intangible capital | Paul4innovating Innovation Views

Recognizing it is all about Value Creation

I am reading a lot about the concept of value creation recently, it answers everything but tells us so often nothing about how it is made up or it is truly present. It seems to have that same ‘heady vaulted position’ as innovation in that we all talk far more about the ‘promise’ of it, we want it but still are not prepared to put the real effort into it to make it happen.

So let me try and explain my thoughts on value creation. So what is behind value creation? What drives it? What will tell us this is an organization where value creation seems to well invest in, nurtured, built and protected?

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 be in constant change and adjusting to 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 to build new growth and what I call “stock” that along with “flow”. I loved this explaination of the two.

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Rethinking the measuring of innovation

I’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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Exploring the Value Of Your 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 and value enhancement, let’s explore some more.

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 these innovation capitals (and their 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

Recognizing the value of our innovation-related assets is where the smart money should go, and then we need to invest in innovation capital. To gain growth and 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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So what drives value creation?

I 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.
Continue reading “So what drives value creation?”

Are we measuring what really matters?

Today, 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 so are we measuring what really matters?.

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 themselves, equally I often think not?

We lack a real line of sight into the true value of our organizations.
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Innovation requires the nesting of all capital

Innovation cannot exist without all the capitals that contribute to its make-up. Yet we simply fail to appreciate all the capitals that innovation requires. It is a real pity as they are truly nested.

Equally many innovators are simply not prepared to put in the necessary work to achieve this understanding and the organization’s innovation looses out, stuck in perpetual incremental mode, lacking in anything really new or radical.

All the capitals ‘fire’ innovation. They make innovation combustible.

More often than not when we talk within business of capital we tend to default to the financial kind. Of course providing the financial capital into innovation is vital; it provides the potential ‘burn’ but what is often understated and certainly under-appreciated is the other capitals. These have been ‘tagged’ under intellectual capital or are often ‘lumped’ into our intangible assets.

What we need is to recognize the real “nesting effect” all our capitals.

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Work to be done is innovations invisible hand

Back in 1776 Adam Smith in his book “The Wealth of Nations” discussed the concept of the work to be done and this applies so much to innovations need of where to focus our future efforts.

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?’ Continue reading “Work to be done is innovations invisible hand”

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 as intangible capital grows in importance. 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 organization’s 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
Continue reading “The importance of managing our intangible capital is the key for today’s innovating business.”