology forecasting, information provision and consultancy regarding the choice
of research trajectories. Reports coming out of IP departments
should help to identify potential strategic allies, select lucrative
market segments, and recruit new personnel.
Researchers agree that Western companies have lagged behind

in the organizational implementation of IP strategy. The vanguards are found in Japan, and Hitachi Ltd. and Toshiba Corp.
are two of the leaders.17 At Toshiba, intellectual property departments exist at both the business-unit and corporate level.
Toshibas IP units provide the planning and coordination of
activities related to IP rights; draft and stipulate technology contracts; protect software; file and license designs, trademarks and
patents; and host an information center. The organizational
structure reflects both the importance assigned to IP rights by
top-level management and the companys comprehensive
approach to the issue. Toshibas IP strategy yielded roughly 340
European patent applications per year between 1978 and 2003
over hundreds of technological subgroups.18
The increasing corporate value of intellectual property has a
consequence for senior leaders: They must not leave IP-related
questions to functional management levels alone. Instead, they
must take a strategic approach to the issue. The key lies in treating intellectual property as they would any other strategic issue
facing their organizations. By thinking through the questions systematically about competitive advantage, industry structure,
entry barriers, competitors, suppliers and organization they
can make IP a strategic weapon in the corporate arsenal.

REFERENCES
1. Peter J. King, managing partner of Arthur Andersens Intellectual
Property Asset Management Practice, quoted in the introduction to K.
Rivette and D. Kline, Rembrandts in the Attic: Unlocking the Hidden
Value of Patents (Boston: Harvard Business School Press, 1999).
2. The particular order of the questions is inspired by G. Saloner, A.
Shepard and J. Podolny, Strategic Management (New York: John
Wiley, 2000), 160, 165.
3. Next to the specifically mentioned references in the following endnotes, this article builds on the following major contributions: G. Rahn,
Patenstrategien japanischer Unternehmen, Gewerblicher Rechtsschutz und Urheberrecht (international) 5, (1994): 377-382; E. Kaufer,
The Economics of the Patent System (New York: Harwood Academic
Publishers, 1989); S. Scotchmer, Standing on the Shoulders of
Giants: Cumulative Research and the Patent Law, The Journal of
Economic Perspectives 5 (winter 1991): 29-42; N.T. Gallini, Patent
Policy and Costly Imitation, RAND Journal of Economics 23 (spring
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in Sequential Innovation, RAND Journal of Economics 26 (spring
1995): 20-33; P.C. Grindley and D.J. Teece, Managing Intellectual
Capital: Licensing and Cross-Licensing in Semiconductors and Electronics, California Management Review 39 (winter 1997): 8-41; D.J.
Teece, Capturing Value From Knowledge Assets: The New Economy,
Markets for Know-How and Intangible Assets, California Management
Review 40 (spring 1998): 55-79; R.C. Levin, A.K. Klevorick, R.R. Nelson and S.G. Winter, Appropriating the Returns From Industrial
Research and Development, Brookings Papers on Economic Activity
3 (1987): 783-820; and C. Shapiro, Navigating the Patent Thicket:
Cross Licenses, Patent Pools and Standard-Setting, Innovation Policy
and the Economy 1 (2001): 119-150.
4. In 1926 Novo Nordisk started exporting insulin to the rest of Scandinavia and Germany. In 1936 Novo was supplying insulin to not fewer
than 40 countries.

5. For a comprehensive empirical study of this industry, see R.

Bekkers, G.M. Duysters and B. Verspagen, Intellectual Property
Rights, Strategic Technology Agreements and Market Structure: The
Case of the GSM, Research Policy 31 (2002): 1,141-1,161.
6. Ibid. According to the literature, however, it seems legitimate to say
that Motorola did not fully sustain this advantage to the present.
7. J. Hudson, Generic Take-Up in the Pharmaceutical Market Following Patent Expiry: A Multi-Country Study, International Review of Law
and Economics 20, no. 2 (2000): 205-221.
8. For discussions of patent fences, see O. Granstrand, The Economics and Management of Intellectual Property: Towards Intellectual Capitalism (Cheltenham, England: Edward Elgar Publishing, 1999): 6-8,
W.M. Cohen, R.R. Nelson and J.P. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing
Firms Patent (or Not), working paper w7552, National Bureau of Economic Research, Cambridge, Massachsuetts, 2000; and M. Reitzig,
The Private Value of Thickets and Fences Towards an Updated
Picture of the Use of Patents Across Industries, Economics of Innovation and New Technology, in press.
9. A. Arora, Patents Licensing and Market Structure in the Chemical
Industry, Research Policy 26, no. 4-5 (1997): 391-403.
10. B.H. Hall and R.H. Ziedonis, The Patent Paradox Revisited: An
Empirical Study of Patenting in the U.S. Semiconductor Industry,
1979-1995, RAND Journal of Economics 32, no. 1 (2001): 101-128.
11. Arora, Patents Licensing and Market Structure in the Chemical
Industry, 393.
12. See I. Horstmann, G. MacDonald and A. Slivinski, Patents as
Information Transfer Mechanisms: To Patent or (Maybe) Not To
Patent, Journal of Political Economy 93 (October 1985): 837-858, for
a more fundamental discussion of the trade-off between patenting and
secrecy.
13. C. Heath, J. Henkel and M. Reitzig, Who Really Profits From
Patent Infringements? Innovative Incentives and Disincentives From
Patent Indemnification, working paper 2002-18, Center for Law, Economics and Financial Institutions at Copenhagen Business School,
Copenhagen, Denmark, 2002.
14. T.J. Calabrese, A.C. Baum and B.S. Silverman, Canadian
Biotechnology Start-Ups, 1991-1997: The Role of Incumbents Patents
and Strategic Alliances in Controlling Competition, Social Science
Research 29, no. 4 (2000): 503-534.
15. H. Ernst, C. Leptien and J. Vitt, Inventors Are Not Alike: The Distribution of Patenting Output Among Industrial R&D Personnel, IEEE
Transactions on Engineering Management 47, no. 2 (2000): 184-199.
16. According to the database of the German Patent Office, Henkels
national trademark protection in Germany for detergents comprises 64
trademarks in connection with Persil, 19 in connection with Weisser
Riese, 11 with Spee, 13 with Fewa and 9 with Perwoll to mention
five of its nine brands.
17. Granstrand, The Economics and Management of Intellectual
Property; see also R.H. Pitkethly, Intellectual Property Strategy in
Japanese and U.K. Companies: Patent Licensing Decisions and
Learning Opportunities, Research Policy 30, no. 3 (2001): 425-442.
18. According to the European Patent Register, Toshiba (which
includes Kabushiki Kaisha Toshiba as well as those corporations bearing the fragment Toshiba in their corporate name) had filed for 8,427
European patents between 1978 and October 2003. Patents were distributed over 2,430 subgroups.

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