Organizations have been focused for far too long around the importance of financial capital. It determines and drives organizations destinies. We are caught in a constant focus upon our achieving a return on our (financial) capital as our measuring criteria. Organizations strive for improving their ROCE, RONA, IRR, EVA and a host of other financial measures.
As Clayton Christensen has been arguing the agenda of organizations begins and ends with the “search for numbers”. I think there is a time for changing this, we need to search for the knowledge that makes-up eventually the numbers.
There has been a distant voice for some time putting forward the need to appreciate and value the other capitals sitting within organizations. Much of the discussions have been housed under the term “intellectual capital” which denotes the sum of knowledge made up and contributed by our human assets, our organizational structures and our relationships that are developed.
These are the ‘capitals’ that transform into economic value through organization action. It is the financial capital that simply finances this.
Financial capital dominates any discussions
Yet financial capital and all its associated aspects rules, no, it utterly dominates. It totally fails to tell us in numbers alone where and what creates the value, it simply reports it.
It is this financial capital through our profit and loss, our balance sheets hides the value, or spreads it out in ways no one really understands its make-up.
Certainly those attempting to judge an organization just have to rely on a ‘history of numbers’ and some ‘selective’ market view to make investment judgements.
Equally those often running our organizations have a restricted view of where their real capital lies, as they focus on the numbers and then work down.
Today,we are in a rapidly changing world and we need to understand it differently
The reliance of financial capital being the absolute measure is being challenged thankfully. Our business world is facing considerable disruptions from the accepted past practices, performance has become more volatile, more dynamic, more reliant on understanding that knowledge is where the value lies.
“Business as usual” is thankfully in a steep but protracted decline, the necessity today is to be constantly evolving and learning and that comes from knowledge acquisition, assimilation and then transforming and exploiting this into new value. We need to find new models for evaluating our real value and capital stock.
These ‘absorptive capacities’ are where we need to manage our knowledge flows better to translate and direct our understanding of new, value creating capital. We need to report on these far more as they offer the ‘residing’ and new stock that gives us new innovation potential and fresh value.
Learning capital needs to emerge and dominate future discussions
We need to give increasing incentives for organizations to learn. We need to judge the quality of this learning, not listen to ‘bland’ statements often presented. We need to know where this knowledge is targeted in narrative, discussions, spillovers and interactions.
What is being exploited, what is being determined in the decision-making process to give greater confidence that our invested financial capital is “in good hands”.
Keeping reliant on just discussing the financials within organizations we know is not enough. We have to force better discussions on the make-up of the other capitals, as these are still poor, left to individual interpretation and variable and we need to change this.
We are increasing opening up
As organizations become more open (open innovation for instance) the strength of linkages, of knowledge exchange, the translation of these activities is becoming really valuable to understand and focus upon more.
Through many of our activities we actually ‘borrow’ and it is then the ‘dynamic linking’ that we bring into the process, gives up the increased potential of innovation. It is the ease of learning, the ability to acquire and apply knowledge that creates the potential for innovation.
How many organizations really articulate their knowledge capital in acquisition, assimilation and transformation? Do we know how ‘path dependent’ they are- are they lagging in the market, are they simply opportunistic, are they locked-in far too much in potential downside risks.
Do they suffer from cognitive failure, do they lack the appropriate competencies to meet the constant challenges occurring around them. How much of this can you really extract from cold, hard numbers? Not a great deal.
Recognizing where our true value resides
The real problem we have is the lack of appreciation of what makes up our value, the real underlying wealth creating value, the one that truly ‘generates’. The tangible part is easier to appreciate (plant, land, material etc.) but is becoming a significantly declining part of the total sum of value of our organizations- sometimes it is only making up 30 percent..
It is our difficulties of understanding the intangibles as it is a very challenging task. Yet this has huge implications on the ‘health’ of the organizations we continue to invest in. Most organizations resort to “inferring” the value. This needs to change. The value today is in the interactions between the different components that make up our intangibles, out intellectual capital.
We are in need to identify what ‘drives’ organizations and that is our knowledge stock
For gaining and sustaining real advantage, and showing why it has the potential for creating new wealth we need to understand our capital stock.
This needs to be far more forwards looking; it needs to be more open and more transparent and it needs to ‘flow through’ the organization to find the potential to find new value from innovation. The call is growing increasingly for a new valuation model.
Static knowledge where we view financial numbers, never take our knowledge beyond what we are reading, failing to connect it and advance it is just not good enough, we do need to understand the underlying dynamic capabilities that make-up the organization. We need to access, absorb and translate our knowledge stock, allow it to flow and be developed into greater value-adding stock and innovation outcomes.