Impact investing for social good through new innovation- a growing momentum?

A growing group of investors around the world are increasingly seeking to make investments that generate social and environmental value as well as financial return. Sound impossible?

Well, no actually. There is a growing recognition of the need for effective solutions to social and environmental challenges that have increasingly real threat and growing inequalities.

Impact investing or more often housed under the broader heading of “Impact Economy” is about finding the ways to combine investors, philanthropists, entrepreneurs and business executives along with governments in finding new and different ways to explore the changing economic and social landscape. Through this emerging newer type of investing there is potentially that the promise of new jobs and profits, mixed in with improved social impact, can be derived from new innovation activities. It needs this convergence and seems to be gathing in pace and broader recognition.

Scaling up needs capital and different business models

In one of my recent blogs I spoke of the issues of the difficulties of scaling up within social innovation projects ( I raised the question “how do you scale up a highly fragmented set of solutions when we lack more often than not the developed networks and the intermediaries that can assist?”  It is the ability to certainly raise the capital that often constrains this. I have to also say, it is the business social model that often can’t scale equally due to a failure to recognize the mechanisms or levers to achieve that. Scale suffers if these are not recognized and in place and great ‘local’ ideas just simply stay local.

The Impact Economy

“The act of sense making is discovering the new terrain as you are inventing it.”—Brian Arthur

The Impact Economy is about using profit-seeking investment to generate social and environmental good by placing capital into businesses and funds that can provide solutions to scale, that often the philanthropic organization is not able to do due to its limited funds or covenant.

Recently the White House hosted a meeting of all the different interested parties around this Impact Economy (June 22, 2011).  In collaboration with the Aspen Institute it was bringing together the Impact Economy Initiative, a project of the Philanthropy and Social Innovation (PSI) program, and working directly with the Office of Social Innovation and Civic Participation at the White House to enable this event and explore ways to take this further. A report about the outcome recommendation comes out later this summer.

So far in a report completed earlier it has been identified than $50 billion of assets under management are associated with impact investments. The predictions are this can rise rapidly to $500 billion, even talk of $1 trillion in the year’s ahead if this momentum moves from a present uncoordinated set of innovation activities into a new domain, a major complementary force for providing capital, the talent and creativity needed to address pressing social and environmental challenges.

The ability to address global challenges at scale would be dramatic.

The combination of a number of ultra- wealthy investors, high net-worth individuals, corporations and foundations all seeking to diversify, to leverage investment as a tool to drive social change can realize this ‘scale’ promise.

They are still looking for returns, perhaps less market-rate returns but where their capital is catalyzing impact. This means they are getting more interested in the pull of growing emerging economies, the more value-driven behaviours of consumers that is emerging post recent crisis and the need for relating and contributing to finding effective solutions to social and environmental challenges across all societies. Part of the aim also is to recalibrate supply and demand that looks harder at social impact.

There is also talk of a social contract that may develop into Social Impact Bonds- investors provide capital to fund community-based programmes whose successful implementation lessens long-term public expenditure and improves society outcomes. Clearly this emerging concept will not be easy but it does bring together all parties to attempt to drive impact and innovate in different fields where we have bigger social challenges. The key is it does need to generate shared value for all and that is going to be a hard road to travel.

Let’s look at some of the critical success factors for this to succeed.

The Monitor Institute wrote a report, released in 2009 ( on impact investing, and it provides an excellent overview of what needs to happen.  Their list of critical success factors was to view this from different parties’ perspectives but let me provide the list of significant issues to be resolved:

  • Developing a range of different but creative packaging instruments that make it possible to gain sufficient returns and bring the different parties together in this project.
  • Most probably have some infrastructure specially suited to manage opportunities (separate stock exchanges, intermediaries and specialists)
  • Form a clear network/ community to enable linkages between investors and explore common goals.
  • Encourage sufficient commercial capital to participate in joint deals by involving all possible investors that see this as critical to contribute funds too.
  • Build sufficient submarket funds or grant capital that might have different investment rates so a more ‘blended’ rate is attractive and resolves different ‘benefit’ criteria between parties.
  • Achieve a common approach for assessing social/ environmental elements of investment from research and valuation aspects.
  • Structure a viable market for investment opportunities where competitive returns can be demonstrated that
  • Impact rating systems can be developed that offer acceptable minimum standards to certify companies and verification and are not actually equally destructive.
  • Achieve a growing standard of metrics that set out goals of achieving social or environmental objectives
  • A real push will be needed for more product innovation that meets the challenges, is able to be scaled up and overcomes potential (parts of) society’s objection or concerns with accepting the changes it might bring.

This is an evolutionary path.

The view is this is going to be a ‘messy’ transition in the evolution of  the activity surronding this. The fact that it is bringing together significant parties at the White House recently does indicate that this is getting a level of ‘traction’ and serious policy attention.

There is certainly growing interest along with real social pressure on the recognition for finding new innovative solutions to social and environmental challenges that reduce these pressing issues and become catalysts for new job opportunities and provide positive impact for societies.

We do need to explore new ways to resolve difficult issues. It is worth exploring and watching this Impact Economy movement as this can lead to that necessary combination of capital, talent and social challenge resolve that can partly help move us forward in new innovating ways that can hopefully engage all parts of society.

We do need some positive movement in this and if there is real convergence that solves societal problems through new innovation then we should all take note.

Can innovation lead us to economic recovery?

After some recent #innochat debates (  around innovation including the future of Nations, of the US, and of innovation itself and how it needs an organizing framework to work more efficiently,  I wanted to dig a little deeper, to get my own head around all of this. We do have real problems in the world and we need to find solutions but something strange is happening and I was not sure I understood it. So I’ve been on a little investigative journey that is beginning to make some good sense, well at least to me.

A host of financial contagion has been heaped upon us progressively in recent years.

We have gone through a host of speculative bubbles, rising debts, global recessions in the recent years and we are still standing. Our real financial assets seem to have been refinanced a few times to enter into our jargon the use of ‘toxic assets’ that we are still working through. Many of the developed world’s economies are far too weak to create jobs or achieve the economic growth spoken about by our politicians. Increased government backed spending is heading us to another bubble based on imported price inflation, rising commodity prices and steps that might take us back to increased taxes, higher inflation and lower public services. Even if some form of deal is made at the eleventh hour to raise the debt ceiling in the US, it will only be a short term stop gap. We seem to be in deep trouble.

Yet we still seemingly function, in some parts extremely well, others badly- why?

Where I do puzzle though, is why do our economies still function?  We seem to be still standing, well hopefully, as I write this blog with the US debt deadline fast approaching of August 2nd. There is a set of arguments that build on the thinking that we are measuring the wrong activities. We are still caught up in the economic theories of the 20th century of models and doctrine.

According to some, a new theory is emerging in the last decade, the one called “innovation economics”. It is based on knowledge, technology, entrepreneurship and innovation and these take a more centre stage and are combined forces that are mutually dependent.

The issue is that the ‘force’ of innovation has not yet been fully grasped in economic models or government policies. It is ‘lagging’ partly as many of the dominant advisors advocate older models of measures that ignore or simply have not been adequately captured enough to influence or change the economic thinking around the importance of innovation.  The present older economic thinking is still based on allocating efficiently, searching for equilibrium, trying to ‘force’ rationality into markets, thinking individuals are constantly searching for this but are they?

Innovation economics works in different ways according to what I’m still trying to fully understand (if I ever will). Firstly there are constant ‘disruptive’ forces that keep the markets constantly out of equilibrium or disturb it simply to knock it out of this ‘even’ state. Resources are invested not according to ‘edict’ or just policy levers alone but seek to go where there is a natural ‘intersection’ where the convergence of those factors that meet the ‘need’ just simply combine. These respect no borders, they go where they seem to work, and these are where innovative activities thrive.

Nothing is as predictable as we have come to expect in the past, it is this seeking out extraordinary changes in new ideas, concepts and connections that has a powerful new force behind it for this new economic force. We live in simply ‘chaotic’ times and we need to manage this accordingly, to ‘grab’ the breaking opportunites and to ‘anchor them’ onto our shores, by providing the innovation factors that are needed and attractive; to commit and grow them around mutual partnerships and dependencies.

Recognizing this quantum change

If we accept or get a ‘sense’ that “innovation economics” are driving economies, often in hidden ways, then the quicker we identify the critical levers of innovation the better. The old school of capital accumulation and its value (to stockholders), budget management thinking of surplus or deficit, social spending all get challenged in very different, perhaps unique ways. Governments and the different sectors (business, non profit, communities) need to work out the building blocks of innovation in far more smarter ways than today.

We need to value agility, flexibility, knowledge adoption and rapid diffusion; we need to view productivity in different ways. People, skilled in different appealing ways, using the new value drivers have increasing value that needs greater premium recognition.

The new innovation productivity need

The measurement of how each organization is improving its productivity needs some rethinking. It is the ‘relentless’ focus on technology, on knowledge acquisition, absorption and diffusion. It is opening up the ‘black box’ of actual innovation activities going on in organizations and valuing these.

We need to focus on the adaptive efficiency that constantly takes place within organizations to spot trends, react to them and absorb the learning to adjust and innovate through these, to provide the new innovation coming from this set of activities.

This calls for investments in knowledge, in infrastructure that focus on activities that spur new productivity approaches that lead to innovation. These are not just the traditional ones based of lower costs, still judged today, as the winning value but on the new innovation value scale of ‘new generation activity that is occurring’.

We need a deeper innovation grounding of internal workings

It calls for a deeper grounding in what is actually going on inside organizations within their innovation activities. It is combining of these four emerging forces of knowledge, technology, entrepreneurship and innovation that make the growth models of tomorrow and innovations ‘black box’ as our need to really get into to understand.

What are your thoughts?

We need to find a new economic order that reflects the changes that have beeb going over in the last thirty years, know we have to learn there real value points. We unleashed a series of events in pursuit of opening up across global markets which are destroying much of the past in whole communities, shifting jobs and wealth creation, complex trading policies, chronic imbalances in tax and managing through national vested value generating stimulus packages. The world is simply different, our need is to find the economic levers of this new world.

We are seeing speculative investments that are always seeking constant new ‘feeding grounds’, erratic monetary policies  along with the quest for low interest rates and increased monetary supply leading to speculative asset investments. Some past lax oversight, forced consolidations for organizations to continue in existence when they should be closed, and changing capital reserve requirements are all adding even further to uncertainly and draining financial reserves.They are equally draining our personal reserves of respecting the institutions charged with managing these. These need understanding better.

So we do need some very different economic thinking, one that reflects the change in the economy. Are the new denominators of value, based on creation through innovation? It does seem the concept of ‘innovation economics’ based on knowledge, technology, entrepreneurship and innovation might hold something important within its emerging theories to consider? Do you see this also?

Renewing Innovation through the Social Innovation Agenda

The challenges are growing in their social dimension across Europe, the United States and a host of other countries, both developed and developing, that are needing new fresh responses. Social demands will inevitably increase as nations are being confronted with budgetary constraints, increased deficits and mounting debts to resolve. Social needs will become more pressing and innovation, social innovation, will increasingly explore opportunities to extract ‘more from less’. Innovation can play an increasing part in resolving social challenges that are increasingly confronting us.

Starting a new movement on social innovation in Europe

Recently I became a member of . I certainly  feel this is going to offer something exciting and vibrant. It is a growing community of thinkers, creators and innovators with the knowledge and skills to change the way we face Europe’s most pressing issues. Contributors to the site will take a strong hand in shaping the direction of social innovation across Europe, breaking down silos and raising a unified voice. I need to find my own part in this, as there are multiple ways for contribution, which I’m still presently figuring out.

Social Innovation Europe (SIE)’s online hub present aims are to become an indispensable resource providing the latest information on European social innovation. It will feature interviews with prominent innovators, case studies of successful ventures, the latest research, and in-depth analysis from the leading thinkers in the field.

Why do we want to address social innovation even more now?

Social needs are now more pressing than ever, they will regretfully get worse before they get better. The combinations of the recent global crisis, the economic shifts from the West to the East will increasingly reduce opportunities and increase the social dimensions that will need to be dealt with. We are in social strife with unemployment challenges, ageing and climate change that all have growing stress on declining revenues in the West.

As our financial resources are getting more limited, new solutions must be found. The short term fiscal stimulus packages and bailouts have alleviated the short term but we do need to provide new innovation solutions to pressing social demands that will occur in increasing ‘waves’ over both the short, medium and long term perspective.

Social challenges are actually innovation opportunities

The challenges are tough but should be viewed as potentially new opportunities for economic and social innovations to take place. Providing solutions that are high in quality (or high enough), beneficial and affordable to the needs of the users requiring these, and that can add hope and provide value to improving their daily lives. These can offer different combinations of business, government, and entrepreneurs different avenues to explore, that are both worthwhile and contribute to society but can offer valuable job and yes, profitable enterprises, and returns for investments made.

Social innovation means what?

Social innovation is innovation that is social in approach, in both the end result and the means of getting there. It offers new products, services and business model opportunities that simultaneously meet social need, that deliver more effectively than alternatives,(if there are ones) and most importantly, it create and builds new social relationships, communities and collaborations to achieve these ends. They can make ‘us’ feel good by our direct contribution to enhancing society’s capabilities to act together to resolve part of the challenges we need to confront. Social interactions and vested interests need to be combined and as a direct result it generates a ‘social capital’ that builds in value by its activity and by its increasing movement up the experience curve.

There are barriers that will need to be knocked down to accelerate social innovation.

Like any innovation, social innovation has risks. It offers all the usual ‘suspects’ associated with innocation of good imagination, perseverance, overcoming adversity, shortage of funds and a continued optimism that your idea to create a product or service and its implementation, can and will happen.

There are some important differences for social innovation though.

Social innovation is far more a participative process, partnership forming, constantly identification seeking, that has more ‘scaling-up’ problems than business innovation and that is hard enough! You are confronted by more society barriers, which is often at odds with what you are trying to resolve. Sometimes you meet a totally incompatible barrier that need that extraordinary leap of creative design to navigate around and that is where the model (social against business model) comes into play in analysing and resolving to overcome this. Social innovation does needs its own tools, techniques and models that today are somewhat lacking.

Equally, when you step more into the social innovation space you come up against a more traditional risk-adverse and cautious mindset unless the crisis is dire. The culture of administrators, their wish to stay with closed systems and often fragmented systems are tough to overcome. The skills of many around you, wanting to help, can be more limiting in experience but often can make up this ‘deficit’ through their enthusiasm. There is also the constant battle for funding through the scaling up from pilot or experimentation to larger scale (the social innovation life cycle) which can be demanding and often distracting, often taking you away from your primary task of resolving the social problem.

Scaling up seems a huge obstacle to overcome

In all I read and understand, the scaling up from that perfect local project into a regional than national one, is immensely hard. There are very few examples where the combination of coherence, comprehensiveness and broader outlook come together without significant changing of a workable local model. The art of communicating, of diffusing the skills, knowledge, understanding of the key variables and the local experience are hard to often translate. Much in social innovation is intangible, more than business; as it is in tacit knowledge that often successful social innovation solutions are made.

How do you scale up a highly fragmented set of solutions when we lack more often than not the developed networks and the intermediaries that can assist? Some of our established institutions like the Salvation Army can find major new roles to invent and work within, that provies the structure and need of networks, contacts and established infrastructure well established. Its mission and role emphasis might need to change to capitalise on this.

The three categories of social innovation

In a report, which has certainly helped shape this blog, on “Social innovation in the European Union” they are suggesting that you can schematically classify social innovation into three broad categories:

Firstly, grassroots social innovation that needs to respond to pressing social demands and directed more at the (growing) vulnerable groups in society.

Secondly, a broader one that addresses societal challenges where the boundary blurs between social and economic and directed more towards society as a whole. (My Salvation Army could be a clear example or the Red Cross or even the Open University)

Thirdly, the systemic type:  that relates to fundamental changes in attitudes and values, strategies and policies, organizational structures and process delivery systems and services. These include climate change, recycling as examples.

All three categories play a part in helping to manage and shape society.

Economic & Social Dynamism

There are many social challenges that will need creative and careful strategic framing that require innovation thinking. The pressing social issues will continue to rise to the highest political level and eventually ‘they’ will act, they will be forced too. Social Innovation will then explode in importance when the combination of all our forces: government, non profit, business, communities and entrepreneurs all come together, as they have to, so as to resolve growing social problems through new innovative approaches.

We all need to firstly be aware and then engage in understanding the power and opportunity social innovation can provide and the part we can play. Innovation can be a powerful enabler to many of our social challenges we are in need of facing up too. It should be on everyone’s radar as it is only one ‘touch moment’ away from social issues that are all around us.

How can we decouple growth and consumption through innovation?

Some weeks back the International Herald Tribune (June 7th, 2011) offered a view by Chandran Nair, the CEO of Global Institute for Tomorrow, under the title “Can the planet support more Americas? Then this week an article “Over-innovation makes US firms suck at Sustainability because they are too innovative” by Jens Martin Skibsted and Rasmus Bech Hansen ( Each makes me stop and come back to my deepening view we have to decouple growth and consumption through innovation.

This is not an easy subject but let me lay out some opening views and thoughts. Why bother? Well I really do believe we need to radically change our approaches through the use of applying innovation in new ways.

These two articles added further to my personal concerns that we do need to (quickly) come out of the denial we seem to have in all societies. Innovation needs to be radically applied in new ways that alter the present mindsets of politicians, economists and business people who feel that the only path is continued consumption and growth. This approach is simply not sustainable and we need to find a radical alternative that still offers all of us progress but in a radically altered world.

The two articles in summary first

Try to imagine a world with three Americas- three giant economic super powerhouses with citizens all pursuing their equivalent American type dream of buying, selling and just consuming more. It is a prospect that excites many business people hell bent on growth as their yardstick. Can we deny Asian governments and their people after decades of poverty, struggle and hard work to be on the brink of obtaining a greater degree of abundance? The answer is our planet will become unimaginably stressed; we have already passed the earth’s regenerative capacity. We all would be condemned not blessed by this. The world does not have enough for two more consumption driven Americas. Yet we stay in denial and the spin of innovation is all about achieving more.

Equally America today is an amazing consumer. Some argue the US is the biggest environmental sinner as the economy is based on consumption, throw away consumption. The argument is the American company is innovative, entrepreneurial, and intensely competitive and they tend not to look at sustainable solutions, only the next big thing. Getting any change here is challenging those deep-founded and engrained beliefs and that is seemingly unlikely to happen, especially when the Government and the parties wrangle on increasing the debt ceiling. It seems we are not addressing the long term problems that are hurtling towards us. Can America become more standard to allow more recycling, greater re-usage and shared systems? Can America actually slow down and optimize and not chase consumption by encouraging change in a throw-away society? Can America redefine consumption by adding extra value and prolonging product life cycles?

What would it take to make such dramatic changes?

Clearly innovation thrives when there is a crisis. We seem to be heading for many, like rolling thunderstorms building up until they are so over our heads we just jump. Jump in real fear but jump in responding with a desire to survive by changing our habits and supposed consumption needs.

The main need is in finding fresh ways in taking those first big steps to radical change.

We must find ways to constrain consumption that do not continue to stress, deplete, degrade or waste our natural resource base. We need to reward, and reward heavily those “more is less” activities that put natural resource management in the centre of our thinking. Governments will be looking more at carbon taxes (Australia has just announced one), resource taxes and ensure producing organizations use far fewer materials and far less energy in their products and these can only be  radical not incremental as it is today. This will slowly change consumption habits. We have to get multiple-fold increases in resource-efficiency that don’t move the problem from one stressed aspect to another or trade off mutual dependencies. We must REDUCE dramatically fossil fuels, fisheries, grain stock consumptions and forest products by applying disruptive intervention by Governments that impose tax on the people that ‘pollute’ and don’t want to face the radical change necessary that continue to ‘consume’ more than they really need  . We will have to “name and shame” the ones that have vested interests in maintaining the status quo. Leadership, global leadership is needed but re-orientating innovation away from consumptive growth can be one of the major enablers to support this need.

Managing in an uneven world

There is a good book called “What’s mine is yours? Collaborative Consumption”  by Rachel Botsman & Roo Rogers that tracks and explains the rise of a fascinating new consumer behaviour they call “collaborative consumption.” Driven by growing dissatisfaction with their role as robotic consumers manipulated by marketing, people are turning more and more to models of consumption that emphasize usefulness over ownership, community over selfishness, and sustainability over novelty. Although it focuses more on exploiting the ability of the Internet so as to create networks of shared interests and trust and to simplify the logistics of collective use it offers some further thought to managing change in consumption.

Collaborative Consumption appears in three “systems” suggest the authors, product service systems, redistribution markets and collaborative lifestyles.

The movement described in collaborative consumption helps but it is not radical enough. We need to constrain consumption, to channel this into smarter solutions that continue to create value for both the business and society so the consumer sees extending use as critical. Out of this shift can come entirely new industries that manage product life to extract, to extend and enhance and the consumer gets rewarded by constrained consumption in different imaginative ways -getting sent consumption tax pay checks for instance, to continue to invest and fuel the consumption of them wanting to consume less because they get paid for it.  Radical but necessary and this would be needing every ounce of innovation ingenuity and reshaping of whole industries, government approaches and our mindsets. A tough one that!

There is no easy path but we have to take the right one.

I like the idea of these three parts- systems, markets and lifestyles. We do need significant breakthroughs in innovation that allows for ideas that feed off of novel life-changing concepts that meet cultures different adjusting needs of expectation. One that values a more sustaining lowering of consumption and does not add deepening conflict and strife but allows for a more balanced consumption for all to share. Call me an innovation idealist!

Recently Don Tapscott and Anthony D Williams famous for their Wikinomics book commented recently “the rate of business model innovation has not accelerated” since they wrote their book in 2006. They are beginning to understand the reason as “it is becoming difficult or even impossible for companies to achieve breakthrough success without changing their entire industry’s modus operandi”

I would suggest we have to go even further on this observation, we have to change entire society modus operandi over to ‘more is less’, away from constantly increasing consumption and growth. Otherwise in the 21st century of a very crowded planet, already highly stressed in its resources we will be facing a very tough, bleak world.

Taking off the blinkers

It is time to take off the blinkers and find alternative ways to put innovation to work. Are you an optimist or pessimist? Can innovation be put to work and be so radical to alter habits of lifetimes? Can societies recognise and reward ‘more is less’ as a viable alternative to today that pushing consumption is simply not sustaining- higher growth through increased consumption is a road to depletion? Seemingly necessary is a huge shift away in how we manage in society in what we seem to be told of our current planets problems. I have to admit, privately, sometimes I wonder where it will all end?

It is time we made one of those extradordinary  steps on how we value progress and put to work innovate solutions in completley radical new ways, of ‘more is less’ as the sustaining and rewarding path that societies all have to work towards.

Learning to absorb new knowledge for innovation

In a blog I wrote in November last year entitled “Moving-towards-a-more-distributed-innovation-model”(  I outlined some thoughts on the flow of knowledge in a distributed innovation model and discussed the Absorptive Capacities more from an internal organizational perspective.

Increasingly we are looking outside for new knowledge that needs internally managing.

As organizations seek increasingly outside their own walls, the appreciation of how they are managing knowledge, learning and interpretating this is becoming a critical aspect of open innovation to be successful. There is a growing need to absorb, integrate and apply this in new and novel ways for accelerating the innovation performance.  The more we seek, the more the knowledge increases in complexity as markets are rapidly changing. The more we are relying on knowledge flowing into the organization the more we have to strength our inter-dependence and collaboration efforts to extract the knowledge we are acquiring for it potential value. Are organizations recognizing the value of structuring their knowledge flows? Do they have the right learning mechanisms to accelerate and exploit new potentials from this knowledge?

Organizations tend to be set up for incremental learning.

Often the markets we operate within are volatile and suddenly change. Our capacity to change is often governed by the new knowledge we are provided. To make a change beyond incremental learning we need a different path of learning, we need often new capabilities to learn. We all tend to place what is being said to us as highly situational and we often interpretive it in the way that we know, we reject alternatives to see things differently and as such we do not spot the innovation opportunity that was actually in front of us. We look for what we know. This is sometimes called being locked within your own ‘competency trap’. To move away from this risk we need stronger learning mechanisms, a change in the path of learning.

Understanding Absorptive Capacity and how it works

“Absorptive capacity” is a term introduced through some academic research by Cohen & Levinthal, back in 1990 to describe an organizations “ability to recognize the value of new, external information (knowledge), assimilate it, and apply it to commercial ends”. Since then there has been significant academic contributions for exploring and validating this, in order to improve innovation performance and competitive advantage yet it is still not well integrated into our innovation process.

What we do need is to improve our HR management systems to build a more efficient transfer of knowledge throughout the organization to leverage it. This is part of applying the principles of absorptive capacity as we increasingly use more networks, external partners and collaborate with others we are accessing wider skills, inputs and competencies and we need to learn what this provide to aid the innovation process. The theory goes that the more we understand, the more the innovative behaviour and capability goes up in potential, then the more we have in richer innovation choice .

The Model of Absorptive Capacity explores potential and realized knowledge.

The Absorptive Capacity Components

The need for a distributed organization innovation knowledge system

In some studies by Van den Bosch et all (2003) they suggested the need for three combined capabilities to manage and absorb the flow of knowledge coming into the organization

  1. System capabilities that are used to integrate explicit knowledge
  2. Co-ordination capabilities that build upon teams that establish the routines for structuring communications
  3. Socialization capabilities that begin to share a ‘certain’ ideology, understand the potential of new paradigms and work towards interpretating tacit information for the good of the community.

When organizations are acquiring new insights, new knowledge that is not as closely related to their existing knowledge base there needs to be a very active set of efforts to manage this new incoming flow so as to extract all its potential value, to absorb it and disseminate it across the relevant parties within the organization. Having the three capability parts structured clear helps establish different areas of capability focus and embed it more fully.

Can you imagine the need for rapid learning of leading-edge knowledge that is required to be absorbed within the company, these require dedicated structured learning, and these cannot be left to individuals or ad hoc measures. When you are learning anew you are searching for cognitive structure, managing implicit, often un-codified knowledge (tacit) that is difficult to transfer and also increased complexity, where you need to absorb a greater range of ‘components’ and apply new‘ architectural’ knowledge. The difficulties multiply if you do not recognize the needs to structure knowledge but to explore it in more open unbiased ways.

The ability to use external knowledge has three sequential processes.

A)     Exploratory Learning– recognizing and understanding the potential value of the new knowledge that lies outside the organization

B)      Transformative learning– dispersing and assimilating the valuable new knowledge

C)      Exploitative learning– using the assimilated knowledge to create something different in knowledge or product and seek to exploit this in commercial ways.

The more open Absorptive Capacity Process leading to understanding and outcomes

The more ‘open’ Absorptive Capacity Process

The call for managing the effective use of knowledge

One of the central drivers of the competitiveness of organizations is its effective use of knowledge. It is the generation, acquisition, integration and application of (new) knowledge needs managers to manage learning. Knowledge underpins innovation, the more it changes, the more it becomes complex to discover, the more we have of this real need to upgrade how we experience, experiment and absorb learning. This needs structuring. As we absorb more external knowledge from our collaborators the need is to organise this well. Absorptive capacity needs to go beyond good theories into increased application. Absorptive capacity is an integral part of an organizations innovation capabilities and its healthy development is a real significant dimension of innovation management that we all need to consider well.

The importance of managing our intangible capital is the key for today’s innovating business.

Today, we are valuing organizations in completely different ways than some years back. In the past we were valuing organizations purely on their tangible assets, the ‘hard’ (easier to) quantify assets, shown on the balance sheets as the basis for the value of the organization. Today that is not the case; it is more the off-balance sheet bound up in networks, relationships, connections and the ability to manage the fluidity that is occurring constantly around us, and the organizations ability to respond appropriately in seeking out improved, new value through better innovative offerings .

Intangibles are providing the new value system equation to focus upon

We are valuing the knowledge perspective far more and this is increasingly recognizing the importance of the intellectual capital that makes up the organization. The more intangible assets are being recognized as the valuable aspects of the potential future of a business. These are the more ‘dynamic’ parts that come under human capital (competency, sharing, collaborative, learning quickly, collective competence and enduring value for the future), the innovation capital (creativity, fast prototyping, risk taking, empowerment, replacement/ renewal), the relationship capital (responsiveness, retention, connections), and customer capital (the customer base, the potential and the ability to connect) and finally, the process capital (productivity, cycle time, process yield, on time delivery) is perhaps more traditional that has many intangibles that are becoming far  more tangible in outcomes today that are highly valued.

It is these five capitals that together are making up the intellectual, more dynamic, capitals that are valued far more today than traditional assets ‘seen’ on a balance sheet (buildings, machinery, the physical more static assets).

The real value creation capabilities of the five intangible capitals

It is the ability to combine these five capitals (human, innovation, relationship, customer and process) that offers the real value creation capabilities of organizations yet these are the very things ignored in existing current balance sheets, not valued in the assets of the organisation. Surely this is wrong and indicating we need our accounting systems to catch up and capture the real valuable picture within our organizations?

These ‘capitals’ are often well hidden yet they are the real, ongoing value creation capitals. How can we identify these both internally and externally in better ways to give us a clearer understanding of the investments that are going into developing these capitals to measure against the results?

How can we develop the right story of how the organization creates value? It is by bringing together these more intellectual capitals to reflect the shifts that have been taking place in knowing what is within the organizations actual asset base; the assets that create the wealth.

We need to re-think the old world value delivery systems to assess organizations

The value chain that is good for one day is often not good for another. It needs to be constantly challenged and changed, to meet the consistently ‘disruptive’ conditions being faced. We need to have an effective ‘innovation machine’, we need to have increasing reliance on open networks as the new key assets and a really clear understanding of the new dynamics of power, the difficult-to-replicate capabilities and competencies that are made up with the five capitals mentioned above. Within these five capitals lay the unique competitive edges that offer real advantage that cannot be duplicated or replicated or often matched easily. These need increased focus.

An organizations ability to flourish in today’s hyper competitive environment organizations will be totally dependent on their abilities to manage the five capitals that make up most of its intangibles. Often these are left as not as fully realized in their potential value. Unlocking these you unleash the true potential of organizations to be constantly ‘dynamic’ in their activities to adapt and respond, listen and learn and leverage their unique assets.

Finding the right solutions – moving intangibles to tangibles.

Are we focusing enough on these five capitals of human, innovation, relationship, customer and process? Perhaps until we learn how to capture and measure their true value they will remain hidden from plain sight and still constitute investment risk for many. This applies to both inside the organization and in external understanding. Internally if you are not consistently measuring your capitals you don’t leverage them fully and as these five capitals are often intangible, they are not well measured. Equally investors are very reluctant to invest without this necessary insight to judge the organization’s real value creation potential, and so they simply rely on historical data, old formats of accounts and balance sheets and then simply apply selective discounts to the investment premium.

We need to find better solutions to quantifying and qualifying the intangibles within organizations, by making them increasingly more tangible, so all can see and value them for their real wealth creating potentials.

We need to provide tangible outcomes from managing the intangibles, as these are making up the really important wealth creating capital of the organizations and this is where internal  investments need to be well positioned, clarified and defined. To create new value you need to innovate, to innnovate you need to invest in these five (more) intangible capitals but you need to know where, why and what you are getting for that investment. You need to understand these capitals and make them tangible for everyone involved, it is the key to unlock your latent wealth.

The forming of new structures- the business ecosystem of innovation federations

At present we are seemingly in a state of flux, we are learning to move from linear innovation models into more dynamic ones that are increasingly forming around innovation ecosystems.

Our whole understanding of innovation is changing; we are evaluating and changing our existing focus from closed (internal orientation) into open (external orientation) thinking for accelerating and improving our innovation performances.

Regretfully we are not yet fully equipped to manage within these new innovation ecosystems. We need to give the factors an increasing focus and lead into a better emerging theory of leading or good practice.

Measuring innovation in different ways is becoming important

To start we are today measuring innovation more on the following aspects or should be:

  1. Linkages– content and productivity of relationships, alliances, collaborations, interactions, networks, clusters and all the complementary aspects and assets deployed to do this
  2. Knowledge engagement– the ability to attract knowledge into the organization, through greater content and value, through the people involved and the way we access, anchor and diffuse this new knowledge.
  3. Intangible assets– the increased focus on providing improved climates and cultures to allow innovation to thrive and the struggle (still) between short term and long term payback. Increasingly people and the combination of the intellectual capital will be the central focal point of innovation capability building.
  4. Conditions for innovation– the ability to sense and respond to shifts in markets, competition, and evaluating changing and variable demand as well as assess the impact of changing policies, global impact points, recognizing changing patterns, the effect of non-linear dynamics, understanding adoption/ diffusion rates  and skill relevance are far more recognized.

These help build greater outward orientation and awareness for more open collaborative innovation to take hold.

Our pressing need is to review the Theory of the Firm to address the effects of Ecosystems.

In simplified terms, the theory of the firm aims to answer these questions:

  1. Existence – why do firms emerge and how and why do they thrive or die
  2. Boundaries – why is the boundary between firms and the market
  3. Organization – why are firms structured in such a specific way, for example as to hierarchy or decentralization? What is the interplay of formal and informal relationships?
  4. Heterogeneity of firm actions/performances – what drives different actions and performances of firms?

Theory of the firm is an analysis of the behaviour of companies that examine inputs, production methods, output and prices and today these are dramatically changing. Firms are required to operate in ecosystems, often multiple ones and this begins to alter our older theories that fitted more in the 20th century but not in this changed 21st century of globalization where speed, scale and scope increasingly play a more important part.

We need a new theory on the Organising Network of Firms with Ecosystems.

We are forming in many different ways significantly more relationships that matter to each organization, so as to deliver innovative products and services that would not be able to be delivered by only having the one organization attempting it, unless they are prepared to undertake the growing costs of more complexity. Often this involves designing the architecture, platforms, construct new standards and be equipped to integrate and adapt different members of a community, who have something relevant to contribute. Managing this growing form of complexity is challenging old theories, boundaries, organizations and how they exist going forward.

Ecosystem innovation is more today about managing beyond the immediate known’s found within one organizations limited focus of the world. The organization that envisages a changing world needs to often organize around ecosystems to seek and influence the broader effects of where they presently compete to bring about some kind of more substantial advantage or respond to survive. (an example is the Android ecosystem vs. Nokia’s race to catch up). The race is to gain advantage and often try to dominate and influence the future direction a market will take.

Opening up our thinking towards ecosystems has a powerful effect

As we begin to open up our thinking to ecosystems these are having a powerful effect on our perspectives as different partners contribute to this often ‘emergent’ thinking. This becomes more evolutionary and requires a completely different way to manage these ‘relationship contract’s that are forming around a given concept or platform. They require increased interactions within the community and need far more tightly controlled activities to gain the synergies and effects from working within an ecosystem.  Relationship management needs to keep focusing on enhancing, driving innovation and knowing how to adapt this within the whole concept. No easy task.

Ecosystems that produce ultimately new business models often rest on a large capacity for agility within the participating organizations. Internal capabilities and competencies often get highly stretched by the new dynamics taking place, you need a strong orchestrator of the ecosystem to manage these challenges and many cultural biases that can blind a ‘line of sight’.

Aligning partners on a platform needs-basis is very different from aligning them to just one organizations needs. In the past we adapted to meet that specific requirement  of that one dominant organization as they controlled the process. Today you can argue differently, why what you see as needed is not the best and maybe clearly different that first envisaged and it is better and evolutionary but demands more change and disruption both internally to manage it as well as how it is delivered to the end beneficary. It allows for more breakthrough innovation, greater challenging of the existing status quo and often taking organizations out of their existing comfort zones.

Of critical importance is nurturing the health of the ecosystem.

There are three fundamental aspects that need to be considered

  1. The value to each within the ecosystem. These values may be different but it is the recognition that the platform provided is the best possible way to deliver their individual part of the solution.
  2. Critical mass of the parties within the ecosystem gives it that certain robustness. The combined effects in the ecosystem are greater than the efforts and sum of individual effect.
  3. The successful ability to seek continuous performance and improvement by the way each learns. This equally achieves improved benefits and collaboration effects, so as to give the continuous upward push towards delivering a new innovation concept. This co-evolution or joint learning can lead to optimization effects, increased relevance and generating synergies unlikely without some creative friction along the way.

Ecosystems are evolutionary and do have ‘normal’ life cycles

For the health of the innovating ecosystem you need to go through four stages

  1. Birth– the buying into the initial concept, the pioneering and focus on the critical acquisition of key partners, market understanding iterations and the founding principles and roles each party is required to play and contribute
  2. Expansion– as the ecosystem knowledge and activities expand you will need to have scale and scope built into the system. Standards need to be actively worked out , platforms established and robust, dedicated resources enabling and coordinating activity
  3. Leading & Evolving– This could be possibly the ‘red queen effect’ that drive the evolution but you do need clear roles, that include network orchestrators and more than likely one dominant partner who manages the ecosystem. This party needs to ensure bargaining techniques, resolution management and an amazing set of skills not to throw something out that might have hidden value. One party needs to ‘mind the (open) commons and manage the IP across the ecosystem not to allow it to stop the collaboration. This type of leadership is going to be a rare, valued set of skill sets.
  4. Self-renewal – it is the ability to deliver on the ideas otherwise the value of contributing to the ecosystem has no value. The ability to understand the potential for delivery is critical in any assessment as non-renewable ecosystems will not lead to ongoing evolution and may have very specific or limited advantage. Where ecosystems seem to work is where the goal usually has to be for a BHAG (big, hairy, audacious goal) that delivers clear differentiation and increases revenues multiple fold.

You must match your organizations ability and access the fit within any innovation ecosystem.

Operating within an innovation ecosystem requires considerable evaluation. Does the synthesis of your new offering by working within the ecosystem federation combined with other organizations create a coherent customer solution that is more than likely going to disrupt the existing market? Can you afford to participate or go it alone? Collaborations that have increased levels of complexity have often higher risk by managing within ecosystems. You have to really assess that all the partners can deliver their parts and usually this is a complete unknown so you have to work through a set of tough strategic questions to get closer to the knowns. These would include but not limited to:

  1. How does your offering measure up as critical/ attractive within a ecosystem federation that will add value.
  2. Knowing where you fit within the value chain. Do you have dependencies on others, can each satisfy their commitments on time, what resolutions/ warning system needs to be in place and getting a clear understanding of risk of failure by others within the ecosystem.
  3. The higher the evolution for the final customer, the higher the delay in adoption as a risk so you have to be clear on the ‘returns’ and estimated timing to manage your expectations.
  4. The more partners within the ecosystem the more complexity and risk. The dominant party needs to provide some compelling arguments on vision, potential effects and understanding of the changes caused in competitive dynamics by joining.
  5. Answer the basis questions of when, why, how, where can we compete within any federation of parties. You need to pace your resources to match the process (see below)
  6. Maybe you can reduce your involvement (and risk exposure) by becoming a sub eco-system provider to support others within the platform.

Just remember this as a summing up.

In ecosystems this remains a key insight The dynamics of the system will be dominated by the slow components, with the rapid components simply following along.” Slow constrains quick, slow controls quick”.  To manage ecosystems is hard, it is an adaptive system.

Think carefully through any move to join innovation ecosystems, they do have potentially a high, immensely attractive return, if managed well, they are nearly always disruptive to the existing markets and highly valuable to the participants. There also is a big ‘but’ as the pathway to get to that ‘success point’ is full of potential risk and emense ‘spent’ energy.

Think this carefully through. Hence we need far more theory and informative discussions on innovation within ecosystem federations to help us all form around (or not) new structures for innovation.