Why You Need Intellectual Property Protection

Before you can understand how to use patents, trade secrets, copyrights, and trademarks as strategic tools, you first need to understand why you need intellectual property protection at all. The answer lies in the components of a successful technology strategy. Introducing an innovative new product or service that meets the needs of customers is a necessary but not sufficient condition for success. Success also depends on protecting your product or service, or the way it is produced and sold, against imitation by competitors. Otherwise, your competitors rather than you will capture the profits that flow from your innovation.

Why is the ability of competitors to imitate your products and services so problematic to your profitability as an innovator? The answer is simple. You need to earn a profit on the sale of those innovative products and services to recoup the investment that you made to develop them. Initially, when you introduce a new product or service, you will have a monopoly; no one else yet offers a product or service that meets the same needs of the market you are serving. Your monopoly position allows you to charge high enough prices to generate the profit margins that you need to recoup your investment.

Unfortunately, any success that you have will motivate your competitors to copy what you are doing. If your competitors can come up with a product or service that meets the same customer need, or they can undermine your advantages in producing or selling your product by copying how you do those things, then they can capture some of the profits that you are earning. To make matters worse, the more successful you are at the introduction of the new product or service—and the less you want to be imitated—the more motivated your competitors will be to imitate what you are doing. Your success makes it more obvious that competitors should imitate you—and in many cases it provides them with the information that they need to imitate your new product or service, or your method of producing and selling it, successfully.

If imitators are not stopped, they will undermine all of your profit. To produce their copies of your initial product or service, imitators need to get access to the same resources that you are using: the employees, the capital, and the raw materials. As a result, they bid up the prices of these resources, causing your profit margins to fall. Moreover, the imitators take away some of your customers. Each customer that they woo away from you drives down your revenues, further hurting your profit margins.

Clearly, you need to stop your competitors from imitating your new products or services if you are going to be successful. Unfortunately, doing this is not easy. Most new products are simple to copy, particularly for large, established firms. One study by Richard Levin and his colleagues showed that approximately half of the time, the average unpatented new product can be duplicated by 6–10 competitors, at less than half the cost of the original development.¹ Edwin Mansfield performed another study, which showed that, on average, one third of new products can be imitated in 6 months or less.²

Companies can figure out how to imitate your new products and services in a wide variety of ways. Many new products can be reverse engineered, with your competitor’s technical staff simply taking apart your new product and figuring out how it works. Once their engineers figure out how your product works, it is often very easy for them to come up with another way to do exactly the same thing.³

Your competitors can easily hire your employees as a way to learn what they know. Labor markets are free in most countries, and people often leave their jobs to go work for competitors. So your competitors could figure out how to imitate your products and services by offering a higher salary to your employees to get them to jump ship. Then they can use the knowledge that your employees have developed while working for your company to create products and services that imitate yours.

Sometimes simply working on similar new products allows your competitors to figure out how to copy your new products or services. Most companies are working on new products and services that are similar to each other, and just knowing that your company has figured out a way to, say, make a product smaller or add features to it, is sometimes enough to allow your competitors to come up with an imitative product or service on their own.⁴

Your competitors can also look at public documents and publications to figure out how to copy your new product or service.⁵ Because engineers and scientists have strong expertise in the area in which they work, they can often extrapolate from partial information obtained in public sources and figure out how to imitate your new products or services, just on the basis of information that you have made public.