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Valuing a Company's Innovation Capability

| On 01, Jan 2010

Message: 1339
Posted by: Brendan Dunphy
Posted on: Tuesday, 10th June 2008


Is the innovation capability of an organisation measurable as a financial  asset and is it typically valued during due diligence at the time of acquisition? We all know that a Brand has a value (negative or positive) so is it also possible to value other intangible assets such as innovation capability? Does anyone have any experience of trying to do this and with what results? What are the challenges and constraints? If not, is this one fewer reason to invest in improving my innovation capabilities?


Message: 1343
Posted by: Ellen Domb
Posted on: Friday, 13th June 2008


Patents and copyrights are the easiest things to measure, and there are companies that track number of patents per employee (or per technical employee)  even though the patent information is that only 4% of patents end up in the development of profitable products.

Perhaps if you gave some more detail about why you are asking the question we could get more people involved in this discussion.


Message: 1346
Posted by: Brendan Dunphy
Posted on: Sunday, 15th June 2008


Hi Ellen and thanks for the comment.

 

The background to my question is as follows. Although most innovation is still product-related the scope for innovation now frequently extends beyond product to include process, business model, organisation etc. The patent process (arguably) deals with product stuff but what about the rest? When it comes to valuing a company for acquisition or during due diligence how can these other less tangible innovation forms be valued, other than as a cost that contributes to the overall performance of the business? As organisations recognise the need to invest in improving general innovation capabilities (training, innovation processes, tools etc) is there any way that the resulting capabilities can be isolated and measured and therefore more accurately valued? If not, is this a constraint to investing in such capabilities? http://brendandunphy.blogspot.com/


Message: 1348
Posted by: shyam gopal
Posted on: Monday, 16th June 2008


This ties back to another thread in this forum about measuring innovation. Finally all outcome of innovation for organisations will be increase in profits, so RoI on innovation becomes a critical measure, more so than number of patents per employee and such.

Then comes up the question of whether an environment of financial measurement is conducive to creativity and innovation. But I'm sure all organisations need to find the balance and drive pragmatic innovation


Message: 1350
Posted by: Ellen Domb
Posted on: Monday, 16th June 2008


Excellent question (how to value the innovation proclivities of a company) and I agree with Shyam that a company with a strong innovation culture should be superior in conventional metrics (external, like new products, new services, patents, awards, etc.  and internal, like ratio of cost of goods to selling price, etc.)   But I'm a big fan of an old book, Punished By Rewards: The Trouble with Gold Stars, Incentive Plans, A's, Praise, and Other Bribes by Alfie Kohn.   This is a great study of how difficult it is to create an incentive system that actually promotes the desired behavior, instead of promoting the ability to make the system dispense rewards.    It does NOT answer the question about how to measure–what it will do is get you thinking about why you want to measure that parameter in the first place, and how to create a system to achieve the goal, not one to achieve the measure.   

YES, this doesn't answer the question at all re valuing a company.  One reason I'd be reluctant to do that is the really bad history of acquisitions–if company A acquires B in part because B has a highly innovative culture, after the acquisition, typically much of B's management is gone and the B people either learn the A culture or they leave. 

Sorry to be so discouraging.  Does anyone out there have a more encouraging view?


Message: 1351
Posted by: Brendan Dunphy
Posted on: Monday, 16th June 2008


This piece from The Register concerning Motorola's trimming of its Innovation Labs pending the sale of its Mobile divison in 2009 supports your premise; it is not waiting for a buyer to disband its innovation capability but is taking the action itself!


Message: 1352
Posted by: Ellen Domb
Posted on: Monday, 16th June 2008


I asked for LESS depressing news!  Anyhow, thanks for the information.  If there was an attachment for the Motorola article, it got lost–please re-post?  Thanks.


Message: 1353
Posted by: Brendan Dunphy
Posted on: Monday, 16th June 2008


Try this link http://www.theregister.co.uk/2008/06/16/motorola_cuts_labs_jobs/

Brendan.


Message: 1354
Posted by: Paul Hobcraft
Posted on: Tuesday, 17th June 2008


I do think there are instruments or techniques out there that can place a value on intangibles. Take the concept of intellectual capital for instance. Measuring Human, Structural and Relationship capital all are critical to the innovation capacity and future capacity of the organisation. These can be measured through a DD audit for instance to give an “indicative' price/ value to these.Equally the value of exchange is becoming more important to innovation. perhaps described, as a new currency, where you focus upon three aspects1. Negotiable s and deliverables2. Tangible and intangible exchanges3. Impact of decisions and actions to specific business activities.These are more likely to be ongoing than at time of acquisition.The third are of investigation for innovation capability could be Latent Capabilities to investigate Leadership, Workforce Calibre, Organizational assets, Reputation, Market opportunities, R & D in progress, Corporate renewal program as aspects that 'might' make the organisation unique and show how the organisation is focusing upon innovation capabilitiesRegardsPaul Hobcraft


Message: 1356
Posted by: K.S.Ramachandra
Posted on: Thursday, 19th June 2008


The following comment is from my own perspective. There are various “essential processes” in an organisation which are routinely carried out and not doing these processes regularly there will be downslide i the business whic imediately becomes apparent to everyone i the organization. For example, proceses like QA/QC, Purchase , Stores, Sales, R&D, Marketing bla..bla.. are all considered essential processes in any organisation and there are set procedures, targets,guidelines, procedures and KPIs for tracking and measurement . Whereas “Innovation” as process has not attained the status of an “essential process” in most of the organisations as of date and there are umpteen number of definitions and ways of practice in organisations.Considering number of patents the organisation has filed or is posseing ned not represent the innovation capability of the organisation. Innovation is well beyond just patents and brands .Hence valuing a company's innovation capability is still an evolving theory/practice.At this point I would like to give one useful URL:http://creativityandinnovation.blogspot.com/2006/12/innovations-driving-growth-at-general.html


Message: 1357
Posted by: Brendan Dunphy
Posted on: Thursday, 19th June 2008


How about these from Innovating to Win as useful metrics for the softer, non-product innovation domains? Does anyone know of any existing benchmarks that may incorporate these or similar metrics?

Brendan DUNPHY http://brendandunphy.blogspot.com/