Platt Perspective on Business and Technology

Keeping innovation fresh – 12: risk and benefits analyses in determining marketable value

Posted in strategy and planning by Timothy Platt on March 29, 2012

This is my twelfth installment in a series on innovation, and more specifically on serial innovation and the development of ongoing new sources of unique value propositions within an organization (see Business Strategy and Operations – 2, postings 243, 246 and 248-253, 255, 257 and 259 for parts 1-11.) I have been discussing a range of issues revolving around the relationships between innovation centers and industrial research facilities on the one hand, and main marketable-business lines responsible for product development, production, marketing and sales on the other.

In Part 11: evaluating innovations and their marketable value I began a discussion of the monetizable valuation of innovation, as this would be used in evaluating the feasibility and the potential for returns on investment from moving an innovation from the research center to main business development and production centers. My focus there was on the decision to protect through trade secret approaches, proprietary in-house developed innovative knowledge, or alternatively to seek protection of that knowledge through patent protection. I used that discussion to list and briefly discuss some of the key factors that would go into determining which approach to maintaining exclusive access to an innovation would yield higher returns and at lower costs.

There is a measure of uncertainty in any business decision, even if some appear to essentially always lead to the same expected outcome. You do not always know what your competition is planning and doing, or what will happen in the marketplace, and the unexpected can arise in supply chain systems and in a variety of other contexts too. There is always uncertainty so there are always risk considerations, and that definitely applies when making process decisions as to which innovations to advance towards production, how to do that and how to secure exclusive rights to the value of these innovations as you proceed.

Much of my approach to understanding the valuation and cost-effective commoditization of innovation parallels reasoning that I developed and presented in my series Mining and Repurposing of Raw Data into New Types of Knowledge (in Macroeconomics and Business and see particularly Part 4 of that series with its risk-based axiomatic model of information valuation.) Think of my reasoning in Part 11 of this series as representing a simplified deterministic approach to the valuation side of the innovation center to production process. Here I add the complexities of chance and probabilities to this problem. I began there by establishing a zero-risk/maximum realizable valuation baseline with an Axiom 1, and I repeat that version of this foundation valuation model here:

• Repurposing Valuation 1. Any given unit of information achieves its maximum marketable value at any given time, place and circumstance where it can be transferred in that marketplace with zero risk to buyer, seller or to that information’s sources (collectively referred to here as the three participants or the three participant classes.)

Looking at the issues of innovation valuation strictly from the perspective of the creating and owning business, I would set as corresponding valuation baseline in accordance with this:

• Innovation Value Protection 1. Any given unit of innovation-defining information achieves its maximum marketable value at any given time, place and circumstance where it can be transferred from the innovation center to the main producing business lines within an overall organization with zero risk of loss of exclusivity and control over that information, and at no operational or other risk limiting or due diligence expense.

Consistent with repurposing valuation axioms 2-4, I would propose for this context:

• Innovation Value Protection 2. Any factor that increases risk of loss of this information to potential competitors reduces its maximum value in direct proportion to the likelihood of loss of exclusivity, and for this to a degree proportionate to the level of completeness to which proprietary confidentiality would be breached.

So a high probability of loss of control and exclusivity regarding a minor portion of the design information that goes into defining an innovation, and a low probability of loss of substantial portions of this proprietary information might upon calculation yield comparable levels of loss in actuarially determined maximum achievable value for that innovation. And as a clarification of an issue that this raises:

• Innovation Value Protection 3. Loss of value as discussed in axioms 1 and 2 above is a function of the cost to a competitor to replicate that innovation, and is equivalent to the reduction in costs that this competitor would have to expend to develop, produce, market and sell a replicating competing alternatively sourced product.

And this brings me to the fourth axiom of the valuation model I presented in Part 4 of the information repurposing series:

• Repurposing Valuation 4. The (sic.: net of risk maximum) marketable value that any given unit of information could hold is whatever the maximum realized sales price it could achieve in the specific marketplace in which it is offered and at the time of sale minus any risk-based devaluation as specified by axioms one through three – it is simply what the market would bear minus risk expenses in determining net value.

With the modifications for context that I propose above, I would argue the case that this same axiom and this same wording would apply when evaluating and determining valuation of an innovation too, as it would be evaluated for possible transfer to production within a business. And that simply sets a net of risk baseline value. Now operational and manufacturing costs and market potential for revenue generation come into this picture. And I will add them to this discussion in my next series installment where I will add in factors to yield of net of net, final monetizable valuation model. Meanwhile, you can find this and related postings at Business Strategy and Operations – 2 (and also see Business Strategy and Operations.)

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