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.

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.

The post Constructing Innovation as Value Management first appeared on Building Your Innovation & Ecosystem Intelligence.

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.

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 make up 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 organizations 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 a 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 enough and organizations are judged on their innovation activity going through the pipeline and that judgement often lacks the real make up of the application of the different capitals.

Greater engagement or not?

We can leave this to the management, just sit back and simply expect increased dividends but will not enjoy many of those nasty surprises when the results fail to materialise.

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.

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 investors briefings.

Making these more visible, leads to greater accountability and to be ‘accountable’ you need to understand the make up 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!

 Exposing the softer side of value creation is the key.

The need is to understand value creation is coming from the ‘softer’ side, the often intangibles that remain hidden for the real value enhancing aspects of a business.

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.

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.

These can include but are not limited to:

• The ways an organization is setting about combining and utilizing networks and relationships
• How are they actively advancing their creative and innovation capabilities and competences? Are there specific frameworks and approaches.
• The ways they are actually seeking out in explicit ways that deepening of customer understanding

• The purposefully ways that reputation is being protected, quality in 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 into 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 organizations 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 it continues 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?

• 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.

The emergence of the business narrative to help us.

Telling the organization story is becoming important. Our organizations need to shift their orientation and begin to provide a better, more compelling story of their business.

Perhaps the following attributes might be the place to start building a better business narrative for others to understand what is driving value creation.

This can be reflected upon in some of these suggested ways as a guide to begin in telling the unique story that makes up your organization, against another:

• More offering a predictive value that ‘projects’ the future
• Explaining how something is being achieved and will be further strengthened.
• The critical importance of explaining the context that made or makes up decisions
• Placing the emphasis on direction and not precision
• The explicit linking of strategy and execution
• The use of existing systems and processes and their life-cycle
• Offering a view on emerging and perhaps more complex systems and processes with their future fit, and what this might have in organization implications.
• The shaping of the organization’s behaviour, what is influencing and shaping it
• Enough detail to be comprehensive, comprehensible but still delivered with simplicity.

There is a growing public demand 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 is so important to this.

It is the input of the capital and the processes in place that will provide outputs and eventual outcomes and that broader knowledge about the ‘inner workings’ gives us the deeper belief that value creation has a greater chance of being sustained, allowing us to better judge continuance to invest or to exit.

The post So what drives value creation? first appeared on Building Your Innovation & Ecosystem Intelligence.

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.

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, it’s in the business model” or similar assumption- what is?

Where does real value lie?

Let’s begin with the makeup of capitals. Often when you begin to talk of capital, automatically the financials come to mind. The financial decisions and results are an outcome of 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 the ones that makeup:

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

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

3) the competencies that include individual experiences, knowledge, competencies, skills, capacity to learn, and the absorption and translation 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 of all the intangibles that make up our organizations, be these ones regarded as the classics of human, relationship and structured capital.

Often intangibles are fused with intellectual capital in discussions and that makes it often even harder to gain the serious attention of management.

Thankfully this is changing as the realization is growing that organizations must understand where their sources of value creation are actually lying, otherwise they are back in the dark, stumbling around and not sure what they are doing on the true underlying impact of their sustaining performance. It is about time they are ‘called out’ on this.

Making the business impact more explicit is required.
We can go deeper within our organizations to analyse. We can seek out  the non-financial drivers that analysts should focus upon as being measured and reported upon?

Today we are placing high premiums on the intangibles but investors lack the understanding of the value gap and what makes this up. There is a real understanding gap. We need the business to adapt far more too today’s dynamics and explain the ways they are ‘setting about’ this.

We need to gain a greater insight into many things

Those aspects that make up explicit understanding of strategic execution and organization alignment, the underlying make-up of the governance and management credibility, the quality and consistent ongoing evaluation of the strategy and the operational agility to support any changes.

Also there is a real need to understand the real innovativeness occurring within or around the organization, what is flowing in and out of the organization. Also understanding what mechanisms and structures are specifically in place to attract and retain talented people beyond existing monetary incentives or stock options.

Then what is the possible impact of significant key executive losses ‘just’ underneath the more visible board member that might have a material impact on the business.

Each has a significant impact on future earning and it is the executive that can demonstrate and show their ability to manage ‘forward’ will have the higher value premium placed on their organizations ability to attract greater investment sentiment.

Then we need to explore other dynamic factors that have a substantial impact on potential

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 and lastly 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 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.

We need to start asking real questions relating to organizational assets?

What and where are the resources that are expected to generate future sustaining benefits and growth- should they not be more viable within the organizations?

We need to start asking more specific questions:
• Are you measuring the intangible content of your organization and focusing on this strategically?
• What confidence do you have in sustaining the future growth, what are the risks and what would options are you considering for growing in alternative values?
• How do you exploit the tangible assets and relate these with the higher asset values you extract from your intangibles- how are you aligning these efficiently and more effectively?
• If you agree that intangible assets are the or one of the major sources of value, creation and sustainability what explicit plans have you in place for developing and protecting these? What are these plans?
• How do you actually combine all your assets to create existing value, productivity and innovation and where will these be changing in the future to achieve ongoing and sustaining growth?

What are your concerns on this asset combination that needs addressing going forward?

We should seek 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.

It is not beyond the capabilities and ingenuity of the organizations themselves, so they can begin to map this new path. A pathway towards generating a better understanding of the non-financial assets that are making up their ongoing real performance.

We simply need to know

Knowing what makes up the real value of an organization’s total assets I think it is possible. We certainly need to go beyond just the present-day financials and some generalised statements that are not real measures of true ‘wealth generating’ understanding.

Will this change happen?

This is, of course, is another story but I believe there is a ‘wind of change’ blowing that might kick-start this dramatic shift to measuring the real value aspects of our organization and those that lie in the intangibles and we can make these far more explicit, that is for sure.

I hope it starts blowing really hard so we can finally clear away the cobwebs of old-style thinking, gathered primarily around financial capital.

The post Are we measuring what really matters? first appeared on Building Your Innovation & Ecosystem Intelligence.

Does it give us the level of detailed understanding to feel confident?

Let me outline some different thoughts, coming from some detailed research that is swirling around in my mind today. It’s a little complicated, but lets try.

I apologize this is a little longer than ideal so maybe take it in bite seized chunks.

Seeing an organizations business model but through whose eyes?

Is the business model important? Of course it is but how we see its value all depends on who are you, what you are looking for, knowing what provides the real value creation within that specific organization becomes important to appreciate their business model.

Understanding the business model of organizations is important, it can tell us much, if it is well designed and explained.

.Today we are stuck looking into our business organizations through a very selective window, often chosen by the leadership of the organization, designed deliberately  into what they chose to report upon.

It is what they believe they want to tell you about ‘selected’ activities and outcomes that are actually going on. Do you believe these selective opinions?  I certainly do not on many occasions regard them as transparent as I would like.

Firstly, financial numbers alone give a limited guidance, they hid so much to make it difficult for the outside to really gain full confidence in their understanding of what lies underneath.

If organizations rely simply on ‘just’ the numbers, this tend to be a ‘static’ set of figures that reflect something recent and everything in the past. That is not helpful in knowing where organizations are heading or if they are well-equipped to get there.

If financials are no real use for the future – what is?

Numbers alone do not give us confidence to invest in the organizations future; we only blindly invest in a historical position actually. We take better comfort from the forward-looking statement that is positioned to fill this future thinking space.

Is this really good enough? I don’t think so and so do plenty of others – that is way there is a serious call for changing this. We do need better knowledge and insights.

Surely we all need to recognize this reporting must change, we live in rapidly changing environments where established organizations are increasingly being caught out.

We need to understand more of the why. We need to know what is making up the present and future thinking of the leadership of organizations. For this the business model is not a bad place to gather around, decide and explore its relationship parts to form an opinion if what the leadership is thinking, is making future sense.

There is a call for a more integrated reporting structure that is forward-looking. This might help.

There is a growing argument for a more integrated reporting framework with one of those pushing for this is the IIRC. IIRC has as its objectives to enhance market and context specific insights, it wants to place a greater emphasis on the longer-term strategy and reveal the behavioral triangle of governance, risk and remuneration.

It is seeking this out through how the business model works expecting a clear linkage of the dynamics and key relationships that it depends. Now that, for me, is good news. They are suggesting this comes through business narratives.

But will this make a real difference to attempt to describe the business model (BM), unless we have a standard way to evaluate and describe this. I don’t think the IIRC is yet there in what this needs to have contained within the BM Narrative but they are moving along a good track, if it is not the best track – more on that another time perhaps.

What is driving this call for reporting change?

There are a set of issue that are driving this move towards a more integrated reporting. The open question is will it make the real difference, restore confidence, and allow stakeholders, the many and varied  investors into the ‘hearts and minds’ of our organizations to show a shared belief. Will it bring back trust within our organizations?

So who wants to see what is made up within any integrated business model?

There are so many interested parties wanting to understand our business organizations. The current proposal is to present the business model through Business Narrative thinking for telling the real story. This clearly raises a greater set of question in my mind:

• Whose context will these narratives be targeted towards, what will form the nature of them and will we see or simply ‘sense the value that lies within these BM Narratives?
• Will we gain that clarity on the leadership objective and ‘decent’ insights into their strategy and the thinking that is making this up?
• Will they be clear, not replace one set of flowery statements with another. A business model should clarify a compelling picture of how, if it is constructed well by identifying those drivers of development and future (sustaining) performance.
• We don’t want it loaded with safe haven or harbour statements with financial positions, but some forward analysis and explanations that provide the context and construct of why this business model can deliver, and what are its risks and critical aspects of the BM.

Of course we need to accept these will still be a partial understanding to retain competitive advantage.

Do our organizations want to talk about their business models or will they feel they are revealing too much? Will they lack that real confidence because sometimes they don’t know what does truly make up their business model in real value points? The business model and its related parts needs significant understanding and opening this up might reveal inherent weakness.

Forget all the present loaded documents that ‘spin’ themes, generalize on priorities and time-frames – do they offer decent explanations of actions, comprehensive and quantified information?  Do they map this back to strategic priorities?

Will organizations leaders be comfortable to put their necks a little more on the chopping block? Can we, should we encourage this? Yes we should, that is why they are there, to be paid to manage risk and opportunities, to navigate and deliver and be well rewarded for these efforts.

It is a different balancing act, needing deeper evaluation of all the implications of revealing the business model, without it turning into simply ‘bland’ statements that will give little fresh value.

You can go on and ask a series of further questions:

• Do we as outsiders really extract useful information today – is what is currently being produced and talked about really insightful or bland statements of possible intent?
• Do we really know if the present BM have a clear integration, the parts in its total design, not just work and fit with each other but actually ‘talk’ to each other.
• How much can we expect on tangible comments on sustainability, risks and impacts to existing strategies? We should.
• Will organization invest enough in decent graphics that help explain their business model or just prettify their reports?
• Can we grasp differences within the different  business units and their business models or do we just accept the top picture?

We need stuff we can relate too, that will help us understand or a narrative has no real value, just more soothing balm. There are real, significant questions any move to pushing organizations towards reporting on their business models. Today this is being explored through present trials and experimentation in a number of our top organizations.

These are the pioneers working through this. This early adopters recognize a more open, forward-looking outlook will attract more positives than keeping present stakeholders and investors in the dark. Informing them of a better business model narrative of the future intent can give greater understanding and confidence.

How would organizations go about this BM narrative task?

Should these be top down or bottom up? The top-level business model is usually made up of multiple business models underneath. The larger and more complex the organization the harder it might be to describe a ‘generic’ business model. How will this be resolved?

We would also want to search for a certain consistency across organizations offering where proirities lie, alongside some clear and measurable KPI’s to help in any assessments

 How will the leadership of organizations deal with failures? It is far more beholden of the leadership today to talk about the  failures but place these within the real learning that came out of this and actions it has taken from this so this becomes an expected rhythm of advancing the knowledge and learning.

Do we expect to understand what are the external drivers prompting discussion and informing relevant decisions? Do we get the relevant joining of the dots to provide a more integrated picture? Explicit linkages that give context to strategy to direction

The questions are many and complex.

Can this be achieved, or are we perhaps raising our expectancies way to high. I expect the way to high would be the winner here, sadly. Will the business narrative follow a prescribed format or be allowed to evolve and through a set of emerging practices become the accepted leading practice that will eventually be broadly adopted? Most probably.

We know the Business Model is made up of key resources and relationships that enable the real engagement and point towards a distinctive value proposition. What is needed in all business model narratives is the coverage of all the basic building blocks that frame the discussion as a universal starting point.

What to integrate within this business narrative might be tough:

• Provide distinctive understanding of what our brand strives to be?
• What would transmit real values and clarity to the reader?
• Provide future stories and scenarios that paint that BM canvas for what we are doing in the ‘here and know’, that gives it the ‘richness and vibrancy’ people want to here.
• Put the people side into the BM equation – to discuss the learning behaviors and intentions that will underpin the BM – our people and where they really fit within the business model design to make it work through knowledge and innovation contribution.
• Explain the make-up of the critical intellectual capitals that will generate the future value creation
• Clarify the value propositions and their key building blocks

We do need to evoke a powerful narrative as the journey that others would want to be on

The really challenging part of any move towards building and communicating the BM narrative resolve around some perhaps “hairy” internal challenges

• A cohesive team that can stay on-message
• Meets investors needs
• Offer a picture of sustainable value- actions that drive
• Offer information that is used to manage the business, not all but enough!
• It is structured and coherent
• Has alignment and consistency between actions and rhetoric
• Showing the places and activities where an organization is managing for value.

There is a really strong case to look more towards the future

Organizations by making this move to having good, helpful and well-structured constructs of their business model is a step towards being more open, more willing to engage. These moves will help the stakeholders to want to become a better knowledgeable partner wanting to get involved. Ones that by being clearer on what is making up an organizations business models today and by discussing these can reduce conflicts, help navigate in this more complex world.

What will happen if organizations start adopting a business narrative around their business models?

I am excited in what I read about what the integrated reporting is presenting as potential results. Equally I am troubled. Adopting the business model, even in just a narrative reporting form can offer really value but it needs designing well, to be a substantial advancement in our understanding of organizations view of the future.

I do hope the central change aspect of reporting, based on the business model suggested by the IIRC, is managed well, otherwise we miss a further opportunity to change a rather broken down, out of date reporting mechanism that is “not fit for today’s or tomorrows purpose.” We do need to be more forward looking and understand the relationships that make up the value within our organizations, the business model helps in this.

What do you think? Any thoughts on this? We are arriving a different point on reporting and the business model and its understanding will become even more important to our future.

Main References here:

Steve Denning- Mastering the discipline of business narratives.

PwC- Trust through Transparency

Integrated Reporting (IIRC)

* This article was extensively revised on 15th February from the original.

The post Seeing a business model through whose eyes? first appeared on Building Your Innovation & Ecosystem Intelligence.

The combined capitals determine and drive 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, in a rapidly changing world, 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 steep 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. These ‘absorptive capacities’ are where we need to direct our understanding of new, value creating capital. We need to report on these far more as they offer the ‘residing’ 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.

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 for gaining and sustaining real advantage, and showing why it has the potential for creating new wealth. This needs to be far more forwards looking; it needs to be more open and more transparent.

The call is growing increasingly for a new valuation model. Static knowledge where we view financial numbers is just not good enough, we do need to understand the underlying dynamic capabilities that make-up the organization.

Conflicting signals of what makes up intellectual capital dominate still

The same old problem exists today that has plagued the concept of intellectual capital and its promotion. The community that has been arguing for this as a measuring of the real value of an organization remain divided, locked in their own interest and models; the conflicting nature of these different views has held intellectual capital back.

Organization management will never invest the dedicated time and interest unless they see some level of coherence and understanding that can be translated into an actionable framework.

There have been many attempts but nothing has really changed our traditional reporting of financials with some (restricted) board discussions. Organizations are hiding under rocks, taking cover from the potential relentless sun that would force them to adapt. We need to change this.

Some change might’ be in the reporting air

One organization attempting to radically alter this current (one-eyed) reporting we have today is the www.theiirc.org  proposing their integrated reporting mechanism, where they are shifting the focus more to where value creation lies.

They argue this will improve the quality of the information available to provide for a more efficient and productive allocation of capital. It promotes a more cohesive and efficient approach to corporate reporting that draws on different strands that cover more fully, the factors that are materially important.

The focus is future orientated; it pushes to gain a connectivity of information, in all the capitals and their dependences, and seeks the ability to have integrated thinking that account for the (changes in) connectivity and interdependencies.

It expects a greater understanding of how the organization tailors its business model through its activities, performance and outcomes in its use of all the capitals.

The key for the IIRC has been to seek out the connectivity of information flows into the management reporting, analysis and decision-making so internal and external reporting has this integrated reporting as required.

Are we on the cusp of a real change in reporting?

Are we going to see this initiative gathering momentum in the coming years?  It does seem so as the detailed guiding frameworks in understanding all an organizations capitals, of the thinking behind business models and capital have been piloted and tested and recently published.

I have written on it here in my “shifting attitudes, thinking responsibly” post.

All I hope, no fervently wish, is that the intellectual capital community comes together and can find the same determination to provide greater understanding of the capitals, so this integrated reporting gains even greater momentum and paves the way for improved understanding of the real value that resides in our organizations.

There is a time, and that surely is now as the right time, in coming together over a recognized ‘standard’ definition of intellectual capital and its organization measurement.

What must stop is the continued pushing individuals narrow views of what makes up our capitals but to focus on what our customer needs. Those measurements, which may not be perfect but ones our business organizations will engage in, invest their time and establish the structures to capture those aspects that make up the Intellectual Capitals (IC).

Organizations need to feel utterly comfortable in deploying emerging guidelines so as to understand, test, develop and talk about their capital and the residing values it offers by deploying it through their ecosystem of connected parties.

Offering conflicting ideas or frameworks is never welcome within organizations, they want to feel comfortable in investing and backing in the one that they ‘feel’ the winner.

We urgently require a common standard in approach for measuring all our organizations capital.

Measuring often many intangibles is for many very uncomfortable territory, until the approach becomes ‘standard’. If those within the IC community continue to offer conflicting advice, organizations are very reluctant to commit.

Can the IC community come together and give them a clear model to work from? Please, or will it be eventually taken out of those existing hands, passed into the hands of a new, more business-savvy group of individuals that can ‘piece together’ capitals in a way organizations will actually welcome and adopt.

To encourage acceptance you need clarity, a common understanding and an approach, then the value potential begins to emerge with any adoption because it offers clear language and common measurement instruments that organizations understand and can work with.

It is a growing imperative to gain a common framework to measure the sums of all our capitals.

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

Are we working towards understanding the material sustainability issues better and linking them to financial drivers and where we fit within these complex issues?

There is such an increasing need to develop or simply updating our business language to build stronger cases for change, improvement and broader community engagement but these still seem to be missing.

How are organizations aligning their organizations not just with their own strategies but those in the wider world that contribute into a more sustaining future? We are needing to answer a fair few of these questions in my opinion.

The lack of engagement, of common understanding

Within each corporation there is this overwhelming need and growing concern to engage, to engage our employees, provide them a clearer sense of purpose and offer a better understanding of what a ‘higher’ purpose they are working towards looks like in their language not just through the eyes of the corporate board.

How does the external world perceive us, how do we attract new investment, greater stakeholder engagement.  How can we achieve this in better ways than we are doing today?

Many of those traditional measures of purpose left over from the 20^th century are simply not working. The social contract between employer, employee and their communities has broken down and this ‘sense of drift’ is certainly making it far more difficult to galvanize each part of the renewing growth equation – including government – to fix it, to be part of a common united sense of solution that connect and resonate across all ‘vested’ parties.

The Integrated Reporting movement (www.theiirc.org )

I’m not sure how aware we all are on the work being undertaken under the auspices of the integrated reporting movement .  This  is a process that results in changing the communication mechanisms provided by an organization, most visibly a periodic integrated report, about value creation over time.

An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long-term.

Arguable much of the change to achieve Integrated Reporting needs to be driven by companies themselves and the development of the IIRC framework is enabling companies to shape the process based on their own experiences.

A useful starting place to pick up on this

A useful report to initially read is ‘Understanding transformation: Building the business case for Integrated Reporting’ that set out to understand the processes that companies go through as they move towards Integrated Reporting. The organisations participating in the research are at different stages but all are involved in the IIRC’s Pilot Programme, which aims to help develop an International Integrated Reporting Framework

The work being presently undertaken

Over 100 global businesses and 50 institutional investors are directly involved in the IIRC’s work. This includes some of the world’s most iconic brands, such as Coca-Cola, Clorox, Microsoft, Hyundai, Tata, Unilever, Marks and Spencer, SAP and National Australia Bank.

Their engagement within the Pilot Programme are trialling the principles, content and practicalities of the Framework for two years to provide feedback and build business momentum towards its implementation.

By tracking their experiences over the two-year duration of the pilot, the aim is to capture the changes and benefits of adopting Integrated Reporting. This will help to build the business case for a wider shift towards Integrated Reporting and help to generate support among key stakeholders, including internal audiences, boards, investors and regulators.

The business and investor benefits of <IR> are seemingly compelling.

According to latest reports, the empirical evidence from the IIRC Pilot Programme shows that enables the articulation of strategy and how the business is creating value over time.

This information potentially provides the new lifeblood of capital markets. enables a better communication of the material factors that create value over the short, medium and long term. It works towards investor decision-making and the efficient allocation of capital, essential aspects needed for us all to understand.

The next step of a Consultation Draft of the International <IR> Framework

According the website after a successful three months of engagement and the launching the Consultation Draft of the International Framework at events in 10 of the world’s largest capital markets, extensive consultation has taken place with organizations across the world.

From South Korea to Sweden, Italy to Indonesia, and the Netherlands to New Zealand people have evaluated and commenting on the Consultation Draft.

The IIRC are using received submissions to shape the Framework which will be published in December 2013.

We certainly require more integrated thinking for us to all gain this greater sense of identity.

 If we can achieve a means of presenting the material about the organization’s strategy, governance and performance on commercial, social and environmental issues then this is a significant step forward. By the ability to effectively connect these often siloed areas, businesses are able to provide not only an update on past performance but also a long-term perspective of future value generation.

Integrated Reporting is, therefore, potentially moving us to good, or at least, better reporting. It provides and equips companies to manage their operations, brand and reputation strategically and to manage better any risks that may compromise the long-term sustainability of the business.

If this initiative does allow organizations to present their material information about the organization’s strategy, governance and performance on commercial, social and environmental issues in an integrated fashion

 Regaining engagement through in integrated reporting will benefit many.

I think this collaborative work can potentially advance some of the important areas we need, to regain the engagement within communities. Of course this integrated reporting will have far more initial value to the financial markets and direct investors but if we can begin to see a better, cohesive, articulated business story provided by organizations then it can begin to ‘flow through’ in many different ways.

Beyond the financial community, I think we can all gain by understand the specific business models better, we can begin to appreciate the assets that make up value creation far more and these will be far more based around the intellectual capital assets within organizations and we will begin to gain a higher sense of where innovation is contributing within this integrated reporting.

The value for us all is to become engaged in this work

I think this is a body of work that is well worth exploring and keeping engaged with, it may be a good catalyst for changing our thinking and attitudes and partly help us move finally away from antiquated reporting based on the last century and reporting on assets that are extremely limited on what is making up the real worth of one organization over another.

It is certainly about time that reporting within organizations became significantly better to understand where the real value creation is derived.

If the IIRC can offer a better integrated framework for reporting, something that offers a more cohesive reporting structure that is sadly lacking today, thirteen years into a new century, then we can all benefit from this better understanding.

We can then revise our views on the value and appreciation of what makes up the organization for its value creation – past, present and future – and then decide accordingly, if it has real worth or not going forward, from each of our unique stakeholder perspectives.

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