3143 P-01 3/23/99 10:07 AM Page 1 1 The Dominance of Intellectual Property 1.1 Eclectic Science 3 1.2 Paradigm Shift 4 1.3 Looking at Intellectual Property Value 6 (a) H. J. Heinz Company 7 (b) Johnson & Johnson 10 (c) Merck & Company 10 (d) Microsoft Corporation 11 (e) Minnesota Mining & Manufacturing Company (3M) 13 (f) Philip Morris Company 13 (g) Nike, Inc. 14 (h) Procter & Gamble Company 15 1.4 Investment Performance 15 (a) Intellectual Property Infringement Damages 17 (b) Patent Infringement Damages 17 (c) Trademark Infringement Damages 18 (d) Copyright Infringement Damages 18 1.5 Overview of This Book 19 010 3143 P-01 3/23/99 10:07 AM Page 2 3143 P-01 3/23/99 10:07 AM Page 3 ntellectual property is the central resource for creating wealth in Ialmost all industries. The foundation of commercial power has shifted from capital resources to intellectual property. In fact, the def- inition of capital resources is shifting. No longer does the term capital resource bring to mind balance sheets of cash or pictures of sprawling manufacturing plants. The definition of capital includes intellectual property such as technological know-how, patents, trademarks, copy- rights, and trade secrets. Corporations once dominated industries by acquiring and managing extensive holdings of natural resources and manufacturing facilities. Barriers to entry were high because enormous amounts of fixed asset investments were required to displace well- entrenched players. Today, companies that once dominated industries are finding themselves fighting for survival. Up-start companies are creating new products and services based, not on extensive natural resource holdings or cash hordes, but on intellectual property resources. Management of these properties will determine the winners from the losers in the decades ahead. 1.1 ECLECTIC SCIENCE Dr. Leroy Hood was recently featured in a front-page story of The Wall Street Journal. He is in the business of automating the process biotechnology scientists’ follow to find the defective genes underlying cancer. The search must be conducted among the 100,000 genes that comprise the human species. Making matters more complicated, the current process is slow and tedious because precisely measured solu- tions must be manually shuttled among hundreds of test tubes. Dr. Hood is changing the process by combining a broad range of technologies. 030 3143 P-01 3/23/99 10:07 AM Page 4 THE DOMINANCE OF INTELLECTUAL PROPERTY One of his machines identifies the sequence of the three billion mole- cules that make up human DNA and does it 60 times faster than man- ual methods. He has accomplished this by bringing biotechnology together with computer science, mechanical engineering, physics, liq- uid science, optics, and electronics. Dr. Hood exemplifies the trend that all businesses must now follow if they are to be successful. He marries established ideas and technologies from far flung fields. In less than ten years corporations have been faced with techno- logical advances including the continued miniaturization of electronics and widespread communications without wires. Surgical equipment manufacturers are facing increased use of noninvasive surgical tech- niques. Computer makers have seen their mainframe businesses lit- erally reduced to, and replaced by, a tabletop model. CD-ROMs are killing traditional encyclopedia sales. All of these changes are tech- nology based. As a result, all corporations need more technology and it is often the kind they do not possess. The New World order is defined by change. The leaders in this tumultuous environment will be those that embrace change. Change is coming fast and it keeps com- ing—all driven by technology. Time to gain expertise in all the differ- ent technologies required to compete does not exist. There is no room for the old “not-invented-here” mindset. The pace of change does not afford any company the luxury of developing expertise in all the diver- gent technologies that it needs. It is even doubtful that such a wide ranging goal could be accomplished. 1.2 PARADIGM SHIFT In the world before the Industrial Revolution, early man moved away from a hunter-gatherer economy to an agriculturally based economy. Our ancestors roamed across large expanses in search of animals to hunt. Self-sufficiency dominated this model. A major shift occurred when early humans decided to stay in one place and grow the materials 040 3143 P-01 3/23/99 10:07 AM Page 5 1.2 PARADIGM SHIFT that they needed for survival. As an enterprise, agriculture employed virtually everyone in the world not living in the cities and used them in a series of repetitive tasks, done sequentially every season; pre- paring the ground, seeding, tending, harvesting. Then the cycle was repeated. In the agricultural paradigm, the amount of sun, rain, and tem- perature were vital to a successful season. People became accustomed to dealing with cycles measured in terms of days and seasons. Most farms were small and capable of supporting only one family, reinforc- ing mankind’s desire to be self-sufficient. Over time, however, it became clear to some that the agricultural society was constrained by two key elements: labor and land. Farming at a higher level of out- put—above mere subsistence—required more land and more labor. Expansion of the agricultural economy required collective work and abandoning elements of self-sufficiency. The Industrial Revolution created a new paradigm. Fueled by a world-wide affluence and an expanding population, the industrial revolution was triggered by technology and the realization that some products could be mass-produced and sold much more cheaply than similar hand-crafted products. The new paradigm of economic be- havior evolved into one requiring large amounts of capital for the pur- chase of buildings, machinery, and equipment. Companies were formed to raise the needed capital and individualism initially took another step backwards. The new companies soon learned that the cost of produc- ing their goods meant not only controlling the manufacture of prod- ucts, but also that vertical integration enhanced cost controls and profits. Soon, large companies were acquiring their suppliers of coal, suppliers of rail transportation, and finally the retailers that sold the manufac- tured products. The new mega-companies desired to become entirely independent with regard to all of the functions required to obtain raw materials, produce sub-assemblies and component parts, produce fin- ished goods, and retail them to the consumer. Self-sufficiency once again reigned, but this time in the form of a different kind of collec- tive: the mega-company. 050 3143 P-01 3/23/99 10:07 AM Page 6 THE DOMINANCE OF INTELLECTUAL PROPERTY The Intellectual Property Age is now upon us and the new para- digm is yet to be fully played out, but clearly the trend again contin- ues away from independence and toward a vital need for the talents of others. Interdependence is at the root of the paradigm shift taking place. Technology management in the future will center on leveraging technology that is owned to gain access to technology that is needed. Sharing technology is a concept many will find difficult to accept but accept it they must. Denis Waitley writes in Empires of the Mind,1 “The leaders of the present and the future will be champions of coop- eration more often than of competition. While the power to maintain access to resources will remain important, ‘the survival of the fittest’ mentality will give away to survival of the wisest, a philosophy of understanding, cooperation, knowledge, and reason.” Access to vital resources has changed because the nature of the most important resources is no longer embodied in fixed material assets. Gaining access to technology means cooperating with other companies, even competitors, in order to gain access to their knowledge-based resources. Independence is being replaced by interdependence. Waitley succinctly explains, “The future leaders will only get what they want by helping others get what they want.” This point was previously illustrated by the story about Dr. Leroy Hood who uses technology from far-flung fields to accomplish his goals. 1.3 LOOKING AT INTELLECTUAL PROPERTY VALUE Intangible assets and intellectual property dominate the value of busi- nesses. Here is a comparison of the market value of selected companies with the accounting value presented on their respective balance sheets. 1Denis Waitley. Empires of the Mind—Lessons to Lead and Succeed in a Knowledge- Based World, New York: William Morrow and Company, Inc., 1995, page 8. 060 3143 P-01 3/23/99 10:07 AM Page 7 1.3 LOOKING AT INTELLECTUAL PROPERTY VALUE The market value has been determined by combining the total stock value of shareholders’ equity and the book value of long-term debt.2 When this value is compared to the balance sheet for different asset cate- gories a huge gap of value is identified. The gap represents the aggregate value of all intangible assets and intellectual property of a company. A diverse group of companies has been selected for this analy- sis. They represent a broad cross-section of industries, all of which show a significant gap in accounting for intellectual property and intangible asset values.3 The following companies have been selected to demonstrate the dominance of intangible assets and intellectual property, not only for specific companies but also for a broad cross section of industries: Company Industry Heinz Food Johnson & Johnson Medical Merck Pharmaceutical Microsoft Computer Software Minnesota, Mining & Manufacturing (3M) Industrial Philip Morris Tobacco Nike Apparel Procter & Gamble Consumer (a) H. J. Heinz Company H. J. Heinz is not a glitzy entertainment company or a high-tech telecommunications company. Heinz is a food company that is the leading producer of ketchup with over 50 percent of the U.S.