Monetizing innovation - by whom?
Innovation and value creation are inextricably linked. It goes without saying that to be successful, any innovation must create more value in the end-market that its development and delivery costs. Then there is the question of where that value is appropriated: by the end-customer, by the originator and its supply chain, or by imitating competitors.
This depends upon:
- Deep understanding of value chain though to end-user
- Protected Intellectual Property or know-how
- Business model design
- Complementary assets
- Bottlenecks in supply chain relationships
- Brand, style, advertising
Appropriating value from innovation is one of the most challenging aspects of innovation. This aspect is less widely discussed than its importance suggests, although there is a strong strand of analysis that derives from Teece’s seminal paper in 1986 ("Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy").
Innovators need to be conscious of the attributes that drive appropriability, and features of design of the offering and how it is taken to market will need to be optimised throughout the evolution process. The most successful organisations put considerable effort into defending appropriability, but the history of innovation has many examples where lack of attention to this aspect has been extremely costly.
The same goes for regional or national wealth creation policy. Attention needs to be directed at how an economic area retains the value from its innovative assets, rather than seeing the gains derived elsewhere. This could be one of the most searching questions for national economic development in the globalised 21st Century world.
Value creation might be expressible in conventional financial terms, eg the NPV benefit to the customer from purchasing the good or the service, or in broader measures including regulatory conformance, fashion, image and lifestyle enhancement. Innovators need to build a model of the end-customer benefit early in the ideation and development activities, continually check out the validity of the model, and use this to optimise the offering as it evolves. Multiple scenarios are likely to be involved. Early engagement with early adopter end-users is helpful, and it is notable that many innovations succeed by finding a receptive, less challenging, market to gauge demand and price point, introducing greater capability and market breadth on an evolutionary basis.
The end-market value created can be appropriated anywhere in the supply chain, driven by factors such as strong intellectual property, brand, customer buying power, where complementary assets are held, and supply chain architecture. A wide range of strategies are employed to focus value appropriation on the organisation in question, from patents and trade secrets to broad licensing to stimulate market, from capturing upstream and downstream presence to strategic management of relationships within supply chain partners to ensure some kind of bottleneck to localise value capture.
This is a very complex subject, but the primary point here is the need to explicitly model both value creation and means to appropriate value (which may change during a product lifecycle). This must be an integral part of any innovation project - from the outset. This could be from developing a new good or service in a commercial marketplace, or it could be developing a better way to deliver a service in the public sector. It is important to have a clear view of what value is created where, and the means to analyse and optimise.
In the public sector, focus on outcome value is just as important as in commercial business. Without the drive to improve the efficiency of legitimate outcomes, innovation will always be hostage to conventional wisdom and parochial motivations. Unfortunately, public sector organisations tend to focus on inputs. Outputs may be more difficult to measure in the public sector, but this challenge is overplayed - meaningful output and outcome measures can be devised, and input resources articulated to these outcomes. Attention to knowing what contributes to value generating outputs is a crucial platform for innovation in the public sector.
Separately, the public sector drives innovation through its regulatory and its large procurement activities. Public sector procurement should be mindful of the value appropriation implications of its actions on the wider economy, and take these into account when considering regulatory measures and procurement strategies.
Innovation Governance Checklist
- Is a model of value creation and appropriation in place at stages in development of new goods and services, and in policy design?
- Are there review stages in place that assess how well leaders of innovation projects articulate end-value and value capture?
- Is there a strategy for sustaining appropriation of value that is robust across market evolution and external shifts, including IP protection processes and husbanding of complementary assets?
- In the public sector, is there a clearway to articulate resources to achieved outcome benefit?
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