Intellectual Capital ‐ Navigating in the New Business Landscape

Citation

Ditillo, A. (1998), "Intellectual Capital ‐ Navigating in the New Business Landscape", Business Process Management Journal, Vol. 4 No. 1, pp. 85-88. https://doi.org/10.1108/bpmj.1998.4.1.85.1

We know surprisingly little about Intellectual Capital. What is it? How can it be defined? Why is it so important? What is its role in companies? How can it be managed? Is it possible to measure it? In which way? Does it effect the values of companies?

Very few authors have tried explicitly to answer these questions but recently a new movement bringing together accountants, consultants, engineers, human resource managers and mathematicians has considered directly the problem of intellectual capital. As a result, the arguments of books and articles on this topic are really disappointing and scarcely convincing. They are too abstract and general, with the lack of the pragmatism necessary to understand exactly what intellectual capital is and how it can be managed.

The book of Roos et al. has been written exactly with the objective of overcoming these problems. It aims to help managers “to grasp” intellectual capital, to monitor the efficiency of the intangible part of the company and to create an intellectual capital measurement system. In addition, according to the authors, it aims at beginners who want to approach the problem in a simple way and at practitioners who want pragmatic suggestions on how to manage the intellectual capital.

During the 1980s academics and practitioners started to recognise that they were neglecting one of the most important sources of the value creation in companies: the intangibles. This is particularly true in the current environment characterised by a high level of complexity and uncertainty where the ability to perceive and to react to the threats and opportunities is essential. It depends on the skills of the personnel and on the information and knowledge available in the company. Knowledge and information are now the most strategically important resources for acquiring a competitive advantage. Therefore companies should start to recognise all their assets and flows, including the invisible ones and that their survival depends on the capability of managers to “navigate” in this “new business landscape”.

The answer to the problems produced by this new context has been the development of two new streams of thought. One stream of thought is linked to the idea that companies should concentrate their attention on the process of knowledge creation. First, it is necessary that all the members of the company participate in the process of organisational learning in order to acquire the information and knowledge to deal with the complex and uncertain changes coming from the environment. Second, the process of research and development becomes central for the success of the company because it enables the development of new products and services in response to new customer’s needs. Finally, the communication between people at different levels of the organisation guarantees the exploitation of the knowledge developed in different parts of the company and contributes to the creation of new knowledge through the comparison and sharing of different cognitive models. In addition, the knowledge created should contribute to the competitive advantage and to the value creation of the company. The recognition of invisible assets and core competencies, and the management of knowledge become the key activities of the company.

Another stream of thought is linked to the idea that the management of knowledge requires its measurement. In the 1970s some authors tried to measure the value of personnel so that it could be indicated in the balance sheet. The attempt to develop new performance measures continued in 1980s with total quality management and the new emphasis on customer satisfaction. In the 1990s the concept of a balanced scorecard to evaluate the performance of the company, including not only financial indicators but also other indicators such as cycle times, rate of on‐time delivery, employee turnover, customer satisfaction, etc., has been developed.

Intellectual capital theory represents an attempt to fuse these two streams of thought. The management and measurement of knowledge are strictly inter‐linked and cannot be separated, on the principle that “what you can measure, you can manage, and what you want to manage, you have to measure”.

The problem with the first theories on intellectual capital was that they presented a long list of indicators without trying either to link them in a common framework or to prioritise them. The consequence was that the managers of companies did not know how to use them and how to solve the inevitable trade‐offs of the process of decision making. Therefore, a “second generation” of intellectual capital practices has been developed in order to overcome these limitations. The book of Roos et al. is part of this new generation. It suggests how to aggregate the different intellectual capital indicators in an intellectual capital index and how to relate the latter to the market value of the company.

The book starts with a definition of intellectual capital. The latter can be seen as:

a language for thinking, talking and doing something about the drivers of companies’ future earnings. Intellectual capital comprises relationships with customers and partners, innovation efforts, company infrastructure and the knowledge and skills of organisational members. As a concept, intellectual capital comes with a set of techniques that enable managers to manage better.

According to the authors, intellectual capital is made up of human capital (competence, attitude and intellectual agility) and structural capital (relationships, organisation, and renewal and development). Human capital contributes to the innovation and renewal of the company in order to match changes of the environment, while structural capital guarantees the sharing and diffusion of the knowledge created, which can in this way be exploited in different parts of the company.

From this definition it immediately becomes clear that intellectual capital has a big impact on the management and life of companies: it transforms the way of thinking of them. Managers should concentrate their attention not only on the physical part of the company but also on the invisible and intangible part of it. This is because the market value of many companies is many times the value of their physical capital. The difference between the two depends on the knowledge, brand, innovation projects and other “invisible” assets, which contribute hugely to value creation.

One of the most interesting concepts of the book is that companies should consider not only the stocks of the different forms of intellectual capital but also the flows between them and the financial capital. This contributes to the presentation of a dynamic concept of intellectual capital, which continuously changes in the course of time.

Once it has defined the concept and the contents of intellectual capital, the book continues by putting forward a comprehensive system for capturing and measuring intellectual capital. This system is based on a process model, which starts by understanding the strategy and key success factors of the company and ends by identifying the indicators linked to the different categories of intellectual capital. These indicators are not designed to measure the exact, absolute level of stock intellectual capital, but only its changes.

The central part of the book is an attempt to explain how to aggregate different indicators of intellectual capital in one intellectual capital index and how to correlate the changes in intellectual capital with the changes in market value. To consolidate the intellectual capital indicators in one single measure it is necessary to understand what to aggregate, what each indicator really captures, what it actually measures and what is the meaning of a change in that indicator. This analysis should contribute also to the establishment of priorities and rankings. The next step is to express each indicator in a dimensionless number and to assign a weight to it. In this way, the indicators can be consolidated into one or several indices, which represent the point of reference for evaluating intellectual capital. Furthermore, the analysis of the correlation between the intellectual capital index and the market value index can provide some insights on the contribution of intellectual capital to the process of value creation.

This part of the book makes a useful and original contribution to the topic, which must be taken into consideration by all interested academics and practitioners. It offers some practical suggestions on how to manage and measure intellectual capital through the building of an intellectual capital index, which can be related to the market value of the company. For this reason, it can be located in the framework of the second generation of intellectual capital practices.

The book ends with some suggestions for a new meaning of management. The latter becomes a revolutionary activity, which requires the creativity necessary for discovering the future and learning to exploit the opportunities it offers. This is possible if managers are ready to listen to the dissenting voices of employees and to nurture them. They must abandon the old and well‐known practices for new ones, which guarantee a strong sense of direction in a process of continuous change. Only in this way will companies be able to survive in the current relentlessly shifting environment.

All the theoretical concepts presented by the authors are supported by examples coming from the experiences of firms that manage intellectual capital practically. This contrasts favourably with the level of abstractness and generality of previous works on the topic.

Unfortunately, the interesting arguments of this book are obscured by two important defects. First, the authors do not explain what to do when it is difficult to express the indicators of intellectual capital as dimensionless numbers. As a result, the rules presented in the book can be applied only to a limited number of indicators. Furthermore, the intellectual capital index is calculated through simple mathematical calculations, which are based on the weights managers assign to the indicators. Consequently, the evaluation of intellectual capital is too subjective with the risk that the wrong conclusions will be drawn. Second, the intellectual capital system does not allow comparisons to be carried out between firms.

In conclusion, I believe this book represents a good starting point for considering the second generation of intellectual capital practices but the analysis has to be taken further to reach that level of sophistication necessary to face and manage the complexity of reality.