Patent portfolios for strategic R&D planning

J. Eng. Technol. Manage. 15 Ž1998. 279–308

Patent portfolios for strategic R & D planning Holger Ernst

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Institute for Research in InnoÕation Management, UniÕersity of Kiel, Olshausentrasse 40, 24098 Kiel, Germany Accepted 23 April 1998

Abstract Empirical research has found a discrepancy between the perceived importance and the actual level of information on competitor’s R & D strategies. It has been argued in the literature that patent information might be used to overcome this information deficit. However, empirical research further reveals that patent information is rarely used in strategic R & D planning. The present paper explores this issue and introduces two types of patent portfolios for strategic R & D planning. In patent portfolios on the company level, patenting strategies are identified and the quality of overall technological positions is benchmarked against relevant competitors. In addition, we present a patent portfolio on the technological level, which, as it is known from various technology portfolios, helps companies to manage the allocation of R & D resources effectively. Based on patent data from 21 German, European and Japanese mechanical engineering companies we show the application of both patent portfolios for strategic R & D planning purposes. The patent portfolios prove to be a very valuable tool for R & D decision makers in companies. Based on the experiences made in the case study, recommendation for the effective use of patent portfolios are formulated. q 1998 Elsevier Science B.V. All rights reserved. Keywords: Patent; R&D; Strategic planning; Portfolio techniques; Mechanical engineering; Industry; International comparison

1. Introduction A cornerstone of technology management is the establishment of technology monitoring systems, which allow a company to timely anticipate technology changes within its competitive environment, which can, at the same time, yield either chances for new business opportunities or risks for existing businesses. On this information, adequate )

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strategic research and development ŽR & D. decisions can be based ŽZahn, 1995.. However, empirical evidence shows a discrepancy between the perceived importance and the actual level of information on competitor’s R & D strategies. As Simon Ž1988., on p. 468 of his work, concludes: ‘‘Large information deficits occur with respect to the R & D strategy of competitors. This result is not surprising, since it proves to be very difficult to get valid information in this particular area. However, this is the area, which, under a long perspective, receives highest priority’’. 1 This information deficit can first be attributed to the fact that R & D figures are either not at all published by companies or, if published, are only available on an aggregate level and are almost impossible to compare due to measurement differences ŽBrockhoff, 1994.. Second, empirical studies reveal that most companies rely on sources of information for technology monitoring, which allow to detect technological changes only, when the new product has already been introduced into the market, e.g., trade fairs, product analyses, etc. ŽBrockhoff, 1991; Lange, 1994.. Consequently, the time to effectively react to technological challenges is often not sufficient. Therefore, several authors have called for the use of information contained in patent data in technology monitoring ŽAshton and Sen, 1988; Brockhoff, 1991; Mogee, 1991; Shapiro, 1990.. The ability of patent information to measure R & D activities is attributed to some unique characteristics of patents ŽErnst, 1996.. First, patents are available even for companies, which are not required to publish R & D figures and they can be allocated to subfields of interests, i.e., to companies, business units, products, technological fields or inventors. Here, the upcoming of patent databases has greatly enhanced the possibilities of systematic data retrieval on a large scale. Second, patents are an objective measure of R & D activities, since a patent will be examined and eventually granted by the patent office. Furthermore, a large amount of technological information is contained in patents, they are uniformly classified according to the International Patent Application ŽIPC. classification scheme, which eases the analysis of specific technological aspects and they allow the coverage of international technological developments, which gains importance in the light of increasing global competition. In addition, a patent presents a patentee’s non-negligible expectation as to the ultimate utility and marketability of the invention. Finally, in comparison to other information sources, patents are often the only source for the timely recognition of technological changes ŽCampbell, 1983; Ernst, 1996.. Major support for the use of patents as a measure for R & D activities comes from quantitative empirical research, where the lagged relationship between R & D activities, patents and market changes on the company level has been examined ŽHall et al., 1986; Pakes and Griliches, 1984; Ernst, 1996.. As Griliches et al. Ž1986., on p. 7 of their work, summarize: ‘‘Not only do firms that spend more on R & D receive more patents, but also when a firm changes its R & D expenditures, parallel changes occur in its level of patenting’’. Since no time lag was identified in these studies, patents are viewed as an alternative input measure for R & D activities ŽGriliches, 1990.. For a sample of 41 German mechanical engineering companies, a positive relationship between patent

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The quote was translated from German by the author of this paper.

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applications and subsequent sales increases with a time lag of 2 to 3 years from the priority year was found ŽErnst, 1996.. This result supports the use of patent data even as an output measure of R & D, since they indicate those technological activities which lead to subsequent market changes. This information proves to be very valuable, since it goes far beyond the input-oriented measure of the level of R & D spending by patents. However, several studies show that many companies have not yet recognized the benefits of patents as a strategic information source and therefore rarely use patent information for strategic planning purposes ŽEPA, 1994; Lange, 1994.. This may be generally attributed to a lack of knowledge about the advantages of patent information and more specifically on the unfamiliarity with instruments, which are based on patent data and can be used in strategic R & D planning. This paper picks up this issue and introduces patent portfolios to be simultaneously used for the strategic planning of R & D. In Section 2, we introduce patent portfolios on the company level, followed by patent portfolios on the level of technology fields in Section 3. In both sections, first the general concept of each portfolio type is discussed briefly. Main emphasis, however, lies on the implementation of both patent portfolios in a comprehensive case study, since the acceptance of these instruments in practice depends on a proof of feasibility. The applicability of both patent portfolios were tested within a specific area of the international machine tool industry, where the patenting behavior of 21 companies from Germany Ž11., other European countries Ž4. and from Japan Ž6. was analyzed. The case study was first intended to cover German companies only, with whom we closely co-operated during the case study. However, it proved to be necessary to include foreign companies in order to completely mirror the competitive situation in this particular branch of the machine tool industry. Since German companies were guaranteed strict confidentiality, any information, which could lead to the identification of company names had to be excluded from the paper. Based on the experiences made in the case study, recommendations for the effective use of patent portfolios are formulated in Section 4. We finish this paper with concluding remarks and implications for further research in Section 5.

2. Patent portfolios on the company level 2.1. General framework In Fig. 1, patenting strategies of companies are characterized according to two different dimensions: patent activity and patent quality. Patent activity measures the level of R & D activities, whereas patent quality measures the impact of these activities. Patent applications are the fundamental indicator of patent activity. Getting an efficiency indicator and correcting for firm size effects on the absolute level of patent activity ŽMansfield, 1986; Tager, 1989., patent applications ¨ should be either related to R & D spending or alternatively to the number of employees in case R & D data are not available. Patent quality is measured by calculating an index of patenting indicators, which are supposed to be of higher quality than an average

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Fig. 1. Identification of patenting strategies in a patent portfolio on the company level.

patent application. In the literature, patents granted, valid patents, patent applications in major foreign countries and patent citations have frequently been identified as indicators of patent quality ŽErnst, 1995, 1996; Narin et al., 1987.. We argue that including several indicators of patent quality reduces the variance of measurement errors, if the analysis of patent positions relies on one indicator of patent quality only. In Fig. 1, four generic types of patenting strategies can be distinguished. In an earlier study, we positioned 50 German mechanical engineering companies in this type of patent portfolio, where patent activity was measured by the number of patent applications per employee and the quality index consisted of patents granted, valid patents, patent applications at the European and US patent office and of patent citations. We found that company performance as measured by sales growth and sales per employee increased with patent quality and the combination of patent quality and patent activity, which we call patent performance. Hence, selective patentees of high-quality patents are more successful than active patentees of low-quality patents. This leads to the conclusion that the success potential of different patenting strategies can only be sufficiently assessed, if indicators of patent quality are included ŽErnst, 1996.. In essence, the level and quality of a company’s overall R & D activities can be benchmarked against its relevant competitors in patent portfolios on the company level. Since empirical evidence suggests a positive relationship between patenting strategies and company performance, positions in the patent portfolio should have an impact on R & D strategies, since companies to be positioned in the lower quadrants with a low R & D productivity ought to basically reconsider their R & D activities. Furthermore, patent portfolios help to identify those companies, which need to be included in technology monitoring activities. Here, companies located in the upper left hand quadrant should not be overlooked.

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2.2. Research design and measures We use the patent portfolio, as described above, to evaluate the overall patenting strategy of the 21 companies in our sample. For this purpose, we gathered patent data, which had been published between 1981 and 1992 by the German Patent Office ŽGPO.. Based on this patent data, we calculated five different patenting indicators per firm with respect to patent activity and patent quality. 2 Ž1. Patent applications ŽPA.. This patenting indicator measures the total number of patent applications at the GPO. Registered designs Žutility models. were excluded. The number of patent applications measures the patent activity of a company. Since foreign companies from Japan and other European countries were included in the case study it has to be taken into account that their patent activity might be underestimated relatively to their German competitors, since the latter group of companies enjoys a so-called ‘home-country advantage’. 3 On the other hand, however, foreign patent applications are said to be of higher quality than national patent applications ŽBasberg, 1987.. 4 Thus, patent applications at the GPO of Japanese and European companies included in this sample should be of higher quality than national patent applications of their German competitors. In sum, it is expected at the outset that patenting strategies of foreign companies will be characterized by a lower patent activity and a higher patent quality in comparison with their German competitors. Ž2. Share of granted patents ŽShare of GP.: A patent will only be granted, if the technological invention consists of new technological elements. Therefore, a granted patent is believed to be of higher technological capacity than the mere patent application ŽBasberg, 1987.. The rate of granted patents can differ substantially between companies and thus possibly deflates a high number of patent applications ŽBrockhoff, 1992.. Here, the share of granted patents is measured as the number of granted patents ŽGP. over the number of patent applications ŽPA. minus the number of patents under examination at the GPO, Ži.e., share of GP s granted patentsrŽpatent applicationsy patents under examination.. Ž3. Share of valid patents ŽShare of VP.: Patents are valid, if they have been previously granted and the protection fee is still paid for by the patent applicant. It can be argued that valid patents are still economically valuable for the company, i.e., the economic benefit is larger than the cost of maintaining the patent. It can further be assumed that the amount of valid patents correlates with the time of maintaining a

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A detailed discussion and definition of patenting indicators can be found in the work of Ernst Ž1995, 1996.. 3 The ‘home-country advantage’ has to be considered, when patent activity of two companies is analyzed at the home country of on of the companies under consideration, since patent applications are more likely to be filed first nationally due two lower financial and administrative effort involved compared to a foreign patent application, which will later be selectively filed ŽSchmoch et al., 1988.. Patent applications of foreign companies have to be examined at their respective national patent offices too in order to assess the total level of their patent activity. 4 With respect to the different quality of patent applications, one could speak off a ‘home-country disadvantage’ for national patentees.

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patent, which is widely believed to be an indicator of high quality patents ŽGriliches, 1990; Schankerman, 1991.. The share of valid patents measures the number of valid patents ŽVP. over the number of patents granted ŽPG., Ži.e., share of VP s valid patentsrgranted patents.. Ž4. Share of US patents ŽShare of USP.: International patent applications are considered to be more valuable, since the cost of obtaining an international patent is substantially higher than that of a national patent application. Here, we take US patents since they have been found to be an adequate indicator of economically important patents ŽErnst, 1996; Soete, 1987.. The share of US patents measures the number of US patents ŽUSP. over the number of patent applications ŽPA., Ži.e., share of USP s US patentsrpatent applications.. Ž5. Citation ratio ŽCit-Ratio.: The number of citations received by a patent in subsequent patent documents can also be viewed as a sign for an economically important invention ŽAlbert et al., 1991; Narin et al., 1987.. Here, we take the citation ratio which measures the number of patent citations over the number of patent applications, Ži.e., Cit-Ratios patent citationsrpatent applications.. It reflects the number of citations which are received by an average patent application in subsequent patents. The identification and classification of patenting strategies with respect to the activity and quality dimension of patenting behavior will visualized in the above described patent portfolio. Therefore, based on the five individual patenting indicators, two additional indicators of patent quality and patent activity per firm need to be defined: Ž1. Patent Quality: Patent quality is calculated as an index, which consists of the sum of relative measures for each of the above described individual indicators of patent quality, i.e., the shares of granted, valid and US patents and the citation ratio. Relative values are calculated by relating the respective indicator of patent quality for each company to its mean value over all 21 companies ŽErnst, 1996., Že.g., relative share of granted patents per firm s share of GP per firmrmean share of GP over all 21 firms.. Ž2. Patent Activity: Similarly to patent quality, the company’s patent activity is measured by the number of its patent applications relative to the average number of patent applications over all 21 companies, Ži.e., patent activity per firm s number of patent applications per firmrmean number of patent applications over all 21 firms.. 2.3. Results The description of patenting strategies by different patenting indicators is first shown in Table 1, where the abbreviations GE, JP and EP symbolize German, Japanese and European firms. For illustrative purposes, the following remarks should be made. Ø For German companies, mean shares for granted patents of 65%, for US patents of 31%, for valid patents of 69% and a mean citation ratio of 0.69 can be observed. The particularly high share of valid patents hints towards a high commercial importance of these patents to the respective companies. It interestingly increases with decreasing firm size, which supports the view that a smaller number of patents is often fundamentally important for smaller companies ŽEPA, 1994; Tager, 1989.. In Table 1, for the smaller ¨

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Table 1 Description of patenting strategies by different patenting indicators Company

PA

GP

VP

USP

Share of USP

Share of GP

Share of VP

Cit-Ratio

GE1 GE2 GE3 GE4 GE5 GE6 GE7 GE8 GE9 GE10 GE11 GE ŽMean. EP1 EP2 EP3 EP4 EP ŽMean. JP1 JP2 JP3 JP4 JP5 JP6 JP ŽMean. Total ŽMean.

28 51 73 58 6 9 14 25 6 7 5 25.6 23 11 9 3 11.5 34 6 27 31 13 4 19.2 21.1

16 32 50 38 4 4 9 10 2 6 1 15.6 9 5 5 2 5.3 20 2 15 16 1 2 9.3 11.9

14 18 24 14 3 4 7 1 2 4 1 8.36 4 5 5 2 4.0 15 2 11 16 1 2 7.8 7.4

12 17 47 39 0 0 5 9 1 0 2 12.0 11 0 9 2 5.5 29 6 27 31 6 2 16.8 12.1

0.43 0.33 0.64 0.67 0 0 0.36 0.36 0.17 0 0.4 0.31 0.48 0 1 0.67 0.54 0.85 1 1 1 0.46 0.5 0.80 0.49

0.64 0.8 0.78 0.69 0.67 0.57 0.69 0.42 0.5 0.86 0.5 0.65 0.39 0.71 0.71 1 0.70 0.83 1 0.65 0.39 0.11 0.67 0.69 0.67

0.88 0.56 0.48 0.37 0.75 1 0.78 0.1 1 0.67 1 0.69 0.44 1 1 1 0.86 0.75 1 0.73 1 1 1 0.93 0.79

0.5 1.04 1.20 0.36 1.83 0.00 0.5 0.48 0 1.43 0.2 0.69 0.39 0.00 0.56 0.33 0.32 1.15 0.83 2.93 0.45 0.08 1.5 1.16 0.75

Source: PATDPA, WPI; Own calculations.

German companies, like GE5, GE6, GE7, GE9, GE10 and GE11, high shares of valid patents are shown. As supposed before, the inclusion of foreign competitors, esp. from Japan, does increase the mean values for indicators of patent quality. In particular, the mean values for the share of US patents Ž49%., the rate of valid patents Ž79%. and the citation ratio Ž0.75. substantially increase. Ø The patent quality of Japanese companies is high. This is indicated by the highest shares of valid and US patents Ž93%, 80%. and the highest citation ratio Ž1.16. among the companies under consideration. This result confirms the findings of earlier studies based on citation analysis, where, besides the undisputed high patent activity of Japanese companies, a high quality of Japanese patents was stressed ŽAlbert et al., 1991.. Ø Company GE3 is the most active company within this sample ŽPA s 73.. In addition, high shares of granted patents Ž78%., of US patents Ž64%. and a high citation ratio Ž1.20. mirror the high quality of the company’s patent applications. However, the share of valid patents Ž48%. is comparatively low. This may be attributed to increasing technological obsolescence, which can be the result of two possible effects. First, fast technological changes have led to the shortening of technological and thus product life cycles, which resulted in the faster aging of patents. Second, interesting technological

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developments have been realized by the company, which have turned out as market failures. Ø Company GE4, as the second most active company within this sample ŽPA s 58., does hold a large number of patents, which are of lower quality, esp. compared to company GE3. This is illustrated by lower shares of granted patents Ž69%., of valid patents Ž37%. and a low citation ratio Ž0.36.. In this case, the inclusion of quality indicators proves to add further important information, since high patent activity has to be differentiated according to its quality. This aspect becomes also relevant for companies GE8 and EP1. Patenting strategies are additionally displayed in a patent portfolio in Fig. 2. The patenting behavior of 21 companies can be categorized into four different types of patenting strategies ŽFig. 1.. 5 ‘Active patentees of high-quality patents’ are located in the upper, right hand quadrant of Fig. 2. They can be considered as the technological leaders within this industry. Since, as discussed earlier, the quality of Japanese patent positions is highlighted, a group of seven companies ŽGE1, GE2, GE3, GE4, JP1, JP3, JP4. appear to be the technological driving forces within this industry. It becomes very clear that Japanese companies hold a high number of high-quality patents at the GPO. Therefore, it can be assumed that those companies compete with innovative products on the German market. It furthermore appears in this sample that the major competition for German machine tool manufactures comes from Japan and not from other European countries. Some other companies are classified as ‘Selective patentees of high-quality patents’. Here, smaller companies are located, which do not file many patents. However, the technological potential of these companies ought not to be underestimated, since the quality of their patent position is high. Therefore, the patenting behavior of these companies needs to be observed and examined carefully in technological competitor monitoring. Technological positions have been identified and evaluated by means of analyzing overall positions in patent portfolios on the company level. This allowed a first assessment of the activity level of overall R & D efforts and its differentiation according to the achieved quality of the overall technological position relative to the competition. The positioning of companies in patent portfolios gains even more importance for strategic planning, since empirical evidence for this industry suggests a relationship to company performance ŽErnst, 1996.. If companies are located in the lower quadrants of the patent portfolio, they should basically reassess their R & D activities. Furthermore, relevant competitors with respect to their patenting strategy as an origin of potential technological threats for a company can be identified. Whereas the patent portfolio on the company level contains useful information for the evaluation of overall R & D strategies, it fails to provide information about variations in companies’ positions according to specific technological fields. Thus, differences in technological emphasis cannot be identified and evaluated, i.e., companies’ technological strengths may vary depending on the respective technological field. Therefore, in the following section a

5

The reference lines in the patent portfolio represent the mean values of the respective portfolio dimensions. For scaling reasons, the natural logarithm was taken.

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Fig. 2. Identification of patenting strategies in patent portfolios.

patent portfolio on the level of technology fields is presented, which can serve as a basis to support strategic R & D allocation decisions.

3. Patent portfolios on the level of technology fields 3.1. General framework In the literature and the consulting business it is stressed that companies are not well advised, if they react to the increasing technological competition only by increasing their total level of R & D expenditures. It is argued that the effective use of scarce R & D resources in those R & D projects, which yield the most profound and sustainable advantages over the competition becomes increasingly important ŽBrockhoff, 1994; Sommerlatte, 1995.. Thus, various planning instruments have been suggested to support the effective allocation of R & D resources. Among them, different types of technology portfolios have been put forward ŽBrockhoff, 1994; Pfeiffer et al., 1986.. Conventional technology portfolios are mainly based on subjective evaluations of technological positions. However, it has been observed that these evaluations can differ substantially with respect to the interviewed experts ŽMohrle and Voigt, 1993.. Thus, Brockhoff ¨ Ž1992. introduced a technology portfolio, which is based on less but objective patent data ŽBrockhoff, 1992.. In Fig. 3 a patent portfolio for an electronics manufacturer is exemplary displayed. The allocation of patents to technological fields is the prerequisite for drawing patent portfolios. In Fig. 3, ten technological fields are considered. The patent portfolio has the same basic structure, which is known for two-dimensional portfolio illustrations. On the

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Fig. 3. Patent portfolio on the level of technology fields for an electronics manufacturer. Source: Brockhoff, 1992, p. 48

abscissa the relative patent position is measured, which is derived from the number of patent applications by the firm relative to the number of patent applications of its most active competitor. Both companies are considered equally active at a value of 1. As in other portfolios, the abscissa values are predominately determined by the behavior of the firm under consideration. On the ordinate the attractiveness of each technological field is assessed by using growth rates of patent applications. Here, the growth during the past 4 years relative to the growth in the preceding 16 years is measured, which covers the 20 year patenting period and stresses recent changes in patent growth. It is assumed that technological fields with high patenting activity are more attractive than those fields with low patenting activity. The ordinate values are largely influenced by all companies that file patents in the respective technological fields. The size of the technological fields reflects the distribution of total company’s patents by technological field. This indicates the importance of each technology within the company’s R & D portfolio. Technology importance is calculated by the number of patent applications in a technological field relative to the total number of patent applications of the company in question. From Fig. 3 it becomes obvious that the company holds strong patent positions in many of the considered technological fields. However, much emphasis lies on the technological fields with the lowest growth rates. The fastest growing technological field, however, is dominated by a competitor and obviously not much importance is given to this technological field by the company. According to the overall picture to be inferred firm Fig. 3 the company needs to reconsider, whether further R & D resources should be shifted from slow to faster growing technological fields. Basically, the patent portfolio can be used to evaluate technological strengths and weaknesses of competing companies with respect to different technological fields. On

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this information strategic R & D investment decision can be based. In the following, we will apply the patent portfolio on the companies of our sample. This presents the first implementation of patent portfolios on a larger scale. 3.2. Research design and measures 3.2.1. Definition of technology fields Five technological fields were identified in intensive talks with company experts. Technological field 1 ŽTF1. covers machining concepts and machining components. Within TF1 three more technological subfields were distinguished in order to elicit those patents, which are directed towards the development of new machining concepts. 6 These patents are associated with a high innovative potential and were therefore separately allocated to technological field 1.1 ŽTF1.1.. In addition, patents with regard to machining components, which can be removed from the machine tool Žaccessory parts. needed to be differentiated from the former group of patents. They are assigned to technological field 1.2 ŽTF1.2.. A further group of patents deals with power devices for machine tools and can be considered as a separate technological field, which distinctly differs from TF1 or TF1.1. These patents were allocated to technological field 1.3 ŽTF1.3.. Technological field 2 ŽTF2. covers automation technologies for tools to be used in machine tools to process the workpiece, whereas technological field 3 ŽTF3. covers automation technologies for the workpiece to be processed in machine tools. Patents concerning control-technologies for machine tools are allocated to technological field 4 ŽTF4.. Technological field 5 ŽTF5. comprehends fundamental technological developments, which are aimed at enhancing the range of processes to be performed by machine tools Že.g., laser technologies.. 3.2.2. Data retrieÕal Patents and registered designs applied for by the respective companies at the GPO were used for the forthcoming analysis. Besides patents, registered designs were included in the analysis, since they often comprehend important technological information. In this sample, registered designs accounted for not more than 10% of the total number of industrial property rights held by the respective company at the GPO. 7 Patent data were derived from the database PATDPA for the time period between 1981 and 1992. Since the case study was carried out at the end of 1994, patent applications, which had been filed until the end of 1992 could only be included, due to the 18-month time lag between priority date of the patent application and its publication. For the years 1988 to 1992, patent applications, which are assumed to mirror the latest technological developments were retrieved. In order to cover the time period before 1988, we included those patents in the analysis, which were still valid at the time of the case study in the end of 1994. This twofold approach ensures the adequate assessment of the technologi6 A further reason for this approach was the fact that most patents were allocated to TF1. Thus, a more specific breakdown of patents by their technological emphasis within TF1 seemed to be appropriate. 7 In the following, registered designs will be included while referring to ‘patent’ or ‘patent application’.

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Fig. 4. Relationship between patents, technological fields and IPC-classes.

cal capacity for the respective company at the time, when patent portfolios were analyzed. The technological capacity of each company can be characterized by two elements: first, an older patent stock, which is still used commercially and second, the latest number of patent applications, which signals latest technological activities. The inclusion of valid patents enhances the meaningfulness of positions to be illustrated in patent portfolios, since the rate of valid patents has been proven to be a quality indicator of patent applications, i.e., they are positively related to overall company success ŽErnst, 1995.. This procedure further ensures a corresponding time frame between patenting and market activities. The patents needed to be allocated to the above defined technological fields. Fig. 4 illustrates the relationship between patents, technological fields and IPC-classes. The total number of patents can be allocated according to each patent’s classification with respect to the IPC classification scheme. However, this approach turned out to be problematic, since the respective IPC-classes did not always gave a clear picture of the main technological content of the individual patent. 8 Thus, we chose a different approach. Based on all pieces of information contained in a patent document and with the inclusion of company expertise, patents were assigned to the five technological fields. Technological expertise came from three senior R & D managers from German companies in this sample. The assignment process was conducted in a workshop with the R & D managers, where they all agreed on the final 8

This can be intended by the patentee, if he seeks to hide patents in IPC-classes not related to the protected technology.

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allocation of patents to the respective technological fields. It proved to be very helpful that the database PATDPA allows to look at the entire patent document including the technical abstract, where the technological content of the invention is described in detail. In addition, the main and supplementary IPC-class, where the patent had been assigned to by the patent office, were further used. Here, it became obvious that the essence of the technological invention did not always coincided with the assigned IPC-class. Furthermore, in a substantial number of patents only the supplementary IPC-class provided the decisive piece of information for allocating the respective patent to the correct technological field. For calculating growth rates of patent applications for the evaluation of a technology’s attractiveness, technological fields have to be related to the relevant IPC-classes. This allocation procedure is illustrated for ‘control-technology’ ŽTF4. in Fig. 4. 9 3.2.3. Drawing of patent portfolios As outlined above, the drawing of patent portfolios comprehends three elements, the relative patent position, the technology attractiveness and the technology importance. The relatize patent position of a company in a particular technological field measures the number of patents owned by the company relative to the number of patents of a competitor in a particular technological field. Here, we take the company with the largest number of patents per technological field as the benchmark, Ži.e., number of firm’s patents in the technological fieldrnumber of patents in the technological field from the most active competitor.. Thus, the maximum value for the relative patent position in each technological field is 1. The technology attractizeness was measured by calculating growth rates of patent applications at the GPO in the respective main and supplementary IPC-classes, which are of relevance for each technological field. 10 The supplementary patent classification was included, since it often provided the necessary information for assigning the patents to the correct technological field. Two different growth rates of patent applications were calculated. First, the relative growth rate ŽRGR. measures the average growth of patent applications in a technological field relative to the average growth of total patent applications in all above defined technological fields over the entire time period of our analysis between 1981 and 1992, Ži.e., relative patent growth per technological field ŽRGR. s average growth of patent applications per technological field between 1981 and 1992raverage growth of patent applications in all technological fields between 1981 and 1992.. 11 Second, in order to assess recent changes in the growth trend of patent

9

Because of confidentiality, the IPC-classes for the other technological fields cannot be mentioned. The allocation of patents to these technological fields followed the previously described pattern. 10 The yearly distribution of patent applications in each technological field and the total number of patent applications over all technological fields at the GPO between 1981 and 1992 can be inferred from the work of Ernst Ž1996.. 11 To control for measurement errors, the natural logarithm for the yearly growth rates was taken. The validity of the arithmetic mean for the correct estimation of average growth rates has been proved ŽWetzel, 1964..

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applications, we calculated the relative development of growth rates ŽRDGR.. The development aspect in calculating the growth rates was captured by relating the average growth of patent applications in the period 1987 to 1992 to the average growth of patent applications in the preceding years from 1981 and 1986, Ži.e., development of patent growth per technological field s average growth of patent applications per technological field between 1987 and 1992raverage growth of patent applications per technological field between 1981 and 1986.. 12 Then, RDGR for each technological field was calculated, which measures the development of the average growth of patent applications in a technological field relative to the development of the average growth of total patent applications in all technological fields Ži.e., relative development of patent growth per technological field ŽRGDR. s development of patent growth per technological fieldrdevelopment of patent growth in all technological fields.. In Fig. 5 both growth rates of patent applications for each technological field are illustrated. Looking at RGR reveals that patent applications in TF3 and TF4 had grown faster compared to TF1 and TF2. The growth of patent applications in TF1 had remained relatively constant, whereas patent applications in TF2 had substantially decreased relative to the growth of overall patent applications in the four technological fields. From this measure of growth rates, TF4 appears to be most attractive, since patent applications had grown fastest. This interpretation needs to be adjusted by looking at the other growth variable RDGR. It appears that the growth of patent applications in TF4 had decreased faster in recent years than the average growth rate of overall patent applications. Here, TF4 seems to be less attractive and this development might be viewed as an indication that this technology had already reached its maturity stage with a limited development potential. For TF2 and TF3 the evaluation of technology attractiveness does not differ with respect to the measure of growth rates. However, RDGR stresses the favorable development in TF3 and the unfavorable development in TF2 more sharply. Looking at TF1 yields interesting results. While RGR hints towards an average technology attractiveness, this judgment has to be reassessed. In relation to total patent applications, patent applications in TF1 had increased by more than 6%. Because of the economic slowdown in Germany in 1991 and 1992, the overall number of patent applications at the GPO substantially declined in comparison to preceding years. This affect could also be observed for patent applications in the machine tool industry ŽErnst, 1997.. This negative trend in general patent activity obviously did not affect patent applications in TF1 in the same way as it did for the remaining technological fields, esp. TF2 and TF4. This observation lead to the conclusion that new technological developments in TF1 had been given highest priority by the companies in that industry. It should therefore be retained that constant patent activity in periods of overall economic slowdown, which results in a relative increase of patent activity, can be interpreted as an indicator for attractive technological fields. Thus, it appears to be advisable to examine TF1 even further.

12

Thus, the overall time frame of the analysis was divided into two equally long periods of 6 years. As pointed out before, other selections of time frames are possible.

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Fig. 5. Growth rates of patent applications at the GPO in technological fields.

RGR and RDGR for TF1.1, TF1.2 and TF1.3 are also displayed in Fig. 5. Patent applications concerning new machining concepts ŽTF1.1. had slightly decreased over the total time period. However, RDGR indicates the importance of this technological field and thus supports the above mentioned high attractiveness of this technology. On the contrary, patent growth in TF2 was higher over the total period, whereas the recent development of patent growth was substantially lower. It appears, that patent applications in technological fields with minor interest, i.e., patents concerning accessory parts of the machine tool, are more sensitive to economic fluctuations. Both growth rates impressively show that new technological developments in TF1.3 must have been of particular interest in the considered industry. As pointed out earlier, inventions in TF1.3 are closely related to TF1.1. However, this approach for calculating growth rates of patent applications to evaluate the attractiveness of technological fields could not be used in case of TF5 due to two reasons. First, most patents which had been allocated to TF5 spread widely over various IPC-classes. In fact, most patents concerning new processes could be found in those IPC-classes, where patent activity is largely dominated by those companies, which had already been offering these technologies in their standard product range. For the companies included in this case study, which represent a specific sector within the machine tool industry, however, these patent applications represented very innovative features to their machine tools. Second, IPC-classes of TF1 and TF5 did overlap. Consequently, a different measure of technology attractiveness needed to be adopted for TF5. Here, we had to rely on subjective judgments by the senior R & D managers, who

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were involved in this case study. The respective persons unanimously rated this technological field as most attractive compared to the other technological fields. For the sake of perspicuity, TF5 will be included in the patent portfolios with the subjectively measured highest technology attractiveness rating. The importance of a technological field within the companies’ portfolio of R & D activities is measured by the share of patents in a technological field relative to the overall number of patents owned by the company, Ži.e., number of firm’s patents in a technological fieldrtotal number of firm’s patents.. The technology importance illustrates the distribution of patents over the different technological fields and thus indicates a company’s priorities within its total R & D activities. 3.3. Results 3.3.1. Strategic eÕaluation of positions in patent portfolios In Section 2, a group of companies has been identified, which could be characterized by an active and high-quality patenting strategy. These companies, GE1, GE2, GE3, GE4, JP1 and JP2, obviously posses the highest technological potential among the companies under consideration in this case study. 13 Therefore, these companies will be presented separately in the following patent portfolios analyses. 14 Fig. 6 shows the patent portfolio for six companies pursuing an active, high-quality patenting strategy. On the ordinate, the technology attractiveness is measured by RGR. On the abscissa, the relative patent position per technological field is shown. For the strongest patentee in a technological field, the relative patent position has the value of 1. Thus, the strongest patentee in each technological field can be easily identified at the right hand side of the patent portfolio. The circle size of the five technological fields is drawn such it reflects the technological importance of the respective technological field. The positions of the companies in all five technological fields are illustrated in the patent portfolio and numbered accordingly. The notations in Fig. 6 have to be read as follows: GE4r5 describes the patent position of German company No. 4 in TF 5. JP3r4 describes the patent position of Japanese company No. 3 in TF 4. The following remarks concerning the patent positions of the individual companies can be made: Ø Company GE3 is the dominant patentee in TF1. This technological field is given the highest priority within the company’s patent activity. The technological efforts seem to be mainly directed towards the development of new machining concepts and machining components. This position has to be considered in relation to the also strong patent position in TF5, which reveals that R & D activities are furthermore undertaken to fundamentally enhance the existing features of machine tools by adding new processes.

13

Company JP4 was excluded from this analysis and assigned to the other group of companies, since it was found that the majority of patents referred to technological fields and hence products, which were not offered by the other companies. Thus, the number of relevant patents decreased. 14 For an evaluation of patent portfolios for the remaining companies see the work of Ernst Ž1996..

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Fig. 6. Patent portfolio for patentees with an active, high-quality patenting strategy in TF1–TF5 using RGR as a measure of technology attractiveness.

Company GE3 also holds strong patent positions in TF2 and TF3, however, these technological fields receive less attendance compared to TF1. It is noteworthy that company GE3 captures a weak patent position in TF4, which receives a high technology attractiveness rating and which is dominated by Japanese competitors. This incident could turn out as a competitive disadvantage, esp. in comparison to Japanese companies. Summarizing the patent position of company GE3, it is shown that it holds strong patent positions in all technological fields except TF4. The company seems to pursue an holistic R & D strategy, where R & D-activities are carried out in all relevant technological fields in this industry. However, it remains clear that technological emphasis is put on TF1. In other words, the ability to develop innovative machining concepts seems to be the core competence or core technological asset of this particular company. Ø Contrary to company GE3, the technological effort of company GE1 does not vary over the technological fields. Each technological field, except T5, is given almost equal importance. The weak position of company GE1 in TF1 is striking, esp. compared to companies GE1, GE3 and GE4. On the other hand, company GE3 contains a strong patent position in TF2 and TF3, in the latter being even the strongest patentee among the present companies. Based on a small number of patents in TF1, company GE3 must

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have devoted its R & D resources on the improvement of automation technologies as far as tools and workpieces are concerned. Here lies the core technological competence of this company, whereas the development of new machining concepts seems to play only a minor role. In addition, neglecting the highly attractive TF5 appears to be problematic. Ø Company GE4 is the second strongest patentee in TF1. It puts an even higher emphasis on this technological field than company GE3. In addition, company GE4 holds the strongest patent position in TF5. In contrast to company GE3, patents of this company can hardly be found in the other technological fields. Company GE4 concentrates its R & D activities on the development of machining concepts, machining components and new processes, whereas automation and control technologies are neglected. Ø The position of company GE2 in the patent portfolio is similar to the position of company GE3. Company GE2 is the strongest patentee in the least attractive TF2 and holds a strong patent position in TF3, however, the technological focus, as indicated by the technology importance measure, clearly lies on TF1, where the company reaches the third strongest relative patent position. Thus, it can be inferred that company GE2 also takes a holistic approach for its R & D activities. However, a weaker patent position in TF1 and neglecting TF5 hints towards a technological disadvantage compared to company GE3. Ø For both Japanese competitors JP1 and JP3, a distinctive difference in comparison to the patent positions of their German competitors becomes strikingly apparent. Both companies hold strong patent positions in TF4 and both companies consider this technological field to be of most relevance for their R & D activities. On the other hand, only a very few patents can be found in the ‘traditional’ areas of machine tool technologies, i.e., in TF1, TF2 and TF3. Obviously, a different view about the relevant core technologies in that industry between German and Japanese companies exists. It is further interesting to note that both Japanese companies hold patents in the most attractive technological field, i.e., TF5. In sum, the vast majority of Japanese patents can be found in highly attractive technologies and the technological focus lies on TF4. These observations lead to the assumption that Japanese companies could mean a serious technological competitive threat to their German counterparts. The evaluation of patent positions largely depends on the attractiveness of the technologies under consideration. As discussed earlier, a second measure of technology attractiveness has been defined with the underlying idea that recent changes in the growth trend of patent applications should be recognized. Fig. 7 shows a second patent portfolio using RDGR as the measure of technology attractiveness. From both Figs. 6 and 7, the following conclusions concerning the attractiveness of each technological field can be drawn. Ø TF3 and TF5 receive high attractiveness ratings independently of the respective growth rate taken to measure technology attractiveness. Therefore, strong patent positions in these technological fields are to be evaluated positively. According to expert judgments, the development potential of TF5 is viewed to be even more important, since new technological developments in this field are believed to have the highest competitive impact. Thus, competitive moves in this technological field have to be recognized immediately and be included in strategic R & D investment decisions.

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Fig. 7. Patent portfolio for patentees with an active, high-quality patenting strategy in TF1–TF5 using RDGR as a measure of technology attractiveness.

Ø TF2 receives low attractiveness ratings independently of the respective growth rate taken to measure technology attractiveness. Thus, further investment in this technological field may not be justified. Ø The attractiveness of TF1 is revealed in Fig. 7. The development of new machining concepts has to be an essential element of R & D activities. Strong patent positions in this technological field are favorable. Ø The high attractiveness of TF4 is supported in Fig. 6, where RGR was used to measure technology attractiveness. Patent applications in this technological field have been growing very fast during the time period covered in this analysis. Thus, a high impact of this technology on the competitive situation in the machine tool industry can be assumed. According to Fig. 7, however, where RDGR was used to measure technology attractiveness, the assessment of TF4 has to be differentiated, since the growth of patent applications has substantially decreased in recent years. This development does not support further R & D investments in this technology. The patent positions in TF1 are further examined in Figs. 8 and 9, where we look at three subsets of TF1, i.e., innovative machine concepts in TF1.1, accessory parts in TF1.2 and power devices in TF1.3 ŽSection 3.1.. The patent portfolios can be distin-

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Fig. 8. Patent portfolio for patentees with an active, high-quality patenting strategy in TF1.1–TF1.3 using RGR as a measure of technology attractiveness.

guished by the respective growth rate measuring the technology attractiveness. The following aspects need to be pointed out. Ø The strong patent position of company GE3 in TF1.1 further supports the assumption that this company leads the technological development in this area. Only company GE2 contains a comparable patent position. It becomes obvious that the formerly observed strong patent position of company GE4 in TF1 needs to be reassessed, since only a small number of patents are related to the development of new machining concepts, whereas the large number of patents in TF1 are related to accessory parts of machine tools. Consequently, the attractiveness of this patent position is less favorable. Japanese companies hold the weakest patent positions in TF1 and particularly in TF1.1. Ø Furthermore, the dominant patent position of company GE3 in TF1.3 has to be remarked. This technological field is most attractive within TF1. Summarizing, the above described patent portfolios yield the following strategic implications for the individual companies. Ø Company GE3 holds strong patent positions in all defined technological fields, except TF4. This leads to the conclusion that this company develops and sells complete, technologically demanding products. Here, the observation from looking at patent

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Fig. 9. Patent portfolio for patentees with an active, high-quality patenting strategy in TF1.1–TF1.3 using RDGR as a measure of technology attractiveness.

portfolios on the company level is verified, where company GE3 had been labeled a technological leader within the companies under consideration and esp. among the German machine tool manufacturers included in this analysis ŽFig. 2.. Within this overall strategic framework, technological emphasis is given to the further improvement and new development of machining concepts. This is mirrored by strong patent position in TF1.1, TF1.3 and TF5. Here lies the core technological competence of the company. Since all three technological fields receive high technology attractiveness ratings, these patent position are to be evaluated positively and further R & D investment seems to be advisable. As far as automation technologies are concerned, TF3 appears to be more favorable than TF2. Ø The analysis of patent positions has visualized strategic differences between the companies GE1 and GE3. The technological focus of company GE1’s R & D activities has lied on the improvement or new development of automation technologies. This is indicated by strong patent positions in TF2 and TF3. Since the analysis of patent strategies in Section 2 revealed a high commercial importance of its patent stock as indicated by a high number of valid patents ŽTable 1., it can be argued that this company has gained competitive advantages in automation technologies. However, due to the low attractiveness rating for TF2 the strong patent position has to be viewed critically. This

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technological field might not yield promising future development opportunities and the competitive impact will presumably decline. On the other hand, company GE2 shows significantly weak patent positions in technological fields concerning the development of new machining concepts, i.e., in TF1, TF1.1 and particularly in TF5. Taking the attractiveness of these technological fields into account, a redirection of R & D efforts in favor of these technological fields should be recommended. Ø Company GE2 has similar patent positions as company GE3. However, company GE3 seems to enjoy a technological lead in the development of new machining concepts, especially with respect to TF5. Future R & D efforts of company GE2 should therefore be aimed at closing this technological gap. Ø Evaluating the patent position of company GE4 makes it necessary to differentiate the strong patent position in TF1, since only a small number of patents are directed towards the development of new machines. The high number of patents concerning accessory parts of machine tools may explain the low rate of valid patents ŽTable 1.. This again supports the above discussed assumption that economically minor worthy patents are more sensitive to economic fluctuations, since new patents are less applied for and existing patents are more likely to not be renewed. Ø For the Japanese competitors strong patent positions in TF4 could be observed. Adding the findings of the analysis of patenting strategies in Section 2, where the high quality of Japanese patent positions has been stressed ŽFig. 2., it is reasonable to assume that Japanese companies must have successfully transformed this technological focus in competitive advantages. In the future, it becomes critical for those companies to sustain their competitive position, which has been so far largely influenced by their strong positions in ‘control-technology’. However, since the competitive impact of this technology gradually declines, as shown by RDGR, it becomes important to strengthen the technological position in other highly attractive technological fields, i.e., the development of new machining concepts. Here, patent activity of Japanese companies in TF5 need to be mentioned and observed continuously. Ø Particular attention should be drawn to TF4, since Japanese companies hold strong patent positions in this technological field, whereas German companies seem to have neglected this technology. There appears to be a distinctive different view on core technologies between Japanese and German machine tool manufacturers. It can be shown that Japanese companies dominated the patent activity at the GPO in computerized numerical control ŽCNC. technology since its upcoming in the late 1970s and its market penetration in the mid 1980s. Parallel to the development of patent activity in ‘CNC’-technology trade figures between Japan and Germany dramatically changed in favor of Japanese companies leading to a large German trade deficit in machine tool trade with Japan. Furthermore, German companies lost their previously dominant market position in world trade with machine tools. In conclusion, Japanese companies successfully altered the basis of competition in the machine tool industry by introducing innovative ‘CNC’-technology ŽErnst, 1997; Wieandt, 1994.. Therefore, the weak position of German companies in TF4 in the patent portfolios has to be viewed as a major competitive disadvantage. When the upcoming of this new technology became obvious, companies needed to react to the technological challenge by adjusting their R & D activities accordingly. It can be shown that early warning signals could have been

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recognized by looking at patent applications at the Japanese and German patent office ŽErnst, 1996.. However, patent portfolio analysis has shown that patent growth has recently decreased in TF4. This could be viewed as evidence that this technology has already entered the maturity phase and that further development potentials to achieve competitive advantages may thus be limited. This development is largely influenced by decreasing patent applications from Japan. It is interesting to note that German patent activity has been increasing in recent years, which mirrors the attempt of German companies to break the almost monopolistic position of Japanese companies in ‘CNCtechnology’ ŽVDW, 1993.. However, in the light of overall decreasing patent activity in this technological field and opportunity cost, it may not be advisable to devote too much R & D resources in this ‘catch-up-strategy’ ŽErnst, 1997.. 15 3.3.2. Reliability of positions in patent portfolios It could be observed in Figs. 6–9 that the patent portfolios differed according to the measure of technology attractiveness. The evaluation of technology attractiveness has a large impact on the strategic recommendations derived from the positions in patent portfolios. Thus, it should be examined to what degree positions in patent portfolios deviate depending on the respective attractiveness measure on the ordinate. Therefore, we performed correlation analyses between the various positions in the patent portfolios. 16 As far as the abscissa is concerned, no deviations between the portfolio positions occur, since the relative patent position has been identically measured in all four patent portfolios. Three different types of correlation analyses were performed. 17 Phrasing it more technically, it can be said that we correlated the y-axis values Žordinate. of each technological field between the respective portfolio illustrations in Figs. 6–9. The results are displayed in Table 2. For the first correlation analysis, which was performed for positions in all four patent portfolios in Figs. 6–9 Ž n s 36 technological positions or ordinate values., a highly significant correlation coefficient Ž r s 0.41. can be observed. This result indicates that the positions in different patent portfolios have a substantial degree of similarity, however, the moderate value of the correlation coefficient simultaneously reveals that the positions in patent portfolios depend on the selected measure of technology attractiveness. Further correlation analyses show that this result has to be differentiated according to the respective technological fields. In Figs. 6 and 7, where all four technological fields are displayed, patent positions are more similar as indicated by the highest and significant correlation coefficient Ž r s 0.47.. In both patent portfolios, positions with respect to TF2 and TF3 remain basically unchanged, where TF2 receives a low and TF3 a high technology attractiveness in both patent portfolios. However, it 15

It is interesting to observe that German patent activity in future-orientated laser-technologies in the area of machine tools has recently declined, whereas Japanese patent activity has substantially increased ŽErnst, 1996.. 16 A similar approach was used by Wind et al. Ž1983. in order to identify diverging classifications of strategic business units in different types of market portfolios ŽWind et al., 1983.. 17 No correlation analysis was performed for TF5, since the attractiveness of this technological field was subjectively rated by industry experts and remained constant over the different patent portfolios.

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Table 2 Results of correlation analyses between portfolio positions in Figs. 6–9 with respect to different measures of technology attractiveness Figure Žpatent portfolio.

Fig. 7

Fig. 9

Figs. 6–9

Fig. 6 Fig. 8 Figs. 6–9

0.47)) Ž ns 21. y y

y 0.36 Ž ns15. y

y y 0.41))) Ž ns 36.

Level of significance: ))) s -1%, )) s - 5%; y s no correlation analysis performed; ns number of observations. Source: own calculations.

can also be inferred that the relative distance between both technological fields, in other words, or the distance between both technological fields and the average attractiveness of all technological fields have substantially increased. In comparison to Fig. 6, TF3 receives a higher technology attractiveness in Fig. 7, whereas the technology attractiveness of TF2 declines. Both figures fundamentally differ with respect to TF1 and TF4. In Fig. 6 TF1 receives a low technology attractiveness, whereas it receives a high technology attractiveness in Fig. 7. On the contrary, the technology attractiveness is rated high for TF4 in Fig. 6, whereas it is rated substantially lower in Fig. 7. The difficulty with regard to TF1 is mirrored by the result of the correlation analysis between the position in Figs. 8 and 9. The correlation coefficient decreases to the value of 0.36 and proves to be not significant. Two effects account for this result: first, the evaluation of technology attractiveness of TF1.1 and TF1.2 fundamentally changes between both patent portfolios. Second, the attractiveness of TF1.3 further increases, if RDGR is used as an attractiveness measure. In sum, it is obvious that patent portfolios in Figs. 6–9 show a substantial degree of similarity. However, the correlation analyses reveal that positions, esp. between Figs. 8 and 9, differ with respect to the respective growth rate used in order to assess a technology’s attractiveness. Thus, it can be concluded that the selection of a particular measure for technology attractiveness influences the structure of patent portfolios and thus the recommendations derived from them. This effect is further stressed, since different indicators to measure the relative patent position are also plausible. Consequently, the drawing of different patent portfolios seem to be advisable in order to assess the sensitivity of strategic recommendations derived from patent portfolios depending on the selection of different portfolio dimensions.

4. Discussion In this paper, patent portfolios have been presented as a tool to analyze technological strengths and weaknesses of companies with respect to the attractiveness of technologies under consideration. On the information obtained from patent portfolios strategic R & D-investment decisions can be based. However, the precision of these strategic implications depends on the validity of the patent portfolios. Therefore, based on the experience made during this case study, recommendations for the effective use of patent

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portfolios as a valuable tool for strategic decision makers ought to be pointed out. These recommendations are summarized in Table 3. Ž1. As far as the general structure of patent portfolios is concerned, a narrow focus has to be avoided. Especially, if the analysis is exclusively restricted to those technologies, which are known to the respective company, important technological changes in other areas, e.g., competitors or suppliers, may be overlooked. In addition, the time frame between patenting and market activities should correspond. Ž2. Patent applications are the core patenting indicator to be used in patent portfolios, since they mirror the latest technological developments and are immediately available, when the patent is published. The inclusion of valid patents as a quality indicator of patent applications increases the meaningfulness of positions in patent portfolios, since they hint towards those technologies with significant commercial benefit to the individual company. Furthermore, registered designs often comprehend important technological information and should therefore not be neglected. If international competitors are included, the comparability of patent numbers needs to be assured.

Table 3 Recommendations for the effective use of patent portfolios Aspect of usage

Recommendations

1. General aspects

Ø Wide approach to assess all relevant technologies Že.g., technologies of competitors, suppliers. Ø Corresponding time frame between patenting and market activities Ø Selection of appropriate patenting indicators - registered designs Žcontain useful information. - patent applications Žlatest R&D developments. - patent stock Žvalid patents, quality indicator of patents. - international comparability Ø Use of complete information in patent documents Žesp. abstract. Ø Allocation of patents based only on IPC-classes is problematic Ø Inclusion of technical expertise is inevitable Ø Strongest patentee as benchmark, if all companies compete with each other Ø Strongest competitor as benchmark, if there is reciprocal competition Ø Inclusion of further quality indicators of patents Že.g., citation ratio, share of granted or foreign patents. Ø Predominant use of objectiÕe criteria - growth rates based on main- and supplementary classification of patents - relative growth rates; recent development of patent growth - total level of patent applications Ø Validation of objective criteria by subjective evaluation Žinclusion of market knowledge. Ø Patent portfolios with various measures of technology attractiveness Žsensitivity analysis. Ø Analysis of patent strategies on the company level - identification of relevant competitors - quality assessment of the overall patent position Ø Co-ordination of patent portfolios with other instruments of strategic planning

2. Patenting indicators

3. Allocation

4. Relative patent position

5. Technology attractiveness

6. Supplements

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Ž3. The proper allocation of patents to technological fields is of fundamental importance. In this case study, the careful and precise assignment of patents to the five technological fields has been reached by including all information contained in a patent document. If patents are allocated according to IPC-classes only, the results may not be correct. This has to be weighed against the advantages of an easier, automatic allocation on a case by case basis. For both alternatives, the inclusion of technical expertise is inevitable. Ž4. The calculation of relative patent positions does not cause any problems. The strongest patentee in a technological field should be used as the benchmark, if all companies under consideration compete with each other. In case of reciprocal competition, the strongest competitor in each technological field should be used as the benchmark instead. Qualitative differences of patent positions can further be illustrated, if other quality indicators of patent applications are included in assessing the relative patent position. In particular, those quality indicators should be included, which have been proven to be positively related to company success. Those are, besides valid patents, patent citations and patent applications at foreign patent offices, esp. at the European patent office ŽEPO. and in the US ŽErnst, 1996, 1995; Narin et al., 1987.. The relative patent position could than be measured as a multidimensional variable. For this purpose, an index measure of patent quality or patenting performance as a combination of patent quality and patent activity has been suggested ŽErnst, 1996 and Section 2.. Ž5. The evaluation of patent positions mainly depends on the technology attractiveness. Thus, it is very important to use a valid measure for the attractiveness of technologies included in patent portfolios. Here, we relied almost exclusively on objective measures of technology attractiveness, i.e., growth rates of patent applications. The correlation analyses have shown that the attractiveness of a technology is sensitive with respect to the selected attractiveness measure. This has to be kept in mind, when strategic recommendations are derived from this type of patent portfolios. It appears advisable to draw different patent portfolios with different measures for technology attractiveness in order to integrate possible deviations in patent positions and its implications into the strategic planing process. As far as ‘control-technology’ ŽTF4. is concerned, there is evidence that analyzing patent activity proves to be an effective instrument in order to describe the diffusion pattern of this technology in the machine tool industry. Based on the development of patent applications over time, different stages in the life cycle of ‘control technology’ can be identified, on which strategic R & D investment decisions can be based ŽErnst, 1997.. The analysis of TF1 particularly revealed that relative growth rates of patents ought to be used. TF5, however, has clearly shown the limits of measuring the attractiveness of technologies based on growth rates of patents. Thus, besides objective patent data, subjective assessments need to be included in an overall attractiveness measure. Subjective evaluations should be oriented towards economic performance criteria, besides the technological assessment. 18 For the determination of a valid measure for technology attractiveness, we suggest a multidi-

18

For example, base-, pacing-, key- and old technologies can be distinguished ŽSommerlatte and Deschamps, 1985..

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mensional variable, which consists of relative growth rates of patents, the total level of patenting and an assessment of the technological and economic development potential. Ž6. As shown in Section 2 of this paper, patent portfolios on the level of technological fields should be supplemented by an analysis of patent portfolios on the company level. Here, the overall quality of patent position can be assessed and relevant competitors be identified. Furthermore, the patent portfolio, which is a technology-oriented planning tool needs to be aligned with other strategic planning instruments in order to avoid one-sided, technology dominated misconceptions. Here, methods to integrate patent and market portfolios have been suggested ŽErnst, 1996..

5. Conclusions and implications for further research In this paper, we analyzed the technological positions of 21 competing companies in the international machine tool industry. In Section 2 we introduced patent portfolios on the company level, in which patenting strategies can be differentiated according to patent activity and patent quality. Here, the quality of overall technological positions can be evaluated in relation to the competition. ‘Active patentees of high-quality patents’ are the technological driving forces within the industry under consideration and the technological potential of ‘selective patentees of high-quality patents’ should not be underestimated. Companies positioned in the lower quadrants of the patent portfolio should basically question the productivity of their R & D activities. However, the quality of patent positions may differ with respect to different technological fields. Therefore, we analyzed patent positions by technological fields in patent portfolios on the level of technological fields. Here, we identified technological core competencies of each individual firm, which differed in particular between German and Japanese companies. These technological positions were further evaluated with regard to the attractiveness of each technological field, since it becomes essential for the formulation of strategic R & D investment decisions. Based on our experiences made in this case study we summarized recommendations for the effective use of patent portfolios in further applications. Final discussions with our partners in industry about the results of the case study revealed that both instruments were viewed to add valuable information to the strategic R & D planning process and that both instruments appeared very appealing to practitioners under benefit-cost considerations. 19 The cost of patent data retrieval amounted to approximately US$10,000 and it took a half-day-workshop with senior R & D managers to define the technological fields. However, it has to be added that the costs of patent data analysis cannot be generalized, since they depend on the extent of patent searches performed and the search expertise of the analyst. However, patent data retrieval costs are relatively low compared to other forms of technological information sources ŽAshton et al., 1991. and more important they have to be judged according to the outlined major benefits for strategic R & D planning. As stressed at the outset of this article, many 19

This has been confirmed also by other studies Že.g., Bauer et al., 1991..

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companies lack sufficient information about R & D strategies of competitors, although this type of information is viewed to be of significant importance ŽSection 1.. This was exactly the problem the German companies in our case study were facing. They felt motivated to participate because it was aimed to identify instruments, which allow the monitoring of technological activities of competitors, the evaluation of a company’s technological strengths and weaknesses relative to its competitors and the improvement of strategic R & D decision making. The acceptance and use of patent portfolios for these purposes, however, depends on a proof of feasibility to the companies. Thus, the successful implementation of these instruments in this case study is beneficial for practitioners. Due to the positive experiences, the German companies which had been extensively involved in the case study have started using patent portfolios continuously as part of their technological competitor monitoring activities. Thus, it can be finally summarized that the continuous and strategic analysis of patent information should become an essential part of strategic planning activities within each company. This could help to improve the insufficient level of information about competitors’ R & D strategies. As the experiences from this case study further show, the optimal use of patent information in strategic planning can only be achieved by the inclusion of company expertise in the patent retrieval and analysis process. Thus, the outsourcing of strategic patent data analyses to external information brokers does not seem to be advisable ŽReiche and Selzer, 1995.. Hence, companies need to establish a particular unit within the organization, which is responsible for the continuous and systematic evaluation of patent information ŽErnst, 1996.. Our discussion in Section 4 yields some implications for further research. Here, we would like to outline two major aspects with respect to patent portfolios on the level of technology fields. Firstly, the automatic allocation of patents to technological fields according to IPC-classes increases the efficiency of the patent portfolio method. However, this may come at the expense that patents are not assigned to the proper technological field. In the case study the precise assignment of patents to the five technological fields has been reached by looking at individual patent documents. In a different, large scale study, one could attempt to assess the degree of deviation between both methods for assigning patents to technological fields. In our case study, approximately 15% of the patents had been allocated to a different technological field, if we had relied on the IPC-classification only. Senior managers from the companies in our case study would not accept this degree of error and thus preferred the manual allocation procedure. Secondly, it has been suggested to measure both dimensions of the patent portfolio as multidimensional constructs ŽSection 4.. In particular, a measure of the relative patent position could include indicators of patent quality as known from the quality index introduced for patent portfolios on the company level. Here, each indicator of patent quality could be calculated for each technological field. This would allow to weight patent activity as measured by patent applications by patent quality for each technological field ŽErnst, 1996.. Consequently, one could merge both portfolio illustrations into one figure. This approach would probably further enhance the meaningfulness of patent portfolios for strategic R & D planning since a positive relationship between quality indicators of patents and company performance has been found. In addition to this indirect assumption of causality which is the underlying rationale for presenting

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patent portfolios in this article, one could attempt to directly test the relationship between a company’s position in the patent portfolios and various measures of economic performance. The hypothesis to be tested is that companies holding strong patent positions in highly attractive technological fields are more successful than those competitors holding weak patent positions in unattractive technological fields.

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