Creating Value but not capturing it is like investing in a river of water that flows into the sea- Master Mentors
One of the biggest challenges of the businesses and entrepreneurs today is, not only to create value from the investments they make, but also capture its value that can be monetised immediately or as a steady and growing stream of revenues.
When we invest in building a house and the house appreciates in value, a value is created that is captured in the form of the difference between the perceived value of the building and the investment done to create it.
However most of the businesses today are creating intangible value in the form of software applications, web portals, music, algorithms, business ideas etc. It is indeed a challenge for smaller organizations to convert this into monetizable value that can be defended in the market place against imitation and replication.
On a routine basis, the value created by the business for itself, is reflected in the profits generated through the sale of its products and services, while the overall value generated is captured in the cumulative value to the suppliers, customers, users and the society in general.
Apart from the operational value, which will get added to the book value of the company, businesses create clusters of value that grow like a mountain, provided organizations are following right strategies. These could be termed as 'Valuemines' or 'Valuetraps' that trap the value created by the organizations.
The Valuemines created and added by the organization could be represented in the following ways:
i) Brand Value- A Brand name that conjures a lot of positive impressions in the minds of a consumer and reflects a strong identity in the market place, helps a company to charge a premium on its products or services compared to smaller brands, me-too products and generic products available. Hence investments in creating strong brands supported by genuine product propositions adds lot of value to a company and is stored as an intangible in the equity created. Many times, brands have been sold for substantial values in the corporate history. Organizations like Interbrand conduct regular surveys to estimate and rank the global brands and note the appreciation or depreciation in the brand value in relation to other global brands.
ii) Intellectual Property ( IP) Rights : Patents,Copyrights, Trademarks, Industrial design rights and Trade secret protection rights are some of the protection mechanisms available to innovators or those wanted to protect their uniqueness against duplication, copying, imitation that lead to value erosion.
It is important for the inventors of a product/process or any other unique system to protect their invention from getting copied by filing for Patents in relevant geographies. Similarly brands can protect their brand names from being misrepresented by others in the market place through Trademarks.
iii) Agreements with suppliers partners, clients and owners of complementary services:
Exclusive long term agreements that give access to delivery platforms, business creating brands franchise agreements, distribution agreements, contract manufacturing agreements, service agreements or any other monetize-able agreements capture lot of value for organizations. For example, HCL Infosystems generates over 2 Billion USD revenue consistently along with a sizeable profit for many years due its exclusive distribution arrangement for Nokia cell phones. Jubiliant Organsys generated a huge business and high market capitalzation from its agreement for exclusive franchising for India for Dominos Pizza.
Most of the times, these agreements are win-win for both sides as the companies leverage their core strengths in maximising the market opportunity thus generating business and profit for both the Principal and the Agent or the delivery partner.
Similarly, access to a scarce raw-material for a long term through an irrevocable agreement captures value for the organization as it is able to manufacture its products and services without interruption. For example, access to gas through a long term contract with a gas generating company by a gas based power plant or a fertiliser plant captures value for the company.
iv) Investment in creation of own delivery networks, consumer facing infrastructure and client/user-base acquisition:
Organizations that own a large franchise from users and customers, have immense power in the market place. Companies like Microsoft, Google for example are able to generate huge revenues by being able to launch new products and services and reach global audience instantly.
HCL infosystems, India, has been able to launch a number of brands through its sales organization that can reach to the corporates and dealer outlets across the country using its own infrastructure.
This will give these organizations, immense power in acquiring smaller companies with strong IPs and generate huge scale. Microsoft was able to take over Hotmail and Google was able to take over Doubleclick to create huge businesses from the IPs/businesses which would have otherwise struggled to grow.
A case in point is the power 'Luxottica Spa, Italy' wielded over the global optical markets when it acquired the global optical retail chains, 'Sunglass Hut' and 'Lenscrafters'. Having controlled over 25% of the sales of the global sunglasses brands like 'RayBan', Luxottica, used its retail muscle to squeeze the global brands and propagated its own brands and products. Eventually, Bausch & Lomb Inc., the owner of RayBan had to sell out its family gold and its flagship brand to Luxottica, Italy for a meagre 650 million USD (much lower than its peak value) in 1999, RayBan once again flourished under Luxottica to regain its global leadership position and became a highly successful and profitable brand in its portfolio.
v) Large scale Manufacturing/ Servicing infrastructure : Large plants and servicing infrastructure could potentially offer an opportunity to become low cost producers or providers of service of highest quality. This could lead to the organizations hitting sweet spots in volumes and profitability.
Innovations are one of the primary sources of value creators for an organization and create value in the long term. They need to be protected by organizations before they change the fortunes of their organizations.
The innovation has to be taken to the market through an appropriate 'Business Model' that will allow the value of the innovation to be unlocked.
' A Business model is a description of how your company intends to create value in the marketplace. It includes that unique combination of products, services, image, and distribution that your company carries forward. It also includes the underlying organization of people, and the operational infrastructure that they use to accomplish their work'- KM Lab.
A Business Model is required to capture the value of the innovation, identify the value proposition, and create an appropriate go to market strategy for unleashing the power of the same.
While generally the innovations are incremental in nature, breakthrough innovations occur rarely that change the dynamics of the industry they operate in.
Innovations could be:
A) An application like 'Instagram' or 'Angry Birds' that spread rapidly across the globe creating a huge base of users that are attractive to Social networks and Mobile Advertisers,
B) A product innovation like Apple iPhone that changed the way we perceive and use a phone by providing high level of positive experience, augmented by the availability of a number of applications, useful to the consumers,
C) A delivery model innovation like that of Dell Computer which changed the dynamics of the computer industry by offering direct delivery and also the power to configure their computers,
D) An incremental innovation like that of 'Intel' that continuously comes out with faster and faster chips,
E) An operating system innovation like Android that allowed a number of applications to be developed cheaply and ported onto the market place,
F) A price based innovation like ' Walmart', 'South West Airline', 'Deccan Air'.
G) A formula or a process based innovation like in Pharmaceuticals, that come out with new chemical compounds or alternate processes to manufacture off-patent products etc.
In all these cases it is important to consider the market power of the innovating organization that could allow it to monetize or become a victim of imitating competitors.
When captured in the form of intellectual property (IP) or as a Copyright, innovations have the capability to create a revenue generating assets that can also be sold to others for a substantial consideration.
In case the innovator is having an extremely unique and valuable intellectual property, but is a small organization, he needs to raise money from the funds or align with a larger partner who can do the necessary investments to unlock value and also maintain entry barrier.
For example, in pharma industry, the small companies who invent new formulae tend to align with large companies to access global markets, often on very respectable terms.
If the innovation is a weak one which is replicable, but the organization has the capability to invest in marketing and sales infrastructure, the company could quickly develop a complementary infrastructure that could help in scaling up the revenues and profits that could be used to ward off the competitors and discourage them from doing so.
A number of times, innovators welcome competition and work closely with the competition to evolve industry standards that will help the overall market for the product and the complementary products grow.
It is imperative for the innovator to protect the innovation through appropriate copy rights and patents that will deter the competition in duplicating the products and services.
Inability on the part of Xerox to patent its invention of the office computer, has helped companies like IBM, Apple come out with similar products that changed the computer hardware industry landscape and also oust XEROX from the business.
Apple despite being a new entrant into the smart phone segment, came out with breakthrough strategies by enabling developers to create large number of applications that enhance the user experience and break the entry barrier created by existing players.
Android, a free operating system for mobile phone has been able to make rapid inroads with its proposition that was not only free, but could compete with Apple in the ability to support applications. This was subsequently taken over by 'Google'.
It is very important for the innovator to strive and understand the full power & commercial potential of the innovation before putting in place appropriate business system to unlock the value. Then, an appropriate business model has to be selected. Also, align with complementary players in unlocking the value at the same time creating & enhancing the entry barriers for the competition.
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