A value based innovation model Constance Van Horne 1, Jean-Marc Frayret 1 and Diane Poulin 1 (1) FOR@C Research Consortium and CENTOR (Centre de Recherche sur les Technologies de l Organisation Réseau), Department of Management, Université Laval, Pavillon Palasis-Prince Québec, Québec, G1K 7P4, Canada. Corresponding author: connie.van-horne@forac.ulaval.ca
1. Introduction The challenges of the new global economy are numerous and seemingly unending. For primary sector industries in particular, companies find themselves playing catch-up to new environmental regulations, new technologies, changing customer expectations and lower margins. The changes that are required to ensure a company s sustainability are often radical in nature. The radical nature of these changes forces companies to look outside their traditional boundaries to outside agencies and they are increasingly looking to universities or centers of expertise to find solutions to these new challenges with innovative products and processes. In this context, the authors have developed a conceptual model of the innovation process, entitled the innovation value matrix. This model analyses how value is perceived by the various actors of the innovation process and the aim of this matrix is to aid researchers and firms to develop formal methods to evaluate the intangible capital of innovative knowledge, invention and innovation. In this paper the authors will explore the innovation value matrix within the perspective of the Canadian forest products industry. The enormous challenges and paradigm shifts the industry is currently undergoing make it fertile ground for researchers. The first part of the paper will outline the dynamics of the global and Canadian forest products industry. Following will be a brief explanation of centers of expertise and their role in innovation processes in general and the Canadian forest products industry in particular. A short review of the literature concerning valuing innovation will then be presented. The innovation value matrix will then be introduced and the phases, actors and values will be outlined. The initial methods being used for valuation will also be presented. The conclusion will present future research directions and outline the means that are anticipated to test and validate the matrix and its valuation methods. 2. The global and Canadian forest products industry Juslin and Hansen (2002) have identified four major trends facing the industry. The first is restructuring, consolidation and search for profitability. The second is reducing costs through production optimization and technological innovation. The third is a shift towards a customer orientation, centered on differentiation and adding value. Finally the
fourth trend is confronting environmental challenges. In addition to these trends the Canadian industry faces added challenges. The current framework on which the Canadian forest products industry is built is not sustainable. Historically Canada has been a global cost leader in commodity products, and relied on low fiber, transportation, energy and labor costs for their competitive advantage. In this model the only way to increase profits is to reduce cost and increase harvest as prices are market controlled. Increased environmental pressures, higher energy prices, lower yields and fiber quality and increased competition from a globalized economy force are forcing companies to make radical changes in their business models and practices. These radical changes will require an increased need for innovation. Furthermore, as the framework under which the industry was historically based is challenged by external pressures, the market is also rapidly evolving. Clients are growing in size and purchasing power and demand more services with the products they order. These demands require companies to enter the knowledge economy and learn the necessary skills to satisfy their clients and adjust to a rapidly changing marketplace. Hoovgaard and Hansen (2004) have indicated that although the industry actively innovates with processes (processing technologies and new machines to increase fiber utilization rate) and to a lesser extent, products (engineered wood products for example) and there have been much fewer efforts in terms of business system innovation (which includes new business models and marketing strategies). However, Wagner and Hansen (2005) have concluded that it is innovations in business systems which will be necessary for companies to remain competitive in the future. As the skills to adopt these new types of innovations are often lacking due to very low investments in internal research and development firms turn to external sources for their innovations. Globerman et al (1998) study of R&D rates indicate that globally rates are less than 1% of revenues invested in R&D (Canada is among the lowest in the world at.4%). Moreover, although figures are not available for other regions the authors indicate that over 80% of all research in the Canadian industry is funded by the Federal and Provincial governments.
These demands require companies to enter the knowledge economy and learn the necessary skills to satisfy their clients and adjust to a rapidly changing marketplace. As these skills are often lacking due to very low investments in internal research and development Canadian firms need to turn to external sources for their innovations. 3. Centers of expertise Van Horne et al (2005a) define a center of expertise as a center, whether virtual or physical, that gathers experts from multiple disciplines to study complex and multidimensional problems in a team environment, in order to create and transfer new knowledge and insights to concerned stakeholders. The mission of a centre of expertise may serve various purposes and customers/audiences according to the sources of its funding, but a common goal can be extrapolated: that is to create value using research and innovation. The outsourcing of most research is confirmed by the study of Canadian forest support industries (Anderson, 2005) in which the author described innovation in the industry as being supplier-dominated in terms of new machines, processes and business systems. For example she writes that almost all research on environmental issues is done by external consulting groups (which could fall under the definition of centre of expertise). The forest products industry has several of these centers, based in major forestry centers around the world, developing innovative knowledge and inventions to improve both the industry s competitiveness and the sustainable development of the forest. This knowledge is developed in collaboration with industry firms and then transferred to them. As it is well established that a firm s association with university or science based groups is an important variable for the adoption of radical innovations (Becheikh et al., 2005) the use of such centers can be seen as a positive factor in the industry s innovation processes. However, developing innovative knowledge is only the first step of the innovation process and the transfer and transformation of this new knowledge into invention and then implemented innovation is neither obvious nor simple, especially in the context of an industry with very low rates of internal research and development (Globerman et al. 1998; PriceWaterhouseCoopers, 2005). The downfall of this strategy will be outlined in
the following brief review of the literature concerning valuing innovation and innovation networks. 4. Valuing innovation and R&D As the knowledge economy makes its impact on all (and not just high-tech) industries attention has increasingly turned to the valuation of intangible assets such as R&D and knowledge. Tipping et al (1995) list ten metrics used by high-tech companies to determine the value of their R&D projects: financial return, strategic alignment, projected value of R&D pipeline, sales or gross profits from new projects, accomplishment of project milestones, portfolio distribution of R&D projects, customer satisfaction surveys, market share, development cycle time, product quality and reliability and gross profit margin. Many of these measure the effective value of an implemented innovation rather than the intangible value of knowledge of the inventions. In the academic world the classic work by Stahl and Steger (1977) used scales of innovation and productivity to rate researchers and then used had scientists rate their peers; in fact, the found a great degree of correlation between the two results. Using a much studied firm in the innovation literature, Krogh et al (1988) describes how 3M predicts the probability of success for new R&D projects, and therefore chooses the projects in which to invest. An outside team evaluates projects based on several factors. The predicting items are: the competitive position of the business unit spearheading the project, 3M s performance compared to competing firms, the degree to which the technology relates to existing technical base and the degree to which the new (or proposed) market relates to their existing customer base. More recent work by Dillon et al (2005) indicates that the most successful companies search for key value commodities to create products that meet unspoken need. A value commodity could be coolness, a commodity that Steve Jobs and Apple have been able to mass market (i.e. ipod) to great success. Valuing knowledge and inventions is still not a fixed science. In comparison, valuing commercialised or implemented innovations using financial analysis is a less frustrating pursuit. However, not all benefits or value is derived from increased profits or decreased costs. Particularly in natural resource industries where environmental concerns are
paramount and are often considered more valuable than a higher ROCE. Intangible values need to be taken into account in any decision to innovate. As these types of innovations arrive from outside the firm (Van Horne et al. 2005a; Anderson 2005) it is up for the centre of expertise or consulting agency to properly define the value of these innovations. It was for this purpose that the innovation value matrix was developed, however with increased exploration it is hoped that the matrix will be useful for all actors in the value creation network to evaluate their knowledge and innovations. 5. Innovation value matrix The innovation value matrix (Figure 1), introduced in Van Horne et al (2005b), analyses how value is perceived by the various actors of the innovation process and the aim of this matrix is to aid researchers and firms to develop formal methods to evaluate the intangible capital of innovative knowledge, invention and innovation. Producer of innovative knowledge Consumer of innovative knowledge Consumer of innovation Innovative knowledge (new knowledge from which originate the innovation) Scientific value: - peer recognition - number of references Opportunity value: - relevance to real world problems - possible solution to a client's problem Potential development value: - relevance to actual problems - potential contribution to strategic goals New-use of knowledge and Invention (embodiment of the innovative knowledge into an invention) Implementation value: -patents - credibility/good will Potential business value: - in-depth market analysis - customer prospects Potential service value: - potential to improve competitive advantage or fulfill environmental regulations Innovation (exploitation of the newuse and invention) Application value: - licensing agreements - licensed patents Effective business value: - number of users - sales Effective service value: - improve market position - increase sales - increase efficiency Figure 1. The innovation value matrix
5.1. Phases of the innovation process Innovative knowledge is built from an initial idea or problem and for the most part is based in existing base of knowledge. The four phases of knowledge transformation, as outlined by Nonaka (1991), are all used to create new explicit knowledge that is written and easily transformed and new tacit knowledge of the researchers. Knowledge of both the concerned industry, in our case the forest products industry, and relevant science is necessary. New-use of knowledge and invention represents applied research, and application of the innovative knowledge. Once research has been applied, or old knowledge has been used in a new way, there is invention. This invention often takes the form of betasystems, prototypes or applied concepts. Innovation occurs when the invention is implemented or commercialized by the consumer of the innovation. The Organization for Economic Co-operation and Development (OECD, 1997) define a technical product or process innovation as the implementation/commercialization of a product or process with improved performance, production or delivery methods that deliver marked new or improved services to the consumer. If the invention is never exploited there can be no innovation. Therefore, the authors do not consider a patent an innovation, unless that patent has been made operational or produced by a company. 5.2. Roles and values There are three main roles identified by the model: the producer of innovative knowledge, the consumer of innovative knowledge and the consumer of the innovation. Intuitively we understand that each of these roles views the value of each stage of the process in a unique and particular manner. The authors believe that by understanding the value attributed by each role, the other actors in the network will be able to better sell their knowledge, invention or innovation to the respective decision makers in each organization. The producer of the innovative knowledge can be a centre of expertise, an internal research department or any other group that specializes in the creation of new knowledge.
From the point-of-view of the innovative knowledge producer, innovative knowledge has scientific value that can be evaluated in terms of peer recognition. This translates into the number of papers accepted for publication and the number of times the works are cited. Implementation value can be judged by the number of patents issued and the credibility or goodwill that the scientist or centre of expertise has accrued. Finally, application value can be assessed in terms of the number of licensing agreements reached and the development of collaborative relationships with the consumer of the innovation. In fact this can be viewed as positive real world evaluation. The consumer of the innovative knowledge can be an organization or an internal unit of an organization that takes the innovative knowledge and uses the new knowledge to invent a new product or a new use of that knowledge. From the point-of-view of the consumer of innovative knowledge, innovative knowledge has an opportunity value which means that the innovative knowledge is relevant to real world problems. In other words, developing the innovative knowledge could lead to a solutions (or be a part of one) to a problem of one of their clients. Preliminary market studies and the number of potential users are also evaluated. The potential business value of an invention is judged through customer prospects and an in-depth market analysis. Effective business value would be calculated by the number of users, sales and the number of commercialization agreements reached. The consumer of the innovation is the organization or individual who purchases, uses or directly benefits from a new product or service. From the point-of-view of the consumer of the innovation, innovative knowledge has potential development value which again refers to the relevance of the innovative knowledge to actual problems. Developing this knowledge must also contribute to, or be in line with, the strategic goals of the corporation. Potential service value is evaluated by an invention s potential to improve the competitive advantage of a company and its usefulness and ease of use. Furthermore, it can be judged by its contribution to the fulfillment of environmental or certification regulations. Effective service value can be assessed with several variables: increased sales and efficiency, improved market position, decreased costs, etc. Overall an innovation will be judged by its contribution to the sustainable growth and development of a corporation.
6. Conclusions and future work The challenges faced by the Canadian forest products industry will require the implementation and commercialization of new products and processes, many of which will be radical in nature. The challenge of using external centers of expertise requires improved tools and methods for the transfer of the developed knowledge to the industry. The authors developed the innovation value matrix as a model that could be used to understand innovation processes, the roles of the actors and the values they associate to each phase of the process. Future work will include the development of formulas to measure the intangible capital that is inherent in innovative knowledge. An initial survey of key actors in firms that are termed innovative is being planned to access their values of innovative knowledge. The authors realize that intuition is often relied upon, but it is our intention to codify this intuitive tacit knowledge into easily transferable explicit knowledge. Validation will take the form of case studies and a survey to be sent to the 300 largest forest products industry companies in the world. The use of both quantitative and qualitative methods is intended to provide as a complete a portrait as possible to be able to provide real benefits to industrial players and advance the science of innovation processes. References Anderson, F. (2005), A comparison of innovation in two Canadian forest service support industries. Forest Policy and Economics. In press. Becheikh, N., Landry, R., Amara, N., (2005), Characteristics and Determinants of Innovation in the Manufacturing Sector: A Systematic Review of Empirical Studies. Technovation, (in press). Dillon, T., Lee, R., Matheson, D. (2005) Value Innovation: Passport to Wealth Creation. Research-Technology Management 2, (March-April), 22-36. Globerman, S., Nakamura, M., Ruckman, K., Vertinsky, I., (1998) Innovation, Strategy and Canada s Forest Products Industry. Canadian Public Policy 24 (supplement).
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