Chapter 15

Exploiting Knowledge
and Intellectual
Property

LEARNING OBJECTIVES
By the end of this chapter you will develop an understanding of:

• identifying different types of knowledge and intellectual property

• choosing and applying appropriate methods of knowledge management
• developing a strategy for licensing intellectual property.

Innovation and Knowledge

In this chapter we discuss how individuals and organizations identify ‘what they know’ and
how best to exploit this. We examine the related fields of knowledge management, organi-
zational learning and intellectual property. Key issues include the nature of knowledge, for
example explicit versus tacit knowledge; the locus of knowledge, such as individual versus
organizational; and the distribution of knowledge across an organization. More narrowly,
knowledge management is concerned with identifying, translating, sharing and exploiting
the knowledge within an organization. One of the key issues is the relationship between
individual and organizational learning, and how the former is translated into the latter, and
ultimately into new processes, products and businesses. Finally, we review different types of
formal intellectual property, and how these can be used in the development and commerciali-
zation of innovations.

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442 Part V Creating Value

In essence, managing knowledge involves five critical tasks:

• generating and acquiring new knowledge

• identifying and codifying existing knowledge
• storing and retrieving knowledge
• sharing and distributing knowledge across the organization
• exploiting and embedding knowledge in processes, products and services.

Generating and Acquiring Knowledge

Organizations can acquire knowledge by experience, experimentation or acquisition. Of
these, learning from experience appears to be the least effective. In practice, organizations
do not easily translate experience into knowledge. Moreover, learning may be unintentional
or it may not result in improved effectiveness. Organizations can learn incorrectly, and they
can learn that which is incorrect or harmful, such as learning faulty or irrelevant skills or
self-destructive habits. This can lead an organization to accumulate experience of an inferior
technique, and may prevent it from gaining sufficient experience of a superior procedure to
make it rewarding to use, sometimes called the ‘competency trap’.
Experimentation is a more systematic approach to learning. It is a central feature of
formal R&D activities, market research and some organizational alliances and networks.
When undertaken with intent, a strategy of learning through incremental trial and error
acknowledges the complexities of existing technologies and markets, as well as the uncertain-
ties associated with technology and market change and with forecasting the future. The use of
alliances for learning is less common and requires the intent to use them as an opportunity for
learning, a receptivity to external know-how and partners of sufficient transparency. Whether
the acquisition of know-how results in organizational learning depends on the rationale for
the acquisition and the process of acquisition and transfer. For example, the cumulative effect
of outsourcing various technologies on the basis of comparative transaction costs may limit
future technological options and reduce competitiveness in the long term.
A more active approach to the acquisition of knowledge involves scanning the internal
and external environments. As we discussed in Chapter 7, searching consists of looking for, fil-
tering and evaluating potential opportunities from outside the organization, including related
and emerging technologies, new markets and services, which can be exploited by applying
or combining with existing competencies. Opportunity recognition, which is a precursor to
entrepreneurial behaviour, is often associated with a flash of genius, but in reality is prob-
ably more often the result of a laborious process of environmental scanning. External scan-
ning can be conducted at various levels. It can be an operational initiative, with market- or
technology-focused managers becoming more conscious of new developments within their
own environments, or a top-driven initiative, where venture managers or professional capital
firms are used to monitor and invest in potential opportunities.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 443

Identifying and Codifying Knowledge

It is useful to begin with a clearer idea of what we mean by ‘knowledge’. It has become all
things to all people, ranging from corporate IT systems to the skills and experience of indi-
viduals. There is no universally accepted definition, but the following hierarchy is helpful:

• Data are a set of discrete raw observations, numbers, words, records and so on. Typically
easy to structure, record, store and manipulate electronically.
• Information is data that have been organized, grouped or categorized into some pattern.
The organization may consist of categorization, calculation or synthesis. This organization
of data endows information with relevance and purpose, and in most cases adds value to
data.
• Knowledge is information that has been contextualized, given meaning and therefore made
relevant and easier to operationalize. The transformation of information into knowledge
involves making comparisons and contrasts, identifying relationships and inferring conse-
quences. Therefore, knowledge is deeper and richer than information, and includes framed
expertise, experience, values and insights.

The concept of disembodied knowledge can become a very abstract idea, but it can be assessed
in practice. Here are some types of knowledge identified in a study of the biotechnology and
telecommunications industries:1

• variety of knowledge
• depth of knowledge
• source of knowledge, internal and external
• evaluation of knowledge and awareness of competencies
• knowledge management practices, the capability to identify, share and acquire knowledge
• use of IT systems to store, share and reuse knowledge
• identification and assimilation of external knowledge
• commercial knowledge of markets and customers
• competitor knowledge, current and potential
• knowledge of supplier networks and value chain
• regulatory knowledge
• financial and funding stakeholder knowledge
• knowledge of intellectual property (IPR), own and others’
• knowledge practices, including documentation, intranets, work organization and multidis-
ciplinary teams and projects.

There are essentially two different types of knowledge, each with different characteristics:

• Explicit knowledge, which can be codified, that is expressed in numerical, textual or graph-
ical terms, and therefore is more easily communicated, e.g. the design of a product.

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444 Part V Creating Value

• Tacit or implicit knowledge, which is personal, experiential, context-specific and hard to

formalize and communicate, e.g. how to ride a bicycle.

Note that the distinction between explicit and tacit is not necessarily the result of the difficulty
or complexity of the knowledge but rather how easy it is to express that knowledge. Each
of these contribute to the intellectual assets and innovative performance of companies, but
in different ways. For example, the tacit knowledge of individuals and groups may be neces-
sary to exploit the more explicit types of knowledge, such as R&D and IPR. In this way the
interaction and combination of explicit and tacit knowledge can strengthen the position and
reputation of an organization.
It is also useful to distinguish between learning
Video Clip exploring Xerox and how and learning why. Learning how involves improv-
its range of knowledge management ing or transferring existing skills, whereas learning
programmes is available on the
why aims to understand the underlying logic or causal
Innovation Portal at
www.innovation-portal.info factors with a view to applying the knowledge in new
contexts.
As we have seen, knowledge can be embodied in people, organizational culture, routines
and tools, technologies, processes and systems. Organizations consist of a variety of individu-
als, groups and functions with different cultures, goals and frames of reference. Knowledge
management consists of identifying and sharing knowledge across these disparate entities.
There is a range of integrating mechanisms which can help to do this. Nonaka and Takeuchi
argue that the conversion of tacit to explicit knowledge is a critical mechanism underlying the
link between individual and organizational knowledge. They argue that all new knowledge
originates with an individual, but that through a process of dialogue, discussion, experience
sharing and observation such knowledge is amplified at the group and organizational levels.
This creates an expanding community of interaction, or ‘knowledge network’, which crosses
intra- and inter-organizational levels and boundaries. Such knowledge networks are a means
to accumulate knowledge from outside the organization, share it widely within the organiza-
tion and store it for future use. This transformation of individual knowledge into organiza-
tional knowledge involves four cycles:2

• Socialization. Tacit to tacit knowledge, in which the knowledge of an individual or group

is shared with others. Culture, socialization and communities of practice are critical for
this.
• Externalization. Tacit to explicit knowledge, through which the knowledge is made explicit
and codified in some persistent form. This is the most novel aspect of Nonaka’s model. He
argues that tacit knowledge can be transformed into explicit knowledge through a process
of conceptualization and crystallization. Boundary objects are critical here.
• Combination. Explicit to explicit knowledge, where different sources of explicit knowledge
are pooled and exchanged. The role of organizational processes and technological systems
are central to this.
• Internalization. Explicit to tacit knowledge, whereby other individuals or groups learn
through practice. This is the traditional domain of organizational learning.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 445

Storing and Retrieving Knowledge

Storing knowledge is not a trivial problem, even now that the electronic storage and distribu-
tion of data is so cheap and easy. The biggest hurdle is the codification of tacit knowledge.
The other common problem is to provide incentives to contribute, retrieve and reuse relevant
knowledge. Many organizations have developed excellent knowledge intranet systems, but
these are often underutilized in practice.

INNOVATION IN ACTION 15.1

Knowledge Management at Arup

Arup is an international engineering consultancy firm which provides planning, designing,
engineering and project management services. The business demands the simultaneous achieve-
ment of innovative solutions and significant time compression imposed by client and regulatory
requirements.
Since 1999, the organization has established a wide range of knowledge management initia-
tives to encourage sharing know-how and experience across projects. These initiatives range from
organizational processes and mechanisms, such as cross-functional communications meetings
and skills networks, to technology-based approaches, such as the Ovebase database and intranet.
To date, the organizational processes have been more successful than the technology-based
approaches. For example, a survey of engineers in the firm indicated that in design and problem
solving discussions with colleagues were rated as being twice as valuable as knowledge databases,
and consequently engineers were four times as likely to rely on colleagues. Two primary reasons
were cited for this. First, the difficulty of codifying tacit knowledge. Engineering consultancy
involves a great deal of tacit knowledge and project experience which is difficult to store and
retrieve electronically. Second, the complex engineering and unique environmental context of
each project limits the reusing of standardized knowledge and experience.

In practice, there are two common but distinct approaches to knowledge management.
The first is based on investments in IT, usually based on groupware and intranet technologies.
These are the favoured approach of many management consultants. But introducing knowl-
edge management into an organization consists of much more than technology and train-
ing. It can require fundamental changes to organizational structure, processes and culture.
The second approach is more people- and process-based, and attempts to encourage staff to
identify, store, share and use information throughout the organization. However, the storage,
retrieval and reuse of knowledge demands much more than good IT systems. It also requires
incentives to contribute to and use knowledge from such systems, whereas many organiza-
tions instead encourage and promote the generation and use of new knowledge.

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446 Part V Creating Value

Richard Hall goes some way towards identifying the components of organizational
memory. His main purpose is to articulate intangible resources and he distinguishes between
intangible assets and intangible competencies. Assets include intellectual property rights and
reputation. Competencies include the skills and know-how of employees, suppliers and dis-
tributors, as well as the collective attributes which constitute organizational culture. His
empirical work, based on a survey and case studies, indicates that managers believe that the
most significant of these intangible resources are the company’s reputation and employees’
know-how, both of which may be a function of organizational culture. These include:3

• Intangible, off balance sheet assets, such as patents, licences, trademarks, contracts and
protectable data.
• Positional, which are the result of previous endeavour, i.e. with a high path dependency,
such as processes and operating systems, and individual and corporate reputation and
networks.
• Functional, which are either individual skills and know-how or team skills and know-how,
within the company, at the suppliers or distributors.
• Cultural, including traditions of quality, customer service, human resources or innovation.

The key questions in each case are:

Activity to help you explore this 1. Are we making the best use of this resource?
theme, identifying innovation 2. How else could it be used?
capabilities, is available on the
Innovation Portal at
3. Is the scope for synergy identified and exploited?
www.innovation-portal.info 4. Are we aware of the key linkages which exist
between the resources?

Sharing and Distributing Knowledge

In practice, large organizations often do not know what they know. Many organizations now
have databases and groupware to help store, retrieve and share data and information, but
such systems are often confined to ‘hard’ data and information, rather than more tacit knowl-
edge. As a result, functional groups or business units with potentially synergistic information
may not be aware of where such information could be applied.
Knowledge sharing and distribution is the process by which information from different
sources is shared and, therefore, leads to new knowledge or understanding. Greater organi-
zational learning occurs when more of an organization’s components obtain new knowledge
and recognize it as being of potential use. Tacit knowledge is not easily imitated by competi-
tors, because it is not fully encoded, but for the same reasons it may not be fully visible to
all members of an organization. As a result, organizational units with potentially synergistic
information may not be aware of where such information could be applied. The speed and
extent to which knowledge is shared between members of an organization is likely to be a
function of how codified the knowledge is.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 447

This process of connecting different knowledge and people is underpinned by commu-

nities of practice. A community of practice is a group of people related by a shared task or
process or by the need to solve a problem, rather than by formal structural or functional
relationships.4 Through practice, a group within which knowledge is shared becomes a com-
munity of practice through a common understanding of what it does, of how to do it and
how it relates to other communities of practice.
Within communities of practice, people share tacit knowledge and learn through experi-
mentation. Therefore, the formation and maintenance of such communities represents an
important link between individual and organizational learning. These communities naturally
emerge around local work practice and so tend to reinforce functional or professional silos,
but also can extend to wider, dispersed networks of similar practitioners.
The existence of communities of practice facilitates the sharing of knowledge within a
community, owing to both the sense of collective identity and the existence of a significant
common knowledge base. However, the sharing of knowledge between communities is much
more problematic, owing to the lack of both these elements. Thus, the dynamics of knowledge
sharing within and between communities of practice are likely to be very different, with the
sharing of knowledge between communities typically being much more complex, difficult
and problematic.
Many factors can prevent the sharing of knowledge between communities of practice,
such as the distinctiveness of different knowledge bases and the lack of common knowledge,
goals, assumptions and interpretative frameworks. These differences significantly increase the
difficulty not just of sharing knowledge between communities but also of appreciating the
knowledge of another community.
However, there are some proven mechanisms to help knowledge transfer between differ-
ent communities of practice:5

• An organizational knowledge translator is an individual who is able to express the interests

of one community in terms of another community’s perspective. Therefore, the translator
must be sufficiently conversant with both knowledge domains and trusted by both com-
munities. An example of a translator would be a ‘heavyweight product manager’ in new
product development who bridges different technical groups, or bridges the technical and
marketing groups.
• A knowledge broker differs from a translator in that they participate in different communi-
ties rather than simply mediate between them. They represent overlaps between communi-
ties, and are typically people loosely linked to several communities through weak ties who
are able to facilitate knowledge flows between them. An example could be a quality man-
ager responsible for the quality of a process that crosses several different functional groups.
• A boundary object or practice is something of interest to two or more communities of prac-
tice. Different communities of practice will have a
stake in it, but from different perspectives. A bound- Video Clip of an interview
with Francisco Pinheiro of Atos
ary object could be a shared document, e.g. a quality
highlighting some of these themes is
manual; an artefact, e.g. a prototype; a technology, available on the Innovation Portal at
e.g. a database; or a practice, e.g. a product design. www.innovation-portal.info
A boundary object provides an opportunity for

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448 Part V Creating Value

discussion and debate (and conflict) and therefore can encourage communication between
different communities of practice.

For example, formally appointed knowledge brokers can be used to systematically scavenge
the organization for old or unused ideas, to pass these around the organization and imagine their
application in different contexts. Hewlett-Packard, for instance, created a SpaM group to help
identify and share good practice among its 150 business divisions. Before the new group was
formed, divisions were unlikely to share information, because they often competed for resources
and were measured against each other. Similarly, Skandia,
Case Study of Joint Solutions Ltd, a Swedish insurance company active in overseas markets,
an intermediary between medical attempted to identify, encourage and measure its intellec-
professionals and companies that tual capital, and appointed a ‘knowledge manager’ who
make medical devices, is available
was responsible for this. The company developed a set of
on the Innovation Portal at
www.innovation-portal.info indicators that it used both to manage knowledge inter-
nally and for external financial reporting.
More generally, cross-functional team working can help to promote this intercommunal
exchange. Functional diversity tends to extend the range of knowledge available and increase the
number of options considered, but it can also have a negative effect on group cohesiveness. The
cost of projects and efficiency of decision making. However, a major benefit of cross-functional
team working is the access it provides to the bodies of knowledge that are external to the team.
In general, a high frequency of knowledge sharing outside of a group is associated with improved
technical and project performance, as gatekeeper individuals pick up and import vital signals
and knowledge. In particular, cross-functional composition in teams, it could be argued, permits
access to disciplinary knowledge outside. Therefore, cross-functional team working is a critical
way of promoting the exchange of knowledge and practice across disciplines and communities.

INNOVATION IN ACTION 15.2

Profiting from Digital Media

The business model for capturing the value from video was simple but conservative: own and
enforce the copyright, global cinema release, followed by DVD rental and sale and, lastly, TV and
other broadcast. The DVD stage was critical, as it generated income of $23.4 billion in the USA
in 2007, compared to $9.6 billion from cinema release. Note that when DVD was introduced in
1997, three of the major studios initially refused to publish on it, as they feared losing revenue
from the existing proven VHS tape format.
In 2013, the value of digital movie purchases grew to more than $1 billion, video streaming
to more than $3 billion, but despite a decline of 10%, physical DVD and Blu-ray sales and rentals
still accounted for almost $10 billion, demonstrating the slow pace of substitution.6 Therefore,
the industry has begun to promote the successor to DVD, the high-definition DVD. After a stupid
format war, Blu-ray became the new standard for high-definition disks early in 2008. Initial sales
of the new format have been slow, not helped by uncertainty of the format war, with nine million

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 Chapter 15 Exploiting Knowledge and Intellectual Property 449

Blu-ray disks shipped in 2007, compared to nine billion conventional DVDs – just 0.1% of the
market (in addition some 40 million Blu-ray PS3 games were sold – since its launch in 2006
the Sony PlayStation 3 has sold some 11 million games consoles which also play Blu-ray disks).
Surveys in the USA and Europe suggest that 80% of consumers are happy with the picture and
sound quality of DVD and standard definition broadcast. Therefore, formats such as Blu-ray and
high-definition satellite and cable broadcasts are aimed at the 20% ‘early adopters’ who value
(i.e. are prepared to pay a premium for) higher-definition pictures and sound, primarily for films
and sports coverage.
However, for the majority who favour cost and convenience over quality, the Internet is the
current preferred medium, legal or otherwise. Illegal sites lead the way, such as ZML which offers
1700 movies for (illegal) download, whereas to date the legal services like MovieFlix and FilmOn
tend to be restricted to independent or amateur content. Hollywood has been slow to adapt its
business model, and still relies on cinema releases, followed by DVD rental and sales, and finally
broadcast. Legal download and streaming offer the potential for lower cost (and prices), as this
removes much of the cost of creating, distributing and selling physical media, as well as greater
convenience for consumers in terms of choice and flexibility. However, DVD sales depend on the
major chain stores for distribution, for example in the USA Wal-Mart accounts for around 40%
of sales, and this represents a powerful resistance to change. As a result, in 2008 legal online film
distribution was only around $58 million in the USA, less than 5% of total film sales. Television
broadcasters have been faster to adopt such services, such as the BBC iPlayer in the UK, mainly
because their current business model is based on subscription or advertising, without the film
studios’ legacy of reliance on physical media and retail distributors. In the USA, Apple iTunes and
TV and the Microsoft Xbox have begun to dominate the emerging market for download video
rental, but copyright issues have restricted the legal sale of video by download.
As a result of the growing importance of Internet sales of video material, in 2007 the
Writers’ Guild of America went on strike for better payment terms for electronic distribu-
tion and sales. The Hollywood studios’ offer was for the payments for Internet sales to be
based on the precedent set by DVD – 1.2% of gross receipts – whereas the writers wanted
something closer to book or film publishing – 2.5% of gross. The final settlement, reached in
February 2008, was a compromise, with a royalty on download rentals of 1.2% of gross, and
0.36–0.70% of gross on download sales, and up to 2% where video streaming is part-funded
by advertising. A partial victory for the authors, but this compares with 20% of gross receipts
claimed by some leading actors of blockbusters. Clearly, there is work to be done on the final
business model for the creation, sale and distribution of digital video. Greater clarity of the
regime for managing intellectual prop-
erty is a start, and faster broadband will
Tool to help you explore knowledge
soon make higher-quality download
management, absorptive capacity
practical for the mass markets, so all audit, is available on the Innovation
that remains is a little innovation in the Portal at www.innovation-portal.info
business model.

Sources: The Economist, 23rd February 2008, 386(8568); ALCS News, Spring 2008.

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450 Part V Creating Value

Exploiting Intellectual Property

In some cases, knowledge, and in particular its more explicit or codified forms, can be com-
mercialized by licensing or selling the intellectual property rights (IPR), rather than the more
difficult and uncertain route of developing new processes, products or businesses.
For example, in one year IBM reported licence income of $1 billion, and in the USA the
total royalty income of industry from licensing is around $100 billion. Much of this is from
payments for licences to use software, music or films. For example, in 2005 the global sales
of legal music downloads exceeded $1 billion (although illegal downloads are estimated to
be worth three to four times this figure), still only around 5% of all music company revenue,
with music downloaded to mobile phones accounting for almost a quarter of this. Patterns
of use vary by country. For example, in Japan 99.8% of all music downloads are to mobile
phones rather than to dedicated MP3 players. However, despite the growth of legal sites for
downloading music and an aggressive programme of pursuing users of illegal file-sharing
sites, the level of illegal downloads has not declined.
This clearly demonstrates two of the many problems associated with intellectual property:
these may provide some legal rights, but such rights are useless unless they can be effectively
enforced; and once in the public domain, imitation or illegal use is very likely. For these rea-
sons, secrecy is often a more effective alternative to seeking IPR. However, IPR can be highly
effective in some circumstances and, as we argue later, can be used in less obvious ways to help
to identify innovations and assess competitors. A range of IPR exists, but those most applicable
to technology and innovation are patents, copyright and design rights and registration.

Patents
All developed countries have some form of patent legislation, the aim of which is to encour-
age innovation by allowing a limited monopoly, usually for 20 years, and more recently many
developing and emerging economies have been encouraged to sign up to the TRIPS (Trade
Related Intellectual Property System). Legal regimes differ in the detail, but in most countries
the issue of a patent requires certain legal tests to be satisfied:

• Novelty. No part of ‘prior art’, including publications, written, oral or anticipation. In most
countries the first to file the patent is granted the rights, rather the first to invent.
• Inventive step. ‘Not obvious to a person skilled in the art.’ This is a relative test, as the
assumed level of skill is higher in some fields than others. For example, Genentech was
granted a patent for the plasminogen activator t-PA, which helps to reduce blood clots,
but despite its novelty, a Court of Appeal revoked the patent on the grounds that it did not
represent an inventive step because its development was deemed to be obvious to research-
ers in the field.
• Industrial application. Utility test requires the invention to be capable of being applied
to a machine, product or process. In practice a patent must specify an application for the
technology, and additional patents be sought for any additional application. For example,
Unilever developed Ceramides and patented their use in a wide range of applications.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 451

However, it did not apply for a patent for application of the technology to shampoos,
which was subsequently granted to a competitor.
• Patentable subject. e.g. discoveries and formula cannot be patented, and in Europe neither
can software (the subject of copyright) or new organisms, although both these are patent-
able in the USA. For example, contrast the mapping of the human genome in the USA and
Europe: in the USA the research is being conducted by a commercial laboratory which is
patenting the outcomes, and in Europe by a group of public laboratories which is publish-
ing the outcomes on the Internet.
• Clear and complete disclosure. Note that a patent provides only certain legal property
rights, and in the case of infringement the patent holder needs to take the appropriate legal
action. In some cases secrecy may be a preferable strategy. Conversely, national patent
databases represent a large and detailed reservoir of technological innovations which can
be interrogated for ideas.

Patents can also be used to identify and assess innovation, at the firm, sector or national level.
However, great care needs to be taken when making such assessments, because patents are
only a partial indicator of innovation.
The main advantages of patent data are that they reflect the corporate capacity to generate
innovation, are available at a detailed level of technology over long periods of time, are com-
prehensive in the sense that they cover small as well as large firms and are used by practitioners
themselves. However, patenting tends to occur early in the development process, and therefore
can be a poor measure of the output of development activities, telling us nothing about the
economic or commercial potential of the innovation. (See Figure 15.1 and Figure 15.2.)
Crude counts of the number of patents filed by a firm, sector or country reveal little, but
the quality of patents can be assessed by a count of how often a given patent is cited in later
patents. This provides a good indicator of its technical quality, albeit after the event, although
not necessarily commercial potential. Highly cited patents are generally of much greater
importance than patents which are never cited, or cited only a few times. The reason for this
is that a patent which contains an important new invention – or major advance – can set off
a stream of follow-on inventions, all of which may cite the original, important invention upon
which they are building.

$120000
$100000
$80000 Renewal
$60000 Translate
$40000 Official
$20000 Agents
$0
FIGURE 15.1 Typical lifetime cost of a single patent from the European Patent Office

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452 Part V Creating Value

Japan
Germany
US
Netherlands
France
UK
Korea
Malaysia
Singapore

0 5 000 10 000 15000 20000 25000 30000 35000 40000

US $
Years 1–5 Years 6–10 Years 11–15 Years 16–20

FIGURE 15.2 Lifetime patent costs in different national markets

The most useful indicators of innovation based on patents are (Table 15.1):

• Number of patents. Indicates the level of technology activity, but crude patent counts reflect
little more than the propensity to patent of a firm, sector or country.
• Cites per patent. Indicates the impact of a company’s patents.
• Current impact index (CII). This is a fundamental indicator of patent portfolio quality. It
is the number of times the company’s previous five years of patents, in a technology area,
were cited from the current year, divided by the average citations received.
• Technology strength (TS). Indicates the strength of the patent portfolio, and is the num-
ber of patents multiplied by the current impact index, i.e. patent portfolio size inflated or
deflated by patent quality.
• Technology cycle time (TCT). Indicates the speed of invention, and is the median age, in
years, of the patent references cited on the front page of the patent.
• Science linkage (SL). Indicates how leading edge the technology is, and is the average num-
ber of science papers referenced on the front page of the patent.
• Science strength (SS). Indicates how much the patent applies basic science, and is the num-
ber of patents multiplied by science linkage, i.e. patent portfolio size inflated or deflated by
the extent of science linkage.

Companies whose patents have above-average current impact indices (CII) and science
linkage (SL) indicators tend to have significantly higher market-to-book ratios and stock-
market returns. However, having a strong intellectual property portfolio does not, of course,
guarantee a company’s success. Many additional factors influence the ability of a company to
move from quality patents to innovation and financial and market performance. The decade
of troubles at IBM, for example, is certainly illustrative of this, since IBM has always had very
high quality and highly cited research in its laboratories.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 453

TABLE 15.1 Patent indicators for different sectors

Current impact Science linkage
index (expected Technology life (science
value 1.0) cycle (years) references/patents)
Oil and gas 0.84 11.9 0.8
Chemicals 0.79 9.0 2.7
Pharmaceuticals 0.79 8.1 7.3
Biotechnology 0.68 7.7 14.4
Medical equipment 2.38 8.3 1.1
Computers 1.88 5.8 1.0
Telecommunications 1.65 5.7 0.8
Semiconductors 1.35 6.0 1.3
Aerospace 0.68 13.2 0.3
Source: Narin, F. (2012) Assessing technological competencies, in: J. Tidd (ed.) From Knowledge
Management to Strategic Competence, 3rd edn, London: Imperial College Press, pp. 179–219.

There are major inter-sectoral differences in the relative importance of patenting in

achieving its prime objective, namely to act as a barrier to imitation. For example, patenting
is relatively unimportant in automobiles, but critical in pharmaceuticals. Moreover, patents
do not yet fully capture technological activities in software since copyright laws are often used
as the main means of protection against imitation, outside the USA.
Examples of the strategic value of patents include recent acquisitions of complete patent
portfolios, and legal battles for alleged infringements of intellectual property rights:

• Apple aggressively defends its patents against alleged infringements, including HTC and
Samsung in 2011, seeking to ban sales of competing mobile devices.
• Nokia won a patent dispute regarding touch-screen technology with Apple in 2011, and
now receives 2% of iPhone revenues, in excess of $30 billion annually.
• Oracle launched a case against Google, alleging Android infringes Java patents, claiming
$6.1 billion in damages.
• Nortel sold its entire patent portfolio in 2011 for $4.5 billion to a consortium of firms: Apple,
Microsoft, Sony, Ericsson and RIM (BlackBerry).
• In response, Google acquired Motorola’s mobile Case Study illustrating the tension
telephony patents in 2011 for $12.5 billion, because created by using intellectual property
of the vulnerability of its Android platform. to protect innovation rather than
preventing broader competition and
innovation, Apple versus Android, is
Using ‘international patents’, where a single patent available on the Innovation Portal at
filing can include up to 144 countries, in 2009 the www.innovation-portal.info
USA filed 487 000 patents, Euro 6 group 387 000

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454 Part V Creating Value

and Japan 218 000. Compare this to emerging economies such as China (48 000) and
India (32 000) and this suggests at current relative growth rates China will catch up in
20–30 years.7

INNOVATION IN ACTION 15.3

The Goldilocks Patent Strategy: Exploiting (Nearly)

New Technologies
A study of the relationships between the age of patents and financial performance appears to pro-
vide some additional support for a ‘fast-follower’ strategy, rather than a ‘first-mover’ approach.
It found that the median age of the patents of a firm is correlated with its stock-market value,
but not in a linear way. For firms utilizing very recent patents or older patents, the relationship
is negative, resulting in below-average performance over time, whereas firms using patents close
to the median age outperform the average over time.
The study examined 288 firms over 20 years, and 204 000 patents. When patents are filed,
they must list the other patents which they cite, by patent number and year of filing. These data
allow the median age of the patent to be calculated – the median difference between the pat-
ent application date and the dates of the prior patents cited. This provides an indication of the
age of the technological inputs used, but needs to be compared to the average within different
technology patents classes, as the technology lifecycle varies significantly between the 400 pat-
ent classes, from months to decades. This comparison reveals a variation in the median ages of
technologies used by different firms operating in the same technical fields, indicating different
technology strategies. Finally, these data are compared with the financial performance, in this
case share performance, of the firms over time. The results show that firms at the technological
frontier, defined as one or more standard deviations ahead of their industry, or for those using
mature technologies, that is 1.3 or more standard deviations behind the industry average, the
stock returns underperform. However, the stock-market returns outperform for firms exploiting
median-age technologies.
One interpretation of this observed relationship is that the firms with the very new patents
face the very high costs and uncertainty associated with emerging technology, including devel-
opment and commercialization. Conversely, the firms using mature patent portfolios face more
limited opportunity to exploit these commercially. However, the firms with patents closer to the
median age (in the relevant patent classes) have reduced much of the very high cost and uncer-
tainty associated with the newer patents, but retain significant scope for further development
and commercialization. Therefore, one lesson may be for firms to more carefully manage the age
profile of their patents, and to focus exploitation on a specific time window. This is not simply
about being a fast follower, which implies some degree of imitation, but another argument for
closer integration between technological and market strategies.

Source: Heeley, M. B. and R. Jacobson (2008) The recency of technological inputs and financial
performance, Strategic Management Journal, 29, 723–44.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 455

Copyright
Copyright is concerned with the expression of ideas, and not the ideas themselves. Therefore,
the copyright exists only if the idea is made concrete, for example in a book or recording.
There is no requirement for registration, and the test of originality is low compared to pat-
ent law, requiring only that ‘the author of the work must have used his own skill and effort
to create the work’. Like patents, copyright provides limited legal rights for certain types of
material for a specific term. For literary, dramatic, musical and artistic works copyright is
normally for 70 years after the death of the author, 50 in the USA, and for recordings, film,
broadcast and cable programmes 50 years from their creation. Typographical works have 25
years of copyright. The type of materials covered by copyright include:

• ‘original’ literary, dramatic, musical and artistic works, including software and in some
cases databases
• recordings, films, broadcasts and cable programmes
• typographical arrangement or layout of a published edition.

Design Rights
Design rights are similar to copyright protection, but mainly apply to three-dimensional
articles, covering any aspect of the ‘shape’ or ‘configuration’, internal or external, whole or
part, but specifically excluding integral and functional features, such as spare parts. Design
rights exist for 15 years and 10 years if commercially exploited. Design registration is a cross
between patent and copyright protection; it cheaper and easier than patent protection but
more limited in scope. It provides protection for up to 25 years, but covers only visual appear-
ance – shape, configuration, pattern and ornament. It is used for designs that have aesthetic
appeal, for example consumer electronics and toys (the knobs on top of Lego bricks are
functional, and would therefore not qualify for design registration but were also considered
to have ‘eye appeal’ and were therefore granted design rights).

INNOVATION IN ACTION 15.4

Using Patents Strategically

Each year, some 400 000 patents are filed around the world. However, only a small proportion
of these are ever exploited by the owners, and many are not renewed. Based on a review of the
research and case studies of 14 firms from different sectors, the study identified a range of dif-
ferent patent strategies:

• Offensive. Multiple patents in related fields to limit or prevent competition.

• Defensive. Specific patents for key technologies which are intended to be developed and com-
mercialized, to minimize imitation.
(continued)

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456 Part V Creating Value

• Financial. Primary role of patents are to optimize income through sale or licence.
• Bargaining. Patents designed to promote strategic alliances, adoption of standards or
cross-licensing.
• Reputation. To improve the image or position of a company, e.g. to attract partners, talent or
funding, or to build brands or enhance market position.

In practice, firms may combine different strategies, or more likely have no explicit strategy
for patenting (which is our experience outside the pharmaceutical and biotechnology sectors).
The European Patent Office (EPO) suggest only two alternatives: patenting as a cost centre, i.e.
to provide the necessary legal support, or as a profit centre, to generate income. However, this
ignores the more strategic positioning possibilities patents can provide if they are viewed as more
than just a legal or income issue.

Source: Gilardoni, E. (2007) Basic approaches to patent strategy, International Journal of

Innovation Management, 11(3), 417–440.

Licensing IPR
Once you have acquired some form of formal legal IPR, you can allow others to use it in
some way in return for some payment (a licence) or you can sell the IPR outright (or assign
it). Licensing IPR can have a number of benefits:

• reduce or eliminate production and distribution costs and risks

• reach a larger market
• exploit in other applications
• establish standards
• gain access to complementary technology
• block competing developments
• convert competitor into defender.

Considerations when drafting a licensing agreement include degree of exclusivity, terri-

tory and type of end use, period of licence and type and level of payments – royalty, lump sum
or cross-licence. Pricing a licence is as much an art as a science, and depends on a number
of factors such as the balance of power and negotiating skills. Common methods of pricing
licences are:

• Going market rate. Based on industry norms, e.g. 6% of sales in electronics and mechani-
cal engineering.
• 25% rule. Based on licensee’s gross profit earned through use of the technology.
• Return on investment. Based on licensor’s costs.
• Profit sharing. Based on relative investment and risk.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 457

First, estimate total lifecycle profit. Next, calculate relative investment and weight according
to share of risk. Finally, compare results to alternatives, for example return to licensee, imita-
tion or litigation.
There is no ‘best’ licensing strategy, as it depends on the strategy of the organization and
the nature of the technology and markets. For example, Celltech licensed its asthma treat-
ment to Merck for a single payment of $50 million, based on sales projections. This isolated
Celltech from the risk of clinical trials and commercialization, and provided a much-needed
cash injection. Toshiba, Sony and Matsushita license DVD technology for royalties of only
1.5% to encourage its adoption as the industry standard. Until the recent legal proceedings,
Microsoft applied a ‘per processor’ royalty to its OEM (original equipment manufacturer)
customers for Windows to discourage them from using competing operating systems.

INNOVATION IN ACTION 15.5

ARM Holdings
ARM Holdings designs and licenses high-performance, low-energy-consumption 16- and 32-bit
RISC (reduced instruction set computing) chips, which are used extensively in mobile devices
such as mobile phones, cameras, electronic organizers and smart cards. ARM was established in
1990 as a joint venture between Acorn Computers in the UK and Apple Computer. Acorn did
not pioneer the RISC architecture, but it was the first to market a commercial RISC processor in
the mid-1980s. Perhaps ironically, the first application of ARM technology was in the relatively
unsuccessful Apple Newton PDA (personal digital assistant). One of the most successful applica-
tions was in the Apple iPod. ARM designs but does not manufacture chips, and receives royalties
of between 5 cents and $2.50 for every chip produced under licence. Licensees include Apple,
Ericsson, Fujitsu, Hewlett-Packard, NEC, Nintendo, Sega, Sharp, Sony, Toshiba and 3Com. In
1999, it announced joint ventures with leading chip manufacturers such as Intel and Texas
Instruments to design and build chips for the next generation of hand-held devices. It is estimated
that ARM-designed processors were used in ten million devices in 1996, 50 million in 1998,
120 million devices sold in 1999 and a billion sold in 2004, and more than two billion in 2006,
and 20 billion by 2012, representing around 80% of all mobile devices. The company now
employs around 2000 people, headquartered in Cambridge, UK, with design centres in Taiwan,
India and the USA. It has sold 800 processor licences to more than 250 companies, and has cre-
ated 30 millionaires amongst its staff. In 2014, ARM achieved sales of more than £700 million,
reflecting the growing demand for mobile devices.

The main strategic motives for licensing are:8

• strategic freedom to operate

• access to knowledge
• entry to new markets

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458 Part V Creating Value

• establishing technological leadership

• enhancing reputation.

The benefits of licensing depend very much on the absorptive capacity of an organization and
its complementary assets.9 Absorptive capacity such as internal R&D and know-how allow
an organization to more easily identify, evaluate and adapt external knowledge, whereas com-
plementary assets allow an organization to create additional value by combining internal and
external knowledge, for example applying technology to a new market segment.10
However, the successful exploitation of IPR also incurs costs and risks, such as the:

• cost of search, registration and renewal

• need to register in various national markets
• full and public disclosure of your idea
• need to be able to enforce.

In most countries the basic registration fee for a patent is relatively modest, but in addition
applying for a patent includes the cost of professional agents, such as patent agents, translation for
foreign patents, official registration fees in all relevant countries and renewal fees. Pharmaceutical
patents are much more expensive, up to five times more, owing to the complexity and length of
the documentation. In addition to these costs, firms must consider the competitive risk of public
disclosure and the potential cost of legal action should the patent be infringed. Costs vary by coun-
try, because of the size and attractiveness of different national markets, and because of differences
in government policy. For example, in many Asian countries the policy is to encourage patenting
by domestic firms, so the process is cheaper. There are still significant regional differences in the
rates of patenting (Figure 15.3). Patents are only a partial indicator of innovation, and tend to lag
R&D, but at this rate of growth, China will catch up with the USA and Europe in 20–30 years.
500 000
450 000
400 000
350 000
300 000
250 000
200 000
150 000
100 000
50 000
0
USA EU6 Japan China India South
Korea

FIGURE 15.3 International patents by region

EU6 = Germany, France, the UK, the Netherlands, Sweden and Italy.
Source: Derived from Godinho, M. M. and V. Ferreira, V. (2012) Analyzing the evidence of an IPR take-off in China
and India, Research Policy, 41, 499–511.

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 Chapter 15 Exploiting Knowledge and Intellectual Property 459

Chapter Summary
• The generation, acquisition, sharing and exploitation of knowledge are central to suc-
cessful innovation, but there is a wide range of different types of knowledge, and each
plays a different role.
• One of the key challenges is to identify and exchange knowledge across different groups
and organizations, and a number of mechanisms can help, mostly social in nature, but
supported by technology.
• Tacit knowledge is critical but is difficult to capture, and draws upon individual expertise
and experience. Therefore, where possible, tacit knowledge needs to be made more explicit
and codified to allow it to be more readily shared and applied to different contexts.
• Codified knowledge can form the basis of legal IPR, and these can form a basis for the
commercialization of knowledge. However, care needs to be taken when using IPR, as
these can divert scarce management and financial resources and expose organizations
to imitation and illegal use of IPR.

Key Terms Defined

Boundary object or practice something of interest to two or more communities of practice.
Different communities of practice will have a stake in it, but from different perspectives.
A boundary object may be a shared document, for example a quality manual; an artefact,
for example a prototype; a technology, for example a database; or a practice, for example
a product design.
Community of practice a group of people related by a shared task, process or the need to
solve a problem, rather than by formal structural or functional relationships.
Copyright legal rights associated with the expression of ideas, and not the ideas themselves,
only available if the idea is made explicit or codified, for example in a book or recording,
and can demonstrate some effort or skill used. There is no requirement for registration,
and the test of originality is low compared to patent law.
Design rights only apply to the shape and configuration of objects. They do not require
registration and automatically protect a qualifying design for ten years after the design
was first sold or 15 years after it was created, whichever is earlier.
Explicit knowledge can be codified, that is expressed in numerical, textual or graphical
terms, and therefore is more easily communicated, for example the design of a product.
Intellectual property rights (IPR) include all formal legal means of identifying or registering
rights, including patents, copyright, design rights and trademarks.

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460 Part V Creating Value

Knowledge broker differs from a translator in that they participate in different communities
rather than simply mediate between them. They represent overlaps between communities,
and are typically people who are loosely linked to several communities and are able to
facilitate knowledge flows between them. An example could be a quality manager respon-
sible for the quality of a process that crosses several different functional groups.
Knowledge translator an individual able to express the interests of one community in terms
of another community’s perspective. Therefore, the translator must be sufficiently conver-
sant with both knowledge domains and trusted by both communities.
Patent a limited legal monopoly, usually for 20 years, provided an invention satisfies certain
requirements, including novelty, inventive step and application.
Tacit or implicit knowledge personal, experiential, context-specific and hard to articulate,
formalize and communicate.

Discussion Questions
1. Consider a smartphone. What types of intellectual property are necessary to create
value?
2. In what ways can tacit knowledge be made explicit and codified?
3. What mechanisms exist to help the sharing and transfer of knowledge within an
organization?
4. What are the advantages and disadvantages of using formal IPR to commercialize an
innovation?

Further Reading and Resources

Knowledge management and intellectual property are both very large and complex subjects.
For knowledge management, we would recommend the book Working Knowledge: How
Organizations Manage What They Know, by Thomas H. Davenport and Laurence Prusak
(2nd edn, Harvard Business School Press, 2000), which draws upon 30 case studies, and
for a more academic approach Knowledge at Work: Creative Collaboration in the Global
Economy by Robert Defillippi, Michael Arthur and Valerie Lindsay (John Wiley & Sons Ltd,
2006). We provide a good combination of theory, research and practice of knowledge man-
agement in From Knowledge Management to Strategic Competence, edited by Joe Tidd (3rd
edn, Imperial College Press, 2012), which examines the links between knowledge, innovation
and performance. Harry Scarbrough edits The Evolution of Business Knowledge (Oxford

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 Chapter 15 Exploiting Knowledge and Intellectual Property 461

University Press, 2008), which reports the findings of the UK national research programme
on the relationships between business and knowledge (including one of our research projects).
For a comprehensive technical legal overview of intellectual property, see David
Bainbridge’s Intellectual Property (9th edn, Pearson, 2012), or for a much more concise sum-
mary try John Palfrey’s Intellectual Property Strategy (MIT Press, 2011). For understanding
the strategic role and limitations of intellectual property, we like the theoretical approach
adopted by David Teece, for example in his book The Transfer and Licensing of Know-how
and Intellectual Property (World Scientific, 2006), or for a more applied treatment of the
topic see Licensing Best Practices: Strategic, Territorial and Technology Issues, edited by
Robert Goldscheider and Alan Gordon (John Wiley & Sons Ltd, 2006), which includes practi-
cal case studies of licensing from many different countries and sectors.

References
1. Marques, D.P., F.J.G. Simon and C.D. Caranana (2006) The effect of innovation
on intellectual capital: An empirical evaluation in the biotechnology and telecom-
munications industries, International Journal of Innovation Management, 10(1):
89–112.
2. Nonaka, I. and H. Takeuchi (1995) The Knowledge Creating Company, Oxford:
Oxford University Press.
3. Hall, R. (2012) What are strategic competencies?, in: J. Tidd (ed.), From Knowledge
Management to Strategic Competence, 3rd edn, London: Imperial College Press.
4. Brown, J.S. and P. Duguid (2001) Knowledge and organization: A social practice
perspective, Organization Science, 12(2): 198–213; Brown, J.S. and P. Duguid
(1991) Organizational learning and communities of practice: Towards a unified
view of working, learning and organization, Organizational Science, 2(1): 40–57;
Hildreth, P., C. Kimble and P. Wright (2000) Communities of practice in the distrib-
uted international environment, Journal of Knowledge Management, 4(1): 27–38.
5. Star, S.L. and J.R. Griesemer (1989) Institutional ecology, translations and bound-
ary objects, Social Studies of Science, 19: 387–420; Carlile, P.R. (2002) A prag-
matic view of knowledge and boundaries: Boundary objects in new product devel-
opment, Organization Science, 13(4): 442–55.
6. ‘Sales of Digital Movies Surge’, Wall Street Journal, 7th January 2014.
7. Godinho, M.M. and V. Ferreira (2012) Analyzing the evidence of an IPR take-off
in China and India, Research Policy, 41: 499–511.
8. Lichtenthaler, U. (2007) The drivers of technology licensing: An industry compari-
son, California Management Review, 49(4): 67–89.

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462 Part V Creating Value

9. Mazzola, E., M. Bruccoler and G. Perrone (2012) The effect on inbound,

outbound and coupled innovation on performance, International Journal of
Innovation Management, 16(6): doi 1240008; Walter, J. (2012) The influence
of firm and industry characteristics on returns from technology licensing deals:
Evidence from the US computer and pharmaceutical sectors, R&D Management,
42(5): 435–54.
10. Denicolai, S., M. Ramirez and J. Tidd (2014) Creating and capturing value
from external knowledge: The moderating role of knowledge-intensity, R&D
Management, 44(3): 248–64.

Deeper Dive explanations of innovation concepts and ideas are

available on the Innovation Portal at www.innovation-portal.info

Quizzes to test yourself further are available online via the Innovation
Portal at www.innovation-portal.info

Summary of online resources for Chapter 15 –

all material is available via the Innovation Portal at
www.innovation-portal.info

Cases Media Tools Activities Deeper Dives

• Joint Solutions • Xerox • Absorptive • Identifying • Linking knowl-

• Apple versus • Francisco capacity audit Innovation edge and
Android Pinheiro Capabilities innovation
management

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