Intellectual Property Management

Contributions to Management Science

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R.L. D'Ecclesia/S.A. Zenios (Eds.)Operations Research Modelsin Quantitative Finance1994. ISBN 3-7908-0803-2

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M. Bertocchi/E. Cavalli/S. Komlosi (Eds.)Modelling Techniques for FinancialMarkets and Bank Management1996. ISBN 3-7908-0928-4

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E. Canestrelli (Ed.)Current Topics in Quantitative Finance1999. ISBN 3-7908-1231-5

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J. Windsperger/G. Cliquet/G. Hendrikse/M. Tuunanen (Eds.)Economics and Managementof Franchising Networks2004. ISBN 3-7908-0202-6

Klaus Jennewein

Intellectual PropertyManagementThe Role of Technology-Brandsin the Appropriation of Technological Innovation

With 62 Figuresand 22 Tables

Physica-VerlagA Springer Company

Series EditorsWerner A. MiillerMartina Bihn

Author

Dr. Klaus JenneweinT-Mobile International AG & Co. KGGroup StrategyLandgrabenweg 15153227 BonnGermanyklaus.j ennewein @ t-mobile.net

ISSN 1431-1941ISBN 3-7908-0280-8 Physica-Verlag Heidelberg New York

Cataloging-in-Publication Data applied forLibrary of Congress Control Number: 2004109407

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Softcover design: Erich Kirchner, Heidelberg

SPIN 11011996 88/3130/DK-5 4 3 2 1 0 - Printed on acid-free paper

With love to my wifeAmelie and my son Leo

,,Ein hohes Kleinod ist der gute Namen"'A valuable gem is the good name'

(Friedrich Schiller,1759-1805)

Preface

Innovation is a source of competitive advantage. In other words, firms mayleverage innovation to generate rents, at least temporarily. And this isintended to be a self-sustained business model: part of the rent extractedfrom the market may be re-invested into new technological developmentswhich in turn permit additional innovations, thus regenerating the sourcesof rents. This is the positive loop of innovation.

In this sense, business would be a permanent hunt for innovations, insearch of rents.

Yet, innovations need to be protected if firms want to benefit from rentsover long periods of time. However, the strategic management literaturetends to suggests that patents are a weak protection against aggressiveimitators. Secrecy may help but we also know that technology ends upleaking in most cases. Speed in new developments to cut "time to market"may be another way of protecting the technological advance of the firm.But again, this may not be enough as start-ups may out-compete theestablished firm in the race for innovation.

This is where Dr. Klaus Jennewein's key idea comes into the picture.The core of his thesis is that brand equity may be combined totechnological protections such as patents to build a multi-layer, complex,intricate shield to protect the sources of rents against competitors andimitators.

Dr. Jennewein presents two detailed case studies which remarkably feedinto his argument. One case is Bayer's aspirin. How come a drug companyis still able to extract rent from an innovation which was first introduced tothe market over a century ago? How come Bayer still has a dominantmarket position when the patent protection disappeared so long ago? Howcome producers of the generic molecule were unable to win against thepioneer of Aspirin?

The second case study tells us the story of the routers of Cisco Systemsin the network business. There we see how a newcomer, a start-up, wasable to build a long-lasting competitive advantage, based on systematiceffort to leverage technological innovation, while carefully building anddefending the reputation of the company, its products and its services. As aresult, Cisco became the de facto standard in the profession, meaning bothinnovative technologies and reliable services. The technology received thebacking of the brand name, and vice versa. When Cisco was badly in needof technological expertise, the name of Cisco helped the company attractand retain the best talents, including through a campaign of acquisition oftargeted companies.

VIII Preface

In the tradition of grounded theory, Dr. Jennewein actually builds fromthese two in-depth, rich and detailed case studies to present a life cyclemodel. The model shows how intangible technological assets may beintertwined over the years with brand equity to build a long lastingprotection to innovations. He shows how the start-up firm focuses onbringing a new technology to the market and enjoys a temporarymonopoly, that of the innovator. More innovations - mostly process andthen incremental innovations - are generated as the start-up consolidatesits position as a recognized pioneer. Interestingly enough, this recognitionbrings along an emerging brand name which is going to becomeincreasingly important as imitators come into the picture. The brand namehelps sustain market shares and significant margins, yielding enoughreturns to invest in new developments. When radical innovation strikesagain, the company is now an incumbent. It cannot fully rely on itstechnological capabilities, as these are only partly relevant to the newcontext. The incumbent thus primarily relies on its brand name whichhelps the company bridge over towards the new technological paradigm.

In a way, K. Jennewein is celebrating the wedding of the patent with thebrand, the technology with the market reputation, the engineer with themarketer. Dr. Jennewein further suggests to organize the corporation insuch a way that this marriage be successful. Instead of letting thedevelopment Engineer deal with technology in his unit, the Lawyer at theheadquarters deal with patent and other forms of technological protections,the Marketer in his marketing departments deal with brands, K. Jenneweinrecommends to pursue an integrated intellectual property strategy. Heinsists to show that the multilayer shield to protect the innovations must becrafted by a coordinated team working hand in hand over the years. This isactually not what I observe in most companies today. To our opinion, thisis the core contribution of this book.

This is a brilliant and convincing book with many concrete implicationsfor both business practitioners and academics in the field.

Prof. Dr. Thomas Durand Prof. Dr. Alexander GerybadzeEcole Central Paris Universitat Hohenheim, Stuttgart

Acknowledgements

"On ne voit Men que par le cozur. L 'essentiel est invisible pour lesyeux "

Antoine de Saint-Exupery

According to the currently ongoing scientific discussion in the field ofstrategic and in particular technology management, intangible assets andespecially intangible technological assets represent the most importantstrategic asset for business corporations. However, although the given highstrategic importance of intangible assets, many authors criticise theinefficiency of the existing system of intellectual property right protection.Empirical studies have clearly revealed that singular patent right protectiondoes generally not enable companies to efficiently and effectivelyappropriate the returns of their intangible technological assets. Thegrowing awareness of the shortcomings of legal protection rights hasencouraged the investigation of alternative protection modes with a mostlytechnological focus. On the other hand, the investigation of the role ofcompany specific market based assets in the appropriation of returns ofintangible technological assets has been almost entirely neglected byresearch, so far.

This lack of research has motivated the here presented investigation ofthe role of brand equity in the appropriation of intangible technologicalassets. The investigation reveals by an empirical and theoretical analysisthe complementary relationship between technological and market basedassets, and shows how this relationship affects the ability of companies toappropriate the returns of technological innovation. The investigation isplaced at the intersection of strategic management, technologymanagement, and the management of brand equity and builds upon theresource based view.

A major endeavour such as this work which has been handed in as PhDthesis at the University of Hohenheim at Stuttgart and the Ecole CentralParis would never have been possible without the support and guidance ofmany people which I want to thank here.

The research was undertaken during my time as PhD student at theCentre of International Management and Innovation at the University ofHohenheim and the Laboratoire Strategic et Technologie at the EcoleCentrale Paris. My first and greatest debt of gratitude is to Prof. Dr.Thomas Durand and Prof. Dr. Alexander Gerybadze my two PhDsupervisors. It was their creative and professional opinion as well as thesufficient freedom which have inspired and enabled the realization of this

X Acknowledgements

endeavour. Prof. Dr. Bertrand Quelin of Ecole HEC as well as Prof. Dr.Helmut Kuhnle and Prof. Dr. Ulrich Schwalbe at the University ofHohenheim I want to thank for their constructive questions and remarks.

Next I have to thank the companies and research institutes that enabledthrough their cooperation to realize the empirical investigations and to gainfurther empirical evidence. Here I want to thank in particular Mr. MichaelChmilewski of Bayer AG, Mr. Harald Zapp of Cisco Systems GmbH, Mr.Robert Chanezon of Rhodia SA, Mr. Jean Moulin, Mr. Jochen Maser, andall the others who gave so generously of their time. I want to particularlyshow appreciation to Mr. Ulrich Schmoch of the Frauenhofer Gesellschaftat Karlsruhe for extremely valuable support and help in searching andprocessing of the patent and trademark data. His generous help inaccessing the needed data-bases and encouraging discussions considerablycontributed to the success of the extensive econometric investigation.

I also owe a great debt of gratitude to my colleagues at the Centre ofInternational Management and Innovation at the University of Hohenheimand at the Laboratoire Strategie et Technologie at the Ecole Centrale Paris.In particular I want to thank my friend and former colleague MichaelStephan for the inspiring and reassuring discussions. The mutual support,above all during the data mining and data processing process, has probablyhelped the both of us to avoid some major frustration. I also would like toexpress my thanks to Miss Barbara Ungerer and Miss Fatiha Gunelli, whohave always been a source of encouragement and were of great help tomaster the bureaucratic hurdles encountered during the binationaldoctorate studies. Last but not least, I want to thank Nuria Martin, EricPfaffmann and Wolfgang Burr for the good co-operation and cheerfultime.

I reserve the last acknowledgement for those who really made thisresearch project possible - my wife and my parents. To Amelie, Annelieseand Martin I owe the greatest debt. The constant support, encouragement,and reassurance made it all worthwhile. To all of you, my thanks and love.

Klaus Jennewein

Contents

I The New Era of Intangible Assets 11.1 Problem Development 3

1.1.1 General Economic Significance of Intangible Assets 41.1.2 Role of Intangible Assets in Business Enterprises and the

Central Problem of Appropriation 61.2 Field of Investigation and Terminological Specification 10

1.2.1 Survey of Previous Research Work in the Field ofAppropriating Intangible Assets and the Role of BrandEquity 11

1.2.2 Main Focus of the Thesis 141.2.3 Terminological Specification 16

1.3 Research Structure 18

II Case Studies on the Appropriation of Intellectual Assets 2311.1 Methodology of the Case Studies 23

11.1.1 Choice of Case Examples 2311.1.2 Data Ascertainment and Specific Sources of Information..25II. 1.3 Methodological Proceeding and Validity of Case Studies..26

11.2 Case-Study: Bayer Aspirin 28H.2.1 Company and Product Profile 28

11.2.1.1 The Innovation: Acetylsalicylic Acid 30II.2.2 Appropriation Regime and Intellectual Property

Constellation 34H.2.2.1 From Technological Invention to a Global Brand 3711.2.2.2 Bayer Aspirin in the Inter- and Post-War Period 3911.2.2.3 The Revival of Bayer Aspirin 44

n.2.3 Persistent Market Share 5111.2.3.1 Bayer's Sustainable Strategic Advantage: The

Trademark Bayer Aspirin 5211.2.3.2 Innovations Nurturing Existing Brand Equity 5511.2.3.3 Bayer Aspirin in the 21st Century 59

II.2.4 Discussion and Findings 6211.3 Case Study: Cisco Systems 66

11.3.1 Company Profile 6611.3.2 From the Computer Lab to the Global Leader in the

Internet Economy 67II.3.2.1 Cisco Systems: A Large Multinational with the

Culture of a High-tech Start-up 69

XII Contents

II.3.2.2 Central Attributes of the Success of Cisco Systems ...7511.3.3 The Multibillion Brand 84

11.3.3.1 Leveraging Brand Equity 8611.3.3.2 Brand Strategies 8811.3.3.3 The Brand Cisco Systems in an Internet World 90

11.3.4 Discussion and Findings 92II.4 Contrasting the Two Cases 95

III Intangible Assets: Characteristics, Generation & Protection 101III. 1 Characteristics of Intangible Assets 102

III.l.l Particular Characteristics of Intellectual Assets 102III. 1.1.1 Qualification & Structure of Immaterial Assets 103III. 1.1.2 Public Good Characteristics of Intellectual Assets.. 107III. 1.1.3 Non-Abrasion in Use I l l

III. 1.2 Human Capital, Intangible Asset, and IntellectualProperty: A Definition 113

III .1.2.1 Human Capital, Intangible Assets, and IntellectualProperty 114

III. 1.3 Upshot I: Types and Characteristics of IntangibleAssets within Business Enterprises 120

111.2 Generation and Acquisition of Immaterial Assets 121111.2.1 Generation of Intangible Asset within Business

Companies 125111.2.1.1 Research- and Development Activities 126111.2.1.2 Learning-by-Doing 134

111.2.2 External Sources of Intangible Assets 137111.2.2.1 Acquisition of Intangible Assets: Licensing 140111.2.2.2 Integration of Intangible Assets: Merger &

Acquisitions and Enticement of Employees. 143111.2.2.3 Excursion: Internal R&D and the Acquisition of

External Immaterial Assets 149111.2.3 Co-operative Forms of Intangible Asset Creation 151

111.2.3.1 Joint-Ventures, Strategic Alliances, and Networks .152111.2.3.2 Networks and Informal Knowledge Trading 155111.2.3.3 Co-operation Decision Process 158

111.2.4 Upshot II: Sources of Intangible Assets 160111.3 Protection Modes of Intangible Assets 161

111.3.1 Legal Property Rights 162111.3.1.1 Patent Rights 163111.3.1.2 Trademarks and Brand Equity 168111.3.1.3 Petty-Patents 175

111.3.2 Further Possibilities of Protection 176

Contents XIII

m.3.2.1 Trade Secrecy 177111.3.2.2 Lead-Time-Advantages 180111.3.2.3 Complementary Resources 182

111.3.3 Choice of Efficient Protection Mode for TechnologicalAssets 183

111.3.4 Upshot III: Intangible Assets and Their EffectiveProtection in Globalised Markets 192

IV Strategic Management of Intangible Assets 195IV.l Intangible Technological Assets as a Strategic Resource 195

IV. 1.1 Strategic Role of Intangible Technological Assets inthe Competitiveness of Business Enterprises 201

IV. 1.1.1 Intangible Asset Ambiguity and Barriers toImitation 201

IV.l.1.2 The Complementarity of Strengths 204IV.l.1.3 Legal Barriers to Imitation 205VI.1.1.4 Up-holding Imitation Barriers 208

IV.l.2 Central Problems of Intangible Technological Assets inthe Generation of Sustainable Competitive Advantage...21O

IV. 1.2.1 The Key Importance of the Appropriation ofEconomic Returns of Intangible Resources 211

IV. 1.2.2 Strategic Limitations and Shortcomings of PatentProtection 219

IV. 1.2.3 The Advantage of Multinational Enterprises in theAppropriation of Intangible Technological Assets .222

IV.l.3 Upshot IV: Strategic Role and Importance of theProtection of Intangible Assets in the Generation ofSustainable Competitive Advantage 224

IV.2 Brand Equity in the Protection of Technological Assets 225IV.2.1 What is Brand Equity? 227

IV.2.1.1 Dimensions of Brand Equity 228IV.2.1.2 Strategic Relevance of Brand Equity 234

IV.2.2 Generation of Brand Equity and the Advantage ofBeing First 237

IV.2.2.1 Pioneering Brands and Customer Switching Costs.238IV.2.2.2 Brand Equity and First-Mover Advantages 239

IV.2.3 Strategic Role of Complementary Brand Equity inProtecting Intangible Technological Assets 245

IV.2.3.1 The Role of Intangible Technical Assets inEstablishing Brand Equity 246

IV.2.3.2 The Complementary Nature of Brand Equity inProtecting Intangible Technical Assets 247

XIV Contents

IV.2.3.3 Integration of Technology Management and theManagement of Brand Equity 251

IV.2.4 Upshot V: Strategic Significance of ComplementaryBrand Equity and Immaterial Technological Assets 254

IV.3 Model of Complementary Brand Equity 256IV.3.1 Intangible Technological Assets, Complementary Brand

Equity and the Effective Appropriation of Returns 256IV.3.1.1 The Importance of Brand Equity in Appropriating

the Returns of Technological Assets 257IV.3.1.2 The Role of Complementary Brand Equity in

Generating New Intangible Technological Assets ..262IV.3.2 Efficient Management of Established Brand Equity 268

IV.3.2.1 The Role of Subsequent Technological Innovationsin the Upholding of Established Brand Equity andthe Advantage of the Innovator 268

IV.3.2.2 The Management of Complementary BrandEquity and Intangible Technological Assets alongthe Technology Life-cycle 273

IV.3.2.3 The Role of Established Brand Equity in theMarket Introduction of Subsequent ProductGenerations 277

IV.3.3 Upshot VI: The Strategic Role of ComplementaryBrand Equity in the Appropriation of IntangibleTechnical Assets 281

IV.4 Organising and Implementing Efficient Brand EquityManagement 283

IV.4.1 Legal vs. Managerial Responsibilities 284IV.4.2 Principal Organisational Forms of Brand Equity and

Technological Management 286IV.4.2.1 Models of Organisational Integration of

Technology and Brand Equity Management inDiversified Companies 287

IV.4.2.2 Ensuring Sufficient Investments in Brand Equityand Technological Assets 294

IV.4.3 Apparent Problems in the Integration of Brand Equityand Technology Management 299

IV.4.4 Tools for Aligning Brand Equity and TechnologyStrategies 306

IV.4.5 Upshot VII: Organising for an Effective Brand Equityand Technological Management 314

Contents XV

V Econometric Analysis 317V.I Methodology 318

V.I.I Data Sources and Ascertainment 318V.1.2 Choice of Object and Scope of Investigation 320V.I.3 Theoretical Concept and Derived Hypotheses 324

V.I.3.1 Underlying Theoretical Concept and ItsOperationalisation 324

V.I.3.2 Research Hypotheses 328V.I.4 Method of Statistical Evaluation and Statistical Validity

of Results 330V.2 Statistical Analyses 335

V.2.1 Descriptive Statistics 335V.2.2 Econometric Analyses 342

V.2.2.1 Cross-sectional Analyses 343V.2.2.2 Industry Analyses 351V.2.2.3 Analysis of the Impact of Patent Filings,

Trademark Registrations on Companies' BrandEquity and Operating Profits 358

V.3 Discussion and Findings 363

VI General Summary and Conclusion 367VI. 1 Discussion of Methodological Proceeding 369VI.2 Resume of Research Finding and Implications 371

VI.2.1 General Summary of Findings 371VI.2.2 Implications for Research and Practice 378

VI.3 General Conclusion and Scope for Further Research 383

Bibliography 385

List of Abbreviations

adj. R2

A&DAGAPCapprox.ASAAMAAVVIDBTOCEOCICDCTOcf.chap.cp.DMDPAe.g.EoSEPOEUFDAISPICGSi.e.IOSIPIPCIPOM&AMNEN.A.NIHOTCp./pp.PCPCTR&Dresp.

adjusted coefficient of determinationacquisition and developmentAktiengesellschaft / public companyAlien Property Custodianapproximatelyacetylsalicylic acidAmerican Medical Associationapplication, voice, video, and integrated textBenelux Trademark Officechief executive officerCorporate identity and corporate designchief technology officerconfer tochaptercompare withDeutsche Mark / German MarkDeutsches Patentamt / German Patent Officefor exampleeconomies of scaleEuropean Patent OfficeEuropean UnionFood & Drug Administration (USA)Internet service providerInternational Classification of Goods and Servicesthat isInternetworks Operating SystemsInternet ProtocolInternational Patent Classificationinitial public offeringmerger and acquisitionmultinational entreprisenot availablenot-invented-here-syndromeover the counter drugs/self-medication drugspage/pagespersonal computerPatent Co-operation Treatyresearch and developmentrespectively

XVIII List of Abbreviations

ROI return on investmentRTA revealed technological advantagesect. sectionSCA sustainable competitive advantageTM trademarkTRIPS trade related aspects of intellectual property rightsUK United Kingdomunpubl. unpublishedU.S. United States of AmericaUSPto U.S. patent and trademark officeVoIP Voice over Internet ProtocolWIPO World Intellectual Property Organisation