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.

Value is not just from within, it is the links our organizations are constantly making with others, in the interactions, relationships and the combining of the activities. The important need is to manage the stocks and flows of the capitals

The role of all the capitals is crucial to understand, they create or destroy value. It is the constant flow between all the capitals deployed that makes up the value creation process.

Our management within our organizations needs to know where this real value creation resides.

Understanding all the makeup of capitals needs to be approached in practical ways.

The place to focus is on recognizing the material components of what is making up the specific value creation aspects that will provide benefits that have been captured, understood, maintained and then enhanced for the additional value creation

Clearly, the ultimate objective is to enhance the organization’s abilities in the longer-term to appreciate the growth strategy. The more we know as outsiders of the value creation process the more likely this will attract greater investment. Often this is determined by the final product, service or business model outcome.

Today we lack the measures to judge longer-term adequately, that this is enough in organizations. We are judging them on their innovation activity going through the immediate pipeline and that judgment often lacks the real makeup of the application of the different capitals, invested in the knowledge that can provide the sustaining growth- today we are far too geared on immediate expectations and those are locked up in the short-term.

It is becoming critical to understand our sources of knowledge, it gives us the unique capital that differentiates one Enterprise from another. The intangibles today are up to 80% of the value assigned to the (market value) worth. Managing these intangibles is critical to our future. Yet, we still have a very poor grasp of how to capture these and drive this knowledge capital. That needs to change.

It is the Knowledge and Innovation combined that make the firm competitive. There is this positive correlation between these two. One amplifies the other, one deepens the other in the connected understanding. The basis for this comes from both human and artificial intelligence. As we learn to capture from both we build our capital base and strengthen our future potential. We make ourselves more sustainable as well as increasingly adaptive.

The greater the stock of knowledge understanding will increase the potential flows of innovation and this “powers” the future value creation.

Greater engagement or not?

We can leave this knowledge building to the management, just sit back as investors or consumers and simply expect increased dividends and new products. We actually need to dig a little deeper and push management to inform us we will not enjoy many of those nasty surprises when the results fail to materialize. The argument is that the investors, the stakeholders within a business, need to understand the business logic far more, to make a more informed decision to continue to invest or partner with a particular organization. That logic comes partly from the abilities to create value

Knowing the successful generation of all the intangible values and their transformation into tangible forms and how this is systematically being harnessed tends to confirm the realization of the business goals or what the possible risks are.

Organizations are certainly fairly reluctant to discuss these except behind closed doors to selected investment parties in their investor’s briefings. Making these more visible leads to greater accountability and to be ‘accountable’ you need to understand the makeup of your capitals.

The present incentive for business organizations to become more vocal in explaining their business models, their process for value creation and offering more insight on all their capitals is their need to grow and that comes from investors wanting to invest and customers wanted to buy something that has a sustaining future!

 Exposing the softer side of value creation is the key.

The need is to understand value creation is often coming from the ‘softer’ side, those often intangibles that remain hidden for the real value enhancing aspects of a business but are constantly at work, generating knowledge, understanding and new thinking. These need drawing out more.

The real capital that contributes to value creation is coming from knowing answers to these questions offered below.

Many of these can be reported upon and that would enhance the understanding and attract investment. By thoughtfully measuring and reporting upon these builds that external confidence that the business is focusing on the sustaining values relevant to its goals and growth objectives.

Just work through this list of aspects of value creation that we should be gaining insight into:

* The ways an organization is setting about combining and utilizing networks and relationships

* How are they actively advancing their creative and innovation capabilities and competencies? Are there specific frameworks and approaches.

* The ways they are actually seeking out in explicit ways that deepening of customer understanding

* The purposeful ways that reputation is being protected, quality is being enhanced

* How are the brands protected, enhanced and improved to add increasing value

* How they are capturing new knowledge internally and the ways this flows and gets translated into new value through specific value enhancing stores

* How the focusing on social issues and values is contributing to society and equally underpinning their value into both local and global communities

* What are the plans and intent to link social, environment and harness the intellectual capitals, to enhance and strengthen society and the organization’s linkage, and the outcomes being achieved?

* Where they are recognizing, strengthening and exploiting the value chain linkages

* Providing a greater depth of explaining and extending the organizations skills and capacities to learn and absorb, through advancing specific capabilities, and deepening capacities.

* How they continue to build loyalty and trust and what aspects need repairing or renewing due to difficult decisions or changing circumstances, showing a clear pathway of achieving this responsiveness and flexibility.

* How and where does innovation fit, for achieving the growth perspectives and discussing any shortfalls, through prescribed or alternative actions? Are you building a common sense of innovation purpose?

* Are there explicit innovation competencies, processes, and governance actively being managed, that provide support to the activities being undertaken and being consistently risk assessed?

* What is the risk appetite for innovations? How is this managed? How is this explained and celebrated?

* Lastly, what they are exploring in the different forms of evaluation, experimentation and ongoing assessment to ‘measure’ the real underlying asset wealth of the organization.

This is their learning journey and its growing value to all associated with this to achieve that better visibility into our organizations, Better outcomes and a greater relationship between investors and the organization needs to be achieved. I think it is possible but it is a journey many are reluctant to travel. Value often gets locked up, caught in the internal world of the one organization and so often never becomes value creation.

We need to talk about what makes up “value creation”.

Value Creation is really important to know about. Where is it coming from, what is being put into place to nurture, develop and allow its creation to evolve and spread, so it has the ability to attract more understanding for value and creation? The more we open up our thinking and ideas the more we can build from this. That openness offers so much more value creation possibility yet we don’t talk about it, we simply generalize it like a “buzz word”

There is a growing need to know where the value creation is coming from and what the management of our organizations is doing to protect and enhance it. Knowing the makeup of the material capitals that form into a value creation is so important to this. We should talk of value creation in specific and detailed ways. That gives those listening confidence it is being taken seriously and not just given lip service.

The post Recognizing it is all about Value Creation first appeared on Building Your Innovation & Ecosystem Intelligence.

Organizations have been focused for far too long around the importance of financial capital. It determines and drives organizations destinies. We are caught in a constant focus upon our achieving a return on our (financial) capital as our measuring criteria. Organizations strive for improving their ROCE, RONA, IRR,  EVA and a host of other financial measures.

As Clayton Christensen has been arguing the agenda of organizations begins and ends with the “search for numbers”. I think there is a time for changing this, we need to search for the knowledge that makes-up eventually the numbers.

There has been a distant voice for some time putting forward the need to appreciate and value the other capitals sitting within organizations. Much of the discussions have been housed under the term “intellectual capital” which denotes the sum of knowledge made up and contributed by our human assets, our organizational structures and our relationships that are developed.

These are the ‘capitals’ that transform into economic value through organization action. It is the financial capital that simply finances this.

Financial capital dominates any discussions

Yet financial capital and all its associated aspects rules, no, it utterly dominates. It totally fails to tell us in numbers alone where and what creates the value, it simply reports it.

It is this financial capital through our profit and loss, our balance sheets hides the value, or spreads it out in ways no one really understands its make-up.

Certainly those attempting to judge an organization just have to rely on a ‘history of numbers’ and some ‘selective’ market view to make investment judgements.

Equally those often running our organizations have a restricted view of where their real capital lies, as they focus on the numbers and then work down.

Today,we are  in a rapidly changing world and we need to understand it differently

The reliance of financial capital being the absolute measure is being challenged thankfully. Our business world is facing considerable disruptions from the accepted past practices, performance has become more volatile, more dynamic, more reliant on understanding that knowledge is where the value lies.

“Business as usual” is thankfully in a steep but protracted decline, the necessity today is to be constantly evolving and learning and that comes from knowledge acquisition, assimilation and then transforming and exploiting this into new value. We need to find new models for evaluating our real value and capital stock.

These ‘absorptive capacities’ are where we need to manage our knowledge flows better to translate and direct our understanding of new, value creating capital. We need to report on these far more as they offer the ‘residing’ and new stock that gives us new innovation potential and fresh value.

Learning capital needs to emerge and dominate future discussions

We need to give increasing incentives for organizations to learn. We need to judge the quality of this learning, not listen to ‘bland’ statements often presented. We need to know where this knowledge is targeted in narrative, discussions, spillovers and interactions.

What is being exploited, what is being determined in the decision-making process to give greater confidence that our invested financial capital is “in good hands”.

Keeping reliant on just discussing the financials within organizations we know is not enough. We have to force better discussions on the make-up of the other capitals, as these are still poor, left to individual interpretation and variable and we need to change this.

We are increasing opening up

As organizations become more open (open innovation for instance) the strength of linkages, of knowledge exchange, the translation of these activities is becoming really valuable to understand and focus upon more.

Through many of our activities we actually ‘borrow’ and it is then the ‘dynamic linking’ that we bring into the process, gives up the increased potential of innovation. It is the ease of learning, the ability to acquire and apply knowledge that creates the potential for innovation.

How many organizations really articulate their knowledge capital in acquisition, assimilation and transformation? Do we know how ‘path dependent’ they are- are they lagging in the market, are they simply opportunistic, are they locked-in far too much in potential downside risks.

Do they suffer from cognitive failure, do they lack the appropriate competencies to meet the constant challenges occurring around them. How much of this can you really extract from cold, hard numbers? Not a great deal.

Recognizing where our true value resides

The real problem we have is the lack of appreciation of what makes up our value, the real underlying wealth creating value, the one that truly ‘generates’. The tangible part is easier to appreciate (plant, land, material etc.) but is becoming a significantly declining part of the total sum of value of our organizations- sometimes it is only making up 30 percent..

It is our difficulties of understanding the intangibles as it is a very challenging task. Yet this has huge implications on the ‘health’ of the organizations we continue to invest in. Most organizations resort to “inferring” the value. This needs to change. The value today is in the interactions between the different components that make up our intangibles, out intellectual capital.

We are in need to identify what ‘drives’ organizations and that is our knowledge stock

For gaining and sustaining real advantage, and showing why it has the potential for creating new wealth we need to understand our capital stock.

This needs to be far more forwards looking; it needs to be more open and more transparent and it needs to ‘flow through’ the organization to find the potential to find new value from innovation. The call is growing increasingly for a new valuation model.

Static knowledge where we view financial numbers, never take our knowledge beyond what we are reading, failing to connect it and advance it is just not good enough, we do need to understand the underlying dynamic capabilities that make-up the organization. We need to access, absorb and translate our knowledge stock, allow it to flow and be developed into greater value-adding stock and innovation outcomes.

The post Struggling with counting ALL the sums of our capital first appeared on Building Your Innovation & Ecosystem Intelligence.

There is a growing need for having some dynamic tensions within the organization’s system; these helps generate the better conditions for innovation to thrive. We are learning more on the better tools, techniques and approaches available for putting the learning tensions into our work, making them more dynamic, linked and increasingly relevant to the work to be done.

1). A common language is essential

Any dynamics in the system needs that ability to talk the same language, something that becomes common and embedded to support the routines and move quicker to the concepts and solutions, as others can ‘understand’ them as well. It is through working on the inner stories and appreciating the history, it is having an appreciation of events, good and bad, it is through local slogans, your jargon and dialogues that bring people together. The power of storytelling helps gain adoption and identification to those needs for working on a common cause.

2). Creating constant opportunities for conversations

So many organizations don’t work on the ongoing conversations, design workshops, road shows and dialogue sessions that give everyone linkage and growing identification. You begin to identify your sense of purpose and value contribution if there is a consistent diffusion of messages; these should be always lead from the top or moved up and down the organization to allow for these ongoing conversations.

3). Using the knowledge that resides

Organizations like to believe they are building domains of expertise but often they are actually building the silo’s to restrict the flow of knowledge. Knowing where the right functional expertise lies, the relevant skills, experiences or relevant insights ‘reside’ is increasingly important to throw open to all, to tap into, extract and contribute. This expertise can help with our daily routines by offering different thoughts, ideas and practices that may have a real impact on how you can change.

4). Wrapping up intelligence to give it real value and knowledge understanding

The bundling of intelligence is becoming critical. It needs to be increasingly shared across the organization at real time speed. As we look increasingly outside our organizations, our focal markets sensing and seizing the information and being able to connect it, to bundle it into knowledge that has potential application or relevance allows for absorptive capacities to really come to live. Those are able to learn to bring into the organization by accessing, anchoring and diffusing that external capacity for creating and exploiting new value.

5). Capturing and extracting tacit knowledge

Our ability to capture and access the tacit knowledge that resides in all our employees is a critical issue to achieve new dynamic tension. How do we harness tacit knowledge, capture it, even recognize its value we need to encourage a continuous learning environment, we need to have clear organization learning strategies. Tacit knowledge helps us tackle the unknowns associated with discovery. The more we share, put effort into collaborative ventures the more we learn. The more we engage with external experts the more we should gain from these exchanges. Context becomes vital, as does striving for that common language and association.

6). Allowing time to explore and improve our human capital

Tacit knowledge as it becomes embedded in shared values, assumptions and beliefs you can qualify and map tacit knowledge. Our tacit knowledge increases the human capital. It can, through creative acts give strong feeling and give a real sense of commitment. The more we explore, the more we ‘ignite our passions’ but you need to consciously find the time to explore by clearing the path to allow the absorbing to take place and then extract the knowledge through putting any challenge into context, allowing time to access, anchor and diffuse.

The ability to harness our dynamics is vital

The ability to make our environments more dynamic, more engaging, more challenging, more a place to learn and contribute allows greater movement and potential for innovation and growth. A growth that is for the organization and its people, to provide all the different intellectual capitals to combine, be those human (knowledge, skills and experiences), relationship (social and through our networks) or through the structural ones you put into place (where you pool knowledge, use routines and systems).

Good use of our intellectual capitals and knowing what these are, does allow for a greater unlocking of innovation value. The more we ‘work and encourage’ our learning capitals, combining the power that lies in the dynamic linkages we can forge, in acquisition, in assimilation and then into eventual transformation then this allows known knowledge to become new wealth-generating innovation

The post Putting some dynamic tension into the system first appeared on Building Your Innovation & Ecosystem Intelligence.

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.

There was a growing recognition that a ‘flexible’ and broader set of metrics was needed, to permit time and critical mass to continued to accelerate away, so the eventual returns on the emerging business model would have the time to evolve and provide the valuation potential expected. It was the measuring of value- potential and realized – that along with the beliefs and response provided by the owners that gave ‘investor confidence’

My first thought: do we know enough about the thinking for VC’s on how they judge investment?

Venture Capital is a driving force behind entrepreneurship and innovation. It fuels the economy, creates growth opportunities for companies large and small and, it funds the business development strategies of major corporations. What can we learn to apply in established organizations for judging innovation differently so “risk” becomes higher in factoring in so as not to reject ideas far to early in their life but to encourage them.

Thankfully the venture capital community has a different set of measures to judge the longevity and potential. Clearly financial returns always loom within the thinking, possibly even more so, as those investing funds are highly focused and demanding returns. Yet it is more considered by the VC on where to invest venture capital to gain real ‘return’ becomes a portfolio of investments.

There is this continued recognition that many investments made are lost in a portfolio of risky investments. The thinking is based upon how we assess ‘our’ investment, in how many ventures as ‘we’ recognize many will be losses before we hit the jackpot and recoup all the investment over the one winner to cover all the numerous losers and make significant returns on top.

Why do we not measure the health of our innovation investment far more?

In many ways our established organizations can move far more into a portfolio of investments as they should have the confidence in their knowledge, competencies and people to make ‘greater’ investment. The problem is they most probably don’t have this confidence and part of this reason does lie in a narrow range of measurements they are taking of the ‘return’ on their investments and not looking much harder at the ‘heath’ of the organization to give this confidence.

Why do established businesses ignore the investment rationale for delivering real innovation winners that can change the fortune of their business? They often leave this ‘venturing’ to others to search and achieve transformational solutions, ones that can even radically alter existing business value propositions and then we hear them ‘crying’ over being disrupted or ‘we’ did not innovative enough? Something needs to change.

But while Venture Capital is an integral part of the global economy , the unique inner workings of venture capital firms and their processes are sometimes suggested are a well-guarded secret, so we need to tease these out and find ways to adopt many of them in our established organizations thinking as well. There is perhaps no ‘secret sauce’ just investor confidence and the imperatives to make returns or be themselves out of business.

I know some of our established organizations are attempting to do this ‘venturing’ yet we do need to ‘pool this thinking’ to open up the measurement for innovation investment in the future to be part of each organizations mind-set for measuring success.

Here are my contributing thoughts to take the health of innovation as more central in our measures.These are not VC related but underscore believe, commitment and the drive towards structured learning, in a more balanced way.

Measuring more of the ‘health’ of innovation within established organizations

Shown below are a list of the factors I feel can be major contributors (far from exhaustive), firstly into the soft side of our balance sheet that is made up of culture, climate and environment as our creative and engagement capacity. This side of the innovation balance sheet gives the commitment and sense of belief that can encourage investment, as the people side equates to the measurement of the team within a new venture. It determines much of the belief this is worth investing in.

Some of these initial suggestions of course are inter-changeable or become reliant on each other, but it gives a decent understanding of what makes up the balance sheet needs we all must have in place to have a thriving innovation organization. It needs to address the creative, engagement and relationship part that innovation always needs.

Informal mechanisms (the contributors to the left side of our innovation balance sheet)

Those that are leading to improving the softer aspects of innovation (our left side of the innovation balance sheet) that would contribute to its build and health.

• Uncovering good and emerging practices in innovation
• The value of good leadership & distinct culture creating the linkages
• Targets and partner identification for relating and collaborating
• Skill of working together effectively – team building, encouraging diversity
• Integrating external parties to leverage through networks and relationships.
• Framing ambitions and plans of strategic targets and relating those to individuals
• Engaging the outer peripheries to capture insights and needs to drive engagement
• Exchanging expertise and seeking synergy in exchanges
• Story telling/ narratives, those relating and explaining, sharing and extending
• More bottom up engagement in formulation – sharing and informing
• Seeking individual insights, encouraging an open learning environment
• Developing the agility to quickly react to changes, effective and decisive intent
• Work on speed, external orientation and improvisation,flexible and adaptive
• To promote “doing more with the same”, less rework.
• The CEO acts as the central source of encouragement and determination
• Encourage informally at all levels in exchange

The formal mechanisms (the contributors to the right side of the innovation balance sheet)

Those that contribute to the make-up of the harder aspects of innovation or our right side of the innovation balance sheet that build this part, beyond ‘just’ financial.

• Ingraining innovation as a corporate function
• Determining how you lead and manage this, how you develop this out in its parts
• Identify the constraints , articulating the resolutions, recognizing the boundaries
• Optimizing the process and structures, constantly reviewing to improve
• Determining the allocation of funds to offer the balance needed to achieve the goals
• Innovation portfolio management designed
• Type of openness to innovation flows to encourage and drive outcomes
• Embedding technology and capacity for rapid experimentation, and discovery
• Rapid ideas, discard failing ones & triple investment on good ideas
• Distance from Customer – determining the importance and setting about the connecting
• Ingrain as a corporate functionality the need to always be conscious of greater alignment
• Determining how you lead and manage through governance and design.
• Identify the constraints and boundaries, pushing and probing
• Optimizing the process and structures on an ongoing basis
• Determining the allocation of funds into the different framing activities
• Innovation portfolio management, striving for value, impact and return
• Type of openness to innovation flows and external engagements needed
• Embedding technology and capacity for rapid results and early wins
• Rapid ideas, discard failing ones & triple investment on good ideas, experiment and explore
• Involvement from both Customer and other stakeholders within your innovation process

Irrespective, for me, the health measuring equation you decide to follow has to be robust

It clearly has to account for a more holistic view of innovation – a more balance view of what ‘makes up innovation’. We need to constantly focus on the outcomes, less on the inputs or outputs, as although these are valuable to measure the effort being put in, it is my believe we should be mostly focusing on measuring the outcomes, those that are successful in learning and advancement, ones that lead to real new innovation outcomes. Those outcomes that give return, both immediate and for the future.

This can offer a different risk and opportunity assessment that can be underpinned by this ‘health’ innovation that builds what is ‘sound’ and ‘solid’ to invest onto as the metrics build more on the dynamic innovation capabilities.

This measuring of the ‘health’ of our innovation across a balanced view will give a growing confidence by the board to invest, by providing more leading indicators and engagement justifications will potentially encourage investment into a more riskier level of initiatives. Confidence grows with learning, discovery and engagement.

Pushing  for more ‘measured’ risk it certainly makes a ‘innovation portfolio’ more demanding to manage but potentially far more rewarding in its total returns in learning, in advancement, in capability and capacity building and in growth potential. Having measurements that ‘push’ learning and discovery can reveal more distinctive and radical innovation potential through greater engagement. The outcome is relating more by looking  out into the world. providing solutions that customers relate too and are more prepared to provide the stronger financial returns we want from innovation, as they see the different increasing value that is being offered.

Yes, our measurements do make a difference, it is time we took a fresh look at providing new ways to measure the health and potential to encourage greater innovation investment we need.

The post Rethinking the measuring of innovation first appeared on Building Your Innovation & Ecosystem Intelligence.

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.

Let me explain the innovation capital stock in (my) five parts

• It is a bundle of the firm’s resources and assets that renders complementary services in the process of new knowledge (innovation) creation and commercialization

• Innovation capital as renewal capabilities of our organizations in the form of producing intellectual properties that offer value and extracting from our intangible assets

• Innovation capital possesses attributes that make it a ‘strategic’ asset with the key lies in specifying the nature and application of these assets in relation to the new knowledge ‘flowing’ into the organization, for generating and commercializing concepts and ideas, into new forms of innovation

• The innovation capital is made up of the ‘dynamic interactions between the intangibles employed and the ongoing development of these intangible assets.

• It is the ‘effective use’ of all the different kinds of intangibles that contribute to the activity into innovation capital.

For me it is these tangible and many intangible assets that fire innovation, they make innovation combustible, to ‘spark’ new value creation.

Innovation will continue to struggle if we don’t understand its capital make-up.

If we don’t understand where the innovation value resides, we will certainly struggle to continue to build innovation’s position in the organization.

Today innovation is still regarded as ‘expendable’, sacrificed on the altar of short-termism.

This creates a growing uncertainty, often reducing innovation down as that no real ‘sense of urgency’ and becomes ‘contained’ in discrete projects, failing to offer that real, substantial, ongoing value for the enterprise.

We simply don’t ‘unlock’ the real value of innovation. If we lack the understanding and abilities to build this sustaining operational capacity for innovation we have ongoing problems.

There is the need as its longer-term goal, to be simply fully embedded inside the organization that it ‘resides’ and simply becomes indistinguishable, it becomes the operating core, constantly aligned to the strategic needs and goals. Innovation’s benefits must be outstanding and well understood.

Innovation will remain tentative, always stuttering along, lacking this absolutely organization innovation rhythm if it is not fully understood in where it generates it capital from and what new capital and stock it provides.

Actually, most of our innovation capital is learning capital.

The more we strengthen our knowledge and value our people, the more we can generate new knowledge, build greater narratives, deepen discussions, make better connections and build our interactions across growing communities.

The more we discover, the more knowledge we gain does lead up to determining potentially better decision-making and value-creating potential.

This should, in theory, give greater confidence, both internally and externally, that our invested financial capital is in good hands.

The power lies in the linkages we can forge, in the acquisition, in assimilation and then into eventual transformation, that allows known knowledge to become new wealth-generating innovation.

Our learning capital needs to emerge and dominate future discussions in improving its quality and value contribution. We need to increase incentives for organizations and their people to learn new things or update their existing knowledge.

We need to learn how to articulate knowledge in its acquisition, assimilation and transformation and that comes back to understanding absorptive capacity.

Managing organizational learning and innovation, more ICT is needed.

To successfully manage innovation capital and understand the make-up of the intellectual assets, the new main role of ICT is pulling together Web 2.0/3.0, collaborative technologies, social networking tools, wikis, internal blogging and knowledge capture, so as to help people share this growing body of knowledge through common platforms and electronic storage.

As our social networks expand they become a vital source of intellectual capital and innovation understanding. These relationships and networks need to be fostered, constantly measured in their value and contribution, and structured in ways to communicate and interpret outcomes for ‘directing’ future value creation.

The whole promising ‘wave’ of collective intelligence, social networking and building real useful communities of knowledge is a real challenge today to pull together. It is becoming a crucial factor and investing in the physical capital this needs, does allow for people to share knowledge through common platforms and strengthen the knowledge, with the human capital that innovation requires, to drive real growth.

For instance, EU investments in ICT’s are due to increase by about 25% under Horizon 2020 compared to FP7. This EU investment will support the whole chain from basic research to innovation that can deliver new business breakthroughs, often on the basis of emerging technologies.

We also need to recognize the work-to-be done, not work already done!

Work to be done is the need for our future growth and well-being to be derived through innovation activities. These so much made up of intangible parts will provide the new wealth of organizations in the knowledge sharing economy of today and the near future.

We need new forms of evaluation to measure the real asset wealth of the organization to understand the points of intensity, their connected dynamics and what is required to reconfigure the changing capabilities and capacities needed to grow in the future. There is a lot of work to be done out there.

Shifting our investments into today’s more valued capital- Innovation
It is how much we are able to adapt to fast-moving changes that will determine our success. It is the combination of the sum of our capital and knowing what factors and assets contribute to making our innovation capital that will determine the ‘health’ of our future.

I think it is essential going forward that we need significantly increase our innovation capital focus, so it can be fully unlocked, so as to release the true dynamics within the system and structures of our organizations to realize innovation’s potential.

For me, Innovation Capital and its make-up is where we need to focus, understand and invest. It drives our ability to create and sustain value creation.

The post Exploring the Value Of Your Innovation Capital first appeared on Building Your Innovation & Ecosystem Intelligence.

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

The shift taking place in recognizing that our capital is well beyond ‘just’ financial is rapidly altering organization investment decisions. The McKinsey approach has set about capturing a broader understanding of innovation than R&D alone.

Innovation and its value creation goes well beyond just R&D, it is made up of a broad range of intangible assets that are firm-specific and due to this, they are being recognized as hard to replicate, providing a growing edge over competitors if they are identified and invested in correctly.

In this report they considered the broader aspects of Innovation Capital capturing software, design, market research, training and new business processes as well as spending by governments and through tertiary education in science, technology, engineering and mathematics (STEM) subjects.

The value of this inclusive approach

By taking this inclusive approach to innovation spending they were suggesting allowed them to document better the investments underlying innovation, to see the greater “innovation infrastructure”

We are clearly seeing the continued increase in the valuations given to certain organizations, up to 80% of the value is coming from the intangibles, with the vast majority of our business organizations are really slow in getting to grips with identifying what is making up this value in their premium.

The urgency for us all, each organization, is to identify the investments and the returns as the innovation impact offered by McKinsey’s report is delivering a significant business case for understanding and recognizing the strategic importance of identifying and developing all your innovation capital.

Just go back and re-look at the graphic above for investing in Innovation Capital for its impact and implications for each of us.

Recognizing Innovation Capital is really important

So the make-up of innovation capital is big, I mean really big, this might help generate a greater innovation wake-up call. In a report from McKinsey and Co, called “Innovation matters: Reviving the growth engine” and first presented at the G8 leaders Innovation Conference, in London on 14 June 2013.

This report quantifies the importance of innovation in driving productivity growth and sets out the actions that governments and societies can take to build “Innovation Capital.”

The paper offered is stimulating the need for building the “innovation infrastructure” for our growth and as a key capability for our organizations and countries.

Where to start in specifically identifying Innovation Capital?

Within the McKinsey report they break down Innovation Capital into three components. These are:

Physical Capital is formed by investments in information and communication equipment (ICT) and across the countries analysed it represents 16 per cent of the Innovation Capital.

Knowledge Capital is formed by investments that build firms’ intellectual property and brand equity, including investments in computerized information, R&D and marketing investments, as well as relevant research in universities. It represents 60 per cent of Innovation Capital across the countries McKinsey analyzed.

Human Capital is formed by investments in building individual or organizational skills that drive productivity growth. This includes public and private investments in tertiary STEM education, employer-based training programmes and investments to develop organizational efficiencies (e.g., redesign of business processes or review of business models more broadly). Across countries analysed it represents 24 per cent of Innovation Capital.

It is important to recognize that McKinsey has captured and measured these to produce the impressive impact that innovation capital has. Is your organization identifying these for assessing their innovation capital? Most probably not.

Finding our innovation uniqueness

The make-up of our Innovation Capital are unique to each organization and highly valuable, I’d argue the report by McKinsey on its contribution is still significantly understated but a terrific step forward in attempting to quantify it.

It is the pivotal role of people as innovation carriers – their networks, collaborations, knowledge flows, interactions and tacit knowledge – and how innovation itself is a potent competitive force that drives productivity.

All this is often hidden in plain sight as our people are innovation’s active ingredient, the catalyst that turns novelty into real benefits.
Innovation capital is a big win if we can harness it well.

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We need to think about recognizing the ‘combining effects’ of four foundation pillars; of value creation (vc), business models (bm), intellectual capital assets (ica) and innovation capital (ic). It is the dynamics within the multiple combinations that will generate the future wealth creation we need.

We are in need of having a better understanding of the integrated value focal points of these four pillars combining, they need connecting so we can build the supporting structures and place the roof of need, our wealth creating one, to give us a new potential of harnessing our innate abilities to be creative. These four pillars offer perhaps a new core, a new transforming power, they make our activities connected and dynamic.

Unlocking all our potential is the job needing to be delivered upon

Our job today is to unlock the potentials from knowledge, harnessing our capitals to focus more on releasing our resources to work on their dynamic capabilities that combine vc + bm + ica + ic to make this a ‘room’ that gives us the potential to reside and generate new wealth potential.

A transforming one, where the make-up of value creation, articulated through business model designs by knowing the capitals that ‘feed into’ and build our stocks and flows for new innovation that does have the greater potential for wealth creation to occur.

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Organizations have been focused for far too long around the importance of financial capital. It determines and drives organizations destinies. We are caught in a constant focus upon our achieving a return on our (financial) capital as our measuring criteria. Organizations strive for improving their ROCE, RONA, IRR,  EVA and a host of other financial measures.

As Clayton Christensen has been arguing the agenda of organizations begins and ends with the “search for numbers”. I think there is a time for changing this, we need to search for the knowledge that makes-up eventually the numbers.

There has been a distant voice for some time putting forward the need to appreciate and value the other capitals sitting within organizations. Much of the discussions have been housed under the term “intellectual capital” which denotes the sum of knowledge made up and contributed by our human assets, our organizational structures and our relationships that are developed.

These are the ‘capitals’ that transform into economic value through organization action. It is the financial capital that simply finances this.

Financial capital dominates any discussions

Yet financial capital and all its associated aspects rules, no, it utterly dominates. It totally fails to tell us in numbers alone where and what creates the value, it simply reports it.

It is this financial capital through our profit and loss, our balance sheets hides the value, or spreads it out in ways no one really understands its make-up.

Certainly those attempting to judge an organization just have to rely on a ‘history of numbers’ and some ‘selective’ market view to make investment judgements.

Equally those often running our organizations have a restricted view of where their real capital lies, as they focus on the numbers and then work down.

Today,we are  in a rapidly changing world and we need to understand it differently

The reliance of financial capital being the absolute measure is being challenged thankfully. Our business world is facing considerable disruptions from the accepted past practices, performance has become more volatile, more dynamic, more reliant on understanding that knowledge is where the value lies.

“Business as usual” is thankfully in a steep but protracted decline, the necessity today is to be constantly evolving and learning and that comes from knowledge acquisition, assimilation and then transforming and exploiting this into new value. We need to find new models for evaluating our real value and capital stock.

These ‘absorptive capacities’ are where we need to manage our knowledge flows better to translate and direct our understanding of new, value creating capital. We need to report on these far more as they offer the ‘residing’ and new stock that gives us new innovation potential and fresh value.

Learning capital needs to emerge and dominate future discussions

We need to give increasing incentives for organizations to learn. We need to judge the quality of this learning, not listen to ‘bland’ statements often presented. We need to know where this knowledge is targeted in narrative, discussions, spillovers and interactions.

What is being exploited, what is being determined in the decision-making process to give greater confidence that our invested financial capital is “in good hands”.

Keeping reliant on just discussing the financials within organizations we know is not enough. We have to force better discussions on the make-up of the other capitals, as these are still poor, left to individual interpretation and variable and we need to change this.

We are increasing opening up

As organizations become more open (open innovation for instance) the strength of linkages, of knowledge exchange, the translation of these activities is becoming really valuable to understand and focus upon more.

Through many of our activities we actually ‘borrow’ and it is then the ‘dynamic linking’ that we bring into the process, gives up the increased potential of innovation. It is the ease of learning, the ability to acquire and apply knowledge that creates the potential for innovation.

How many organizations really articulate their knowledge capital in acquisition, assimilation and transformation? Do we know how ‘path dependent’ they are- are they lagging in the market, are they simply opportunistic, are they locked-in far too much in potential downside risks.

Do they suffer from cognitive failure, do they lack the appropriate competencies to meet the constant challenges occurring around them. How much of this can you really extract from cold, hard numbers? Not a great deal.

Recognizing where our true value resides

The real problem we have is the lack of appreciation of what makes up our value, the real underlying wealth creating value, the one that truly ‘generates’. The tangible part is easier to appreciate (plant, land, material etc.) but is becoming a significantly declining part of the total sum of value of our organizations- sometimes it is only making up 30 percent..

It is our difficulties of understanding the intangibles as it is a very challenging task. Yet this has huge implications on the ‘health’ of the organizations we continue to invest in. Most organizations resort to “inferring” the value. This needs to change. The value today is in the interactions between the different components that make up our intangibles, out intellectual capital.

We are in need to identify what ‘drives’ organizations and that is our knowledge stock

For gaining and sustaining real advantage, and showing why it has the potential for creating new wealth we need to understand our capital stock.

This needs to be far more forwards looking; it needs to be more open and more transparent and it needs to ‘flow through’ the organization to find the potential to find new value from innovation. The call is growing increasingly for a new valuation model.

Static knowledge where we view financial numbers, never take our knowledge beyond what we are reading, failing to connect it and advance it is just not good enough, we do need to understand the underlying dynamic capabilities that make-up the organization. We need to access, absorb and translate our knowledge stock, allow it to flow and be developed into greater value-adding stock and innovation outcomes.

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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.

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 that make them dynamic

There is a pressing need to connect the real sources of value creation and these come from all our capitals and bring this clearly into the ‘line of sight’ of the management itself within our business organizations,  as well as the shareholders.

There is this chronic lack of real understanding of where the true value does come from or if it is known, given the public recognition it deserves beyond the usual “oh, its in the business model”or similar assumption- what is? Where does real value lie?

Lets begin with the make up of all our capitals, it is way beyond just financial

Often when you begin to talk of capital, automatically the financials come to mind. The financial decisions and results are an outcome from our ability to leverage all the other capitals making up our organizations. Most of these are intangibles and you often get that glazed look and the standard reply “intangibles are difficult to measure”.

Yet they really do need to be effectively measured and understood. They need to be really understood to know where the value creation potential does actually lie. Knowing the values of these can determine the gaps that need plugging and the potential that can be leveraged in what you have available to you.

Understanding ALL the capitals within our organizations is essential

Thankfully understanding our capitals, beyond the financials, has been a work-in-progress for many years, we know more about it yet it still remains grossly understated within any of the reporting mechanisms organizations make.

The need to make our intangibles that remain invisible on our present balance sheets has to be addressed. These are ones that make up

1) the internal structures, processes, routines, databases that contribute to the structural capitals ,

2) the external structures where external relationships, networks and customer capital contribute into the make-up of relationship capitals, and

3) the competences that include individual experiences, knowledge, competences, skills, capacity to learn, the absorbing and translating of an idea that all build and contribute to the human capital aspects of our organizations.

Turning the intangible light switch on is becoming essential

Management is still groping in the dark on measuring its intangibles, yet there is this pressing need to find the light switch and through the spotlights on the understanding on all the intangibles that make up our organizations, be these ones regarded as the classics of human, relationship and structured capital.

We need to explore many dynamic factors that have a substantial impact potential for our business.

How often do you hear thoughtful and coherent explanations of market positions, besides the market ranking, the depth in management experience?

Or the understanding of the quality and ongoing upgrading of major processes that are not generic statements but factual and measurement driven?

Or the progress made in research leadership beyond the top-level picture of “areas of focus” so you can truly assess the innovation pipeline and its potential impact beyond the immediate?

We are rapidly moving from physical to knowledge based, often in a real need to build very intellectual based enterprises and knowing where the real value lies is becoming absolutely essential to understand.

This will require a significant shift in existing managerial mindsets. Managing our ‘range of capitals’ is essential to do.

We should seek a better visibility into our organizations

Better outcomes and a greater relationship between investors and the organization needs to be achieved. I think it is possible but it is a journey many today are reluctant to travel. They should.

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There is a growing need for having some dynamic tensions within the organization’s system; these helps generate the better conditions for innovation to thrive. We are learning more on the better tools, techniques and approaches available for putting the learning tensions into our work, making them more dynamic, linked and increasingly relevant to the work to be done.

1). A common language is essential

Any dynamics in the system needs that ability to talk the same language, something that becomes common and embedded to support the routines and move quicker to the concepts and solutions, as others can ‘understand’ them as well. It is through working on the inner stories and appreciating the history, it is having an appreciation of events, good and bad, it is through local slogans, your jargon and dialogues that bring people together. The power of storytelling helps gain adoption and identification to those needs for working on a common cause.

2). Creating constant opportunities for conversations

So many organizations don’t work on the ongoing conversations, design workshops, road shows and dialogue sessions that give everyone linkage and growing identification. You begin to identify your sense of purpose and value contribution if there is a consistent diffusion of messages; these should be always lead from the top or moved up and down the organization to allow for these ongoing conversations.

3). Using the knowledge that resides

Organizations like to believe they are building domains of expertise but often they are actually building the silo’s to restrict the flow of knowledge. Knowing where the right functional expertise lies, the relevant skills, experiences or relevant insights ‘reside’ is increasingly important to throw open to all, to tap into, extract and contribute. This expertise can help with our daily routines by offering different thoughts, ideas and practices that may have a real impact on how you can change.

4). Wrapping up intelligence to give it real value and knowledge understanding

The bundling of intelligence is becoming critical. It needs to be increasingly shared across the organization at real time speed. As we look increasingly outside our organizations, our focal markets sensing and seizing the information and being able to connect it, to bundle it into knowledge that has potential application or relevance allows for absorptive capacities to really come to live. Those are able to learn to bring into the organization by accessing, anchoring and diffusing that external capacity for creating and exploiting new value.

5). Capturing and extracting tacit knowledge

Our ability to capture and access the tacit knowledge that resides in all our employees is a critical issue to achieve new dynamic tension. How do we harness tacit knowledge, capture it, even recognize its value we need to encourage a continuous learning environment, we need to have clear organization learning strategies. Tacit knowledge helps us tackle the unknowns associated with discovery. The more we share, put effort into collaborative ventures the more we learn. The more we engage with external experts the more we should gain from these exchanges. Context becomes vital, as does striving for that common language and association.

6). Allowing time to explore and improve our human capital

Tacit knowledge as it becomes embedded in shared values, assumptions and beliefs you can qualify and map tacit knowledge. Our tacit knowledge increases the human capital. It can, through creative acts give strong feeling and give a real sense of commitment. The more we explore, the more we ‘ignite our passions’ but you need to consciously find the time to explore by clearing the path to allow the absorbing to take place and then extract the knowledge through putting any challenge into context, allowing time to access, anchor and diffuse.

The ability to harness our dynamics is vital

The ability to make our environments more dynamic, more engaging, more challenging, more a place to learn and contribute allows greater movement and potential for innovation and growth. A growth that is for the organization and its people, to provide all the different intellectual capitals to combine, be those human (knowledge, skills and experiences), relationship (social and through our networks) or through the structural ones you put into place (where you pool knowledge, use routines and systems).

Good use of our intellectual capitals and knowing what these are, does allow for a greater unlocking of innovation value. The more we ‘work and encourage’ our learning capitals, combining the power that lies in the dynamic linkages we can forge, in acquisition, in assimilation and then into eventual transformation then this allows known knowledge to become new wealth-generating innovation

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