Do you know which companies the most profitable ones? Often, they’re not the best organized, the best run or even the best marketed. It turns out it is not about cutting costs, improving process efficiency and implement best practices – although those are all really noble endeavors.

invisible.jpgThe real driver of profitability is the competitive advantage offered by a company’s Intellectual Property (IP).  Today, intellectual property is the only real source of sustainable competitive advantage and profit, according to Mark Blaxill and Ralph Eckardt, authors of the upcoming The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property (Portfolio, March 2009).

Blaxill and Eckardt argue that most corporate leaders generally ignore or hand off responsibility for intellectual property – patents, trademarks and brands, copyrights and trade secrets – because IP isn’t readily visible or measurable with traditional business tools. Instead, they distract themselves with operational performance goals, which will not sustain competitiveness in the long run.

From the authors The Invisible Edge:

Why IP is so important: Only IP allows companies to own the innovations that allow them to differentiate their products and services, exclude competitors, attract customers and persuade them to pay a premium. By contrast, operational and financial “best practices” are easy to replicate and, therefore, don’t provide a long-term advantage.

Why there’s little correlation between operational discipline and long-term profitability: Operationally undisciplined companies can be extremely profitable – if they recognize and are disciplined about their intellectual property. (Look at the pharmaceutical industry: It’s famously undisciplined and spends enormously, but historically it has generated enormous profits – until recently when many blockbuster drugs began to lose their patent protection.)

Why the most strategic decisions leaders can make involve often-conflicting IP imperatives: Putting IP at the center of strategy means making critical choices about when and how to share and collaborate on intellectual assets; when and how to control them and make them proprietary; and how they can be simplified in order to change the basis of competition.

The sea change in corporate strategy: from “fast company” to “smart company”: Just as the “cheap company” of the past (the one that pulled costs out of products) gave way to the “fast company” (which accelerated time to market and improved processes), the “smart company” creates and manages the best suite of intellectual assets to achieve sustained competitive advantage. Strategy now focuses on transforming a business into a “company of ideas.”

The leadership imperative for “smart companies”: IP specialists – including lawyers, engineers and scientists – should prepare to move themselves into and be fit to succeed in the senior ranks of business leadership. Said another way, to compete today, most CEOs need to learn how to use IP strategically.

The questions investors should ask: Did this company invent something important? Do they own it? How does the company manage and value IP (e.g., who is the chief IP officer and to whom does that person report)? What’s the company doing to expand its IP position?

Using examples from industries from Intel to Toyota, the authors guide the reader through the mechanisms that create wealth through innovation.  We learn how even something as mundane as the razor blade can entail decades of research culminating in Gillette’s Fusion and Fusion Power razors, which are covered in a blanket of more than thirty patents.  These cover everthing from a method of crimping the blade steel to the grip design.

The Invisible Edge is a good read for anyone working in an industry that may have forgotten where value is really generated.

The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property  is available for pre-order from Amazon.

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