Capital Creation and Organizational Innovation

Michi–News–

Richard T. Watson, University of Georgia and Liechtenstein Consortium for Digital Capital Creation.

Transforming for the future is a challenging and endless task made more difficult when you don’t fully understand the nature of your current business. In this blog, I present a useful and powerful framework for giving you such an understanding, so you are better prepared to envision a successful future.[1]

The purpose of an organization is to create capital—a durable and transforming factor that provide the basis for production, innovation, and sustained competitiveness. Typically, such a statement fires the neuron that equates capital with financial assets, but there are multiple types of capital. For me, there are six main categories of capital (Table 1). Capital creation occurs when one or more forms of capital are converted to other forms of capital or an enhancement of the same capital, as shown in the following figure (Figure 1).

Figure 1: The capital creation system

 

Table 1: Types of capital

Capital National Organizational Individual
Economic Public infrastructure, both physical and informational Financial, physical, and manufactured resources Personal investments
Human The general health, skills, knowledge, and abilities of the population Skills, knowledge, and abilities of a workforce Personal skills, knowledge, and abilities
Natural Natural resources, living systems, and ecosystem services Rights to use or extract natural resources, such as farming and mining Public parks and gardens
Organizational The political, economic, and legal systems, and national culture Institutionalized knowledge and codified experience (software and databases), routines, patents, manuals, and structures Personal planning, management, and leadership skills
Social Structures for integrating and assimilating citizens within society to create broad and diverse social networks The ability of an organization to benefit from its social connections The ability to benefit from personal social connections
Symbolic National reputation and image

Respect and admiration for a nation’s institutions and culture

 Organizational reputation, image, brands, and ranking within its industry The personal honor, status, reputation, or prestige possessed within a given social structure

 

While many organizations, and probably yours, focus on creating economic capital by producing a product or service it can sell, this is not universally true. Universities, for instance, concentrate on creating human (graduates) and organizational (knowledge and intellectual property) capital. Religions produce social (the community of believers) and symbolic (prestige and authority) capital. Government agencies fashion economic (e.g., highways) and organizational (e.g., regulation of electronic communication) capital creation, which in turn provides critical capital for other organizations to incorporate in their capital creation processes.

All organizations require a mix of the six types of capital to varying degrees. Deciding on the complementary blend and point of focus determines capital productivity, but this blend is not static. It changes with new technology and varying customer needs. Restructuring an industry’s capital creation system and shifting the focus often induces radical change and higher levels of capital productivity. In the next blog, I will use the car industry to show how a firm’s innovation in its capital creation systems can have a major negative impact on its competitors.

[1] This blog note draws extensively on Watson, R. T. (2019). Capital, Systems and Objects: The Foundation and Future of Organizations. Athens, GA: eGreen Press.