Another choice: The Intellectual Property Strategy

Over the past two weeks, I have been outlining broad strategic options for entrepreneurs of which a disruption strategy is just one choice. The concept is that a given entrepreneurial idea can be commercialised in many different ways. The key to entrepreneurial strategy is to identify the feasible set of choices available to start-ups and to write a business plan for each. After all, you can’t have a strategic choice without actually having a choice and I maintain that entrepreneurs often have many more choices than they think at the outside.

Thusfar, I have considered two options that have in common that they are focused on execution. Recall that being focused on execution means that a start-up embraces potential and on-going competition and formulates a plan to continually beat that competition by developing and continually re-investing in capabilities that allow the venture to beat the next wave of competition on quality, cost or some combination of the two. However, in choosing to focus on execution, a start-up can choose whether to be oriented towards competition (and building out a new value chain in competition with established firms) or to be oriented towards cooperation (and work within existing value chains). These two strategies were termed disruption and value chain respectively and each might be the appropriate one to be matched with an entrepreneurial idea.

Today I want to turn to strategies that are based on investing in control rather than execution. As I pointed out in a previous post, investing in control represents a somewhat familiar — or textbook — path to earning monopoly rents (or competitive advantage) as it involves undertaking a strategy that gives the entrepreneur control over key resources or assets that themselves allow the entrepreneur (or others) to create entry barriers. Thus, in contrast to focusing on execution, control involves more investment upfront but then, if successful, an easier competitive life later on as the venture can live off the future monopoly rents as it would an annuity because its customers would have fewer options to switch out to in the future.

As with execution, there are both compete and cooperate options open to entrepreneurs investing in control. Indeed, with these two dimensions, strategies now can be easily placed in a 2×2 (the mainstay of the MBA classroom).

You’ll notice that I have left one of these blank — I’m trying to create a bit of anticipation for a future post. But today, I want to talk about the intellectual property strategy. Like a value chain strategy, the intellectual property strategy involves orienting your venture towards selling to established firms, but unlike it, the focus is on control. The term intellectual property strategy is no accident because the image we have in mind is of an entrepreneur controlling their core idea and, basically, selling that idea.

While control can come as a result of asset development, network effects and the advantages of scale and liquidity, it can also come from something as simple as intellectual property protection. Consider the case of the George Foreman Lean Mean Fat-Reducing Grilling Machine. The grill was invented by Michael Boehm and Robert Johnson based on an inspiration from George Foreman, the famous boxer, who used to tilt a skillet pan when cooking burgers so as to drain out excess oil and fat. A patent was filed for the unique design in 1995, but prior to that, Boehm had done a deal with Salton Inc to manufacture and distribute the grill.

In this strategy, two IP assets were combined and sold. The grill (and associated patent) and George Foreman’s name (with its associated story). Suffice it to say, this turned out to be a huge success with the grill selling over 100 million units in just 15 years. Foreman was reported to have earned over $200 million from the deal; far more than he earned from boxing.

That’s basically the intellectual property strategy. This makes it look simple but it will usually involve lots of investment and time to appropriately protect and control the idea. It may also work by the venture acquiring complementary assets in the existing value chain rather than by being bought out by those firms. It all depends.

The point is that it is often an option for an entrepreneurial firm to undertake this strategy. Then again sometimes entrepreneurs flirt with it and decide on another path. Google and Facebook famously had these options presented but chose a different path; something I’ll return to very shortly …