Value of Ideas Trumps Value of Products

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In a well-marked line from the movie The Social Network, Facebook founder Mark Zuckerberg turns to the Winklevoss twins, who are suing him for stealing their invention, and says: "If you guys were the inventors of Facebook, you'd have invented Facebook." The words speak volumes about the origins of one of the most successful companies on the planet, but are also a commentary on the origins of any invention.

"Anytime you invent something, you have really invented two things—the thing itself, and an idea," says Harvard Business School visiting professor Gautam Ahuja, a professor of strategy at the Ross School of Business at the University of Michigan. In the case of Zuckerberg vs. the Winklevosses, the twins may have had created a simple interface for college kids to connect with one another, but it took Zuckerberg to take the idea and turn it into that of a worldwide social network that would allow everyone to share their lives with one another across geographies.

"Compared to the value of the global network idea, the value of the actual product of a platform for college kids was much less," says Ahuja. "Often the concept value of the invention is more important than the physical aspect."

In a paper published last year in the Academy of Management Review called "The Second Face of Appropriability: Generative Appropriability and Its Determinants," Ahuja makes distinctions between two types of value: "primary appropriability," or a company's' ability to exploit the opportunity of an invention by turning it into a product, and "generative appropriability," a firm's ability to capture the later value inherent in the idea.

"Often companies don't fully exploit the latest ideas that their product has created," says Ahuja, who wrote the paper with Curba Lampert of Florida International University and Elena Novelli of City University London. "They go on and create new products and inventions without realizing the potential for building new products out of their existing inventions."

The idea, in the way that Ahuja emphasizes it, is akin to how I define and use algorithm à la Theory of Algorithms and The Core Algorithm. An algorithm is the conceptual underpinning of something, the essence of how it works, and the DNA that governs its evolution. For example, the essence of how an automobile runs is via the combustion of gasoline, which releases energy to power it. The auto industry has banked its numerous business worldwide, over the past century, on this very idea or algorithm. In fact, with the advent of hybrid and electric vehicles, we can distill that essence even further: They run by tapping potential energy in the natural or manufactured resources provided.

For companies looking to increase their generative appropriabilty, Ahuja offers advice as well. [1] "Push for stretch goals in innovation," he says. Under pressure to produce in a short period of time, research teams are necessarily forced to go back and find new value in what has already been done than reinventing the wheel.

[2] Likewise, firms are better off providing moderate levels of resources—not too much and not too little—to research teams. "If the budget is too small, there is little possibility of creating new products," says Ahuja. "But if it's too high, there is no incentive to go back and look at your own ideas." With a level in the middle, R&D teams will both forced to look at current ideas and able to take them in new directions.

[3] Finally, says Ahuja, it's essential to put a knowledge management system in place that provides incentives for new designers to talk to old-guard engineers rather than just reading about their inventions on paper. He cites the words of former Hewlett-Packard CEO Lew Platt: "If only HP knew what HP knows, we would be three times more productive." Just the interchange between old and new designers can help generate new ideas from old ones.

Reference: Inventing Products is Less Valuable Than Inventing Ideas.   

Over the last five years, I have learned really tough lessons in entrepreneurship, and these lessons fall perfectly in line with what Ahuja surmises and advises.  Early on I was able to secure good financing, which, unfortunately, I used too quickly and unwisely.  There were a lot of concepts, models and ideas I still had to work through, and clarify, and the inevitable mistakes I made ended up being expensive ones.  For example, I engaged website developers who were not competent or scrupulous, and I had to dismiss them in an effort to cut my losses.  It was when I was virtually depleted financially that I figured out how to create the platforms for my many projects - that is, websites, blogs and social media - in ways that served my purpose and at costs that were nominal.  It was a combination of [1] and [2] above: I was under pressure to get my businesses and projects launched, and I managed to work effectively with minimal resources.