The innovation economy

You should read this article that argues another phase change is occurring: from a knowledge economy to an Innovation economy. It’s suggesting that even when you have great structural capital (factories, assets, and all that stuff), great financial capital (money!) and great intellectual capital (knowledge and know-how) you will still not be a successful organisation.

Nothing really happens unless you also have innovation capital, which are the assets you build up that let you do value creation.

Now, of course, since the discipline of corporate innovation is still so young, we’re as far away from a decent system of valuation of Innovation Capital as we are from manned starhips that cross the void. At least with intellectual captial you can compare the difference between the book value of all the assets on the balance sheet and the market valuation of a firm and say “yep, that’s how much our know-how is worth!”.

This is a concept that resonates strongly with me. I’ve worked in banks and technology companies – both Lloyds and Microsoft for example – where all of the traditional assets were available in spades. How come, then, neither of these companies has truly produced anything that was game changingly value creating in the last decade?

Organic growth is not the same thing, even though its highly desirable, obviously.

I’m of the view that both lack Innovation Capital, and furthermore, that almost all organisations do. Lloyds has spent the last couple of years building its Innovation Capital up, and it may be we’ll start seeing some interesting new stuff eventually.

I’ve been away from Microsoft too long to have any insight about its capabilities in this area, but no-one is stupid there, so I’d not be surprised to discover they get this also.

Anyway, the point of al this, if its true, is that the role of innovation groups suddenly fits neatly into the value hierarchy of an organisation in the same way that accountants and marketers do.

But I’m also thinking that without a reasonable system for the valuation of Innovation capital, we’re going to be nowhere for a while yet.

Academics and other big-brained people… do you care to take on the challenge?

13 Responses to“The innovation economy”

  1. January 8, 2010 at 3:05 pm #

    Nice if probably apochryphal story of Unilever execs asking Innocent Smoothies founders about the secret of their success. "A sense of humour and always making time to have fun" was the reply. Unmoved, the Unilever manager (whose bosses had just offered more than £27m for a brand which at that time turned over about £2m) asked 'is there a process for that?'. I rest my case. Until we can accept qualitative judgement/intelligence over hard "evidence" a as source of value we will consistently see brands with all the inanimate capital attributes of a great company but the innovation capabilities of a dinosaur.

  2. January 9, 2010 at 1:22 pm #

    Well I'd argue that there is little chance of accepting qualitative as a source of value without the ability to measure it. That's the problem for innovators, since practically everything they do starts out qualitative.

  3. January 9, 2010 at 1:46 pm #

    Hi James
    Peter Drucker famously said that "Because the purpose of business is to create and keep a customer, the business enterprise has two — and only two — basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs." Perhaps the problem with organisations that hoard both tangible and intangible assets is not their lack of innovation per se, but a lack of balance between marketing and innovation.
    This works both ways.
    Many organisations are not so good at creating desirable new products but are very good at commercialising what they already have. Mobile telcos come to mind. They are not particularly good at innovation (which please note, is rather different to technological invention) but are very good at packaging their current products into every more complicated bundles. Have you seen the small print attached to even the simplest of Deutsche Telekom bundles?
    It took partners like Nokia and Palm, and complete outsiders like Google and in particular, Apple, to really drive innovation forward in the mobile telecoms industry, to the point where mobile telcos may become just the owners of the low-value-added pipe that carries our bits & bytes, if they are not very careful.
    On the other hand, a few organisations are great at creating desirable new products but are not very good at commercialising these new products. Universities come to mind. They are particularly good at technological invention, can see how the inventions could potentially revolutionise customers lives for the better (and make a profit in the process; my definition of an innovation), but to be frank, are rubbish at commercialising these innovations.
    John Hagel in an excellent blog post on Unbundling Dell’s Business suggests that organisations should decide whether to compete on creating winning new products and commercialising them, on operating high-volume infrastructure, or on building strong relationships with customers. It may be that even those organisations that want to focus on the first of the three must still work hard get the balance right between innovation and commercialisation.
    Looking around me I don’t see any signs of an emerging innovation economy. Everyone is talking about innovation, but few really know what it is and even fewer are doing it. And looking deep inside innovation at its foundations in the resource-based theory of the firm, dynamic capabilities and their associated micro-foundations, I see that knowledge and innovation are inextricably linked together. Having knowledge doesn’t automatically lead to innovation, but without knowledge there can be no real innovation. There is clearly still a long way to go in understanding the knowledge economy before we can even start to think about the innovation economy.
    Graham Hill
    Customer-centric Innovator
    @grahamhill

  4. Ken Maier
    January 9, 2010 at 2:34 pm #

    Hi James
    As usual some thought provoking insights here.
    I don't know if anyone remembers an author by the name of Alvin Toffler- however many years ago he wrote a book called "PowerShift..Wealth, Knowledge, and Violence at the Edge of the 21st Century". The core theme of his book was the transitions that took place from an agricultural to an industrial to an information economy and the impact that would have for the future. Ultimately- he concluded that in an information economy – that the customer would become the supplier, as the value of the information they give would be worth as much (if not more) than what they spend. I doubt that Mr. Toffler envisioned a Web 2.0 world with communication forums such as Facebook, LinkedIn, Twitter, and blogs like this- however I do believe he foresaw a future where the customer would be the supplier- not only giving information but giving new product and service ideas..
    Having said this there are no shortage of solutions in the market today for capturing and managing ideas -however very few of the solutions take the next step and enable the customer to create a Innovation Pipeline that combines both the qualitative and quantitative metrics associated with the value of those ideas. Some companies (such as Experian)have figured this out and use their Innovation Pipeline metrics in their finanical meetings with Investment Bankers and have in fact seen a direct correlation between the value of their Innovation Pipeline and their share price ( shareholder value).

  5. January 9, 2010 at 2:51 pm #

    Oh, that's interesting! Where did you get the information on Experian.. would love a link.

  6. January 9, 2010 at 11:02 pm #

    Hi James
    I understand that Experian is a user of the BrightIdea suite of open innovation management tools. See the following Computerworld article on Experian and BrightIdea
    http://www.brightidea.com/news-coverage-9.bix
    Graham Hill
    Customer-centric Innovator
    @grahamhill

  7. January 9, 2010 at 11:12 pm #

    Hi Ken
    Working together with customes to create innovation is what James' former employer might have called Co-Creation and what his current employer calls Co-Production.
    There is a considerable amount of research, experimentation and leaning going on in private and public organisations around how to make co-creation/co-production work.
    Take a look at the following for an overview:
    Promise
    Co-creation: New Pathways to Value
    http://personal.lse.ac.uk/samsona/CoCreation_Repo
    UK Govt. Cabinet Office
    Co­production in Public Services: A New Partnership with Citizens
    http://www.cabinetoffice.gov.uk/media/207033/publ
    Graham Hill
    Customer-centric Innovator
    @grahamhill

  8. January 10, 2010 at 1:24 pm #

    Oh, thats excellent, Graham, thankyou!

  9. Ken Maier
    January 11, 2010 at 1:24 pm #

    Hi Graham
    Thanks for the links.. will review them today. Interesting and more food for thought.. mass customization, customer centricity,Co- Creation, Co- Production and the concept of Prosumption… are they all the same things or a continuous evolution?
    Albert Lafely (CEO of P&G) was one of the others who I believe got it right several years ago when he said that "by 2010 50% or more of P&Gs RD would take place outside the four walls of P&G"..
    Best
    Ken

  10. Ken Maier
    January 11, 2010 at 2:11 pm #

    Hi Graham..
    well so much for my other work this am.. the link from Promise has completely captured my attention.. Still going through it – however this document encapsulates the thinking of 20 other papers.. I love it!
    Would like to contact you directly- please send me an email address or reach me at kenmaier01@gmail.com
    Best
    Ken

  11. Ken Maier
    January 11, 2010 at 4:05 pm #

    The following link just hit my email- a good example of a company seeking "co-creation" via open innovation for 4GL networks.. not to mention a million dollar prize. http://www.myprize.my
    Take a look.. join and offer some ideas..

  12. January 12, 2010 at 12:28 am #

    "in a world where the pace of change has gone hypercritical" – I actually stopped reading there 🙂
    In the absence of slavery, I suppose the equity of an "innovation capital" intensive business would function like permanent venture capital. Employees lifestyles are funded reliably now, the firm then creams off the uncertain future profits in return. So if you want people to invest into your company, they're only likely to do so if they have security, pension benefits, all that stuff. Otherwise, why wouldn't they just take the idea (research, contacts, designs…) and walk?
    I did love reading Alvin Toffler's books when I was, oh God, about 14. I came to them through my Dad's old copy of The Shockwave Rider, which credits Toffler in the foreword. I'm still amazed how accurate everything John Brunner wrote turned out to be.
    http://en.wikipedia.org/wiki/The_Shockwave_Rider

  13. Stephen
    January 12, 2010 at 11:41 pm #

    People may be interested in the views of Dan Tapscott as part of the ‘Us Now’ series.
    http://www.youtube.com/watch?v=V2J2OefYKOE
    He discusses the concepts of co-creation within government.
    Notice, he is a gen-X person who has a great deal of wisdom and energy to pass-on to the world.
    I need to say a little more about the gen-x/y debate, but for the moment, what I will say is something I have said on a previous thread e.g. all generalisations are untrue.
    Some of the Gen-W people I had to put up with drove me mad, but they did teach me a few things though.
    At the same time, I am having a great time working with my Gen-Y colleagues, they respect me and I respect them, and we both have a great deal to learn from each other.
    Perhaps part of the role of the older generation is to help the world move on, and also pass on some wisdom and learning.
    Nothing would make me more happier than seeing some old systems move on into the past, which are still running code today that I (and others) wrote twenty years ago.

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