Innovation Reguires the Nesting of All our Capitals

February 26, 2014 By Paul Hobcraft

We fail to recognize all the capitals that perform in our organizations. Financial capital rules but the majority that make up the underlying knowledge capitals are actually far more valuable to nurture and understand.

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

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

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

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

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

Each of our capitals performs a particular function and the overhaul make-up of their understanding becomes our eventual code to perform innovation. Each organizations uses it mix of capitals to accomplish and generate innovation. It is in this mixture of combinations brought together constantly in different ways , this ‘nested effect’ that innovation occurs. The capital you ‘bring to bare’ will generate the innovation outcome or does highlights the gaps and gives real clues on where it is repeatedly falling down.

Organizations miss the power to consistently tap into all the potential that ‘resides’ or could be added to make innovation happen. It is the unique set of capitals that offers the real potential to set each organization apart from others, it gives them the wealth-generating potential, their uniqueness and ‘chance’ to be seen as future valued.

So what makes up our capitals?

Firstly let me offer my definition of what is innovation capital

“Innovation capital is the sum of all that promotes the development and changes required for achieving innovation outcomes, within one organization or its broader networked environment for market place advantage. These are made up of the resources, processes, and capabilities to develop a constantly evolving capacity to innovate.”

Most of our capitals are learning capitals

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 out across growing communities. The more we discover, the more knowledge we gain and this leads up to determine a potentially better decision-making that should, in theory, give greater confidence that our invested financial capital is in ‘good hands’.

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

There has been an incredible ‘body of work’ on what does make up our capitals.

For many the term intellectual capital tends to put people off or prompt immediate definitions of “oh you mean intellectual property” so there has been a concerted re-framing to form around ‘our’ intangible assets instead. Our intangibles are far more essential today to understand. They are made-up of a complex set of assets. These can be made up of software development, product design, branding and training to go alongside intellectual property and still be accounted for, yet we have still not truly scratched the surface of capitals. There is so much more that is our true capital in organisations.

There is a ‘decent’ consensus today that our intangible capital drivers are made up of three parts: human, relationship and structural. Nested underneath these are perhaps fifteen or even more, one such view pioneered by Entovation, which is led by Debra Amidon.

For Human capital it is made up of knowledge, leadership, innovation, entrepreneurship and creativity, and finally reputation capital

For Relationship capital this is made up of diversity, brand, network, cultural, social and community capital

Then for Structural capital this has strategic, organization, intellectual property, technological and environmental capitals.

Then we have the ‘new kid on the block’ in Natural Capital, to help advance the business case for better ecosystem management, with a focus on innovative initiatives to reduce supply chain and operational risks, cut business costs, enhance brand reputation, and fuel revenue growth.

Many capitals do make up our organization’s real stock and flow

I have to admit these are a lot of capitals to swallow and set about giving dedicated focus too. Yet it is this ability to recognize each capital and its make-up that when combined does offer the value creation capabilities of organizations.

The greater we can identify the underlying aspects of these capitals, the more we can combine them in unique evolving combinations to bring about new value creation. I’d start at the three broader intangibles of human, relationship and structural and then once you have your ‘intangible bearings’ you dive deeper.

It is in this greater use of capitals that lays the true value of the organization and its wealth generating capacities.

Outsiders really can’t figure out the potential for future value while these intangibles remain hidden. The current balance sheet reports the financials, normally reliant as quantifiable only on historical data, even with some sort of (short-term) future commentary around market conditions, outlooks on tangible investments and generalisations on the value of people.

Somehow this needs changing. We need to gain a better understanding of the whole picture of capital investment, not just financial and the tangibles. that we can touch and see, but the intangibles that we must sense and measure.

We need to build a better value creation story.

Why I tend to pull out innovation from the above list of capitals for instance is it takes arguably the ‘raw material’ within the other capitals into the eventual commercial outcomes that ‘inform’ us of the past, present and future wealth-generating outcomes.

It is working the combinations of all the capitals into unique combinations that give us the potential ‘stock’. Stock can be enhanced through more investment, it can be preserved through holding investment and it can diminish if it is not managed thoughtfully, or critical parts leave, reduce or get ignored.

The job today is unlocking potential, that wealth generating potential and that requires adding stock. Through focusing on the make-up of all the capitals we unlock knowledge, we can release resource from those unproductive activities and support those that promote and generate fresh value. New knowledge gives us the ‘raw’ innovation stock.

We need to know where our value creation resides – it is nested in our organizations.

By recognizing our ‘stock’ and knowledge through exploring and investing in our group of capitals we have that greater chance of value-creation. We need to move away from the bias of one capital, financial, it is not the dominating one in today’s world, it is our knowledge generating capital, those that ‘capture’ the true story of appreciating if one organization has future investment value or not, by the outcomes they generate.

We live in an evolving complex, uncertain world

In a world of increased volatility today, it is not how our financial capital alone is moving; it is how our knowledge is flowing and being absorbed. The more we absorb and then translate, the more value we have to generate our future. To make greater sense of all the ambiguity out there, we need to build our knowledge capital.

It is the leveraging of all our capitals, the understanding of their interdependence, the value of the interactions making up the dynamics within the system, the investments being made and the potential of their impact these have on the wealth generation and future value that ‘resides’ or not.

Knowing what makes-up our intangibles is so crucial within our organizations to understand. Do you really know what makes-up your real capital?

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