Most companies focus on protecting proprietary technologies that give their products and services an advantage over those of competitors. The classic cases include Xerox, which legally monopolized the copier market for nearly 20 years, earning double-digit margins and earnings growth. When Xerox was forced to license is copier patents under terms of a federal consent decree in 1975, the company saw its market share, margins, and industry dominance quickly erode.
Another example, Dell Computer owed it’s early success in the PC business not to the technological superiority of its products, mostly made with off-the-shelf components, but rather to its innovative build-to-order direct sale business model. In other words its sales advantage was not in the computers but in its system for selling, distributing, and providing after sale support for those computers. These elements were patent protected.
In contrast Walmart owes its $100+ billion retailing success not to its products, but to the sophisticated purchasing, marketing, and distribution systems that enabled the company to operate more efficiently, maintain lower prices, and achieve higher rates of customer satisfaction than its competitors do. But notice a difference in how Walmart and Dell have attempted to sustain and leverage their respective competitive advantages. Dell secured over 40 patents on its innovative business model. The patents covered not only the customer configurable online ordering system but also the method by which the system was integrated with sales, continuous flow manufacturing, inventory, distribution, and customer service operations. No one knows how Dell might litigate to block a potential direct sales rival from copying it system too closely. However, Dell did leverage those patents to bolster its market advantage by using its patents is a collateral for a cross licensing deal with IBM that in 1999 provided it with lower cost components. This use of patents is in direct contrast to Walmart, which had no patents on its business system; it relied instead on the notoriously ineffective protection of trade secret law. As result the retailing giant couldn’t even prevent key employees from walking out the door and taking their knowledge of Walmart’s proprietary system to eventual online rivals such as Amazon.
The crucial point here is that companies must ensure that they protect with intellectual property whatever it is that has the most value to their business and whatever represents the most vital source of their competitive advantage. In doing so their intellectual property maintains their sustained advantaged business position. Said another way, when looked at from a competitor’s standpoint, the risk of losing an infringement suit has to make economic sense. It rarely does for products and services protected by high quality patents and other forms of IP. There are risk exposure analysis programs available that calculate the risk a company takes when knowing violating other’s IP. These are typically based upon decision trees with possible outcome and respective payoff branches, backed-up by litigation database information specific to the business/technology sector involved.