The value and price of innovation

All models are wrong, but some are useful. The most useful models are those that manage to capture key dilemmas in decision making. Even very simple models can be useful.

Consider the model below. Very simple. Yet it illustrates an important dilemma of how to balance short term versus long term value creation.

Profit can be used in two ways: pay dividend or invest in innovation. If you pay dividend the investors are satisfied. They invested in the company and expect a reasonable return of that investment. If you increase dividend, less is to be invested in innovation.

Innovation is a key driver for creating new products, new ways of working, new business models and developing new markets. Without innovation the company will become stale and loose compared to more innovative companies. Successful innovation will improve revenue and then profit.

That is the good part. Value is created.

Innovation is messy. You can't plan in a traditional sense. You need to experiment. To test. To fail. To learn. Try again. Innovation is risky. It takes time. And it is costly.

That is the bad part. Costs are increasing.

If innovation does not materialise into increased revenues the cost will reduce profits and reduce dividend to the investors.

So what to choose?

It depends. Short term dividend payment or long term dividend payment? It is not an easy choice. One thing is certain: without any investments the future holds no dividend at all. So some innovation is necessary. But how much? For how long? And how to organise? What drives innovation more specifically?

I know this model is wrong. I have emitted, forgotten, misunderstood and twisted how things work. I know. Please improve it. Make it even more useful. That is the purpose. Understand more. Learn more. That process will make decisions more informed and better. If so, the model was useful.