The most significant economic target that Japan aims to achieve by the 2020 Tokyo Olympics and Paralympics is gross domestic product of Y600 trillion – a figure which would represent its strongest economic performance since the end of the Second World War. The key to achieving a strong economy is to increase the proportional economic contribution made by small to medium-sized enterprises (SMEs) and entrepreneurial ventures. From an IP perspective, SMEs and entrepreneurial ventures require support in order to create a sustainable competitive advantage. Conventionally, specialist IP firms have provided support by helping to identify superior technologies, filing patent applications and advising on commercialisation. However, support needs to be provided in a way that facilitates the preliminary design of the business and the assessment of which technologies should be established as IP rights.

Patent attorneys and other IP specialists need to adopt a new approach, whereby IP support focuses on business-effective outcomes. Providing IP support for the sole purpose of acquiring IP rights offers little value – any organisation that cannot make use of those rights cannot create a sustainable competitive advantage

VRIO analysis: ‘I’ for IP rights

‘VRIO analysis’ is a business analysis method which categorises the characteristics of a company’s management resources into four elements, which are then combined in order to evaluate the company’s competitive advantage.

This is a business analysis method that everyone involved in intellectual property should know; indeed, running a company without knowledge of VRIO analysis jeopardises the long-term viability of the entire venture.

The letters in ‘VRIO’ stand for the following four concepts:

  • ‘V’ is for value;
  • ‘R’ is for rarity;
  • ‘I’ is for inimitability; and
  • ‘O’ is for organisation.

A major factor of ‘inimitability’ is the acquisition of IP rights such as patent rights. This is why VRIO analysis is relevant to everyone involved in intellectual property.

Managerial status can hence be classified as follows:

  • ‘VRIO’ – sustainable competitive advantage;
  • ‘VRI’ – potential competitive advantage;
  • ‘VR’ – temporary competitive advantage;
  • ‘V’ – competitive equilibrium; or
  • none – competitive disadvantage.

Hence, a business without value, rarity, inimitability or organisation is in a state of competitive disadvantage (and not worth considering for investment); while a business with all of the letters has a sustainable competitive advantage.

The key question lies in the difference between ‘VRIO’ (affording a sustainable competitive advantage) and ‘VR’ (affording a temporary competitive advantage).

Many companies that are maintaining average profits in their sectors do so by successfully selling products or services in particular markets. Because of their distinctive technologies or business models, their management assets have intrinsic value and rarity, satisfying the conditions of ‘VR’ advantage.

When these companies incorporate the two other items – inimitability and organisation – their temporary competitive advantage transforms into sustainable competitive advantage.

Conversely, when a company loses its inimitability and organisation, its competitive advantage will no longer be sustainable, but merely temporary. Hence, scholars and patent attorneys often recommend that company management and IP personnel obtain IP rights (eg, patent rights), thereby acquiring inimitability that is effective for a certain duration (20 years for patents). However, this advice alone is incomplete.

Patent rights alone will not prevent infringement

Astute readers may have noticed that the above examples of IP specialists’ typical recommendations pay no attention to ‘O’ – that is, organisational characteristics for maintaining sustainability. As a result, non-IP-savvy companies which merely acquire patent rights may believe that they have acquired a competitive advantage without realising that they are ignorant of the quality or significance of that advantage. This result reflects one of the failings of IP specialists, which is especially prevalent in Japan.

Although the impression of inimitability can be reinforced by acquiring exclusive patent rights, this activity is totally pointless without organisational traits that can guarantee their exclusivity. Organisation is the key factor that allows management resources to operate in combination; and ‘O’ is a key element of VRIO analysis. In fact, a company with no structure, agency or means to carry out the exercise of IP rights has been described as being like “a nation which has only laws and penalties, and which lacks any enforcement structure such as a police system to ensure observation of the law”. The patents owned by such a company will readily be infringed by competitors; indeed, acquiring the patents will result in the disclosure of critical information to competitors.

It would be wrong for an IP specialist to recommend acquiring IP rights to a company that has no structure, agency or means to exercise them – indeed, to do so would be doubly wrong for a company whose top management or IP personnel believe that the exercise of rights is beyond the scope of their ability (ie, a company with no intention of exercising the rights).

Further, provided that a small and inconspicuous company is profitable, there is no particular need for it to acquire patent rights. It can be said that patent rights benefit companies that aim to achieve conspicuous success; they are practically useless for companies that have no intention of doing so.

The question thus arises for business owners and high-level managers: have you received a clear explanation of this matter from the specialists whom you have met? Why not test the effectiveness of the patent rights that you have acquired?

If the traits of inimitability and organisation cannot be achieved in-house, external service providers are required.

Transition to publicly listed company

What if a business intends to achieve conspicuous success, but has no structure, agency or means to exercise IP rights? This is one of the most significant problems faced by entrepreneurial technology ventures that aim to become publicly listed companies.

As discussed above, no matter what one-of-a-kind technologies it may have, if a company is small, inconspicuous and profitable, then no other company would consider following its example or copying from it. The bottom line is that no one is paying attention.

Once a company is listed, however, the situation is different: that company will attract the world’s attention regardless of whether it is seeking to do so. Parties attempting to follow its example or copy from it will appear one after another.

There may also be parties that attempt to crush the listed company and deprive it of business and profits. It is therefore essential for listed companies to establish both inimitability and organisation, through a structure that ensures it can maintain its sustainable competitive advantage.

Maintaining sustainability

Suggestions for establishing organisational traits for maintaining sustainability might include the following:

  • establishing an IP department or a legal department;
  • sharing patent rights with another company that has an IP or legal department;
  • collaborating with another company that specialises in the exercise of IP rights or engaging such a company to represent it in exercising its rights; or
  • forming a temporary partnership with another party (eg, an external patent firm or law firm) until the company can establish an in-house IP department or legal department.

Ideally, establishing an IP department or legal department within the company will correspond with the optimal utilisation of management resources. However, depending on internal circumstances (eg, human and financial resources, specialised knowledge and skills and practical experience), the company must make use of the skills and services of external partners through collaboration.

This problem goes beyond SMEs and entrepreneurial ventures. There have been numerous cases of major companies or companies with prominent products and services plateauing at the stage of acquiring patent rights, having failed to reach the level of organisation that allows for a continuous response to risks.

By implementing ideas such as the above, ‘VR’ (affording temporary competitive advantage) incorporates ‘I’ to become ‘VRI’ (affording potential competitive advantage); it then incorporates ‘O’ to become ‘VRIO’, ensuring a sustainable competitive advantage.

The ‘VRI’ crossroads

In Japan, numerous entrepreneurial technology ventures have developed and held the rights to high-value technologies which they have failed to commercialise. This is partly because a venture entrepreneur, confident in his or her company’s ideas and technologies, will often believe that success is assured based on their value and rarity alone. This attitude is clearly in evidence in transactions between venture entrepreneurs and financial institutions: a venture entrepreneur will often apply for finance on the grounds of value and rarity alone. In some cases, he or she will succeed. If financing is not forthcoming, the entrepreneur often blames the financial institution – but financial institutions are not supposed to finance companies that have no expectation of future success, regardless of present success.

A company finds itself at a crossroads when ‘VRI’ is established. Companies often endeavour to create the management resources necessary to achieve value, rarity and inimitability, to the point that their funds become depleted. Venture entrepreneurs should take this as a chance to reflect on whether they should aim to achieve the necessary organisational traits in-house (ie, establishing VRIO) or whether they should follow the path of a small R&D company, maintaining ‘VRI’ alone.

In the latter case, they need not establish in-house organisation, but will need only an R&D capability. Maintaining the R&D capability at full capacity will be a source of sustainable competitive advantage, as an alternative to organisation. This may result in a change of direction, so as to be equipped with the required organisational traits at an appropriate time, or a merger or acquisition with another company that already has them.

Thus, choosing the path of a small R&D company is one option. Achieving ‘VRI’ can pave the way for the subsequent survival of the business. However, for an entrepreneur that aspires to greater success, ‘VRIO’ should be the target – indeed, it is the only guarantee of long-term success. On making this business choice, the following advice should be taken into account:

  • Resources should no longer be invested in developing value and rarity.
  • Advisers who can create a vision of a profitable business will be required.
  • The focus should be on designing the business first, then acquiring patents.

Specialists who provide full-suite IP support and commercialisation support services for SMEs and entrepreneurial ventures are not connoisseurs of value and rarity, but are experienced managers or management advisers who can support the establishment of inimitability and organisation. Instead of establishing inimitability first and planning organisation next, high-quality human resources experts will plan and design the organisation of the business first, then consider which part of it should evolve into inimitability. This fits the fundamental structure of the patent system, in which a profitable business is designed first, a patent is subsequently sought to protect the business and a patent application is filed to acquire the patent.

As long as Japan is seeking to strengthen its economy in the years to come, conventional HR methodologies aimed at achieving a temporary competitive advantage through value and rarity are no longer required. What is required is specialist guidance on designing a profitable business first, and acquiring patents that accurately correspond with the business plan.

Masayuki Shobayashi

This article first appeared in IAM. For further information please visit www.iam-media.com.