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.

Alex

Marketing

Gibson

IP Lawyer strategist

Susan

CEO

Nicole

Designer

Chris

Branding Expert •

Learning Points

- TM and ID to increase the Power of Marketing - Brand Building - How to Protect TM and ID - Trademarks Management

Basic IP Modules in 2005

Module 3 Invention and Patent Module 4 Trade Secrets Module 5 Copyright & RRs

•

Learning Points

- Basics of trade secrets - TS management program - Violation of TS - TS audit •

Learning Points

- Basics of invention and

IP Promotion

- Patent application - Patent infringement - Patent management •

Learning Points

- Basics of copyright - Copyright and related rights - Ownership of copyright - Using works owned by 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 today’s economy in

• 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

Delivery & Credit Brand Name Quality Level Augmented Product Installation Packaging Core Benefit or Service Features Design After Sale Service Warranty Actual Product Core 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 Marketing Service Core technological know-how Complementary 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…

Product Development Cycle

One Integrated Company

CRO’s CRM’s Product Development Tool Companies Testing Services

Many Distributed 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 regional clusters Specialized, networked regions

Understanding the Process of Innovation

$

The Process/Steps of Innovation Pre-IPO

• • • • •

Bright Idea Experimental Research Business Plan

• • • •

Legal Entity Founders = Mgt Team Minimal Revenue Slow Growth

Start-Up

Proof of Concept

Idea / Concept Seed

• • •

Expansion

High Growth

• • •

Head Count

• • • •

Support Functions Administration Marketing Revenue Growth

Viable Market acceptance Heading to IPO or M&A

Multiple Cycles Time

The Needs of Each Stage

$

•

Corporate and

• •

Recruitment Business

•

Secretarial Financial

•

Training

• •

Development

•

PR and Marketing A & P Market Access

•

Business Plan

•

Prototype/ POC

•

Project Management

•

Business Premises

•

Networking

•

Business Development

•

Project Management

•

Management Training

Start-Up Seed Idea / Concept Expansion

•

International support and Mkt. Access

•

Diversification strategies and support

•

Recruitment

•

Training and Incentives 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 – Contract Management – because a lot of IP is IT-related; some of the more complex IP issues arise in IT context because IP is often created (or improved) in context of a contract (eg, supply contract or joint venture relationship) Asset Management – Risk Management – because IP is an asset, albeit intangible; it has a value 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

•

Technical

•

Business

•

Export

•

Financial

•

Relationships

•

Accounting

•

Tax

•

Insurance

•

Security

•

Automation

•

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 / Utility Models/Trade secrets Patents / Utility models Invention Financing Literary / artistic creation Industrial Designs/ Trademarks/GIs Trademarks/ GIs Ind. Designs/Patents/Copyright All IP Rights Commercialization Marketing Product Design Exporting Licensing 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’m in business

for

myself, but not

by

myself”.

“Why would I work for someone else when I can work for myself and reap the rewards of my efforts?"

“I have the opportunity to learn from the success and failure of others.”

“I want a ‘bottled’ process for success that I can use in developing my own successful business.” "Why would I spend years and the investment required to establish a

successful brand

when I could buy a franchise which provides immediate access to a successful business system and 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 Classification of Retail Establishments Level of Service Product Assortment 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

Wholly owned subsidiaries International Joint Ventures International Strategic Alliances

Advantage

 Enables global strategic coordination  Protects technology  Realizes (potentially) location and experience economies  Gives access to local partner's knowledge  Allows sharing of development costs and risks  May be more politically acceptable than 100% foreign ownership  Allows foreign par ent do deploy resources across more national markets at once  Similar to international joint ventures

Disadvantage

 High costs and risks  Requires overseas management skills  May be slower to implement  Loss of control over technology and ma nagerial know-how  May impede global coordination  May make realization of location and experience economies more difficult  Sharing of profit "pie"  May be more difficult to manage than international joint ventures

Entry Mode

Franchising Licensing Exporting

Advantage

 Low financial risk  Relatively low developmen t costs

Disadvantage

 Lack of direct control over quality  Successful international franchising requires considerable start-up and ongoing pre sence 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  Similar to franchising  Similar to franchising  Fewer "maintenance" costs than franchising  Ability to realize experience curve economies  Transport costs  Trade barriers  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 Advertising/Direct Mail Auto & Truck Rentals Automotive Products/Services Batteries-Retail & Comm.

Beverages: Special Business Brokers Business/Mgmt Consultants Campgrounds Check Cashing/Financial Services Children’s Services Clothing and Shoes Computer/Electronics/Internet Construction Materials Consumer Buying Services Convenience Stores Cosmetics Dating Services Drug Stores Educational Products/Services Employment Services                    Fitness Florist Shops Food/Restaurants Golf Products/Services Greeting Cards Hair Salons & Services Health Aids & Services Home Furnishings Home Inspection Hotels and Motels Insurance Janitorial Services Jewelry Laundry & Dry Cleaning Lawn/Garden/Agriculture Maid & Personal Services Maintenance Marine Services Optical Aids & Services                      Packaging/Ship/Mail Painting Services Paralegal Services Payroll Services Pest Control Services Pet Sales/Supplies Photography Printing/Copying Real Estate Services Recreational Services Rental Equipment & Supplies Retail Stores Security Systems Senior Care Sign Products & Services Tanning Centers Telecommunications Transportation Services Travel Agents Vitamin & Mineral Stores 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 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