Monday, 15 November 2010

Design and Innovation – Unpacking intangible drivers of value added and competitiveness

Economic geographer, Professor John Bryson of Birmingham University, highlights in his new book due to be published in December, ‘Design Economies, the Changing World Economy,’ that, “Companies are increasingly competing on variables relating to design, brand and place. 
“The notion of ‘inimitability’ is central to this and devising strategies on this basis to deliver continued market share.”
Whilst it is easy to talk about design, brand and place it is not always easy to unpack what we really mean by these. Trying to quantify the value of these notions becomes an even greater challenge. 
Products are becoming more complex, mixed in with service and cultural elements. We are in the territory of ‘intangibles’. 
Mentioning this word to business people and policy makers alike you may get a variety of reactions from scepticism, disinterest, confusion and perhaps some misunderstanding. 
What does John Bryson mean by design, brand and place?
According to Bryson, design covers product design and design of production.  So products can be designed to include greater customisation, quality of service, continuous innovation and cultural resonance reflected in both product and brand. 
Production includes designing greater efficiencies and flexibilities making processes harder to replicate, including bundled products and services, continuous process innovation and enhanced delivery times through nearness to market.
Place is wrapped up with ‘cultural capital’ as a resource that can increasingly deliver vital ‘inimitability’ for our companies to trade on in selling products and services.  Brand sums up these unique aspects and communicates this meaning to consumers.
This means policy makers need to understand cultural resource and how to protect and promote it.
Accounting knows how to deal with tangibles but despite the evident value-creating capacity of intangibles the case for capturing and representing their value within existing accounting practice remains a challenge. 
Following the recent financial crisis and in the world post Lehman Bros’ demise it is one that is now widely regarded as best forgotten.
However there is a definitional issue – we have not come up with an agreed definition for intangibles.
Rohit Lekhi, Research Republic, whose report for the Work Foundation “Accounting for Intangibles: Financial reporting and value creation in the knowledge economy”, notes that intangibles include, “Knowledge, know-how, human capital, informational data, reputation, design, innovation and organisational practices as examples of such assets.”
Speaking to me on this Rohit Lekhi noted, “while most accountants are clear that they wouldn’t start where we are now if they were starting again today, they remain very sceptical about the case for widespread accounting reform.”
For the West Midlands this is a vital issue going, in my view, to the heart of our competitiveness.
Research by the Design Council in 2007, ‘The Value of Design Factfinder Report’ found that 66% of West Midlands businesses felt that design had either ‘a limited’ or ‘no role’ to play in their businesses. 
In the same survey 41% of WM businesses recognised that design was becoming more important in helping them to compete, however, 57% of businesses didn’t have any form of in-house design activity.
Dr James Moultrie, Institute for Manufacturing, Cambridge University, in a report for the Design Council, ‘Company Spending on Design, Exploratory Survey of UK Firms 2008’ found that design spend in companies surveyed was overwhelmingly focussed on the technical aspects of design, such as R&D and production, accounting for about 80% of spend; promotion accounted for around 10% of design spend with design identity attracting around 5% of spend and user-centred design around a further 5% of design spend.
The Lekhi report states, “Traditional accounting acts to obscure a whole array of intangible drivers of value and thus fails to anticipate their future value creation.”
Rohit Lekhi reckons that for most investors the metrics being used are “the balance sheet and gut instinct.” Adding, “Most business people have an instinctive recognition that intangibles are important - and increasingly so, given the growing importance of knowledge intensive industries. But there remains deep scepticism amongst many investors about whether the largely unrealised value of a firm’s intangible assets can really be used to underpin investment decision”
A report by Gil and Haskel, of Queen Mary and Imperial Universities respectively, 2007 revised 2008, ‘Industry-level Expenditure on Intangible Assets in the UK,’ suggests that overall industry spend on intangibles in 2004 was 152bn with tangible spend at £92bn. 
Manufacturing intangible investment was £40bn and tangible at £12bn – a ratio of 2.5 to 1 up from 1.2 to 1 in 1977. Manufacturing accounted for 12% of total tangible investment and 31% of intangible investment in 2004. Perhaps more striking is the fact that most value added in manufacturing is coming from intangible investment.
Whilst these figures vary between different reports, it is clear that the emerging knowledge economy, now accounting for over 45% of UK value added employment, is largely driven by many of the intangibles which we find so hard to quantify – including design and innovation.
It is investment in intangibles that is increasingly the key driver of competitiveness, growth and value added.
Rohit Lekhi’s report notes that, “investment in economic competencies such as reputation and human and organisational capital account for around 50% of total intangible investment in 2004.”
Will Hutton of the Work Foundation has said, "Manufacturing invests more, proportionately, in intangibles than the service sector. Manufacturing is the biggest single investor in design, spending twice as much on design as it does on R&D,"
Recently Professor Verganti said, “the challenge for companies is not having the ideas but making sense of them and having a vision. The companies that are most successful are the ones that understand the meaning behind their products to produce radical innovations.”
“To innovate the meaning of products you need to work with interpreters, people capable of radical vision.  Most radical people succeed when they are in ‘circles’.  The interaction between a circle of designers who are interpreters of meaning, respected collaborators such as technologists, business people and others who can think outside the box, will make for a great design circle that should successfully discover new meaning for old products.”
Given all that Professor Verganti, Politicnico di Milano has said about the need to focus on the relevance and meaning of products to our customers and their lives all this data suggests that we have real potential to improve our design game and in the process our competitiveness.
Rohit Lekhi says that “Business people seem to be coming to the view that it would be interesting and helpful to get an understanding of the role of intangibles in so far as they affect strategic direction.
“One of the more powerful aspects of the language of intangibles is the way they could offer a richer view of the strategic elements of a business. For example there are big differences in how you divert resources to ‘maximise shareholder returns for the short-term’, or ‘determine to become number 1 in your field in high-end design’.
“As we progress through the landscape of the knowledge economy increasingly the issue coming forward is how do we render what we do as different – or how do we do things we didn’t do before? Put another way how do we do radical innovation?
“If we don’t understand where value is added then it is very difficult to drive strategy moving forward. The essential truth is that intangibles are key drivers of value in the modern economy – even if we can’t measure them with the stark clarity of the balance sheet.”

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