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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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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Exploring the Value Of Your Innovation Capital

Innovation Capital

Following on from my last post of “Place your future bets- invest in Innovation Capital” which outlined the significant contribution innovation capital plays in our economic growth, let me offer some further thoughts on its value to really capture and understand, so we can measure it within our organizations.

We have the three components; of physical capital, knowledge capital and human capital that are the innovation-related assets, these make-up Innovation Capital.

I have been arguing that innovation capital draws from the core of intellectual capital and its suggested (and broadly recognized) components of human, structural and relational capitals or social capital. I have previously discussed this converging up, as the ‘nesting effect’

Innovation capital needs assessing and measuring so we can understand the relationship between this innovation capitals (and its present and future potential) and organization performance. We need to know the innovation capital ‘stock’.

Why, well ‘stock’ can be ‘static’ and we need to make this more ‘dynamic’ so innovation can ‘flow’ from this constant renewing of our capitals and be transformed into new value.

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Place Your Future Bets – Invest In Innovation Capital

Value of Innovation CapitalRecognizing the value of our innovation-related assets is where the ‘smart money’ should go. To gain growth and to improve productivity is through innovation. We need to translate knowledge into new values.

When you pause and consider the make-up of Innovation Capital you realize it makes such an economic contribution and  in a report from McKinsey & Co, they have set about identifying this to produce the above summary, covering 16 countries, to understand the real value of this Innovation Capital.

These numbers are big and still don’t fully capture everything associated with innovation as much remains ‘hidden’ or ‘attached’ to other activities as well.

We need to shift our thinking on what makes up Innovation Capital

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Building upon four key wealth creating pillars

Wealth creation 1Most rooms we enter have four sides; they provide the structure to build upon. Presently in many of our economies, particularly in the West, we are struggling to find real growth; we are limited on our wealth-creating possibilities. Why is that? Our structures seem to be weak not strong.

We are certainly relying far too much on ‘selected’ pockets of economic activity to keep us going. Technology is clearly one of these. Yet our longer term forces for sustaining growth remain ‘fragile’, our structures remain wickedly  ‘out of kilter’ and we need to find stronger connecting frameworks that reinforce each other, so we can build further upon these to manage our business activities in new ways.

In most of our economic activities technology is playing a significant part in altering our habits, routines and thinking but it alone, is not enough. For technology to really give benefit it needs to be driven by our ability to generate wealth creating activity and that comes from integrating knowledge, gaining experience and being able to articulate this in better ways.

To achieve this, our business structures that we have in the past relied upon are in need of changing. They need different pillars to build upon.

Welcome to my four pillar room……..with a view

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Where innovation value resides

Often surveys and reports catch you by surprise. I’ve been working through the Imaginatik Global Report called “The State of Global Innovation for 2013” and certain parts did exactly that. The sheer difficulties that organizations seem to have to quantify the benefits and value achieved through innovation worries me.

I had previously provided a review more on the Strategic and readiness part of the Imaginatik report, in my post “The coming age of innovation in 2014 and beyond” and less so on the other part discussed, the Process and Execution part.

It is the process and execution side that have more of the deeper issues to tackle and more importantly, the one’s that take considerable time if you are tacking culture and the environment to allow for innovation. They are far more complicated to provide answers too. I feel like pushing this along, here goes:

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Value realization comes through innovation and our business models.

Everything, it seems we work towards in business, is for seeking out new value creation, for new growth, for wealth creation, for providing improved returns on the investments we have been making.

To achieve this we consciously have to set about the value capture and what contributes to its realization. This is where innovation plays such a vital part. If we don’t build our innovation capital we will certainly have a much harder, perhaps even impossible time of realizing new value. We are more than likely to just maintain our existing value or see it steadily decline. So a constant focus upon renewal is always needed. Do we consciously do that on a daily basis or just once a year at annual review time?

Value-adding activities need to be central in nearly all of our decisions. The how we can turn our resources into being more productive, more creative is increasingly becoming one our biggest strategic areas of  future investment decision. Our resources are those all-inclusive assets, capabilities and processes that make up the Enterprise.

Yet it is clear management is spending far more of their discussion time and focus on the ‘harder assets’ that are made up of land, buildings, equipment and machinery – the ‘heavy’ financial capital investment decisions. Any new investment in IT, processes, software are usually well identified in the accounting or discussed within the narratives that support the reported numbers. We constantly report on these in our annual reports to validate and justify management’s decision.

Where we still seem to remain far too silent upon is our ‘softer capabilities’ Of course we extol the virtues of our employees for their hard work, for their vital role within any result, yet we still struggle to go beyond ‘simple’ articulation and quantify this value. Why is that?

Managing the innovation ‘stock’ and ‘capital’ potential

We do need to know our ‘innovation stock’, a large part of our wealth generating capital and where it can be best put to use. We are valuing the knowledge perspective far more and with this we are increasingly recognizing the importance of the intellectual capital that makes up the organization.

We are still caught in old world value reporting systems. We are not assessing our organizations for their true ‘invested’ worth. As the more intangible side is completely under-reported we make educated guesses. We are valuing firms on what we ‘feel’ they will generate in future innovation value but those internally as well as us externally lack the real ability to measure this. Yet we can if we took the same amount of time to understand the ‘make up’ of these.

We are needing to value the knowledge perspective far more. Far more intangible assets and the knowledge available is 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), creative capital (creativity, fast prototyping, design and development, replacement & renewal), the relationship capital (responsiveness, retention, absorption, empowerment, networking), customer capital (the customer base, engagement, the potential and the ability to connect), entrepreneurial capital ( risk- taking, venturing and exploring)  and finally, the process capital (productivity, cycle time, process yield, on time delivery) are becoming far highly valued today. It is these contributing capitals that make up the unique mix we find within our innovation capital. These significantly deliver the value creating abilities.

We need to know the multiple capitals that make the true value of a business.

It is these different capitals that together are making up the intellectual, wealth generating parts. It is those that are more dynamic, the contributing parts of our capitals that should be highly prized today for the investment premium.  Yet often this ‘premium’ is often no more than an educated guess on what we suspect on past track records, assumed as the basis for the possible ‘promise’ in the future. We need to change this guessing into much more harder validation. Lets move away today from those traditional assets ‘seen’ and well measured on a balance sheet (buildings, machinery, the physical more static assets) and capture and report on the real value generating ones that create the innovation growth.

We need to make much more of a concerted effort to identify these intellectual and knowledge providing capitals and perhaps ‘house them’ under this broader innovation capital. As it is innovation that renders that different, unique set of value outcomes far more. Surely it is this innovation capital that is at the core for future wealth, that value creation potential. Innovation capital must be treated as the essential strategic asset and is it is central it needs to be far more reported upon by the management of organizations. Of course it constantly gets mentioned within the narratives by management today but often lacks quantifiable and substantive validation.

For years there has been this call for a far more integrated reporting mechanism, one that ‘accounts’ for identifying the intellectual capital to provide this better understanding. The struggle with this argument is it still seems to be a ‘pipe dream’ as management seemingly fails to understand the mechanisms within these. Can this change, if so how?

 Maybe we should reframe the measuring of intangibles differently?

Today we are operating in business environments that are highly diverse, specific and subject to rapid change. This reacting to this volatility and our ability to spot new opportunities is what is often keeping management up at night and certainly giving the investors equally sleepless nights, trying to second guess organization performance so as to make the decision to continue to invest or begin to divest.

The value creation being created simply needs articulating better. Markets and investors need the value generating perspective far better framed and explained. Today this is often random, ad hoc, left to individual interpretation in their presentation; it needs some form of uniformed framework to bring this together to allow for clearer, more transparent comparison and judgement of real value. It does need a more integrated framework of value creation.

The focus should be on value creation through the business model

Last week I read an excellent paper written by Vivien Beattie and Sarah Jane Smith called “Value Creation and Business Models: Refocusing the Intellectual Capital Debate”. I was kindly sent this by Vivien Beattie after the abstract caught my eye. It has triggered much of my thinking in the last week.

Of course! The Business Model, this is the place for us to gauge measure and gather a real sense of the dynamics that are making up the organization. Today there is certainly far more of an emphasis upon understanding the business model, so why not make this even more central to reporting?

The quality of the business models is paramount to the value proposition to the customer and this triggers even more of value identification within the value proposition, so central to the Business model canvas.

Within the business model we need to gain a real sense of the dynamics that make this up. Where is the intellectual capital being applied to create new innovation, where are the new business opportunities? It is the abilities to ‘connect’ these, in how we acquire, combine and utilize those unique and valuable resources with the business idea. It is this dynamic ‘combination effect’ that delivers the value (proposition) to the customer.

The Business model is the new unit of analysis for evaluating future value

Arguably the business model is holistic and is becoming increasingly the new unit of analysis, that spans the organization and ‘articulates’ its capital and strategic value capturing parts.

Can we achieve a more integrated set of disclosures that combine the Business model, its strategic approach, what makes this up and clarifying its value creating process?

This potential approach does need to place a much heavier emphasis on the innovation capital and all the knowledge creating aspects that make up intellectual capital. It would need a significant shift in management’s understandings as they would need to articulate the critical components far more, they would have to find a common communicating language. Where better than the ‘heavier’ use of the business model canvas or the layering structures that makes this understood?

Externally we can also judge far more the potentials within the stated ‘interactions’ between the critical components of the business model. Management does not have to ‘give the store away’ in their competitive position to its competitors but they certainly can do a better job to convey much of the dynamics that make this up, in better, thoughtful ways. Make this more financial contingent for future investments.

Beyond narrative reporting, we need to push further.

Narrative reporting has been suggested as the step for this to happen. To make the business model an essential mandatory part of the management reporting. I think this can even be pushed further. Whenever management has been ‘pushed’ by regulatory forces it has taken the time to learn and understand the parts that make this up. Our intellectual capitals are part of this learning as equally knowing the ‘dynamics’ that make up the innovation capital becomes essential.

The business model, the intellectual capital and the innovation capital simply make up such a significant part of the Value Creation process. Realization of this ‘make up’ and understanding its critical connections is needed far more today to understand. Knowing these can move us towards value our organizations far better than we can do at present.

Communicating the value creation and business model is critical today

Today and in the future, it is the ones that can articulate and ‘point towards’ what makes up the value creation will attract and command investors premium. Those that can describe how they are setting about sensing and seizing opportunities by knowing the more dynamic ‘interactions’ will be in a far better shape to exploit and capitalize on them.

The organizations that understand their unique mix of capitals and how it is made up in this broader sense, will be able to deploy their innovation capital towards the ‘value proposition points’ far better. These will will be through constantly evolving business models, to convert opportunity to their gain, repeatedly by directing their innovation capital far more effectively.

The key today is they need to know what to invest into as the critical resources and this is far less the ‘hard’ assets but more the softer competencies, capabilities and capacity parts that are made up through knowing what contributes into the innovation capital.