Tuesday, November 15, 2011

Complementary Innovation

By Jim O'Shaughnessy

Targeted invention efforts complement a company’s organic innovation processes and thus have come to be dubbed “complementary innovation” or “non-organic innovation” to compare or contrast them with the former, more familiar innovation activities. The rationale for these complementary activities is rooted in the practical: no company can possibly afford to address every innovation challenge confronting it through its normal resource allocation process, yet no company can remain fully exposed to the innovation threats imposed by vigorous competition. This gap between necessity and affordability is the niche of complementary innovation.

The technique was born with a specific challenge in mind. In the early 1990s, Advanced Micro Devices was on the horns of a dilemma. It was paying Intel very substantial patent license fees it could ill afford but required the license from Intel as a market enabler. Intel’s portfolio was size dominant and AMD was compelled to true up the balance with cash.

This situation inspired the first targeted invention effort. Over a reasonable period of time AMD was able to complement the patent portfolio realized from its ongoing investments in organic innovation with new additions from this complementary process to achieve its goal of a strategic patent balance with Intel. AMD eventually cross-licensed with Intel at par. The complementary innovation strategy met its intended objective there—bulking up the size and diversity of the AMD portfolio to be found economically equivalent to Intel’s portfolio.

Similarly, at Rockwell we were disadvantaged for years in cross licensing in the field of telecommunications with AT&T and its patent successor, Lucent. We broke the paradigm in a way different from the approach we had previously adopted with AMD but based on certain principles that became evident in our work there.

Targeted invention efforts can contribute considerably to the negotiation calculus and dynamics. This can be exemplified by Rockwell’s negotiations with Lucent, assuredly a dominant party in telecommunications, where we used workshops to build quickly the size of our communications portfolio in comparison to historical organic innovation efforts. This had the added benefit of increasing patent velocity dramatically. In crafting the portfolio, and mindful of the typical lognormal value distribution that comes from historic practices, we determined to add to the portfolio based on a simple but powerful premise: patent things important to others, in this case, Lucent.

We took this aphorism one step further: determine where Lucent was vulnerable and patent into its weaknesses. Patents applied to points of vulnerability or weaknesses have greater blocking potential and can be felt by the other party to have greater relevance to its business. And, because we had a more favorable leverage ratio in the implicated market, the negotiation turned an important corner that favored Rockwell over the then dominant party.
This result did not occur overnight either in crafting the necessary portfolio, negotiating the cross license more favorably to Rockwell, or eventually in realizing the benefits of the investment. 

Complementary innovation is often used as a hedge. On the premise that no company can afford all the organic innovation it needs, here targeted invention can populate the portfolio with patents useful later as the company negotiates its entrée to the market otherwise foreclosed by competitor’s patents except perhaps at very high costs. The technique can also be used well in advance of market entry to begin developing a portfolio capable of sheltering the investments to be made as part of the strategic plan.
I have worked with many companies in many countries in many and diverse industries that use these and like practices to target gaps in their portfolios when assessing the capabilities of their patents to secure the desired or necessary objectives. This is a hallmark of complementary actions. 

This article was originally published in Innovating Perspectives in March 2008. For this and other back issues of our newsletter, please visit our website at innovationsthatwork.com or call (415) 387-1270.  

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