Copyright © 2008 by Nelson, a division of Thomson Canada Limited ENTREPRENEURSHIP A PROCESS PERSPECTIVE Robert A. Baron Scott A. Shane A. Rebecca Reuber Slides Prepared by: Sandra Malach, University of Calgary

Copyright © 2008 by Nelson, a division of Thomson Canada Limited 7 Intellectual Property: Protecting Your Ideas 1

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 1.Explain why product development in new firms is difficult, but why new firms tend to be better than established firms at product development in most industries. 2.Explain why established firms find it easy to imitate entrepreneurs’ intellectual property quickly and at a low cost. 3.Define a patent, explain what conditions are necessary for an inventor to patent an invention, and outline the pros and cons of patenting.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 4.Define an industrial design, explain what conditions are necessary for an invention to be an industrial design. 5.Define a trade secret, explain what conditions are necessary for an invention to be a trade secret, and outline the pros and cons of trade secrets. 6.Define a trademark, describe why trademarks are useful to entrepreneurs, and explain how an entrepreneur can obtain a trademark.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited LEARNING OBJECTIVES 7.Define a copyright, and describe how it protects an entrepreneur’s intellectual property. 8.Describe a first-mover advantage and explain the conditions under which it provides a useful form of intellectual property protection. 9.Describe complementary assets, and explain when it is better for an entrepreneur to obtain control over complementary assets than to be innovative.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited “Every man with an idea has at least two or three followers.” --Brooks Atkinson Once Around the Sun, 1951

Copyright © 2008 by Nelson, a division of Thomson Canada Limited INTELLECTUAL PROPERTY The core ideas about a new product or service The only major advantage (most of the time) new ventures have over established firms

Copyright © 2008 by Nelson, a division of Thomson Canada Limited THE PRODUCT DEVELOPMENT PROCESS A difficult and uncertain process Solution must be produced and marketed for less than the customer is willing to pay May result in something different than people set out to produce

Copyright © 2008 by Nelson, a division of Thomson Canada Limited ESTABLISHED FIRM ADVANTAGES Better at manufacturing Better access to capital Tacit knowledge from experience Economies of scale Better at marketing Established reputations Established customers

Copyright © 2008 by Nelson, a division of Thomson Canada Limited NEW FIRM ADVANTAGES Superior product development Develop new products cheaper and easier No bureaucratic structures and rules in place Better incentives for employees Greater flexibility

Copyright © 2008 by Nelson, a division of Thomson Canada Limited WHY NEW FIRMS LOSE AT PRODUCT DEVELOPMENT The typical unpatented process innovation can be copied at less than 50% of the cost of developing the original innovation more than 40% of the time. (Richard Levin)

Copyright © 2008 by Nelson, a division of Thomson Canada Limited WHY IS IMITATION SO EASY? Competitors have a variety of methods for imitating intellectual property: Reverse engineering Hiring employees or suppliers from the entrepreneur Assigning staff to copy the new product

Copyright © 2008 by Nelson, a division of Thomson Canada Limited PATENTS To obtain a patent, an invention must: Be novel Not be obvious to a person in the field Be useful Not publicly disclosed for more than 1 year prior to the date of filing.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited WHAT CAN YOU PATENT? YES Process Method Machine Chemical formula Design NO Business method Something that doesn’t work Most software Life Form

Copyright © 2008 by Nelson, a division of Thomson Canada Limited THE PATENT PROCESS File an Initial Application with CIPO Determine prior art (novelty) Determine claims carefully Submit a full application Application becomes public 18 months after initial filing date. Patent valid for 20 years from application date

Copyright © 2008 by Nelson, a division of Thomson Canada Limited ADVANTAGES OF PATENTS Helps to raise capital by demonstrating competitive advantage Raises the cost of imitation Provides a monopoly right Prevents a second party from using the invention as a trade secret

Copyright © 2008 by Nelson, a division of Thomson Canada Limited DISADVANTAGES OF PATENTS Cost (min. approx $15K) Requires disclosure of the invention Provides only a 20 year monopoly Can be circumvented Difficult and costly to defend Less effective for most types of technology Can be irrelevant if technology is fast moving Requires patents for each individual country

Copyright © 2008 by Nelson, a division of Thomson Canada Limited INDUSTRIAL DESIGN Features of shape, configuration, pattern or ornamental design Purely decorative in nature Term 10 years Application must be submitted within 12 months of disclosure. Mark with (D), name of owner

Copyright © 2008 by Nelson, a division of Thomson Canada Limited TRADE SECRETS A piece of knowledge that confers an advantage on a firm and is protected by non-disclosure agreements and processes. Protect a competitive advantage without disclosing how an underlying technology works

Copyright © 2008 by Nelson, a division of Thomson Canada Limited DISADVANTAGES OF TRADE SECRETS Must be kept hidden to remain valuable Doesn’t provide a monopoly right To enforce and claim damages in court, must show a loss of competitive advantage or breach of contract

Copyright © 2008 by Nelson, a division of Thomson Canada Limited TRADEMARKS A word, phrase, symbol, design that distinguishes the goods and services of one company from those of another Obtained by using the mark or filing an application Term 15 years, renewable Application to CIPO.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited COPYRIGHTS A form of intellectual property protection provided to the authors of original works of authorship Protect the right to reproduce, further derive, copy, or display the protected item Advantages to filing but not required. Term: life of the author + 50 years.

Copyright © 2008 by Nelson, a division of Thomson Canada Limited FIRST MOVER ADVANTAGE: The Advantage of Speed and Timing The first to offer a product in a particular market Lead-time advantage Locations Suppliers Learning curve advantage

Copyright © 2008 by Nelson, a division of Thomson Canada Limited FIRST MOVER ADVANTAGE Conditions for First Mover advantage: They control scarce or intangible assets More customers result in increased value Switching costs People are content with the status quo Reputations are important The learning curve for production is proprietary

Copyright © 2008 by Nelson, a division of Thomson Canada Limited WILL A NEW COMPANY PROFIT? Three factors determine whether a new company will profit from introducing a new product: The ability to secure a strong patent The absence of a dominant design The presence of complementary assets in marketing and distribution

Copyright © 2008 by Nelson, a division of Thomson Canada Limited WHICH IS MOST IMPORTANT? Complementary Assets Are More Important… Being Innovative Is More Important… When patents are not very effective When patents are very effective When a dominant design existsBefore a dominant design exists When learning curves are shallow or not proprietary When learning curves are steep or proprietary When knowledge is codifiedWhen knowledge is tacit When products are observableWhen products are not observable