If someone came to you and asked the question: “tell me what makes up your financial capital?” I expect you could answer this fairly comfortably. It might need a little added help from your finance department but you could produce and show significant details that we are all ‘schooled’ to understand and generally have accepted, as under common definitions and standard practice.
Our businesses are measured constantly on their financials, we produce a constant flow of reporting documents that provide useful insight and allow for a more informed judgement by present and future investors on the health of the company. We are ‘wedded’ to our financials and ignore the real value within our organizations of all the other critical capitals that generate and strengthen the business.
What if that same person came to you and asked instead: “what makes up the innovation capital of the company?’” could you answer this as clearly as the financial one – I would suggest most probably not. (By the way, if you feel you can then please let me know I would be more than interested). We are focusing more on past performance and not future generating potential by staying fixated on just the financials within all that makes up our organizational capital
So what makes up our innovation capital and why is it important to know?
Should we care, does it matter? I would argue it does, increasingly so. Within the innovation capital lies the future of the organization and holds one of the real golden keys to the sustaining performance of the company, or not.
The generally accepted view is that Innovation boosts a company’s earnings, speeds growth, ensures an advantage over competitors, and greatly appeals to shareholders. Put another way, businesses that deliver earnings growth based on a continuous stream of new products and services and new ways of doing business capture the innovation premium.
So tell me, why are we seemingly so bad at identifying what actually makes up our innovation capital, apart from some sweeping generalised statements attached in the accompanying comments within the financial result statements?
We need to find a way to unlock this as we are constantly being pushed for new business models that create, deliver and capture value. It is in the entire make up, the value structure around the offering, and this is made up of distinct capitals that drive the new business towards success.
How do I define innovation capital?
“Innovation capital is the sum of all that promotes the development and changes required for achieving innovation outcomes, within one organization or its broader networked environment, for market place advantage”.
“These are made up of the resources, processes, knowledge and capabilities, that are constantly evolving and highly dynamic to build greater innovating capacity.”
These innovating capitals build upon the capabilities of ‘sensing, seizing and transforming‘ so as to build new capital that focus more upon the dynamics within innovation. You are searching for what makes-up and provides the true value creation in successful outcomes; in final product, services, knowledge understanding or executing within further business models”
We need to understand what makes up innovation capital far more in the future.
Mostly this innovation capital comes from the different intellectual capitals, those unique sums within each organization, of knowledge made up of our human assets, organizational structures and social partners making up the organizations eco system.
It is when we bring these together in different, evolving ways we transform the knowledge into new economic value, through this organization and personal actions. Financial capital cannot do that, it can only fuel the other capitals.
Within these capitals lie the three primary components of intellectual capital: human capital, structural capital and relational capital. These do the heavy lifting to generate the value in the capital.
Human Capital is perceived as the knowledge and learning abilities of the human resources, it primarily as comprising knowledge (explicit and tacit), skills, intellect and talent of individuals.
Structural Capital provides the organizational mechanisms and architecture for retaining, packaging, reinforcing and transferring knowledge along business activities.
Relational Capital represents a firm’s accumulated knowledge and ability to absorb, exploit and extend knowledge from its relationships to create, develop and maintain conditions that serve the interests of both the firm and increasingly its principal external partners.
Increasingly other capitals are being given increased focus
Technological Capital includes efforts in R&D, technological infrastructure, intellectual and industrial property.
Organizational Capital includes elements such as organizational culture, values, attitudes, information and telecommunications capability and organizational structure.
Strategic Capital that builds up the layers to offer a viable business, it provides increasingly the logic and purpose that ‘connects and attracts’ and ‘accounts’ for delivering the business model, that provides to the market and delivers on the need to build and sustain the organization and keeps it viable and evolving..
We need to make greater efforts to measure these capitals, as they possess the value of all the knowledge used, combining human with physical capital to generate outputs that drive progress and future outcomes.
We are highly vulnerable unless we know what makes up our capital stock.
Financial Capital is useless on its own to generate growth unless it has its ‘feeding stock‘ and that is within the other capitals.
It is the ‘stock’ of these that generates the values. It is these unique bundles of a organizations resources and assets that give us our new innovation value, through the process and flow of knowledge and its creation, leading to commercialization. We need to constantly create fresh innovation capital.
It is the dynamic interactions and flows between the different innovation capital assets and the other intellectual assets that innovation requires for successful activity and outcomes.This is where absorptive capacity plays its vital part in structuring this process.
The hard part is valuing innovation capital as these are constantly being renewed and evolving.
Innovation capital is a set of renewal capabilities and understanding what these are is critical but today is not well understood. We find it extremely difficult to report clearly on the makeup of our innovating capital yet investors are increasingly attributing more to the intangibles, based on limited knowledge.
Determining and being able to articulate the value within these capitals would be truly valuable and would help us differentiate between those that are static or simply repeating, and those that are dynamic, ever evolving, searching for new knowledge.
Perhaps a good example here is to think of Apple and its innovation premium.
Apple delivers on its innovation promise in products, we, as customers seem to want. They have mastered the convergence of ‘breaking’ technology, placing a significant emphasis on design, user experience,combining materials to deliver products that make that statement of quality, fulfill our increasing appetite for technology we see as increasingly valuable to our daily lives.
Then they bundle it by providing ease of use within the make-up of the product, offering closed platforms to enhance individual experiences and deliver this ‘bundle’ through the sheer generation of excitement and buzz. They seem to be able to leverage all their capitals. They build in the emotional capital, the reputation, a trust factor, raising our expectations of a future promise. They are leveraging all parts of their capital stock extremely well, on a constantly evolving platform of knowledge and learning. Can others emulate this combination effect?
How can we capture and articulate the innovation capital?
So the key to identifying innovation capital lies in its stocks and knowledge building assets and their uniqueness in the resources that make this up, in constantly evolving and learning, these are the a real strategic asset. Leveraging the ‘stock’ of our innovation capital can render different productive value outcomes.
It is our ability to ‘mix and combine’ the innovation activity that it consists of, in all the decisions and activities that occur, from the recognition of a need or a problem, through research, development and commercialization of an invention into successful market outcomes builds the capital.
Knowing this make-up of our innovation capital provides us the potential for driving our future growth. Identifying the real capital that will drive and sustain real advantage, providing the future potential for new wealth should be the essential way we measure organizations performance, not on past financial performance or personal perception, built on limited understanding.
We need greater insights into all our organizations ‘collective’ capitals
It is the ‘combination effect‘ of leveraging all our capitals that yields the real lasting sustaining values. Today, we are lost in numbers and details, financials dominate most discussions.
Until we can peer under the organizations hood a little more and understand the make up of all the capitals then we will continually fail to understand the real innovation activity that generates the value and we will always have a lack of measuring an organizations performance in any comprehensive way.
We rely too much on historical numbers, alongside a judgement of the rhetoric offered by the board about the promise of future performance. Judging innovation’s performance is based partly on current product launches and announced future pipeline where the board is typically cautious. It often make us as those investors equally cautious.We need to know more on what can and does ‘drive’ future performance that lies at its core or is being built in new capabilities and capacities.
If we had a better understanding of the make up the innovation capital, and what makes up its critical enablers, then we are better positioned to qualify and even quantify a more confident future, based on the capital that ‘feeds’ the future potential.
Holding the future back
We need to understand the strategic importance of the make-up of the innovation capital and presently most corporate boards lack any clear line of sight into this. It holds innovation back, it constrains growth, it makes us cautious of the future, if we don’t fully understand the make-up of our capital. I think It is time we did.