Member Blogs

The model of integrated thinking that combines three frameworks – Integrated Reporting, Sustainability, and Intangible Capital is excellent, but the framework for innovation is missing. In the framework for innovation there is a debate over a traditional vs. a new framework. In the traditional framework, investment in R&D is considered the primary driver of value creation. But the debate is also about process. In the traditional framework, the process is linear with stage gates in a “waterfall” that begins with R&D. In the new framework, it’s nonlinear and iterative that simultaneously discovers needs and solutions that include patents, inventions and technologies created in R&D that spans companies, universities and governments. Steve Blank popularized the Lean Startup Movement (LSM) by showing how an iterative process is more effective for startups than the linear process. Blank is now analyzing R&D which is thinks is not effectively creating value. Here are references.  

http://steveblank.com/2015/12/01/innovation-outposts-in-silicon-valley/

http://steveblank.com/2015/11/21/at-the-center-of-the-frenzy-innovation-outposts-and-the-evolution-of-corporate-rd/

http://iriwebblog.org/2015/11/16/why-iri-members-struggle-with-lean-startup-in-their-companies/

My thinking on a framework for innovation is that LSM is a subset of a larger framework described as the fourth generation (4G) of innovation management (and R&D) to emerge since 1900. 4G has twelve principles and practices. One is a new framework for capital accounting that combines tangible and intangible capital based on capabilities - people with knowledge, tools, technologies and process - and the structure of those capabilities governed by architectural rules.  The 4G model in this principle is similar to Integrated Reporting with multiple capitals including intangible capital and a process of value creation.  4G recognizes that radical innovation is necessary to create new value based on dominant designs to transform capabilities, business models and industry structures to change societies to achieve goals such as sustainability. Capabilities are the building blocks of value in organizations, markets, industries and societies. They can be measured, developed and shared in value chains and networks. Capabilities are similar to atoms in chemistry and physics. 

The Information Technology & Innovation Foundation (ITIF) is one of the best think tanks in Washington because they study how innovation drives economic growth. However, the ITIF largely ignores how intangible capital drives innovation and economic growth. In their recent report,

Contributors and Detractors:Ranking Countries’ Impact on Global Innovation,

https://itif.org/publications/2016/01/20/contributors-and-detractors-ranking-countries%E2%80%99-impact-global-innovation

http://www2.itif.org/2016-contributors-and-detractors.pdf

they use an obsolete model of policy that almost completely ignores both intangible capital as a driver of innovation AND the methodology of innovation management as a driver of innovation.

The report focuses on measuring global competitiveness of innovation in countries with a model of innovation that is driven almost entirely by the traditional factors of economic growth such as deregulation to achieve free markets and global trade, availability of capital, protection of intellectual property, and tax incentives for funding R&D. The report considers "human capital" as mainly general higher education produced at universities. 

The ITIF is promoting an obsolete policy for competitive innovation that is like promoting an obsolete policy for competitive manufacturing that focuses mainly on capital investments in factories (land and buildings) and the unregulated cost of labor and labor conditions while ignoring the methodology of manufacturing management and engineering based on smart people with specific knowledge required to manage and operate modern assembly lines enabled by flexibility in sequence and the interchangeability of parts, assisted by Frederick Taylor's scientific management, expert knowledge of and application of quality management based on statistics, resulting in the competitiveness enabled by the principles and practices of a system of lean production and the relationships in supply chain management to achieve just-in-time, reduced inventory and maximized flow while controlling high standards of quality.

And of course, business success for growth in manufacturing requires the right products to be manufactured with validated market demand and value resulting from competitive innovation management with competitive strategy, organization, marketing, R&D, finance and HR based on tangible and intangible capital.

Right before Thanksgiving I attended Sustainatopia. It was the first time the conference was held in Boston (it started in Florida and has also been held in California). It’s a really broad group of people and discussion tracks including impact investment, smart cities, LOHAS (lifestyle of health and sustainability), sustainable strategies and innovation, empowering women and millennials.

I was on a panel with Dr. Stephen Jones, President of Antioch University New England. The Sustainatopia organizers chose the title of our session: Integrative Systems Thinking and Innovation. I have to admit I wasn’t sure if anyone would come (it’s a pretty esoteric title:). But we ended up with a few dozen people who were extremely engaged, including corporate sustainability officers who struggle with building bridges across their organizations.

Steve spoke eloquently about how nature is a wonderful guide to systems thinking. His view was a great companion to my explanations of the integrated thinking/reporting movement. The idea of the capitals is a great bridge to talk about the components of the ecosystems companies build.

The conversation got really interesting when we started talking about innovation. I shared the research my firm did a number of years ago that showed that while most innovation efforts are focused on creating processes, these processes often trip on structural barriers involving missing/mismatched capitals (the right people, culture, connections etc). We had a great group in the room and had a lot of input and questions from the participants. It’s clear that the audience saw the link between innovation and integrated thinking. It’s a good reminder to those of us who talk about integrated reporting that the integrated thinking behind it has far-reaching influence.

MIT Technology Review just published their list of the smartest top 50 companies for 2014.

Here's the list.

http://www.technologyreview.com/featuredstory/524671/50-smartest-companies-2014/

The criteria for the list is not the typical nonsense used such as the number of patents or PhD's on staff but whether the innovation being done by the company is a game changer (a radical innovation) that will change an industry. The company at the top of the list is Illumina which is doing radical innovation to drive down the price of DNA sequencing to a level that will change the practice of medicine.

The interesting question is then - How does intangible capital fit in the criteria? My answer is that a special specific type of intangible capital is the essential part of the capability to  do radical innovation. For example, measurement and development of intangible capital that supports radical innovation are two of the twelve principles of the fourth generation (4G) of innovation management.

Integrated Reporting (IR) is the new international project to upgrade financial accounting to measure innovation and intangible capital. It would be great if IR could produce a list that was similar to the MIT top 50.

One of our ICountants, Vedran Antoljak, posed this question:

In case of EU, some countries (such as Hungary) have included measures of Innovation Capacities as one of criteria when evaluating projects for EU and national grants and other co-financing programs. In other words, if we would be able to push this for IC, it would tremendously increase companies' appetite for use of IC measurement tools such as iCounts. This is a tough and risky approach, but it would bring high results. Do we have any experience or examples of similar approaches in the world?

In our ICountant training, we distinguish between the innovation ecosystem and the innovation process. Our existing measures of IC are directly applicable to the ecosystem. We would have to add something for innovation processes. But that may not be necessary.

The question is whether you think that innovation capacities are primarily around how to do innovation (process) or around whether or not you have the knowledge, competencies, culture, connections, etc. to innovate (ecosystem)? The first can be taught. The second can take years to build.

My questions to Vedran and the community are:

• Is there an EU definition of "Innovation Capacities?"
• How are others measuring this?
• Are there other examples we could look to?

Intangible Capital (IC) is misunderstood by the federal government, universities, economists, think tanks in Washington, and other organizations such as The Conference Board. Here’s a new report by the Information Technology  and Innovation Foundation (ITIF) entitled “The Limits of the Knowledge-Based Capital (KBC) Framework” that is unaware of intangible capital frameworks such as described by SmarterCompanies .  

http://www.itif.org/publications/limits-knowledge-based-capital-framework

The federal government and other organizations have been studying how IC is linked to the GDP and to innovation. The ITIF report correctly cites the work, research and prolific publications of Carol A. Corrado of the Conference Board and Charles R. Hulten of the University of Maryland and the NBER. Unfortunately, the ITIF report makes the mistake of assuming that the only KBC framework that describes intangible capital is the one defined by Corrado, Hulten and Daniel Sichel (CHS). The report is unaware of the framework for IC described by SmarterCompanies and other frameworks that integrate IC with innovation.

The link between innovation and IC has been established and described  in the fourth generation of innovation management (4G) to emerge as best practice since 2000. Since 1900, there have been four generations of best practice. 4G has been described in Wiley’s Encyclopedia of Technology and Innovation Management in Chapter 21.  In 4G, innovation is driven by capabilities which are combinations of tangible and intangible capital. 4G capabilities are people with knowledge, tools that are developed and bought with tangible capital, technology and processes.    

With architectural rules, capabilities in 4G are structured into “stacks” of services, applications, products, platforms, components and technologies combined with knowledge and processes. “Stacks” are linked together to form projects, organizations, business models, and industry structures such as value chains.  In 4G, capabilities evolve into dominant designs that govern new markets.  4G has twelve principles and one is that innovation hubs that typically have more than 50 partners such as the Department of Energy (DOE) innovation hubs and the Apple hub for their iPhone family that coordinates service providers and third party supplier of applications are required to create new dominant designs.

There’s been quite a firestorm on the web started by Chris Heuer declaring Social Business Is Dead – Long Live What’s Next.  I’m interested because I see social business as a parallel and overlapping concept with intangible capital and new forms of measurement.

Basically, Chris say that the words and the concepts of social business have not been embraced by large corporations:

Through my conversations with colleagues and executives at large enterprises, the words Social Business have not struck the right chord with leaders. The movement has failed to earn their faith, trust and budgets in a significant way. While the ideas behind the moniker are invaluable in defining the future of work, most large companies simply aren’t buying into or investing in Social Business transformation efforts in more than a piecemeal sort of way

The underlying assumption here is that for an idea to succeed, it has to be accepted by big business. But this assumption contradicts everything we know about innovation. All of us in the business of disrupting management practices have to understand that the people we are disrupting are managers who are comfortable in their positions at the top of the pyramid. Large companies are full of such people. And, as Chris points out, there aren’t a lot of immediate motivations for the kind of wholesale change that social business implies.

This assumption in itself shows a bit of an industrial mindset—the idea that change can and must come from leaders and bosses—even though the concept of social business clearly would say otherwise. And that consultants can co-opt the power of managers and make broad changes in an organization. This is the irony of our era. All of us, even at the vanguard of change, are creatures of our upbringing. Every one of us in the workforce (and unfortunately even my sons who are in college) is the product of an education system that was, like all the rest of our institutions, optimized in the industrial era. We are industrial beings trying to cope with a post-industrial reality.

One of the basic concepts of that reality is that disruptive change comes from the bottom of markets—in this case, from the bottom of the management pyramid and the external environment of a company.

This means that the hard work of selling new ideas has to be done at the grassroots level. Our work is to empower people with tools that they can use to do their work better. It has to succeed there and filter up. The days of top-down, legislated change are over (as if they were ever that successful to begin with). When the success of your business depends on a smart, engaged workforce, you need for your people to be part of any change.

I’m heading to DC later this week to an academic conference, ICICKM. On Thursday I’ll be presenting a paper with John Dumay that basically says that practitioners have to get out of the cathedral and stop legislating how next generation business should be measured and managed—and get into the streets as missionaries to help empower people with the skills and tools they need to be successful.

Everything that Social Business and Intangible Capital are about tells us that power comes from the people: from your employees and customers and communities and stakeholders of every kind. Social Business isn’t dead. The idea that’s dead is that big business will show us the way to create social businesses. Don’t get to the people through the bosses. Get out and sow change in the streets.

I’m a little obsessed about the untapped intangible capital inside organizations. This IC represents potential growth, innovation and the prosperity we crave for our communities. But it often lies fallow because management and even the employees themselves fail to understand their collective power.

That’s why I started a blog named Smarter Companies back in 2008 and why I chose the name for the new company I launched in January of 2013. Why Smarter Companies? Because I have seen first hand the power that is unleashed: When organizations see their knowledge and connections as assets. When organizations support sharing and learning and collaborating inside and outside the walls of their org.

There is a huge need for innovation and change inside companies today. If we are going to do something about it, the first step has to be really practical. That’s why we are offering a number of tools (most of them open source) to answer simple questions:

• How important are intangibles to the future of your organization?
• What are your unique intangibles?
• How do they combine to create value for your customers and stakeholders?
• How well does this system work? Where are the opportunities for improvement and monetization?

These are the basic questions that an organization needs to get started with the task of managing for maximum intangible value—and to become a smarter company.

Hope you will visit our site, check out the community, the tools, the marketplace and join our mission to make every company as smarter company.

There was a great article in the Financial Times entitled The strategy consultants in search of a strategy.

This article comes on the heels of the very vigorous discussions going on at Relationship Economy and here at Smarter-Companies about the future of consulting which make it clear that consultants themselves see change coming.

And it’s a continuation of the discussions we have had since the publication of Intangible Capital where we talk about the implications of the rise of the digital economy. One of the big implications we wrote about was the shift from strategy to innovation as a management focus (the others include the shift from org charts to networks, the shift from command and control to orchestration and the shift from accounting to ICounting).

Strategy is at its roots a largely top-down exercise that assumes the people at the top have and know how to use all the knowledge necessary for a company to succeed. But one of the basic changes in the digital economy is that knowledge and collaboration reside throughout a company’s network. This means that emergent strategy, or innovation, is growing in importance. This view says that information and learning need to come from the bottom up and outside in rather than just the top down.

It’s in this context that I see the disruption of strategy consulting. You’re not helping much if you facilitate management teams sitting in ivory towers to develop their views of what needs to be done and then implement “change management” programs to essentially “sell” the strategy to all the underlings. Consultants in this case are caught in their own industrial, top-down mode of thinking.

The alternative is consulting that helps companies listen, engage and learn from their stakeholders. What do the company’s stakeholders need? How do they experience the company? What are the drivers of growth and profitability? This alternative is what leads consultants to the study of intangible capital. Today, 80% of the value of the average U.S. company and 100% of its competitive advantage is intangible.

Strategic consulting is being disrupted because the nature of strategic advantage is being disrupted. Today it’s about intangibles like people, process, partners and purpose. To be a “strategic” consultant, you have to help companies see, measure and optimize these intangibles. It’s not about formulating a plan and driving execution (although there will always be a place for this). It’s much more about understanding the intangibles driving the future success of your clients’ businesses and incorporating stakeholders in the conversation about how to maximize the potential of these intangibles through innovation and growth.

“They make it look so easy!” How often do you say that about professionals in sports, public speaking and other human endeavors? Is this just your impression or are they really using less energy or incurring less wasted motion? Is that what the little old lady in New York City meant when the tourist asked her, “How can I get to Carnegie Hall?” and she immediately
advised, “Practice, Practice. Practice?”

Which of your peers seem to get certain tasks done quicker and better while other peers excel in yet other tasks? (Gilbert 1996) defined a term, Performance Improvement Potential, PIP, which denotes the ratio of a person’s performance at a given task to the performance of an exemplar at that task. Ratio’s as high as 15 are often seen, meaning that the subject person has the potential to improve 15 fold.

Is this related to power, the time rate of doing work? Not necessarily. Why does one race car driver lap the course in less time than another, even in the same race car? It isn’t because he is peddling harder. It seems that there is a knowledge factor involved.

What does ‘work smarter instead of harder” mean to you? Does working smarter mean accomplishing the same work in less time? How about accomplishing less work in less time yet producing the same result? Maybe there is more to be said than e = mc². Perhaps e/k = mc² because more knowledge with less energy yields the same result.

Intellectual capital, Human capital, and Knowledge management have been hot topics for two decades. Lots of organizations are paying lots of money to improve the production, sharing and utilization of knowledge. Although Gilbert’s PIP indicates that one person can do more than
another, what indicates that one person knows more than another? (Hawkins 1995) defines a Level of Consciousness scale and a questionnaire that has located several thousand persons on this scale. It seems that the higher the level of consciousness the less has to be communicated to impart meaning, especially about complicated, ambiguous subjects.

It has been almost 500 years since Machiavelli wrote, “Knowledge is power.” What branch of science has described the interchangeability of knowledge and power? What branch of engineering has shown how to make such tradeoffs when designing systems? Maybe we could do systems engineering Better, Faster, and Cheaper if we just learned how to think and used a higher level of language to express ourselves.

+ Gilbert, Thomas, Human Competence, Engineering Worthy Performance, HRD Press, 1996.

+ Hawkins, David, Power vs. Force, Hay House, 1995.