The Management of Knowledge Creation and Innovation Through an Intellectual Capital Lens Prof. Göran Roos

VTT 2 ©Göran Roos 2007 Interest in innovation and R&D performance has been rising on the back of a wide range of successful products and services Context

VTT 3 ©Göran Roos 2007 Remember Innovation is not only based on natural sciences

VTT 4 ©Göran Roos 2007 What do companies think about innovation?

VTT 5 ©Göran Roos 2007 What is the real situation? t Booz Allen Hamilton Global Innovation 1,000 Study 2006: – Innovation can lead to higher performance, but the process isnt automatic and it does not necessarily require above average levels of investment. The most successful companies combine an integrated process and a supportive culture to create a sustainable competitive advantage – Money simply cannot buy effective innovation. – Patents generally dont drive profits – Less than 10% of companies are High-Leverage Innovators and distinguish themselves not by the money they spend, but in having a very good innovation management system t Innovation Network Survey, fall 2004 [same result from 2005], new innovation leaders in medium to large companies: – 71% said they had no metrics for their position – 60% of them have innovation as part of their mission/job objectives – 67% are allowed to work on new concepts for their company (new is not defined) – 68% have no well defined innovation process within their company – 54% have no working definition of innovation

VTT 6 ©Göran Roos 2007 Research vs Innovation – What is the relationship?

VTT 7 ©Göran Roos 2007 EXPANDING THE INNOVATION HORIZON t Innovation can be ignited by business and technology integration. t Technology can enable and drive innovation. But to truly capitalize on technologys potential and unleash an organizations creative energy, technology know-how must be combined with its business and marketing insights. CEOs view consistent business and technology integration as crucial to innovation Source: Dr.V.S.R.Krishnaiah, Sr.Technical Director, NIC

VTT 8 ©Göran Roos 2007 Business Model Innovation is key t A Value Proposition is an overall view of a company's bundle of products and services that are of value to the customer. t The Target Customer is a segment of customers a company wants to offer value to. t A Distribution Channel is a means of getting in touch with the customer. t The Relationship describes the kind of link a company establishes between itself and the customer. t The Value Configuration describes the arrangement of activities and resources that are necessary to create value for the customer. Nornally these are expressed in IC-Navigator form and using the (Stabell and Fjeldstad 1998) Value Logics t The identified Resources that can be deployed by the firm to create value including those that form the basis for a competitive advantage t A Partnership is a voluntarily initiated cooperative agreement between two or more companies in order to create value for the customer t The Cost Structure is the representation in money of all the means employed in the business model. t The Revenue Model describes the way a company makes money through a variety of revenue flows.

VTT 9 ©Göran Roos 2007 Truly understand your customers and your customers customers [consumers] Customers are trading both up and down within categories, demanding differentiated value from businesses Growth Historical Demand Emerging Demand Price Positioning t Seeking good enough quality at rock-bottom prices when they perceive no differentiated value t Willing to pay large premiums for new luxury brands when they deliver differentiated value Source: IBM Institute for Business Value analysis Value Proposition Target Customer

VTT 10 ©Göran Roos 2007 What drives the B2B relationship? Situational Importance of Different Perceived Value Driver Categories Perceived Knowledge of Buyer Importance to Buyer < Seller High Low Seller Seller Distinctness Mental Proximity FunctionalityFunctionalityPrice PriceDistinctness Value Proposition Target Customer

VTT 11 ©Göran Roos 2007 Value and knowledge distance Known by nobody everybody Known by the Supplier Known by the Customer Knowledge distance Potential Value to be extracted from the relationship by the supplier + - Value Proposition Target Customer

VTT 12 ©Göran Roos 2007 Value Chain Inbound logistics Service Marketing & Sales Outbound logistics Operations Infrastructure Human Resource Management Technology development Procurement Margin SupportActivities PrimaryActivities Source:Porter, M.E. 1985: Competitive Advantage; Creating and Sustaining Superior Performance, The Free Press Value Configuration

VTT 13 ©Göran Roos 2007 Value Shop Source:Stabel,. B., Fjeldstad,Ø. D.: Configuring Value for Competitive Advantage: On chains, shops, and networks, SMJ, Vol 19, No 5, 1998 Procurement Infrastructure Human Resource Management Technology development SupportActivities PrimaryActivities Find someone with a problem Control/Evaluation Execute Develop alternative solutions Acquire the right to address the problem Co-select with client one solution Value Configuration

VTT 14 ©Göran Roos 2007 Value Network Source:Stabel,. B., Fjeldstad,Ø. D.: Configuring Value for Competitive Advantage: On chains, shops, and networks, SMJ, Vol 19, No 5, 1998 PrimaryActivities Procurement Infrastructure Human Resource Management Technology development SupportActivities Promote Network Manage Member Contracts Service Provisioning Infrastructure Operation & Maintenance Value Configuration

VTT 15 ©Göran Roos 2007 The presence of resources with different behaviour Owned or Controlled By the Firm Owned or Controlled By the Firm Owned or Controlled By the Firm Additive Additive Owned or Controlled by the Other Party Owned or Controlled By the Employee Resources

VTT 16 ©Göran Roos 2007 KnowledgeEconomicsIndustrialEconomicsNetworkEconomics The utilisation of resources with different behaviour Resources

VTT 17 ©Göran Roos 2007 Examples of Resource Transformations HUMAN ORGANISATIONAL RELATIONAL PHYSICAL MONETARY HUMAN ORG. REL. PHYSICAL MONETARY Investment in assets Investment in building links Investment in brands, image and systems Recruitment training, conditions Facilities to train with Possible new products & know-how Facilities build relationships Sales of products Chance to build skills in relationship handling Importing IP, processes, association with brands Use of other companys assets Relationship selling, preferential deals Developing competence through use Market intelligence Produce By numbers Sales of IP, processes & knowledge Knowledge codification, new IP Building & developing relationships Developing prototypes Sales of man-hours Investment In financial instruments Systems generate IP Networking Equipment generates products Training Resources

VTT 18 ©Göran Roos 2007 Revenue Logics t Effort-based pricing – A cost-based (or effort-driven) pricing model t Value-based pricing – A value-based (or perception-driven) pricing model t Profit Sharing – Revenue-sharing contract with primary customers t Licensing – Charging on copyright (the right to use the IP) t Loss Leader-pricing – Creating customer base (for later revenue) or supporting sales of other parts of the product/service offering t Hybrid/Media model – Vendor sells/leases ad space or information [space] based on customer relationship t Channel charging – Vendor charges for carrying information relating to other goods in/on its primary product/offering t Membership fee – Vendor charges for the right to take part in an activity t Negative Working capital – Vendor generates financial returns on the capital held as a consequence of getting paid by its customers before paying its suppliers Revenue Model

VTT 19 ©Göran Roos 2007 Innovation does not happen by itself t It is the result of hard work, well planned and executed and is no happening t Innovation is work rather than genius,…and very much a matter of discipline (Peter F Drucker, 1985)

VTT 20 ©Göran Roos 2007 Summary t Innovation does make a difference at the bottom line t Few companies do it well t There is a difference between research and innovation and especially in their management t Innovation is more than technology t Innovation Management is Key and is facilitated by applying the IC lens t We know how good innovation management looks t It will become even more important in the future