Leveraging Intellectual Property Assets for Business Success: Building an Enterprise Based on a Franchise Dr. Guriqbal Singh Jaiya Director Small and Medium-Sized Enterprises Division World Intellectual Property Organization www.wipo.int/sme SMEs Website IP for Business Series • Making a Mark (Trademarks) • Looking Good (Designs) • Inventing the Future (Patents) • Creative Expression (Copyright and Related Rights) http://www.wipo.int/sme/en/multimedia/ Development of 10 Modules Module 1: Importance of IP for SMEs developed in 2004 as a pilot project Based on “IP for Business” in SMEs Homepage • Why is IP relevant to your SME? • IP as a business asset • IP as an investment • The value of IP assets • Introduction of IP Audit Basic IP Modules in 2005 Module 2 : Trademarks and Industrial Designs • Main Story : Susan faces difficulty in marketing due to weak brand and poor design. With the help of Gibson and hard work, her company eventually succeeds in developing a new brand and a nice design to attract consumers. • Learning Points - TM and ID to increase the Power of Marketing Alex - Brand Building Gibson Susan Nicole Chris Marketing IP Lawyer CEO Designer Branding - How to Protect TM and ID strategist Expert - Trademarks Management Basic IP Modules in 2005 Module 5 Module 3 Module 4 Copyright & RRs Invention and Patent Trade Secrets • Learning Points - Basics of trade secrets - TS management program - Violation of TS - TS audit • Learning Points • Learning Points - Basics of copyright - Basics of invention and - Copyright and related IP Promotion patent - Patent application rights - Ownership of copyright - Patent infringement - Using works owned by - Patent management others Advanced IP modules in 2006 Module 6 : Patent Information Module 7 : Technology Licensing in a Strategic Partnership Module 8: IP in the Digital Economy Module 9 : IP and International Trade Module10 : IP Audit Spotlight is on knowledge in today’s economy • Knowledge, Weightless, Information, Digital or Service Economy • Factors of production: Land, Labor, Capital, Intangibles (Knowledge) • Knowledge as useful Information (or Service) • Information as a “Public Good” • Information as Property Market-oriented Economy • Playing Field: Unfair competition; free riding • National Legal Systems: Diversity (bilateral/regional/ international treaties or agreements) • Adding Value : Meeting or exceeding market needs or expectations • Market research: Consumers‟ needs, competing products or substitutes, gaps • Technological innovation as an element of marketing The challenge of adding value in today’s economy • Raw materials/Inputs: Processing (Value addition) = Value added output/component; product; sale; Profit • Value addition: Better: Functional/technological or aesthetic/non-technological; Rational/Emotional (More for Less) • Price; access/availability; consistency • Individual, Enterprise (legal person), Chains, Networks; consortia; Open Innovation (Industry-Government-Academia) • Ownership vs. access to knowledge • Value Addition, Value Delivery and Value Extraction Levels of Product Augmented Product Installation Packaging Brand Features Name Core Benefit After- Delivery Sale & Credit or Service Quality Service Design Level Warranty Actual Core Product Product What is innovation? • Innovation is the process and outcome of creating something new, which is also of value. • Innovation involves the whole process from opportunity identification, ideation or invention to development, prototyping, production marketing and sales, while entrepreneurship only needs to involve commercialization (Schumpeter). What is innovation? • Today it is said to involve the capacity to quickly adapt by adopting new innovations (products, processes, strategies, organization, etc) • Also, traditionally the focus has been on new products or processes, but recently new business models have come into focus, i.e. the way a firm delivers value and secures profits. What is innovation? • Schumpeter argued that innovation comes about through new combinations made by an entrepreneur, resulting in – a new product, – a new process, – opening of new market, – new way of organizing the business – new sources of supply Dimensions of innovation There are several types of innovation – Process, product/service, strategy, which can vary in degree of newness: – Incremental to radical, and impact: continuous to discontinuous Drivers for innovation – Financial pressures to reduce costs, increase efficiency, do more with less, etc – Increased competition – Shorter product life cycles – Value migration – Stricter regulation – Industry and community needs for sustainable development – Increased demend for accountability – Demographic, social and maket changes – Rising customer expectations regarding service and quality – Changing economy – Greater availability of potentially useful technologies coupled with a need to exceed the competition in these technologies What is innovation? • Gary Hamel argued that today‟s market place is hostile to incumbents, who now needs to conduct radical business innovation: – Radically reconceiving products and services, not just developing new products and services – Redefining market space – Redrawing industry boundaries New conditions for innovation • Small start-up entrepreneurs increasingly depend on large firms: – as suppliers or customers – for venture finance, – for exit opportunites, – for knowledge (production, markets and R&D) – and for opening new markets. New conditions for innovation • Large firms increasingly depend on small start-ups – for NPD, – as suppliers of new knowledge (which they cannot develop themselves), – or organizational renewal, for experimentation with busienss models, – for opening new markets, etc New developments in innovation raises new issues and problems • Greater emphasis on commercializing scientific discoveries, particularly in IT and the bio-sciences • Speed and potential value of scientific progress leads to emphasis on solid and well-designed portfolios of research projects • Universites as active drivers of innovation: Academic entrepreneurship and the entrepreneurial university • University-industry partnerships • Increased search for radical innovation and top-line growth. Complementary Resources Manufacturing Distribution Finance Service Core technological know-how Complementary Marketing technologies Other Other Bargaining power of owners of complementary resources depends upon whether complementary resources are generic or specialized. New Business Models Emerge Then… Now… CRO’s CRM’s Product Product Development Development Cycle Tool Testing Companies Services One Integrated Many Distributed Company Companies New Regional Model Emerge Then… Now… Region D Region A Region B Manufacturing Region C Research Trials/Testing Services Region G Development Region E Region F Self-contained Specialized, regional clusters networked regions Understanding the Process of Innovation The Process/Steps of Innovation Pre-IPO $ • Viable Expansion • Market acceptance • Legal Entity • Heading to IPO or M&A • High Growth • Bright Idea • Founders = Mgt Team • Head Count • Experimental • Minimal Revenue Start-Up • Multiple Cycles • Research • Slow Growth • Support Functions • Business Plan • Administration • Proof of Concept Seed • Marketing Idea / Concept • Revenue Growth Time The Needs of Each Stage •Recruitment •Business •Corporate and Development Secretarial •A & P $ •Financial •Market Access •Training •PR and Marketing •Networking •Business Expansion •Business Plan Development •Prototype/ POC •International support and •Project Management Mkt. Access •Business Premises Start-Up •Diversification strategies •Project Management and support •Management Training •Recruitment Seed •Training and Incentives Idea / Concept Time IP Management Needed in all stages An Aspect of Good Management • People Management – because IP is generated by people and used by people • Knowledge Management – because a lot of knowledge is informal and may or may not crystallise as recognisable category of IP • IT Strategic Planning – because a lot of IP is IT-related; some of the more complex IP issues arise in IT context • Contract Management – because IP is often created (or improved) in context of a contract (eg, supply contract or joint venture relationship) • Asset Management – because IP is an asset, albeit intangible; it has a value • Risk Management – because there are risks to an organisation flowing from its actions, or failure to act, in relation to IP (including risk of lost opportunity) with permission of P Crisp, AGS, 2003 Introduction to IP Management 1 • Legal • Accounting • Technical • Tax • Business • Insurance • Export • Security • Financial • Automation • Relationships • Personnel Introduction to IP Management 2 • Trademarks (Brands) • Geographical Indications • Industrial Designs • Patents and Utility Models • Copyright and Related Rights • Trade Secrets • New Varieties of Plants • Unfair Competition Basic Message 1 IP adds value at every stage of the value chain from creative/innovative idea to putting a new, better, and cheaper, product/service on the market: Patents / Trademarks/ GIs Utility Models/Trade secrets Ind. Designs/Patents/Copyright All IP Rights Patents / Industrial Designs/ Utility models Trademarks/GIs Invention Commercialization Marketing Financing Product Design Exporting Literary / artistic Licensing creation Copyright/Related Rights All IP Rights Basic Message 2 • IP Strategy should be an integral part of the overall business strategy of an Enterprise • The IP strategy of an Enterprise is influenced by its creative/innovative capacity, financial resources, field of technology, competitive environment, etc. • BUT: Ignoring the IP system altogether is in itself an IP strategy, which may eventually prove very costly or even fatal Basic Message 3 (More for Less) • Own Use • Licensing • Franchising • Merchandising (Mickey Mouse, Hello Kitty) Strategic Entrepreneurship and Innovation • Entrepreneurship is concerned with: – The discovery of profitable opportunities – The exploitation of profitable opportunities • Firms that encourage entrepreneurship are: – Risk takers – Committed to innovation – Proactive in creating opportunities rather than waiting to respond to opportunities created by others Entrepreneurship 1 Entrepreneurship drives innovation, competitiveness, job creation and economic growth. It allows new/innovative ideas to turn into successful ventures in high-tech sectors and/or can unlock the personal potential of disadvantaged people to create jobs for themselves and find a better place in society. Entrepreneurship 2 Entrepreneurship, in small business or large, focuses on "what may be" or "what can be". One is practicing entrepreneurship by looking for what is needed, what is missing, what is changing, and what consumers will buy during the coming years. Entrepreneurship 3 Entrepreneurs have: – A passion for what they do – The creativity and ability to innovate – A sense of independence and self- reliance – (Usually) a high level of self confidence – A willingness and capability (though not necessarily capacity or preference) for taking risks Entrepreneurship 4 Entrepreneurs do not (usually) have: – A tolerance for organizational bureaucracies – A penchant for following rules – A structured approach to developing and implementing ideas – The foresight to plan a course of action once the idea is implemented and established Entrepreneurial Success 1. People (Entrepreneur /Entrepreneurial Team) 2. Opportunity (Marriage of Market and Product/Service) 3. Access to Resources (Land. Labor, Capital, Knowledge And the fit amongst these three elements (Business Model) What is a Franchisee? “Frantrepreneur” (fran*tre*pre*neur) n. One possessing the desire to be a business owner -- without the desire to recreate the wheel -- by following a proven system for the benefit of personal and professional goals. The Frantrepreneur Mentality “I have the opportunity “I‟m in to learn from the success business for and failure of others.” myself, but not “I want a „bottled‟ process for by myself”. success that I can use in developing my own successful business.” “Why would I work "Why would I spend years and the for someone else investment required to establish a when I can work for successful brand when I could buy a myself and reap the franchise which provides immediate rewards of my access to a successful business system and efforts?" a brand name which others already have made successful?" Entry Strategies • New Business – Develop a new product or service – Develop a similar product or service – Competitive approaches • Existing Business – Buying a business – Franchise – Joint venture – customer or supplier Classification of Retail Operations Ownership Level of Service Classification Product Assortment of Retail Establishments Price Classification of Ownership Independent Retailers Chain Stores Franchises Foreign Market Entry Options •Indirect Exporting •Direct Exporting •Licensing •Franchising •Turnkey Projects •Management contract •Strategic alliances •Joint ventures •Wholly Owned Subsidairy Entry Mode Advantage Disadvantage Wholly Enables global strategic High costs and risks owned coordination Requires overseas subsidiaries Protects technology management skills Realizes (potentially) location May be slower to implement and experience economies International Gives access to local partner's Loss of control over Joint knowledge technology and managerial Ventures Allows sharing of development know-how costs and risks May impede global May be more politically coordination acceptable than 100% foreign May make realization of ownership location and experience Allows foreign parent do economies more difficult deploy resources across more Sharing of profit "pie" national markets at once International Similar to international joint May be more difficult to Strategic ventures manage than international Alliances joint ventures Entry Mode Advantage Disadvantage Franchising Low financial risk Lack of direct control over quality Relatively low Successful international franchising development costs requires considerable start-up and ongoing presence overseas (cost) Is likely to impede, make global coordination costlier than ownership Growth may be slower depending on franchisee's intentions Sharing of profit "pie" Possible loss of know-how to potential competitor Licensing Similar to franchising Similar to franchising Fewer "maintenance" costs than franchising Exporting Ability to realize Transport costs experience curve Trade barriers economies Motivation of local agents a challenge SELECTING AN ENTRY MODE • Core Competencies and Entry Mode The optimal entry mode for these firms depends to some degree on the nature of their core competencies. In particular, a distinction can be drawn between firms whose core competency is in technological know-how and whose core competency is in management know-how. • Technological Know-How • If a firm‟s competitive advantage (its core competence) is based upon control over proprietary technological know-how, licensing and joint venture arrangements should be avoided if possible in order to minimize the risk of losing control over that technology, unless the arrangement can be structured in a way where these risks can be reduced significantly. • When a firm perceives its technological advantage as being only transitory, or the firm may be able to establish its technology as the dominant design in the industry, then licensing may be appropriate even if it does involve the loss of know-how. By licensing its technology to competitors, a firm may also deter them from developing their own, possibly superior, technology • Management Know-How • The competitive advantage of many service firms is based upon management know-how. For such firms, the risk of loosing control over their management skills to franchisees or joint venture partners is not that great, and the benefits from getting greater use of their brand names can be significant. Categories of Franchises Accounting/Tax Services Fitness Packaging/Ship/Mail Advertising/Direct Mail Florist Shops Painting Services Auto & Truck Rentals Food/Restaurants Paralegal Services Automotive Products/Services Payroll Services Golf Products/Services Batteries-Retail & Comm. Pest Control Services Beverages: Special Greeting Cards Pet Sales/Supplies Business Brokers Hair Salons & Services Photography Business/Mgmt Consultants Health Aids & Services Printing/Copying Campgrounds Home Furnishings Real Estate Services Check Cashing/Financial Services Home Inspection Recreational Services Children‟s Services Hotels and Motels Rental Equipment & Supplies Clothing and Shoes Insurance Retail Stores Computer/Electronics/Internet Janitorial Services Security Systems Construction Materials Senior Care Jewelry Consumer Buying Services Sign Products & Services Convenience Stores Laundry & Dry Cleaning Tanning Centers Cosmetics Lawn/Garden/Agriculture Telecommunications Dating Services Maid & Personal Services Transportation Services Drug Stores Maintenance Travel Agents Educational Products/Services Marine Services Vitamin & Mineral Stores Employment Services Optical Aids & Services Weight Control Franchise Agreements in Profile • Data from 91 publicly traded franchisors in US – % outlets franchised (75% mean, 12% - 100%) • (best performers have a mixture of own and franchised) – Franchise fee ($29k mean, $5k - $123k) – Royalty rate (5,6% of revenue mean, 2% - 12%) • (franchise fees and royalty rates are market benchmarked) – Advertising rate (3,8% of revenue, 0% - 15%) • (marketing power is function of #outlets * ad rate) – Term (14 years average, 5 – 20 years range) – # outlets (2.650 mean, 100 – 13.600 range) Questions To Ask Yourself • How much capital do you have to invest? • How much liquid assets do you have? • Do you require a specific level of annual income? • Are you interested in pursuing a particular field? • Are you interested in retail sales or performing a service? • Do you want a part-time or full-time opportunity? • How many hours are you willing to work? Questions To Ask Yourself (continued) • Do you want to operate the business yourself or hire a manager? • Do you want to have employees? • Do you want to have inventories? • Do you want to have Accounts Receivables? • Will franchise ownership be your primary source of income or will it supplement your current income? • Would you be happy operating the business for the next 20 years? • Would you like to own several outlets or only one? Questions to Ask a Franchiser • Determine what assistance the franchiser provides. Do they assist with training, store design, location construction, site selection, and feasibility studies? • Do they have any access to demographic studies to get an understanding of the audience within the market area? • What types of support will the franchiser provide once your franchise has opened its doors? • After the initial investment, will there be additional financial obligations requiring working capital? • Does the franchiser offer any form of financing? • Ask the franchiser how many franchises have been sold in the state you will be operating in during the last 12 months, and how many have been opened for business? Questions to Ask a Franchiser (continued) • What types of territorial restrictions and protections have been set up by the franchiser? • Is the franchiser planning on expanding within your state? Are they focusing on any specific locations? • What arrangements are established through the franchiser in terms of product supply? • Ask if the franchiser has been forced to terminate any of its franchisees and detail the reasons for this decision. Have any franchisees failed or gone bankrupt? • Are there any current lawsuits pending or past judgments against the franchiser? What steps are taken to settle disputes between the franchiser and franchisees? Questions to Ask Franchisees • How long have you owned your franchise? • Is your franchise profitable? • In which month did you reach your breakeven point? • Have you made approximately the same profit that was forecast in the disclosure document? • Were your opening costs consistent with the original projections in the disclosure document? • Are you satisfied with the franchiser? • Are you satisfied with the product or service? • Is the operations manual, clear, up-to-date and adequate? • Are you satisfied with the marketing and promotional assistance provided by the franchiser? Questions to Ask Franchisees (continued) • Was the initial training and ongoing support sufficient for you to operate your business? • What was your background prior to buying your franchise and was it beneficial to your success? • Are deliveries of goods provided by the franchiser timely and competitively priced? • Is the franchiser fair and amicable to work with? • Does the franchiser listen and help you with your concerns? • Have you or other franchisees had any disputes with the franchiser? What was their nature? Were they resolved fairly? • Do you know of any disputes between the franchiser and the government? • Do you know of any disputes with competitors? • Who are the major competitors? Common Mistakes of Prospective Franchisees • Not reading, understanding or asking questions about the UFOC, franchise agreement and other legal documents • Not understanding the responsibilities of the franchisee and the obligations of the franchiser • Not seeking sound legal and financial advisors • Not verifying oral representations of the franchiser, representatives or brokers • Not contacting enough current franchisees • Not contacting closed, sold or changed franchisees and confirming reasons • Not having enough working capital • Not recognizing the need for financing Common Mistakes of Prospective Franchisees (continued) • Not knowing how to make a proper loan request • Not developing true and accurate budgets/forecasts and financial statements • Not meeting the franchiser’s key management and support personnel • Not analyzing your market in advance • Not developing your marketing strategy • Not determining dollar amounts necessary to implement marketing strategy including advertising and promotional programs • Not choosing the right location • Not analyzing the competition Established Franchisers offer: Established versus New • Name Recognition Franchisers • More regional and national advertising • Experienced management • Better chance of competing with competitors in a price or advertising war • More refined training and support • Better purchasing power with established price discounts • More likely to have franchise financing available • More established and efficient working prototype or company-owned stores • Improved assistance from existing qualified franchise owners through advisory councils Should You Use a Consultant? A Franchise Consultant... • will take the time to educate you on the franchise industry • will help you define your qualifications so that you don’t waste your energies and time on franchises that are not right for you or that you are not qualified for • can provide you valuable insight on franchises that you won’t find on your own • will help you present your qualifications to a Franchiser • are paid by the Franchisers, but they recognize that this only happens if they provide you excellent service and present to you the right opportunities • will take an unbiased approach to helping you achieve your goals
"Leveraging Intellectual Property"