Patent Strategy Lesson – “The Innovator’s Dilemma” and Patent Committees – Guest Post by Peter Kim

In a first for Patinformatics.com, I am happy to share the podium with Peter Kim, a Principal at Irvine Pointe Advisory, LLC, an IP Strategy consulting firm. Peter is a long-time colleague, and expert at patent licensing and strategy.

Fortune Magazine recently stated that the word “disrupt” is tech’s most misused and overused piece of jargon.  But I wonder if the reporting of its demise has been greatly exaggerated.  Disruptive technology and its impact on established industries has been one of the most exciting management/business concepts since its introduction in a 1997 book by Clayton Christensen.  As recently as 2011, Christiansen was ranked by Harvard Business Review as the world’s most influential management guru.  In fact, a 2011 biography revealed that Christiansen’s book deeply influenced Steve Jobs (a business visionary who revolutionized no fewer than 7 different industries).  I disagree with Fortune Magazine that it’s time to retire the word “disrupt.”  In fact, I would argue the concept hasn’t been studied thoroughly enough.

“The Innovator’s Dilemma” was not specifically written to cover intellectual property strategy, but in this article I will draw some lessons about disruptive technologies to apply to the context of corporate patent committees.  The book’s lessons may have impacted CEO (and other C-Level) suites, but they haven’t yet trickled down into the offices that actually manage a company’s intellectual property strategy.  In large companies, a patent committee is the group that decides which ideas/inventions will be filed as new patents.  Patent committees play a critical (and under appreciated) resource allocation role that can have an enormous impact on a company’s innovation strategy.  And they risk ignoring disruptive technologies at their own peril.

Let’s first review the definition of disruptive technologies and the Innovator’s Dilemma.

“Disruptive technologies” are new technologies that redefine product performance for customers, i.e. represent a new paradigm shift.  Examples of disruptive technologies include: electronic book readers (including tablets), hydraulic fracturing of oil and gas (“fracking”), semiconductor system-on-chips (“SoC”), and input/output memory (measured in “iops”).  In each of these examples, the technology redefined product performance in a dramatically different way.  Often a disruptive technology is first adopted for new applications in a small emerging industry, until the technology improves enough to displace legacy technologies used by customers in large established industries.  By contrast, “sustaining technologies” are new technologies that sustain the industry’s historical rate of improvement along traditional measures of product performance.

The Innovator’s Dilemma is that leading companies tend to fail when confronted with the arrival of disruptive technologies.  The failures are often due to surprising reasons — not because the leading companies are mismanaged, or because a technology is advancing too quickly for a company to keep up (aka “the technology mudslide hypothesis”).  Leading companies fail because they excel at managing “sustaining technologies” (in fact, this is historical contributor to success), which turns out to be exactly the wrong approach for managing “disruptive technologies.”

I recommend rethinking about Patent Committees using a framework I refer to as the 3 P’s: Purpose, “Pitch,” and Participants.

  1. The purpose of patent committees should be broadened to explicitly seek disruptive technology inventions and enlarge patent budgets for this purpose.
  2. The pitch to patent a disruptive technology invention should be based on a new set of criteria adapted to disruptive technologies rather than using those for a sustaining technology invention.
  3. The participants of a patent committee should include advocates of disruptive technologies.

PURPOSE: I recommend broadening the purpose of a patent committee to think of patents as an insurance policy covering a disruptive technology.  My observation is that leading companies allocate very little of the overall patent budget for disruptive technology inventions, for example less than 5%.  (By contrast, small startup companies allocate nearly their entire patent/R&D budgets to disruptive technologies.  And patent decisions are made by individuals instead of a large patent committee.)  Large companies prefer to allocate most of their patent budgets on sustaining technologies.

My opinion is that the traditional purpose of patent committees in large companies is too narrow; protecting against only existing competitors blinds a company to the greater threat of new entrants.  However, patents on “sustaining technologies” are practically useless against a new entrant/competitor using a disruptive technology.  As such, the patent budget for disruptive technologies should increase to at least 10%-20%.

Why 10%-20%?  Selecting a precise patent allocation percentage for disruptive technologies is difficult, but as proxy guidance, 3 well-known examples exist for employee time allocations to side projects and unorthodox innovations.  Hewlett-Packard allowed employees to spend 10% of their time on wild ideas (leading to the invention of HP printers).  The famously innovative company 3M allows employees to spend 15% of their time to pursue other innovations (leading to the invention of “Post-It Notes”).  Google allows employees to spend 20% of their time on projects that interest them (leading to fifty percent of the new products launched in the second half of 2005).

 “PITCH”: The inventor’s “pitch” to apply for a patent on disruptive technology needs to emphasize very different characteristics than those traditionally used by patent committees.  The inventor’s pitch or proposal is typically presented directly in-person to the patent committee, or submitted in-writing as a document called an invention “disclosure.”  Whether evaluated as a presentation or a disclosure, I recommend using two distinctly separate checklists for evaluating disruptive vs. sustaining technology inventions.  According to Christensen, a disruptive technology exhibits the following characteristics:

  • Underperforms in mainstream market but contain other features valued by new customers
  • Technology targets a small or undefined market
  • Company’s most profitable customers don’t want or can’t use it
  • Initial customer is least profitable customer in market
  • Low projected profit margin and financial return
  • Low cost of development, using off-the-shelf materials/components
  • Internal fear of cannibalizing existing products
  • Championed by engineering department, or by staff from small acquisition
  • Technology is moving faster than market need (i.e. closing the “performance gap”)

The distinct nature of disruptive technology is sometimes misunderstood because it is evaluated using a checklist for a sustaining technology.  However, understanding the differences is crucial to developing effective intellectual property strategies.

PARTICIPANTS: The participants of a patent committee should be expanded to include advocates of disruptive technology.  The 3 most common advocates of disruptive technology are:

  1. R&D technologists
  2. Engineers dealing with new markets/customers
  3. Staff from small acquisitions (fluent in needs of new markets/customers)

These advocates should be empowered to vote on disruptive technology inventions, or file the patents through a separate patent budget allocation dedicated to disruptive technology inventions.  The 4 biggest objections to disruptive technology inventions at a traditional patent committee are:

  1. Small/undefined markets cannot address the company’s near-term financial goals
  2. The patent budget should be used for technology requested by core customers
  3. Financial return projections are lower than those for other inventions
  4. The new technology might cannibalize existing revenue

However, the core insight is that a new technology established in emerging markets, will someday invade large established markets, and waiting to allow a new entrant to reach that point will give the new entrant insurmountable advantages (lower manufacturing costs, greater design experience, and ability to wage price war).  Advocates of disruptive technology are ideally suited to understand these future threats, to lobby for filing disruptive technology patents, and to prepare for future marketplace shifts.

The desired outcome of thinking about patent committees as outlined above is to capture inventions of disruptive technologies that otherwise would be ignored.  After a company has implemented these recommendations, the resulting disruptive technology patents will become the foundation of new value creation and revenue growth.  And only after the word “disrupt” makes its rounds at corporate patent committees, should we consider whether it is actually (as claimed by Fortune Magazine in the opening paragraph) being overused.

AUTHOR BIO

Peter Kim is a Principal at Irvine Pointe Advisory, LLC, an IP Strategy consulting firm. He has over a decade of industry experience with two publicly-traded IP licensing companies and two venture-backed patent monetization startups. He was Director of IP Strategy at Rambus (RMBS), responsible for driving future licensing revenue growth through strategic semiconductor patent acquisitions. Peter also worked for Acacia Research, IPVALUE Management, and Walker Digital. He is a co-inventor on 17 U.S. patents — including 2 patents sold to Groupon, and 12 patents sold to IGT.

Comments 3

  1. Well written. But as a huge fan of the Innovators Dilemma myself, and a former IP manager, I beg to differ.

    Disruptive innovations are very important, and can change the world in a way that sustaining innovations generally can’t. However they are also very risky, and only a very small fraction will ever make money. Startups generally have little choice but go for disruptive innovation, as they will have little chance with sustaining innovations. In contrast, large established companies have proven ways to make money from sustaining innovations – and this is why a very high proportion of the patents we see from large companies are for sustaining innovations. And I see nothing wrong with this – it fits in with their business model.

    This is not to say that large companies should do not try disruptive innovations as well – but even for big companies, these will probably fail.

    There is a third option, very commonly used. Large companies watch for startups who have managed to successfully (more or less) commercialised disruptive innovations – and then buys them out. The small company is happy because they been paid for their hard work and risk, and the big company is happy because a lot of the technical risk in the disruptive technology has been removed, although often some commercial risk remains.

  2. Thank you Mike. Christensen offers a different view about M&A in the book. He recommends that large companies spin-out (i.e. sell) disruptive tech as a separate company because “value networks” that nurture sustaining tech have a tendency to kill disruptive tech. However, I agree with your point that large companies should watch for startups to acquire/integrate. My favorite model for this is ARM Holdings, which has a long history of acquiring “complementary technology” (different concept than disruptive) and creating an integrated offering to customers in the form of processor optimization packs or “POPs” (e.g. s/w tools, physical ip, graphics ip). But complementary tech is not the same as disruptive tech. A large company that acquires disruptive tech takes the risk of mismanaging it, as discussed in the book.

  3. I found the article to be very insightful and in fact very much on point of how the large corporations in Silicon Valley keep sharpening their technological edge.

    While the tendency of a large corporation is to preserve its money making business, it is disruption what they fear the most. Andy Grove at Intel was keen on forcing that very point (at the time I believe the term he used was green technologies to define new entrants in the market).

    Paul Otellini the recently retired Intel CEO admitted he saw the change and threat ARM represented as the market shifted to samartphones first, then iPads. But the inertia of the corporation resisted the change of direction.

    If I understood the article correctly, it speaks of codifying disruptive DNA into the very heart of a large corporation via a patent committee so that it recognizes change in the form of new technologies; having done that it infuses the corporation with the required technology to meet the new threats while it continue to pursue its other lines of business.

    Large companies thrive on sustaining, but they survive by acquiring; by definition the start up has only one card to play disruption. This is by design.

    Few people mention that the main object of a start up is to be achieve a successful exit with favorable equity to the team. Rare are the Steve Jobs and Mark Zuckerbeg who stick around to see their companies grow to become large global corporations (and in the case of Michael Dell privatize again). while most startups aim at resolving a specific technological problem, not all their solutions would prove adequate and will fail to stay in business, even if they had viable technology.

    I would argue that a large company that codifies identifying and promoting disruptive technologies is a far more efficient solution as it blends it with its established line of products. Apple would in my opinion represent that model very well. Kodak might be the other extreme;and most recently BlacBerry and Nokia. All failing to foresee threats or adapt to the changes while they were dominant in the market.

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