Business Research

Overcoming Competition through Creativity, R&D and Patents

As competition increases, and the average life-cycle of products decreases, the success of businesses rely even more on their ability to generate a continuous stream of innovations.

Kendall Artz, department chair of Management and Entrepreneurship, and the director for the Baylor Entrepreneurship Program; and Patricia Norman, associate professor of Management and Entrepreneurship; set out to determine the factors in innovation that allow corporations to maintain a competitive advantage while improving their financial bottom lines.

In their paper "A Longitudinal Study of the Impact of R&D, Patents and Product Innovation on Firm Performance," published in the Journal of Product Innovation Management (3rd Quarter, 2010), along with co-authors Don Hatfield and Laura Cardinal, Artz and Norman examined the relationship between a company's commitment to research and development and their innovation.

The team drew from a sample of 272 firms in 35 different industries, looking at data accumulated over a 19-year period.

Invention was the first factor considered by the researchers. Artz and Norman evaluated companies' invention by looking at the number of patents they received. They also studied innovation, by looking at the number of new product announcements made by the companies. They then examined the relationship between the two indicators and how the relationship affected the companies' financial success.

"The basic question we set out to answer was what is the impact of a firm's R&D on patents and firm performance," Artz said.

"Individual parts of that question had been studied before," Norman said, "but we wanted to look at it all together."

Based on those previous studies, the team hypothesized that as spending on R&D increased, the number of patents would increase, but that at a certain point, inefficiencies would set in, causing the number to again decrease.

"Instead, what we found, is that instead of turning down with inefficiencies, the curve goes up," said Artz. "The more R&D a company does, the more patents they secure and product announcements they make."

Apple, for example, is heavily invested in research and development.

"Apple is a very innovative company, and their R&D focuses on products that complement each other," Norman said. "They definitely see a greater return as they continue to spend in that area."

But the biggest surprise for the researchers came when they looked at how the number of patents correlated with ROA (return on assets) and sales growth.

"We expected there to be no direct relationship between patents and performance," Norman said. "What we didn't expect to find is that there is actually a negative relationship.

One reason they believe this negative relationship exists is because of the way patents are used, not just to protect new ideas and inventions, but also as tools to prevent the competition from doing the same.

"There is a trend for some companies to engage in using patents as a strategic weapon, defensive patenting," Norman said. "A company can secure extensive patents around a competitor's key patents, and essentially lock them out of the ability to further develop their product. It either forces them to not innovate their product, or pay their competitors to use their patents."

Hybrid vehicles, for example, have been affected by the use of defensive patenting.

When Toyota Motor Company began developing the gas-electric Prius more than 10 years ago, the automaker filed for patents on more than 2,000 systems and components of the vehicle. This meticulous patenting on the most minute of details, has forced the competition to respond in a way that's favorable to Toyota.

"Ford either paid Toyota to use their patents, or to cross-license their patents when Ford created the Fusion," Norman said.

Honda took a different approach by avoiding the patented systems and creating their own version, a "mild hybrid." However, their Insight is less efficient, getting only 40 miles per gallon, versus the Prius' 51 miles per gallon.

Nissan has taken an entirely different path to avoid possible patent issues, by developing the Leaf, a fully electric car.

Mobile phone companies are also known for defensive patenting.

"Mobile phone companies tend to try to patent as much technology as they can," Artz said. "The industry is filled with lawsuits, settlements, and cross-licensing agreements. Patents have really come to mean leverage. Without patents you have no leverage at all."

"This may not show up in sales numbers, as our research points out," Norman said, "but it definitely affects the dynamic of what's going on in the industry."

Not included in their study, but also of some importance, the researchers note, is the increasing prevalence of "patent trolls," people who do no research and development of their own, but purchase the patents of others hoping to capitalize on them in the future. While the practice is largely frowned upon by businesses, it has gained ground in recent years and does have an impact on the way businesses seek and maintain patents.

Artz and Norman have both used the information from their study in their Baylor classrooms.

"The reason firms need to innovate and spend money on research and development is that it is critical to their survival," Artz said. "That's why we were interested in it, and why it was so important for us to study. What we learned is that the way students may have thought about patents in the past isn't necessarily the way they work. This work will, hopefully, highlight for students and industry, the value of innovation to a firm."

Norman agrees, and hopes students and businesses take away a better understanding of competitive dynamics from the study.

"Innovation is a huge issue," she said. "The link between spending on R&D and creativity and innovation does impact sales. It's critical to the bottom line."

The results of their most recent study have prompted the team to begin looking at possible future areas of study.

"I'd like to look at strategic alliances and how innovation revolves around those alliances," Artz said.

Norman, too, would like to do further research in that area.

"Things like cross-patent agreements and competitive strategy are very interesting," she said.

Kendall Artz and Patricia Norman
Baylor University