Some days you are slogging through something as exciting as watching paint dry, when something pops up to make you smile. So it was for me today. I had spent most of the day working on a number of patent applications in different phases of the process when I noticed an interesting post on what has become one of my favorite innovation blogs, Endless Innovation.
In “The Semiconductor Industry Patent Scorecard”, Dominic Basulto comments on some data from The Patent Board, reported in the Wall Street Journal. Dominic concludes by questioning whether a company’s innovation record is a predictor of its financial performance. This is a good question. While the topic is too large to address in a simple blog post, I would like to offer a few relevant observations.
We must always bear in mind that there are many factors influencing a company’s financial performance. Innovation is only one aspect of this complex equation. Having said that, I contend, other factors being equal, a company with a strong and established innovation core competence will, over time, outperform the company reliant on accidental innovation. The fact that so many companies fail to achieve a positive ROI on their R&D effort is largely due to the fact that most companies are still floundering in the muck of the accidental innovation quagmire.
But, what about patent activity? Doesn’t that give us insight into who will be the shining star of the investment portfolio? Well, yes it can; but you must understand how to read the tea leaves. For example, in the data graphs shown in the Wall Street Journal, one can readily see that the innovation cycle time values for both profiled companies have been getting worse over the past four years. Is this a clue as to why they are not the financial performance leaders?
Patents, as indicators of innovation, are useful. Within any given industry, there is a certain proclivity toward patent activity. This means that while the ratio of R&D investment to patent activity will vary from industry to industry, within a given industry it is possible to make a comparison. But, what do you compare? The answer to this question is not for the squeamish.
Let’s begin with the basics. Patent activity, measured in terms of applications and grants, is an indicator of the innovation efficiency of an organization. To understand that, you must consider the ratio of R&D spend to intellectual property generated. If you don’t know the R&D spend figures, you can get a rough, but useful, measure by using top line revenue. The simple idea here is that it is much more significant when a $100 million company has 20 filings that it is when a $10 billion company has this same IP output. Interesting? Yes, but there is more to think about.
Where are the companies putting their resources? To gain insights into this, you will need to consider the IPC classes of patent filings to get a rough idea of the technology area in which a company is investing. Are they investing in exciting markets, or are they investing in tired markets? You can peel the onion back even further. By looking at the details of the technologies being developed, you can understand if, within their chosen markets, they are developing technologies on the rising slope of the technology S-curve as opposed to ones that are near the end of their life cycle.
While this is somewhat simplified and I have covered only a few of the basics, I hope this provides some useful insights. Patent records are very interesting sources of information. If you have access to the right tools, they can provide valuable insights into a company. What is more interesting is that they are also tremendous sources of insights for innovation practitioners. But that is a topic for another post.
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