When digital patent seeking can be the new lifeblood of non-tech industries
By Hyuck Choi
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Executive Summary
According to strategy and IP consulting firm Konsert, industrial firms in the top quartile of focusing on digital patent filings (ie 50%+ of their total patent filings) observed a 7% revenue growth rate, whereas firms that de-emphasized digital innovation patents lagged in revenue growth rate hitting just 4%.
Research published in the Journal of Product Innovation Management suggests industrial and manufacturing firms (ie “aging industries”) with more formalized innovation systems have a significantly increased growth rate of digital patent creation (patenting of a digital product such as AI code) over a three-year period.
Quantifying a company’s degree of formalization in actual practice will be helpful when managing towards an accelerated digital patenting growth rate necessary to “jump categories” in digital innovation focus.
Disparities in revenue growth: why digital patents matter for industrials
Though most attention is paid to the tech space, increasing digital product innovation is important for “aging manufacturing industries” because a small edge could provide a distinctive advantage against competitors in these already-substantial markets. Key benefits to having more momentum in digital product innovation include operational efficiency, improved sustainability, reduced costs, dynamic consumer interaction, and better adaptability to dynamic market backgrounds (“The Benefits of Digital Transformation in Manufacturing”, Bluecrewjobs, 2023).
The importance of digital patent filing in fact exists in most industries. The strategy and IP consulting firm Konsert analyzed Forbes Global 2000 companies in the IT & Telecom sector, showing that the top 5% of companies who generate 50% of the industry’s profit file four times as many digital patents on average while the top 20% files three times as many digital patents. But they also showed that the relationship between digital patents and revenue/profit was non-industry specific: the top-10 most profitable industry sectors in the Forbes Global 2000 companies, that accounted for 50% of the total digital patents filed, include not only banking and computer services, but also automotive and home improvement retail.
Most importantly, Konsert found a trend existing within heavy equipment, industrial equipment and automotive companies: from 2017 – 2019, revenue growth rate of the top quartile in digital patent filing (50%+ of their new patent filings being digital products) was 7% while that of the average firm (32% of their new patent filings being digital products) had 4% revenue growth rate (“The Case for Digital IP”, Konsert.com, 2020). An industrial firm, by definition, can only move from that average to top quartile and reap rewards of greater revenue growth by achieving (albeit over a several year period) a greatly increased digital patenting growth rate that far exceeds the growth rate of their non-digital patenting.
The formalization that accelerates digital patenting growth rate
There is theoretical tension between formalizing innovation to reduce ambiguity and allowing the fluidity needed to innovate. To contribute to this debate, a recent paper in the Journal of Product Innovation Management explored the influence of formalization on digital product innovation using two data sets: (a) survey responses from senior managers (CEOs, sales and marketing directors, business development managers, etc.) at 395 firms across four European manufacturing industries (plastics and rubber, utility vehicle, machinery and plant engineering, and energy) with an average of 723 million Euros in revenue and 2,700 employees; and (b) the rate of change in digital patents filed by each of those firms with the European Patent Office (Espacenet) over a three year period after the surveys were conducted.
Formalization was defined as a system or set of agreements that reduces uncertainty by clarifying ambiguous procedures and distribution of resources. This was measured through a series of survey questions using 5-point Likert-type scales that questioned the informants’ firm’s formal processes to build, accomplish, and monitor digitalization projects. Control statistics included firm age, firm size (by employees), specific manufacturing sector, and R&D expenditures relative to sales which were collected from the Amadeus database (Bureau van Dijk, Moody’s Analytics).
The degree of formalization specifically affected digital patent growth, verified through statistical analyses of ordinary least squares regression and R^2 variance. The model showed firms with a relatively high formalization scores could reach three-year growth rate in digital patents filed that was many multiples more than firms with lower formalization scores. Analyses furthered showed that the impact of formalization was neither firm size-specific nor industry specific. Although older firms tended to see improvement in digital product innovation from formalization, firm age did not have an influence on the actual number of digital patent growth. The incremental benefit of formalization was found to diminish, but instead of a U-shaped relationship, a logarithmic trend was found indicating that even at high levels, formalization does not negatively influence digital patent growth.
The path forward: assessment and iterative introduction of procedures
To drive digital patent growth in manufacturing industries, it is important to implement set procedures that may not be the norm. This will be especially important for firms that have a very low degree of formalization for digital product innovation projects, regardless of firm age, firm size, and specific industry. Unfortunately, the article itself was not specific and quantitative about these action tasks as the independent variable was opinion of executives on formalization and not the procedures themselves. To address this, general managers when establishing a formalized system could.
Day One: Identify the current and desired extent of formalization of the managing unit. This will differ according to the specified goal and nature of the team. The first step is surveying a cross-section of executives and managers, which is explained in more detail in the original article, to gauge if their opinions are congruent to the actual state-of-affairs.
After: Assess the firm level position in digital patenting relative to competitors and establish strategies to rank up if even just in one category. Even if it does not become a core competency, considering that this relative position showed strong correlation to revenue growth, manufacturing firms may risk a good deal of future market power by neglecting the trends and allowing the process to just happen organically.
Finally: Test procedures on a smaller level (unit, division, etc.) that introduce formalization. These may include: (a) establishing clear roles and their expectations to reduce the level of uncertainty about access and importance of company resources; (b) making codified and documented procedures that leads the team attention towards product innovation to allow members to focus on the digital patents as an end goal; (c) encouraging cross-coordination by reducing confusing terms or procedures across different sections to keep intact the synergy of different knowledge and ideas.
All-in-all, implementing a formalized innovation system in manufacturing industries could accelerate digital patent growth, increasing digital patenting rates that correlate to greater firm-wide annual revenue growth.
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Hyuck Choi is a PhD student in Chemical and Biomolecular Engineering at the Georgia Institute of Technology and a member of the GA Tech PhD-2-Consulting Club. The research applications proposed in this article are solely the views of the author and do not necessarily reflect the views of the original academic journal article authors nor any individual member of our Editorial Board.