Wednesday, March 31, 2010

Intellectual Capital v/s Intellectual Property – What’s the difference?

One question frequently pops up during my presentations and discussions on Intellectual Capital with industry captains – “Aren’t you referring to Intellectual Property?” My answer is always an emphatic NO followed by a brief explanation of the difference between the two. Soon however, the multiple recurrence of this question prompted me to apply my mind to answering this question more definitively. So here goes.
I start first with the dictionary meaning (Webster’s) of the three words:

Intellectual – showing a notable mental capacity; guided or developed by relying on the Intellect.

Capital – an advantage or asset

Property – something owned; right of possession
Next, I extrapolate the above definitions to infer the meaning of the two phrases on hand as follows:

Intellectual Capital – An advantage or asset that is developed from the use of notable mental capacity.

Intellectual Property – A right or possession that is developed from the use of notable mental capacity.

This is as far as we can get using the dictionary. But the difference between the two phrases is already starting to emerge. While both IC and IP are developed from the use of intellect or mental capacity, IP has explicit ownership rights associated with it whereas IC does not. This is not to say that IC cannot be owned. It just cannot be owned explicitly, meaning to say that unlike IP which can be patented explicitly, IC does not usually have a legal title of ownership attached to it. This is the essential difference between the two. However by no means is this all. There are many more differences lurking underneath this academic perspective of the two phrases, of which I enumerate seven differences below in no particular order:
  1. IP can be legally protected – Most countries around the world have patent protection laws that enable individuals and firms to register and patent their intellectual property – most notably their inventions and innovations. Patent protection laws are mainly responsible for the decision of firms to invest in R&D activities in industries that thrive on the output from continuous research - such as Pharmaceuticals and Biotechnology. IC on the other hand resides within the confines of the firm’s boundaries and needs to be protected where necessary using any combination of secrecy, discipline, procedure, agreements, contracts, etc.

  2. IC is more intangible than IP – At the time of patenting an IP, the owner has to make a full disclosure of the property by including relevant drawings,  descriptions, prototypes, etc. that clearly explain the functioning of the intellectual property. This makes the IP somewhat tangible, since even if the IP in question is a process, it can be visualized and understood clearly from the documents available in the patent file. IC on the other hand is much more intangible and moreover it usually has no accompanying documentation. For example if the IC of an auto ancillary firm is to produce world class spark plugs, then such IC is perhaps the outcome of a judicious combination of stringent procurement standards, quality controlled manufacturing processes, automated testing systems, continuous skill enhancement of workers, empowerment on the assembly line, a wholesome rewards and recognition policy and a brand that has been nurtured and built over the years. Each of these intangibles may be resident in and owned by different departments within the firm, but it is only when all of them come together in the right combination that IC, and hence competitive advantage, accrues to the firm.

  3. IC is a process, IP is an event – The question that arises from the foregoing paragraph is “Surely with a little additional effort, IC can be converted into IP?” After all there are many benefits to be had from the advantage of legal protection. This is easier said than done. This is because IP is the outcome of a research project which is outcome based – meaning the research process leads to a definite invention or innovation which can be patented. Once patented, the IP becomes static. IC on the other hand is highly dynamic. In the example that we have seen previously, the auto ancillary firm may have  to continuously invest in brand building, scour suppliers for lighter and longer lasting raw materials, investigate newer and more effective training methods, ensure industry leading rewards program, etc. to sustain its IC and competitive advantage in the marketplace. Thus unlike IP, IC to my mind is a continuous improvement process.

  4. IP can be traded – This property arises from the fact that IP has an associated ownership title. Therefore, like other tangible assets, it can be traded, rented, leased, bought, sold, sub-let and loaned for financial consideration. IC on the other hand, is relevant only within the context of the firm that has developed the IC and hence it cannot be traded like IP in the same way.

  5. IP has a life – This is one of the key differences between the two. All patents have a life depending on the type of the patent. For instance in India, patents for food, drugs and insecticides have a life of 7 years and all other patents have a life of 14 years. The patent expires at the end of its life, at which point the Intellectual Property becomes public property, available for the general benefit of mankind. IC on the other hand does not have a finite life. For instance, the formulation used in making the popular Coca Cola drink is knowledge that is confined within the company for more than hundred years now. The secret formulation and its use is Intellectual Capital that is a closely guarded secret and that has provided the Coca Cola Company with a sustained competitive advantage. Had the company chosen to patent the formulation instead, the secret would have been out in the open by now and the process of making Coca Cola would not have been so mysterious anymore! Correspondingly Coca Cola would not have been such a desirable brand anymore.

  6. IP does not necessarily provide Competitive Advantage – This difference is very important. IP protection laws ensure that the returns from the investments made in developing the IP accrue solely to the owner of the IP and not to unscrupulous overnight raiders. This does not necessarily mean that IP leads to a competitive advantage. In fact, just the opposite may be true. Remember the clash between Matsushita’s open VHS format and Sony’s proprietary Betamax format in the nineties. Even though Betamax had better technology, Matsushita obtained the competitive advantage by licensing VHS technology openly and inexpensively to its competitors thus driving Betamax out of the market.

  7. And finally, IC is a superset of IP – Even in the case where firms invest in and patent their IP, they still have to do many other activities to successfully market the IP. Some of these include material management, production planning and control, quality control. Safety, Branding, Promotions, Advertising, Dealer development, etc. Each of this activity is perhaps an island of Intellectual Capital within the individual department. When done consistently and in a coordinated manner, the islands join together and appear to give the IP an image which is larger than life, leading to its successful marketing. But therein lies to my mind the biggest difference between these two – IC is a superset of IP. In other words, a firm may be able to obtain competitive advantage without IP, but it cannot obtain competitive advantage without IC.

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