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Competitive AdvantageProfessor Stephen LawrenceLeeds School of Business

University of Colorado

ESSAM 2010

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Agenda Sustainable Competitive Advantage

Robust business model Extraordinary organizational elements Proprietary elements

Protecting Ideas & Innovation Intellectual Property Protection

Patents, copyrights, trademarks, trade secrets Licensing

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Sustainable Competitive Advantage1. Is the business model robust?

Can we make money in good times and bad?

2. Are there superior organizational elements? Processes, capabilities, resource

3. Does the business have proprietary elements?

Patents, trade-secrets, special knowledge, …

1. ROBUST BUSINESS MODELThree elements of competitive advantage

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A Robust Economic Model What is our value proposition?

Why will customers buy from us?

What is our business model? How will we make money?

What is our cost structure? Where are our costs?

Dell Supply Chain

What is our VALUE PROPOSITION? Why will our target customers buy from us

and not the competition? What is our compelling argument for

purchase? Are our customers delighted to do business with

us? Can we create a blue ocean strategy?

Unique offering different from the competition?

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What is our BUSINESS MODEL? How will we make money?

Where? From whom? How often? How can we create a recurring revenue

stream? How robust is our business model?

Will it hold up in good times and bad?

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Where is our COST STRUCTURE? Is revenue adequate in relation to capital? What are our customer acquisition &

retention costs? Are contribution margins attractive? Are cash cycle characteristics favorable?

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2. SUPERIOR ORGANIZATIONThree elements of competitive advantage

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Superior Organizational Elements Marketing capabilities Process & operational capabilities Innovation capabilities Examples

3M and Nokia Proctor & Gamble Zara

Your business concepts?

3. PROPRIETARY ELEMENTSThree elements of competitive advantage

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1. Proprietary Elements Patents, copyrights, trade-secrets, … Advantages and problems Examples

Pharmaceuticals CAT scanners Jog stroller

Your business concepts?

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Three Critical Factors

1. The Appropriability Regime

2. Complementary Assets

3. Industry Structure & Maturity

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

1. Appropriability Regime If a particular innovation, or the knowledge

on which it rests, can be completely “appropriated” it means that no one else can use it or copy it.

Allows a large “share” of the pie to be retained by the “supply” side

Offers innovators enormous bargaining power in the value chain..

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

Sources of Appropriability1. Intellectual property protection

Patents Finite length The right to prohibit “producing”

Copyrights The right to prohibit “copying”

2. Secrecy Trade secrets & non compete clauses Complexity and “tacit” knowledge

3. Speed (First Mover Advantages)

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

2. Complementary Assets

Held Assets Brand name Distribution

channels Customer

relationships

Capabilities Manufacturing

capabilities Sales and service

expertise Customer

knowledge Organizational

culture and learning

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

Those assets necessary to translate an innovation into commercial returns

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Types of Complementary Assets

Coreknow-how

Distribution

ServicesComplementary technology

Competitive manufacturing

Suppliers

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

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3. Industry Structure & Maturity

Power ofSuppliers

Power ofCustomers

Ease ofSubstitution

Barriers toEntry

IndustryIndustryRivalry

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Changing Industry Boundaries Lower transport costs to expand geographic markets (e.g.

advent of bulk carriers and container vessels in shipping) Make it cheaper to customize products for national markets,

globalizing the industry Enhance product performance, bringing in new customers

and competitors Blur the boundaries between previously distinct activities

(e.g. computers, telecommunications, media) Narrow industry boundaries by allowing producers to tailor

their activities to smaller segments

Adapted from Iain Cockburn , Boston University, 2006; http://www.mbs.edu/home/jgans/tech/

Intellectual PropertyProfessor Stephen LawrenceLeeds School of Business

University of Colorado at Boulder

Uses of Intellectual Property Protection

Prevent competitors from appropriating your IP Control

Limit who uses IP, where, how often, terms … Value

Extract value from IP (e.g., licensing) Sharing

Provides rules for sharing IP

Value of IP

Jason Haislmaier, Holme Robert Owen LLC, January 23, 2007

Tools for IP Protection

Jason Haislmaier, Holme Robert Owen LLC, January 23, 2007

PatentsPatent: grants holder protection from others making, using, or selling similar idea

Patents Right to Exclude others for 20 years

Quid pro quo: right to exclude in exchange for disclosure Traditional justification: incentives for innovation

Standard for patentability (US) First to invent (in Europe, first to file) Three Criteria

Non-obviousness (to someone schooled in the art) Novelty (beyond what already is patented) Utility (a potentially useful description)

Specialised examiners have much discretion No explicit penalties for mistakes) “There are as many patent offices as there are patent examiners”

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

Patents in Force (2000)

http://en.wikipedia.org/wiki/Patents

Patent Infringement Many businesses, inventions, or innovations

are results of improvements on, or modifications of, existing products.

Copying and improving on a product: May be perfectly legal A good business strategy.

Products can be licensed from the patent holder.

Advisable to hire a patent attorney to ensure no possibility of patent infringement.

CopyrightA legal concept giving the creator of an original work exclusive rights to it for a limited time

Copyrights Right to Exclude others from copying for a long time

No Quid pro quo Rights granted without standardized disclosure mechanism

Traditional justification: Protecting artistic works Standard for copyrighting

A ban on copying precise expression No standard of utility or novelty itself

Except if expression itself is duplicated Certification and registration are possible, not required

Copyrights are registered with Library of Congress Usually do not require an attorney. Term of the copyright is the life of the author plus 70 years

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

Copyright Issues Issues surrounding access to

material on the Internet have led to major legal battles for the entertainment industry Example: Napster and DRM

Copyright cases often revolve around “subjective” criteria Example: Does software

duplicate the “look-and-feel” of a competitive application

TrademarksA distinctive sign or indicator of some kind which is used by an individual, business organization or other legal entity to identify uniquely the source of its products and/or services to consumers, and to distinguish its products or services from those of other entities.

TM

Trademarks Right to stop others from confusing your

potential customers Limitless duration as long as business is

ongoing More “property rights” than “intellectual

rights” Symbols

® for federally registered trademarks TM for any unregistered trademark SM for any unregistered service mark

Adapted from  Professor Joshua Gans, University of Melbourne, 2006; http://www.mbs.edu/home/jgans/tech/

Trademarks A distinguishing word, name,

or symbol used to identify a product Can last indefinitely Can be filed solely on intent to

use the trademark in interstate or foreign commerce

Can also be filed with intent to use in the future

Trade SecretsA formula, practice, process, design, instrument, pattern, or compilation of information used by a business to obtain an advantage over competitors or customers: "confidential information".

Trade Secrets Right to keep knowledge a secret Protection against others revealing or disclosing

information that could be damaging to business. Have a life as long as the idea or process remains a secret. Not covered by any federal law but is recognized under a

governing body of common laws in each state. Entrepreneur needs to take proper precautions

Easily created, easily lost Legal action can be taken only after the secret has been

revealed High standards for prosecuting a case

Trade Secret Law Trade secrets are not registered Once secrecy is gone, trade secret is gone Enforced by contract

Non-disclosure agreements (NDAs) Confidentiality agreements

Legal action can be taken only after the secret has been revealed High standards for prosecuting a case

LicensingContractual agreement giving rights to others to use intellectual property in return for a royalty or fee.

Licensing Provides means to “share” IP Types of licensing

Patent license agreement: specifies how the licensee would have access to the patent.

Trademark: involves a franchising agreement. Copyrights.

Licensing has become a revenue boom for many Fortune 500 companies.

Licensing Questions Will customers recognize licensed property? How well does the licensed property complement my

products or services? How much experience do I have with the licensed

property? What is the long-term outlook for the licensed property? What kind of protection does the licensing agreement

provide? What commitment do I have in terms of payment of

royalties, sales quotas, and so on? Are renewal options possible and under what terms?

Developing an IP Strategy

Jason Haislmaier, Holme Robert Owen LLC, January 23, 2007

Testing for Competitive AdvantageSWOT analysis

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SWOT Diagram

http://en.wikipedia.org/wiki/Swot_analysis

How can you create a sustainable competitive advantage for your concept?

Consider Robust business model Extraordinary organizational elements Proprietary elements

Can you create a blue ocean strategy?

Team Assignment

Tavazo Co. case What problems does Tavazo confront with its plan to grow

internationally? Which of these do you think are typical of small businesses

that wish to become international? What are the particular problems and opportunities of a

family business? What criteria should Tavazo use when developing its

international strategy and selecting international markets? How might Tavazo participate in the international value

chain in its industry? What is most appropriate for Tavazo - horizontal vs. vertical integration?

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Competitive AdvantageProfessor Stephen LawrenceLeeds School of Business

University of Colorado

ESSAM 2010