StrategicManagement_IP

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35 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
n recent years, the primary locus of value for many corpora-
tions has been found in their intellectual property rights. By
one informed estimate from the late 1990s, some three-quarters
of the Fortune 100’s total market capitalization was represented
by intangible assets, such as patents, copyrights and trade-
marks.1 In this environment, IP management cannot be left to
technology managers or corporate legal staff alone. Given that
the generation of returns from IP rights is a capital-intensive,
long-term activity and that decisions affecting intellectual prop-
erty are usually irreversible at low cost, IP management must be
a matter of concern for functional and business-unit leaders as
well as a corporation’s most senior officers.
Little of the writing on the subject of intellectual property
rights, however, has been directed at top-level executives; instead
it has frequently been done by specialists, for specialists. And
senior managers, in order to effectively govern and exploit their
often huge IP assets, need help to answer these specific ques-
tions:2 How can the company use intellectual property rights to
gain and sustain competitive advantage? How do IP rights affect
the industry’s structure? What options do IP rights offer vis-à-
vis competitors? How can IP rights grant incumbency advantage
and establish barriers to entry? How can IP rights help the com-
pany gain vertical power along the value chain? What organizational design accommo-
dates an intellectual property strategy most effectively?
Enormous knowledge is hidden in the economics literature and in the heads of corpo-
rate IP managers about the way companies have developed answers to these questions.3
Making such information available to top-level management will help lead intellectual
property rights out of their shadowy existence in patent and legal departments and enable
companies to tap into their strategic value. (See “About the Research.”)
Creating and Sustaining Competitive Advantage
Intellectual property rights can help a company gain competitive advantage in various
ways, but three are paramount: They can provide a temporary technological lead (incum-
bency), protect brand names and help form an industry standard. Combinations of
patents and trademarks can help to sustain IP-based competitive advantages.
Strategic Management
of Intellectual Property
Markus Reitzig is an assistant professor at Copenhagen Business School in Denmark. He can be
reached at reitzig@cbs.dk.
I
Intellectual property 
now makes up a large
proportion of many
companies’ market value,
and IP management 
can no longer be left 
to technology or legal
departments alone.
Markus Reitzig
CITI03
Text Box
Reitzig, Marcus, “Strategic Management of Intellectual Property”, MIT Sloan Management Review, Spring 2004.
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 36
The use of patents to enjoy a short-term technological lead is
the best-known way to create competitive advantage with IP
rights, but it is fading in importance in many industries. The
pharmaceutical industry is an exception.
Denmark-based healthcare company Novo Nordisk A/S, for
example, built a dominant market position in Europe with dia-
betes drugs as the result of its license on a technology for manu-
facturing insulin from animal sources.4 “But cases like this are
rare, even in pharmaceuticals,” says Lars Kellberg, Novo Nordisk’s
vice president of business development and patents. “With mod-
ern high-throughput technology, screening methods and the
wide availability of compound libraries, it’s usually just a matter
of time until competitors find an alternative target molecule that
offers a different route to the treatment of a disease from the
patent-protected innovation of the first mover.” According to
Kellberg, “Dominant market positions due to the patenting of
one unique pharmacological solution are most likely to occur
today in the field of naturally occurring hormones; for example,
proteins derived from genome-based research.”
A second way to create competitive advantage with IP rights
involves their relationship to standards. In the mid-1990s,
Motorola Inc. had exclusive control of certain technologies that
gave it a lead in the field of GSM (Groupe Spéciale Mobile) tech-
nology.5 Other players participating in the market at the time,
including Nokia, Alcatel and Philips, held significant shares of
the patents for such technologies as switching technology,
speech coding, radio transmission and encryption. Motorola,
however, built a superior position in Europe with a three-
pronged IP-strategy approach.
First, the company supported the establishment of a common
mobile-telephony standard in Europe from the initial meeting of
the Groupe Spéciale Mobile in 1982, and it has continued to do
so since 13 mobile-phone operators agreed to accept GSM as the
international standard. Second, before and after the establish-
ment of the GSM standard, Motorola pushed its IP activities and
secured patent ownership of various essential technologies that
GSM would depend on. Third, in 1988 Motorola refused to sac-
rifice its exclusive IP rights in phone-procurement negotiations
with operators. This combination of patenting parts of the tech-
nology used in a standard, engaging in a hard-nosed licensing
policy, and making farsighted investments allowed Motorola to
create a competitive advantage in technologies that would usually
be too complex for a single player to dominate.6
Sustaining the kind of advantage that Motorola created with
its focus on GSM is difficult because, after all, technologies
change and patents expire. (Patents usually expire 20 years after
application; in certain specific cases in Europe, after 25 years.) In
the pharmaceutical industry, it is not uncommon for a target
molecule in the form of a commercialized drug to begin earning
profits a decade after the patent was applied for. One way to mit-
igate this limitation is by developing an effective combination of
intellectual property rights.
Leo Pharma A/S, a Denmark-based drug company, follows
this approach with certain skin medications. The patents protect-
ing the company’s blockbuster drug, Daivonex, will expire in
three to four years. Whereas the application of Daivonex is rec-
ommended for the steady treatment of psoriasis, Leo Pharma has
developed a second drug, Daivobet, for the treatment of acute
attacks of the disease. The two drugs are therapeutic comple-
ments, but the patents for Daivobet will last another 17 years. Leo
Pharma is bundling the two products into one therapeutic
approach; joint branding of the products to physicians and
patients assures that sales of Daivonex will benefit from the
remaining patent lifetime of its acute-treatment complement.
The Daivonex-Daivobet example illustrates the complemen-
tary use of identical types of IP rights: two patents. A patent and
a trademark can also be used complementarily, as Bayer AG has
done with aspirin. Bayer’s first patent on aspirin expired at the
beginning of the last century, but the company still earns enor-
mous revenues as a result of the strong brand value. As trade-
marks can, in principle, be renewed indefinitely, managers should
be prepared to shift their focus from patents to trademarks as the
former expire. Recent studies show that the postexpiration patent
value of a drug is enormously affected by the product’s market-
ing during the patent’s life. The returns from originally branded
The article presents first-phase findings of a larger
research study on the managerial use of intellectual prop-
erty rights that is currently being conducted at the Copen-
hagen Business School. Primary data were collected
through in-depth interviews with senior corporate repre-
sentatives responsible for IP matters. Secondary sources
include both scientific publications and publicly available
information aboutcompanies as well as information from
patent and trademark databases. 
At first, a broad synopsis of the scientific literature was
carried out. Its essence is a distillation of managerially
relevant insights from various sources encompassing theo-
retical and empirical economics as well as applied manage-
ment. Classic strategic aspects were then buttressed by
IP-related findings from these earlier scientific studies,
preferably from large-scale empirical studies. Remaining
strategic aspects not touched upon in prior studies on IP
were addressed by providing real-world examples. A test of
the emerging IP strategy’s comprehensibility for future
managers with other than technical or legal backgrounds
was carried out in a teaching experiment with students at
the Copenhagen Business School.
About the Research
37 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
drugs can be significantly higher than expected after patent expi-
ration, despite competition from generic products.7
Finally, substitute patents can be used to sustain a competitive
advantage in certain industries, such as basic chemicals. Compa-
nies can build a “patent fence”; that is, they protect not only a
product’s core invention but also easy-to-build substitutes.8
Patents That Shape Industry Structure
Going back to the 19th century, when international dyestuff
manufacturers used patent rights to form cartels in certain mar-
ket segments (such as alkali), IP rights have been used to shape
the structure of various industries. In 1933, DuPont licensed its
cellophane to Sylvania (a U.S. subsidiary of a Belgian company).
The contract specified that DuPont would earn a 2% royalty on
Sylvania’s sales of cellophane when Sylvania had 20% or less of
the market’s share. But DuPont would earn royalties of 30% on
any sales over that market-share figure, rendering it unprofitable
for Sylvania to exceed its quota.9
In the semiconductor industry today, patents are also licensed
but not primarily for reasons of market sharing. Patent-protected
technology is exchanged mutually between a larger number of
players in the market. The exchanged technology is highly comple-
mentary and enters the products of many players. Since daily pro-
duction costs in the industry are enormous, however, one of the
most dangerous threats for a firm arising from this mutual
dependence is to have its production facility closed — if only for a
few days — as the result of an injunction in the case of pending
patent litigation. The losses can be so severe as to drive a company
out of business. To pose a credible counterthreat, companies seek
to hold patents that are also used by their competitors. Thus the
main purposes of patenting in this industry are not necessarily to
deter entry but to create a market for know-how exchange and to
obviate the threat of being shut down by established competitors.10
Vertical and Horizontal Differentiation
In cases of head-to-head competition with core products, senior
managers must consider such issues as product design, informa-
tion and timing as they relate to IP rights. Competition along the
dimension of technical IP rights has long been thought of as a mat-
ter of protecting major technological breakthroughs that would
lead to radical innovations in the market (that is, competition with
vertically differentiated products). This perspective is still legiti-
mate in some industries (pharmaceuticals, for example) but not
all. According to a top IP manager at Nokia, one of the company’s
most precious assets is a multiple patent, design and trademark
combination covering Nokia’s unique user interfaces for cellular
phones. A cellphone interface is rarely a radical innovation driving
down the opportunity costs of production. (Competition on this
feature comes much closer to horizontal than to vertical differen-
tiation, well known from the field of branding but almost
unknown in the patent sector.) User surveys confirm, however,
that Nokia’s interface is valued highly by a large share of customers.
Companies can also outwit competitors by conveying IP
information strategically. They may, for example, disclose infor-
mation in legal bulletins about IP rights that confuses competi-
tors about potential technology trajectories they are pursuing.
German companies in the 19th and 20th centuries issued mis-
leading “evasion” patents to render it difficult for competitors to
establish a clear link between dyestuff patents and the dyestuff
products actually sold in the market.11
The timing of IP rights decisions is also important. The key
trade-off lies between the disclosure of technical knowledge and
the assurance of early protection through patents.12 Products
with short life cycles may generate most of their returns before a
patent is granted. If such products are illegitimately imitated dur-
ing this period, patent holders face difficulties in claiming their
real economic losses in courts as opposed to patent infringement
occurring after a patent’s grant.13 For that reason, secrecy may be
more effective than the patent process for technology products
with short life cycles.
Incumbency Advantages
Incumbency advantages can result from economies of scale,
cumulative investment in a technology, consumer loyalty and
switching costs. Companies can often use intellectual property
rights to obtain incumbency advantages.
Incumbent biotechnology companies in Canada have success-
fully employed cumulative investment. Increases in the level and
concentration of incumbents’ patenting appear to discourage the
founding of new businesses and to enhance incumbency advan-
tages, particularly in human application sectors (such as diagnos-
tics, therapeutics and vaccines) of the industry where development
and approval processes are more costly and time-consuming.14
Companies can also use IP rights to increase switching costs.
In the semiconductor industry, patenting is not necessarily used to deter entry but to create 
a market for know-how exchange and to obviate the threat of established competitors.
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 38
One effect of established standards is that subsequently developed
complementary technology is often designed to be standard-com-
patible. Switching costs for users changing from Microsoft desktops
to Linux do not solely depend on the features of the Microsoft and
the Linux operating system but also on complementary software.
And standards are not the only way to create switching costs.
Novo Nordisk has a trademark-protected insulin-delivery device
called NovoPen. As Lars Kellberg notes, “The most profitable part
of the business in this sector is the refill business — selling insulin
cartridges that fit the base delivery device.” To make sure that
Top-level managers need to answer six pressing questions if they are to turn the use of intellectual property rights (IPRs) into a
strategic weapon.
The Fundamentals of an IP Rights Strategy
Strategic 
Question
How do IPRs help
companies gain
and sustain com-
petitive advantage?
How do IPRs affect
the structure of an
industry?
Which options do
IPRs offer in the
competition with
other industry
players?
How do IPRs relate
to incumbency
advantage and
entry barriers?
How can IPRs 
help companies
gain vertical power
along the value
chain?
Which organiza-
tional design 
is necessary to
accommodate an 
IP strategy?
Strategic 
Aspect IPRs Options
Create IPR-based technological incum-
bency
Create brand name
Create IPR-protected installed base/
de facto standard
Sustain competitive advantage through
IPR combination
Use IPRs to amass market share in tech-
nologically discrete industries
Use IPRs as bargaining chips in techno-
logically complex industries
Use IPRs to differentiate vertically
Use IPRs to differentiate horizontally
Create advantages through cumulative
patenting
Create advantages by combining brands
and patents
Create “learning economies” by identify-
ing andbinding elite scientists
Support product-space packing with
trademarks and patents
Use IPRs to increase power in a different
segment of the value chain
Create IP functions at the corporate and
the business-unit level
Examples
Novo Nordisk (insulin)
U.K. industrial product manufacturers*
Motorola (GSM standard)
LeoPharma (psoriasis drugs —comple-
mentary patents)
Bayer (aspirin — complementary patent
and trademark)
Dyestuff industry in the 19th century
U.S. semiconductor industry
Numerous luxury brands
Patents protecting radical innovations
Kellogg (cereals — trademarks)
Nokia (mobile phone interfaces —
trademark, patent and design
combinations)
Canadian biotech industry
Geox (footwear)
German chemical, electronic and engi-
neering corporations
Henkel KGaA (detergents)
Nokia (loudspeakers)
Toshiba
* See P. Michell, J. King and J. Reast, “Brand Values Related to Industrial Products,” Industrial Marketing Management 30, no. 5 (2001): 415-425.
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39 MIT SLOAN MANAGEMENT REVIEW SPRING 2004
competitors cannot enter this market at low cost, the corporation
has taken sophisticated IP countermeasures. “We patent-pro-
tected the cartridge-pen interface,” says Kellberg, rendering it dif-
ficult for rivals to offer cartridges that go with NovoPen.
Consumers face full switching costs — including the purchase of
a new base delivery device — if they want to choose cheaper car-
tridges from another supplier.
IP rights are not solely a matter of technical advantages. Pro-
motional advantages are created through the existence of strong,
trademark-protected brands. And some companies recognize the
value of patents for branding. At least three large shoe manufac-
turers, Teva, New Balance, and Geox, incorporate (pending)
patents directly or indirectly into their marketing by making the
information visible to the customers. Geox even has a top-level
Web site category called “Patents.”
Binding human resources to a corporation is also important
for companies seeking to maintain incumbency advantages with
IP rights. Recent studies show that a small elite of inventors
accounts for the major part of a firm’s patented output.15 Identi-
fying and binding such people to the corporation is essential for
building up “learning economics” in high-tech corporations.
Attracting top scientists from competitors can accelerate the
learning process. And IP rights information services, found in
many large companies today, can help to complete these tasks.
Raising Entry Barriers
Optimally, an incumbency advantage can be turned into an entry
barrier for followers. Companies have long used trademarks as
one of several legitimate ways to “pack” a product space to reduce
the number of profitable niches for competitors.
Henkel KGaA Germany, a laundry and home-care company,
has protected a wide variety of laundry detergents with trade-
marks, capturing many preferences consumers may have.16 By
doing so, the company makes further horizontal product differen-
tiation more difficult for its competitors. While the practice of dif-
ferentiating products horizontally and protecting them with
trademarks is well-known (Kellogg’s approach with breakfast
cereal is another example), Henkel’s laundry-product portfolio is
differentiated vertically as well. Several of the detergents exist both
in traditional and advanced patent-protected fast-solubility forms
(which are also protected by trademarks). The goal is “to support
every delivery form and any reasonable concentration range of
innovative active ingredients,” notes Thomas Mueller-Kirschbaum,
CTO of Henkel KGaA’s Laundry and Home Care. “Aside from
patents, a lot of our products and packagings are protected by util-
ity models, design patents, and trademarks,” he says. The strategy
has paid off: Henkel has been ranked among the European market
leaders for detergents for many decades now.
The same rationale explains why Novo Nordisk brings out
patent-protected one-way insulin-delivery devices and partly
cannibalizes its own business of NovoPen. The one-way devices
(not refillable) “patent block” another niche in the product space
for insulin-delivery devices.
Creating Power With Suppliers
Even among sophisticated IP managers today, it is commonly
assumed that the use of IP rights is restricted to horizontal com-
petition. But there is little theoretical reason to stick with this
premise, and the real world provides some contradictory evidence.
Consider the effects of Nokia’s patents on loudspeakers. Even
though the company does not engage in the production of cell-
phone components, it keeps a handle on its suppliers by maintain-
ing control of key IP rights in different segments of the value chain.
Nokia has such patents not in order to squeeze suppliers but “to
forearm against price increases in an upstream segment where
competition is not too high as there is only a handful of suppliers,”
according to senior IP manager Peter Halkjær. In more competitive
areas involving, for example, antenna technology, where Nokia can
choose from dozens of suppliers, it is not as important to buttress
its supply chain management by leveraging IP rights. Still, the
company plays it safe, taking out patents in other technologies, and
because of its strong position on the value chain, it can influence
disputes between suppliers and operators of Nokia equipment.
Organizational Design
Since the tasks associated with the execution of a proper IP strat-
egy are many, labor has to be divided and hierarchy and control
have to be established. In addition to filing for and enforcing IP
rights, companies must attend to licensing, technology forecast-
ing, information provision and consultancy regarding the choice
of research trajectories. Reports coming out of IP departments
should help to identify potential strategic allies, select lucrative
market segments, and recruit new personnel.
Researchers agree that Western companies have lagged behind
Nokia keeps a handle on its suppliers by maintaining control of key IP rights in different segments
of the value chain “to forearm against price increases in an upstream segment.”
SPRING 2004 MIT SLOAN MANAGEMENT REVIEW 40
in the organizational implementation of IP strategy. The van-
guards are found in Japan, and Hitachi Ltd. and Toshiba Corp.
are two of the leaders.17 At Toshiba, intellectual property depart-
ments exist at both the business-unit and corporate level.
Toshiba’s IP units provide the planning and coordination of
activities related to IP rights; draft and stipulate technology con-
tracts; protect software; file and license designs, trademarks and
patents; and host an information center. The organizational
structure reflects both the importance assigned to IP rights by
top-level management and the company’s comprehensive
approach to the issue. Toshiba’s IP strategy yielded roughly 340
European patent applications per year between 1978 and 2003
over hundreds of technological subgroups.18
The increasing corporate value of intellectual property has a
consequence for senior leaders: They must not leave IP-related
questions to functional management levels alone. Instead, they
must take a strategic approach to the issue. The key lies in treat-
ing intellectual property as they would any other strategic issue
facing their organizations. By thinking through the questions sys-
tematically — about competitive advantage, industry structure,
entry barriers, competitors, suppliers and organization — they
can make IP a strategic weapon in the corporate arsenal.
REFERENCES
1. Peter J. King, managing partner of Arthur Andersen’s Intellectual
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Value of Patents” (Boston: Harvard Business School Press, 1999).
2. The particular order of the questions is inspired by G. Saloner, A.
Shepard and J. Podolny, “Strategic Management” (New York: John
Wiley, 2000), 160, 165.
3. Next to the specifically mentioned references in the following end-
notes, this article builds on the following major contributions: G. Rahn,
“Patenstrategien japanischer Unternehmen,” Gewerblicher Rechts-
schutz und Urheberrecht (international) 5, (1994): 377-382; E. Kaufer,
“The Economics of the Patent System” (New York: Harwood Academic
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Giants: Cumulative Research and the Patent Law,” The Journal of
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in Sequential Innovation,” RAND Journal of Economics 26 (spring
1995): 20-33; P.C. Grindley and D.J. Teece, “Managing Intellectual
Capital: Licensing and Cross-Licensing in Semiconductors and Elec-
tronics,” California Management Review 39 (winter 1997): 8-41; D.J.
Teece, “Capturing Value From Knowledge Assets: The New Economy,
Markets for Know-How and Intangible Assets,” California Management
Review 40 (spring 1998): 55-79; R.C. Levin, A.K. Klevorick, R.R. Nel-
son and S.G. Winter, “Appropriating the Returns From Industrial
Research and Development,” Brookings Papers on Economic Activity
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Cross Licenses, Patent Pools and Standard-Setting,” Innovation Policy
and the Economy 1 (2001): 119-150.
4. In 1926 Novo Nordisk started exporting insulin to the rest of Scandi-
navia and Germany. In 1936 Novo was supplying insulin to not fewer
than 40 countries.
5. For a comprehensive empirical study of this industry, see R.
Bekkers, G.M. Duysters and B. Verspagen, “Intellectual Property
Rights, Strategic Technology Agreements and Market Structure: The
Case of the GSM,” Research Policy 31 (2002): 1,141-1,161.
6. Ibid. According to the literature, however, it seems legitimate to say
that Motorola did not fully sustain this advantage to the present.
7. J. Hudson, “Generic Take-Up in the Pharmaceutical Market Follow-
ing Patent Expiry: A Multi-Country Study,” International Review of Law
and Economics 20, no. 2 (2000): 205-221.
8. For discussions of patent fences, see O. Granstrand, “The Econom-
ics and Management of Intellectual Property: Towards Intellectual Cap-
italism” (Cheltenham, England: Edward Elgar Publishing, 1999): 6-8,
W.M. Cohen, R.R. Nelson and J.P. Walsh, “Protecting Their Intellec-
tual Assets: Appropriability Conditions and Why U.S. Manufacturing
Firms Patent (or Not),” working paper w7552, National Bureau of Eco-
nomic Research, Cambridge, Massachsuetts, 2000; and M. Reitzig,
“The Private Value of ‘Thickets’ and ‘Fences’ — Towards an Updated
Picture of the Use of Patents Across Industries,” Economics of Innova-
tion and New Technology, in press. 
9. A. Arora, “Patents Licensing and Market Structure in the Chemical
Industry,” Research Policy 26, no. 4-5 (1997): 391-403.
10. B.H. Hall and R.H. Ziedonis, “The Patent Paradox Revisited: An
Empirical Study of Patenting in the U.S. Semiconductor Industry,
1979-1995,” RAND Journal of Economics 32, no. 1 (2001): 101-128.
11. Arora, “Patents Licensing and Market Structure in the Chemical
Industry,” 393.
12. See I. Horstmann, G. MacDonald and A. Slivinski, “Patents as
Information Transfer Mechanisms: To Patent or (Maybe) Not To
Patent,” Journal of Political Economy 93 (October 1985): 837-858, for
a more fundamental discussion of the trade-off between patenting and
secrecy.
13. C. Heath, J. Henkel and M. Reitzig, “Who Really Profits From
Patent Infringements? Innovative Incentives and Disincentives From
Patent Indemnification,” working paper 2002-18, Center for Law, Eco-
nomics and Financial Institutions at Copenhagen Business School,
Copenhagen, Denmark, 2002.
14. T.J. Calabrese, A.C. Baum and B.S. Silverman, “Canadian
Biotechnology Start-Ups, 1991-1997: The Role of Incumbents’ Patents
and Strategic Alliances in Controlling Competition,” Social Science
Research 29, no. 4 (2000): 503-534.
15. H. Ernst, C. Leptien and J. Vitt, “Inventors Are Not Alike: The Dis-
tribution of Patenting Output Among Industrial R&D Personnel,” IEEE
Transactions on Engineering Management 47, no. 2 (2000): 184-199.
16. According to the database of the German Patent Office, Henkel’s
national trademark protection in Germany for detergents comprises 64
trademarks in connection with Persil, 19 in connection with Weisser
Riese, 11 with Spee, 13 with Fewa and 9 with Perwoll — to mention
five of its nine brands.
17. Granstrand, “The Economics and Management of Intellectual
Property”; see also R.H. Pitkethly, “Intellectual Property Strategy in
Japanese and U.K. Companies: Patent Licensing Decisions and
Learning Opportunities,” Research Policy 30, no. 3 (2001): 425-442.
18. According to the European Patent Register, Toshiba (which
includes Kabushiki Kaisha Toshiba as well as those corporations bear-
ing the fragment Toshiba in their corporate name) had filed for 8,427
European patents between 1978 and October 2003. Patents were dis-
tributed over 2,430 subgroups.
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