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VSI AllianceTM White Paper The Value and Management of Intellectual Assets Version 1.

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(IPPWP2 1.0)

Issued by the Intellectual Property Protection Development Working Group


Released June, 2002

NOT LEGAL ADVICE The discussions of the law in this document are not intended to be legal advice. This document is not to be used as a legal reference. Readers should refer to their own legal counsel for answers to questions concerning the law.

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VSI Alliance is a trademark of the VSI Alliance, Inc. All other trademarks are the property of their respective owners.

Please send comments and questions to: IP Protection Development Working Group (DWG), VSIA
Ian R. Mackintosh Chair 3054 Three Springs Road, San Jose, CA 95140 408-406-3152, ian@sonicsinc.com Raymond Burkley Vice-Chair Burkley Associates, P. O. Box 496, Cupertino, CA 95015 408-735-1540, rburkley@netgate.net VSI Alliance 115495 Los Gatos Blvd, Suite 3, Los Gatos, CA 95032 408-356-8800, info

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Notice
The document is provided by VSIA subject to a license agreement, which restricts how this document may be used.

THIS DOCUMENT MAY NOT BE COPIED, DUPLICATED, OR OTHERWISE REPRODUCED. THE DOCUMENT IS PROVIDED BY VSIA ON AN "AS-IS" BASIS, AND VSIA HAS NO OBLIGATION TO PROVIDE ANY LEGAL OR TECHNICAL ASSISTANCE IN RESPECT THERETO, TO IMPROVE, ENHANCE, MAINTAIN OR MODIFY THE DOCUMENT, OR TO CORRECT ANY ERRORS THEREIN. VSIA SHALL HAVE NO OBLIGATION FOR LOSS OF DATA OR FOR ANY OTHER DAMAGES, INCLUDING SPECIAL OR CONSEQUENTIAL DAMAGES, IN CONNECTION WITH THE USE OF THE DOCUMENT. VSIA MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY AS TO INFRINGEMENT, OR THE IMPLIED PURPOSE. THE READER SHOULD BE AWARE THAT IMPLEMENTATION OF THE DOCUMENT MAY REQUIRE USE OF SUBJECT MATTER COVERED BY PATENT OR OTHER INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. NO LICENSE, IMMUNITY, OR OTHER RIGHT IS GRANTED BY USE OF THIS DOCUMENT IN ANY SUCH THIRD-PARTY RIGHTS. NEITHER VSIA NOR ITS MEMBERS TAKE ANY POSITION WITH RESPECT TO THE EXISTENCE OR VALIDITY OF ANY SUCH RIGHTS.

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Intellectual Property Protection Development Working Group


Company Members:
ARM ECSI Fujitsu Mentor Graphics Philips Semiconductor Cadence Design Systems Ellipsis Digital Systems IBM Oki Telecom VCX

Individual Members:
Patrick Beauvillard Eduardo Charbon Ken Hodor Ian R. Mackintosh Brahmajai Potu Patrick H. Sullivan Raymond Burkley (Vice-Chairman) Suzanne P. Harrison Gerald N. Keeler Miodrag Potkonjak Gang QU Joseph F. Villella, Jr.

Current DWG Member Representatives


Simon Watt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ARM Richard Terrill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cadence Design Systems Mark Bales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cadence Design Systems Adam Morawiec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ECSI Minesh Shah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fujitsu Ltd. Takeshi Fuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fujitsu Ltd. Ken Goodnow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .IBM Ken Hodor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individual Member Ian R. Mackintosh (Chairman) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sonics Tadashi Hiruta. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oki Electric Industry Miodrag Potkonjak . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individual Member Patrick Beauvillard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individual Member Raymond Burkley (Vice-Chairman). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Individual Member Larry Rosenberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VSIA-TC Chair

Authors
Patrick H. Sullivan Suzanne P. Harrison Gerald N. Keeler Joseph F. Villella, Jr.

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Revision History
Version 1.0 Version 1.0 Version 1.0 Version 1.0 Version 1.0 Version 1.0 Version 1.0 May 2001 June 2001 January 2002 March 2002 June 2002 June 2002 June 2002 Original outline Preliminary draft DWG draft for TC approval Draft edited and formatted for member review Draft edited and formatted for Board approval Board approved version formatted for final release Formatted version for final release

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Table of Contents
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Preface. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Purpose and Structure of This Paper. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Industrial Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Intellectual Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Intellectual Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Protecting Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 What Kinds of Value Does IP Provide? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 What Is Value? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 What Are Some Major Dimensions of Value? . . . . . . . . . . . . . . . . . . . . . . . . . 18 Measuring Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Valuation Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Some Helpful Valuation Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Competitive Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Perspectives on Managing IP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 A. Glossary of Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 B. Recommended Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 C. Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 D. Competitive Intelligence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39 E. Methods and Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 List of Tables
Table 1: Characteristics of Legally Protected Intellectual Property in the United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Table 2: The Value of IC to Corporations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Table 3: Goals and Best Practices at Each Level of IP Management . . . . . . . . . . . . 27

List of Figures
Figure 1: The Components of Intellectual Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Figure 2: Measures of Intellectual Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Figure 3: The Hierarchy of IP Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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About the Authors


Patrick H. Sullivan is an expert at securing profits from intellectual assets. He is a founding partner of ICMG, a consulting company that specializes in helping companies extract value from intellectual capital. He has extensive knowledge and experience in intellectual property management and is a frequent speaker on the subject. His articles have appeared in several professional journals. Mr. Sullivan is a member of the editorial board of and a regular contributor to the Journal of Intellectual Capital. He is a frequent contributor to Les Nouvelles, the journal of the Licensing Executives Society, the author of Value-Driven Intellectual Capital and Profiting From Intellectual Capital, and the co-editor of Technology Licensing. (psullivan@icmgroup.com) Suzanne P. Harrison is a co-founder of ICMG, a consulting firm that specializes in helping companies extract value from their innovations. She conducts economic and financial analyses in support of intellectual property litigation, and advises clients on maximizing value from their patent portfolios. Ms. Harrison is a recipient of the Licensing Executives Society North America Fellowship. She holds an undergraduate degree in economics from the University of California at Davis and an MBA from the University of Chicago. Ms. Harrison has written numerous articles, and speaks frequently on how companies can extract value from their innovations. She is the co-author of Edison in the Boardroom (John Wiley & Sons, 2001). (sharrison@icmgroup.com) Gerald N. Keeler is the firm-wide leader of Andersens Intellectual Asset Management Consulting Practice. This practice focuses on the extraction of value from intellectual assets: intellectual property strategy, portfolio mining, and intellectual asset management system design and implementation. He has over 23 years experience as an expert in intellectual property disputes, commercial and government contract claims, lost profits analysis, and damages quantification. He earned his BA degree from the University of California, Berkeley, and his MBA from San Jose State University. (gerald.n.keeler@us.arthurandersen.com) Joseph F. Villella, Jr. is a partner at the firm of Gray Cary Ware & Freidenrich LLP. His practice focuses on all aspects of intellectual property licensing and technology transfer, as well as intellectual property asset management. His clients range from small, pre-IPO start-ups to large, multinational public companies. Before joining Gray Cary Ware & Freidenrich, Mr. Villella spent nearly twenty years in a variety of legal and management positions in the intellectual property and licensing organization of IBM Corporation. At IBM, he was responsible for both the legal and business aspects of licensing for the IBM computer storage divisions. He has spoken at numerous conferences worldwide on the subject of intellectual property protection and exploitation. (jvillella@gcwf.com)

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Preface
As a direct result of a member survey in CY 2001, the VSIA Intellectual Property Protection Development Working Group (IPP DWG) began to focus upon the specific and increasing interest of our members in the business and legal aspects of IP protection. With this in mind, we elected to find knowledgeable sources to draft an informative and directly useful white paper that presented issues, solutions, and tools that VSIA members could consider and apply. It was quickly apparent that we could approach IP from a legal perspective, a business perspective, or both. We decided to focus this white paper largely on the business perspective, allowing us to learn from subsequent member reactions whether to follow it later with more indepth coverage on the legal viewpoint. Initially, we contacted two companies, ICMG (an internationally known boutique consulting firm specializing in the extraction of value from intangible assets), and Arthur Andersen (which has a specific practice in the management of intellectual assets). The combination of principals from these two firms, ably joined by a partner of the law firm Gray Cary Ware & Freidenrich LLP, rounded out the set of experts who willingly gave of their time and knowledge to produce this paper. This resulting white paper focuses upon the uses of intellectual property as business assets to improve the revenue and profitably of firms within VSIA. The methods and practices contained in the text have applications for VSIA members that address not only the needs of Virtual Component (VC) providers and users, but also discuss principals, methods, and practices of broad applicability to even large IDMs and traditional semiconductor manufacturers, throughout their businesses. We additionally believe this material will readily fill a role as a comprehensive reference document for readers. Indeed, there are many tactical and strategic uses for the contents of this paper, and the DWG is pleased to present it to the membership. We specifically would like to thank the four authors for their contributions. Parenthetically, by the time this project came to a close, each of them had become a member of the VSIA. We are most pleased to include them in our ranks and proud to present to the membership the results of their efforts as part of the DWG. Ian R. Mackintosh Chairman, VSIA IPP DWG

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Purpose and Structure of This Paper


The mission of the Virtual Socket Interface Alliance (VSIA - www.vsi.org) is to dramatically accelerate system chip development by specifying open standards that facilitate the mix and match of hardware and software virtual components from multiple sources. The Intellectual Property Protection Design Working Group (IPP DWG) is one of nine working groups within the VSIA. This working group is focused on the unification of information, actions, and activities that are related to the protection of virtual components (VCs), including: Protection against unauthorized use Protection of the underlying design date Detection of IP utilization Tracking of IP use This paper is one in a series designed to provide the VSIA membership with a greater understanding and appreciation of the need for protection and control over the licensing of the technology represented by their virtual components. This paper outlines methods used to establish a value for a firms intellectual property (IP). It describes how firms may manage their IP in order to maximize its value to the firm, whether by maximizing revenue or return on investment, or by maximizing the price that customers pay to license and use the IP. It is intended for a readership with a strategic as well as tactical interest in IP. On the strategic level, the information is intended for CEOs, members of the board, and executive managers. On a tactical level, it is expected that senior engineers and technical people will find the commercial and profit perspectives a valuable addition to their technical view of business. Tools that can assist IP developers in determining which methods apply to their circumstances are summarized in Appendix E. This rest of this paper is organized under four major headings: Background: a brief overview of such basics as industrial knowledge, intellectual capital, intellectual property, the forms of legal protection, and how innovations can be protected using means other than legal protection. Valuing Intellectual Assets: a primer on valuing intangible assets, including perspectives on why firms value their IP, how they use the information, when valuation is important, and how to decide what kind of valuation is necessary. Competitive Intelligence: a brief overview of competitive intelligence and the outcomes firms may expect of competitive intelligence. Perspectives on Managing IP: a brief review of the phases companies progress through in the management of their IP, including a discussion and examples of the best practices of sophisticated companies.

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Background
In recent years, the percentage of company value attributable to intangible assets (intellectual capital) has increased dramatically. In a study of thousands of non-financial companies over a 20-year period, Dr. Margaret Blair of the Brookings Institution reported a significant shift in the makeup of company assets. According to the study, in 1978, 83 percent of the firms value was associated with their tangible assets, and 17 percent with their intangible assets. By 1998, only 31 percent of the value of the firms studied was attributable to their tangible assets, while a stunning 69 percent was associated with the value of their intangibles. The growth in the importance of intellectual assets is due in no small part to the boom in U.S. patents during the last full decade (1990-1999). During that period, the U.S. Patent and Trademark Office (USPTO) issued more than 1 million patents-or about 100,000 each year. This rate of patent issuance was nearly triple the historical rate of 36,000 per year on average since 1836. The patent boom extends beyond the United States, a trend revealed in A Technology Assessment and Forecast Report (USPTO, March 1999). In 1998, the most recent year for which international data are available, organizations around the world filed a total of 147,520 patents, in countries that disclose patent filings.1 A recent study by the Council on Competitiveness, a Washington, D.C. think tank, showed that in 1995 the U.S. ranked number one in its index of real and projected innovations per million residents. The Council now foresees the U.S. as number five on this index by the year 2005 and predicts that Japan will take the primary spot, with the U.S. falling behind several smaller nations, including Finland. Intangible assets are an important element of corporate value; however, since they are intangibles, they are not recorded on the balance sheet in the normal course of a companys business operations. The field of intellectual asset management has been evolving over the past decade to provide methods, tools, and processes for managers who want to better control and take advantage of these hidden assets. In this paper we consider intellectual property to be business assets (in addition to their status as legal documents). Not all companies understand how IP may be used as a set of business assets. For companies associated with the VSIA, virtual components are critical to both the design and manufacturing elements of their businesses. The broad scope of this paper deals not only with the value of virtual component IP as a business asset but also with all IP within the firm, and in particular with its use in pursuit of both short- and long-term profitability. The amount of intellectual property within the electronics industry as a whole is expected to increase significantly within the next few years. As the electronics industry shifts to a design-for-reuse methodology, firms' patents and other forms of IP must be designed to protect the innovations of each firm over the long term. With the anticipated rise in the number and kinds of intellectual property that companies develop, it is prudent to consider how this investment in patented technology can be turned into profits that support the business strategies and goals. Known methods and processes for establishing the value of intellectual property are introduced and discussed. In addition, definitions and descriptions are provided for activities, methods, and strategies that can be used to create profits and strategic planning from the company IP portfolio.
Of these patents, organizations in the U.S. filed 80,294, organizations in Japan filed 30,841, and organizations in Germany, France, and the U.K. combined filed 16,233. Copyright 2002 by the VSI Alliance, Inc. All Rights Reserved. VSIA CONFIDENTIAL LICENSED DOCUMENT 7
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Given the number of opportunities for exploiting the business asset aspects of intellectual property, it is up to each VSIA member company to determine the degree to which IP management may be of benefit. Not all opportunities, methods, or best practices described in this paper will apply equally to all companies. An understanding of the range of ways in which each form of IP can be used to generate revenues, profits, or strategic position will help managers establish both the need for, and the level of, protection that is to be afforded to the IP. This paper draws on two recently published bestsellers on the topic of managing intellectual property for profits. (For more information, see Appendix B, Recommended Reading.) Edison in the Boardroom: How Leading Companies Realize Value from Their Intellectual Assets, J. Davis and S. Harrison (New York: John Wiley & Sons, 2001) Value-Driven Intellectual Capital: How to Convert Intangible Corporate Assets into Market Value, P. H. Sullivan (New York: John Wiley & Sons, 2000) To put intellectual property and all of its ramifications into perspective, readers should have a common understanding of basic concepts, terms, definitions and relationships. The Background section of this paper provides information that underlies the intellectual property, business, and strategy aspects of what is to follow.

Industrial Knowledge
Any discussion of intellectual property should start with a basic understanding of what it is designed to protect: industrial knowledge. While there are many definitions of what constitutes industrial knowledge, virtually everyone agrees that it includes knowledge, lore, ideas, and innovations. It is also agreed that industrial knowledge may be divided into two kinds: tacit and codified. Tacit knowledge resides within an individuals mind; it often manifests itself as a skill, an ability, or know-how. Examples of tacit knowledge and abilities are artistic skills, such as design and painting. Tacit knowledge is shared by demonstration or example. For this reason, it is difficult to leverage tacit knowledge because its transmission requires a one-on-one sharing. Although in modern times these skills have become codified, in older days tacit knowledge was passed from teacher to student, from master to apprentice. Tacit knowledge, because it is attached to its owners, has at least two defining characteristics. First, it is not interchangeable; tacit knowledge is unique, so no two people know exactly the same things. Second, the shareholders of the firm cannot own it; indeed, it leaves the company at the end of each workday. Codified knowledge is knowledge that has been committed to some form of communication medium, such as paper or computer memory. It might be a handwritten document, a computer program, a circuit design, or a cartoon. Codified knowledge can be legally protected. Codified knowledge, unlike tacit knowledge, is interchangeable; it belongs to the company and not to its creators. For this reason, it is to the advantage of the knowledge firm to transform the innovations produced by its employees and other stakeholders into codified form, to which the firm can assert rights of ownership. The distinction between tacit and codified knowledge is of particular importance to owners of what we call knowledge companies. Knowledge companies use their knowledge (tacit and codified) as a major source of competitive advantage.

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Intellectual Capital
Intellectual capital (IC) differs from industrial knowledge in at least one important way. Intellectual capital is defined as knowledge that can be converted into profit. All or even most of the knowledge contained within a firm is not considered intellectual capital, only those portions that can be converted into profits (or value). Knowledge companies, defined as companies who make their profits by converting knowledge into revenue, use their knowledge (intellectual capital) as a major source of competitive advantage. They use their specific product or market knowledge to differentiate themselves from their competitors. Intellectual capital is composed of two major elements: human capital and intellectual assets, as shown in Figure 1 below:

Intellectual Capital
Human Capital (tacit knowledge) Intellectual Assets (codified knowledge) IP

Figure 1: The Components of Intellectual Capital

Human capital is the tacit (not codified) portion of intellectual capital. It includes such elements as knowledge, know-how, and relationships. Intellectual assets include the firms codified knowledge, know-how, and relationships. A subset of the firms intellectual assets is legally protected and goes by the legal name intellectual property.2 Intellectual property is one of several forms of intangible assets. There are other forms of intellectual capital from which profits may be extracted. Finally, it should be noted that intellectual property is a subset of the codified assets of the firm. These, in turn, are a subset of the firms entire stock of intellectual capital. Intellectual property, then, is a small portion of the firms total intellectual capital.

Intellectual Property
There are five major forms of intellectual property: patents, trademarks, copyrights, trade secrets, and semiconductor mask works.
For a complete discussion of the different forms of intellectual capital, see P.H. Sullivan, Value-Driven Intellectual Capital, pp. 225235. Copyright 2002 by the VSI Alliance, Inc. All Rights Reserved. VSIA CONFIDENTIAL LICENSED DOCUMENT 9
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Patents. A patent is typically defined as a government grant extended to the owner of an invention (either the individual inventor or an organizational entity) that excludes others from making, using, or selling the invention. The owner of a patent has the right to license others to make, use, or sell the invention. Patents are protected under the U.S. Constitution and the Patent Cooperation Treaty of 1970, in Title 35 of the U.S. Code. Patent protection can be extended to inventions that are novel (new and original), useful, and not obvious. Some corporations have patentable inventions but choose to protect some of them as trade secrets rather than filing for a patent. Patents may be issued for four general types of inventions or discoveries: compositions of matter, machines, man-made products (including those that are bio-engineered), and processing methods (including business processes). To apply for a patent, the inventor must send a detailed description of the invention (among other documentation) to the U.S. Patent and Trademark Office, where patent examiners review and determine its patentability. The average time between patent application and issuance is about 2.3 years. Under international patent law, patents are issued for a nonrenewable period of 20 years, which is measured from the date of application. Inventors who are granted patents in the United States must pay fees to maintain the patent in good standing. Federal courts have exclusive jurisdiction over disputes involving patents. Trademarks. A trademark is a name associated with a company, product, or concept; it can also be a symbol, picture, sound, or smell associated with a name, product, or concept. An example is Intel Inside. A mark may already be in use, or a company may register a trademark to be used on a product. A trademark may be part of the trade name a company uses to operate its business. Trademarks are protected by federal statutes under the Lanham Act (Section 15 of the U.S. Code) and under a states statutory or common law. Trademark status may be granted to unique names, symbols, and pictures, as well as to unique building designs, color combinations, packaging, presentation and product styles (called trade dress), and even Internet domain names. Trademark status may also be granted for identification that does not appear to be distinct or unique but that over time has developed a secondary meaning that identifies it with the product or seller. The owner of a trademark has the exclusive right to use it on the product it was intended to identify, and often on related products. Service marks receive the same legal protection as trademarks but are meant to distinguish services rather than products. A trademark is indefinite in duration, so long as the mark continues to be used on or in connection with the goods or services for which it is registered, subject to certain defenses. Trademarks are protected under state law even without federal registration, but registration provides an additional measure of protection by clearly establishing the date of first use, for example. Copyrights. A copyright is the right of ownership extended to an individual who has written or otherwise created a tangible or intangible work, or to an organization that has paid that individual to do the work while retaining possession of the work. Copyright protection grew out of protection afforded by the U.S. Constitution to writings Subsequent law (U.S. Copyright Act, U.S. Code in Title 17, Section 106) has extended this right to include works in a variety of fields including architectural design, computer software, graphic arts, motion pictures, sound recordings (for example, on CDs and tapes), and videos. Any type of work may be copyrighted as long as it is original and in a tangible medium of expression, such as on a CD or disk.

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A copyright gives the owner exclusive rights to the work, including right of display, distribution, licensing, performance, and reproduction. A copyright may also grant to the owner the exclusive right to produce (or license the production of) derivatives of the work. A copyright lasts for the life of the owner, plus 50 years. Fair use of a copyrighted work is allowed by others; the fairness of use is judged in relation to a number of factors, including the nature of the copyrighted work, purpose of the use, size and substantiality of the portion of copyrighted work used in relation to that work as a whole, and the potential market for or value of the copyrighted work. Copyrights are protected under both state and federal law, with federal law superseding. A number of organizations promote the protection of intellectual property, including the World Intellectual Property Organization, which covers copyrights, patents, and trademarks. Trade Secrets. Trade secret information is defined broadly as information that (1) is not generally known to others; (2) confers an economic advantage on a company; and (3) is the subject of reasonable efforts to maintain secrecy. Trade secret law encompasses a broad selection of information, in that it protects the unique and secret aspects of ideas. Trade secret protection is lost, however, once its subject matter becomes generally known. Thus, even one leak of key confidential information by a company can jeopardize its proprietary rights to such information. Trade secrets are determined by a body of common law originally developed by state courts. Similar to other judge-made rules, trade secret law represents a balancing of competing interests. Companies want protection for their research and against breaches of trust; employees want freedom to take new jobs where they can use their learned skills; and customers and the public want innovative products and vigorous competition in the marketplace. Each of these interests should be accommodated by a court in resolving a trade secret dispute. Trade secrets may be contained on or in paper records, computer printouts, drawings, photographs, magnetic tapes and disks, computer programs, or any other media, regardless of physical form. Examples of information that can be classified as a trade secret include: source code, file structure and algorithms of a companys software, strategic information relating to products and product specifications, customer lists, and product plans. In the protection of trade secrets, it is important that the party disclosing or receiving the information be put on notice that the information is confidential. Thus, marking information as confidential is a vital step in protecting it. However, random use of a confidentiality notice dilutes a companys claim that it has taken reasonable steps to keep trade secret information secret. Therefore, the Confidential marking should only be applied to information or documents that a company truly deems to be a trade secret and wishes to keep confidential. Some companies find it helpful to create a tiered classification system for marking confidential information, with categories ranging from need to know to internal use only to nonconfidential. Another important means of protecting the trade secret status of information is to ensure that all persons who come into contact with a companys trade secrets (employees, vendors, consultants, independent contractors, and so on) execute a confidentiality agreement appropriate for the circumstances. In addition to those mentioned above, there are other forms of legally protected intellectual property, including semiconductor mask works. Table 1, below, highlights the key characteristics of each form of intellectual property.

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Table 1: Characteristics of Legally Protected Intellectual Property in the United States Consideration
Protected Property Scope of Protection

Patent
Invention Exclude others from making, using, selling Patent Application

Trademark
Goodwill Protect against misrepresentation of source

Copyright
Expression of idea Exclusive right to reproduce, distribute, display, perform Creation of work

Trade Secret
Secret Information Right to make, use, sell, secrete, and protect from use, disclosure Conception or receipt

Mask Works
Semiconductors Exclusive right to produce chip

Trade Dress
Appearance Presentation of product

Effective Date

Use or filing date

Registration, first commercial exploitation Original

General use

Requirements

Novel, non-obvious, useful Invent around, improvements

Distinctive, non-descriptive

Original

Commercially valuable Independent creation, reverse engineering

Distinctive, non-useful Independent creation

Vulnerability

Independent creation

Independent creation, reverse engineering 10 years

Duration

20 years from Perpetual if application used correctly and policed Moderate Moderate High Low Moderate Moderate

Disclosure or Author's life plus 50 years; or independently developed 75 years Low Nil Moderate Low Moderate High

Perpetual if used correctly and policed Low Moderate Moderate

Cost Maintenance Cost Enforcement Cost

Low Nil Moderate

Intellectual Assets
Intellectual assets (IA) are the codified knowledge of the firm. Intellectual assets differ from intellectual property in one important respect. Whereas intellectual assets comprise all of the firms codified knowledge, intellectual property is only that portion of the firms codified knowledge that has been legally protected. While there are many types of intellectual assets, those usually of interest to the firm are often the following: Technical Intellectual Assets. These include bits of know-how that are intended to be commercialized themselves or will support a piece of commercialized technology in some way. In technology companies, the technical intellectual assets are of two kinds: design and operations. Design Intellectual Assets. Innovations in this category are those that use technological processes related to the firms major activity. Examples are new production technologies and improved product features.

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Operations Intellectual Assets. Operations deal with day-to-day activity of the firm as it conducts business. Operational intellectual assets for a manufacturing company might include manufacturing methods, processes, and procedures. For other companies these intellectual assets may be the documents, drawings, or otherwise codified bits of knowledge that define and guide the activities of employees. Documents that record operational activity are often of great commercial potential. For example, considerable business leverage may come from coordinating the information contained in a range of otherwise not correlated documents: licensing agreements, confidential disclosure agreements, joint venture agreements, outsourcing contracts and customer lists.

Protecting Intellectual Property


Companies that develop intellectual property such as software, design documentation, and specifications often ask what they can or should do to protect their intellectual property rights. The answer, of course, is to employ the full range of IP protection available to them. Trade Secret Protection. The first step in protecting intellectual assets is to treat valuable information as a trade secret. To do this, the developer must take reasonable precautions to prevent disclosure of the information. Disclosure may result in the loss of trade secret status. For example, an employer should require confidentiality agreements with employees, as well as with any subcontractors who come into contact with the information. The company should also distribute and enforce written confidentiality policies applicable to employees. These policies should include physical security steps, such as locking up the information, putting confidentiality notices on the information, and restricting access to the information to those who need to have it. The extent of the property right that one can maintain through the trade secret aspects of intellectual property is limited by the extent to which the owner of the trade secret protects his interest from disclosure to others. One can easily lose trade secret protection by failing to take reasonable precautions to protect it. The extent of precautions taken becomes even more important as the number of people to whom the trade secret is exposed increases. When providing trade secrets to vendors or customers, it is essential that a written confidentiality agreement be put in place that adequately protects the trade secret nature of those materials. Copyright Protection. The next step in fully protecting intellectual assets is to use the measures currently available under the copyright laws. When the United States adopted the copyright provisions of the Berne Convention, the requirement to place a copyright notice on ones work was eliminated. Prior to that time, a copyright notice was necessary to fully reap the benefits of copyright protection. Even though this requirement has been eliminated, a copyright notice may eliminate the so-called innocent-infringer defense. Where should the copyright notice be placed? In the case of software, the notice should be placed in the actual lines of code, both source and object. If the program contains individual modules that have independent value, it would be wise to put a notice in each module. A notice should also be placed on any physical medium on which the program is provided or distributed, on any accompanying documentation associated with the application program, and on the display screen seen by the end user of the program. The notice on the display screen should appear on the first or second screen and should be visible long enough to provide notice.

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Although registration of a work is not necessary to protect it under the copyright laws of the United States, in most cases it is a necessary condition for bringing an action for infringement. It is also a necessary condition for obtaining certain remedies such as statutory damages and attorney fees. It is most beneficial to register a work within three months of its first publication so as to obtain the full benefit of the remedies made for any infringement of copyright commenced after first publication and before date of registration. Patent Protection. While patents have historically been used extensively to protect hardware inventions, patent protection for software is often overlooked. Perhaps this is because protection was not available for software before 1980. Patent protection offers several opportunities for the holders of patent rights. First, the company that wants to ensure freedom of action in the future will need to build a patent portfolio. Companies holding a portfolio of patents that includes software inventions can cross-license these to others with needs that complement their own. Patents thus provide a bargaining chip. Second, patents can provide a revenue stream in the form of royalties that far transcends, in both time and scope, the royalties that can be earned from the licensing of the software itself. Most products have a life span that is far shorter than the term of a patent. As a result, if in producing a product a company acquires one or more U.S. patents, those patents may generate royalty income long after the product has any remaining market value. Further, most inventions have a utility that goes far beyond a single product, and if a company is lucky enough to acquire a patent on a very basic invention, then a whole spectrum of the industry could owe patent royalties on that patent. Although patents offer a range of benefits to the holders of the patent rights, they are expensive. The administrative and attorney fees for obtaining a patent in the U.S. can easily exceed $15,000. Major U.S. corporations have found that the total cost of obtaining and servicing a patent over its lifetime may approach $250,000. In contrast, a trade secret costs nothing to protect over the amount of money that a company normally spends to protect its valuable information. A company must first decide whether it has innovations that are appropriate for patent protection. Probably the single most important criterion for selection is the license value of an issued patent. Thus, promising innovations for patent filing are those for which it would be easy to detect infringement and which potential licensees would find difficult to modify in order to avoid infringing on the rights of the patent holder. The spectrum of intellectual property protection available for intellectual property assets is broad. Companies should be aware, however, of the tension inherent between trade secret protection and patent protection. Maintaining information as a trade secret is dependent on secrecy, and trade secret status is lost upon public disclosure. Applying for patent protection requires full public disclosure of information to support the patent claims. Thus, a company seeking to maximize protection of its innovations should thoroughly consider the benefits and risks of each form of IP protection.

What Kinds of Value Does IP Provide?


Once a company has decided what kind of IP protection to pursue, it should consider the value of its protected technology. There are two forms of value that VSIA companies should concern themselves with: going-concern value, and value in a merger or acquisition.

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Going-concern Value. This is the value the company has by virtue of its continued existence in business. Going-concern value for a knowledge company is largely composed of the value of the knowledge of the workforce (both tacit and codified) that carries out the operational functions of the business, thereby making it a going concern. Patents and other forms of IP are particularly valuable to a going concern because they represent tangible intellectual assets capable of producing cash flow. Going-concern value is usually calculated as the net present value of the future cash flows of the corporation. That is to say, considering all of the cash the corporation is expected to generate (income net of costs), immediately as well as in the future, going-concern value is the net present value of that cash. Merger and Acquisition (M&A) Value. Valuing a company for acquisition by another company is very different from valuing a company as a going concern. In the M&A case, the value of a company depends more on what it is able to add to the acquiring firms value than on what it can generate on its own. The M&A value of a firm may be thought of in two parts. The first is the increased cash flow that newco will be capable of generating once it has the intangible assets of the acquired company. The second is the value of the acquired firms intangible assets and of the acquiring firms tangible complementary business assets. Types of Value Sought by Companies. At a 1999 meeting of the ICMG, the participants listed the different types of value provided by intellectual property to their companies. Those values included: Protection for innovations Litigation avoidance Design freedom Product and services revenue Reputation and image Access to the technology of others Reduced costs Blocked competition Barriers to entry by potential competitors Customer loyalty The most obvious value of intellectual property to the firm is in the form of cash flow. In addition, the firms intellectual property may determine how the firm will conduct its business in a cost-effective manner. Because the firms intellectual property creates its income and manages its cost streams, IP is a primary generator of the firms profits. The second kind of value is less direct. Some firms use their intellectual property to position themselves strategically. Their IP is evidence of their intellectual leadership and can be a basis for their customer loyalty. Other firms use the size and power of their patent portfolios to intimidate competing or copycat firms that might otherwise file lawsuits claiming rights to an innovation. Still other firms use their portfolio of intellectual capital assets as a bargaining chip in business negotiations. Direct-value activities are those that provide an unambiguous link between intellectual capital and valueeither revenue or profit. Any intellectual property activity that results in revenue or cost reduction is considered a direct-value activity. Thus, a direct-value activity (1) can be explicitly linked to the vision or strategy, (2) deals with revenue or cost, and (3) is easily measured.

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Indirect-value activities, in contrast, cannot be directly linked to vision, strategy, revenue, or cost, and they are not easily measured. The links between the activities and the value they produce, while often intuitively obvious and sometimes compelling, are not associated with a transaction (such as a sale). A transaction is an event that signifies a transition from one state to another, which typically includes the payment of a market price. Indirect-value activities are not associated with transactions, and are therefore less clearly linked and measured. Some kinds of IP-related value have defensive dimensions, while others have offensive dimensions. Defensive activity prepares the firm for invasive action by individuals or groups outside of the firm. Its purpose is preparation, and its focus is on developing assets or resources that will help repel or neutralize intrusive activities that threaten some aspects of the firms vision or strategy. Defensive activity is generally viewed as passive in nature. Offensive activity targets individuals or groups outside the firm. The purpose of offensive activity is to advance the organizations ability to achieve its strategic vision or to implement its strategy. The activity frequently concerns revenue and profit generation, and its targets are customers and groups outside the firm. Some intellectual property management activities are neither entirely defensive nor entirely offensive but a mixture of both. (See Table 2.)
Table 2: The Value of IC to Corporations Type of Activity
Offensive Defensive Offensive and defensive Cost-reduction activities (manufacturing, distribution, sales, and marketing)

Direct Value
Revenue of sales; access to the technology of others

Indirect Value
Enforcement of legal rights Obtaining legal protection; litigation avoidance; design freedom Reputation and image; blocking competition; barriers to entry; customer loyalty; being involved.

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Valuing Intellectual Assets


A cynic is a man who knows the price of everything, and the value of nothing.
3

What Is Value?
Value is a concept with many interpretations. Which of these interpretations applies to an organization or business depends, of course, on the beholder. This paper discusses value from the perspective of an economist. To people with this view, value is related to usefulness. Nothing can have value without being an object of utility. If it be useless, the labor contained in it is useless, cannot be reckoned as labor, and cannot therefore create value. 4 To the economist, value is a measure of the utility that ownership of an item brings to its owner. Utility is often viewed as a stream of benefits, stretching into the future, that an owner foresees as the rent he or she will receive by virtue of owning the item. Utility may be measured in a number of ways. To the visual artist, utility may be the pleasure his or her work gives to the viewer. To the designer, utility may be the functionality of a design. To the accountant, utility may be measured in the accuracy of historical expenditure data. To the economist, however, utility is most often measured in dollars. Economists use discounting and summing calculations to determine the net present value of a future stream of benefits. This is most often the economists measure of value. Value is different from both cost and price. Value is a measure of the usefulness of something, whereas cost is a measure of the amount of resources required to produce it, and price is what an items owner believes others will pay for it. Value is relative. The value of a piece of rental property for example, may be assessed differently by a seller, a potential buyer, an insurance company, a tax assessor, the executor of an estate containing the property, a government entity considering taking possession by eminent domain, or a potential mortgage lender. The value assigned to an item depends primarily on the needs of the person or organization making the valuation. In the business context, value measurements are often used as inputs to decision-making. The value of an intangible or a piece of intellectual capital is often the basis for deciding whether to invest further in developing the intangible, to continue holding it, or to sell it. This kind of value measurement may be called economic. From an economic standpoint, the value associated with knowledge firms lies largely in the knowledge they create for future commercialization, and the capabilities they create for extracting current profits from existing knowledge.

3. 4.

Lady Windemeres Fan (1982), Act III, Scene 2, found in Bartletts Familiar Quotations, 15th Edition. Karl Marx, Capital (186718830, pt. II, ch. 3, Abridged edition prepared by Julian Borcharadt, translated by Stephen L. Trask. 17

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What Are Some Major Dimensions of Value?


Two of the major dimensions of value are time and frequency. Time as a Dimension of Value. There are current and future dimensions associated with intellectual assets. This time dimension is most apparent in companies that produce products in which the intellectual capital is involved in an R&D activity. For these companies, intellectual property may be thought of as the source of current value for the firm. Much of what is in the firms patent portfolio is the basis for protecting current products in the marketplace, joint ventures, and strategic alliances. Intellectual property represents current value where the value extraction activities have tactical considerations. Intellectual assets, the next tier of intellectual capital, are the assets with less current definition and often more promise for the future. Extracting value from these assets usually requires thinking into the future about positioning and strategies for value extraction, rather than near-term tactics. For this reason, intellectual assets as extractors of value are a bridge from the present to the future (and from the tactical to the strategic). The intellectual capital tier operates almost entirely at the strategic level of decision-making and future value extraction, but uses the same fundamental decision processes as those found in the most fundamental and well-constructed systems for extracting value from intellectual property. For service companies, there is a time dimension associated with value, although the tiering of intellectual capital that is so obvious in product companies is much less significant. Service innovations conceived and implemented in the past have already influenced the firms cash flow. They have already been incorporated into the firms offerings, have been provided to clients, and have produced cash revenues. The cash flow from these past innovations has already been booked, and is reflected in the firms financial reports. The current investment in the salaries of the service firms intellectual capital is expected to produce current sales as well as new innovations or ideas that can be implemented in the immediate future. Measuring Frequency (Static Versus Dynamic) as a Dimension of Value. Intellectual assets may be the source of either static (one-time transaction) value or dynamic (ongoing, cashflowproducing) value. Although the value extraction processes discussed in this paper relate to the ongoing cash-producing value of intellectual capital, it must be recognized that IC assets are often sold individually or as packaged bundles of intellectual assets. One-time Value. The value realized by a sale. This value reflects the market conditions existing at the time of the sale. Ongoing Value. Anyone measuring the value of a going concern takes into consideration the ability of an operation to continue its business functions on the day after the valuation in the same way as before the valuation. The purchaser of a firm needs to know that it has the capacity to continue churning out the products or services that generate the firms income. This is the firms ongoing value. This value distinguishes the going concern from a start-up with a much smaller storehouse of knowledge and learning, and less ability to demonstrate broad capabilities for designing, manufacturing, and delivering products to customers.

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Measuring Value
Value can be measured in two ways: quantitatively and qualitatively. Quantitative measures provide a precise snapshot of a firms activities at specific points in time. Quantitative measurement requires discrete measurements and is very useful for telling us what has happened. In the past, companies were largely concerned with physical assets, and were traditionally concerned with quantitative outputsin particular, amounts of product, dollars, and sometimes time. Quantitative measures may be integer- or vector-based. Integer-based measures may be financial or non-financial. Vectors provide information about direction as well as amount. A vector measurement might tell a company that its intellectual capital has increased substantially over the past year. This means that the vector of change is positive in direction and the length of the vector is relatively long. A vector measurement might also tell a company that its intellectual capital has decreased somewhat as a result of an early retirement policy. This vector points in a downward direction and its length is relatively short. Figure 2 highlights several sample measures. When it is difficult to measure an IC activity directly, companies use indicators rather than precise measurements. Measurement often requires that something be completed before it can be counted, but there are times when one wants to know about work-in-progress. In these circumstances, indicators can be helpful, although they are less definitive than measurements. Indicators provide a picture in shades of gray rather than black-and-white. In contrast to quantitative measures, qualitative measures are typically judgment-based and are often used where the item to be measured or the attribute of interest is not easily quantifiable. One easily understood example of this phenomenon is a non-business intangible: love. A child may ask his or parents, How much do you love me? The answer, of course, defies quantification. In response, parents tend to fall back on answers like, A lot! Qualitative measures provide a sense of what is happening. They may reveal the vector of change rather than the speed. Qualitative measures are useful for answering questions such as Is the amount of your firms intellectual capital changing? The answer might show the direction (up or down) and the general degree of change (a lot, a little, or a moderate amount).

Measures Qualitative
Value Based
Value Category Alignment with Vision & Strategy Satisfaction Quality of IAs

Quantitative
Non-$ $
# Evals/Unit Time $ Invested # Techniques Avail. $ Received # of Staff Subject/Techn. Age Remaining Life Forecast Income Costs to date Forecast costs

Vector Based
Rate of Addition Rate of Deletion Backlog Market Share Forecast Coverage Comprehensiveness Stock Price

Figure 2: Measures of Intellectual Assets

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Qualitative measures are most useful when put into the context of the firm. For example, in a survey, portfolio managers who were asked to define their portfolios responded by listing the following attributes: the technologies included their strategic objectives and intent for the portfolio their strategic use of the portfolio the value of the portfolio (both qualitative and quantitative) the income and cost associated with the portfolio With the exception of the final category, all of the dimensions that portfolio managers used to define and describe their patent portfolios were qualitative.

Valuation Methods
All valuation methods are based on three basic approaches: the market method, the income method, and the cost method. Each of these methods contains elements of market knowledge, cash flow, or merely cost. Economists tend to prefer methods with some form of market inputfailing that, then income or cash flow methods are a reasonable substitute. Cost-based methods are the least desirable to economists because they contain virtually no market component and therefore lack that key component of value determination. The income method estimates the incremental cash flow (revenue less investment, less expenses) attributable to the IA and discounts it to a present value. It is also called the discounted cash flow (DCF) method. By definition, the income method is a cashflow-based valuation method. The cost method measures the value of the resources needed to create (or recreate) an intangible asset. It values an IA at cost. There are several different types of cost, but the layman need consider only two: the cost to create an exact duplicate of the item being valued and the cost to create the functional equivalent of the item being valued. This method contains no input from the market or from cash flow. It is most useful for valuing new technologies, where a potential buyer must purchase the technology at the price offered or spend the cost and time to recreate it. In addition to these classic valuation methods, two other methods are used with some frequency. The reasonable royalty method is a hybrid of the income method and the market method. The incremental revenue is estimated as in the former, and a reasonable royalty rate is obtained from comparable IA that have been licensed, either by the existing owner of the IA or by someone else with a similar IA. The resulting royalty stream, adjusted for tax effects and any associated costs, is then discounted back to present value, as in the income method. The real option method is used when the value of an IA can be viewed as an option on some underlying asset (for example, owning a patent is like owning an option to introduce a new product that is enabled by the patent). The method requires input, including an estimate of the current value of the underlying asset, a measure of the variability of the value of the underlying asset, the risk-free interest rate, and a model for the variation in the value of the underlying asset over time. The value of the underlying asset can be estimated using either the income method or the market value method. Variability is usually estimated using comparable pure plays that are traded in a market. The risk-free interest rate is a published figure. A frequently used model of variability is the geometric random walk, which leads to the Black-Sholes formula for valuing an option.

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Some Helpful Valuation Sources


Several websites and recent publications provide further information on valuation, particularly for readers with no background in finance or economics. Article Khoury, Daniele, and Germeraad, Selection and Application of Intellectual Property Valuation Methods in Portfolio Management and Value Extraction, Les Nouvelles, September 2001, pp. 77-86. (Les Nouvelles is the journal of the Licensing Executives Society.) Books Smith & Parr, Valuation of Intellectual Property and Intangible Assets, 3rd Edition (New York: John Wiley & Sons, 2000). Razgaitis, Early-Stage Technologies: Valuation and Pricing (New York: John Wiley & Sons, 1999). Web site www.icmgroup.com. This site contains an online valuation tool for people with no financial training. The tool asks a few simple questions; with the answers, it calculates the approximate value of an intangible asset. (Home Page>Products & Services>Intellectual Property>Online>Simple Valuation Tool)

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Competitive Intelligence
Competitive intelligence is an organized process for gathering and analyzing publicly available information about trends and competitor activities to further company objectives. Competitive intelligence, for the purposes of this paper, focuses on competitor portfolios of patents and other forms of intellectual property that may be important to the reader. Competitive intelligence exercises are performed every day by competitors, stock analysts, M&A analysts, venture capitalists, and others. Although not usually called competitive intelligence, the processes used are generally the same as those outlined next. The first step in the process of competitive intelligence is to identify companies about which information is desired. Because of our focus on intellectual property, we are concerned with the firms technology competitors (which may differ from the firms business competitors). The second step is to determine what information is required about the competitors portfolio. A firm usually needs a profile of each competitor displaying simple demographic information such as the total number of patents, how the portfolio segments itself by technology area, and an idea of the pace of patenting, both in total and by technology area. Firms also want to know the strengths and weaknesses of the technology (as measured by their patents). Finally, people often want to know the strength of the patent claims, such as their breadth and depth. The third step is to gather all of the desired information about internal intellectual property. These exercises focus on the internal intellectual property position, and allow for the development of analyses on a user-friendly set of data. Graphs, pie charts, and other visuals illustrate technical and IP strengths, weaknesses, threats, and opportunities. This is a very revealing analysis that is well worth the effort of collecting competitive intelligence. The fourth step is to conduct the same analysis on a number of selected competitors. The first competitor analysis is usually focused on the competitor presenting the greatest actual or potential threat. In this case, it is optional to eliminate from consideration the portions of the portfolio that do not compete with the firms technologies. Recent news articles about competitors, any product release information the companies may have made public, or other similar narrative information is often very helpful. There is a rich store of publicly available information that usually provides a full picture of a firms technological and strategic intentions. This public information, in concert with the portfolio demographics developed, provides a complete picture of technology directions, strengths, weaknesses, opportunities, and threats. A detailed outline about competitive assessment may be found in Appendix D, Competitive Intelligence.

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Perspectives on Managing IP
The authors of this paper have studied more than four dozen companies that manage their intellectual property, seeking insights into what defines IP management success. These studies show that there is a range of expectations for IP management of the corporation. An understanding of a firms current (and desired) degree of IP management capability is valuable in prioritizing the day-to-day management activities surrounding IP. The authors of Edison in the Boardroom have created an excellent diagnostic tool that identifies and groups IP management capabilities into five major sets. These sets are displayed graphically as a pyramid divided into five levels (see Figure 3). Each level of the pyramid represents the expected capabilities that the company executives and board of directors have for the management of the firms intellectual property. Each level of IP management builds on the foundation of the lower levels. At each level, managers must master the best practices, characteristics, and activities that the level requires. Mastery of the capabilities at each higher level builds the foundation for greater increases in shareholder value. Some companies are happy with their current IP management capabilities. These companies may find it useful to know what other companies at their level are trying to accomplish, as well as what best practices those firms use. Equally, companies that aspire to a higher level of capability may find it helpful to learn what successful companies expect at each succeeding level and also what best practices must be mastered (see Figure 3).

Visionary
(Drive Growth) Level 5

Integrated
(Manage for Growth) Level 4

Profit Center
(Manage for Profitability) Level 3

Cost Control
(Control Costs, Improve Productivity) Level 2

Defensive
(Portfolio, Protect Markets and Technology)

Figure 3: The Hierarchy of IP Management

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The levels of this hierarchy may be briefly described as follows: Level One is the Defensive level. Any company with intellectual property starts at Level One. Here companies are interested in protecting their innovations, primarily by obtaining patents. Most companies at this level want to develop the largest patent portfolio that time and resources allow. Companies operating at Level One generally view IP purely as a legal asset, and IP management tends to be under the purview of the intellectual property counsel. Level Two is the Cost Control level. When companies tabulate the costs of producing and maintaining the patent portfolio, they begin to seek ways to reduce patent costs and to increase the effectiveness of the dollars they spend. At Level Two, companies buy software and systems to make the patent generation and prosecution processes more efficient. A company at Level Two develops and installs methods and procedures for focusing its IP efforts on fewer patents, but patents with a closer tie to the companys business purposes and strategy. Companies operating at Level Two also view IP as a legal asset, and tend to keep it under the purview of their IP counsel. Level Three is the Profit Center level. Companies reach Level Three when they realize that they can produce income from licensing their patents as well as from product sales. At Level Three the IP function shifts from being a cost center to a profit center. Moving up to this level requires a major change in a companys attitudeand even its organization. Level Three companies usually move the business portion of IP management out of the legal department. At this level, companies begin to view IP as a business asset, rather than just as a set of legal assets. Level Four is the Integration level. The business units of Level Four companies begin thinking about how to make money from their intangibles. At this level, IP management activities spread beyond the IP commercialization units organizational boundaries. IP activities are integrated with other functions, and embedded in the companys day-to-day operations, procedures, and strategiesmuch as quality programs have been embedded in companies that used to treat them as a separate function. Level Five is the Visionary level. At Level Five, IP activities have become deeply ingrained in all aspects of company activity. The company looks strategically into the marketplace for consumer and customer preferences. It anticipates technological trends and seeks to position the company as a leader. A company at Level Five acquires or develops the IP that is necessary to create and protect the companys future. These levels provide IP managers with a framework for viewing their activities and programs. For additional perspective, Table 3 summarizes what companies at each level seek to accomplish and the practices that must mastered at each level. IP managers may use this information to benchmark their own activities or initiatives against other companies operating at the same level of IP management capability.

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With the foregoing in mind, IP managers and CEOs are encouraged to characterize their companys current IP management activity, and to identify a level in the hierarchy that most closely describes the firms capability. If there is another level that describes where the firm wishes its capability to be, that should be noted as well. As a next step in the self-diagnosis process, IP managers should look at the entries in Table 3 for their firms current level of capability. Do other firms at that level have the same aspirations? Why or why not? Finally, if an IP manager wants to move a firm to a different level of capability, what activities and programs would the firm have to initiate?
Table 3: Goals and Best Practices at Each Level of IP Management Level of IP Management Level One: Defensive What Companies Try to Accomplish Generate Patents Protect core businesses Initiate procedures for patent generation and maintenance Reduce IP portfolio costs Refine focus of generated IP Best Practices for Companies at This Level Take stock of owned IP Manage patent fees Respect IP rights of others Be willing to enforce

Level Two: Cost Control

Relate patents to business Create cross-functional IP committee Establish processes and criteria for screening potential patents Routinely prune the portfolio Obtain management buy-in Start pro-active licensing Initiate IP donations and royalty audits Organize to extract value from IP Develop advanced screening criteria

Level Three: Profit Center

Extract value directly from IP Focus on non-core, non-strategic IP with tactical value

Level Four: Integration

Extract strategic value from IP Integrate IP awareness across the company Become more sophisticated and innovative in managing IP Stake a claim on the future Encourage disruptive technologies Embed IP and IP management into company culture

Align corporate strategy and goals with IP strategy Manage IA across multiple business functions Conduct competitive assessments Focus on strategic value extraction from IP Patent strategically Institute an IP performance measurement and reporting system

Level Five: Visionary

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Summary
Intellectual assets (IA, recorded ideas and innovations unique to a company) and intellectual property (IP, a subset of IA, those assets that are legally protected) are elements of intellectual capital (profit-yielding IA and IP). Intellectual capital is an important component of corporate value, but one that is challenging to quantify due to its intangible nature. The methods and ideologies illustrated herein yield ways of managing the strategic and tactical aspects of intellectual capital, with the intrinsic viewpoint of intellectual property as a business asset in the corporate value chain. Intellectual property is designed to protect industrial knowledge (knowledge that is essential to the core competency of an enterprise) and is divided into tacit knowledge (that which resides in an individuals mind) and codified knowledge (that which has been committed to some form of communication medium and can be legally protected). The proper use of industrial knowledge (both tacit and codified) furthers a companys competitive advantage through conversion into a profit source, or intellectual capital. The five major forms of intellectual property are patents, trademarks, copyrights, trade secrets, and semiconductor mask works. These must be protected through processes and best practices designed specifically for each type, to maintain the intellectual property as proprietary to the company. Once protection is attained, value is attainable from intellectual property in the form of going-concern value (IP capable of producing an ongoing cashflow, the most common form) and merger and acquisition value (that which the IP can add to the acquiring firms value). Activities that complement the former, and allow realization of full value are direct-value activities (those that provide a direct link to revenue or profit), indirect-value activities (those that are not directly linked to a transaction), defensive activities (those which prepare the company for invasive action by external entities) and offensive activities (those that advance the organizations ability to achieve its strategic goals outside the firm). While the idea of value has many interpretations, in the context of this discussion, value is the measure of the utility (profitability) that ownership of intellectual property brings to the enterprise. Two major dimensions of value are time and frequency; extracting value from intellectual property requires thinking into the future about strategy and positioning, and recognizing that IP is the source of either static (one-time transaction) value or dynamic (ongoing cashflow-producing) value. Value is measured both quantitatively and qualitatively; qualitative measurements reveal how much (profit) and in what direction (increase or decrease) intellectual property provides value, while qualitative measurements provide a sense of how the value is provided. In all cases, common valuation methods are based on two approaches: the income method (which estimates incremental cashflow) and the cost method (which values IP at cost and the resources needed to create it). Competitive intelligence is a method a company can use to determine its position in intellectual property management as compared with competitors. The Hierarchy of IP Management is a tool that a company can use to determine its current and projected status of intellectual property management internally.

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A. Glossary of Terms
Codified knowledge Competitive assessment Knowledge that has been committed to some form of communication medium, such as a handwritten document, a computer program, a drawing, a blueprint, or a cartoon. The process of evaluating ones competitors against a number of measurement standards. In this paper, competitive assessment refers to the evaluation of ones technology competitors, specifically their intellectual property position. The processes and the result of those processes for obtaining information of a competitive nature about ones business or technology competitors. In this paper, competitive intelligence refers to information about ones competitors intellectual property. A valuation method that values IP at cost and the resources needed to create it. Activities that prepare the company for invasive action by external entities. Activities that provide a direct link to revenue or profit. Development Working Group, such as the VSIA Intellectual Property Protection (IPP) DWG. Ongoing, cashflow-producing value. IP capable of producing an ongoing cashflow, the most common form. A tool that a company can use to determine its current and projected status of intellectual property management. The collective creativity, skills, productivity, and relationships of an organizations employees. Valuation method that estimates incremental cashflow. Activities that are not directly linked to a transaction. Knowledge that is essential to the core competency of an enterprise. Assets that confer legal rights and economic benefits upon their owner but are not physical, or tangible, objects. Examples include patents, know-how, relationships, and copyrights. The codified, tangible, or physical descriptions of specific knowledge to which an organization may assert ownership rights.
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Competitive intelligence

Cost method Defensive activities Direct-value activities DWG Dynamic value Going-concern value Hierarchy of IP Management Human capital Income method Indirect-value activities Industrial knowledge Intangible assets

Intellectual assets

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Intellectual capital (IC) Intellectual property (IP)

Knowledge that can be converted into profit. This form of capital comprises two major elements: human capital and intellectual assets. The subset of intellectual assets that is legally protected. Intellectual property is a legal term describing legally protected intellectual assets as well as the different forms available. In the U.S., these forms are patents, copyrights, trademarks, trade secrets, and semi-conductor masks. Value that IP can add to an acquiring firms value.

Merger and acquisition (M&A) value Offensive activities Qualitative measurements Quantitative measurements Static value

Activities that advance the organizations ability to achieve its strategic goals outside the firm. Measurements that provide a sense of how intellectual property provides value. Measurements that reveal how much profit and in what direction (increase or decrease) intellectual property provides value. One-time transaction value.

Structural capital The tangible assets of the firm. Often describes the physical elements of the support and infrastructure that firms provide to supplement their intellectual capital. Tacit knowledge VC Virtual Socket Interface Alliance (VSIA) The knowledge and know-how residing in someones mind, also known as human capital. Virtual component. The VSI Alliance (VSIA) was formed in September 1996 with the goal of establishing a unifying vision for the system-chip industry and the technical standards required to enable the most critical component of the vision: the mix and match of virtual components (IP) from multiple sources.

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B. Recommended Reading
Anyone who wants to explore the fields of intellectual asset management and value extraction in more detail will find the following books valuable. They are drawn from a list of books on Amazon.com that relate to intellectual capital management. These books focus on intellectual assets from the economic or business assets perspective and on value extraction. Rivette, K. G., and Kline, D., Rembrandts in the Attic. Boston, Mass.: Harvard Business School Press, 2000. Rembrandts in the Attic is a call to action book. It is particularly good at describing how and why patents and IP are valuable. The book contains examples, drawn from successful companies, of the uses of patents as a tool of business strategy. This book does not explain exactly how to extract value from IP, but it provides examples of how firms have benefited from hidden value found in their patent portfolio. Davis, J., and Harrison, S., Edison in the Boardroom. New York: John Wiley & Sons, 2001. This book provides an easy-to-understand model for identifying the appropriate best practices for managing your companys intangible assetsthe firms intellectual propertyto increase shareholder value. Most corporate executives and senior managers have no frame of reference for managing these assets because traditional accounting and budgeting processes do not assign value to such intangibles as ideas and skills. This book presents a conceptual framework and a set of best practices for identifying, valuing, and managing the bottom-line value of a companys intellectual assets. It provides a unique, five-level hierarchy of asset management. It includes candid revelations, viewpoints, and techniques, punctuated by anecdotes, practical examples, and testimonials gathered from knowledgeable professionals in industry. Lev, B., Intangibles: Management, Measurement, and Reporting. Washington, D.C.: Brookings Institution Press, 2001. This is a book about financial reporting of intangible assets. It makes a case for reporting on intangibles through the accounting framework. It is also the report on a Brooking Institution-sponsored task force, originally intended to recommend some informal measures to be used for reporting to shareholders about the nature and kind of a firms intangible assets. The task force found this to be too daunting a task and eventually abandoned it. Professor Lev was commissioned by the task force to report on the current state of reporting and to recommend whether and how to report on intangibles in the future. If one accepts that accounting is the best framework within which to measure and report a firms intangible assets (and there is much controversy about this point), then Professor Levs book may become a standard text. In any case, Chapter Two of this book is an excellent treatment of the economics of intangibles.

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Sullivan, P. H., Value-Driven Intellectual Capital: Converting Intangible Corporate Assets into Market Value. New York: John Wiley & Sons, 2000. Whereas Rembrandts in the Attic is a call-to-action book, and Edison in the Boardroom is a book of best practices, Value-Driven Intellectual Capital presents methods and techniques used by companies that use sophisticated processes for managing their IP. It discusses deciding what fundamental business purpose is to be fulfilled by intangible assets; identifying the roles and functions necessary to achieve that purpose; deciding how the firm should organize to deliver those functions; and creating an infrastructure for managing intellectual assets. The book also presents a vocabulary and a framework developed by companies themselves to assist with the management of their intangibles. Although this book focuses on intellectual property and its management, many of its principles and methods are applicable to other forms of intellectual capital as well. Sullivan, P. H., Profiting from Intellectual Capital: Extracting Value from Innovation. New York: John Wiley & Sons, 1998. This was the first book to be published on extracting value from intellectual capital, and it stands up as a valuable reference. It discusses the basic principles of value extraction and includes chapters written by company representatives describing how they applied these principles. Sveiby, K. E., The New Organizational Wealth: Managing & Measuring KnowledgeBased Assets. San Francisco: Berrett-Koehler, 1997. This is the best book written on the management and measurement of intellectual capital from the knowledge perspective. Sveiby outlines his own conceptual framework for developing business strategies in order to focus on knowledge assets. He details how to use and measure the firms tacit knowledge assets and how to monitor them for financial success. Included are case studies of companies that have used Sveibys methods, as well as models that managers can use to lead their companies to increased profitability and long-term organizational success.

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C. Bibliography
The literature in the field of intellectual asset management is rapidly expanding, so the authors do not claim that the following is an exhaustive bibliography. Nevertheless, it should provide any readers interested in more detailed or background information a good starting place for more in-depth reading. Intellectual Capital and Intellectual Property Brooking, A. Intellectual Capital. London: International Thomson Business Press, 1996. Davis, J., and Harrison, S. Edison in the Boardroom. New York: John Wiley & Sons, 2001. Edvinsson, L., and Malone, M. S. Intellectual Capital: Realizing Your Companys True Value by Finding Its Hidden Brainpower. New York: Harper Collins, 1997. Edvinsson, L., and Sullivan, P. Developing a Model for Managing Intellectual Capital, European Management Journal, Vol. 14, No. 4 (August 1996). Hudson, W. J. Intellectual Capital: How to Build It, Enhance It, Use It. New York: John Wiley & Sons, 1993. Klein, D. A., and Prusak, L. Characterizing Intellectual Capital, Multi-Client Program Working Paper, Ernst & Young, March 1994. Parr, R., and Sullivan, P. H. Technology Licensing: Corporate Strategies For Maximizing Value. New York: John Wiley & Sons, 1996. Petrash, G. Dows Journey to a Knowledge Value Management Culture, European Management Journal, Vol. 14, No. 4 (August 1996). Stewart, T. Intellectual Capital: The New Wealth of Organizations. New York: Doubleday, 1997. Stewart, T. Brainpower. Fortune, June 3, 1991, p. 44. Stewart, T. Your Company's Most Valuable Asset: Intellectual Capital. Fortune, October 3, 1994. Sullivan, P. H. Profiting from Intellectual Capital: Extracting Value from Innovation. New York: John Wiley & Sons, 1998. Sullivan, P. H. Value-Driven Intellectual Capital: Converting Intangible Corporate Assets into Market Value. New York: J. Wiley & Sons, 2000. Sullivan, S. Insights into Commercializing Technology. Les Nouvelles (March 1993), pp. 30-35. Sveiby, K. E. The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets. San Francisco: Berrett-Koehler, 1997. Teece, D. Managing Intellectual Capital: Organizational, Strategic, and Policy Dimensions. Clarendon Lectures in Management Series. Oxford: Oxford University Press, 2001.
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Teece, D. Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, Research Policy 15 (1986), pp. 285-305. Knowledge Management Manville, B., and Foote, N. Strategy as If Knowledge Mattered. Fast Company. Nonaka, I., and Takeuchi, H. The Knowledge Creating Company. New York: Oxford University Press, New York City, 1995. Williams, R. L., and Bukowitz, W. R. Knowledge Managers Guide Information Seekers. HRM Magazine (January 1997), pp. 77-81. Measurement Measuring What People Know: Human Capital Accounting for the Knowledge Economy. Paris: Organization for Economic Co-operation and Development, 1996. New Corporate Performance Measures. Report Number 1118-95-RR. New York: The Conference Board, 1995. Kaplan, R. S., and Norton, D. P. Translating Strategy into Action: The Balanced Scorecard. Boston: Harvard Business School Press, 1996. Lev, B. Intangibles: Management, Measurement, and Reporting. Washington, D.C.: Brookings Institution Press, 2001. Lucas, C. Visualize, Measure, & Manage. Unpublished working paper. The Dow Chemical Company, 1996. Sveiby, K. E. The New Organizational Wealth: Managing and Measuring Knowledge-Based Assets. San Francisco: Berrett-Koehler, 1997. Wallman, Steven, M. H. Preface to Howard M. Friedman, Securities Regulation in Cyberspace. New York: Bowne, 1997. Wallman, Steven, M. H. Regulation for a New World. Business Law Today (Nov./Dec. 1996), pp. 8-13. Wallman, Steven, M. H. Technology Takes to Securities Trading. IEEE Spectrum (February 1997), pp. 60-64. Strategy Hamel, G., and Prahalad, C. K. Competing for the Future. Boston: Harvard Business School Press, 1994. Hamel, G., and Prahalad, C. K. Strategic Intent. Harvard Business Review (May-June 1989), pp. 67-78. Imparato, N., and Harari, O. Jumping the Curve: Innovation and Strategic Choice in an Age of Transition. San Francisco: Jossey-Bass, 1996. Lewis, J. D. The Connected Corporation. New York: The Free Press, 1995.

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Porter, M. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press, 1985. Porter, M. Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: The Free Press, 1980. Porter, M. What Is Strategy? Harvard Business Review (Nov.-Dec. 1996), pp. 61-78. Prahalad, C.K., and Hamel, G. The Core Competence of the Corporation. Harvard Business Review (May-June 1990), pp. 79-91. Savage, C., Fifth-Generation Management. Boston: Butterworth-Heinemann, 1996. Sullivan, P. H. Strategic Vision: Creating the Future. Unpublished paper, 1986. Technology Management Clark, K. B., Hayes, R. H., and Lorenz, C. The Uneasy Alliance: Managing the ProductivityTechnology Dilemma. Boston: Harvard Business School Press, 1985. Foster, R. Innovation: The Attackers Advantage. New York: Summit Books, 1986. Hayes, H. H., Wheelwright, S. C., and Clark, K. B. Dynamic Manufacturing: Creating the Learning Organization. New York: The Free Press, 1988. Rogers, E. M. Diffusion of Innovations, 3rd Edition. New York: The Free Press, 1983. Smith, D. K., and Alexander, R. C. Fumbling the Future: How Xerox Invented, Then Ignored, The First Personal Computer. New York: William Morrow, 1988. Stobaugh, R., and Wells, L. T., Jr. Technology Crossing Borders: The Choice, Transfer, and Management of International Technology Flows. Boston: Harvard Business School Press, 1984. Values Hall, P. Brian. Values Shift: How Individuals and Leaders Develop. Rockport, Mass.: Twin Lights, 1995. Tobins Q Bernier, G. Market Power and Systematic Risk: An Empirical Analysis Using Tobins q Ratio. Journal of Economics and Business, Vol. 39 (May 1987), pp. 91-99. Brainard, W.C., and Tobin, J. Econometric Models: Their Problems and Usefulness-Pitfalls in Financial Model Building. American Economic Review, pp. 99-122. Cartwright, P. A., and Kamerschen, D. R. An Empirical Analysis of the Temporal Behavior of the q Ratio in the U.S. Economy. Review of Business and Economic Research (Spring 1989), pp. 1-12. Chen, K. C. Tobins q Ratio and Its Applications. Illinois Business Review, Vol. 40 (1983), pp. 9, 10.

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Chen, K. C., Hite, G. L., and Cheng, D. C. Barriers to Entry, Concentration and Tobins q Ratio, Quarterly Journal of Business and Economics, Vol. 28, No. 2 (1989), pp. 32-40. Cockburn, I., and Griliches, Z. Industry Effects and Appropriate Measures in the Stock Markets Valuation of R&D and Patents, American Economic Review, (May 1988), pp. 419-423. Hirschey, M., and Weygandt, J. J. Amortization Policy for Advertising and Research and Development Expenditures. Journal of Accounting Research (Spring 1985), pp. 326-335. Kim, W. S., and Esmeralda, O. L. Excess Market Value, the Multinational Corporation, and Tobins q-Ratio. Journal of International Business (Spring 1986), pp. 119-125. Lindenberg, E. B., and Ross, S. A. Tobins q Ratio and Industrial Organization. Journal of Business (University of Chicago) Vol. 54 (January 1981), pp. 1-32. Ross, S. A. Tobins q Ratio and Industrial Organization. Journal of Business, Vol. 54, No. 1 (1981), pp. 1-32. Shleifer, A., and Vishny, R. W. Management Ownership and Market Valuation: An Empirical Analysis Journal of Financial Economics, Vol. 20 (1988), pp. 293-315. Stevens, J. L. Tobins q Ratio, Monopoly Earnings, Risk, and Dividend Policy. Journal of Business Research (June 3, 1986), pp. 213-223. Tobin, J. A General Equilibrium Approach to Monetary Theory. Journal of Money, Credit and Banking, pp. 15-29. Wernerfelt, B., and Montgomery, C. A. Tobins q and the Importance of Focus in Firm Performance. American Economic Review (March 1988), pp. 246-50.

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D. Competitive Intelligence
The following outline complements the brief section on competitive intelligence (CI) found in the paper. It expands upon the ideas described in the narrative and is intended to provide the reader with more information on the breadth and scope of what a truly competitive assessment capability might involve. What is competitive intelligence? Competitive intelligence is a system for gathering and analyzing publicly available o information about technology and industry trends and competitors activities used to further the companys objectives. History: o - Japanese companies have been using well established CI systems since WWII - European companies have benefited from CI assistance provided by their governments - CI is a fast growing corporate discipline Information is not the same as intelligence o - Information consists of bits of factual data - Intelligence is a collection of information pieces that have been filtered and analyzed - Intelligence is actionable CI is both a: Productinformation catered to a specific query or analysis o Processa systematic approach for acquiring the publicly available information o about competitors or potential competitors Why care about competitive intelligence? There are a variety of reasons that companies, people, and organizations concern o themselves with CI. Competitive intelligence can help: - Boost competitive advantage and profits - Anticipate change - Predict competitors actions - Identify new opportunities - Identify competitive threats - Know how to protect the companys IP from competitors (build strong patent walls) - Predict and understand competitors IP activity - Learn from others mistakes and successes - Survive in todays technological environment

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Competitive intelligence has many applications It is performed daily by experts, analysts, consultants and strategic decisiono makers. It is performed for a variety of reasons and by a mix of people. Often it is not referred to as CI; however, by and large, the process and the product can be defined as CI. Competitive intelligence contributes to: - M&A activities and analyses - New product development - Marketing and sales - Research and development - IPOs and financing - Intellectual property (filing, protection, assertion, and so on) Competitive intelligence is an ongoing process involving the following steps: Planning o Collecting o Analyzing o Communicating and disseminating o Making decisions o What to look for? Different types of data o Places to look (thinking outside the box) o Interpreting the information; the key to CI is knowing how to analyze and interpret o the data that is uncovered Resources The skill (art) of collecting and analyzing the information from a variety of o resources is the essence of CI. Strategic interpretation of the information is critical. Sources of information include: - Interviews - Publications - Speeches - Financial reports - Government documents - TV and radio - Analyst reports - Trade shows - Trade organizations and associations - Sales materials - Direct observation - Publicly available databases - Internet Note: There is a difference between legally and illegally obtained information, as well as ethical and unethical information gathering.

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Who does competitive intelligence? Financial and economic specialists (VCs, analysts, and so on) o Legal directors o Marketing directors o Strategic planners o Competitive intelligence is most effective when it permeates every facet of the o organization; every strategic part of the organization should participate IP and competitive intelligence Arguably, every intellectual property professional should be an expert in o competitive intelligence. However, traditional IP professionals are expert at their specific competitive intelligence task or motive. IP attorneys are required to perform their competitive intelligence for defending their companies patents and obtaining additional IP. Business developers with an IP focus direct their efforts toward assessing IP trajectories for their competitors, identifying white space, and creating valuable IP to fill that void. Specific competitive intelligence projects within an organization typically require o the collective efforts of the entire IP organization (a thorough competitive intelligence assessment of the companys known competitors IP, unknown competitors IP, and its own IP requires the skills of the IP legal team, business developers, marketing, finance, and so on) Competitive intelligence is embedded in the IP process (filing, prosecution, value o extraction) Culture of IP professionals o Increasing importance and need for IP competitive intelligence: o - Industry-specific strategies (such as Pharma and Biotech) - Global marketplace and competition - Rapidly increasing pace of change IP competitive intelligence tools There are many tools (publicly available and subscription or fee based) that are o designed for IP competitive intelligence and can assist the IP competitive intelligence team member. Many of the tools provide niche analyses and complement traditional research methods. It is important to know when to use IP competitive intelligence tools and how to interpret the information uncovered. Often one analysis leads to another, so it is important to gather and interpret all available information for a complete competitive intelligence analysis. Types of tools: o - Mapping - Tracking - Citation analysis When to use them o Who uses them o How to use them o

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E. Methods and Tools


A number of methods, processes, and tools are available for companies that manage their intellectual assets. The list below is representative of methods and tools that are available in the marketplace. IP Planning and IPM Initiation Tools Intellectual Property Management Self-Assessment and Diagnosis The self-assessment uses a survey process to rate the effectiveness of the companys IPM function and to identify the greatest opportunities for improving IP management. The diagnostic tool evaluates the companys IP function and compares it to best-practice knowledge. Vision, Strategy, and Roles Companies planning to launch or enhance their IP program need to convert statements of vision and strategy into long-term objectives that are measurable and achievable in IP terms. They also need to know how to determine the appropriate roles for IP management. The vision, strategy, and roles support methods are typically provided in a workshop. IP Strategy and Business Plan An IP strategy and action plan helps a company define the infrastructure (people, processes, and technology) required to maximize the value extracted from the companys IP. Strategic Patenting This process involves determining what patents should be created to obtain strategic advantage, either by blocking competitors or by identifying and laying out the IP roadmap for entry into a new area. This is a company-specific activity, usually done in a workshop. Alternatively, a consultant can provide analysis that supports a do-it-yourself approach. Patent-Strategy Alignment A firms technology and patents should be aligned with its business strategy. This requires an examination of the technology, business, and product strategy of the company or division to ensure that the IP supports the strategy. IP Management Processes IP Management Decision System Creation and Process Automation The methods under this heading are for companies that want to establish the set of decisions and decision-making processes necessary within the firm to maximize the value of the firms IP. The goal is to design and implement a management decision system for maximizing the value of the firms IP on an ongoing basis.

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IP Management Benchmarking Most companies struggle to identify firms with which to benchmark their IP management programs. Included in this service is preparing for successful benchmarking, setting up benchmarking meetings, performing the benchmarking, and analyzing the results. This has traditionally been a face-to-face project, but a proprietary database of benchmarking results will be available over the web or by telephone. IP Competitive Assessment (external focus) An IP competitive assessment includes providing techniques for determining the composition and direction of competitors IP portfolios. Using state-of-the-art software, companies can prepare packages of competitive intelligence as input for key development, product, and IP strategy decisions. Typical analyses include overviews of competitors patent portfolios, the future direction for competitors technology development, and an assessment of the competitive landscape. IP Portfolio Analysis (internal focus) This analysis provides an overview and a detailed perspective of the firms IP portfolio, including the rate of insertion and deletion and the relationship between portfolio contents and business strategy. This is a management tool to be used by a company for understanding the overall stocks and flows of IP in the company, including who owns which piece. It provides a central place for analysis of pieces of IP, or the entire portfolio. Methods and Tools for Generating IP Revenue IP Revenue Potential Analysis Through the use of statistical sampling methods, the revenue potential of an IP portfolio (or a subset thereof) may be determined. This is a cost-effective initial step to providing companies with a basis for making subsequent business decisions about the degree to which investment in portfolio mining may be appropriate. Royalty Audits Audit services are available to ensure compliance with licensing agreements. The audit may be designed to include recalculation of royalties, identification of units subject to royalties, and verification of sales of products subject to royalties. Technology-Transfer Potential and Mining Tools There is a large trend for companies to identify under-performing assets that may be used to generate revenue both inside and outside a companys core business. There are proprietary methods and tools for identifying licensable patents and potential licensees. These techniques use state-of-the art IP research software systems. These tools and techniques have been very effective in face-to-face consulting and are ready for delivery over the web or by telephone. Tax Strategies IP Donation for Tax Deductions Under certain circumstances, in the U.S., it is possible for companies to donate technologies to not-for-profit entities and to receive tax benefits from the donation.

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VSI Alliance (IPPWP2 1.0)

IP Holding Companies Establishing an IP holding company enables an organization to create an autonomous business unit focused on managing the companys intellectual assets as a strategic business element that is also its own profit center. Other benefits include the potential for substantial tax savings and improved cash flow. Cross-border cost-sharing arrangements may also be possible for the generation of further tax savings. IP Valuation Methods and Tools IP Valuation Services Services are available for determining the value of intellectual property using financial and market analyses. IP valuations may include an assessment of the technology or product position relative to the competitive landscape, projections of future revenue streams, and identification of industry royalty rates. Examples of circumstances when valuations are typically performed are: Acquisition, sale, joint venture, and merger transactions Cross-licensing negotiations Securitization using intellectual property Tax-related activity

Copyright 2002 by the VSI Alliance, Inc. All Rights Reserved. VSIA CONFIDENTIAL LICENSED DOCUMENT

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VSI Alliance (IPPWP2 1.0)

Copyright 2002 by the VSI Alliance, Inc. All Rights Reserved. VSIA CONFIDENTIAL LICENSED DOCUMENT

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