Innovation is a primary driver of successful industries and businesses. Through innovation, businesses realise new efficiencies, products or services, through which surplus value is generated.
As we explored in a previous post, there are three ways that the surplus value from innovation can be distributed. Two of these represent the standard structure under which most companies operate. Firstly, managers retain the surplus in the business, investing these resources to grow the business through research and development, recruiting new employees or paying out bonuses to reward staff.
Advocating the second way, shareholders and the Board members that represent them, choose to return proceeds from innovation as compensation for the capital provided by investors in the form of dividends or share buy-back schemes.
The third way that the innovation surplus can be shared is by adding an additional consideration, Impact. Here, the additional value created through innovation is not exclusively financial. The innovation has positive effects on society or the environment. Crucially, this impact is commercially sustainable because of the business activity that produces it. Businesses with these characteristics fall into quadrant four of the Innovation value sharing matrix.
Innovation always has an impact beyond financial value creation. In most companies, there is no advocate for innovation-driven positive impact among the key decision-makers. One commonly cited reason for this is that it’s hard to understand or holistically measure the non-financial value a company creates, such as through increased R&D or supporting social causes. As a result, managers and shareholders spend their time developing strategies that move innovative ideas from quadrant 1 to 2 in the matrix. They focus on what they can measure, with a laser focus on improving commercial value above all else.
This might sound cynical, but decision making is optimised when choices can be reduced to measurable, quantitative considerations and the application of algorithms. Billions are spent every year by businesses employing consultants to evaluate the commercial projections of different strategic options, using tried and tested methods.
Our contention is that impact analysis can be similarly robust and is just as useful in determining the future success of a business. It requires an advocate that is interested and part of the decision making process, and useful data and information to inform impact aligned decision making.
Fortunately, there have been some exciting examples of when public companies have decided to add positive impact into the decision making process. We are most excited about the societal shift towards businesses that place equal importance on impact and profit, as our emphasis is on developing start-ups that create innovation that offers commercial success and impact through the sharing of value. For those with positive impact creation at the core of their business model, greater commercial success leads directly to greater impact. More closely understanding and measuring these positive impacts is an important element in calculating the total value these start-ups create.
An example will help to bring this to life. One of our favourites is that of Lifebuoy soap. This soap – invented in 1894 to combat diseases including cholera, often passed on through poor hygiene – was the first to use carbolic acid for its germ-killing properties. This innovation allowed low-cost, health-protecting soap to be mass-produced for the first time, giving affordable access to a crucial product to the masses.
The major benefit of the innovation – better public health – was passed on to individuals and wider society. Lever Brothers, who produced the soap, was rewarded with strong sales and profits because its innovation met an urgent market and social need, and the business model allowed for it to be made and sold in a commercially sustainable way.
Unilever, as Lever Brothers is now called, today continues to put the creation of non-financial value at the heart of its strategy. In fact, Unilever reports that its brands that are committed to reducing environmental negative impacts and improving positive social impact are responsible for 75% of the company’ growth. One argument for this is that products and services that offer solutions to a timeless problem, will always have a market. As the recent pandemic has shown, hygiene and handwashing is as crucial today as it was when Lever Brothers invented carbolic soap.
For most start-ups, success relies on harnessing innovation to increase the commercial value of a product or service. Impact start-ups add an exciting new dimension. In addition to increasing commercial value, they apportion part of the innovation to creating positive impact. We don’t want to give the impression that the answer is as simple as do your best commercially and do your best for impact. Businesses face complex decisions that require trade-offs between the two. Crucially, a defining feature of an impact-focused start-up is the degree to which a holistic consideration of impact is integrated into business decision making.
Gordon Eichhorst, Twitter & Linkedin
Joshua Eyre, Twitter & Linkedin