Is Innovation Capital important to us?

Your new core is innovation capitalPerhaps we are failing to recognise the importance of our Innovation capital, stopping to ask how really valuable knowing this is to us?

Should we care, does it matter? I would argue it does, increasingly so. Within our innovation capital lies the future of the organisation and holds one of the really important ‘golden keys’ to the sustaining performance of the company and its future growth potential.

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 makeup, the value structure around the offering, and this is made up of distinct capitals that drive the new business towards success.

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Rethinking the measuring of innovation

Measuring Innovation 1I’m a little tired of the lack of original thinking that goes into measuring innovation. Most trot out the same old chestnuts, including ‘return on investment’ as always, as near or at the top.

Leaders want to hear this, the sad truth is getting a ‘decent ROI’ for innovation constructed (note constructed) is really hard. If the innovation is new to the world, how can it have a clear financial return on investment until much later, much becomes an ‘educated’ guess?

We need to appreciate new innovation balance sheet thinking

Why a balance sheet thinking? There are hard and soft measures to measuring or judging our innovation. It goes way outside financial numbers. Would we have seen the emergence of Facebook, Apple Watches, Uber etc etc if those that were determining success from their investments had actually insisted on guaranteeing the ROI before launch or within short time frames, that many of our established organizations insist upon? No it was the belief and ‘seeing’ the potential that encouraged those investing to make the initial investment and then continue on ‘future’ returns.

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What makes up your innovation capital?

A new core Innovation CapitalIf 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.

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So what drives value creation?

Standing OutI seem to be reading a lot about the concept of value creation recently. It seems to have the same ‘heady vaulted position’ as innovation in that we all talk far more about the ‘promise’ of it. So what is behind value creation? What drives it? What will allow us to stand out as the place to invest in?

So what is value creation?

Value creation is highly dynamic, it is going on all the time and can increase, decrease or transform in different ways when you exploit your different capitals that will change and reflect your organization’s business activities and eventual outputs. This is when you can begin to see the value created by the use of deploying all the capitals.

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Are we measuring what really matters?

Time to adaptToday, it is the non-financial performance, made up of mostly the intangibles within organizations, that is accounting for upwards of 80% of present investors’ valuation of our organizations.

Yet do shareholders really have the knowledge to judge the real source of value creation inside our organizations? I think not but they should. Does Management actually?

We lack a real line of sight into the true value of our organizations.

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Work to be done is innovation’s invisible hand

Back in 1776 Adam Smith in his book “The Wealth of Nations” discussed the concept of the ‘work to be done.’ This has fascinated me for what we need to do for achieving any new innovation, it is the ‘work to be done’ that generates and pushes boundaries beyond the existing.  This ‘classic’ book has become regarded as the one that described the birth of modern capitalism as well as economics.

Adam Smith also introduced the concept of ‘the Invisible Hand as a core part of his thesis, that man’s natural tendency toward self-interest – in modern terms, looking out for No.1 – results in prosperity, not just for the individual but for society.  ‘The invisible hand’ is essential for free markets and capitalism, through how it generates wealth in competition for scarce resources. By maximizing their own interest as the direct intention, this ‘invisible hand’ also stimulates those around you and in the society you belong. As you seek to leverage your own assets, you are promoting society as a whole. Today this can be more by design, or through an unintended consequence of how knowledge flows.

Arguably the ‘invisible hand’ can today be seen as realizing all our potential, individual and collective, exploiting all available existing assets for benefit and gain. We call these our tangible and intangible assets.  Often overlooked, or under-appreciated are those more intangible assets, that can significantly differentiate, are surely today’s ‘invisible hand?’

The make-up of intangible assets

There are many thoughts around what makes up our intangible assets but these can be summarized as made up of 1) human assets– the knowledge, skills, experiences, our abilities to organize these within our thinking, 2) structured capital as the pool of knowledge made up in our institutions, our rules, norms, knowledge diffusion across broad communities, 3) the social capital that forms today more around our networking that relies on infrastructure, access to knowledge, exchanges and relationships.

It is the ability to combine our tangibles with our intangible capitals that allows us to think and explore all that is around, to discover and exploit the potentials within this ‘work to be done’.

The volatile world we are dealing with today.

Today we seem to live in more volatile times where it becomes more important for us to focus on the work to be done is, not the work done. We have to keep focusing on the future. The ‘work done’ is the accumulated knowledge; the built up ‘stock’ that has contributed and been embodied in the organizations results to date, seen in the past where innovation has contributed in part to this. We have built up ‘know how’ and competencies in the ‘work done’ but this needs improving upon and challenging.

The ‘work to be done’ is where we push forward and explore greater possibilities. Part of this is focused on how we are going to adapt to change, to add more knowledge. For instance, we have operated in the past in far more of a mass production era, where systems could be designed for stable, more homogenized markets, where we could extract the maximum effectiveness and efficiencies. The ‘work done’ was equivalent to the ‘work to be done’ due to this predictability. This is not the case anymore, markets have fragmented, and we set about to design for the individual’s needs or in modular approaches for example.

We are in a ‘race’ to win

Today much has changed; we are faced with rapidly evolving technology diffusion. There is a race among nations and organizations to ‘win’ in global markets. This is causing increasing disruptive forces to come into play, where constant change is becoming more the norm and the emphasis has changed from ‘just’ efficiency and effectiveness but to be constantly adaptive, fluid and have increasing agility.

We focus far more on building in ‘tailored’ service, based on knowing the customers’ needs and understanding, on designing around new business models and in this, the ‘work to be done’ is becoming far more important than the ‘work done.’ It is the realization that it is the contribution of the intangibles assets, our growing intellectual capital, are becoming the real differentiation point to exploit the future potential.

The intangible assets provide the intellectual capital base, these allow us to react to changing demand for the required future value creation so we can effectively compete and sustain ourselves. This constant search for the ‘work to be done’ is fueling what has to be done.

Work to be done is the make-up of learning new skills, develop a greater dexterity and judgement based on what we need to ‘actively’ go out and seek. ‘Work to be done’ is searching for our future growth and well-being and this is derived through our future innovation activities. So much of this is made up of the intangible parts that can combine with what we know, what we have previously achieved, in work done, to provide the new wealth of organizations, as we participate more actively in the knowledge sharing economy of today and the near future.

We can’t remain islands of limited knowledge, we must seek out others to combine and achieve the work to be done. We are arguably in the network era, yet so many are failing to optimize their intangible assets and exploiting different organization dynamics that would greatly benefit their growth, especially when you operate with scarce resource.

Today’s need is for increasing interactions, linkages and seeking new knowledge to stay competitive in global markets.

As we rely increasingly on our growing ‘interactions and linkages’ we need a system to manage this. Absorptive capacity was introduced as an idea and first explored by Wesley Cohen and Daniel Levinthal in a 1990 article (“Absorptive capacity: a new perspective on learning and innovation”) and can provide us the knowledge learning path for building a real “knowledge exchange” process. Innovation ‘feeds off’ knowledge, they are inseparable, like twins, needing each other.

We can learn to exploit innovation, both in learning internally through the process of purposefully searching, doing and using what we gain and externally, by exploring new discoveries, collaborating, exchanging and generally interacting and so gaining fresh expertise, insight and knowledge.

As organizations seek increasingly outside their own walls, the appreciation of how they are managing knowledge, learning and interpreting this, is becoming a critical aspect of a more ‘open’ collaborative 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.  As we seek out more to compete in global markets, the more the knowledge increases in complexity we add more to the ‘work to be done’.

Markets are in constant flux, rapidly changing and we need to manage all the new insights. 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. There is a consistent self-interest in doing this for our prosperity as well as others – the invisible hand.

Are organizations recognizing the value of structuring their knowledge flows?

This is the make-up of much of the work to be done in managing the knowledge flows. We need to recognize the importance of this shift from (physical) ‘work done’ to (intellectual) ‘work to be done’ and reconfigure the changing capabilities and capacities required, so as to grow our future ‘wealth’ of organizations, of nations and within ourselves to learn and respond. We needs to understand that today’s ‘ invisible hand’ is how our intangible assets are increasingly crucial and need to be actively managed, for this essential work to be done.

Forget ‘work done’, that’s in our past, it is already in the (knowledge) bank, we need to focus on the work that needs to be done so we can compete and thrive, there is so much more to understand and learn from as the challenges become more demanding to deliver on our innovation efforts.

There’s so much work to be done.

Our future progress is tied up in offering meaningful work, providing that sense of purpose. Building greater capabilities to quote Saul Kaplan “are the amino acids of innovation.  They are the building blocks that enable value delivery”. We are looking at increasing “the random capability collisions” where new innovation will happen at different intersections that combine knowledge from global markets, other competitors, different cultures and a variety of disciplines.

We need to build new capabilities that are far more market orientated, from co-creation and knowledge acquisition, from sense making, tapping into collective memories across a vast network of understanding. We need to unlearn, we need to reflect. All of these are in the ‘work to be done’ to stay ahead, be relevant and compete in today’s world. A world that is far, far different from the world seen by Adam Smith and what he saw needed doing.

The value in his observations are still valid today, the ‘invisible hand’ is as important today through our successful utilization of our intangible assets as we exploit new knowledge and apply this to innovating our future. One that combines our need with societies, not just based on growth but also on well-being as well. It is knowing the ‘work to be done’ that is so necessary for innovation and much of this remains hidden, waiting to be discovered.