Over the years I have wrestled with a graphic to depict what we do when we support an organization catalyze their good ideas into market worthy innovations and depict when value is created.
We have the over all process steps defined which we adapt for each client, but on paper the steps always look deceptively linear for a process which is emergent and in a dynamic business environment.
It never fails that the question is asked - what is the roi
for an innovation intervention? The short answer is immediately. Our premise is
Value is created all along the process from discovery, to
growth opportunity or idea generation, to opportunity commercialized.
Skills and competencies are developed as employees learn to assess the external business environment, engage stakeholders, utilize network analysis and collaboration tools, enact data driven decision-making and scenario planning. Most organizations view the process of idea creation, as an expense when in fact it is the building of an organization skill and competence, the so-called “intangible asset” made very tangible.
Over 75% of US GDP comes from "intangibles" and yet we are still trying to figure out means to account for this value created daily by 21st century enterprises. Look to Intangible Assets: Measuring and Enhancing Their Contribution to Corporate Value and Economic Growth: Summary of a Workshop from the National Research Council for some emerging trends. The section on Firm Measurement of Intangibles, pages 44 - 45 detail examples from Baruch Lev.
"So what, according to Lev, is the key information that is needed? First, collecting information about capitalizing R&D on the macro level, as in national accounts, ... is important. On the firm level, capitalizing R&D, while a step in the right direction, is not something that investors will get terribly excited about. What is needed is not haphazard, non-standardized measures, such as employee or customer satisfaction grades, brand values, corporate reputation, or triple bottom line.
Investors want to know about factors that drive the business. What is needed is structured input-output information on performance of the major drivers of enterprise value—these are things that accounting is not yet designed to provide. Lev provided two examples of this type of information, one prevalent in the pharmaceutical and biotech industries, the other in Internet and telecommunications firms. In put-output linkages for these industries involve high levels of R&D. Companies may provide information about the product-pipeline and the outcomes from these programs - how many products they are working on and where they are on the scale of development. These pieces of information are major value drivers of biotech companies. If a company has a few products in an advanced development stage, like Phase II clinical tests, a high value will be generated. If they are all in preliminary stage, a very low value will emerge. Good disclosure, by Lev's definition, is something that relates the R&D to its consequences. Innovation revenue, a percentage of total revenue that comes from recently introduced products, is an extremely powerful measure of innovation, in that it can be indicative of two things. First is the ability to come up with new products and services and bring them to market quickly.
Ability to come up with new products and services and bring them to market quickly are competencies that can be learned. They often lie as "untapped talent" in many organizations waiting to be unleashed through a variety of techniques for generating growth opportunities, filtering for resource allocation, and leadership sponsorship. For example: crowdsourcing, future search gatherings, prediction markets, business plan competitions, are all methods we have written about previously here.
P&G's Connect and Develop and Eli Lilly's spin off InnoCentive lead the way as successful demonstrations of the core competence - ability to come up with new products and services and bring them to market quickly.
Most companies provide information about the target market expected launch date and how much they intend to capture from the market. This information can be directly factored into an evaluation model. The second is something that is somewhat less prevalent. Most Internet and telecommunications companies provide a spectrum of information that explains the market value of the company, starting with the cost of acquiring customers, then the consequences. Subscribers increase in some cases and decrease in others. These variables, along with the churn rate and revenues from new customers—which are analogous to innovation revenue—allow computation of customer lifetime value...When he [Lev] computed customer’s lifetime value, which is the piece of the franchise missing from the balance sheet, it can account for 60-70 percent of the entire difference—just this one intangible.
External value is created simultaneously as employees
interact and learn from stakeholder networks, alliance partners, and
customers. A customer's lifetime value is co-created through open networking innovation.
Ultimately, a “value tipping point” is reached and a product or service is realized or commercialized as the innovation intervention progresses thorough stages. With companies like P&G expecting to generate as much as 50% of new product innovation from crowdsourcing, it rapidly becomes apparent the value creation boundary between external and internal has not only blurred, but occurs earlier than at the point of commercialized output.
Innovation Interventions are much like our tornado graphic as we see them as an emergent process, disruptive for a short period, a confluence of environmental conditions, much like market forces, and transient.
The good news is we and others know how to tap the "connected wisdom of stakeholder networks" to unleash innovation in a much more controlled state than a "tornado". It is up to enterprises to adopt the processes we have described above to remain sustainable.
~ Victoria G. Axelrod