Have you ever questioned what innovation is? Or did you wonder if innovation can be measured and can be transformed into value? It is very clear that there must be a connection between innovation and value. Otherwise how can it be explained that the best performing economies are also the most innovative? Or how can it be explained that the companies with the highest market value are the most innovative?
Far from having the claim that we hold the truth, in this article we will try to give meaning to the idea of valuing the innovation. From the multitude of definitions of innovation (or views on the subject), we chose three variants that clearly show the transition from the theoretical notion of innovation to its assessment as a real value.
- 100% Theory: Innovation is often viewed as the application of better solutions that meet new requirements, unarticulated needs, or existing market needs
- 50% Theory – 50% Business: The process of translating an idea or invention into a good or service that creates value or for which customers will pay.
- 100% Business: The market value reported to the value generated from the current business.
Of all three perspectives on innovation, by far the third one can provide us with a more tangible picture of the real value of innovation.
In fact, one of the most prestigious business publications in the world makes an annual ranking of the most innovative companies in the world, ranking based on the mathematical measurement of an indicator showing the impact of innovation on a company’s market value.
Certainly, the rankings have some limitations given in particular by the fact that large and very large companies whose market value can be easily identified because they are public companies are analysed. For sure there are many other companies that can make their way to that ranking.
However, the ranking reveals something we feel everyday using the services of the respective companies or buying their products. In that ranking we find companies that have (and will continue to have a major impact in our everyday life) such as Amazon, Netflix, Apple, Facebook). Surely, we each use the services or products of one of the companies present in the ranking of the prestigious publication mentioned above. Surely the continuous improvement of services and products and the constant launch of new services and products impress us (perhaps not always pleasantly). We certainly appreciate the innovative character of these companies, and here, analyzing the rankings, we also find one of the main reasons why successful companies are continually innovating … innovation has value and that value is directly reflected in market value.
In other words, investors are willing to pay for shares a higher price (sometimes much higher) than the value generated by the current business just because there is confidence that continuous innovation will increase the value of the investment.
Another interesting thing that we discover by analyzing the rankings of the most innovative companies is the very close value of the innovation indicator for companies that are the main competitors in some areas (example: Mastercard vs. Visa or Coca Cola vs. Pepsico). It becomes obvious that innovation is a competition and that actors acting on a particular market are just as much preoccupied to innovate for the simple reason that they have no alternative … otherwise they risk losing market share, diminish incomes and get into delicate financial situations.
If we refer to the national economies of the states where the most innovative companies come from, we discover (without wondering too much) that those national economies are among the strongest and most stable in the world.
The power and stability of a national economy is a direct consequence of the power and stability of the private business environment in that country.
At the same time, governments must encourage innovation both through the legislative framework and financial incentives. Some governments do it very strongly by going almost to the limit of competition. Others do less, others are not too interested in these issues, and their national economies suffer.
Concluding, we can say that continuous innovation has a real value and is the engine of development in the global economic context. Innovation has direct and measurable value when we strictly refer to companies but also has an indirect value to society by contributing to healthy and sustainable economic growth.