Getting value out of innovation

Innovation in products, consumer experience and business models can drive growth and profitability. Yet, often this potential is belied because the company fails to capture the value of its innovation. Instead, the value is captured by others in the value chain or by imitators who never made the effort to invest in innovation in the first place.

The standard answer to the problem of “value appropriation” is intellectual property (IP) protection in the form of patents, copyrights, or trademarks. But, possession of IP rights alone is no guarantee of value appropriation.

Instead, successful innovators reinforce their IP rights by actions in the marketplace. Bajaj’s most successful motorcycle, the Pulsar, based its distinctive ability to provide additional power without sacrificing fuel economy, on its patented Digital Twin Spark Ignition (DTSi) technology. Bajaj drove this point home with a memorable “distinctly male” advertising campaign and hoardings across India that reminded prospective buyers about the uniqueness of the DTSi technology. And, Bajaj enforced its IP rights aggressively when TVS sought to launch the Flame with a technology that Bajaj felt infringed its patent.

Innovation support

When successfully supported by branding and advertising in the market, an innovation can become the de facto standard or synonymous with the category itself, thereby, ensuring steady revenue flows. Bisleri in the case of bottled water, Aquaguard in the case of water filters, and Dalda in the case of vanaspati are examples of the outcomes of such vigorous product market action.

Collaborative action plays a big role in getting value out of innovation. While “going on one’s own” may be tempting from the perspective of not having to share the value created with anyone else, this may be a sub-optimal approach when powerful players control or dominate complementary assets that are critical to capturing the value of innovation. That’s why a company like Embrace, the pioneer of low-cost infant warmers, signed up with healthcare giant General Electric to get its revolutionary product out to a much larger market. Sometimes, this logic may have to be taken one step further and result in even a sell-out or acquisition as in the case of Mahindra taking over the Reva Electric Car Company. Mahindra’s deep pockets, presence across automotive categories, and aspiration to be an automotive leader are expected to ensure much better commercialisation of Reva’s pioneering electric car technology. In a very different domain, investment by Rallis, a Tata group agrochemicals company in Metahelix, a new generation Indian seed company, promises to help commercialise Metahelix’s new varieties of rice and cotton.

Besides product market actions, the ability to continuously improve and enhance an innovation is important. In the late 1980s, India’s Centre for Development of Telematics developed what was at that time state-of-the-art digital electronics exchanges. But their failure to continuously improve these technologies provided an opening for the re-entry of products from multinationals that dominate the Indian telecom industry today. In contrast, Tally started as a simple accounting package but has grown into a more versatile mini-ERP system that has evolved with the needs of Indian small and medium enterprise users.

Occasional forays into relatively radical innovation can have an important rub-off on the commercialisation of other products in the company. Tata Motors’ launch of the Nano and Biocon’s well-publicised foray into oral insulin might not have yielded major economic benefits but they have enhanced the companies’ reputation for innovation with a resultant rub-off on other products in their portfolios.

Importance of IP

Of course, securing the creative and novel dimension of an innovation through IP does provide opportunities for monetisation that transcend launching a new product in the market. Vigyanlabs, a small Mysore-based company, has attracted attention to its novel energy management solution for data-centres thanks to its US patent covering the core of the system.

Possession of IP also provides some bargaining chips for future IP battles and cross-licensing agreements. Some years ago, Biocon strengthened its future negotiating position in the oral insulin space by acquiring the technology and IP assets of Nobex, an American start-up that had a formidable portfolio of patents, both granted and applied for.

Strong IP opens up the opportunity of licensing that provides a completely separate revenue stream. India’s National Chemical Laboratory, a constituent of the Council of Scientific and Industrial Research, has successfully licensed technologies to a host of multinationals, including blue chip companies like Procter & Gamble.

Globally, companies like Qualcomm and Dolby Laboratories have shown the power of licensing as a business model itself. However, it’s worth reiterating that both Qualcomm and Dolby have been “continuous innovators” in their domains of wireless communication and sound reduction technology, respectively. And their licensing model is based on the possession of IP covering a portfolio of relevant technologies that they continuously improve upon.

For a small company with limited assets licensing would appear to be an important option for monetising IP. But, the journey is not always easy. One of the classic stories that brings out the David vs Goliath nature of this battle is that of Robert Kearns, the inventor of the intermittent windscreen wiper. His early attempts to license this technology to some of the auto majors did not succeed. Later, he filed suits against them when they introduced similar features in their cars. He ultimately won his suit, but it was a pyrrhic victory as he spent most of his life in IP battles rather than in creative endeavours.

Given that the Indian environment for technology IP licensing is far less conducive than that of the US, few Indian inventors have used the domestic licensing route. In fact, the complaint I keep hearing from Indian entrepreneurs is egregious violation of IP even by the Government, which thinks nothing of handing over proprietary technologies developed indigenously to other suppliers under the guise of creating multiple suppliers and, thereby, lowering procurement costs.

I hope the message is clear — getting value out of innovation requires as much, if not more, thought than the activity of innovation itself!

(Beyond Jugaad is a monthly column. The author is a Professor of Corporate Strategy and Policy at IIM-B and author of From Jugaad to Systematic Innovation: The Challenge for India.)