Strategic Intellectual Capital Management in Multinational Organizations:
Sustainability and Successful Implications Kevin J. O'Sullivan New York Institute of Technology, USA
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Copyright © 2010 by IGI Global. All rights reserved. No part of this publication may be reproduced, stored or distributed in any form or by any means, electronic or mechanical, including photocopying, without written permission from the publisher. Product or company names used in this set are for identification purposes only. Inclusion of the names of the products or companies does not indicate a claim of ownership by IGI Global of the trademark or registered trademark. Library of Congress Cataloging-in-Publication Data Strategic intellectual capital management in multinational organizations : sustainability and successful implications / Kevin J. O'Sullivan, editor. p. cm. Includes bibliographical references and index. Summary: "This book highlights areas of concern in management of intellectual capital and demonstrates opportunities for the successful use of these tactics"--Provided by publisher. ISBN 978-1-60566-679-2 (hardcover) -- ISBN 978-1-60566-680-8 (ebook) 1. Intellectual capital. 2. Intellectual capital--Management. 3. International business enterprises. 4. Intercultural communication. 5. Corporate culture. I. O'Sullivan, Kevin, 1967- II. Title. HD53.S764 2010 658.4'038--dc22 2009018418 British Cataloguing in Publication Data A Cataloguing in Publication record for this book is available from the British Library. All work contributed to this book is new, previously-unpublished material. The views expressed in this book are those of the authors, but not necessarily of the publisher.
Table of Contents
Preface ................................................................................................................................................xiii Acknowledgment ................................................................................................................................ xix
Section 1 Leadership Chapter 1 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization ............................... 1 Alan M. Thompson, Production Services Network Ltd., Scotland Chapter 2 An Epistemology of Intellectual Capital and its Transition to a Practical Application ........................ 17 Jan Carrell, Northwestern College, Colorado Technical University, USA Chapter 3 Multinational Intellect: The Synergistic Power of Cross Cultural Knowledge Networks .................... 44 Leslie Gadman, London South Bank University, UK Robert Richardson, Mental Health Associates, USA Chapter 4 Dynamic Capabilities in R&D-Networks ............................................................................................. 58 Arla Juntunen, Helsinki School of Economics, Finland
Section 2 Strategy Chapter 5 Intellectual Capital Measurement and Reporting: Issues and Challenges for Multinational Organizations ............................................................................................................ 75 Suresh Cuganesan, Swinburne University of Technology, Australia Richard Petty, Macquarie University, Australia
Chapter 6 National Intellectual Capital Stocks and Organizational Cultures: A Comparison of Lebanon and Iran ...................................................................................................... 95 Jamal A. Nazari, Mount Royal College/University of Calgary, Canada Irene M. Herremans, University of Calgary, Canada Armond Manassian, American University of Beirut, Lebanon Robert G. Isaac, University of Calgary, Canada Chapter 7 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability ................................................................................................................ 119 Herbert Robinson, London South Bank University, UK Chapter 8 An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines ............. 136 Tomás M. Bañegil Palacios, Universy of Extremadura, Spain Ramón Sanguino Galván, University of Extremadura, Spain Chapter 9 The Role of ICTs in the Management of Multinational Intellectual Capital ...................................... 144 Mirghani S. Mohamed, New York Institute of Technology, Bahrain Mona A. Mohamed, New York Institute of Technology, Bahrain Chapter 10 The Link Between Learning Capability and Business Performance in MNEs: The Role of Intellectual Capital .......................................................................................................... 160 Isabel Mª Prieto, Universidad de Valladolid, Spain Elena Revilla, Instituto de Empresa, Spain
Section 3 Implementation Chapter 11 Managing Corporate Responsibility to Foster Intangibles: A Convergence Model ........................... 178 Matteo Pedrini, Altis–Postgraduate School Business & Society, Italy Chapter 12 Intellectual Capital Management in Long-Lasting Family Firms: The DuPont Case ........................ 207 Rosa Nelly Trevinyo-Rodríguez, EGADE Campus Monterrey, México Chapter 13 Knowledge Management and the Links to Human Capital Management: Leadership, Management Capabilities and Sustainability .................................................................. 221 Marianne Gloet, Abu Dhabi Women’s College, UAE
Chapter 14 Building and Maintaining Human Capital with Learning Management Systems .............................. 234 Tom Butler, University College Cork, Ireland Audrey Grace, University College Cork, Ireland Chapter 15 Multinational Companies and Their Link to the Intellectual Capital of Territories: A Proposal of a Tool to Evaluate the Sustainable Development of the Region through its Intangible Assets ...... 249 Agustín J. Sánchez Medina, University of Las Palmas de Gran Canaria, Spain Chapter 16 International New Ventures, Organization Structure, and IC Management ....................................... 271 Irene M. Herremans, University of Calgary, Canada Robert G. Isaac, University of Calgary, Canada
Compilation of References .............................................................................................................. 286 About the Contributors ................................................................................................................... 328 Index ................................................................................................................................................... 334
Detailed Table of Contents
Preface ................................................................................................................................................xiii Acknowledgment ................................................................................................................................ xix
Section 1 Leadership Chapter 1 Facilitating the use of Intellectual Capital in a Matrix Multinational Organization ............................... 1 Alan M. Thompson, Production Services Network Ltd., Scotland This chapter looks at the issues surrounding how to encourage the generation and manage the use of innovation within the organizational environment of being a flat, matrix-shaped, international services contractor. The influence of organizational structure on communication and trust is examined in comparison to traditional hierarchical-shaped organizations. The importance of organizational strategy, particularly in terms of how that strategy is communicated and how to manage when events disrupt that strategy, are looked at in detail. Organizational culture can rest on some more heavily than on others; how those responsible for sustaining and promoting a culture of innovation can be supported is the next layer analysis. Finally the skill sets required of managers are considered along with issues of motivation, influence and handling indirect sources of innovation. Illustrations of the issues and some solutions in action are taken from the company Production Services Network, (PSN) to build a bridge between academic theory and practical application. Chapter 2 An Epistemology of Intellectual Capital and its Transition to a Practical Application ........................ 17 Jan Carrell, Northwestern College, Colorado Technical University, USA Organization requirements for survival evolve reflective of the environment in which they exist. It has been theorized the organizational tool for survival of the 21st century is intellectual capital. As with new concepts the transition from theory to practical implementation is not without challenges. Intellectual capital struggles with transitioning into the world of business. This chapter includes a limited study of organizations in the Midwestern United States whose executives espouse a valuation of their organizations’ intellectual capital but have not bridged the gap from the theoretical understanding of intellectual
capital to the practical documentation of their organizational intellectual capital in practice. This finding illustrates an estrangement between the academic field of theory and the practical implementation in the organizations. Chapter 3 Multinational Intellect: The Synergistic Power of Cross Cultural Knowledge Networks .................... 44 Leslie Gadman, London South Bank University, UK Robert Richardson, Mental Health Associates, USA The world of international business is experiencing transformations of such magnitude that existing business models have become either invalid of incomplete. A fundamental force behind these disruptions has been the emergence of the digital networked economy (Ridderstrale and Nordstrom 2004, Flores and Spinosa, 1998) with its supporting internet and communications technology. One significant manifestation of this economy is the emergence of business models designed to gain competitive advantage by bonding with customers, suppliers and complementors (Wilde and Hax 2001). From the multinational perspective outsourcing and off - shoring have been the most common examples of this approach, but user lead innovation models (von Hippel 2005) based on Open Source methods are rapidly emerging as the leading source of competitive advantage. Commitment has been argued to play an important role in determining the success of these relationships (Abrahamsson and Livari, 2002) suggesting that entrepreneurs must be adept at building and maintaining commitment based value networks (Allee 2004, Sveiby and Roland 2002, Savage 1996, Gadman 1996, Adams 2004). This paper considers the challenges associated with commitment in multinational value networking and finds them to be most problematic in the diffusion of innovation where increasing levels of commitment are required across national boundaries and cultures. (Mauer, Rai and Sali 2004). Current research into core commitment structures of virtual multinational communities is not been well established. By analyzing data from a range of sources the paper concludes that the success of value networks depends on the desire of participants to acquire history - making identities (Gauntlett 2002, Spinosa et al. 1997) by maintaining identity defining commitments across the network. Implications for theory and research are discussed. Chapter 4 Dynamic Capabilities in R&D-Networks ............................................................................................. 58 Arla Juntunen, Helsinki School of Economics, Finland This chapter addresses collaborative business networks at the level of industry/cluster networks, which is important and relevant from the strategic management perspective in several industries. Collaborative networks are seen to offer firms collective benefits beyond those of a single firm or market transaction. The author of this chapter aims to contribute to the development of theories of knowledge management, organizational learning and a resource-based view of the firm. The initial argument is that the characteristics of the task that organizations try to accomplish through forming a specific collaborative network influence the organization’s intellectual capital, the capabilities developed and required. This chapter is based on a longitudinal case study in the ICT-sector.
Section 2 Strategy Chapter 5 Intellectual Capital Measurement and Reporting: Issues and Challenges for Multinational Organizations ............................................................................................................ 75 Suresh Cuganesan, Swinburne University of Technology, Australia Richard Petty, Macquarie University, Australia Multinational organizations operate across a variety of complex competitive environments. Achieving the right balance of global alignment and local flexibility is central to competitive success for these organizations. Viewed from an intellectual capital perspective, multinational organizations need to: design and execute appropriate structures and systems (structural capital); engage and align its international workforce (human capital); and, generate favourable relationships across the multitude of stakeholders it interacts with globally (relational capital). But in pursuing these goals, a number of issues and challenges are faced: How to make sense of intellectual capital investment decisions? How are they to communicate intellectual capital priorities throughout the multinational business? And, with what tools are they to measure and monitor investments and initiatives such that refinements and corrective action can be made? In dealing with these issues, intellectual capital measurement and reporting practices can help. This chapter presents the conceptual framework underpinning intellectual capital, discusses limitations with traditional financial reporting models, outlines the benefits of intellectual measurement, and reports and presents research on the perspective of finance professionals evaluating global companies. Chapter 6 National Intellectual Capital Stocks and Organizational Cultures: A Comparison of Lebanon and Iran ...................................................................................................... 95 Jamal A. Nazari, Mount Royal College/University of Calgary, Canada Irene M. Herremans, University of Calgary, Canada Armond Manassian, American University of Beirut, Lebanon Robert G. Isaac, University of Calgary, Canada Using a set of macro-level socio-economic indicators, we first explore whether two Middle Eastern countries (Lebanon and Iran) provide the foundation for organizations to develop their intellectual capital (IC). Then, we investigate the role of micro-level organizational characteristics that might support or hinder the development of IC management processes within organizations. The insight gained through our comparison will shed light on some important organizational attributes that foster the management of IC for wealth creation. The analysis has important implications for multinational corporations (MNCs) that have operations in the Middle East, are contemplating business involvement in the Middle East, or that have employees with Middle Eastern origin.
Chapter 7 A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability ................................................................................................................ 119 Herbert Robinson, London South Bank University, UK The significant development in knowledge management (KM) literature in recent years is a reflection of the growing interest to academics and practitioners/consultants involved in organizational change and business transformation. Knowledge is a major source of competitive advantage and knowledge assets/intellectual capital has to be managed effectively. The importance of implementing a knowledge management strategy to understand the relationship between physical and intellectual capital, to increase the market value of organizations and achieve corporate sustainability is examined. Using case studies of construction organizations and applying the STEPS knowledge management framework, it was found that there is a greater need for multinational organizations to implement KM. This is because they have knowledge that is diverse and geographically dispersed across a network of organizations. It is concluded that knowledge management has a catalytic role in developing intellectual capital to achieve corporate sustainability. The STEPS framework will enable multinational organizations to identify the reform, resource implications and the results of KM activities. Chapter 8 An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines ............. 136 Tomás M. Bañegil Palacios, Universy of Extremadura, Spain Ramón Sanguino Galván, University of Extremadura, Spain In line with the increasing importance of the intangible economy within the last few years, a higher number of models have been published. In this sense, our main original contribution when measuring Intellectual Capital is related to comparing and assessing the different existent Guidelines, unlike previous published papers. The purpose of this paper is to present and compare some of the most recent and significant contributions from researchers to the field of the measurement and management of intangibles. Chapter 9 The Role of ICTs in the Management of Multinational Intellectual Capital ...................................... 144 Mirghani S. Mohamed, New York Institute of Technology, Bahrain Mona A. Mohamed, New York Institute of Technology, Bahrain This chapter aims to investigate the strategic importance of Information and Communication Technologies (ICTs) in the management of Intellectual Capital (IC) within a Multinational Company (MNC) ecosystem. It provides a systematic multidisciplinary framework that defines the role of technology in leveraging IC across borders and between headquarters and subsidiaries. The chapter addresses the transubstantiation of MNC into boundaryless Global Knowledge-Based Organization (GKB-MNC) which ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC category that sustains competitive advantage through systemic adoption of “Knowledge Iterative Supply Network (KISN)” model proposed by the authors. The chapter suggests new multinational ICT/IC governance strategy that handles the emerging complexities associated with modern intangible resource synthesis. In effect, these complexities originate from the introduction of functionalities such as just-in-time knowledge supply,
elicitation of tacit knowledge, and leveraging of the core competencies for the creation and maintenance of geographically distributed value proposition. Chapter 10 The Link Between Learning Capability and Business Performance in MNEs: The Role of Intellectual Capital .......................................................................................................... 160 Isabel Mª Prieto, Universidad de Valladolid, Spain Elena Revilla, Instituto de Empresa, Spain It is widely recognized that the development of learning capability is key to achieve a durable competitive advantage. This is especially true in the context of MNEs. When MNEs operate in disparate host countries, they enhance their knowledge bases, capabilities, and competitiveness through learning processes. The analysis of the relevance of learning capability to improve business performance and, thus, the organizational competence has been an important issue developed in literature. This chapter explains the link between learning capability and the improvement of business performance by comparing how the main dimensions of learning capability –knowledge resources and learning processes- impacts on performance, in terms of both non-financial and financial performance. It is argued that those MNEs with the highest levels in both their knowledge resources and learning processes obtain a superior performance.
Section 3 Implementation Chapter 11 Managing Corporate Responsibility to Foster Intangibles: A Convergence Model ........................... 178 Matteo Pedrini, Altis–Postgraduate School Business & Society, Italy This chapter presents a model for the integrated management of Corporate Responsibility (CR) initiatives and intangible resources. The model defines an approach for structuring a company’s social efforts (stakeholder management) in such a way as to increase competitiveness through the development of the intangible resources. After having presented an analysis of the studies conducted on the benefits of CR initiatives on the development of intangible resources, the text proposes a protocol for evaluating each CR initiative according to the model. Chapter 12 Intellectual Capital Management in Long-Lasting Family Firms: The DuPont Case ........................ 207 Rosa Nelly Trevinyo-Rodríguez, EGADE Campus Monterrey, México How to acknowledge, manage and measure intangible strategic resources embedded in organizational settings—such as intellectual capital—has been a widely discussed topic during the last two decades. However, when referring to unique organizational forms such as family-owned or controlled firms, the topic is understudied. Considering that approximately one third of S&P 500 are family-controlled firms—i.e. DuPont—, which have survived beyond a lifetime, we ask ourselves how these long-lasting family businesses managed to balance the strategic and parallel creation, development and use of their
intellectual capital both at the family and business levels in order to support growth and regeneration. We introduce the ICFB-Family Wealth matrix in order to describe our findings. Chapter 13 Knowledge Management and the Links to Human Capital Management: Leadership, Management Capabilities and Sustainability .................................................................. 221 Marianne Gloet, Abu Dhabi Women’s College, UAE This chapter explores various linkages between knowledge management (KM) and human capital management (HCM) in the context of developing leadership and management capabilities to support sustainability. Based on the prevailing literature, a framework linking human resource management (HRM), KM and HCM is applied to the development of leadership and management capabilities to support sustainability. The framework identifies ways to promote sustainability through creating effective links between KM and HCM by which organizations can develop their leadership and management capabilities to support sustainability across business, environmental and social justice contexts. This approach provides managers with a framework for addressing sustainability issues and for developing individual and organizational capabilities to support sustainability through KM and HCM practices. Chapter 14 Building and Maintaining Human Capital with Learning Management Systems .............................. 234 Tom Butler, University College Cork, Ireland Audrey Grace, University College Cork, Ireland In this chapter we examine how building, integrating and maintaining human capital with Learning Management Systems acts as an enabler for the management if intellectual capital within multinational organizations. We draw upon learning theory and training practices to demonstrate that human capital is best viewed through a competence lens; that is, accounting for human capital should focus on matters of individual and organizational competence, and that the development of human capital is, in essence, an exercise in competence development, which involves training and learning. This, then, is this chapter’s point of departure in understanding how IT-based systems can enable training and foster learning, thereby building an organization’s human capital. Chapter 15 Multinational Companies and Their Link to the Intellectual Capital of Territories: A Proposal of a Tool to Evaluate the Sustainable Development of the Region through its Intangible Assets ...... 249 Agustín J. Sánchez Medina, University of Las Palmas de Gran Canaria, Spain Nowadays it seems to be widely accepted that a multinational company has many different environmental, economic or social impacts on a territory. Moreover, every region has the right to aim to achieve sustainable development. For those reasons, this work proposes a tool based on the territory’s intangible assets. This tool allows the management of the sustainable development of a region where a multinational company has located, paying special attention to the way that this type of company can influence the development of the region.
Chapter 16 International New Ventures, Organization Structure, and IC Management ....................................... 271 Irene M. Herremans, University of Calgary, Canada Robert G. Isaac, University of Calgary, Canada Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is the manner in which the firm developed a strategy by combining a special set of resources to provide knowledge products to markets in various countries. The firm realized early on that its knowledge, systems, and relationships were to be the keys to its success. With this in mind, the founding partners took steps to ensure that the firm’s structure and controls were conducive to management of its intellectual capital (IC). The chapter discusses the formation of the INV and the management of its IC in special ways to sustain its entrepreneurial activity. In part, this involved creating management processes consistent with its objective of creativity and innovation for the broad purpose of knowledge development. Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing knowledge services.
Compilation of References .............................................................................................................. 286 About the Contributors ................................................................................................................... 328 Index ................................................................................................................................................... 334
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Preface
The focus of this book as the title alludes to is the implementation, management and utilization of intellectual management strategies within multinational organizations. The objective of the text is to describe best practices with the aim to enable the reader to employ strategies to best utilize the intellectual capital contained within the organization and to avoid some of the less obvious pitfalls in managing that intellectual capital within the multinational setting. As the title infers, there is a distinction drawn between managing intellectual capital in a single site or single country setting and that of at a multinational level. Not only is there additional levels of complexity associated with management across national borders, there are also significant differences in the way in which intellectual capital is viewed from culture to culture. Despite the fact that we live in a relatively technologically connected era, technology and communications are not necessarily the solution in their own right to the management of intellectual capital from one culture to another. As an example, the value associated with relationship capital, the value associated with close ties to business partners, whether they be suppliers, customers and to a certain extent competitors, differs from culture to culture. Close ties to suppliers may be valued in one culture, but have significantly less value in others. In addressing intellectual capital management within the multinational setting, we have taken the approach of viewing this from three perspectives, Leadership, Strategy and Implementation, hence the book is broken into three major sections. Technology proliferates these sections as an integral part of the management of intellectual capital, but in today’s environment it can be viewed as an enabler as opposed to necessarily requiring a distinct strategy for the management of such capital. That said there are distinct systems that do exist for managing intellectual capital such as Customer Relationship Management (CRM) systems.
Leadership As with the deployment of any new system or process within an organization, leadership is both necessary from a support perspective (the buy-in of the leadership of the organization at the appropriate level), from a direction setting perspective (aligning the new system or process with the strategic direction of the organization) and from a sustainability perspective to ensure that the process or system stands the test of time. This is even more essential in the multinational context where trust, culture and understanding managing intellectual capital within an organization may be misunderstood. Within the Leadership Section we examine four broad areas that impact the management of Intellectual Capital within the multinational; facilitating the use of intellectual capital, making the management of intellectual capital practical, working with cross cultural networks and leadership.
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In Chapter 1, Thompson looks at the issues surrounding encouraging the generation of intellectual capital and the management of innovation within the organizational environment. Organizational structures included in the review include flat, matrix and international services sector. The influence of organizational structure on communication and trust is examined in comparison to traditional hierarchical-shaped organizations. The importance of organizational strategy, particularly in terms of how that strategy is communicated and how to manage when events disrupt that strategy, are looked at in detail. Organizational culture can rest on some more heavily than on others; how those responsible for sustaining and promoting a culture of innovation can be supported is the next layer analysis. Finally the skill sets required of managers are considered along with issues of motivation, influence and handling indirect sources of innovation. Illustrations of the issues and some solutions in action are taken from the company Production Services Network, (PSN) to build a bridge between academic theory and practical application. In Chapter 2 Carrell looks at the management of intellectual capital within the environmental context in which it exists. It has been theorized the organizational tool for survival of the 21st century is intellectual capital. As with all new concepts, the transition from theory to practical implementation is not without challenges. Intellectual capital struggles with transitioning into the world of business. This chapter includes a limited study of organizations in the Midwestern United States whose executives espouse a valuation of their organizations’ intellectual capital but have not bridged the gap from the theoretical understanding of intellectual capital to the practical documentation of their organizational intellectual capital in practice. This finding illustrates an estrangement between the academic field of theory and the practical implementation in the organizations. Gadman and Richardson, in Chapter 3, discuss the driving forces behind the magnitude of transformations that have driven existing business models to become either invalid of incomplete pertaining to the management of intellectual capital. Fundamental to these changes is the emergence of the digital networked economy with its supporting internet and communications technology. One significant manifestation of this economy is the emergence of business models designed to gain competitive advantage by bonding with customers, suppliers and complementors. From the multinational perspective, outsourcing and off - shoring have been the most common examples of these approaches. User lead innovation founded upon Open Source methods are rapidly emerging as the leading source of competitive advantage. This chapter considers the challenges associated with commitment in multinational value networking and finds them to be most problematic in the diffusion of innovation where increasing levels of commitment are required across national boundaries and cultures. Current research into core commitment structures of virtual multinational communities has not been well established, however, it is important to have and understanding of the current state of play in terms of research in the area in order to enhance the sustainability of intellectual capital management initiatives within the multinational organization. Following on from Gadman and Richardson’s work on cross cultural knowledge networks, Juntunen further discusses the management of intellectual capital within the research and development environment. Chapter 4 addresses collaborative business networks at the level of industry/cluster networks, which is important and relevant from the strategic management perspective in several industries. Collaborative networks are seen to offer firms collective benefits beyond those of a single firm or market transaction. The author of this chapter aims to contribute to the development of theories of knowledge management, organizational learning and a resource-based view of the firm. The initial argument is that the characteristics of the task that organizations try to accomplish through forming a specific collaborative network influence the organization’s intellectual capital, the capabilities developed and required. This chapter is based on a longitudinal case study in the ICT-sector.
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Strategy In the second section of this text we examine the role of strategy in the successful implementation of intellectual capital management programs. Because of the very nature of managing intellectual capital within a multinational environment, significant aspects of any strategy for the implementation of such an initiative must incorporate significant aspects of education to those who’s intellectual capital is being managed. This is due to a large degree to cultural differences from location to location as well as differences in innate opinions as to what has value as intellectual capital. As such we examine the role of strategy in managing intellectual capital within the multinational environment by looking at techniques for the measurement and reporting of intellectual capital. We then look at the impact of national culture in terms of both national and organizational perspective. In doing so we take the example of contrasting two locations, that of Lebanon and Iran. In the latter part of this section we examine the role of intellectual capital management in corporate sustainability, the role that technology plays in the development of intellectual capital management strategy, how intellectual capital management plays into the learning organization within the multinational context. In Chapter 5, Cuganesan and Petty review how achieving the right balance of global alignment and local flexibility is central to competitive success for multinational organizations organizations. Viewed from an intellectual capital perspective, multinational organizations need to: design and execute appropriate structures and systems (structural capital); engage and align its international workforce (human capital); and, generate favorable relationships across the multitude of stakeholders it interacts with globally (relational capital). But in pursuing these goals, a number of issues and challenges are faced: How to make sense of intellectual capital investment decisions? How are they to communicate intellectual capital priorities throughout the multinational business? And, with what tools are they to measure and monitor investments and initiatives such that refinements and corrective action can be made? In dealing with these issues, intellectual capital measurement and reporting practices can help. This chapter presents the conceptual framework underpinning intellectual capital, discusses limitations with traditional financial reporting models, outlines the benefits of intellectual measurement, and reports and presents research on the perspective of finance professionals evaluating global companies. Nazari et al in Chapter 6 demonstrate the use of a set of macro-level socio-economic indicators in determining appropriate intellectual capital management strategy. They first explore whether two Middle Eastern countries (Lebanon and Iran) provide the foundation for organizations to develop their intellectual capital (IC) at the national level. Then, they investigate the role of micro-level organizational characteristics that might support or hinder the development of IC management processes within organizations. The insight gained through our comparison will shed light on some important organizational attributes that foster the management of IC for wealth creation. The analysis has important implications for multinational corporations (MNCs) that have operations in the Middle East, are contemplating business involvement in the Middle East, or that have employees with Middle Eastern origin. In Chapter 7, Robinson discusses the significant development in knowledge management (KM) literature in recent years as a reflection of the growing interest to academics and practitioners/consultants involved in organizational change and business transformation. Knowledge is a major source of competitive advantage and knowledge assets/intellectual capital has to be managed effectively. The importance of implementing a knowledge management strategy to understand the relationship between physical and intellectual capital, to increase the market value of organizations and achieve corporate sustainability is
xvi
examined. Using case studies of construction organizations and applying the STEPS knowledge management framework, it was found that there is a greater need for multinational organizations to implement KM. This is because they have knowledge that is diverse and geographically dispersed across a network of organizations. It is concluded that knowledge management has a catalytic role in developing intellectual capital to achieve corporate sustainability. The STEPS framework will enable multinational organizations to identify the reform, resource implications and the results of KM activities. Chapter 8 discusses the increasing importance of the intangible economy within the last few years, a higher number of models have been published. In this sense, our main original contribution when measuring Intellectual Capital is related to comparing and assessing the different existent Guidelines, unlike previous published papers. Palacios and Galvan present and compare some of the most recent and significant contributions from researchers to the field of the measurement and management of intangibles. Chapter 9 aims to investigate the strategic importance of Information and Communication Technologies (ICTs) in the management of Intellectual Capital (IC) within a Multinational Company (MNC) ecosystem. It provides a systematic multidisciplinary framework that defines the role of technology in leveraging IC across borders and between headquarters and subsidiaries. The chapter addresses the transubstantiation of MNC into boundaryless Global Knowledge-Based Organization (GKB-MNC) which ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC category that sustains competitive advantage through systemic adoption of “Knowledge Iterative Supply Network (KISN)” model proposed by the authors. Mohamed et al suggests new multinational ICT/IC governance strategy that handles the emerging complexities associated with modern intangible resource synthesis. In effect, these complexities originate from the introduction of functionalities such as just-in-time knowledge supply, elicitation of tacit knowledge, and leveraging of the core competencies for the creation and maintenance of geographically distributed value proposition. In Chapter 10 Prieto and Revilla discuss the role of intellectual management within the multinational organization in the context of the learning organization and the strategies that the learning organization requires. It is widely recognized that the development of learning capability is key to achieve a durable competitive advantage. This is especially true in the context of MNEs. When MNEs operate in disparate host countries, they enhance their knowledge bases, capabilities, and competitiveness through learning processes. The analysis of the relevance of learning capability to improve business performance and, thus, the organizational competence has been an important issue developed in literature. This chapter explains the link between learning capability and the improvement of business performance by comparing how the main dimensions of learning capability –knowledge resources and learning processes- impacts on performance, in terms of both non-financial and financial performance. It is argued that those MNEs with the highest levels in both their knowledge resources and learning processes obtain a superior performance.
Implementation In the final section of the book we examine the implementation strategies for achieving sustainability and success in the deployment of intellectual capital management across multinational organizations. We have devoted six chapters to this aspect. As implementation strategies are required inevitably to be tailored to the organization that the strategy is being implemented within and the tailored approach is
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even more significant with a multinational context, the approach that we have taken within this text is to discuss considerations and demonstrate through examples, how intellectual capital management strategies can be implemented within the multinational context. In Chapter 11, Pedrini presents a model for the integrated management of Corporate Responsibility (CR) initiatives and intangible resources. The model defines an approach for structuring a company’s social efforts (stakeholder management) in such a way as to increase competitiveness through the development of the intangible resources. After having presented an analysis of the studies conducted on the benefits of CR initiatives on the development of intangible resources, the text proposes a protocol for evaluating each CR initiative according to the model. Chapter 12 strategizes on the implementation of intellectual capital and discusses how to acknowledge, manage and measure intangible strategic resources embedded in organizational settings—such as intellectual capital—has been a widely discussed topic during the last two decades. However, when referring to unique organizational forms such as family-owned or controlled firms, the topic is understudied. Trevinyo-Rodríguez considers that approximately one third of S&P 500 are family-controlled firms—i.e. DuPont—, which have survived beyond a lifetime, we ask ourselves how these long-lasting family businesses managed to balance the strategic and parallel creation, development and use of their intellectual capital both at the family and business levels in order to support growth and regeneration. We introduce the ICFB-Family Wealth matrix in order to describe our findings. In Chapter 13 Gloet explores various linkages and implementation strategies between knowledge management (KM) and human capital management (HCM) in the context of developing leadership and management capabilities to support sustainability. Based on the prevailing literature, a framework linking human resource management (HRM), KM and HCM is applied to the development of leadership and management capabilities to support sustainability. The framework identifies ways to promote sustainability through creating effective links between KM and HCM by which organizations can develop their leadership and management capabilities to support sustainability across business, environmental and social justice contexts. This approach provides managers with a framework for addressing sustainability issues and for developing individual and organizational capabilities to support sustainability through KM and HCM practices. Butler and Grace discuss building and maintaining human capital with learning management systems in Chapter 14. It is now clear that building and maintaining a firm’s human capital through organizational learning represents the only sustainable source of competitive advantage. They illustrate that the strategic resources which underpin the success of business enterprises include an organization’s physical, human, and organizational capital. Physical capital includes plant and equipment, geographic location, and access to raw materials. Human capital includes the training, experience, judgment, intelligence, relationships, and insights of managers and workers. Organizational capital includes firm structure and processes, internal and external relations, both formal and informal. This chapter argues that human capital can be enhanced through the application of IT (as physical capital) and organizational learning processes (organizational capital). Based upon the research and examples discussed thus far, it seems to be widely accepted that a multinational company has many different environmental, economic or social impacts on a territory. Moreover, every region has the right to aim to achieve sustainable development. In Chapter 15, Medina discusses those reasons and proposes a tool based on the geographic area’s intangible assets. This tool allows for the implementation of strategies for the sustainable development of a region where a multinational company has located, paying special attention to the way that this type of company can influence the development of the region.
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Finally, in Chapter 16 we look at an example of how such an implementation may be accomplished. Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is the manner in which the firm developed a strategy by combining a special set of resources to provide knowledge products to markets in various countries. The firm realized early on that its knowledge, systems, and relationships were to be the keys to its success. With this in mind, the founding partners took steps to ensure that the firm’s structure and controls were conducive to management of its intellectual capital (IC). The chapter discusses the formation of the INV and the management of its IC in special ways to sustain its entrepreneurial activity. In part, this involved creating management processes consistent with its objective of creativity and innovation for the broad purpose of knowledge development. Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing knowledge services.
ConClusion Through this text, we have brought together the thought leaders and researchers involved in the development of strategic intellectual capital in multinational organizations. There are a number of significant conclusions that can be reached in terms of how intellectual capital management is progressing as a practice. The first conclusion is that should intellectual capital management be embarked upon within a multinational organization, it must be done at the strategic level. The complexities of implementing such strategies requires that require that leadership at the highest levels be involved in championing such initiatives and that management at all affected levels be involved and have appropriate e buy-in. Secondly, the implementation of such initiatives needs to be consistent yet context sensitive. In other words, a strategy for valuing and reporting intellectual capital assets needs to be universal within the organization, but needs to encompass the actual situation on the ground at locations in which the organization operates in order to overcome issues such as trust, culture and perceptions of misuse of such capital once codified. Thirdly, there are distinct benefits for not only the organizations that employ intellectual capital techniques, but also for the locations that the organization operates within. Such techniques can lead to greater Corporate Social Responsibility (CSR) better learning within the organization at the local level as well as tighter integration with the local environment leading to heightened competitive advantage. While technology is certainly a driver for intellectual capital management, it cannot be seen as the end result. Technology is an enabler and for organizations, allows for the management of intellectual capital in ways that have thus far not been possible. Of note is that technology acting as an enabler, does not in itself dictate that intellectual capital management initiatives are sustainable. The management of intellectual capital within multinational organizations certainly has payoffs measured in both level of innovation and competitive advantage. Hopefully after reviewing this text, the reader will have significant insight into how to strategically implement strategies that work in their environment and avoid some of the pitfalls of such an implementation.
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Acknowledgment
I would like to personally acknowledge and thank all of the contributing authors for their hard work and the quality of research that went into every chapter of this text. Without the contribution of such thought leaders, research into this field would not be as advanced as it has become. Similarly, I would like to acknowledge and thank all of the countless individuals that have contributed to the success of this book, including those who have offered suggestions and guidance and of course those that have acted as reviewers. Finally I would like to thank all those at IGI Global for making the process of getting this book from concept to the book that you are reading such an intellectually rewarding process. Kevin J. O'Sullivan New York Institute of Technology, USA
Section 1
Leadership
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Chapter 1
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization Alan M. Thompson Production Services Network Ltd., Scotland
ABsTRACT This chapter looks at the issues surrounding how to encourage the generation and manage the use of innovation within the organizational environment of being a flat, matrix-shaped, international services contractor. The influence of organizational structure on communication and trust is examined in comparison to traditional hierarchical-shaped organizations. The importance of organizational strategy, particularly in terms of how that strategy is communicated and how to manage when events disrupt that strategy, are looked at in detail. Organizational culture can rest on some more heavily than on others; how those responsible for sustaining and promoting a culture of innovation can be supported is the next layer analysis. Finally the skill sets required of managers are considered along with issues of motivation, influence and handling indirect sources of innovation. Illustrations of the issues and some solutions in action are taken from the company Production Services Network, (PSN) to build a bridge between academic theory and practical application.
inTRoDuCTion Two relatively modern concepts like intellectual capital (IC) and matrix multinational organization might sound like an ideal partnership. This chapter looks at the tensions and benefits within that partnership, and some ways of capitalizing on them. In knowledge-based industries, innovaDOI: 10.4018/978-1-60566-679-2.ch001
tion – the creation of new knowledge – is essential for survival and growth. Facilitating innovation and managing the intellectual capital engendered along the way is a challenge, but when placed in the context of differing organizational structures, cultures and technological and economic trends, it may seem hard to know where to start. By looking at a service company, contracted to customers, in a matrix-shaped organization spread around the globe, this chapter addresses several layers of complexity
Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
and illustrates the points with examples from the company itself. The discussion moves from issues associated with the matrix structure, through the impact made by organisational strategy and how that strategy is communicated, to human factors and issues of organisational culture, before looking finally at the skills sets required by managers working within such organisations and attempting to meet strategic demands for greater facilitation of intellectual capital. To help the reader gain an understanding of the contextual setting of the chapter, some definitions of the terms used are given below.
tency improvement plans. It is often convenient to display this structure as a matrix of rows and columns. (Fig. 1)
Oil Major Oil major is the industry term for the larger oil and gas operating companies, e.g. Shell, BP, Exxon and the like. These operate on a global scale and include both national and international organizations. A useful description of the development of the oil majors can be found in Yergin (1991). To the oil and gas support industry these are the customers.
BACKGRounD
Function / Discipline Chief
Definitions
Function / discipline chiefs lead cross project assignment personnel from a function or discipline point of view. They are the guardians of competency levels, ‘owners’ of business procedures, and where appropriate are also technical authorities in their respective fields. For example, in the oil and gas industry, such professional disciplines will include chemical process, structural, electrical, safety and environmental engineering, and also the supporting functions such as project management, planning, cost control and so on.
Intellectual Capital The Delphi Group White Paper (2001), drawing upon the work of Edvinsson offers a useful definition, paraphrased as follows. IC can be segmented into three sub-categories: Human Capital, Structural Capital and Customer Capital. Each of these can be considered as valuable assets of an organization in a rather similar way to that of ‘goodwill’ on that organization’s balance sheet. Human Capital is the organization’s ‘know-how’, Structural Capital may be considered as the organizations systems or work processes, and Customer Capital as its relationship with its customers.
Matrix Organization The matrix organizational model is one in which most individual knowledge workers have dual lines of reporting. On the one hand they are responsible to a business manager or team leader for the delivery of work activities, whilst on the other are responsible to a discipline or functional chief in terms of their work methods and compe-
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Project Assignment Team manager Project assignment team managers lead their respective teams, which vary in terms of personnel numbers and skills set mix depending upon the work required. These managers are responsible for sound leadership of their team, and accountable to senior management for the delivery of service to the customer.
Project Assignment Team. A project assignment team is the industry term used to describe a group of people with a wide variety of skill sets dedicated or assigned to sup-
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Figure 1. Production Services Network Organizational Design
port a specific oil or gas production asset or group of assets for a particular client.
Literature Review This chapter cites literature sources mainly from a practitioner standpoint, and also draws some parallels from knowledge capture and knowledge transfer because many organizational behavioral patterns related to these two topics have similarities to those associated with IC. Reference is also drawn from the field of organizational development related to matrix organizational structures. Both of these main reference streams offer some guidance for those engaged in managing IC in a sustainable way within today’s knowledge intensive business environment. The matrix organizational design is typical amongst the more progressive and responsive organizations within the support sector of the oil and gas industry, because the work to be carried out for each customer is broadly similar but the
resource demands throughout the duration of a contract, and contract locations, vary. By organizing on the matrix principle, such companies are able to provide and manage appropriate resources from their entire organization to support multiple customers irrespective of asynchronous timezones or geographical locations. PSN provides oil and gas companies with operational support for their production platforms and processing facilities around the world. For over 20 years the company was a wholly-owned subsidiary of the global support company Kellogg, Brown & Root, in turn part of the Halliburton Company, headquartered in Houston, Texas. PSN was purchased by its management team in May 2006 and continues to operate on a global basis from its headquarters in Aberdeen, Scotland. PSN has built upon those 20 years and has since experienced considerable expansion particularly over the last five years, mainly by developing its non-UK business. It currently has around 8000 employees working in more than twenty coun-
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Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
tries across five continents and is organized on the matrix principle to provide the core business services of engineering, maintenance and operation services to customers. Innovation within each contract brings additional value to both the customer and the service company. One advantage for the customer is being able to apply the innovation early; for the service company advantage is gained by having some genuine application to test the innovation on, and so develop proofs that can be used to sell the innovation to more customers. However there is a certain amount of duality over new ideas in the oil and gas industry, which is also common in many other industries. On the one hand, each oil and gas major likes to be seen as innovative and keen to adopt new ideas or work methods but on the other hand the majors are frequently risk-averse: many would prefer to be second rather than first! This may be partly related to a traditional culture of punishing failure, which tends to make innovators uneasy. Many would-be innovators in this industry would agree with the sentiment expressed by Machiavelli (1513). “…there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in a new order of things. Because the innovator has for enemies all those who have done well under the old conditions and lukewarm defenders in those who may do well under the new”.
WHY is THE oRGAniZATion MoDElED in THE FoRM oF A MATRiX? This section covers the reasoning behind why an organization might select a matrix design over more traditional designs, and the impact that choice of organizational structure has on facilitating intellectual capital.
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In PSN’s matrix organizational design (Fig. 1) the horizontal rows represent support functions or engineering disciplines, and people with their respective specific skill sets, whilst the vertical columns represent the various project team assignments, generally aligned with a specific client or oil/gas field development. Within such an organizational structural design, it is the task of the discipline and function chiefs to input advice and experience on resourcing to fill the jobs with suitably competent individuals, to be guardians of good practice, to deliver updated methods to their functional personnel, and garner good practice and new ideas from the network.
Facilitating the Development of intellectual Capital Those involved with the development and management of intellectual capital need to be aware of specific dynamics and aim not only to avoid stifling ideas offered from individual knowledge workers, but also to nurture them. As Tapscott and Williams (2007) put it: “The production of knowledge, goods, and services is becoming a collaborative activity in which growing numbers of people can participate. This threatens to displace entrenched interests that have prospered under the protection of barriers to entry, including the high costs of obtaining the financial, physical, and human capital necessary to compete”. To discuss these entrenched interests and specific dynamics in a matrix organization, it is worthwhile to briefly examine the more traditional hierarchical structures often found in many organizations, for comparison purposes. In a hierarchical or ‘family tree’ model, there is a danger that prejudiced opinion, however wellintended, will stifle innovative ideas or individuals who may be thinking differently from the chief or simply outside conventional solutions. On
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
occasions the discipline or function chief may be over-cautious, biased or not completely up to date. In a hierarchical model, all communications tend to pass over the desk of the chief, and thus the chief can exert his authority to prevent the progress of what he sees as deviant ideas, or simply not endorse them, in effect damming them with faint praise. Prevarication can be a powerful tool to block change too, and simply being slow to offer opinion can send a very negative signal. In many organizations, the emergence of a new idea immediately overloads someone, often the subject matter expert, with an additional and unwelcome task in reviewing it. All these factors make the survival of the idea uphill from the start, unless the organization’s processes are designed to accommodate innovation. It is unlikely that many organizations, apart perhaps from those engaged primarily in research and development activity, for example, the pharmaceutical industry, will actually be organized around the need to nurture the development of new ideas and hence IC. In general, then, whilst organizing on the matrix principle is not likely to be done just for the purpose of facilitating innovation and to increase the IC of the organization, that model can, if managed appropriately, nurture IC development more efficiently than traditional models might.
Structure for Communication and Trust Within a matrix organizational structure, some managers are likely to expect responses on IC issues to be managed in a similar fashion to issues of an operational nature. That expectation might however be misplaced because of the different dynamics in an IC context. Whilst the matrix model is often compared favorably to the hierarchical organizational model in terms of increased flexibility and responsiveness of operation, this difference requires different methods of managing to unlock its potential advantages. Some of these will be dependent upon the overall culture of the
organization and it’s tolerance of ideas; studies that look at conditions supportive of innovation are discussed later. From the perspective purely of organizational structure though, the ability to support two-way communication is vital. The quality of communication is important too, as Davenport & Prusak (1998) noted in their description of the transfer of know-how between tunnel engineers in Wellington, New Zealand and Boston, USA, yet each group was working for the same company! In PSN, while seniority lies with the discipline chiefs for operational activities, for intellectual capital there is generally more of a two-way discussion flow between ‘equals’, rather than of the expert mentor/student type. This follows the broad principle that innovation is not the sole province of the subject matter expert. Not every organization has recognized that important principle. For example, Collison (2006) cites a government department which had gone to a great deal of effort to ensure the names of individuals were always highlighted in contributions to online documents to encourage people to contact each other, but also included the rank of the contributor. “When I asked why, I was told that it was to prevent the embarrassing situation where someone might call someone of a higher grade, which undermines what they’re trying to do.” Facilitating intellectual capital must embody the principle that a good idea is still a good idea, irrespective of where it came from. Where an industry is populated by a high percentage of people with diverse career backgrounds or has a high turnover rate, the need for openness in communication is even more so. This is emphasized in times of global expansion and during some of the cyclical fluctuation periods. The oil and gas industry has always been cyclical (Yergin, 1991). For the support sector of the industry, this means managing the peaks and troughs associated not only with the oil price but with varying demand for gas, which has become more of an internationally traded commodity in recent times. Cyclicality also affects asset main-
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Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
tenance and modifications work, as the discovery of new oil fields has slowed but not ceased, while increased innovation is required to extend the production of life of older fields, particularly when the oil price is high. In the light of this cyclicality, there is a business need to move people and sometimes the execution of activities around efficiently, while ensuring all people are all suitably competent, experienced, and informed for each project assignment. An oil and gas engineering company attracts engineers from many different industries and many bring transferable solutions with them, rather as medieval trainee artisans travelled from place to place gaining and imparting knowledge, from which the term ‘journeyman’ comes. Within contracting organizations the two-way flow may have to extend beyond the company, to include the customer. This happens when the development of IC may include proprietary issues involving the customer, such as might occur when the service company and customer are working in some form of partnering or alliance arrangement, and sharing the costs and benefits of an innovation. There is the potential for tension here, of course, in the event that the customer subsequently wants to claim IC rights on a jointly developed innovation, not necessarily to commercially exploit the innovation, but possibly to prevent or delay the use of it by competitors. In the open culture of the matrix model, communication working across parts of the organization is more likely to be the norm and there is considerably less gatekeepering and bottlenecks caused by bureaucratic process. Indeed, where there is already an overall collaborative ethos, there is a greater likelihood of collaboration over IC, despite the dynamics being different to collaboration over operational issues. The open approach obviously tends to spread the initial review by tapping directly into the functional ‘horizontal’ line of people, notionally a peer group or community of practice, for feedback and possibly support.
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Geographical spread of an organization will impact the gathering of IP in a number of ways apart from the practical ones of time zones and languages. A multinational organization has diversity not only in terms of people and cultures, but also in inter-person trust levels, arguably made more complex because of the very diversity that can bring such value to the business in many other ways. These differences can be seen as a threat or an opportunity, and yet one of the features of multinational organizations is the value of those different perspectives on sharing and validating intellectual capital. The matrix-shaped structure also creates different leadership dynamics. The behavior of managers is one of the important factors cited by Ekvall (1996) in the context of setting a supportive climate within which innovation may thrive. “It is true that the manager’s attitudes and behavior are important both as a part of the climate and as a general influence on it”.
Further, the supportive climate sought for will also be required to ensure some measure of sustainability in developing IC.
Alignment with The strategic Business intent The business drivers for the organization are important in terms of IC because some if not all of them will drive development of the strategic use of IC. Of almost equal importance though, is how management articulates its strategic direction, as this impacts upon how intellectual capital is handled. These issues are considered in this section, against a backdrop of a relatively volatile business environment. Articulation of strategic direction informs employees about which business activity areas are likely to require new ideas; where intellectual
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
capital management will be needed to satisfy the aims of the organization, and it guides employees on what sort of innovation is likely to be taken up for development by the organization. For example, personnel in some oil and gas support organizations may see the resurgence of the UK nuclear industry and development of offshore wind farms as a potentially profitable line of business. PSN has ensured that its resources remain focused by using email, intranet and film to share its five year strategy internally, which makes clear that these developments are not seen as strategic imperatives at present. Any organization having a strategic intent of developing innovation methods and hopefully innovative outcomes needs to make that intent clear to the organization’s population; to maximize the benefit of the innovation strategy it should be transparently aligned with the overall business intent. For example, PSN, being a newly formed entity following the management buy-out, took the opportunity to reiterate the company strategy for innovation in terms of core values, referred to internally as “PSN’s DNA”. One core value relevant to the subject of intellectual capital and entitled ‘Innovation’ is given below. “We actively look for better ways of doing things, never satisfied with ‘good enough’. Our culture encourages people to collaborate, share ideas across our network and learn from each other. We recognise that not all innovations succeed but we test ideas quickly and learn early without taking large risks.
Our people are at the core of innovation. Applying ideas that improve tools, processes and systems only work because our people have the skills and attitudes that embrace innovation and keep it moving forward”. Source: PSN ‘Joining the Network’ (2006) – An induction booklet about PSN given to all
new employees. Another of PSN’s core values is Integrity, which centers upon acting openly with employees and others – another reason to share the operational strategy with personnel.
Disruptive Events Managers must also manage according to the prevailing business environment and be observant of disruptive events. Disruptive events, despite the connotation of the term, need not be bad ones; history suggests disruption often leads businesses on to innovate in response. The invention and stellar growth of mobile telephony or the internet offer good examples of the new inventions. In the former, landline companies’ diversified into mobile telephony, Indeed, Portio Research (2007) report that “…since the first mobile telephones reached the hands of consumers at the end of the 1980’s, it took approximately 15 years for the first 25% of the human race to subscribe to mobile services, then the next 25% look set to sign up in just four short years. By mid 2008 the world is forecast to cross the highly significant 50% penetration mark.” In the latter, the Internet has made a wealth of services available to those for whom a traditional post office is inaccessible. It has allowed postal services to focus on developing package delivery services, possibly of goods ordered via the Internet, and thus offering a business opportunity instead of only a business threat. The following story from the writer’s experience in warship building shows how a change in business environment can inspire two potentially conflicting innovative responses and illustrates the need for timely communication of strategy to sustain the success of an organization. On a warship, submarine detection requires a dome-like structure to be fitted below the keel. This cannot be fitted until after the ship is launched, and is generally done in a dry dock. In the river Clyde shipbuilding area during the mid-1970s, there were two dry docks competing with each other for business from both river traffic and the other 14
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shipyards in the area. An economic downturn led to the closure of one dry dock, leaving the other to increase prices unchallenged, which it lost no time in doing. Some shipwright technicians devised a clever plan to install the underwater dome using a watertight structure slung underneath the ship after launch, thus avoiding the need to use the exploitative dry dock. They told the management of their shipyard about this innovation. The management listened but did not seem to be acting on the idea, even though it clearly saved costs. The shipwrights were puzzled and frustrated at this attitude. A few weeks later, the management called the shipwrights in to the boardroom and revealed in confidence they had been negotiating with the owners of the last remaining dry dock to purchase it, hence their apparent prevarication. They wanted to explain to their innovative team what was going on, and thank them for their idea, yet needed to retain the confidentiality of the deal to purchase the dry dock for a few more weeks. In this example, the shipwrights had responded to the disruptive event of the closure of the second dry dock with a technical solution. The managers had also responded with an equally innovative solution, but could not make their strategic intention known publicly, yet recognized the long-term value of sharing the news of the deal with the shipwright team before it could become public knowledge. So, how are organizations in general likely to respond to disruption in the context of innovation? The responses of matrix and conventionally organized organizational models may vary. Of importance here is the relatively flat structure characteristic of the matrix, because the very structure, possibly encouraged by a culture of cross–project collaboration over operational issues, is likely to be a significant factor. If the organization is operating relatively smoothly on a daily basis with collaboration, then the impact of a disruptive event is likely to be responded to in a collaborative way too. Thus, we may draw some parallels from the way operational issues are
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dealt with apart from the additional influence of the altered dynamics associated with IC. The dynamics associated with handling of IC in turn are likely to be influenced by the way people behave, and the influence of human behaviors is considered below.
WHiCH HuMAn FACToRs ARE THE MoRE inFluEnTiAl? Organizations do not invent, it is the people within organizations who do that and so it is important for those engaged in managing intellectual capital to take notice of the human factors. This section considers the considerable influence of human behaviors on intellectual capital management. There are many reasons why people invent or innovate. One of the more powerful drivers amongst these reasons might include an individual’s need to invent, rather as a writer must write or a painter must paint. The difference between the purely functional engineering design and the elegant one can be seen, be it of an aircraft or a bridge. Good design, like good style, is easy to recognize but difficult to describe. Apart from competency in design and innovation, the difference may be that of passion for the outcome. This passion, like that of an artist, manifests itself in the outcome of the design. Thus as the inventor develops an idea he may become as passionate about it as a painter would of his painting, and that passion may well rub off onto those with whom he shares it. As Jefferson (1813), himself an inventor and America’s first Commissioner of Patents, noted: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.” Just as many organizations, particularly in today’s more intensive knowledge economy
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
recognize the need to develop innovative solutions to the problems and challenges they face, so the people working in these organizations are also likely to recognize that need. However, on the reasonable assumption that not everyone is driven by that passion, yet might still be inclined to be inventive or innovative, it is important that organizations make it easier for individuals to offer something new.
Getting the Cultural Climate Right There are many influences on what might encourage innovators to offer ideas but conditions for the inventor have a long history of tribulation and skepticism, as Babbage (1852), generally attributed with the invention of the computer noted: ”Propose to any Englishman any principle or any instrument, however admirable, and you will observe that the whole effort of the English mind is to find a difficulty, a defect, or an impossibility in it. If you speak to him of a machine for peeling a potato, he will pronounce it impossible; if you peel a potato with it before his eyes, he will declare it useless, because it will not slice a pineapple”
or break’ change programmes. It is important, then, to ensure the middle managers have time to devote to encouraging and developing new ideas or that the process is not dependent upon one overburdened individual. Managers somehow need to make time to support new ideas without becoming the gatekeeper and possibly inadvertently crushing the delicate flower of invention, or frustrating people who have good innovative ideas, perhaps even to such an extent that they leave and join a smarter and less rigid competitor. What, therefore can organizations do to improve the cultural climate? Ekval’s (1996) work describes a means of measuring the creative and innovative climate of an organization. Drawing from this work provides some guidance on the desirable attributes an organization should have and would benefit from, in terms of innovation. Ekval cites the following ten factors: challenge, freedom, idea support, trust/openness, dynamism/ liveliness, playfulness/humour, debates, conflicts, risk taking, and idea time. It is worthy of note that many of these attributes are very similar to those which are also conducive to successful collaboration and knowledge transfer, such as:
Challenge If an instigator is driven to that degree of frustration then the organizational culture might not be conducive to encouraging innovation and some organisational change might be required. In more recent times, one effect of many companies downsizing in the 1990s to produce flatter organizations, has been to focus a lot of what could be called company culture on the shoulders of the reduced ranks of middle-managers, and incidentally further reducing the time each has available for managing innovation. In times of organisational change – which increasingly is an ongoing state and one that the facilitation of intellectual capital seeks to intensify – the role of this middle layer of management is crucial. For example Kanter (1993) on organizational change believes middle managers can ‘make
Ekval sees a “high challenge” environment as very supportive of the high energy required to innovate. Studies have shown (Ferguson, 1999) that in the oil and gas industry, having a working environment which provides a challenge is very much a main motivator.
Freedom Allowing a relatively high level of independence over working methods, activities and thought processes, was also noted as being important in motivational drivers according to Ekval. He describes the opposite to this in terms of people behaviours, thus: “The opposite climate would include people who are passive, rule-bound and anxious to stay
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inside established boundaries.” Again, work by Ferguson, (1999) also found that.
Idea Support Unsurprisingly, Ekval points out that where the organization’s climate is one in which a new idea is more likely to be met with ‘no’ than ‘yes’, or even ‘maybe’, innovation is poor and collaboration weak. Parallels can be drawn with knowledge transfer and collaboration environments, where there are few or no signs of the necessary reciprocity (Cross et al (2001)), Collison and Parcell (2001) when instigators try to draw out feedback or opinion about a new idea.
Trust and Openness Many studies have shown that high trust levels are a very important factor in sharing knowledge and by extension that will apply to the transfer of knowledge of a new idea. For example, in seeking a contextual definition of trust, O’Brien (1995) defines trust as the “anticipation of positive behavior”, but points out that it is bound in with commitment to the idea and loyalty to the organization. Innovators, after all, might well ask themselves “Why am I not developing this by myself or with another organization?” Mykytyn (1994) provides a list of “essential attributes” which are presumed to produce six factors essential for successful knowledge transfer, the most significant one being trust. Developing this further, Politis (2003) quotes Rotter’s (1967) definition of interpersonal trust “…as an expectancy held by an individual or a group that the word, promise, verbal or written statement of another individual or group can be relied upon”. This is a more complex definition than that given by O’Brien (1995), but perhaps more applicable and relevant as a review team sets out to evaluate a new idea.
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Getting the Process Right PSN’s management buy-out provided an opportunity to revise and simplify the processes associated with gathering innovative ideas. A pilot scheme was executed in support of the core value on innovation, as cited earlier, to test the methods that could be adopted to gather in and nurture good ideas and innovation, whilst at the same time taking away from the instigator what is often perceived as the ‘burden’ of developing an idea on top of the ‘day-job’. Research had shown that in some organisations, it can be said “…and the prize for coming up with a good idea in this outfit is the opportunity to develop it with NO additional resources – and still get the day-job done!” (Thompson 2004), and this was clearly a sizeable obstacle to innovation. The revised process changes were tested within the pilot scheme, which provided a number of learning points. The basic process had a straightforward flow and was fundamentally sound, but a number of issues became clear that showed a significant prize in terms of innovative ideas was within reach, given the right circumstances. The right circumstances required the following four main changes. Firstly, the functional/discipline chiefs needed to dedicate time to support evaluation and subsequent dissemination of good ideas within their areas of influence and authority, do so in a reasonable timeframe, and contribute more enthusiastically to debate. In some cases they either freed up some time, or accepted the need to empower innovation brokers with the right attitude working on their behalf. Some organizations, such as PSN’s previous ‘parent’ company, offer a broker model based upon the their knowledge management broker team structure, where working in a broker role is seen by company personnel as a good mid-career move, because they are in a position to network on a grand scale (Velasquez, G. & Odem, P. (2004).
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Brokering supports the idea of the so-called ‘psychological contract’, for which Handy (1981) provides a useful definition, just as valid today as when he wrote it. “Just as in most work situations there is a legal contract between the organisation and the individual which states who gives who what in consideration for what, so there is an implied, usually unstated psychological contract between the individual and the organisation, be it work organisation, social organisation or family. This psychological contract is essentially a set of expectations.” In the context of the pilot and the subsequently improved and developed innovation process, the kind of relationship is in essence a form of this psychological and unwritten, sometimes tacit yet understood ‘contract’, within which the instigator offers ideas or innovations in good faith, in the belief these may add value to the company and in the expectation that in due course it will bring him some form of recognition. In return, the innovation manager or ‘process owner’ undertakes to treat all ideas courteously and fairly, and administer them in an appropriate and competent manner. Feedback indicated that instigators will judge the strength of management commitment to innovation, and in PSN’s case also commitment to the very concept of core values, on their perception of how well their ideas are dealt with, e.g. managing business cases for investment. A half-hearted effort is likely to be counter productive, not only in terms of IC. Again there is a link between the strategic intention and exploitation of ideas in general, and as can be seen from a number of sources, there has been a significant rise in the number of patent applications over recent years. The World Intellectual Property Organisation (WIPO) estimated in February, 2008 that 156,100 patent applications were filed under the Patent Co-operation Treaty (PCT) in 2007, the highest ever recorded, and this does not include purely national patents.
The WIPO Director General further noted that “Strategic use of the patent system is a business imperative in today’s knowledge-driven economy. The success of the PCT is largely due to the sustained use of the system by some of the world’s foremost innovation-based companies.” The sale of intellectual property has become a big international business too, and is approaching $100bn annually. Secondly, someone needs to ‘own’ the process of nurturing innovation and be given sufficient management authority within the organization to extract response from others in support of this core value, together with adequate resources to maintain momentum of the process. By way of illustration, the innovation pilot manager in effect ‘owned’ the pilot program. The manager was allowed freedom to be proactive by moving out of the main office into satellite offices to gather ideas and more importantly to build up trust. On advice from the corporate communications team, a theme of ‘The Brain Surgery’ was developed with desk drop leaflets and posters displayed in the offices, augmented by local project administrators sending e-mail reminders of these sessions [aka ‘Surgeries’] to remind local staff of dedicated session times. (Fig. 2) (Image courtesy of www.SXC.HU and HAAP Media Ltd, Budapest, accessed January 2008) In general, feedback from the satellite offices on the concept was positive, and comments such as those below were typical. •
• • •
“It’s good that you’ve set up shop here – much better than just posting my idea to someone we don’t know, or never see.” “I wasn’t sure who I should talk to about this, but you’ll know who to pass it on to” “I don’t know if this idea I have will be of much interest, but here’s the story…” “I haven’t really got the time to follow this up by myself, but I was just thinking one day about…”
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Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
Figure 2. PSN’s “The Brain Surgery” flyer.
There was general goodwill towards the concept of gathering ideas, recognising instigators and contributors, and developing the more promising ideas. Over the relatively short duration of the pilot, trust built up between personnel and the pilot innovation manager, and there was even time for some ideas to be developed and put into use during the 3 month pilot. Thirdly, innovation processes need to allow the initial proposal to be kept low key because the originator may have doubts about the appropriateness or viability of their idea. In either case, the subsequent discussions should remain relatively confidential, and ideas abandoned if that is the outcome, outwith the public eye. Instigators do not want their unsuccessful ideas aired widely because they may be subsequently ridiculed. That response is also noted in Taleb’s (2007) account of the invention of the laser. If these first tentative steps lead on to a
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potentially worthwhile idea, the idea can be opened up to a wider internal population. Another reason for retaining confidentiality is that of assuring the inventor that his idea will not be stolen. Fourthly, the system needs to be flexible enough to allow the instigator to stay involved or to drop back to remaining merely informed, because that’s important to people offering an idea in the first place. Academic research suggests there is almost always a strong emotional link between the instigator and his idea. Encouraging people to hand their idea into the foster-care of others needs to be done with sensitivity. The pilot also confirmed that from time to time, an idea may also be marketable, in which case formal business cases for exploitation would be prepared. It may be worth noting that in today’s knowledge intensive business environment, selling intellectual property has become a substantial
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
global business. The European Patent Office cites Athreye and Cantwell (2005) who calculate the value of intellectual property sales as having grown from around 41$bn in 1995 to around 95 $bn in 2005, with the trend over the last 20 years being very steeply upwards. Determination of which innovation might be worthy of development will depend upon the decision making criteria used within the organization, and in many cases these will conform to relatively standard business investment rules and norms, such as cost/benefit, return on investment and so on. However, with new ideas it is often more difficult to make sound judgment whilst minimizing business risk. Organizations which regularly make good use of collaboration methods may already be comfortable with the concept of some form of collective decision making at least for new ideas. In more recent times, they have been able to draw upon the work of Surowiekcki (2004) on the ‘wisdom of crowds’. He cites three necessary conditions for getting that right: •
• •
Independence: where people’s opinions are not determined by the opinion of those around them Decentralization: where people are able to specialize and draw on local knowledge Aggregation: where there is some room in the process for turning private judgments into a collective decision.
If these are all satisfied, Surowiekcki contends, the group judgment is likely to be accurate. Again the matrix organization, with its tendency towards networking, is likely to develop more ideas than the more traditional organization. There also needs to be room in the process to allow for what Taleb (2007) calls the ‘black swan’ event. Describing the invention of the laser as a ‘solution looking for a problem’, Taleb notes that the inventor, Charles Townes, had merely been trying to split light beams, and no more than that, and indeed Townes’ colleagues teased him about
the irrelevance of his discovery! Taleb invites the reader to consider the effects of the laser in the world; compact disks, eyesight corrections, microsurgery, data storage and retrieval – all unforeseen applications of the technology. Development of processes focussing on innovation is one thing, but embedding that process within an organization is quite another. Newman (2007) argues that one of the biggest barriers to the organizational changes needed to improve innovation can be described as the ‘NIH’ (not invented here!) syndrome. Broadly his advice is to manage the development of the process together with those who will subsequently use it. “When people invent their own method for implementing new ideas, they’re more likely to make it happen!” Newman suggests the facilitator should stop short of providing a complete solution, and instead provide only a partial one, so that the users need to become involved to finish the process and more importantly, to ‘own’ it. The matrix structure has an advantage in that the chiefs, who are often subject matter experts for at least a part of their discipline or function, are already known across the project assignments. Similarly there is an opportunity for the intellectual property manager, brokers and function/ discipline chiefs to collaborate over IC. The nature of innovation in many organisations is such that innovations are seldom purely single discipline anyway. Typically, what might start off with one individual seeking a solution to a problem, can quickly develop into a wider solution. The dry dock example given earlier fits that category. It should be remembered too that most inventions are really incremental developments of existing solutions. Drawing together the multiple threads associated with organisational culture and structure reinforces recognition of the importance of organisational culture in a change programme, as concluded by Demski and McCormick (2004) when discussing oil and gas industry change management.
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Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
“In short, being successful in a changing culture requires difficult, long-term effort by management: perseverance, consistency, relentlessness, and commitment. It must be recognised that new initiatives reinforcing radical shifts in strategy, deployment of new technology, or other significant organisational changes will not succeed without cultural change. Culture underpins everything in the organization - from work processes to decisions and behaviours. Without focused attention on changing the underlying culture, major new initiatives will likely be impeded and resisted, and, as a consequence, desired results will not be reached”
skill sets For Mangers Whilst it is true that innovation comes from those within organizations, any organization which mismanages its people and processes will not benefit significantly from the intellectual capital held within the heads of its personnel. Good management of both people and innovation processes is required. So what are the required skill sets for managers charged with sustaining a strategy supportive of innovation? Managers have to adopt and adapt new methods of working to nurture intellectual capital. There will be number of areas where change is needed, for example, some consideration needs to be given to the reward structure for individuals or teams. There also needs to be some form of incentive offered to the project assignment team managers to encourage their team members to feed innovation back into the wider organization. On a large project assignment, there might even be, for at least part of the duration of the project a person charged with doing that. Even running a low-key ‘league table’ might help this, as PSN found when innovation submission figures became available for the pilot innovation program. The two participating offices began to compete with each other. It’s important to ensure that the process includes
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rewarding in a way which is appropriate, rather than assuming that recognition must always be monetary. Ferguson’s (1999) motivational study indicated that financial considerations were about fifth or sixth in the ranking of motivational drivers. Work ethics vary globally and recognition of how different cultures view such issues is needed. For example, experience indicates that the stronger capitalistic culture in the USA feeds a tendency towards instigators seeking a formalized deal outlining the reward for the idea even before the idea has been fully described. That seems less prevalent in other Western cultures, and by contrast, in Eastern cultures, frequently there is a dominance of a team gain ethos over individual gain, for example in the Japanese car industry, such as the ‘quality circles’ at Toyota. Managers may also need to manage indirect sources of innovation, calling for a modified approach to that of internal management techniques. For example, Rometti (2006) in IBM’s Global COE Study on Innovation, noted from interviews with 765 CEOs and business leaders that business partners (36%) and customers (34%) were catching up on the already high proportion of good ideas generated by employees (41%). Interestingly, this study noted that only 15% of innovative ideas came from dedicated research and development teams. This suggests that future trends may require a change of emphasis from managing a formal Research & Development department to managing innovation from wherever it comes.
ConClusion The organizational structure of the matrix multinational organisation is clearly more beneficial than traditional hierarchical structures when facilitating intellectual capital. However, aspects of culture and business environment, and how these are managed within the organizational structure, remain vital issues in the support of intellectual property
Facilitating the use of Intellectual Capital in a Matrix Multinational Organization
development. Considerations that have to be taken into account include the management of people and processes to improve innovation. Alignment with the organization’s strategy is important, as is the need to embrace new technologies as they emerge, for they offer opportunities. The example of PSN is indicative of some of the human factors that are important to innovation, such as mutual three-way trust between instigators, reviewers, and company managers. In the modern knowledge intensive business environment, most organizations stand to gain a substantial prize in terms of innovative ideas, but these need to be coaxed out to win that prize. Part of that coaxing is likely to include an imperative of innovation as an ongoing activity to gain competitive position, and in turn managers will need to heed the foregoing points on organization.
REFEREnCEs Athreye, S. S., & Cantwell, J. A. (2005). Creating competition? Globalization and the emergence of new technology producers. Open University Economics Discussion Paper, 52. (Fig A2) Available at the Social Science Research Network http:// www.ssrn.com/ Babbage, C. (n.d.). Retrieved from the London Science Museum. Collison, C. (2006). Avoiding the typical barriers to effective KM. KM Review, 9(4), 16–19. Collison, C., & Parcell, G. (2001). Learning to fly: Practical lessons from one of the world’s leading knowledge companies (pp. 103-122). Oxford, UK: Capstone Publishing. Cross, R., Parker, A., Prusak, L., & Borgatti, S. P. (2001). Knowing what we know: supporting knowledge creation and sharing in social networks. Organizational Dynamics, 30(2), 100–120. doi:10.1016/S0090-2616(01)00046-8
Davenport, T. H., & Prusak, L. (1998). Working Knowledge: How Organizations Manage What They Know (pp. 99). Boston: Harvard Business School Press. Delphi Group. (2001). The Language of Knowledge [White Paper] (pp. 2, 3, 5). Boston. Demski, D., & McCormick, J. (2004). Understanding and changing corporate culture. Journal of Petroleum Technology, (29): 27–29. Ekvall, G. (1996). Organizational climate for creativity and innovation. European Journal of Work and Organizational Psychology, 5(1), 105–123. doi:10.1080/13594329608414845 Ferguson, J. (1999). Are the people of the North Sea Oil and Gas industry primarily motivated by money? A Motivation Survey. Unpublished MSc thesis, The Robert Gordon University, Aberdeen, UK. Handy, C. (1981). Understanding Organisations (p. 39). Harmondsworth, UK: Penguin. Jefferson, T. (1813). Letter from Thomas Jefferson to Isaac McPherson, 13 Aug. 1813. In A. A. Lipscomb, & B. A. Ellery. (Eds) The Writings of Thomas Jefferson. Retrieved June 13, 2008, from http://press-pubs.uchicago.edu/founders/ documents/a1_8_8s12.html Kanter, R. M. (1993). The change masters: Corporate entrepreneurs at work (p. 306). New York: Routledge. Machiavelli, N. (1972). The Prince, Chapter VI. In Plamenatz, J. [Ed.] Machiavelli, the Prince, selections from The Discourses and other writings (pp. 71, 72).Retrieved 24/10/08 from http://www. constitution.org/mac/prince06.htm Glasgow: Fontana / Collins.
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Mykytyn, P. P., Mykytyn, K., & Raja, M. K. (1994). Knowledge acquisition skills and traits; a selfassessment of knowledge engineers. Information & Management, 26, 95–104. doi:10.1016/03787206(94)90057-4
The World intellectual property organization, an agency of the United Nations. Unprecedented Number of International Patent Filings in2007. Retrieved June 5, 2008, from http://www.wipo.int/ pressroom/en/articles/2008/article_0006.html
Newman, V. (2007). The psychology of managing for innovation. KM Review, 9(6), 10–15.
Thompson, A. M. (2004). The impact of the mode of employment of personnel engaged in the Oil & Gas support industry on knowledge sharing. Unpublished Masters research dissertation, The Robert Gordon University Business School, Aberdeen, UK.
O’Brien, R. C. (1995). Employee involvement in performance improvement: a consideration of tacit knowledge, commitment and trust. Employee Relations, Vol. 17, No. 3. (118) Politis, J. D. (2003). The connection between trust and knowledge management: what are its implications for team performance. Journal of Knowledge Management, 7(5), 55-66. doi:10.1108/13673270310505386 Portio Research Ltd Report. (2007). The Next Billion: Strategies for driving growth and making profits in low-ARPU mobile markets, (p. 1). Retrieved June 16, 2008, from http://www. portioresearch.com/Next_Billion.html Rometti, G. (2006). Expanding the innovation horizon: The IBM global Coe study. IBM Press Room (p. 9). Retrieved June 13, 2008, from http://www-03.ibm.com/press/us/en/pressrelease/19289.wss Rotter, J. B. (1967). A new scale for the measurement of interpersonal trust. Journal of Personality, 35, 651–665. doi:10.1111/j.1467-6494.1967. tb01454.x Surowiecki, J. (2004). The Wisdom of Crowds: Why the many are smarter than the few, (p. 10). London: Little, Brown Book Group. Taleb, N. N. (2007). The Black Swan: The Impact of the Highly Improbable (p. 169). London: Allen Lane. Tapscott, D., & Williams, A. (2007). Wikinomics: How mass collaboration changes everything (p. 16). London: Atlantic Books.
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Velasquez, G., & Odem, P. (2005, October). Harnessing the Wisdom of Crowds – Case Study (p. 4). Paper presented at Society of Petroleum Engineers Annual Technical Conference, Dallas, Texas, and published as proceedings of the Society of Petroleum Engineers, reference SPE 95292. Yergin, D. (1991). The prize: The epic quest for oil, money and power (pp. 56-113). London: Simon & Schuster.
KEY TERMs Term 1: Community of practice Term 2: Contractors Term 3: Disruptive events Term 4: Downsizing Term 5: Gatekeepers Term 6: Intellectual capital Term 7: Managers Term 8: Matrix organization Term 9: Multinational organization Term 10: Oil and gas industry Term 11: Organizational culture Term 12: Organizational structure Term 13: Strategy Term 14: Subject matter expert Term 15: Values
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Chapter 2
An Epistemology of Intellectual Capital and its Transition to a Practical Application Jan Carrell Northwestern College, Colorado Technical University, USA
ABsTRACT Organization requirements for survival evolve reflective of the environment in which they exist. It has been theorized the organizational tool for survival of the 21st century is intellectual capital. As with new concepts the transition from theory to practical implementation is not without challenges. Intellectual capital struggles with transitioning into the world of business. This chapter includes a limited study of organizations in the Midwestern United States whose executives espouse a valuation of their organizations’ intellectual capital but have not bridged the gap from the theoretical understanding of intellectual capital to the practical documentation of their organizational intellectual capital in practice. This finding illustrates an estrangement between the academic field of theory and the practical implementation in the organizations.
inTRoDuCTion Organizations function as organic entities that evolve and adapt in response to their internal and external environments. Organizational responses to their environments emerge in the course of executive interpretation of organizational strategic needs. In recent decades theorists have identified intellectual capital (IC) as an organizational asset that enhances organizational survival in the 21st DOI: 10.4018/978-1-60566-679-2.ch002
century. This chapter queries whether intellectual capital fulfils that role. A brief overview of the evolution of organizations and human resources establishes a framework for organizational intellectual capital valuation. Two questions addressed in this presentation are whether executives define their intellectual capital and whether these executives value their intellectual capital as demonstrated by their actual practice. This discussion provides empirical data from three types of organizations and from three levels of executives. It is this author’s position that intellectual capital alignment
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
to organizational strategic plans is a prerequisite to efficient organizational operations. In order to establish this alignment business executives must be able to define their intellectual capital in tangible terms, to select meaningful intellectual capital, recruit this intellectual capital, and finally to measure the added value of their intellectual capital to organizations’ profile. The data from this study identifies a gap between the executives’ definition of organizational intellectual capital and the valuation executives demonstrate in their actual practice. This breach between theorists’ prescriptions for successful organizations and executive implementation of the recommended tools appears to be consistent with each of the organizations studied in this discussion.
inTEllECTuAl CAPiTAl FounDATions History by definition reflects past events. These past events lay the foundation and indeed mandate the design and structure for the organizations of the future. From organizational history, we are able to track patterns and forecast trends of organizational behavior. This historical reserve communicates tools and resources that have been successful and also identifies those management attempts that were not successful. The wise recognize the value of these lessons learned and benefit from the understanding of the classical management theorists’ dialogue. Oliver Wendell Homes (18091894) stated “When I want to understand what is happening today, I try to decide what will happen tomorrow; I look back; a page of history is worth a volume of logic.” To renew our understanding of organizational behavior a brief overview of the evolution of management theorists, applicable to both organizational theory and human resource utilization, is illustrated in this section. An understanding of why organizations think and behave as they do in the 21st century sets the stage for an appreciation
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of the environment intellectual capital is seeded. Understanding where we came from enriches our understanding of who we are and aid in predicting where we are going as well as contributing to the success of the trip (Sussland, 2001; Weick, 1999). However, to understand organizational development without recognizing the time and environmental factors in which these changes occur is like the description of an elephant by the blind men in the old Indian fable (Saxe, 1816-1887). George and Jones (2002) stated that temporal and spatial concerns are essential features of organizational behavior, and that it makes little sense to ignore them, treat them implicitly, or treat them in an inadequate manner. Weick (1999) asserts that interest in the temporal and sequencing concerns of organizational behavior offers the opportunity to predict organizational needs in the 21st century. This said, we can then first understand the milieu that nourishes the concept of intellectual capital, secondly assess its acceptance, and finally predict its survival. Organizations are metaphorically described as living organisms existing in evolving ecosystems (Jawahar et al., 2001; Church, 1997). It is valuable to recognize the external environment influences that dictate the assets and resources executives exploit to fortify their organization’s strategic and competitive market position (Daft, 2004). The eras in which organizations adapt are neither distinctive nor explicit and may in fact vary based on the multidisciplinary interpretation. Organizational history is traced thousands of years ago when organized societies and political structures marshaled labor and resources to achieve a competitive niche in their limited geographic worlds (Sherman, 2003). Unwritten laws and loyalty proscribed human resource deployment with a high degree of structure, codes, and contractual relationships, combining elements of nomadic tribes, military strength, Roman administration, and Christian beliefs (Sherman, 2003). Global trade, in the then-known world, competition for
An Epistemology of Intellectual Capital and its Transition to a Practical Application
possessions, and social stratification from the early depictions of organizational structure circa 3500 B.C. through the 19th century define the management behaviors during these early periods of organizational history. Valued organizational assets are chronicled reflective of the era in which the organizations exist. Organized groups 3500 years ago defined their assets as stone, water, seeds, and domesticated animals as these organized units struggled for survival (Sherman, 2003). Organizational behavior can be traced through the eras of Agrarian societies, defined by families and clans, which dissolved under the emergence of military strength when assets were defined by human resources found in the peasant infantry. Military influence on organizational structure and design is skillfully illustrated in Sun Tzu’s documented hierarchical organizational strategy in The Art of War dating back to 500 B.C. (Sun Tzu, trans Denna, 2001). Human resources were recognized as valuable assets for their military performance and manual dexterity throughout the Ancient Era, Middle Ages, Renaissance, and into the Industrial Revolution. Each era represented strategic organizational positioning based on the knowledge and information available to them at that specific time. Information regarding navigation and commercial exploration was shared and technology evolved which translated into organizations’ growth opportunities. With this organizational development appeared new organizational theorists whose theories became the basis for classical management (Boylan, 2002; Wertheim, 2004; Hatch 1997). Human resources remained a valuable organizational asset in various roles throughout these centuries. Organization executives’ compartmentalized their human resources in job specialization with Adam Smith’s (1723-1790) treatment of labor. Other early management and human resources theorists include Babbage (1792-1871) who taught basic principles of human resource management and the economy of machinery. Marx
(1818-1883) introduced labor theory, and Lillian (1878-1972) and Frank (1868-1924) Gilbreth helped to find efficient methods for the workers to maximize outputs. This human resource valuation continued through the 1800s into the early 1900s with Frederick Taylor’s (1865-1915) time and motion studies and scientific management contributions (Wertheim, 2004). Taylor’s work resulted in organizational improved work quality and quantity, lower costs, greater efficiencies, higher output, labor-management cooperation, alignment of tasks with goals, feedback loops and training. Taylor, building on the theorists’ work before him, presented systematic study of interactions among job requirements, tools, methods, and human skill, to address employee fit to jobs both psychologically and physically. The Gilbreths, Taylor, and other classical theorists established a new appreciation for the relationship between human resource assts and the organizational performance by acceding to scientific data rather than management prejudice, social stratification, or egomania as demonstrated during the earlier eras of the Middle Ages and Renaissance. This historical movement generated a new approach of recognizing and valuing the organizations’ human resources through and following the Industrial Revolution Era. During this era Barnard (1886-1961) worked to build an understanding between management and the employee with his authorship of instructions to managers in motivating employees (Schafitz and Ott, 2005; Hatch, 1997; Boylan, 2002). Organizations prioritized growth and profits, incentivizing maximization of labor productivity and production. Barnard’s movement attempted to bridge the separation between management and the line employee, reflective of years of mechanistic, formal autocratic rules, and social and political partitions (Adshade, 2003, Allen, 1998). During this classical era, organizations valued their human resource assets for their technical skills and compliance to the bosses’ demands (Wertheim, 2004; Weber, 1958). Large monopo-
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
listic corporations, poor working conditions, and job scarcity provided few opportunities for human resources at this time in organizational history (Adshade, 2003). It was during this mechanistic organizational environment, theorists began to visualize organizations as social systems with human relation assumptions (Breeze, 1980). Follett (1868-1933) saw the need for formalization of social-psychological organizational factors opening lines of communication (Hatch, 1997). Mayo (1880-1949) furthered this movement with his Hawthorne Studies which predicted managers concern for their employees would result in increased employee satisfaction, and improved performance. Kurt Lewin’s Principles of Topological Psychology (1936) introduced the “person-environment fit (P-E Fit).” Lewin wrote that the study of P-E Fit must involve the person’s characteristics, specifically the emotions, thoughts, and values as these characteristics affect the person’s behavior in his/ her environment. Maslow (1908-1970) provided a template for mangers to measure employee needs and to enable mangers to meet employee needs at the level the employee was performing. However, the window of time and environmental factors again influenced organizational change and the role of human resources. The World Wars and Depression in the early to mid 1900s, and their recoveries through the 1950’s, mandated organizations’ executives refocus on financial survival. Lean manufacturing operations were required while employees struggled to keep their jobs and feed their families (Adshade, 2003). Priorities for organizational survival compromised managers’ focus on workers’ satisfaction (Wertheim, 2004). McGregor (1906-1964) proposed his Theory X and Theory Y management tools describing employees as either lazy requiring coercion to work or self-motivated reflective intrinsic desire to keep their jobs. As the economy recovered from the recession during the 1960s and 1970s, organizations again reassessed the role of their human resources and an organizational financial analysis prescribed
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methods to determine human resources’ return on investments (Swanson, 1998). This human resource investment concept was the beginning recognition that organizational book and market value existed in employee selection and contribution relevant to organizational competitive advantage (Porter, 1980). Pfeffer and Salancik (1978) debated allocating resources and authority to subunits that were performing the jobs, providing an illusion of employee empowerment and recognition of employee contribution. Executives examined organizational structure and design with a focus on employee moral as a factor in their motivation contributing to their productivity (Blau, 1965). Executives began to utilize group dynamics to encourage employee participation in decision-making and employees began to be considered for their interconnectivity in the organization, their knowledge beyond their technical skills, and their corporate insight (Wertheim, 2004; Katz and Kahn, 1966). New strategies were sought and identified and tested. Quick organizational remedies to the new environmental, technological stressors and aggressive global competition were assessed, attempted, and for a period utilized. These tools included quality circles, restructuring and reengineering, pay for performance, empowerment, the Disney model, benchmarking, MBO followed by MBWA, TQM, ISO 9000, culture climates, downsizing and streamlining (Collins, 2000; Boyett et al 1998; Peters et al, 1985; Abrahamson, 1996; Naisbitt, 1982; Carsons et al, 2000; Grieves, 2000; Marash et al., 2003; Moyer, 2004). The labor force became increasingly mobile, diverse, and informed. The 1970’s and 1980’s generated various schools of thought (Daft, 2004; Connolly, Conlon, and Deutsch, 1980). Organizations of the future were described as changing entities with an increasing professional labor force, augmented by information flow demanding recognition of knowledge management by virtual organizations. Drucker (1974) recognized organizational change was occurring more rapidly
An Epistemology of Intellectual Capital and its Transition to a Practical Application
than ever before, and he referred to this period as a time of instability looking for a miracle drug. Connolly, Conlon, and Deutsch (1980) stressed organizational effectiveness through structure, chains of command, and span of control. However, Peters and Waterman (1982) and Deal and Kennedy (1982) argued the importance of an organizational culture that emphasized stressing employee satisfaction to reduce turnover and enhance productivity. Roy (2001) described this array of management activities as each dominant giving way to the next as organizations searched for the secret for survival. The Information Age emerges (Naisbitt, 1982). Preparation for survival in the 21st century mandated sustained organizational sensitivity to the demand, both externally and internally, for information. Technology sophistication continued to accelerate, immediate information was available and demanded, and aggressive competitive intelligence was sought as the skirmish for market share was the norm (Naisbitt, 1982; Prusak et al., 2003). Organizations were characterized as adaptive, complex systems. Organization executives emphasized fit: matching processes and performance with the individuality of their human resources (Wertheim, 2004). The pace of change accelerated, continuing the aggressive expansion into the global arena. Competitive global positioning and niche markets sought multinational networks (Ulrich and Lake, 2001; Norton, 1998). Customer idiosyncratic demands and portable market strategies redefined organizational thinking and their perspective of valued assets. Organizations recognize employees as a critical link necessary for sustainable competitive positioning, however, the transition continued with employees still as a means to an end, an after-thought (Ulrich and Lake, 1991). Human resources were still considered a cost even though recognition of their tangible contribution to organizational performance was more widely recognized (Swanson, 1998; Daft, 2004).). Employee valued contributions were shifting
from a skills and core competencies orientation to employee knowledge, interconnectivity, and corporate awareness. Swanson (1998) stated that executives who developed employees intellectually experienced improved returns on their investment (ROI). Stewart (1997) projected that at the turn of the 21st century, 59% of the workforce would be working chiefly with information as compared to 17% in 1900. Chase (1997) identified knowledge management as one of the driving forces of organizational change and wealth, and a key factor in securing organizational survival in the future. Kennedy (1998) recognized the 1990’s organizational climate as information-and-knowledge intensive, citing a study of 2,959 U.S. corporations, of which 90.6% were information-intensive. These knowledge management processes were translated into corporate knowledge and corporate assets (Kennedy, 1998; Sveiby 1998). Stewart (1997) referred to this corporate knowledge as intellectual capital leveraged to produce a higher-valued corporate asset. Bontis (2001) states management of intellectual capital influenced every aspect of business. Ulrich and Lake (2001) wrote that organizations preparing for the 21st century would have to focus on competitive positioning, with a new understanding of what their human resources were and how these human resources fit within the constraints of the organization’s strategic plan. “Building better products or services, pricing goods and services lower than competition, or transitioning technological innovation into research and manufacturing operations must today be supplemented by organizational capability” (Ulrich and Lake, 2001, p 77). Wiseman (2001) claimed that the management of human assets at all levels within the organization would determine an organizations’ sustainable competitive advantage. Managing these human assets would be especially important in this knowledge-intensive environment (Overholt et al, 2000). Employees transitioned to thinking independently, aligned with the
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
organization’s mission, vision, and values (Daft, 2004). Ulrich (1997) discussed about the business environment as a boundary-less, learning entity. Nadler, Gerstein, and Shaw (1992) described the evolving features of 21st century organizations as autonomous work teams, high performance worksystems, networks, and virtual offices. Sveiby (1998) stated traditional accounting tools were quickly losing their relevance in a business world where most of the valuable assets were intangible and centered on knowledge, entrepreneurship, and information. Dzinkowski (1999) recognized that corporate financial indicators were more than the revenue flows and tangible assets of the traditional accounting procedures. The advent of the 21st century environment required new accounting methods to measure new management concept of valuing the human resources, specifically their intellectual capital that surfaced over the past decade under the umbrella of knowledge and corporate awareness. For human resources to support the business strategy, human resource management must be recognized as a fundamental part of the business planning process (Senge, 1999). At no time in the evolution of organizations and the role of human resources has the need or demand for employee knowledge, interconnectivity, or corporate awareness been more critical than in the virtual environment of the 21st century. An organizations’ dependence on and need for employees’ intellectual capital is phrased as the organizations’ new resource in the virtual environment (Ulrich, 1997; Guthrie, 2001; Bhatt, 2001; Johanson et al, 2000; Guthrie et al, 2001; Edvinsson et al, 1997; Roos et al, 1998; Kraatz, 1998; Klaila and Hall, 2000; Andriessen, 2001). The business environments of the 21st century are experiencing leaderless, boundary-less, virtual organizations (Alonzo, 1999; Chang et al; 2001; Ulrich, 1997; Cant, 2004; Hock, 2000). Virtual teams lead the way to success, working in virtual offices, augmented by the information technology prevalent in this century (Nelson et
22
al, 2005; Chang et al, 2001; Alonso, 1999; Boyes et al, 2003; Guthrie, 2000, Chase, 1997; Ulrich, 1997; Werther, 1999). “Virtual teamwork is a holistic approach integrating three key performance drivers: people, process, and technology” (Chase, 1997, pp 84). These requirements in this era establish the foundation for the individual’s intellectual capital.
inTEllECTuAl CAPiTAl: WHY ToDAY intangible Assets Era As the 1990’s ended, the business environment became one of virtual offices using complex networks and sophisticated technology for communication and aggregating data. The desirable employees for this millennium were knowledge-workers who knew and understood the organizational strategy and were able to aggregate information, synthesize and analyze data, make decisions instantaneously, and implement them independently (Chiavenato, 2001; Daft, 2004; Guthrie, Petty, and Ulf 2001). In the virtual corporate environment employee judgment has to be trusted and depended on to be representative of the organization without the luxury of drawing consensus, accessing team input, and without supervision and mentoring of a manager down the hall or two floors above (Smallwood, 2004). This environment mandates that organizations optimize their employee corporate awareness, knowledge, and interconnectivity: their intellectual capital. Employee skills and core competencies are expected to be present while it is the employee’s intangible asset of intellectual capital that must be sought (Ulrich, 1997; Roos et al., 1998; Guthrie, 2001). Organizations need to look at their human resources and identify the intellectual capital necessary to provide sustainable momentum for the organization’s competitive advantage (Edivsson et al., 1997; Roos et al., 1998).
An Epistemology of Intellectual Capital and its Transition to a Practical Application
Intellectual capital is viewed as a facilitator of information, manager of knowledge, producer of technology, source of organization intra-structure, and basis of entrepreneurial creativity. It is in the external and internal organizational environment of this century that the demand for information and technology sophistication exists and it is the organizations’ intellectual capital which orchestrates the utilization of the organizations capabilities. The theoretical allocation of value to organizational intellectual capital elevates the intellectual capital asset to a level of executive scrutiny and legitimacy as both executives and theorists struggle with determining whether IC is a concept or a reality (Guthrie, 2001). Recognition of the need and importance of the organization’s intellectual capital has theoretically been established in organizational financial success and competitive positioning (Guthrie, Petty, and Ulf, 2001). The next level of development of the intellectual capital concept is for organizational executives to define, measure, and reward their intellectual capital (Guthrie, Petty, and Ulf, 2001). Davenport et al. (2003) predict intellectual capital to be the new wealth of organizations. Smallwood (2004) states intellectual capital enhances investors’ confidence for future earnings. However, for intellectual capital to live up to the new wealth predictions executives must first recognize a benefit in and then secondly identify methods for identifying, measuring, managing, and rewarding their organization’s intellectual capital. Executives have struggled with identifying, and then measuring and accounting for their intellectual capital. Fiscal responsibility demands that organizations optimize their finite time and resources and report on the return on the organizations’ investments. If executives are going to invest their limited resources in their IC they must be able to identify and measure their IC, and report organizational benefits from these investments (Cohen et al., 1999). Organizational executives must be able to define their intellectual capital,
and measure the ROI to determine whether, in fact, allocating their limited resources to IC is adding corporate value (Cohen et al., 1999).
introduction of intangibles There is evidence that traditional financial measures are losing confidence in the marketplace. For instance, an Ernst and Young study (Davenport, 1997) shows that investors see traditional financial measures as a lagging indicator of organizational financial success. This same study demonstrated that intangible resources, not products, constitute the organization’s competitive advantage (Davenport, 1997). It was during the 1980s that intangible assets were introduced as significant contributors to organizational value and were referred to as the organizations’ “hidden assets” (Edvinsson et al., 1997). Executives have historically struggled with the measurement of non-financial variables (Low, 2000). In order for executives to account for their hidden assets, organizations have to identify, define, and measure these assets. Sveiby (1989) conversely recommended the Intangible Asset Monitor which created an intellectual capital management tool for measuring total employee competences including their intellectual capital. During the 1990’s, Edvinsson’s Skandia Navigator provided an accounting tool to measure intangible, hidden assets. The indicators of the Navigator tracked the common financial trends as well as the companies’ intangible assets such as information technology literacy. Kaplan and Norton (1992) initiated a Balanced Scorecard model which offered a framework for creating value from both tangible and intangible assets. This tool used a set of cause and effect relationships to determine output measures and performance drivers Dzinkowski (1999) has noted that with the introduction of Adam Smith’s principles on economics in 1776, accounting models listed only an organization’s tangible assets, ignoring the hidden value or intangible assets of an organization
23
An Epistemology of Intellectual Capital and its Transition to a Practical Application
which includes the current and potential value of the organization referred to as the market value. As the Information Age gathers momentum, the difference between an organization’s book value and market value widens (Guthrie, 2001). This difference between the organization’s book value or net assets and the organization’s market value is referred to as the organization’s intangible assets or “hidden value.” The table in exhibit 1-1, pp 11, demonstrates this calculation. Illustrated in exhibit 1-1, General Electric’s market value in 1998 was estimated at $169 billion. Although their net assets were only $31 billion, the actual cost to replace these assets in the1998 market was $77 billion. Therefore, the difference between General Electric’s market value ($169 billion) and its replacement value ($77 billion) is referred to as General Electric’s “hidden value.” It is this value that Roos et al. (1998) call General Electric’s intangible assets, and it is this “hidden value”, or intangible asset, that gives organizations a competitive advantage in the global markets Admittedly, intangibles are difficult to capture quantitatively or assign a value. Assigning a numerical value to the intangibles of an organization is similar to assigning a value to the synergy of an organization. While conceptually a “hidden value” exists, corporate executives continue to struggle with assigning a tangible value to their organization’s intangible elements that create this hidden value (Kennedy, 1998). Sveiby (1998) states there are three reasons for this difficulty in assigning a value to the hidden costs of the organization: 1) assignment of a value seems pointless; 2) fear of exposure; and 3) no tested model exists. The determination of corporate value is traditionally based on generally accepted accounting practices (GAAP). GAAP recognizes corporate value as the business’ strategic portfolio and refers to it as its book value: Book Value = Monetary Capital + Physical Capital (Joia, 2000)
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However, these standards ignore or struggle with the line item of their intangible assets (Barsky and Marchant, 2000; Roslender and Fincham, 2001; Johanson, 1999; Lusch et al, 1994; Flemming, 2002; Foster et al, 1997). Roos et al. (1998) define an organization’s total value as consisting of its financial value and its intellectual capital: TV= FV + IC. (Roos et al., 1998). Stewart (1997) states that “the hard assets of a knowledge company contribute far less to the value of its product (or service) than the intangible assets--- the talents of its people, the efficacy of its management systems, and the character of its relationships to its customers--that together are its intellectual capital” (pp 57). Stewart goes on to say that intellectual capital is not the physical capital of the organization but rather the knowledge, capabilities, ideas, relationships, and talents of the employees. This employee owned capacity of an organization creates, produces and defines all other organizational assets. Executives may be able to recite payroll costs but are not able to quote the replacement costs of their intellectual capital, or whether these assets are appreciating or depreciating (Stewart, 1997). The growth of organizational networks through mergers and acquisitions, however, based on organizational market values emphasizes organizations’ intangible asset value. Market to book value in the 1970’s was equal 1:1, in the mid-90’s it had increased to 3:1, and by 2000 the relationship is more than 6:1, demonstrating an increasing emphasis on the organization’s hidden value or intangible assets (Edvinsson, 2000). In the 1920’s and 1930’s, U.S. investments were 70% in tangible goods and 30% in intangible goods. Today, the investments have reversed where 70% is spent on intangibles (Edvinsson, 2000). This reversal in the trend of investments is illustrated in Kaplan and Norton’s chart below as organizational value is increasingly found in their intangible assets. In 1982, intangibles represented 38% of organizational assets. In
An Epistemology of Intellectual Capital and its Transition to a Practical Application
2002, intangibles represent an estimated 85% of a company’s value. The growing recognition of the difference between market value and book value led theorists to fill this difference by attempting to define these intangible assets. While theorists’ definition of intangible assets varies, arguably the factor that influences all organizational assets remains the intangible organizational asset of intellectual capital (Stewart, 1997; Joia, 2000).
Barriers to Acceptance of intellectual Capital Organizational performance can be directly related to utilization of human resources (Emde, 1998). Whereas the employees’ technical skills are required to do a job, the effectiveness and quality of the job are specific to the employees’ intrinsic factors, that is, the employees’ intellectual capital (Emde, 1998). It is this IC that encompasses the employees’ knowledge, connectivity, and experiences and is articulated in employee behavior. It is this behavior that directly influences the organizations’ performance and survival (Steyn, 2003). Ulrich (1998) states intellectual capital is the organizations’ only appreciating asset the more it is utilized. Dzinkowski(1999) states that the business society has entered a new era where the wealth of nations is dependent on the organizations’ intellectual capital. Accordingly, the best formula for understanding intellectual capital value is determined by the difference between the market value and the book value (Dzinkowski, 2000). Thus, Market Value = Book Value + Intellectual Capital (Joia, 2000) The value of IC is like having a company suddenly struck by a knowledge blight that erases all of corporate knowledge from a storage media including the employees’ minds. The difference between the market value of the company before
and after the blight struck is the value of the company’s intellectual value (Tebbutt, 2004). Tebbutt (2004) states intellectual capital represents 78% of the Fortune 500 companies’ value. According to Dzinkowski (1999) the intellectual capital value can equal 75% of the corporation’s value. However, organizations still struggle with defining their intellectual capital using the GAAP. Measuring, managing, and assigning value to this asset is problematic because of its intangible characteristics (Roberts, 2001; Roos et al., 1998; Mouritsen, 2001). When intellectual capital is not defined, it cannot be measured, and when it is not measured, it cannot be managed (Heffes, 2001). Further, an organization cannot optimize what it does not define, measure, or manage. Lev says that one of the reasons IC assets are not measured or managed is because these assets are not publicly traded, sold, or banked (Lev, 2004; Cohen 1999). Secondly, organizations cannot own, shelf, or inventory these assets, and, further, these IC assets travel with the mobile employee. Therefore, it is riskier to depend on or account for these IC assets as a value to the organization’s book or market value (Bernhut, 2001; Sullivan, 1999). However, it is the measurement and management of the organizations’ intellectual capital that assigns a value to the intellectual capital by the organization (Steyn, 2003; Furlong, 2001). Executives focus on those organizational factors that will generate profit and strengthen strategic positions in the market. These factors are assessed, monitored, and controlled. The dilemma with intellectual capital is that executives struggle with defining it, assessing it, monitoring it and controlling it. Further, Steyn (2003) regards intellectual capital as an employee-owned asset rather than an organization-owned asset. Germeraad and Morrison (1998) illustrated how organizations could work with employees to capture these assets and increase their organization’s market value with their IC. They recommend methods by which organizations could optimize their hidden, intangible assets: identify the IC asset, screen IC for
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
added value to the organization, operationalize IC to meet organization needs, protect and develop valuable organization IC, and divest IC that has lost its value to the organization. Roberts (1999) cites three benefits or incentives for organizations to recognize their intellectual capital: 1) intellectual capital can improve benchmarking in corporate quality management, changing the Plan-Do-Act-Check cycle to Codify-Map-Select-Build-Deploy-Protect cycle of intellectual capital; 2) intellectual capital can be used as a looking glass and as a motivator for the company; 3) intellectual capital can provide external legitimization. Organizations that do develop IC measurement and management can align employees with organizational strategy and anticipate positive financial outcomes (Bukowitz et al., 1997). The management and measurement of organizational IC could assist executives in joining the organizations’ strategy and vision with the individual employee activities, identifying trends, and establishing operative goals on which to act (Bukowitz et al., 1997). Germeraad et al., (1998) state that the active measurement and management of the organization’s intellectual capital has increased organizational opportunities for organizational growth and reduced operating costs. A contributing factor to the lack of systematic tallying of these assets is in part due to the information overload that is also a characteristic of this century. A study of top executives in U.S. Fortune 500 firms demonstrated that while these executives acknowledged the importance of intangible assets, they also acknowledged that drawbacks exist. Such assets are typically not measured, or, when they are measured they may not be used (Stivers et al., 1998). The question remains as to whether definition and valuation of IC has moved beyond the theorists’ research to the executives’ actualization in the corporate world. Thus, if it is good management to identify, access, and either optimize or divest their intellectual capital as the strategy of the organization dictates, executives then must find a way to iden-
26
tify, define, measure, and ultimately manage their I.C. Skyrme (2004) says that what gets measured gets managed. Skyme elaborates by saying that through the management of IC, organizations determine where their strengths are for sustainable performance and enhancement of their stakeholder value (Skyrme, 2004). “Without tools to capture and measure intellectual capital, many firms wind up mismanaging their intellectual assets or worse destroying knowledge value—simply because mangers misunderstand the nature of the IC resources” (Barsky and Marchant, 2000). Clearly one can not manage what one is not able to define or measure. Therein lays the barrier for the future success of intellectual capital as a tool for organizational success.
intellectual Capital made operational and Valued Theorists state that intellectual capital impacts organization viability through its influence of organizational stakeholder relationships (O’Reilly, Chatman, & Caldwell, 1991). Further, these stakeholder relationships theoretically influence the organization’s productivity, market share, competitive position, and regulatory compliance (Guthrie, 2001; O’Reilly, Chatman, & Caldwell, 1991). IC, therefore, has a potentially powerful effect on organizational performance and may arguably be the greatest and most critical investment corporations make (Johanson et al., 2000). However, while organizational executives may cognitively recognize the theoretical posture of IC added value, these executives must be able to purposely define and measure improved organizational performance as an express result of the investment of time and money in their intellectual capital assets. Intellectual capital by itself is worthless, however, unless it is understood in context of the organization’s strategy (Joia, 2000). Intellectual capital asset valuation requires an asset audit to determine its fit and value to the organization
An Epistemology of Intellectual Capital and its Transition to a Practical Application
(Joia, 2000; Kaplan and Norton, 2004; Snow, 1998; Bhatt, 2001). All IC assets are not created equal. As with Mouritsen’s tree metaphor, some assets require nurturing and investment while other IC assets require divestiture (Klaila and Hall, 2000). IC assets have a shelf life, and the benefit of maximizing the IC investment must be balanced with the cost of the time and money of this investment. Investments are made for future, long-term benefits, and the IC future value is difficult to predict (Pearl, 2001; Sullivan, 1999). For example, if the IC asset will enhance organizational survival, the manager must measure the value of this knowledge, connectivity, and corporate awareness against the cost of investing in this asset, or whether the time and money would be better used elsewhere in the organization. It is this executive decision regarding the valuation of the organization’s IC assets that is demonstrated in the executives’ definition of their IC assets, their IC practice, and allocation of organizations’ finite resources to their IC. The dynamic and uncompromising demands of the business environment play a role in determining organizational asset valuation by executives (Guthrie, 2001). These environmental considerations are a determination in the costs of IC asset investment. The enhancement or lack of enhancement of this IC asset may have subtle, or not so subtle, ramifications for other elements of the organization (Guthrie, 2001; Sveiby, 2001). According to Lev (2004), when one examines executives’ practice of acknowledging their intellectual capital assets the executives’ activities are unclear. The Federal Reserve economist Leonard Nakamura states companies indirectly spend trillions of dollars annually on enhancing their IC (Lev, 2004). These types of investments are traditionally not itemized publicly or systematically and therefore not easily accounted for or documented (Lev, 2004). However, considering the characteristics
of the 21st century environment and workforce discussed earlier, it may do executives well to remember the fluid, mobile nature of these assets. These assets are only as secure as the level of their employee satisfaction and commitment to the organization.
The Gap Between Theory and Practice Little doubt exists that the world in which organizations conduct business has radically changed from those of earlier eras and that change is not only the norm but continuing at a pace that exceeds any time heretofore. Buzzwords, theories, and management models fade in and out of style in the world of business. Executives talk about paradigm shifts, and wait for the big one. The life cycles of these theoretical concepts are dictated by the complexity and ambiguous organizational implementation of these concepts. Daft refers to the disconnect between the theorists and executives’ implementation as the great divide (Daft, 2001). It is perhaps through the study of the evolution of organizational change and the role of the human resources that we can begin to understand the gap between the theoretical recommendations and the organizational implementation of these recommendations. Perhaps then valuation of the IC asset can be facilitated in the organizations and the potential for its survival measured. Hatch (1997) states in studying and understanding the evolution of organizational behavior consideration must be given to the application of the theoretical organizational concepts introduced. Moreover, the reasons for this separation include the fact that research methods sophistication has made practical implementation less useful. Additionally, communication between the two groups occurs infrequently, peer-reviewed papers are disseminated within a small incestuous, closed loop, executives do not traditionally turn to academicians for solutions to operation prob-
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
lems or management strategies, and researchers likewise do not turn to practitioners for inspiration in research questions or for insight in their interpretation. Mintzberg (1998) believes there has to be a coming together of the academia and business worlds. That is to say, what is theorized and taught in academia should be implemented in corporations. While executives and theorists share many ideas and concepts, such as missions, visions, and value statements, fundamental differences exist. Executives deal with markets, multiple stakeholders, and operational issues focused on the bottom line and organizational survival. Scholars profess theories, lecture from scholarly material, and coordinate academic curricula. Organizations, conversely, exist in a world of aggressive competition, swift market changes and economic fluctuations, with dramatic, and sometimes fatal, results of executive decisions. Academia exists in a bureaucratic, fairly static, tradition of instruction, knowledge creation, and theory exploration. Bridging this great divide will not be easy. In 1996, more than 1,700 books were published on business methods. Corporations, moreover, spent $60 billion in management training as well as spending $43 billion on management consultants (Pfeffer et al., 1999). However, theorists and academicians have frames of reference that differ from executives when dealing with IC valuation. The methods for obtaining and the purposes for using information are dissimilar. Worse, the work of the theorists and executives is radically estranged. Their social systems and operative processes are structured and designed differently, and the time frames in which they conduct their business are disparate (Daft, 2001). Theorists think and develop concepts in an environment different from that of the executives and managers. Daft (2001) notes that mangers feel like they are flying the airplane while they are building it without the luxury of studying the implications prior to initiating the task. Stewart (1997) states executives must be able to measure year-to-
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year performance, or in today’s pace business progress is more frequently measured quarter to quarter, which allows for company to company comparisons. Executive ramifications to negative operational results impact stakeholders, stockholders, and ultimately their own jobs all within a very brief window of time. Theorists are able to design, rethink, and restructure theories prior to launching these theories into an environment of realistic application. Theories by definition are to be tested and validated frequently in simulated laboratory environments. As this demonstrates the creators and users of theories belong to separate communities with very different value systems and ideologies. However to bridge the gap between theorists and executives several criteria must be met. Specific to the application of the IC concept to the field of management, IC must be defined in terms meaningful to the executives and must be practically measurable in terms of ROI and contributions to the organizations bottom line. The following parameters may be considered. First, the definitions must be in organizational, operational terms. Second, the success of the IC concept must be realized by the attainment of tangible organizational performance measures. While recognition of the presence on the organizational intangible assets exists, and the importance of IC may be obvious, questions remain as to the measurement and documentation of IC in the corporate world (Steyn, 2003). Steyn (2004) states that successful 21st century organizations in the will be knowledge-creating organizations that develop, produce, disseminate, and embody new knowledge. He further notes that “IC has become one of the prime sources for knowledge-based and knowledge-enabled organizations” (Steyn, 2004, pp2). Marr et al., (2004) argue that it is now time for theorists as well as practitioners to move together to the next level of activating intellectual capital. This level includes methodologies, valuations and justifications for organizational implementation. IC may be the
An Epistemology of Intellectual Capital and its Transition to a Practical Application
bridge that connects the theorists, academicians, and the executives. Indeed, while IC is a theoretical concept, it remains widely unaccounted for in the financial and human resource documents of the business world leaving a gap between what is logical in theory but absent in practice (Roos et al., 1998). Cahill and Meyers (2000) note that the practical applications of intellectual capital accounting remain separated from explanatory theory. Executives consistently state that their employees are their most valuable asset, however accounting for this asset, hiring, promoting, or documenting their value in policies and organizational statements, or financially planning for the intellectual capital of their employees remains unseen (Roslender et al., 2001). Again, the maxim “what gets measured, gets managed” resurfaces. The theoretical definition and modeling of intellectual capital remains distinct from the realistic business application (Roslender et al., 2001). The evolution of organizations has demonstrated the progression of valued resources. The ancient clans valued water, seed, and stone for survival. These valued resources were replaced many times as organizations evolved through eras arriving at the industrial era when machines and factories were considered valued resources. Now as we have entered the 21st century we again look at resources that will enhance our chances for survival. This study is presented to illustrate whether Intellectual Capital is that resource. The difficulty is to determine whether IC has evolved from a theoretical construct to organizational implementation as a resource and further whether it is in reality identified as an organizational asset. This study queries whether organization executives in the 21st century define their IC, value their IC in their documentation and financial allocation, and actually implement IC in their practice of hiring, promoting, and award systems.
inTEllECTuAl CAPiTAl sTuDY The intellectual capital theory states a link exists between investing in human resources and measurable improvements in the organization’s bottom line. Stakeholder relationships, internal and external, benefit from well-tended IC and a positive correlation can be found between improved productivity and organizational financial success and IC satisfaction (Whitehead, 1998). The focus on intellectual capital demonstrates the shift to a knowledge economy, information management, and the employment of people for their creativity, connectivity, and knowledge (Mouritsen, 2002; Senge, 1999). This change constitutes a paradigm shift in organizational thinking with regard to the utilization and valuation of their IC assets as reflected in the evolution of organizations from earlier eras to the present time. The 21st century’s critical organizational need is to sustain a viable business within the constraints and demands of an information, knowledge management, and technology age. The dynamic environment of the 21st century presents shrinking product life cycles, stringent, competitive markets, nanosecond information demands, and continuous change. Executives must define the corporate capabilities based on their finite resources today as critically as any time in their history (Germeraad, 1999). In an attempt to meet these challenges, theorists and executives are looking at the new management model of intellectual capital for the answer (Guthrie, 2001; Germeraad, 1999; Johanson, 1999; Roberts, 1999; Cohen and Backer, 1999; Petty and Guthrie, 2000; Chong et al, 2000). The definition of intellectual capital is a moving target. For the purpose of this study intellectual capital is defined as a critical human resource depicting the organization’s knowledge, connectivity, and corporate awareness (Mouritsen, 2002; Johanson et al., 2000; Klaila and Hall, 2000; Andriessen, 2001; Guthrie, 2000; Edvinsson and Malone, 1997; Roos et al., 1998). Cohen and
29
An Epistemology of Intellectual Capital and its Transition to a Practical Application
Backer (1999) have termed intellectual capital the “hottest commodity” in business, and have claimed that it is seen as an organization’s ultimate asset and the measure of the organizations’ real worth. An organization’s IC gathers, disseminates, and converts corporate knowledge into budgets, strategic plans, and presentations and solutions (Cohen and Backer, 1999). The intent of this study is twofold. First, this study evaluated whether executives in selected Midwestern organizations espouse a valuation of their intellectual capital. Secondly, this study assesses whether these executives actualize this valuation in their organizational practices. This study is conducted on a limited basis in the Midwest to determine the practical intellectual capital implementation in the heartland.
Participant selection The types of organizations selected represented academia, manufacturing, and service industries located in Northwest Iowa. Three members of each organization were selected to provide different perspectives within the organization as reflected by position or role of the interviewee. In each organization Chief Executives (CEO), Chief Financial Officers (CFO), and Human Resource Mangers (HR) were interviewed. The selected organizations’ scope of services ranged from local and national markets to international markets. The organizations’ financial continuum varied from a few million dollars to just under 1 billion dollars. The organizations’ products and services were both tangible and intangible in both competitive and niche markets. A noteworthy factor in the interviews is the impact of the profit and not-for-profit status of the organizations on their value of their intellectual capital.
Methodology The technique used to obtain this research data is an “individual in-depth interview.” These interviews
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were conducted face to face with the organizational representatives. This interview method provided each respondent the opportunity to explore the intent of the question, and the interviewer to probe the responses. A relaxed setting facilitated rapport with the respondents and ensured uninterrupted interview time. The time for these interviews ranged from one to three hours. The interview format was both 1) non-directive and 2) semi-structured. The non-directive interview style allowed the respondent maximum freedom to respond within the boundaries of the question. The semi-structured format required the respondent to focus on the question asked to assure continuity in the questions asked. This interview technique is appropriate for this study because it provides an opportunity for respondent to query the definition, and provide individual application in their area of expertise. This style of survey is correct for respondents 1) in management and 2) surveys requesting responses to “thought” queries. This rationale is supported by Kerlinger (1986) who stated with appropriate scheduling, an interview can obtain the required information, allowing for flexibility, and probing essential to the individual situations. This interview data provides an answer to the question: do organizations value their intellectual capital.
survey Tool The question types were open-ended to allow for facts and attitudes to be presented without “group-think” or organizational biases to interfere with the respondents reply. The questions were structured to be “suggestion neutral.” The order of the questions was mixed to allow for responses that were not “sequence of thought” responses. The question tool was consistently followed to minimize interpretation variability. The milieu for the interview was prepared with introductions, and a review of the intent and purpose of the interview. The intended use of the data was described for each respondent.
An Epistemology of Intellectual Capital and its Transition to a Practical Application
The question tool was professionally formatted. Initial questions were simple and direct, establishing a rapport with the respondent. The questions included conceptual queries to individualize responses and obtain responses that identified respondents’ personal ideas and reflected their current position. Questions were also included that demanded existing practice clarification that pre-empted “social responses.” The tool moved forward becoming focused on the intellectual capital questions. Questions became very specific as to the organizations’ practice in valuing their intellectual capital. Specific documents obtained during the interview include job descriptions, performance appraisals, and mission, vision, and value statements. Other data collected through the interviews included budget figures, turnover rates, scope of business including products and services as well as market information. Questions are grouped by question types to establish the respondents’ definition and valuation of IC. Research Question #1 queries whether executives define their intellectual capital as identified by responses to questions 5, 6, and 11, the concept and definition questions. Research Question #2 asks if executives value their IC as determined by the responses to questions 1-4, 7-10, and question 12. These questions are the practice, document, and finance questions. The questions were then grouped: conceptual questions (c): 5, 11 practice questions (p): 4, 7, 9, and 10 document questions (d): 1, 2, and 3 financial questions (f): 8, 12 IC definition: 6
industry and Question Type Findings The findings for industry and question type synthesize the data by industry and question type. The data is blended to state industry behavior reflective of their IC valuation as exhibited in these selected organizations. These findings are discussed following the established format:
conceptual responses, practice responses, document findings, financial findings, and definition statements. The cumulative responses of the executives of the service industry reflect greater conceptual valuation of their IC. Questions 5c and 11c speak to the executives’vision of their perfect employee and secondly, how their organization promotes IC for future organizational success. This organizational behavior suggests the service industry executives place greater emphasis on their employees’ IC and the role of IC by their organizations’ leadership. However, the service executives were also weakest in their description and expansion of how they achieved this, indicating the role of IC in promotions was more theoretical than practiced. Academia scored second in their espoused expectations of their employees while manufacturing expressed greater utilization of their IC in their promotions. However, the overall response of academia reflects greater conceptual valuation of their IC, both in expectations and in their promotions, than the manufacturing industries. Both academia and manufacturing practice IC valuation to a greater degree than the service industries. These executive responses are reflective of their industry cultures. The service industry demonstrates a mindset of meeting customer needs and wants versus the manufacturing focus on high technology and repetitive manual labor, or the academic focus on student learning and research. These various perspectives explain their variant espoused expectations and utilization of their IC. Based on the overall low scores, it is interpreted that formal integration of IC into the concept of recognizing and promoting their employees remains low in all industry sectors interviewed. The low scores in the areas of practice, and remains even lower scores in financial allocation of funds to support their IC, strengthen this conclusion. The focus of the organizations interviewed continues to practice in an environment that does not articulate a definitive IC valuation. The practice questions discuss salaries, hir-
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
Figure 1. Responses by industry averages, graphed by question type
ing practices, and growing their IC. Academia executives verbalize greater demonstration of IC value in practice than do the executives in manufacturing and service industries. Academia executives’ scores range from 4.75 for question 4p to a score of 1.25 for question 10p. In question 9p, which asks the value of IC in their hiring practices, academia rated the lowest score in industry comparisons, scoring 1.75. The service executives rated the highest in their hiring practice value of IC at just over a 2.0. The academicians’ response to question 4p, which questions salary compensation, was significantly higher at 4.75 than either service or manufacturing. Academia CEOs and CFOs stated salaries were commensurate with corporate awareness and knowledge. The academia HR executives were only slightly lower than the CEOs and CFOs, but four out of the five CFO executives were optimistic in their salary recognition based on other comparable jobs. The academia executives consistently felt
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that the salaries in their organizations were better than the salaries either in other jobs in the area or other similar jobs in the industry. The government schools CEOs were more optimistic regarding the salaries in their organizations and were more specific in the factors that contribute to their salaries than were their counterparts in the church-based schools. The summation of the practice responses strengthens this proposition. The three industries are within a .5 variation, with their responses ranging from 2.0 to 2.5. Again, the low scores reflect a low cognitive emphasis in their daily operation regarding the compensation, development, hiring, or measurement based on their employees’ IC. Academia places the greatest emphasis on the knowledge, interconnectivity, and corporate awareness of the IC. Perhaps this is reflective of the theoretical application in contrast to the implementation of IC in a business environment.
An Epistemology of Intellectual Capital and its Transition to a Practical Application
Figure 2. Responses by executive averages, positions graphed by question type
The service executives also rated the highest in the question specific to their documents reflecting organizational value of their IC, questions 1d, 2d, and 3d, scoring between 4.5 to 5.0. Manufacturing rated second in their documentation of the value of IC in their job descriptions and performance appraisal processes, 1d and 2d, though they were not consistently forthcoming with examples of these documents. Academia placed less emphasis on the formal documentation of their job expectations or the defined performance expectations of their jobs, scoring 3.5 to 4.75. In questions 1d and 2d, all executives rated the role of IC valuable, 4 to 4.5 of a possible 5, in the job descriptions and performance evaluations. In response to question 3d, each executive verbalized a willingness to share his/her organization’s job description and performance appraisal documents, though as noted earlier, not all documents were readily available. All industries acknowledged no financial support, scoring a 1.0, and all industries acknowledged no formal definition of IC, with an exception of
a 1.25 score for manufacturing. Manufacturing CEOs and CFOs responded to this question with thoughts of employees’ connectivity to their peers and to the organization. The manufacturing HR executives were more distant from these thoughts and spoke more to employee core competencies.
Position and Question Type Conclusions Position and question type findings combine all industries, comparing the findings by position as seen in the following line graph. Conceptually, questions 5c and 11c, CEOs only slightly led the HR executives in looking at the employees’ IC as a valuable asset, both groups expressing IC characteristics in their perfect employee; however, they rarely considered these characteristics when they considered their employees for promotion, with the CEOs giving this less attention than the HR executives. The service HR executives most frequently considered the employees’ IC in promotions with a low
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
score of 1.8. CFOs only occasionally recognized IC as an employee attribute. The CEOs and HR executives were consistent in their perceptions of IC value in the employee they stated would best meet the needs of the organization, indicating the CEOs and HR executives were looking for the same type of employees. In practice, questions 4p, 7p, 9p, and 10p, the CFOs rated lowest in recognizing IC, averaging 1.5, as an organizational asset with the exception as IC pertains to salaries, question 4p, where the CFOs scored 4.10. HR executives scored consistently higher in the practice questions averaging 2.0 to 2.5. CEOs took a strong position in question 9p regarding the role of IC in the organization’s hiring practices, scoring 2.5 reflective of the CEOs approach to alignment of the employee to their perception of the organization’s vision and performance. All of the industries state the existence of documents that define jobs and appraisal practices. Clarification of these documents reflects an allusion to the organization’s mission and values. These documents also state a need for employee performance to be reflective of these statements. However, the clear focus of these documents is the core competencies and skills required to meet the job expectations. No response or documented behavior articulates an IC emphasis, or in some cases even IC awareness. All executives stated no financial allocations were made to IC, and no asset value was assigned to the organizations’ portfolio for IC value with a score of 1.0. Stair case results document the definitions for IC in response to question 6. CEOs scored 1.75 acknowledging, at least theoretically, that IC was important to the organization. CFOs registered a score of 1.5, and HR scored no points for defining IC. This is again reflective of HR’s focus on the core competencies of the employees as defined in the job descriptions and in the performance appraisal process. Comparing the theoretical and the practice behaviors as demonstrated by the executives’
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responses, the average scores vary only by .5. The average conceptual response was 1.75, while the average practice score was 2.25. In both their conceptual and in their practice responses, CEOs rated the highest score with the HR executives only slightly less. In both areas, the CFOs registered the lowest scores in conceptual or practical implementation of IC within the scope of their daily operations. While the response score distribution is not surprising, the low scores reflect the gap between the literature documentation of IC potential impact on organizational performance and the implementation of IC in the selected organizations’ daily operations. All executives interviewed stated formal documents exist which outline the job descriptions and the performance appraisals. In probing further, it was discovered that the documents formally describe the expectations and measurement of the employee performance but place no specific acknowledgement on the IC potential of the employee. The academia documents allude to the organizations’ interconnectivity and spoke to the need for employees to understand the importance of interpersonal relationships but do not connect this working environment to employees’ intellectual capital. Manufacturing documents spoke to knowledge of equipment and tools, punctuality, and the quality of work but made no attempt to measure the IC of the employee or even to establish a need for the employee to have or acquire intellectual capital. Manufacturing’s training addressed defects and safety issues with the approach to improved output. The service industry spoke of the skills to achieve a satisfactory performance but more frequently addressed organizational mission statements about providing a caring service or environment. Training by all of the organizations was directed at improved technical skills and operational improvement through tangible outputs. The training centered on defects or regulatory requirements such as fire, safety, and harassment issues. The availability of the training hours was
An Epistemology of Intellectual Capital and its Transition to a Practical Application
strictly dependent on operational financial stability and availability of time to meet the regulatory demands. In all but one manufacturing scenario, theoretical compassion for the employee was present, articulated, and apparently genuine. Compensation was dependent on the results of the performance appraisal only to a small degree and most found often in the service industry. The service industry percentage of salary allocation and increases was reflective of the supply and demand of the employee classification. The performance rewards in the service industry were partially reflective of the performance appraisal results, with greater emphasis on budget and inflation influences. Academia compensation had no correlation to employee IC but rather to seniority status. Manufacturing compensation was based on area and industry current rates. All executives were more confident in their responses to the factual questions, 1d, 2d, and 3d; average scores were 4.25 to 4.5 and became less confident in the theoretical and practice questions averaging 1.25 to 2.0. All executives became almost reticent in their responses to the financial questions. The question as to definition left almost 100% of the executives struggling. The terminology appeared foreign to each of them. Questions 8f and 12f were neutralized again with no executive knowledge of financial support or IC valuation in the organizations’ asset portfolios. The definition of IC by executive position was more clearly differentiated than this question was in the industry comparison but still weakly met scoring between 1.0 and 1.45. The theoretical definition of IC by CEOs was only slightly more defined than the CFOs, who were only slightly better than the HR executives were. The CEOs’ approach to the definition of the organization’s IC was more global: knowledge of organization and intelligence. The CFOs talked about brain power and technology. The HR executives brought up skills, ability to think and problem solve, and related IC more specifically to a job orientation.
There was more fluctuation in the executives’ perceptions in the conceptual interpretation of IC value in the organizations, with the CFOs as a group less in line with the CEOs and HR executives. All of the question types presented a small difference in position responses of .5, reflective of a similarity or homogeneous thinking among these executives. The industries demonstrate a lower level of understanding and implementation of the intangible IC assets than the literature describes and continue to function with a greater emphasis in traditional book keeping and traditional skills for human resources recruitment and promotion.
Reliability and Validity The validity of this study addresses the data received from the methodology. Validity is the ability of the measuring tool to obtain the data that was intended (Zikmund 2003). The validity may be confirmed by the consistency and commonality of the responses. Executives in all industries understood the questionnaire vocabulary, specifically as the queries related to the documents, practice, and financial data. As the funnel technique addressed intellectual capital, the terminology was not familiar, also consistently across industries. The validity of the tool was strengthened by its professional design. The results of the study provide applicable data within the construct of this study, giving this study validity. Given the geographic context of the survey tool and the framework of the study, a retest with the same tool would yield the same type of results. The sensitivity of the study refers to the ability of the instrument to measure variability in stimuli to the responses (Zikmund 2003). The sensitivity of the study is documented in the variation by industry and executive position. The tool is sensitive to the role of IC as interpreted by industry environment, its customers, its products, and by the experiences and position of the executive. The validity, reliability, and sensitivity of this study’s design is accurate within its constraints
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
and limitations. Study Analysis of Variance (ANOVA) measures the effects of one variable on an interval scaled dependent variable (Zikmund, 2003). Interpretation of ANOVA infers the significance of variability both between the levels of the groups and within groups in this study. This study utilizes the one-way method, rather than a factorial ANOVA, due to the sample size, which renders the multiple variant analyses insignificant. The one-way analysis compares the means of the samples from multiple populations to determine if the findings are statistically significant. The alpha .05 is used to determine significance interpreting <.05 value as having a significant variance between and within groups while values >.05 have too great a variance to make a claim. The ANOVA analysis is defined with the independent variables considered in this analysis as the industry and position variables and the dependant variables considered are the questions types (Zikmund, 2003). The independent variables of this study each have three levels. The industry levels are academia, manufacturing, and service industry. The second independent variable of position looks at the CEO, CFO, and HR positions. Question types group the dependent variables. The F-test score identifies the variability in the scores of one level as compared to the scores of the other two levels with in each group. The degrees of freedom (df) in this sample size remain relatively small at 44, providing opportunity for further study specific to those areas where borderline variance significance is found. The SPSS application completes the analysis of variances. A. Industry Analysis by Question Type
industry Variance by Question Type Industry variance by question type provides the significance by industry to each question type. Hypothesis of industry definition of IC in RQ #1 is addressed with question type 1 and 5. Question type 1 results with a 0.008 significance and ques-
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tion type 5 results with a significant variance of 0.002. In response to these significance variances, a claim may be made that industry variance exists to their definition of the IC. Industry variance to the hypothesis of industry valuation of their IC as identified by industry responses to question types 2, 3, and 4 results in a significance finding of 0.103, 0.006, and no findings respectively. Type 2 questions, which discuss organizational practice, result in variation significance too large to make a claim of industry variation. Type 3 questions significance of 0.006 indicates industries do have variation significance. Finally, type 4 questions, which queries industry financial support, resulted in the same response from all industries, which results in no statistical finding of variation.
Position Variance by Question Type Position variance by question type provides the significance by executive to each question type. Hypothesis of position definition of IC in RQ #1 is addressed with question type 1 and 5. Question type 1 results with a 0.108 significance and question type 5 results with a significant variance of 0.218. In response to these significance variances, the variation significance is too large to make a claim of executive variation. Position variance to the hypothesis of executive valuation of their IC as identified by executive responses to question types 2, 3, and 4 results in a significance finding of 0.698, 0.810, and no findings respectively. Type 2 and 3 questions, which discuss organizational practice and documentation, result in variation significance slightly greater than the acceptable alpha significance of .05. These findings indicate a marginal significance may be present. A larger sample size is recommended to validate the significance of the variation between executives relative to their practice and documents illustrating their valuation of their IC. Finally, type 4 questions, which queries executive financial support, resulted in the
An Epistemology of Intellectual Capital and its Transition to a Practical Application
same response from all executives, which results in no statistical finding of variation.
Conclusions This study provides empirical data on organizational valuation of their IC from the perspective of three sets of executives in upper management. Future research may consider obtaining additional input from organizational members in management and at supervisory levels of the organization, recognizing the understanding of employee IC will differ dependent on the position from which it is viewed. Secondly, this study occurred in a very homogeneous environment. Future study may provide findings that are more reflective of a broader workforce if the study were conducted in an environment where mobility and diversity of the labor pool was prevalent. Recommendations for future study may include a geographical area where employees represent a greater ethnic diversity and where change is closer to the national norm. Future study may also look at industry types with a focus on the technology industry and industries that experience greater change factors. A future study may also consider industries that have a corporate entity with multiple subsidiary locations in different geographical areas to differentiate the impact of the geographical impact on corporate recognition of IC. Considering the global market environment, a global assessment may be made as to ethnic or cultural differences in recognition of organizational IC, e.g. United States versus European or Asian. Based on the review of the literature, additional deliberation is necessary in understanding or bridging the gap between theorists and executives’ perceptions of organizational recognition of IC. As discussed earlier, organizations act on those resources that enhance their survival. This study demonstrated that those resources evolved from water, seeds, and stones; to machines; and finally to high tech information systems. Although, it is agreed that IC is a valuable resource, it has not
been clearly demonstrated how the leaders of an organization efficiently convert IC to a resource that is accessible and managed. Based on the characteristics of the 21st century, executives are searching for a “tool” that will give to their organization a competitive edge in a very competitive and aggressive global market. However, it is because of these 21st century characteristics that resources surviving as this “tool” that gives the organizations the competitive advantage must be efficient, assessable, measurable, and easily and quickly implemented by the team of managers responsible for the daily operations of the organization. Intellectual Capital is a valuable tool just as stone was in the Ancient Era. However, just like stone, IC must be molded into a user-friendly tool that will allow the user efficient use in the daily operations of his or her job. Executives in this study have espoused a genuine concern for their employees and the employee intellectual capital. However, these executives have not benchmarked an actual practice of assigning value to their IC asset or the contributions of their organizational intellectual capital contributions.
inTEllECTuAl CAPiTAl sTATus ToDAY During the past one to two decades researchers have identified a link between organizational performance and that organization’s human resources, specifically in the information era the organization’s intellectual capital. A study by Youndt and Snell (2004) synthesize the literature finding by the following. First, there appears to be consistent empirical finding that human resources assets and practices contribute to the strategic well being of an organization. Second, there remains a lack of consensus on the single best practice or tool for organizational survival. The 21st century business characteristics comprise a hyper-competitive, global environment,
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An Epistemology of Intellectual Capital and its Transition to a Practical Application
which is complex and radically shifting, with an independent mobile workforce (Cunard, 2005). Cunard goes on to say the selected tools for this environment must be muti-user friendly for a variety of stakeholders. These tools must ‘fit’ a myriad- dimensional market with a specific, measurable ROI. Business thrives is an environment that is focused on efficiency, productivity, and profitability (Pike et al, 2006). The tools selected by these businesses will be required to meet these criteria. Executives are typically straight forward in their needs. They expect to be able to describe and define their tools and methods in an articulated succinct manner. These executives desire to measure in concrete terms the benefits and costs associated with their production of goods and services. They expect to be able to tell their Boards the return on their investments. Does this describe the intellectual tool? We must continue to address the disconnect between academia and business to maximize the resources we have. Ahuja et al (2005) state a process is needed that demands the involvement of both academia and industry. This process must meld academic and industrial perceptions and develop flexible programs that meet both communities aspirations (Ahuja et al., 2005). Thompson et al. (2007) recommend a sharing of industrial best-proven practices that would provide for curriculum contexts. Bridging the gap between business and theorist is an ongoing process that must continue to be addressed. As communities of academicians, researchers, theories, and executives we share commonalities. We also have major differences. Business executives will always search for an operational tool that will accentuate their strengths and minimize their obstacles. The final call has not been made whether intellectual capital is the tool of choice for organizations in the 21st century. Clearly, the work is not complete for executives to rest the future of their organization on this tool solely.
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Tzu, S. (2001). The art of war: a new translation. The Denma Translation Group, (Trans.). Boston: Shambhala Publications, Inc. Ulrich, D. (1997). Creating the boundaryless organization: Based on a presentation by Management Forum Series speaker. Ulrich, D. (1998). Intellectual capital = competence x commitment. Sloan Management Review, 39(2), 15. Ulrich, D., & Lake, D. (1991). Organizational capability: creating competitive advantage. Academy of Management Executive, 5(1), 77–92. Ulrich, D., & Lake, D. (2001). Organizational capability: creating competitive advantage. University of Michigan, Ann Arbor, MI. Weber, A. R. (1958). Union-management power relations in the chemical industry. Labor Law Journal, Sept.
Werther, G. F. A. (1999). The crisis of business intelligence: on the necessity of training reforms. Thunderbird International Business Review, 41(3), 287. doi:10.1002/tie.4270410306 Whitehead, M. (1998). Employee happiness levels impact on the bottom line. People Management, 4(24), 14. Wiseman, R. M. (2001). Rewarding excellence. Academy of Management Review, 26(1), 135–138. doi:10.2307/259402 Youndt, M. A. & Snell, S. A. (2004, September 22). Human resource configurations, intellectual capital, and organizational performance. Journal of Managerial Issues. Zikmund, W. G. (2003). Exploring marketing research, (8th Ed.). Mason, OH: South-Western.
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Chapter 3
Multinational Intellect:
The Synergistic Power of Cross Cultural Knowledge Networks Leslie Gadman London South Bank University, UK Robert Richardson Mental Health Associates, USA
ABsTRACT The world of international business is experiencing transformations of such magnitude that existing business models have become either invalid of incomplete. A fundamental force behind these disruptions has been the emergence of the digital networked economy (Ridderstrale and Nordstrom 2004, Flores and Spinosa, 1998) with its supporting internet and communications technology. One significant manifestation of this economy is the emergence of business models designed to gain competitive advantage by bonding with customers, suppliers and complementors (Wilde and Hax 2001). From the multinational perspective outsourcing and off - shoring have been the most common examples of this approach, but user lead innovation models (von Hippel 2005) based on Open Source methods are rapidly emerging as the leading source of competitive advantage. Commitment has been argued to play an important role in determining the success of these relationships (Abrahamsson and Livari, 2002) suggesting that entrepreneurs must be adept at building and maintaining commitment based value networks (Allee 2004, Sveiby and Roland 2002, Savage 1996, Gadman 1996, Adams 2004). This paper considers the challenges associated with commitment in multinational value networking and finds them to be most problematic in the diffusion of innovation where increasing levels of commitment are required across national boundaries and cultures. (Mauer, Rai and Sali 2004). Current research into core commitment structures of virtual multinational communities is not been well established. By analyzing data from a range of sources the paper concludes that the success of value networks depends on the desire of participants to acquire history - making identities (Gauntlett 2002, Spinosa et al. 1997) by maintaining identity defining commitments across the network. Implications for theory and research are discussed.
DOI: 10.4018/978-1-60566-679-2.ch003
Copyright © 2010, IGI Global. Copying or distributing in print or electronic forms without written permission of IGI Global is prohibited.
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inTRoDuCTion Existing theories of entrepreneurship focus on the imagination and creativity of the entrepreneur (Mongiovi 2000) and view market imperfection as the driver of enterprise. This view has led to the formation of a manufacturer – centric culture which has been the mainstay of commerce for hundreds of years (von Hippel 2005). In contrast, the networked economy is producing new business models based on value networking (Ridderstrale and Nordstrom 2004, Flores 1998). Emerging economies are finding themselves on the cusp of these tectonic shifts as their low cost business models are failing to attract multinationals who regard people as a rich source of intellectual capital and innovation (Sveiby and Roland 2002, Savage 1996, Gadman 1996). Allee (2004) describes value networks as webs of relationships that generate material or social value through complex dynamic exchanges of both tangible and intangible goods, services, and benefits. Examples range from Southwest Airlines, Dell, IKEA, Lastminute.com, and Google who have successfully found new ways to accomplish old goals, to Burton Snowboards, CEMEX’s Patrimonio Hoy and the MIT Media Lab Wind – Up Lap Top who are doing entirely different things and shaping marketplace trends (Hax and Wilde 2005, von Hippel, 2005, Flores and Spinosa 1998). For today’s multinational entrepreneur the challenge is to be competent in designing, leading and managing value networks which span both user and manufacturer - centric cultures across national boundaries. The underlying assumption behind these networks is that they are fundamentally architectures of synergistic commitment where integrative interaction (Richardson 2003) among members leads to emergent innovation far greater than that achieved by individual effort (Gadman 1996). This chapter proposes that for entrepreneurs wishing to disrupt market trends rather than follow them a core competence is the skill to manage across national relationships by maintaining commitment to a shared concern
among all stakeholders. For example, Jake Burton spent the early part of the 1990’s showing people how snowboards were a viable alternative to skis even though the latter were perfectly adequate. Today, it is hard to imagine a world without the snowboard.
iDEnTiTY BuilDinG AnD ARCHiTECTuREs oF CoMMiTMEnT According to Adams (2004) the internet is revolutionary not because of the great search engines and enormous library of interconnected information but because it’s two-way communications technology allows large numbers of people to interact to satisfy concerns. Indeed commitment can be viewed as a state of attachment that defines the relationship between an actor and an entity (O’Reilly and Chatman 1986). The quality of this attachment can be measured by the strength of the commitments generated as one actor, group or organization of actors delivers results to another actor, group or organization in such a way that there can be agreement that their concerns were satisfied (Winograd and Flores 1987; Flores and Spinosa 1998). The relationship can be viewed in terms of focus and strength (Brown 1996), durability (Abrahamsson 2001) and component type (Meyer and Allen 1991). These six aspects are common to all commitments. Table 1 briefly describes these six aspects of commitment. Depending on the target of commitment and the circumstances, an actor may be committed to a value network in different forms. They may feel its benefits (affective component) (von Hippel 2001). They may have an emotional and rational investment in the project which drives their continued participation (continuance component). Finally, the organization is bonded by the strength of the collective words of their members and personal identity based on the extent to which a person’s word is or is not their bond (normative component). Most researchers agree that it is the
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Table 1. Aspect of Commitment
Description
Focus
Defines the target of one’s commitment. This target can be an organisation, project, community
Strength
Defines how deeply an actor or group is attached toward an entity. An actor is more or less committed than simply committed or not.
Terms
Define what has to be done in order to fulfil the requirements of the commitment. E.g. a contract is an explicit request outlining conditions of satisfaction.
Durability
Depending on the commitment target, the durability of the personal contract varies. E.g. commitment to career may last a lifetime while commitment to a project does not.
Component type or form
Commitment is formed from its components. At least three forms of commitment exist: Affective, normative and compliant. These forms build up to a composite which changes over time. They may also be regarded as the essence of commitment which engenders attachment.
Level of commitment
The unit of analysis in commitment studies. 1) Individual commitment 2) group or team 3) organisation. Each can have a commitment towards an entity
affective component which is the most desirable (Meyer and Allen 1997) because it is that aspect which enables bonding at each level of commitment. For example, FedEx and Amazon.com use the internet to establish bonding through conversation - based interactions where they commit to be reliable. They do this by positioning strategies like letting customers know what’s going on. Alerting customers if problems occur and offering counter-proposals designed to resolve the problem to a customer’s satisfaction. Using customer and inventory databases and well-integrated financial and logistical systems, they use the internet to build legitimacy through core commitment structures based on trust (Winograd and Flores 1987). Value networks work in the same way in that they are made up of conversation generated commitment structures formed by the exchange of words in real and virtual space that bond actors to each other. This rich network of commitments delivers value by addressing the concerns of those involved and ultimately those who receive the benefits of the network’s output. Therefore this paper proposes that the essential purpose of commitment based value networks is to achieve synergistic outcomes which are far greater than those achievable by individual effort alone (Richardson 2004). The affective component of value
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networking is the actor’s willingness to give their word and the ability to carry it out. This is one of the key components of identity building. For example, the late Body Shop founder and managing director Anita Roddik talked of her personal identity being inextricably linked to her corporate mission and Nicholas Negroponte, the co-founder of the Media Lab at the Massachusetts Institute of Technology refers to his $100 wind-up powered laptop as “the most important thing I have ever done in my life. If we can make education better particularly primary and secondary schools - it will be a better world.” (Ricciuti 2005). This suggests that richly synergistic communities attract people who are identity seekers who wish to make the world a better place as a result of their actions. Research on the core commitment structures of multinational value networks is uncommon and the overall lack of a theory suggests a qualitative grounded approach to develop analytical categories and propositions (Glaser & Strauss 1967, Meyers 1997, Strauss & Corbin 1990). The theory development in this paper is based on The Tropical Diseases Initiative (TDI) a multinational decentralized, community-wide effort to conduct R&D for neglected diseases. The paper is organized as follows; firstly it provides a review the research method employed in the study. It then provides a
Multinational Intellect
history of TDI related development data. It then proceeds to theory induction by an analysis of contributing behaviour exhibited by members of TDI. The paper concludes by discussing implications of the study for theory and research.
REsEARCH METHoD This section describes the research method employed in the study. It proceeded in three phases: Sampling of case, data gathering, and data analysis. One case was selected in order to increase the depth of the analysis, acquire and report experience with the gathering of new and unfamiliar data (Numagami 1998). TDI was sampled because computation is playing an increasing role in biology and the convergence between computing and biology suggests that comparisons might be made with studies of user innovation networks like Open Source (Raymond, 1999). It is further hoped that TDI would reveal areas as yet undiscovered in current research into identity creation in collaborative communities. TDI also offered an ideal sample because it was in its formative stage with only four individuals making initial contributions. The data in this paper covers the opening period of the TDI project (2004) and studies events occurring during its critical launch up to the present time. Data were gathered from a range of different sources and occurred between February, 2004 and January, 2008. The analysis was inspired by the writings of Winograd, Flores and Spinosa (Winograd and Flores 1987) and their theories of commitment in organisations which fitted closely with the user – centric innovation focus of this paper. They define commitment in organisations as a set of characteristics and their relationships, which together describe the process of committing. The characteristics, relationships and actors performing them are identified and described in this section on the basis of the analysis. Winograd and Flores (1987) have opened the discipline of tracking, mapping, and combining
commitments based on the constituting power of human speech. As they put it, “mapping social institutions in terms of their concern and commitment structure tells us what is genuinely new and what is a new way to accomplish old goals” (Flores & Spinosa 1998, p. 357). In their writings on computers and cognition, they propose a general structure for forming commitments for actions to satisfy concerns and by focusing on concerns and commitments, new domains of assessment emerge. When such domains of assessment are shared amongst a user – centric community they can lead to the identification of new institutions arising alongside old ones as was the case with snowboarding and its emergence as a viable challenge to the ski industry. In this paper the social institution to be mapped is the TDI as it takes on a radically new approach to drug discovery in the manufacturer – centric pharmaceutical industry. If this is accepted, TDI can be seen as a new institution arising alongside and old one and possibly a genuinely new way to accomplish old goals. If we are to evaluate whether a change has occurred, we have to look at the changes in concerns and commitments, i.e., the changes taking place in the respective actors’ commitment nets. “Once we become familiar with the way commitments drive action, we no longer believe that we have to understand in advance the component parts of whatever social action we seek. Rather, we see that we must identify concerns and begin forming commitments to address them. The basic organising skill is forming and managing a commitment to deal with a concern. “On the basis of one commitment, many others can be grown” (Flores & Spinosa 1998, p. 357). Focusing on identity creation, legitimising and positioning behaviours, data were gathered from the project’s web site which contained a “wiki” (a website that anyone can edit and contribute to) and discussion forums which were archived on TDI’s website and open to anybody who wanted to discuss the project. Finally, in order to obtain contextual understanding of the project, data
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were gathered from publicly available documents related to the open source model in general and to the TDI project in particular. Among the most important sources were the TDI web pages (e.g. the original concept paper by Maurer, Rai and Sali (2004), magazine articles, news features and links to other projects attempting similar challenges).
TDi HisToRY AnD DEVEloPMEnT CHARACTERisTiCs This section provides a brief history of the TDI project, its wider context, objectives and an overall characterization of the development process. The current manufacturer – centric approach to drug discovery works up to a point, but it is far from perfect. It is costly to develop medicines and get regulatory approval. The patent system can foreclose new uses or enhancements by outside researchers. And there has to be a consumer willing and/or able to pay for the resulting drugs, in order to justify the cost of drug development. Pharmaceutical companies have little incentive to develop treatments for diseases that particularly afflict the poor, for example, since the people who need such treatments most may not be able to afford them. It is in this environment that a number of users comprising medical biologists, lawyers, entrepreneurs and health-care activists have sought improvements. They have suggested borrowing the user – centric “open-source” approach that has proven so successful in another area of technology, namely software development. Calling their approach “open source drug discovery,” TDI aims to significantly reduce the cost of discovering, developing and manufacturing cures for tropical diseases. The focus on virtual drug discovery and development as operationalized through these partnerships brings many advantages, as well as scientific and managerial challenges. Some are common to those faced by all drug R&D ventures while others seek drugs with a very low cost of manufacture that are easy to use in resource-poor
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environments. Open-source approaches have emerged in biotechnology already. The international effort to sequence the human genome, for instance, resembled a user – centric or open - source process. It placed all the resulting data into the public domain rather than allow any participant to patent any of the results. User – centric methods are also flourishing in bioinformatics, the field in which biology meets information technology. This involves performing biological research using supercomputers rather than test-tubes. Within the bioinformatics community, software code and databases are often swapped on “you share, I share” terms, for the greater good of all. The user – centric approach works in biological-research tools and pre-competitive platform technologies. The question now is whether it will work further downstream, closer to the patient, where the development costs are greater and the potential benefits more direct. While from a multinational perspective these initiatives impose no national boundaries, they do impose boundaries of another kind related to information sharing and knowledge generation and diffusion. For example, TDI founders Maurer, Rai and Sali (2004) asked the question “Would universities and corporations really let their people volunteer? Won’t they insist on intellectual property rights?” Their believed that life sciences companies would not stand in the way of research that did not benefit them directly. Indeed from a commitment perspective TDI was able to encourage universities and companies to donate the data, research tools, and other resources which added to the strength of the project. The reason for their commitment was they had little to lose because the value of their intellectual property depended almost entirely on US and European diseases. For this reason, it cost them very little to share their information with tropical disease researchers.
Multinational Intellect
THEoRY inDuCTion In this section propositions are developed towards a theory of core commitment structures in virtual multinational user - led communities engaged in the process of innovation. Through the application of commitment networks, the propositions are grounded in documented behavioural strategies of founders attempting to bring their innovative ideas into being through collaborative efforts. According to Abrahamsson (2002) the key concepts constituting the basis of the commitment net are actors, drivers, concerns, actions and outcomes. See figure 1. These categories are introduced and defined in the following sections.
Actors There are three levels of actors: individual, group and organization (Hage 1980, Curtis et al. 1988). For the purposes of analyzing the development
of commitment networks in TDI it is beneficial to distinguish explicitly between these different organizational levels for two reasons. First, each organizational level actor participates in TDI for different reasons, is not necessarily from the same nation and subsequently is affected by TDI differently. Second, the distinction between different organizational level actors allows the layered analysis of the changing commitment forms and drivers in the commitment process, which in turn provides a richer view into the dynamic complexities of the commitment phenomenon in the case studied. Adapting the levels of actors to reflect a more interpretive approach the analysis regards actor roles as respectively: improving, integrating and operating (Gadman 1996). See figure 1. TDI attempts to change these commitment networks at each level, so as to increase the ability of the network to produce higher quality results within given time and resource constraints and to allow individual members to understand the
Figure 1.
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benefits of the TDI core mission. As one of the founders said, “Generally speaking, I’m interested in the web and emerging technologies, and how these can be applied to the scientific process. The TDI concept is an excellent example of this, and potentially a way to do a lot of good, hence my interest”. The leadership action takes place at the improving level where the task is to sponsor the project by providing the resources for performing the improvement actions. Maintaining uniqueness and direction through monitoring progress and promoting the TDI core mission and values throughout the organization takes place at this level. For example, during one conversation the founders talked about the way TDI “fills the current gap in early-stage drug discovery”. It also aims to “tip the economics of developing downstream drugs”. As such, it provides a service to sponsors and the Virtual Pharmas they have funded to manage development. They also recognised that their “customers” concerns had to be taken into consideration if TDI was to be maximally effective. They needed pharmaceutical and biotech companies to commit their scientists to the effort, to provide access to proprietary data and to grant funding. For example, in one conversation the founders discussed which types of scientists and areas of science were important. “Do we have specific examples of scientists who will (or ought to) be involved”? They felt the TDI would need non-scientists, too. “Social scientists and law professors will be helpful in designing solutions to governance and IP policy questions. Lawyers will
be helpful if (a) the TDI site decides to adopt “clickwrap” licenses restricting what people do with its discoveries, and (b) TDI negotiates confidentiality agreements in order to obtain access to proprietary data”. This is a key concept in the commitment net formation where different organizations must also be networked into the TDI project. For example, the founders feared that university administrators would be concerned that scientists were contributing information that could be patented by the university. For this reason, each operative level also included external actors working in joint collaboration with groups of university researchers and internal actors within the TDI organization. Operating actors were represented by the various scientists, lawyers, administrator, sponsors, and other volunteers who made up the network. As another founder put it, we need to determine which types of scientists and areas of science are important. Do we have specific examples of scientists who will (or ought to) be involved?” Another replied, “TDI will need non-scientists, too. Social scientists and law professors will be helpful in designing solutions to governance and IP policy questions. Lawyers will be helpful if (a) the TDI site decides to adopt click wrap licenses restricting what people do with its discoveries, and (b) TDI negotiates confidentiality agreements in order to obtain access to proprietary data.” These TDI participants managed and implemented planned process improvement actions. It is these projects that ultimately adopted new behaviour patterns. See table 2.
Table 2. Actors in TDI context. Commitment Net Level
Actor
Role in TDI
Function in TDI
Improving
Local or external to TDI
Leading
Authorization of budgets and resources; provide leadership on strategy interpretation; monitor progress; resolve organizational issues; promote TDI goals
Integrating
Internal to TDI
Managing
Manage interpretation and implementation of strategic plans
Operating
Internal or external to TDI
Key stakeholders
Perform key tactical activities on time and to agreed expectations.
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Commitment Drivers Research in other disciplines (e.g., Sabherwal & Elam 1995, Meyer & Allen 1997) has shown that the development of commitment is influenced by various drivers. The drivers identified in organizational behavioral literature are mapped to the proposed four categories. Research has also evidenced that the resulting commitment works to strengthen or weaken the drivers (e.g., Mowday et al. 1982). A potential driver is anything affecting the commitment of the actors and can occur in the macro and micro environment as well as within the organisation, group or team. It is for this reason that commitment can never be taken for granted (Table 3). Certain drivers, therefore, are more relevant than others. For example, scholars have observed that newcomers joining technical projects must demonstrate some level of technical expertise as well as understanding of what the community expects in terms of behaviour, in order to make a contribution to technical development (Lovgren & Racer, 2000; Wenger, 1997). Alternatively, the TDI founder’s believed that the TDI project should be targeted toward scientists from universities and industries who “should want to join for the reasons that people often join open source projects (enjoyment from doing creative tasks, recognition, altruism etc.)” For example, the three founders
believed that “instead of financial incentives, TDI offers volunteers non-monetary rewards, such as ideological satisfaction, the acquisition of new skills, enhancement of professional reputation, and the ability to advertise one’s skills to potential employers.” They wanted to attract “capable young scientists who are frustrated by the pace of early career advancement. Find ways to directly fund young investigators. Give them decision-making power”. They needed pharmaceutical and biotech companies to give permission for their scientists to volunteer, to provide access to proprietary data and to grant funding. For example, in one conversation the founders discussed which types of scientists and areas of science were important. “Do we have specific examples of scientists who will (or ought to) be involved”? They felt the TDI would need non-scientists, too. “Social scientists and law professors will be helpful in designing solutions to governance and IP policy questions. Lawyers will be helpful if (a) the TDI site decides to adopt “clickwrap” licenses restricting what people do with its discoveries, and (b) TDI negotiates confidentiality agreements in order to obtain access to proprietary data”.
Concerns and action The concepts of concern and action together constitute commitment however, action by itself
Table 3. Drivers for TDI projects. Commitment Driver
Description
Organisational Behaviour Indicator
Project
Reflects the objective features of the TDI project, such as costs and benefits. Project drivers indicate reasons for TDI to exist.
Investments: transferability of skills. Alternatives: existence of other solutions.
Psychological
Psychological drivers involve key individuals in the project, reflecting properties such as the need for identity as an achiever, past historical success, etc.
Work experiences: job scope, employee role, personal fulfillment, importance and competence.
Social
Social drivers originate from a group rather than an individual. These drivers are, e.g. power and politics, or public identification with the TDI project.
Investments that are hard to reciprocate
Structural
Structural drivers represent the contextual conditions surrounding the project: the environment for TDI activities.
Organizational characteristics: fairness of policy, communication
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does not bring about commitment but might be interpreted as a sign. This is consistent with the views expressed by the behavioral school of commitment research which emphasises the role of action as commitment target. Acording to Oliver (1990) “commitment targets should be actions rather than objects, as it is virtually impossible to describe commitment in any terms other than one’s inclination to act in a given way towards a particular commitment target” (p. 30). Consequently, the research sought out evidence of the strength of a person’s commitment by observing patterns and frequency of activity directed at addressing concerns. For example, in the TDI much of the early conversation took place among the founding partners (actors) who played a major part (at the improving and integrating levels) in setting up the initial communications infrastructure. For example, in an attempt to address concerns for a communications platform, one founder volunteered to approach his employer saying, “In principle, NPG (Nature Publishing Group) may be able to provide a home for the site. I’d need to check this with the right colleagues once we’ve worked out what kind of site we’re talking about”. One shortcoming of the research was an inability to say for sure exactly what the deep psychological drivers were and how they were directed toward meeting the overarching concerns of the project. Consequently, while it was not possible to accurately gauge the level of commitment held by the founders of the TDI, their patterns of actions suggested this to be the case. For example, the founders expressed their concern that initial conditions were established such that potential joiners would recognise the benefits of membership. As one person said, “If TDI is able to keep data confidential, joining will cost nothing. Companies will receive benefits in terms of moral satisfaction, keeping employee/ scientists happy, and good publicity on a topic that is politically sensitive for them. Benefits should therefore outweigh costs”.
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outcomes Only actions produce outcomes and outcomes bear relevance in this research since it has been shown that it is on the basis of outcomes that future actions are planned (Newman & Sabherwal 1996). For example, if the outcome of a TDI action was considered unsatisfactory for the sponsor, resources could easily have been withdrawn and the project cancelled. Therefore, an outcome has an influence on its operating environment – i.e., on concerns and actions and drivers. In a study on implementing the Lotus Notes groupware tool in an organization, Orlikowski (1992, 1993) distinguishes (among others) between intended and unintended outcome produced by this groupware tool for the organization. Similarly, TDI activities led to intended and unintended outcome (Kautz 1999), which affected both the drivers, concerns and future actions. In TDI, unintended outcomes may take the form of dissatisfaction with an introduced target, which may subsequently lead to difficulties in the co-operation between different operations. Unintended outcome may also be positive. For example, accidental discoveries may clear the way for a range of new TDI activities (that were initially not intended). Intended outcome reflects the fact that the TDI project has achieved the goals set for it.
The Commitment Process The commitment network model identifies the main analytical elements used for explaining the commitment processes in TDI i.e. TDI concerns, change in commitment drivers and in the form of commitment, and outcome. Concern, as was stated earlier is an ongoing generalization of needs and therefore, guides actors’ attention to certain targets. For example, TDI’s founders were concerned about incentives to attract members, “A key goal will be to satisfy companies that their data will, in fact, be confidential. Although it is easy to dream up such options, it will be much
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more practical to have this discussion directly with prospective partners”. TDI projects were initiated for some specific reasons. These reasons could be interpreted as the concerns that had been found to cause problems to civilised society in general and the pharmaceutical industry in particular. Therefore, a TDI project must embody a concern that directs the actions of those in the TDI project. If only actions are pursued without acknowledging the driving concern it is reasonable to expect that the project will face fundamental problems because it will fail to meet the needs of some specific concerns. For example, early on participants were concerned that the TDI would be viewed as an attempt to undermine proprietary drug development and therefore to be against their long-term interests. The founder’s response was, “I suppose you’d have to ask them. I think the threat to their multi-billion dollar enterprise is fairly limited. The main thing we do is take pressure off with respect to L.D.C. issues. My guess is that we’re a net plus for them”. Another key concern was the establishment of a communication platform which involved the target of increasing the effectiveness of idea sharing, theory generation and knowledge dissemination. It was determined that this could be achieved by the formation of a home page. Thus, the content of TDI concern was the effectiveness of the communications activity and the means used for achieving the goal was the establishment of a TDI home page. This concern had then to be transferred to the operational level of the commitment net for action. In addition, the concern had to be transferred to the improving level of the commitment net in order to ensure the availability of financial and human resources for executing it. The means by which improving and operating commitment nets are changed are the core elements of TDI itself. These TDI elements constitute the infrastructure and the means needed for performing TDI activities through which the different levels of commitment nets change. TDI commitment processes are concerned with studying how TDI concerns and subsequent actions
come about in an actor’s commitment net. This is achieved when the changes in commitment drivers and forms are identified in each TDI phase along with the resulting outcomes.
ConClusions AnD iMPliCATions The purpose of this paper has been to apply a commitment based analytical model (Abrahamsson, 2002) to the Tropical Disease Initiative (TDI) to understand the motivations and strategies supporting the desire of its actors to engage in the discovery and commercialisation of innovative cures for tropical diseases. The way these actors went about their task was defined and explained using a commitment networking model. On this basis, the research suggested that value networks like the TDI are commitment based. Three levels of networks – improving, integrating and operating – were defined and network elements – actors, drivers, concerns, actions, and outcomes – were introduced. As a result of this analysis, five assumptions were induced: 1) that actors satisfy a strong normative need to comply with the principles and values of the network by continually monitoring and adapting to other’s perceptions, 2) the belief that the internet increases the capacity to form and manage networks of commitments but does not necessarily increase the quality of those commitments, 3) the idea that individual, corporate and national identity is based upon the perceived affective strength of a person’s commitment to address the specific concerns of the community, 4) the notion that self - identity is beyond the reach of rational cognitive explanation until revealed in the outcomes of committed action. This last point is consistent with the central argument put forward by Kierkegaard (1985) that our primary access to reality is through our committed action. These five assumptions challenge existing commitment research in that they show that commitment does not develop in linear and causal fashion and is controllable. On the contrary,
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the study shows that personal and national identity and the commitment it engenders is both ambiguous and affective in that actors feel the rightness of commitment before they ever cognitively articulate it. Consequently, multinational enterprise leaders need to be able to declare to followers the public recognition they seek and what is important about their life if they are to build the kinds of commitment based value networks that will help actualise their innovative ideas. Given the concerns of this study, the research suggests that commitment based value networks are primarily about the effective actualisation of innovative ideas. The study also shows that in order to shift the concerns of a multinational culture, entrepreneurs must clearly articulate the concern they are addressing. They must create and maintain clear focus and develop a deep sense of commitment among diverse sets of followers. As the paper illustrates, in the early stages of the TDI formation it was assumed by the founders that “capable young scientists who are frustrated by the pace of early career advancement” would want to join, “for the reasons that people often join open source projects (enjoyment from doing creative tasks, recognition, altruism etc.)”. According to Flickstein (2001) our self-image requires that we learn to objectify our own mental processes. This recognition - based form of identity suggests that our relation to ourselves depends first and foremost on communal practices in general and on the view of others as they are directed towards us in particular. Our sense – of – self, so far as it relates to something important beyond mere coping with our environment requires that we be recognised by others and that we are socialised into norms for right behaviour according to which our actions receive positive and negative sanctions by our communities. Self - identity or self - image is a reflexive process which has continuity by virtue of a person’s ability to maintain an ongoing sense making narrative such that its orientation in the past allows anticipation for the future (Gauntlett 2002). The research reveals a complex interaction
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between the commitment drivers and the successful outcomes of the project especially the unfolding and alteration of commitments in time and through time at the improving, operating and integrating levels as circumstances change. In particular, it shows how over time the objective features of TDI in terms of cost and benefits diminish as obstacles are encountered and psychological and social drivers play a greater part. Indeed it is possible to say that TDI could potentially fail over time if attention is not paid to such changes in the concerns of its commitment network. Some limitations confront the research. Firstly, the constructs and propositions are developed based on data from one case only. Although care was exercised to make the categories and the constructs operational, external validity of the propositions must be verified across a wider sample of cases. Also, due to the focus on self – image through committed and successful action, personal interviews would provide an opportunity to deepen understanding of the psychological drivers of the actors and the way the intended and unintended consequences of their actions shaped their self image. While the exploration on the commitment concept has been focused at the individual level, a more context dependent approach might also be useful. However, one may argue that it is ultimately the individual who makes the decision to change his/her behaviour in line with the ultimate goal of TDI. The study has implications for research into the impact of value networking strategies on strategic management. Firstly, it is important to recall that much strategic planning in business is preoccupied by public reputation, i.e. what the public recognises as important about the business and its tradition. The new focus on strategy in both business review articles and in boardrooms reveals the confusions and difficulties corporations are having over determining their self - image (Porter 1980, Prahalad and Hamel 1990). In taking the position that personal and corporate identity is neither wholly the result of total com-
Multinational Intellect
mitment (Gergen 1991) nor wholly the result of recognition - based identity (Hegel (1979), the implications require a deeper consideration of the challenges surrounding collaborative business models especially those based on the Web (Wilde and Hax 2001). Secondly, by suggesting that personal and corporate identity are outcomes of the well positioned enactment of a compelling concern to make something better than it was before, how do business leaders develop successful positioning strategies such that their committed actions result in the emergence of a new world alongside the old? Thirdly, empowerment of individuals is a key part of what makes value networks successful, since in the end innovations tend to come from small groups, not from large, structured efforts. The study shows that value networks don’t rely on containment or tight control of the environment to maintain their position, but rather, an exquisite balance and ability to respond to rapidly changing conditions. This kind of responsiveness is hard for a large company to achieve, but not impossible, especially in the presence of the kind of competition that virtual networking brings back to the market. Finally, the Internet is a value network’s greatest enabler, making large decentralized projects possible. On the other hand, intellectual property is its nemesis and has the potential to stifle and restrict the creative capacity of free-thinking scholars, programmers, scientists, designers and engineers. There is increasing evidence to suggest that a philosophy, a strategy, and a technology have aligned to unleash great innovation. The internet is simple, yet its power is profound. The power to create integrative interactive emergence by bringing people together in committed conversations that produces outcomes far greater than the sum of the individual parts. The distribution of knowledge is the key contemporary task and if knowledge empowers people, are contemporary systems ready for the disruptive influence of ‘openness’?
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Gauntlett, D. (2002). Media, Gender and Identity: An Introduction. London: Routledge. Gergen, K. J. (1991). The Saturated Self. New York: Harper. Glaser, B., & Strauss, A. (1967). The discovery of grounded theory: Strategies for qualitative research. New York: Aldine de Gruyter. Hage, J. (1980). Theories of organizations: Form, process and transformation. Wiley: New York. Hegel, G. W. F. (1979). The Phenomenology of Spirit. A.V. Miller, (trans.). Oxford, UK: Oxford University Press, Oxford. Kierkegaard, S. (1985). Fear and Trembling. A. Hannay (trans.). London: Penguin. March, J. G., & Olsen, J. P. (1975). The uncertainty of the past: Organisational Learning under Ambiguity. European Journal of Political Research, 3, 147–171. doi:10.1111/j.1475-6765.1975. tb00521.x Maurer, S. M., Rai, A., & Sali, A. (2004). Finding cures for tropical diseases: Is open source an answer? PLoS Medicine, 1(3), e56. doi:10.1371/ journal.pmed.0010056 Meyer, J. P., & Allen, N. J. (1991). A three-component conceptualization of organizational commitment. Human Resource Management Review, 1, 61–89. doi:10.1016/1053-4822(91)90011-Z Meyer, J. P., & Allen, N. J. (1997). Commitment in the Workplace: Theory, Research, and Application. Thousand Oaks, CA: Sage Publications. Meyer, J. P., Allen, N. J., & Smith, C. A. (1993). Commitment to organizations and occupations: Extension and test of a three-component conceptualization. The Journal of Applied Psychology, 78, 538–551. doi:10.1037/0021-9010.78.4.538
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Von Hipple, E. (2001). Open source software and the private – collective innovation model. Organization Science, 14(2), 209–223. Wenger, E. (1997). Communities of Practice: Learning, Meaning and Identity. Cambridge, UK: Cambridge University Press. Wilde, D., & Hax, E. (2001). The Delta Project. New York: MacMillan Palgrave Press. Winograd, T., & Flores, F. (1987). Understanding Computers and Cognition. Reading, MA: Addison Wesley.
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Chapter 4
Dynamic Capabilities in R&D-Networks Arla Juntunen Helsinki School of Economics, Finland
ABsTRACT This chapter addresses collaborative business networks at the level of industry/cluster networks, which is important and relevant from the strategic management perspective in several industries. Collaborative networks are seen to offer firms collective benefits beyond those of a single firm or market transaction. The author of this chapter aims to contribute to the development of theories of knowledge management, organizational learning and a resource-based view of the firm. The initial argument is that the characteristics of the task that organizations try to accomplish through forming a specific collaborative network influence the organization’s intellectual capital, the capabilities developed and required. This chapter is based on a longitudinal case study in the ICT-sector.
inTRoDuCTion Understanding major change factors like managing data and knowledge and the fast pace of technology change that have affected organizations in the late 1990s, this study analyzes the creation and development of dynamic capabilities in a business network context, and reviews how the capabilities developed assisted the organizations in gaining competitive advantage. As a consequence of rapid industry-level changes in the ICT-sector in the 1990s and at the DOI: 10.4018/978-1-60566-679-2.ch004
beginning of 2000, long-term forecasting was difficult due to the dynamic evolution of the industry and actors and because technologies had undergone rapid development, leaving it hard to know which would be the dominant players, technologies and solutions of the future. The convergence of media, IT and telecommunications technologies were creating new business possibilities. As a result, flexibility and adaptability to change were essential for firms to survive. Nevertheless, the years of 1990-2005 produced a major structural change in the ICT-sector with firms responding to those changes with new organizational structures, introducing new
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products and services and learning new skills and competencies. It required efficient collaborative systems to transfer information and knowledge within the organization and between the participants of R&D collaborative networks. This all required an efficient process management, agile leadership, good communication skills with R&D, IT departments and the senior management. In other words, it required active intellectual capital management within the organization to gain the full knowledge and capability capacity of the organization in use. In a partnership, companies are highly committed to the ongoing relationship over an extended time period, and the motivation behind this partnering is a joint objective of a mutual benefit (Dyer & Nobeoka, 2000; Dyer et al., 1998, 59-62). Anderson and Narus (1990,42) defined a working partnership between two companies as “the extent to which there is mutual recognition and understanding that the success of each firm depends in part on the other firm, with each firm consequently taking actions so as to provide a coordinated effort focused on jointly satisfying the requirements of the customer market place.” Cooperation, mutual trust, communication and sharing relevant and confidential information are essential for the development and maintenance of the partnership. Partner organizations are interdependent on each other, sharing the risks and rewards of the relationship. The maintenance of a relationship requires conflict-resolution techniques (Mohr & Spekman, 1994, 151-152). Partnerships also require investments on relationship-specific assets (Dyer & Singh, 1998, 662). Partnering is a process where a customer firm and supplier form strong and also broad social, economic, service and technical ties over time (Anderson & Narus, 1999). In addition, to survive in the fast-changing environment, the case organization as “an adaptive organization” (Radjou, 2002) would have to be more like a shifting “constellation” (Mintzberg & Huy, 2003) that has linkages with its decentral-
ized and semi-autonomous organizational units. Howell (2008) also stresses the importance of adaptive organization and dynamic capabilities in R&D. Capability development in R&D seems to be an important prerequisite for converting external knowledge into internal innovation. Previous studies of the resource-based view of the firm (RBV) claim that the firm’s competitive advantage lies in its capabilities and the efficient usage of them (See e.g. Penrose, 1959; Rumelt, 1974; Wernerfelt, 1984; Zollo & Winter, 2002). In addition, the dynamic capabilities view suggests that organizations acquire new knowledge, skills, expertise, and capabilities through organizational learning (Teece et al., 1997). In the existing literature, there is limited understanding of the dynamics of the emergence of capabilities in R&D networks, particularly with regard to the role of actors in the development process (Alajoutsijärvi et al., 1999; Håkansson & Lundgren, 1995; Håkansson & Waluszewski, 2002; Lundgren, 1991). This study therefore aims to contribute to such discourse by studying the evolution of a capabilities and knowledge through joint collaboration projects from the viewpoint of the two major actors. The purpose of this study is to investigate the joint effort of a multinational company (MNC) and another player of the ICT-sector and how they jointly developed their organizational intellectual capital (IC) and their dynamic capabilities in R&D collaborative networks. The starting premise is that the characteristics of the task that organizations try to accomplish through forming a specific collaborative network influence the organization’s intellectual capital, the capabilities developed and required. This chapter is based on a longitudinal case study in the ICT-sector. The main argument is that identifying the capabilities needed in a business network context and supporting the creation of new capabilities can have a positive impact on the organization’s market share and competitive success.
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BACKGRounD First, this section describes the research method and research traditions. Secondly, it will describe the market situation in the Information and Communication Technology (ICT) –sector in Finland from 1999 to 2003. The case organizations in this study are Nokia and Elisa. Nokia has been a multinational company (MNC) and a major global player in telecommunications since 1990s. It has the largest cell phone market share in the world in 2007. Elisa is an international telecommunication company and the most profitable one in Finland in 2006 to 2007. Elisa has subsidiaries in Germany and global partners like Vodafone and Cisco. Elisa Home Commerce Business (HCB) is based on several emerging, breakthrough technologies (i.e. xDSL, multimedia, mobile technology, Internet) and its commercial development has been influenced both by the “e-hype” period of the late 1990’s and the bursting of this “bubble” early in 2000. The business services HCB provided, as well as the technologies used, differ from those used earlier in the case corporation, as HCB has integrated several technologies, capabilities and resources from a number of actors in different industries to create services for consumers and communities. This particular study is based on the collaborative network efforts between Nokia and Elisa in the telecommunication in 1999-2003. This study describes both the view of MNC and collaboration with an MNC.
Research Approach The research process in this study employs a case study design, data collection and analyzing techniques outlined by Yin (1994). It also uses principles presented by Eisenhardt (1989) regarding the process of building theoretical propositions based on case study research and techniques used in processual analysis presented by Van de Ven (1992,
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169) (see also Pettigrew, 1997; Van de Ven and Poole, 1990). The reason for choosing a case study approach lies in the in-depth knowledge needed regarding the evolution of different collaborative forms and their managerial processes. Information about these phenomena requires good access to an organization in order to be able to identify them (Heide & John, 1995; Yin, 1994). This study is temporally limited to the time period from 1999 to 2003. The time period is long enough to capture the developmental process of a new business, Home Commerce business (HCB) in Elisa and Home Commerce related business in Nokia. The selection of two corporations from the ICT -sector naturally brings limitations concerning the generalization of the results of the study. On the other hand, a case study involving two corporations with excellent data access makes it possible to understand the phenomenon under study more profoundly. Part of this study, such as the interviews and internal documents, are based on a qualitative longitudinal study from 1990 to 2003 undertaken in the ICT-sector in Finland (Juntunen, 2005). The real-time data collection for the study was mainly completed from 1999 to2003. Personal interviews were very important source of information. Around thirty interviews or cooperative meetings were conducted with regard to the new business during 1999 to 2004. They are detailed in the reference list of this chapter. More in-depth questions were emailed to key personnel at HCB to obtain a deeper understanding of the issue in question (cf. Miles and Huberman, 1994; Yin, 1994, 84). In addition, the researcher had the opportunity to observe the business creation process and participate in R&D-projects and the strategy planning process as an employee of the Elisa Corporation from 1999 to 2001. Secondary material was gathered from the case corporation. The data collected consisted of articles, project documents, and emails between members of the projects, memorandums of understanding, strategies, business plans and annual reports from the years 1990 to 2003. Documents were arranged in chronological order and by projects.
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Review of Research Traditions This study aims to contribute to the development of the emerging theory of network management by integrating concepts from the Industrial Network Theory (IMP)1, the resource-based view of the firm (RBV), the dynamic capabilities -view, knowledge management and especially its inter-organizational learning perspective. These research traditions have embarked upon the challenging issues of the competitive positioning of a firm (see e.g. Porter, 1980, 1985), how a firm can acquire competitive advantage and core competences (see e.g. Prahalad & Hamel, 1990, 1994; Hamel & Heene, 1995), and how value is created with the help of external resources (see e.g. Amit & Zott, 2002; D’Aveni, 1994; Eisenhardt & Martin, 2000; Teece et al., 1997). The concepts of organizational learning (Senge, 1990) and knowledge management (see e.g. Allee, 1997; Boisot, 1998; Choo, 1998; Davenport & Prusak, 1998; Leonard-Barton, 1995; Nonaka & Takeuchi, 1995; Sveiby, 1997; Sanchez and Heene, 1997) are also utilized since inter-organizational relationships create possibilities for knowledge acquisition, combination and exploitation. Knowledge Management and its inter-organizational learning perspective in particular are used to analyze the learning process in the organization and learning through experiences in a collaborative form that the case organizations participate in or construct. RBV and Dynamic Capabilities views are used in this study to better understand what kind of capabilities organizations attempt to create and what resources they utilize when constructing business networks. IMP in conjunction with the RBV are selected to analyze the development and acquisition of resources within the focal actor and through relationships in a business net. Resources refer to the resource pool that an actor can coordinate through mobilizing actors in a business network.
Many practitioners are of the opinion that strategy depends on learning, and that learning depends on capabilities (Prahald & Hamel, 1990; Mintzberg et al., 1998, 213). Unique company resources and capabilities are therefore seen as a primary basis of profitability and the basis for formulating its longer-term competitive advantage. This organizational emphasis on restructuring, reengineering, outsourcing and forming alliances to build unique capabilities became known as the Resource-Based View (RBV) (Penrose, 1959; Rumelt, 1974; Zollo & Winter, 2002). The RBV perspective suggests that a firm is a collection of heterogeneous resources (Wernerfelt, 1984). It suggests that a company’s performance is related to differences in its resources. Resources that are not easy to imitate form the basis for competitive advantages (Amit & Schoemaker, 1993). The concept of dynamic capabilities became an addition to the RBV –approach in the middle to late 1990’s. The RBVapproach and its knowledge-based extension of inter-organizational collaborations conceptualize the firm as a collection of resources, of which knowledge and core capabilities are a critical issue in achieving, maintaining and renewing competitive advantage. Companies differ in how they can control resources that are necessary for implementing strategies. The core behavioral assumption is that companies are able to learn by acquiring, assimilating, sharing and dissimilating knowledge within the organization and between organizations. RBV sees the knowledge, capabilities, organizational culture and management as sources of competitiveness. The ResourceBased argument of alliance formation suggests that firms use alliances to establish the optimal resource configuration that maximizes the value of their resources is (Das & Teng, 1998). Using different types of cooperative forms allows companies to develop new value creation and a resource base that a single company could not have formed (Blomqvist, 2002).
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As Nonaka and Takeuchi (1995) said: “When markets shift, technologies proliferate, competitors multiply, and products come obsolete almost in overnight, successful are those companies that consistently create new knowledge, disseminate it widely throughout the organization, and quickly embody it in new technologies and products”. These activities define the “knowledge-creating” company. The knowledge management approach emphasizes knowledge as a key competitive asset (Nonaka & Takeuchi, 1995; Nonaka & Teece, 2001). Knowledge management is seen as a way to enhance performance in many organizations. Knowledge sharing in a network and between organizations is a critical factor in terms of its relative competitiveness (Håkansson, 1989). Knowledge sharing refers not only to codified information, such as product specifications, but also to beliefs and experiences. Seen from this perspective, knowledge creation, management and sharing are a question of mastering the renewal and change in all the activities within an organization and within a network of organizations. Information, on the other hand, can be defined as easily codifiable knowledge that can be shared between network actors (Kogut & Zander, 1997, 386). Different forms of interorganizational relationships generate possibilities for collaboration, learning, knowledge transfer, knowledge sharing, and knowledge exploitation (Amit & Zott, 2001; Nonaka & Takeuchi, 1995). Organizational Learning within the scope of this research can be defined as the organization’s ability to gain understanding from experience through experimentation, observation and analysis (Senge, 1990; Argyris,1993; Kim, 1993). The Industrial Network or “markets-asnetworks” -approach pursued by the Industrial Marketing and Purchasing Group (IMP) view industrial markets as networks of inter-firm relationships. It stresses the importance of business relationships as a coordination mechanism on a balance with markets and hierarchies, and their role in supporting learning and innovation in
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industrial systems (Håkansson, 1989; Lundgren, 1991). Networks represent a complex system in which different interdependencies between actors are characterized by both competition and cooperation, continuously constituting and reconstituting business fields (Alajoutsijärvi et al., 1999; Håkansson & Waluszewski, 2002; Mattson, 1985). Moreover, development of new technical innovations and solutions require continuity in relationships. (See e.g. Håkansson, 1989; Waluszewski 1990; Lundgren, 1991) The RBV and IMP –approaches both view a company as an actor in a web of relationships which influence the firm’s conduct, survival and success. While the RBV –approach focuses on the constraints that a dependence on exchange partners poses and emphasizes the firms’ pursuit for independency by increasing the firm’s resource base, and thus, productivity (Rumelt, 1984; Wernerfelt, 1984), IMP –theory focuses on accumulating benefits and effectiveness via a network of relationships (Håkansson, 1989). The dynamic capability -view adds the dimension of seizing business opportunity via the creation of new capabilities dynamically suitable for the changing situation within both a network and a business context.
operational Environment and the Development of The iCT-sector in Finland The late 1990s and early 2000s also marked a fundamental change in Finland in terms of the structure of the whole ICT-sector as well as in the international position of Finland as it became one of the world’s high-technology driven countries because of Nokia giving it a competitive edge in new digital services. Finland became the fastest developing and most specialized country in communications equipment exports in the world outrunning e.g. Japan, (Paija, 2001, 3), with the extraordinary expansion of this ICT-sector mainly due to the case organization, Nokia. Nokia calls
Dynamic Capabilities in R&D-Networks
the years of 1992 to1999 the years of mobile revolution. During this period, the CEO Jorma Ollila put Nokia at the head of the mobile telephone industry’s global boom – and made it the world leader before the end of the decade. (www.Nokia. com, 2008) The early years of the 21st century were concerned with the world economy as well as uncertainties in regard of the demand for telecommunication services. Starting in the late 1990s, the shift to Internet services in developed and innovative telecommunications and mobile markets caused a radical restructuring of the traditional telecommunications industry from that of the early 1990s (Steinbock, 2001, 136). New enabling technologies generated new business models as the Internet’s open standards and the fast pace of technology- and service innovations ruined vertical integrations in the traditional industry. The emergent new industry structure was horizontally layered and dominated by actors with horizontal business models (Steinbock, 2001, 136). A major change in the structure of the telecommunications industry was a division to the three-layer model of central business operations: the service operator, the network operator and the delivery channels. The change resulted in both increased competition and regulatory actions. This change in industry structure reflected strategic actions made by players in the ICT-sector. It affected the business models and the differential value of different technologies based on the assumptions of what should be the next ‘hot selling’ cell phone or service in future years. According to Elisa’s CEO Matti Mattheiszen (2002): “Buying companies is the easy part, and it’s equally easy to make big promises about the synergies we’re after. In reality, making different corporate cultures compatible or obtaining synergies is a great challenge.” The future competitive advantage of a firm can be found in the economic efficiency of its operations, in its innovativeness and its customer service -capabilities. More generally, a firm should innovate to survive
under competitive pressure (Porter, 1990) and competitive pressure may give more incentives to the stakeholders, managers and employers of the firm to increase their efforts and improve efficiency. Knowledge transfer encompassed a broad range of interactive activities that included ongoing formal, informal personal interactions and cooperative education both with partners and within Elisa. In the different types of collaborative forms, Elisa employed knowledge transfer and research support relationships to create new capabilities and acquire information of new emergent technologies. It was not yet decided what would be future core and non-core technological areas in Elisa. The focus was more on problem solving in incumbent core technological areas (i.e. fixed-line network) through technology transfer. Cooperative research relationships were used both in the core technology area and in new emerging technology areas. Seeking knowledge transfer and creation through vertical and horizontal networking was one way in which the case organization and Elisa collaborated and tried to overcome the challenges of R&D and the rapidly changing competitive and technology environment. Nokia, on the other hand, focused on its core business areas, namely, cell phone services and networks. Figure 1 shows the major drivers of change in 1990s and how they affected the organizations by forcing the companies to react in different ways to the new challenges in the competitive environment. The major drivers of change were liberalization, deregulation in Europe, regulator’s actions in different countries, globalization, increasing competition, new entrants in telecommunication markets, internationalization and new emerging technologies. The competitive responses formulated by the case organizations in this evolving market situation were changes in management, corporate strategy, business models, organizational structures, products and services. The burst of the “IT-bubble” and the end of “e-hype” in 2000 was caused by several factors
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Figure 1. Summary of the major drivers of change and organization’s competitive responses
including a lack of insight into how deregulation of the telecommunication industry in Europe in 1998, commercialization of the Internet and other technologies like broadband and multimedia combined with mobility would change the business environment. In addition, it was hard to estimate the demand for new services and products based on these new enabling technologies. The fast pace of technological innovations and the complexity of new technologies, products and “multi-actor – multi-technology” -markets made it difficult to forecast and understand the implications of networks of organizations and the integration of these emerging technologies. Customers were not accepting products and services based on new technologies as fast as the markets, investors and firms expected. (Simula, 11/2003).The years 2001 to 2003, were characterized by the burst of
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the “IT-bubble” and declining profits in fixed-line and mobile business. Moreover, Elisa experienced changes both in organizational structure and in senior management during these years. The new CEO, Veli-Matti Mattila, commenced his position in July 2003. He changed both Elisa’s corporate and organizational strategy in 2003 to increase business profitability and efficiency. He turned declining profits into success and Elisa became the most profitable telecommunication provider in Finland in 2006-2007. In Nokia, the change of CEO from Jorma Ollila to Olli-Pekka Kallasvuo occurred in 2006. Nokia’s story continued from 2002 to 2008 with 3G, mobile multiplayer gaming and multimedia devices. Nokia was recognized as fifth most valued brand in the world in 2007. (www.nokia. com, 2008)
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The silicon Hill R&D networks Elisa initiated the Silicon Hill 1999 and Silicon Hill 2000 R&D-networks (Jäntere, 2000) (see Figure 2). These were followed by the Megahouse and Megahome development-project nets targeted at further development of technological architecture, basic services, and new home commerce services (Masala, 2000a, 2000b, 2000c, 2000d; Masala & Pesonen, 2000). Home Commerce, in this instance, refers to a set of Internet-based services targeted toward consumers and accessible from home using various terminals. Internationally, the concepts of “Future Home”, “Smart Home”, “Intelligent Home”, “Digital Home”, “Networking Home”, “Smart Environments”, “Internet Home”, “Automated Home” and “Smart Housing” are used for platforms and services within this business (Masala, 2003). This study uses the terms “Future Home” and “Smart Home” in the same context. These concepts refer to “a house or an apartment with a cabled or wireless intelligent network used to control signals for building automation or to transmit multimedia signals”. The concept of building automation denotes “home automation, residential system technology, residential wiring technology. It incorporates all automating measures employed within buildings (including leased housing and private homes). Building automation makes it possible to control and regulate technical systems to ensure efficiency, primary energy savings, productivity and comfort.” 2 Globally, many platform and component providers were interested in home automation and monitoring services, with global actors like Nokia, Hewlett Packard3, Compaq, Philips, Siemens and Cisco4 actively researching possibilities in this business area since the mid 1990s. Moreover, not only were manufacturers and technology providers interested in this business area, universities and research centers5 were also investing in this area, both in Europe6 and in the USA7, where cooperative projects between universities are common. For example, MIT was investing heavily in intelligent
home environments. In the USA, annual conferences have been organized around this theme since 19988. (Masala, 2003) The Silicon Hill R&D-networks were sequential and cooperative associations between the hightech companies Nokia, Hewlett Packard, ICL, Elisa and educational organization like Amiedu. To promote international R&D cooperation Tekes (The National Technology Agency) funded this collaborative research and thus facilitated researcher mobility. Tekes provided a gateway to find the right partners in specific technology collaboration. The training and personal development services of Amiedu offered a wide range of opportunities for enhancing the skills of individuals and teams in the R&D-networks. ICL (currently Fujitsu Services Ltd) assisted in software development. The purpose of these Silicon Hill R&Dnetworks was to define the capabilities needed and the technology design required to build an open-interface future home -service platform in which selected partners could build a complete user-interface for home automation services and home networking. Also, various technology applications and services were evaluated in order to find spearhead solutions related to this specific new business and technology field including home automation, security and social functionalities, home electronics and appliances, entertainment and community services, remote work and educational services (Hietanen, 2000a). The key objectives common to the two Silicon Hill alliances during 1999 to 2000 included the utilization and development of core capabilities in both network and communication technologies, and the creation of a functional technological development, demonstration and piloting environment for companies in the area of Pitäjänmäki in Helsinki (Hölttä, 2000). The case corporations and other network members had realized that the competitive advantage of companies relied on its managerial and organizational processes, supported by dynamic capabilities. These reflect
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Dynamic Capabilities in R&D-Networks
Figure 2. The actors of the two sequential Silicon Hill – alliances during 1999-2000
company’s ability to integrate, build, reconfigure and renew internal and external competences to address changes in its competitive environment. There was no specific leader in the Silicon Hill R&D-networks. Each member had their own specific goals to reach in terms of their own subprojects alongside the common objectives of the R&D-cooperation. One particular goal in these R&D-networks was to fine-tune product concepts. These ideas related to educational platforms in the Internet, self-learning in the Internet, home automation, data security issues, and VOIP-technology9. Elisa’s project group also tried to establish a best practice method, with which Elisa could manage either several concurrent R&D processes in different business units or concurrent R&D projects, concerning multiple products and services, within the case corporation (Hölttä 2000). Elisa’s and Nokia’s aims in the Silicon Hill R&D cooperation were not only related to the learning and transferal of technology but also to the integration of multiple technologies and platforms. The collaborating R&D-partners considered that technology in itself does not deliver innovations. Consumer value of the new technologies was considered important. Convenience was considered as one
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of the major drivers of change. As part of these R&D-projects, several technologies were tested, such as data security, in particular PKI10, VOIPtechnology, Gigabit-Ethernet network technology, and e-learning environments which led to the establishment of Efodi in 2000. Efodi was “the e-learning space” and Elisa’s e-learning platform (Hölttä, 1999). During the year 2000, the focus was on cooperation with the construction companies who were building new houses. Silicon Hill alliances and Megahouse (Masala, 2003) concentrated mostly on home networking and evaluating service concepts. In Elisa, the general research focus gradually shifted towards different payment and billing methods in the Internet and mobile networks. Megahouse was piloted at the “House Fair” in the city of Tuusula in the Villa 2000 –House in 2000. The new service platform in the Megahouse –project was named as Kotiportti™ in the “House Fair”. It was both a home portal and access for different services based on broadband, multimedia and Internet. In Nokia, the new Home Commerce business area was constructed offering platform and network services for partners like Elisa. Also, Nokia established a viable network of sub providers of
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different technological components all over the world during 1999 to 2000. The common corporate and documentation language was English even if the sub providers were from different cultures and had different native languages. Cooperation partners such as Elisa saw Nokia delivering on its promise to lead the development of the growing home communications market based on its strong position in mobile telephony, IP technologies and digital broadcasting. Nokia’s strength across the full range of digital technologies enabled Nokia to develop unrivalled expertise in all major parts of the distribution chain for home communications (broadband access, fast internet access solutions, wireless local networks, next generation media terminals and mobile display devices). This gave Nokia a unique starting point in the home communications market. Heikki Koskinen, Vice President and General Manager, Nokia Home Communications, commented in 2000 (Nokia’s press release, 2000): “Nokia Home Communications is an important part of Nokia’s Global IP Mobility strategy, given that the home is increasingly integrated with the office and personal environments. Nokia will be at the forefront of developing the necessary gateways and terminals to bring high-quality multimedia services into the home. This complements Nokia’s Global IP Mobility Strategy and is in line with our vision of enabling people to communicate smoothly, independently of time or place.” Elisa and Nokia considered themselves as coopetitive actors because they developed Home Commerce or Future Home related solutions and platforms together. Cooperative actors included the television companies and actors from the construction and electrical industries. Non-strategic actors were those who produced a specific part or a single software component according to specification under the tight control of the case companies. Non-strategic and independent actors were those who delivered products such as servers or databases. They were not critical and could be replaced. Based on previous experience,
gained from previous collaborative efforts the case companies knew that some parties would join the network for their own benefit, to gather enough experience and information to come up with a competitive or substituting solution. Therefore, partner selection was an essential determinant of success and knowledge gathering in this new technology business. The impact of the partners of the Silicon Hill alliances assisted the innovations in technologies and processes. The partners developed ideas for new IP mobility strategies and platforms. In 2002 Nokia decided to end its Home Commerce business area. The reasons were the burst of the “IT-bubble”, fear of recession, and a lower return of interest (ROI) from the Home Commerce business than was expected, and also, the change of business strategies and need for concentration in its core businesses to gain global success. Nokia used the capabilities, process and technology innovations in developing its core business areas: mobile phones and networks. From 2002 forward Nokia concentrated on 3G, mobile multiplayer gaming, and multimedia devices. The IP mobility strategy was still part of Nokia’s strategies even if the Home Commerce as a business area was terminated. Nokia gained from the collaboration by developing its contractor network and capabilities in different technologies. Nokia used its technology and process innovations in its following partnerships in platform development. Nokia was still interested in home commerce as part of its core business and mobility. Nokia saw that the future development trends would require a different operating system for a new breed of smart cell phones and palm-top computers with Internet access. It wanted to ensure its position in future palm-top computers and smart cell phones by collaborating with different technology partners. Moreover, a lot of the home commerce conducted in web today will move to television quickly. The MNCs have to stay alert and follow the trends in home commerce and mobile markets to keep their position. The convergence
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of mobile, information technology and television will continue to affect the key players and their market share in the future. Amiedu assisted Nokia and Elisa in the elearning challenges of global enterprises. In year 2000, Nokia had 60 e-learning solutions and 30 000 users. Today, Nokia offers B2B, B2C and B2E e-learning solutions across its supply chains. The solutions have a common strategy, platform and processes. The resource transfer also occurred between the partner companies in Silicon Hill alliances starting in 2000. Some of the key employees switched from one partner company to another. The employees used the previous contacts in R&D networks when they searched for new employers. There were also formal joint alliances formed between some of the companies and thus allowed the resource transfer. In 2000, ICL formed a joint venture called Nice-business Solutions Finland Ltd with Nokia to support Nokia Information Management’s e-business strategy (Business Wire February 21 2000). Tarmo Ruosteenoja, Vice President of Nokia Information Management, said in March, 2000: “Nokia is a world leader in its industry. The mission of Nice-business Solutions Finland Ltd is to implement e-business and customer relationship management solutions and services that support Nokia’s strategy. The arrangement also ensures that in addition to our own growing resources, we have the best expertise in the field at our service.” Moreover, Esa Tihila, Director of ICL’s global e-business and the Chairman of the Board of Directors of Nice-business Solutions Finland said in March 2000: “A joint venture with Nokia is a significant expansion to the existing co-operation between our two companies. ICL is Europe’s leader in e-business services and for us it is important to co-operate with market leaders in long term partnerships.“ Nokia’s subcontractors continued to work together with HCB and they made bilateral contracts. Many subcontractors were SMEs of
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niche skills or products. The advantages of the previous collaboration with MNCs allowed the SMEs to gain access to new potential customers and collaborators. The MNE-networking therefore allowed the SMEs to broaden their customer base and services. Moreover, the platforms and applications developed during the collaboration assisted Elisa to gain its competitive advantage in home commerce and broadband business in Finland.
Managerial implications One important aspect of the managerial implications was the description of the elements leading to the successful formation of a new business and the capabilities needed, thus creating a competitive advantage in the Home Commerce business field. Firstly, the ability to ascertain holistic or architectural technological and business knowledge of the complex emerging technologies provided an opportunity to control the planning and innovation of new services and products, and the capabilities created with close partnerships. If other actors delivered only parts of services, such as components or single products, and the case companies had knowledge of the whole infrastructure, it was difficult for anyone else to take control, maintain the infrastructure and coordinate other actors of the cooperation network even in the same technology field. Business knowledge was needed in managing the upstream processes and in coordinating the data flow in technological integration, particularly in new product development and logistical processes. Another result was the observation that, being a pioneering actor, like Elisa and Nokia in this case, the actor had to develop specific interorganizational relationship and network management capabilities in order to be able to advance from the development of basic technologies to the commercialization and marketing of ICT products and home commerce services. When considering the intellectual capital (IC) and capability development, managerial capabilities
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were needed to organize relationships and orchestrate actors in the R&D-networks. More traditional managerial capabilities included personnel management (HRM), business process planning, budgeting and strategy development. Managerial capabilities needed and developed can be divided into two groups: The network- level managerial capabilities included the mobilization of actors within a business net, the control of information flow between net actors, the contract management of actors in varied roles and of difference importance within a net, collective strategy planning and the coordination of internal and external resources; The business level managerial capabilities included personnel management (HRM), internal resource management, internal cooperation, business strategy planning, product strategy planning and budgeting. Training, informing of best practice cases and meetings with sub contractors were seen as an essential part of the successful supply chain management in the case organizations. The emergence of a new business in the ICTsector seems to be a combination of the evolution of technological and market factors, which are not controllable by any one actor, and of the intentional strategy of developing collaborative forms like partnerships and R&D-networks. Dynamic organizational capabilities created in the Silicon Hill alliances involved both new learning and the renewal of existing capabilities. This study suggests that case companies acquired knowledge in the formation of new business and product ideas by gathering information from various internal and external sources. It mobilized partners to create new integrated services for homes and communities. The vision of a new business and innovations were important factors in the development path of both the companies. Visioning relates to two different types of learning: exploitation and exploration (March, 1991). Exploitative learning meant that the case companies followed the activities of competitors as well as general developments in technology. The broadening contact network, new capabilities,
knowledge of technology and business assisted in the creation of a partner portfolio inclusive of both potential partners and existing partners. The growing partner network demonstrated that knowledge and abilities in the acquisition of partners were adequate. Explorative learning (cf. March, 1991) meant that case companies were capable of (1) identifying new business opportunities of the emerging technologies faster than the competitors, (2) exploiting the collaboration R&D-networks more efficiently than the competitors, and (3) choosing the right partners to reach their strategic and business goals. These findings have important theoretical and methodological implications. First, they support the Industrial Network Approach (see Håkansson et al. 2004) and the Resource Based View in emphasizing the key role of the combining the heterogeneous resources controlled by various actors in order to be able to create new technological and business solutions.
ConClusion New business creation is not an independent, isolated process but a collective process that requires interaction and cooperation with other actors. It involves the establishment and maintenance of a network of relationships with other organizations including suppliers, competitors and customers (Håkansson & Snehota, 1995). In the case organizations, internal resources and collaboration in R&D-networks with other companies were seen to be critical for the creation of future competitive advantage. More and more, inter-organizational relationships are important sources for acquiring external knowledge since they allow for the acquisition of supplementary and complementary capabilities held by their alliance partners while facilitating the flow of knowledge and information between different parties. However, the major challenge for both the national and global ICT-companies is to ensure
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the sustainable growth and the development of the ICT-sector and ICT-related capabilities and skills. This sustainable development will not only be possible through technological development through the development of national and international policies. R&D -networks can offer new sources of innovations and knowledge, and thus, assist in developing the skills and capabilities needed in national ICT-development and assure the competitive advantage locally and globally. The report published by The Foreign Investment Advisory Service (FIAS) in June 2007 claimed that while companies’ supply chain monitoring is important, the ICT industry should also collaborate with the government and non-governmental organizations to improve capability-building and training of their supplier to ensure sustainable development and to improve environmental, social and labor conditions.
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Eisenhardt, K. M. (1989). Building Theories from Case Study Research. Academy of Management Review 14(4, October), 532-550. Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: what are they? Strategic Management Journal, 21(10-11), 1105–1121. doi:10.1002/10970266(200010/11)21:10/11<1105::AIDSMJ133>3.0.CO;2-E Håkansson, H. (1989). Corporate Technological Behaviour - Co-operation and Networks. London: Routledge. Håkansson, H., Harrison, D., & Waluszewski, A. (Eds.). (2004). Rethinking Marketing (pp. 75-97). Chichester, UK: John Wiley & Sons Ltd. Håkansson, H., & Johansson, J. (Eds.). (2001). Business Network Learning. London: Elsevier Science Ltd, Pergamon. Håkansson, H., & Lundgren, A. (1995). Industrial Networks and Technological Innovation. In K. Möller & D.Wilson (Eds.) Business Marketing: An Interaction and Network Perspective. London: Kluwer Academic Publishers. Håkansson, H., & Snehota, I. (Eds.). (1995). Developing relationships in business networks. London: Routledge. Håkansson, H., & Waluszewski, A. (2002). Managing Technological Development. IKEA, the environment and technology. London: Routledge Advances in Management and Business Studies. Hamel, G., & Heene, A. (Eds.). (1995). Competence-Based Competition. New York: The Strategic Management Series, John Wiley & Sons Ltd. Heide, J. B., & John, G. (1995). Measurement issues in research on interfirm relations. In K. Möller & D. Wilson (Eds.) Business Marketing: An interaction and network perspective (pp. 531554). Boston: Kluwer Academic Publishing.
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Steinbock, D. (2001). Two Kinds of ICT Pioneers: The Mobilization of the Digital Technology. In L. Paija (Ed.) Finnish ICT Cluster in the Digital Economy, (pp. 133-171). Helsinki: ETLA The Research Institute of the Finnish Economy. Sveiby, K.-E. (1997). The New Organizational Wealth: Managing and Measuring Knowledgebased assets. San Francisco: Berrett-Koehler Publishers Inc. Teece, D. J., Pisano, G., & Shuen,A. (1997). Dynamic capabilities and strategic management. Strategic ManagementJournal, 18(7),509–533.doi:10.1002/ (SICI)1097-0266(199708)18:7<509::AIDSMJ882>3.0.CO;2-Z Van de Ven, A. H., & Poole, M. S. (1990). Methods for studying innovation development in the minnnesota innovation research program. Organization Science, 1(3), 313–335. doi:10.1287/ orsc.1.3.313
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inTERnET siTEs Elisa Home page.(n.d.). Retrieved from www. elisa.com/english. Nokia. (n.d.). Retrieved from www.nokia.com.
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Wire, B. (2000). ICL & Nokia Form a Joint Venture; A New Company Established to Support Nokia Information Management’s E-Business Development. Business Wire, Feb 21 2000. Retrieved 12/12/2007 from http://findarticles.com/p/ articles/mi_m0EIN/is_/ai_59580792
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unPuBlisHED REFEREnCEs Jäntere, K. (2000). Megatalo / megakoti projektisuunnitelma. versio 2.0. PCS/New Generation Services, Elisa Communications.
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Masala,S. (2003) Älykoti.doc. December 16th 2003. Simula, T. (2000) Tietoliikenneverkot median uutena jakelukanavana. Elisa Communications.
EnDnoTEs 1
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The IMP = Industrial Marketing and Purchasing group has researched and created the so-called Industrial Network Approach (see e.g. Håkansson & Snehota, 1995, Håkansson, 1987) http://www.inhaus-duisburg.de/en/meilensteine/glossar.htm
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h18000.www1.hp.com/corporate/1995ar/ connect.html www.cisco.com/warp/public/3/uk/ihome see e.g. http://www.designing-ubicomp. com/Arbeitsdateien/1_environments.html ee e.g. http://www.automatedhome.co.uk/ links.php3 see e.g. http://www.smarthomeusa.com/info/ default.asp?category=about&infofile=about see http://www.parksassociates.com/events/ forum98/ VOIP = Voice over IP, a VoIP-device and -service to send and to receive IP-voice. Internet telephone refers to communication services – voice, facsimile, and/or voice-messaging applications – that are transported via the Internet, rather than the public switched telephone network (PSTN). The basic steps involved in originating an Internet telephone call are conversion of the analog voice signal to digital format and compression/translation of the signal into Internet protocol (IP) packets for transmission over the Internet. The process is reversed at the receiving end. (www.iec.org.online/tutorials/int_tele) PKI = Public Key Infrastructure; a security service which is divided into two keys: public and secret with which the data security can be guaranteed in transfer.
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Section 2
Strategy
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Chapter 5
Intellectual Capital Measurement and Reporting: Issues and Challenges for Multinational Organizations Suresh Cuganesan Swinburne University of Technology, Australia Richard Petty Macquarie University, Australia
ABsTRACT Multinational organizations operate across a variety of complex competitive environments. Achieving the right balance of global alignment and local flexibility is central to competitive success for these organizations. Viewed from an intellectual capital perspective, multinational organizations need to: design and execute appropriate structures and systems (structural capital); engage and align its international workforce (human capital); and, generate favourable relationships across the multitude of stakeholders it interacts with globally (relational capital). But in pursuing these goals, a number of issues and challenges are faced: How to make sense of intellectual capital investment decisions? How are they to communicate intellectual capital priorities throughout the multinational business? And, with what tools are they to measure and monitor investments and initiatives such that refinements and corrective action can be made? In dealing with these issues, intellectual capital measurement and reporting practices can help. This chapter presents the conceptual framework underpinning intellectual capital, discusses limitations with traditional financial reporting models, outlines the benefits of intellectual measurement, and reports and presents research on the perspective of finance professionals evaluating global companies.
BACKGRounD Multinational organizations operate across a variety of complex competitive environments. Achieving
the right balance of global alignment and local flexibility is central to competitive success for these organizations. In operating across a multitude of varying institutional, regulatory, cultural and business contexts, multinational organizations face
DOI: 10.4018/978-1-60566-679-2.ch005
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Intellectual Capital Measurement and Reporting
a number of challenges. These challenges have been identified as including: •
•
•
Operating a business model that services different international markets with diverse needs, with a distributed organization that has no ‘home country’ bias and which integrates various cultures (Fallah and Lechler, 2008). Managing different language, culture, politics, government regulations, management style and labour skills (Sheu et al., 2004). Balancing tensions such as global versus local and face-to-face versus electronically-mediated communication (von Zedwitz et al, 2004).
Fink and Holden (2005) observe the importance of global knowledge transfers as a means of competition for international organizations and note the following difficulties faced in effecting these: •
•
•
International knowledge transfer systems typically meet resistance by local managers. Organizational personnel in remote locations do not participate in global knowledge management transfers unless central management show respect and appreciation for local customs and cultures. The need for local participants to unlearn practices and skills that are not consistent with the common set of practices that the organization wishes to adopt.
Responding to such challenges requires investments. Investment is needed to create appropriate organizational structures and systems that ensure the recognition of important local business unit differences and their alignment to a global firm profile. Firms also need to invest in developing an engaged workforce that is geographically distributed and which operates with
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diverse norms and values. Finally, international organizations need to expend time and effort in building relationships with local stakeholders and authorities. Global organizations are thus confronted by difficult questions: How to make sense of these investments decisions? How can they communicate these priorities throughout the multinational business? And, with what tools are they to measure and monitor investments and initiatives such that refinements and corrective action should be made? This chapter argues that the management challenges and investment decisions faced by international organizations as outlined above can be usefully conceptualised through Intellectual Capital (IC) frameworks. Indeed, IC and intangible assets frameworks and concepts have already been used to investigate the factors and resources that influence internationalisation of professional services firms, examining relational and human capital in particular (Hitt et al., 2006). The use of corporate citizenship by international organizations as a means of overcoming national barriers and outperforming local competitors has also been studied using an IC calculus (Gardberg and Fombrun, 2006). Furthermore, this chapter contends that international organizations should consider measurement and reporting frameworks that are different from traditional financial reporting. Traditional financial reporting systems often provide an incomplete picture of a firm’s IC. The remainder of this chapter discusses the benefits that IC measurement and reporting can offer, and the role and challenges that organizations face in implementing such practices. Throughout the chapter, the theory that underpins IC measurement and reporting is discussed, and research evidence and examples from practice are presented and analysed. The chapter’s objectives are as follows: 1.
To present research on the perspective of finance professionals evaluating global companies.
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2. 3. 4.
To outline the benefits of IC measurement and reporting. To discuss limitations with traditional financial reporting models. To present the conceptual framework underpinning IC.
The chapter’s objectives are addressed in the ensuing sections.
PRoBlEMs WiTH THE TRADiTionAl FinAnCiAl REPoRTinG MoDEl Financial accounting reports have traditionally been prepared based on the historical cost principle whereby transactions are recorded at the cost of the transaction item(s) at the time the transaction took place. This orthodoxy is very limiting, and leads to a decrease over time in the value relevance to decision makers of the information presented to them. Under current financial accounting practice, there is some room for the revaluation of non-current assets and for revisions to provisions and to items such as inventory. However, beyond changes at the periphery, the information conveyed by financial accounting reports has remained essentially the same for decades. Whilst it was once the case that for a majority of listed companies market capitalisation correlated closely with tangible asset value, this is no longer true (Lev, 1999). The value base of many firms is now weighted heavily towards their IC. Increasingly, it is IC that is the source of most of a firm’s real value and competitive advantage in the marketplace. For many IC rich companies the disparity between market values and reported asset values is so great as to render useless, in decisionmaking and valuation terms, their annual financial reports (Lev and Zarowin, 1999). This widening gap between market and book values has occurred as fixed assets become less important relative to IC in determining a company’s
success (Guthrie and Petty, 2000). Knowledge organizations that leverage their IC to generate super-normal performance in the marketplace are progressively replacing traditional industrial age ‘mass production’ technologies. The focus on tangible assets has diminished commensurate with an increased emphasis on information, expertise, technology and skills (that is, IC) within knowledge based organizations. However, as previously observed, accounting and reporting practice, steeped in a tradition of almost 500 years, remains largely unchanged (Barton, 1984). This is problematic as accounting reports influence action. They communicate what is seen as vital and important to an organization (Hines, 1988). They drive decisions of an economic nature. Given the importance of IC, a demand exists for it to be recognised formally in company financial reports (Guthrie, 1999; Sveiby, 1998; Wallman, 1995). Those who maintain that objectivity is everything, and who steadfastly refuse to accept that anything other than ‘hard’ quantifiable data should appear in accounting reports, will surely raise questions. These might include: ‘how do we know that the value imputed to these new intangibles is correct? And, how can we have faith in the output of such a subjective reporting system? By way of response, consider whether the figures reported for the other firm assets are ‘correct’. Are current financial reporting systems providing information that is truly objective regarding a firm’s position in the marketplace? Are the asset values disclosed under a system of historical cost representative of an objective reality? The answer to both these questions is a resounding ‘no’. At least by reporting some information for intangibles we acknowledge their existence. This broadens the scope for decision making by those relying upon the annual statements, and it also means that we can invest in improving what is already in practice in some progressive organizations (Guthrie et al, 1999). The fact that traditional financial accounting practice does not provide for the inclusion of non-
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financial performance indicators in organizations (Guthrie et al, 1999; IFAC, 1998; SMAC, 1998) adversely impacts knowledge based organizations that are looking to raise capital in the debt and/or equity markets (Lev, 1999). ‘New’intangibles such as staff competencies, customer relationships and computer and administrative systems receive no recognition in the traditional financial reporting model. Interestingly, even traditional intangibles like brand equity, patents and goodwill are reported in the financial statements only when they meet stringent recognition criteria. Otherwise they also have been omitted from the financial statements (IFAC, 1998; IASC, 1998). The invisibility of IC has led to calls from regulators and practitioners as well as academicians for IC information to be disclosed in company annual reports (Guthrie et al, 1999; Stewart, 1997; Wallman, 1995). These calls now have more substance than ever before (Amir and Lev, 1996). Those in favour of extending traditional reporting models argue that we should not continue failing to report those items of IC that represent the bulk of owner’s equity for many firms. To do so is to deny a tenet axiomatic to financial accounting - that is, it should provide decision-useful information. For external constituents and stakeholders of organizations, it has been suggested that IC be reported voluntarily by companies to better address stakeholder information needs and to compensate for the limitations of the traditional accounting reporting environment (Wallman, 1995). Garcia-Ayuso (2003) also holds the view that stakeholder interests will be better protected by requiring that IC (as a subset of intangibles) be reported by companies, and opines: “…because of the larger information asymmetries in intangible intensive companies, there is a greater risk that the opportunistic behaviour of managers results in significant insider gains and harmful earnings management that are obviously harmful for stakeholders. As a consequence, the
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risk of litigation is likely to be greater in those firms unless transparency is enhanced and relevant and reliable information on intangibles is disclosed timely” (p.598). Within organizations, the design of performance measurement systems need to be configured to capture an organization’s IC where these are important in the creation and delivery of value. Performance measurement systems facilitate planning and control actions, coordination and communication throughout the organization, and the motivation and compensation of employees (Meyer, 2002). If the mantra that ‘what gets measured gets managed’ holds, then organizations that rely on IC to compete, but do not measure it, risk failure. Hence, IC measurement systems offer significant initiatives both in terms of management activities and through reporting to external stakeholders.
THE inTEllECTuAl CAPiTAl ConCEPTuAl FRAMEWoRK Definitions of intellectual Capital •
There are numerous definitions of ‘IC’. One of the most workable definitions is offered by the Organization for Economic Co-operation and Development (OECD, 1999) which describes IC as the economic value of organizational (“structural”) capital and human capital. More generally, however, there is broad consensus that IC comprises the elements of human capital, structural capital and relational capital components (Cuganesan, 2005).
Viewed from an IC perspective and revisiting the challenges for multinational organizations outlined earlier, these businesses need to:
Intellectual Capital Measurement and Reporting
• • •
design and execute appropriate structures and systems (structural capital); engage and align its international workforce (human capital); and generate favourable relationships across the multitude of stakeholders it interacts with globally (relational capital).
Plenty of convincing arguments have been forwarded in support of the need to better understand IC via measurement and reporting (Brooking, 1996; Petty and Guthrie, 2000c; SMAC, 1998; Sveiby, 1998; Danish Agency for Trade and Industry, 1998).
As discussed, these range from an intuitive understanding that it ‘matters’(Stewart, 1997) to evidence that reporting IC has the potential to improve the efficiency of both capital and labor markets (Bukh et al, 1999; OECD, 1999). Few authors1, however, have traced the sequence of events involved in the development of IC. A historical perspective is important in understanding the context in which IC started appearing in company annual reports. A general timeline of major IC practice and research milestones appears in Table 1. Table 1 communicates a general sense of the extent to which theory and research has been
Table 1. Milestones: A chronological review of significant contributions to the identification, measurement and reporting of IC Period
Progress
Early 1980s
• Continuing general notion of intangible value (often generically, labeled as ‘goodwill’) held over from the earliest days of doing business.
Mid 1980s
• The ‘information age’ takes hold and the gap between book value and market value widens noticeably for many companies.
Late 1980s
• Early attempts by practitioner consultants to construct statements/accounts that measure IC (Sveiby, 1988).
Early 1990s
• Initiatives by certain companies (e.g. Celemi and Skandia) to systematically measure and report on company stocks of IC to external parties. In 1990, Skandia AFS appoints Leif Edvinsson ‘Director of IC’. This is the first time that the role of managing IC is elevated to a position with formal status and given an air of corporate legitimacy. • Kaplan and Norton introduce the concept of a Balanced Scorecard (1992). The Scorecard evolved around the premise that ‘what you measure is what you get’.
Mid 1990s
• Nonaka and Takeuchi (1995) present their highly influential work on ‘the knowledge creating company’. Although the book concentrates on ‘knowledge’ the distinction between knowledge and IC is sufficiently fine as to make the book relevant to those with a pure focus on IC. • Celemi’s Tango simulation tool is launched in 1994. Tango is the first widely marketed product to enable executive education on the importance of intangibles. • Also in 1994, a supplement to Skandia’s annual report is produced which focuses on presenting an evaluation of the company’s stock of IC. ‘Visualizing IC’ generates a great deal of interest from other companies seeking to follow Skandia’s lead (Edvinsson and Sullivan, 1996). • Another sensation is caused in 1995 when Celemi uses a ‘knowledge audit’ to offer a detailed assessment of the state of its IC. • Pioneers of the IC movement publish bestselling books on the topic (Kaplan and Norton, 1996; Edvinsson and Malone, 1997; Sveiby 1997).
Late 1990s
• IC becomes a popular topic with researchers and academic conferences, working papers, and other publications find an increasingly diverse audience. • In 1999, the OECD convenes an international symposium in Amsterdam on IC.
Years 2000- 2004
• The Meritum project (2001-2003) involves six European countries working together to deliver guidelines for the development of an IC report. • The ‘new’ Danish guidelines are developed (Danish Agency for Trade and Industry, 2003). The guidelines relied upon input from 17 Danish organizations. The aim was to guide companies in the development of their own IC statements.
Years 2005 onwards
• Other countries develop or consider develop guidelines for intellectual capital or extended performance reporting while leading global companies continue to produce IC statements.
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guided by practice. This timeline is, of course, a simplification of the richness in the development process. It does however further an appreciation of the distinction between first-stage and secondstage IC projects. Activity during and prior to the mid-1990s largely belongs to the first stage. Much of the work since may be characterised as second stage. First stage work is primarily concerned with consciousness raising and creating mass awareness of the relevance of IC. A great deal of first stage work is purely descriptive of what various organizations have done. Publications falling under the first stage umbrella tend to take the position that ‘IC is something significant and should be measured and reported’ without systematically relating this general view to a specific external context. The second stage in the development of IC as a research field has seen attempts at theory building and studies producing results with external validity coming to the fore (Bozzolan et al, 2003; Ittner and Larcker, 1998; Williams, 2001). Here, conceptual refinement, methodology consolidation and empirical research are seen as important elements of scholarly development (Petty and Guthrie, 2000; Marr et al., 2003; Andriessen, 2004). A central concern for IC practitioners, consultants and researchers continues to be the rendering of the invisible as visible. For practitioners and consultants, the aim of this endeavour is the formulation of managerial intervention (Mouritsen et al., 2002). For researchers, one focus has been the understanding of the phenomenon of IC, and how it operates to influence firm performance (Marr et al., 2003). Over the last two decades numerous frameworks and methods have been developed to address these issues. The main types are reviewed briefly below. A recent review of IC measurement frameworks by Sveiby (2007) identifies 34 different alternatives. The first of these to evolve Sveiby (2007) classifies as valuation frameworks, where a monetary value of IC is sought to be determined. In contrast, non-valuation frameworks, or score-
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card methods, which seek to disclose measures of IC evolved afterwards and have dominated the literature since the new millennium (see Sveiby, 2007). One of the early scorecard methods, the Balanced Scorecard (Kaplan and Norton, 1992), has attained a dominant popularity in both the academic and management circles (Neely et al., 2004). But this and other related scorecard methods have been critiqued as to their effectiveness (Norreklit, 2000; 2003) and their theoretical foundations (Marr and Schiuma, 2003). The next evolution of frameworks and methods seeking to capture representations of IC utilized not only quantitative measures of IC, but also included narrative (see Meritum Project, 2002; Mouritsen et al., 2003). The additional narrative was intended to locate the quantitative numbers disclosed both as measures of IC and within a broader network of value creation (Mouritsen et al., 2002). These frameworks explicate the reasons behind an organization’s management of IC and offer some indication as to the structure required to manage IC (Mouritsen et al., 2003). In general, popular models used to construct reports on IC include Kaplan and Norton’s Balanced Scorecard (Kaplan and Norton, 1992), Skandia’s Value Scheme (Edvinsson and Malone, 1997), and Karl-Erik Sveiby’s (1997) Intangible Assets Monitor, with the Danish Guidelines also being used by organizations in that country to report their IC. All of these aim to overcome problems with traditional financial reporting.
THE RolE AnD BEnEFiTs oF inTEllECTuAl CAPiTAl MEAsuREMEnT sYsTEMs This section explores why firms report IC. It identifies incentives to report and considers why some firms report while others do not. A discussion of these issues sheds some light on why a growing number of accountants are recommending that traditional financial reporting models be extended
Intellectual Capital Measurement and Reporting
to permit and encourage the disclosure of IC in company annual reports. There are numerous incentives for firms to voluntarily report on their IC. The overriding incentive for most firms to report is to ‘render the invisible visible’ (Cooper and Sherer, 1984) in line with the axiom ‘what gets measured gets managed’. This view is consistent with both stakeholder theory and legitimacy theory. By making IC a focal point both within and outside the firm, the consciousness of the importance of IC as a determinant of firm success is highlighted. The incentives to report can be classified into those relating to the external environment that impacts the firm and those that relate to internal firm activities. This can be described as (Guthrie et al., 1999): •
•
External firm activities: ◦ Capital market effects ◦ Improved access in labour markets Internal firm activities: ◦ Resource allocation/coordination ◦ Efficiency and effectiveness improvements ◦ Improvements in communication ◦ Goal congruence and motivation of personnel ◦ Image and reputation building
In terms of external incentives, there is growing evidence to suggest that both the capital and labour markets respond favorably towards companies that report on their IC (Garcia-Ayuso, 2003; Lev, 1999; Lev, 2001). With an IC report in hand, the capital markets have a better means of assessing ‘true’ firm value. This typically resolves some uncertainty about the firm, thereby improving the stock price (Edvinsson and Malone, 1997; Stewart, 1997). This is discussed in greater detail later in this chapter. Further, there is evidence that the labor market generally holds the firm in higher regard because the additional information provided about human
resources, as part of a broader IC report, conveys the sense that these human assets really matter to the firm (Bukh et al, 1999; Olsson, 1999). Reporting IC has the overall effect of enhancing the image and reputation of the firm among external interest groups. These findings are consistent with stakeholder theory, which is one of the theories with the potential to explain the voluntary disclosure of IC that is discussed later. From an internal perspective, firms that have engaged in attempts to measure and report their IC typically identify the benefits as being increased operational efficiency, improved employee morale and motivation, and better resource allocation within the organization (Bukh et al, 1999; Flamholtz and Main, 1999). Internal stakeholders also feel that an organization that invests in this extra reporting dimension are more likely to be better corporate citizens and have better corporate governance than one that does not. Concomitant with this, the image and reputation of the organization in the eyes of employees is enhanced by investing in greater IC transparency. Two of the incentives to report identified above are particularly worthy of further attention. First, there is considerable evidence to suggest that the capital market views IC as having information content (Mavrinac and Boyle, 1996). Second, it is recognized that reporting IC is aligned with principles of good corporate governance (GarciaAyuso, 2002). Both capital market and governance effects are discussed below, before a discussion on why some firms may not measure and report IC is presented.
Capital Market Effects As noted earlier, it will nearly always be the case, particularly for listed entities, that the capital market will be ahead of accounting reports in valuing a company. The information contained in accounting reports is, in most instances, factored into the market price long before the reports are distributed by the company.
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However, the value of intangibles is not something that the capital market appears to have estimated terribly well (Lev and Mintz, 1999). Were it the case that the market capitalisation of a company is a reflection of its true worth, then we would not have seen the number of instances in which companies have been bought for amounts far in excess of market capitalization. Part of the difficulty the market faces in valuing a firm lies in the fact that much of the value often rests in IC – something for which there is no formal measure (Marr et al, 2003). An important incentive for firms to voluntarily report on their IC, therefore, comes in the form of the benefits likely to accrue to the firm from enhancements to market value and also from a lower cost of capital (Lev, 2001). Grojer and Johanson (1999) posit that disclosing information about IC would improve capital market efficiency causing a reduction in the cost of capital as stock prices rise. Without IC information the capital market is, therefore, inefficient. Lev (1999, p.15) argues that this inefficiency results in an “uncertainty premium” that investors will require in order to convince them to invest in a business that is opaque in respect of information on its IC. A direct consequence of this lack of transparency is an increased cost of capital which leads to lower investment and growth (Lev, 1999). Retarding investment may have dramatic social consequences manifested, for instance, in the form of inhibited growth in sectors such as health and general science that are increasingly important to ensuring quality of life in economies characterized by aging populations. In a situation like this it seems, therefore, that not reporting IC actually destroys value (Lev, 1999). Garcia-Ayuso (2002) continues this theme by noting that the absence of IC information is likely to make stock prices more volatile. Such volatility creates uncertainty that increases the spread in bid versus ask prices (Boone and Raman, 1999). Significantly in light of recent high
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profile corporate accounting scandals (e.g. Enron, Worldcom etc) and the damage done to small investors in those companies, the information asymmetry due to the absence of IC information increases the opportunity for insider gains. Such gains effectively represent an appropriation of wealth by larger shareholders or by insiders who are more likely to be in the know when it comes to the ‘true’ value of a company’s IC (Aboody and Lev, 2000). Lev (1999) also makes a convincing argument in favour of companies disclosing information on their IC by stating that there is a need to restore relevance to accounting: “When the reports are not informative, the information conveyed by them will be largely unrelated to capital market variables….The information conveyed by key financial variables in U.S. corporate financial statements has become less relevant to the valuation of securities in capital markets. This, despite the constantly increasing demand for valuation-relevant information by investors, and the continuous efforts of policymakers (SEC, FASB) to improve the quality and reliability of financial information” (p.3). There is no reason to believe that any developed market outside the U.S. is better off in terms of the quality of information being disclosed. In fact, it is widely believed that the U.S. markets exhibit the most developed reporting behaviors (Lev, 1999). This being the case, there is presumably an even greater need for IC information to be disclosed to capital markets outside the U.S. Further evidence that capital markets are starting to demand IC information comes from Deng et al (1999) who found that knowledge of patents held by a firm positively affects shareholder value via a market pricing adjustment. Barth et al (2001) corroborated this ‘analyst effect’ in finding that analysts effectively reward firms that report on certain IC by giving more extensive coverage to them. There are thus significant capital market
Intellectual Capital Measurement and Reporting
effects for international firms through the reporting of IC and the measurement and disclosure of how they are managing their intellectual capital and intangible resources.
Corporate Governance and Fiduciary Reporting incentives Garcia-Ayuso (2003, p.600) contends that managers believe: “…the voluntary disclosure of information on intangibles has positive effects on their governance mechanisms and strengthens relationships with their stakeholders, as well as their image”. Sackman et al (1989) believe that better reported information about human resources might allow human resources to be allocated more effectively within organizations and may further enable gaps in skills and abilities to be more easily identified. It might also facilitate the provision of more comprehensive information to investors or potential investors, thereby furthering governance objectives relating to communication to external parties (Flamholtz 1996; Lank, 1997). In addition, there may be public policy benefits that result from reporting IC. A negative consequence of traditional reporting practices is that because human resource development appears as a cost rather than an investment, enterprises are encouraged to under invest in training. This can contribute to recruitment and retention difficulties within the enterprise and can lead to an over-reliance on the public sector to support the required levels of training. Better ways of measuring and reporting human resources might therefore encourage greater private investment in education and training (Johanson, 1998; Olsson, 1999).
WHY Do soME FiRMs REPoRT WHilE oTHERs Do noT? Explaining differential reporting patterns is difficult but it should be recognized that not reporting IC does not necessarily mean that management is ignorant of the role that IC plays in driving company performance. There is a multitude of reasons as to why companies may not want to focus the attention of external parties on their IC base. For instance, perhaps management views its current level of IC as an area of relative weakness and does not want to draw undue attention to it. Further, management may feel that it is a source of competitive advantage it does not wish to highlight in the public domain. As Williams (2001) observes: “To maintain any competitive advantage it has, a firm could reduce the IC disclosure levels in an effort not to signal competitors and others as to where potential opportunities may lie” (p.201). Grojer and Johnason (1999) share this view in suggesting that companies may be reluctant to voluntarily disclose information on IC items as the data may be thought too sensitive or important to disclose. Both of these are plausible reasons for not having reporting systems in place that adequately report on a company’s IC. It may be the case, therefore, that management is managing its IC actively, and has mapped out a plan as to how it will lead the organization to greater success, but is being quiet about its efforts. On the other hand, there are clear incentives, as outlined above, for companies to report IC. In addition to these, companies may realize that reporting what other companies report is a
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strong defence against possible accusations that they ignore their IC, and do not manage it well (Guthrie and Petty, 2000). Moreover, it may be that companies in Australia, distanced from the European hub of IC reporting, have the intention of reporting on their IC, but see value in waiting until another organization incurs the costs associated with establishing how such information should be efficiently reported (Petty, 1999). Finally, companies that are reporting their IC may have bought into the argument previously outlined that efficiency gains and productivity improvements will flow from communicating information about their IC to an outside audience (Lev, 1999; Lev and Zarowin, 1999). Eventually, it is likely that a critical mass of reporting organizations will be reached, and this will increase the number and clarity of calls for some structure to be imposed on the reporting process. It is at this juncture that regulators and policymakers will probably become active in working towards establishing a common reporting standard (Guthrie et al, 1999). Thus, although the incentives to voluntarily report on IC seem clear to researchers and pundits in the IC field, the more significant hurdle is convincing the executives within companies who are responsible for preparing the external reports to include IC in those reports. Assuming empowered executives already are convinced, it is logical to expect to find IC being reported in company’s annual reports because executives will want to demonstrate that they are focusing on what really matters (Hines, 1988). In addition to this, as awareness of IC has undoubtedly developed fairly rapidly in relative terms during the past decade, both in the research community and within the practitioner community (Guthrie et al 1999; Stewart, 1997; Sveiby, 1997), it seems reasonable to expect that the extent of voluntary reporting will increase over time. It also seems reasonable to believe that it will be possible to observe the transference of this practice to the wider corporate community beyond the initial reporting acolytes hailing from a few Nordic nations.
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Producing an iC Report A detailed prescription as to how an IC report could be developed is beyond the scope of this chapter. However, in the interest of providing a perspective on the matter that can be colored in by readers in other ways, we present here an initial exploration of the subject. The process involved in producing an IC report need not be overly costly and time consuming. Many firms already capture the data required to feed into the reporting process. Much of the data are collected already as part of the process of monitoring people and systems, as part of strategy formulation, and in the course of gathering competitive intelligence and benchmarking competitive forces with internal performance. Many firms already produce IC accounts that appear in the company annual report as an extension of the traditional audited financial accounts. The consulting firm Celemi has for many years produced such accounts. There is no universally accepted “correct” approach to developing an IC report, but Celemi’s approach offers one example of how an IC report can be produced. In 1995, Celemi published the world’s first Intangible Asset Monitor (IAM) as part of the company annual report. The IAM is a tool very similar in design to that which we envision would provide most entities with maximally useful IC disclosure. Celemi classifies its intangibles into the three categories of individual competence, external capital, and internal capital. Celemi acknowledges the difficulty in measuring the value of IC items with complete accuracy. However, Celemi also points out that what the stakeholders are interested in is reported on more comprehensively than if the IAM were not in place. The end result is that the stakeholders receive more decision-useful information (Sveiby, 1998). Using the IAM, the intangible assets are shown to be increasing or decreasing in value during a period. That is, a directional account of changes in the stock of IC is given. A review of
Intellectual Capital Measurement and Reporting
the techniques used by Celemi to value some of its ‘new intangibles’ provides a focal point for considering how traditional accounting systems may be modified to accommodate the reporting of such items. From Celemi’s IAM, it is clear that Celemi views its employees and their competencies as its most important business asset. Celemi uses nonfinancial metrics to assess the value represented by its employees. The idea is to report the same metrics each year to facilitate benchmarking over time. This conveys an understanding about whether the base of human capital is progressively improving or declining. Measures of employee competence are grouped into the categories of growth/renewal, efficiency, and stability. The growth/renewal factors include measures of employee education level and average years of professional experience. Efficiency measures include value added per expert (professional), and value added per firm employee. Measures of stability include expert seniority expressed in years and the median age of all employees. Similar measures are used to assess the growth/renewal, efficiency, and stability of the external capital and internal capital classes of intangible asset. The relevant metrics for each class of asset are calculated using data captured while doing business, typically from other existing business systems, such as the human resource management system, and are integrated into the financial reporting system. When necessary, new data warehouses are created, and new data capture points established, to feed the necessary data into the system. The combination of these measures across the three categories of IC creates a picture of the state of Celemi’s IC and provides a means for assessing the contribution IC makes to the value of the firm as a whole. Although most of the measures are not financial, it is certainly the case that reporting them places stakeholders in an improved decision making position with respect to their financial interest in the firm. The time-proven maxim
“what gets measured gets managed” ensures that the IC report establishes a new dialogue and a new reality in terms of how IC is viewed by all stakeholders, whether they are inside or outside of the organization. The reporting framework may be rudimentary, but Celemi is at least trying to measure what really creates value. This is a significant departure from traditional reporting systems with a focus on only those intangibles that are purchased, tangible assets, and historical costs. It seems eminently more sensible to make an effort to measure and report that information which is most likely to be useful for decision making purposes. To this end, Celemi’s IAM is a step in the right direction and provides one example of how IC can be reported and of the process involved in producing an IC report.
inTEllECTuAl CAPiTAl REPoRTinG: PERsPECTiVEs FRoM PRACTiCE This section examines the perspectives of accountants on IC reporting elicited through a survey questionnaire. This is considered important as accountants are involved in the preparation of financial reports as well as the assessment of these reports in terms of the adequacy of corporate disclosure. It is considered that doing so will provide an important validation of the thesis of this chapter – that companies, and international companies in particular – should report their IC. Respondents to this study were all members of the accounting profession located in Hong Kong, held at least one degree in accounting and/or finance and had at least five years of experience in the financial industry. 1 They ranged in age from 28 to 63. Fiftysix percent of the respondents were male and 44 percent were female. Eight percent held the role of Chief Financial Officer in a public company or in a large small to medium sized enterprise. A further fourteen percent were public practitioners.
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Twenty-eight percent worked as equity analysts, or in the banking sector generally. Thirty-six percent worked in senior positions in commerce and industry. The remaining respondents were either self-employed, academics, or worked in other unspecified roles in government. They were taken as sophisticated and active consumers of externally reported company financial information for the purpose of this research. Furthermore, these respondents were considered to be aware of the issues relating to the management challenges faced by international organizations. The questionnaire was designed and developed using Kelly’s (1955) Repertory Grid procedure for eliciting respondent vocabulary. Kelly’s procedure is designed to ensure that the terminology used in a survey instrument is consistent with terminology the respondents would ordinarily use to describe a particular issue, construct or phenomenon. A total of 18 candidates pre-tested the questionnaire as a check on questionnaire wording, clarity and construct validity. The questionnaire contained 20 questions. Three of the questions were openended. The remaining questions were closed, but several of these permitted elaboration by respondents on their answer. The survey instrument was administered during professional development sessions, held during 2004, and also during office visits, to a total of 238 respondents. All responses were useable. The questionnaire was administered face-toface as a control on the identity of the respondent and to ensure the integrity of the data. The questionnaires were intentionally designed to be simple so as to encourage respondents to give genuine and considered responses rather than resort to random entry. The questionnaire was intended to produce data that would both describe practice and also enable normative suggestions to be made regarding the regulation of financial reporting. Data were analyzed using simple descriptive statistics to obtain percentage values for responses to each of the closed questions. The open-ended responses were tabulated and analyzed on a content basis
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Table 2. In overall terms, how useful and relevant to decision-making do you find the accounting information that is presented to external stakeholders by listed companies in Hong Kong? (%), N=238 Useful
35
Neutral
14
Not useful
51
Total
100
to identify obvious respondent threads. As Table 2 shows, more than half the respondents (51%) did not find accounting information provided by companies generally useful. In fact, only 35% of respondents found accounting information presented by listed companies in Hong Kong useful for decision-making purposes. This is congruent with claims made in the literature that accounting has lost its relevance (Johnson and Kaplan, 1987; Lev, 1999). However, responses to question 1 in Table 3 reveal that 68% of respondents used the annual report to learn more about a company, and as an aid to decision-making. Question 2 in Table 3 further shows that an overwhelming number of respondents (96%) felt that Hong Kong companies need to disclose more information and be more transparent. The finding in question 2 is reinforced by the response to question 3 in Table 3 which shows that a large majority of respondents (92%) did not think that Hong Kong companies are required to disclose enough information in their annual report. As shown in question 4 in Table 3, the majority of respondents were in favor of the accounting profession and/or the regulatory authorities imposing additional IC disclosure requirements on listed companies in Hong Kong. This call to action on the specific need for companies to give more IC information is consistent with the finding that Hong Kong companies need to be more transparent in general. Question 4 presents a normative view of what should happen that is strongly aligned with the positive view reflected
Intellectual Capital Measurement and Reporting
Table 3. Current state of reporting - perceived decision usefulness and transparency
Table 4. Utility and awareness of IC reporting tools
Question
Yes
No
Question
Yes
No
1. Do you use the annual report of companies you are interested in learning more about as an information source for making decisions? (%), N=238
68
32
91
9
2. Do you think companies in Hong Kong need to disclose more information and be more transparent? (%), N=238
96
4
1. Certain tools are designed to provide information on a company’s IC. Do you think you would find information provided by such tools useful in making investment decisions regarding a company? (%), N=238 2. Are you familiar with the Balanced Scorecard? (%), N=238
82
18
3. Do you think companies in Hong Kong are required to disclose enough information on their IC in their annual report? (%), N=238
8
92
3. Are you familiar with the Intangible Asset Monitor? (%), N=238
19
81 88
87
13
4. Are you familiar with the Skandia Navigator? (%), N=238
12
4. Do you think that the accounting profession and/or the regulators in Hong Kong should require listed companies in Hong Kong to provide more information on their IC? (%), N=238
in question 3 that not enough is happening. Most respondents (91%) believed that they would find IC reports decision-useful, if they were made available. Only a small number (9%) thought they would not find IC information useful in supporting decisions. It may be that these respondents either could not conceive of what information would be provided by the IC reports, or they have so often made decisions without having access to formal reports on IC information that they felt equipped to continue along the same path unaided. When asked about how familiar they were with different types of IC reports, most respondents (82%) claimed to be familiar with the Balanced Scorecard. However, in the follow-up question that asked them to explain what the Balanced Scorecard is, few respondents actually knew. Only 26 respondents (11%) gave an accurate description of the Balanced Scorecard. For instance, one respondent wrote: “it is a method for managers to do staff performance review”. The high recognition factor by respondents for the Balanced Scorecard relative to the other two measurement tools (discussed below) is probably explained by respondents recognizing the name of the Balanced Scorecard as it is well known. Respondents were
seemingly more honest in their claims to know about the Intangible Assets Monitor. As question 3 in Table 4 shows, only 19% of respondents claimed to be familiar with it. However, as for the Balanced Scorecard, in the follow-up question that asked them to explain what it is, few respondents actually knew. Only 3 respondents (<2%) gave written answers that indicated they had substantial knowledge about the Intangible Assets Monitor. Even fewer respondents (12%) were familiar with Skandia’s Navigator. In the follow-up question that asked them to explain what it is, the same three respondents that accurately explained the Intangible Assets Monitor also accurately described the Navigator. The remaining respondents, who claimed to know Skandia’s Navigator, did not know it. As shown in question 1 of Table 5, 88% of respondents thought that voluntarily disclosing IC information should have a positive impact on market capitalisation. However, question 2 in Table 5 shows that when asked if they would themselves pay more for a company that provided better information on its IC, 71% of respondents gave a negative response. Respondents were fairly evenly divided when asked whether voluntary IC disclosure by listed companies is currently being rewarded in Hong Kong. When considered together with the results of question 1 in Table 5,
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Table 6.
Table 5. Perceived value of IC disclosure Question
Yes
No
1. Do you think that a company voluntarily disclosing additional information on its IC should be rewarded by the capital market in the form of a higher share price? (%), N=238
88
12
2. Would you pay more to invest in a company rich in IC if that company offered better and more transparent information on its IC in the company annual report? (%), N=238
29
3. Do you think there is currently a positive association between share price and the extent of voluntary IC disclosure for Hong Kong listed companies? (%), N=238
47
71
Do you think Hong Kong listed companies are disclosing more information on their IC than they did 10 years ago? (%), N=238 Yes
64
No
26
No idea
10
Total
100
53
it emerges that although a majority of respondents (88%) thought companies should achieve higher shares prices if they voluntarily disclosed IC, fewer than half of the respondents (47%) believed this was actually happening. There are positive signs of change, however. As shown in Table 6, 64% of respondents believed that companies listed in Hong Kong are reporting more IC information than they were ten years ago. Question 1 in Table 7 shows that a majority of respondents (60%) felt they were in a poor or very poor position to get hold of information on the IC of listed Hong Kong companies through public sources. Fewer than half this number (28%) rated their ability to obtain such information as good or very good. The findings presented in question 1 are in stark contrast to the results shown in question 2 which show that if private information channels were used a majority of respondents
(68%) felt they would be able to obtain good or very good information on the IC of listed Hong Kong companies. Only 16% of respondents still felt they were in a poor or very poor position to obtain such information once private information sources were considered. Overall, the survey data offers an empirical account of how a group of financial professionals uses IC information and the value that this group imputes to IC reporting. With reference to this important stakeholder group, a number of conclusions can be derived regarding: (i) the utility of information provided by the traditional financial accounting reports; (ii) the role that the annual report plays in communicating information to significant decision-making externalities; (iii) the desire for a change to the content and format of those reports; and (iv) the benefits to have from a greater incidence of IC reporting. The results of the survey clearly indicate that respondents did not find information provided by the traditional financial accounting model all that useful. This agrees with the literature that suggests the lost relevance of accounting data.
Table 7. Respondent ability to obtain information on the IC of listed Hong Kong companies through public versus private information sources? Statements
Very poor
Poor
Neutral
Good
Very good
Total
1. Please rate your ability to obtain information on the IC of listed Hong Kong companies through public information sources? (%), N=238
18
42
12
22
6
100
2. Please rate your ability to obtain information on the IC of listed Hong Kong companies through private information sources? (%), N=238
7
9
16
39
29
100
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However, respondents were still using the annual report to learn about a company. This finding is somewhat anomalous in light of the finding that respondents claimed not to find information provided by the traditional financial accounting model useful. However, it may be explained by the fact that, although many respondents did not find accounting information useful, they did find the annual report useful. Furthermore, they may simply refer to the annual report to check that they are not missing any information without actually finding any relevant and useful information. The respondents were firmly of the view that alternative reporting frameworks were required. The demand for a market response certainly seems to exist with 88% of respondents believing that voluntary disclosure of IC by companies should be rewarded by the capital market in the form of a higher share price. An even greater number of respondents (91%) thought that having access to IC reports would assist them in making investment decisions. In deciding what type of report on IC should be required and what format the report should take, it is interesting to note that there was a very low level of familiarity with the Intangible Asset Monitor (19%) and with Skandia’s Navigator (12%). A greater number of respondents knew of the Balanced Scorecard, but few (11%) actually understood what it is. The high recognition factor by respondents for the Balanced Scorecard relative to the other two measurement tools is probably due to the fact that the Balanced Scorecard is well known. The data suggest that, at this juncture, there is no need to give one particular reporting tool greater consideration than any other when looking at prescribing a method and format for IC reporting by multinational companies. In contrast to the finding that companies voluntarily reporting IC should benefit from higher share prices, most respondents (71%) reported that they would not themselves pay more for greater IC transparency. It seems that respondents hold the normative view that increased transparency should be rewarded
via a share price increase, but are not prepared to use their own money as part of that reward. This may be attributed, in part, to the fact that 68% of respondents claimed to be in a good or very good position to obtain information on IC through private information sources. Therefore, there is no need for this group to pay more for increased transparency as they are already getting the information they require to make informed investment decisions. This finding is significant because it suggests that one group of stakeholders (in this case, financial professionals) is able to gain an advantage over other stakeholder groups because of information asymmetries created by special relationships. This results in an uneven playing field in which some stakeholders are empowered, and others are not. There may also be legal consequences for actors who use information obtained through private channels. An equitable balance could be restored, and potential legal hazards avoided, if companies were to report publicly the information they currently communicate privately to certain elite stakeholder groups.
ConClusions In summary, this chapter argues for the measurement and reporting of IC. If international companies are to compete effectively, they need to invest in structural, relational and human capital as outlined in this chapter. In so doing, a means of making sense of these investment decisions, monitoring the success of these initiatives and communicating the importance throughout global business contexts are required. As this chapter has discussed, traditional financial reporting models are insufficient for these purposes. Hence there are significant benefits that ensue from the measurement and reporting of IC for global companies. These arguments are validated by the results of a research study that presents the perspectives of finance professionals involved in the production
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and evaluation of the financial statements and reports of large international companies.
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Guthrie, J., Petty, R., Ferrier, F., & Wells, R. (1999). There is no accounting for intellectual capital in Australia: a review of annual reporting practices and the internal measurement of intangibles within Australian organisations. Conference Proceedings, Measuring and Reporting Intellectual Capital, Experience, Issues and Prospects, An International Symposium, Organisation for Economic Cooperation and Development, Amsterdam. Hines, R. (1988). Financial accounting: in communicating reality, we construct reality. Accounting, Organizations and Society, 13(3), 251–261. doi:10.1016/0361-3682(88)90003-7 Hitt, M., Bierman, L., Uhlenbruck, K., & Shimizu, K. (2006). The importance of resources in the internationalisation of professional services firms: the good, the bad and the ugly. Academy of Management Journal, 49(6), 1137–1157. International Accounting Standards Committee (IASC). (1998). IAS 38: Standard on intangible assets, UK. International Federation of Accountants (IFAC). (1998). The Measurement and Management of Intellectual Capital: An Introduction, Study 7. United Kingdom: IFAC. Ittner, C., & Larcker, D. (1998). Are non-financial measures leading indicators of financial performance? An analysis of customer satisfaction. Journal of Accounting Research, 36, 1–46. doi:10.2307/2491304 Johanson, U. (1998). The answer is blowing in the wind. Investment in training from a human resource accounting perspective. Vocational Training European Journal, 14(May-August), 47–55. Johnson, H. T., & Kaplan, R. (1987). Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press.
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Kaplan, R., & Norton, D. (1992). The balanced scorecard –measures that drive performance. Harvard Business Review, 70(1), 71–79. Kaplan, R., & Norton, D. (1996). Using the balanced scorecard as a strategic management system. Harvard Business Review, January-February. Kelly, G. A. (1955). The Psychology of Personal Constructs. New York: Norton. Lank, E. (1997). Leveraging invisible assets: The human factor. Journal of Long Range Planning, 30(3), 406–412. doi:10.1016/S00246301(97)90258-2 Lev, B. (1999). The inadequate public information on intellectual capital and its consequences. Conference Proceedings: Measuring and Reporting Intellectual Capital, Experience, Issues and Prospects, An International Symposium, Organisation for Economic Cooperation and Development, Amsterdam. Lev, B. (2001). Intangibles: management, measurement and reporting. Washington, DC: The Brookings Institution. Lev, B. & Mintz, S.L., (1999). Seeing is believing: a better approach to estimating knowledge capital. CFO, February, 29-37. Lev, B., & Zarowin, P. (1999). The boundaries of financial reporting and how to extend them. Journal of Accounting Research, (Supplement 37), 353–385. doi:10.2307/2491413 Marr, B., Gray, D., & Neely, A. (2003). Why do firms measure their intellectual capital? Journal of Intellectual Capital, 4(4), 441–464. doi:10.1108/14691930310504509 Marr, B., & Schiuma, G. (2003). Business performance measurement - past, present and future. Management Decision, 41(8), 680–687. doi:10.1108/00251740310496198
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Mavrinac, S., & Boyle, T. (1996). Sell-side analysis, non-financial performance evaluation and the accuracy of short-term earnings forecasts. Working Paper, Ernst & Young, Boston, MA. Meritum Project. (2002). Guidelines for the Management and Disclosure of Information on Intangibles (Intellectual Capital Report). Meyer, M. W. (2002). Why are performance measures so bad? Rethinking Performance Measurement. Cambridge, UK: Cambridge University Press. Mouritsen, J., Bukh, P. N., Flagstad, K., Thorbjørnsen, S., Johansen, M. R., Kotnis, S., et al. (2003). Intellectual Capital Statements – The New Guideline. Danish Ministry of Science, Technology and Innovation, Copenhagen. Mouritsen, J., Bukh, P. N., Larsen, H. T., & Johansen, M. R. (2002). Developing and managing knowledge through intellectual capital statements. Journal of Intellectual Capital, 3(1), 10–29. doi:10.1108/14691930210412818 Neely, A., Kennerley, M., & Martinez, V. (2004), Does the Balanced Scorecard Work: An Empirical Investigation. Centre for Business Performance, Cranfield School of Management, Cranfield, Bedfordshire, UK. Nonaka, I., & Takeuchi, H. (1995). The Knowledge-creating company. Oxford, UK: Oxford University Press. Norreklit, H. (2000). The balance on the balanced scorecard: A critical analysis of some of its assumptions. Management Accounting Research, 11(1), 65–88. doi:10.1006/mare.1999.0121 Norreklit, H. (2003). The balanced scorecard: What is the score? A rhetorical analysis of the balanced scorecard. Accounting, Organizations and Society, 28(6), 591–619. doi:10.1016/S03613682(02)00097-1
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Olsson, B. (1999). The construction of transparency through accounting on intellectual capital (IC)? Journal of Human Resource Costing and Accounting, 4(1), 7–10. Organisation for Economic Cooperation and Development (OECD). (1999). OECD Symposium on Measuring and Reporting of Intellectual Capital, Amsterdam. Paris: OECD. Petty, R., & Guthrie, J. (2000). Intellectual capital literature review. Journal of Intellectual Capital, 1(2), 155–176. doi:10.1108/14691930010348731 Sackman, S., Flamholtz, E., & Bullen, M. (1989). Human resource accounting: a state-of-the art review. Journal of Accounting Literature, 8, 235–264. Sheu, C., Chae, B., & Yang, C. (2004). National differences and ERP implementation: issues and challenges. Omega, 32, 361–371. doi:10.1016/j. omega.2004.02.001 Society of Management Accountants of Canada. The (SMAC), (1995). Monitoring customer value: management accounting. The Society of Management Accountants of Canada, Guideline #36, Hamilton, Canada.
Sveiby, K. E., (1998). Intellectual capital: thinking ahead. Australian CPA, June, 18-22. Sveiby, K. E. (2007). Methods for measuring intangible assets. Retrieved May 15th, 2007, http://www.sveiby.com/portals/0/articles/IntangibleMethods.htm Von Zedtwitz, M., Gassmann, O., & Boutellier, R. (2004). Organizing global R&D: Challenges and dilemmas. Journal of International Management, 10, 21–49. doi:10.1016/j.intman.2003.12.003 Wallman, S.M.H., (1995). Commentary: the future of accounting and disclosure in an evolving world: the need for dramatic change. Accounting Horizons, September, 81-91. Williams, S. M. (2001). Is intellectual capital performance and disclosure practices related? Journal of Intellectual Capital, 2(3), 192–203. doi:10.1108/14691930110399932
EnDnoTEs 1
2
Society of Management Accountants of Canada. The (SMAC), (1998). The management of intellectual capital: the issues and the practice. The Society of Management Accountants of Canada, Issues Paper #16, Hamilton. Stewart, T. A. (1997). Intellectual Capital: The New Wealth of Nations. New York: Doubleday Dell Publishing Group, Inc. Sveiby, K. E. (1988). Den nya Arsredovisningen, [The Invisible Balance Sheet (in Swedish)]. Stockholm: Konrad Group. Sveiby, K. E. (1997). The New Organizational Wealth: Managing and Measuring Knowledge Based Assets. San Francisco: Berrett – Koehler Pub. Inc.
Brennan and Connell (2000) being an exception. Participants to the research were drawn from CPA Australia, which is one of the world’s largest professional accounting bodies with approximately 112,000 members. Over 8,500 members live and work in Hong Kong. Members are highly trained in financial matters. To become a member, one must graduate from a recognized university with a degree in accounting, obtain several years of advanced work experience and sit for five post-graduate professional examinations. Members are required to participate in approved annual continuing professional development hours at a minimum level of 20 hours per annum. Further, members of CPA Australia are known to possess core financial skills relating to the reading and
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interpretation of annual reports. Though the need and demand for information by the members will differ to that of financial analysts, their understanding of company and market financial matters is likely to be similar to that of the analysts.
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Chapter 6
National Intellectual Capital Stocks and Organizational Cultures:
A Comparison of Lebanon and Iran Jamal A. Nazari Mount Royal College/ University of Calgary, Canada Irene M. Herremans University of Calgary, Canada Armond Manassian American University of Beirut, Lebanon Robert G. Isaac University of Calgary, Canada
ABsTRACT Using a set of macro-level socio-economic indicators, we first explore whether two Middle Eastern countries (Lebanon and Iran) provide the foundation for organizations to develop their intellectual capital (IC). Then, we investigate the role of micro-level organizational characteristics that might support or hinder the development of IC management processes within organizations. The insight gained through our comparison will shed light on some important organizational attributes that foster the management of IC for wealth creation. The analysis has important implications for multinational corporations (MNCs) that have operations in the Middle East, are contemplating business involvement in the Middle East, or that have employees with Middle Eastern origin.
inTRoDuCTion The Middle Eastern countries are generally perceived as hotbeds for political upheaval rather than DOI: 10.4018/978-1-60566-679-2.ch006
as serious business investment considerations. In spite of this perception, many multinational companies (MNCs) are looking for opportunities in this region and view the Middle East as a growing, lucrative marketplace. The Middle East has great potential for becoming a significant international
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National Intellectual Capital Stocks and Organizational Cultures
economic force because it contains vast natural and human resources. Its strategic geographical position places it at the center of the global stage, making it an arena for competing global powers. As trade between the industrialized world and Middle Eastern countries continues to grow, the importance of gaining an understanding of the region’s complex and diverse people will become more apparent to MNCs operating in developed nations. Spurred by the desire to gain access to untapped markets and resources, MNCs have been a major force in increasing the volume of international trade worldwide. As a result of the increased pace of globalization, MNCs in developed countries are continuing to expand their operations to countries very different from their own in regard to business environment and practices, economic stability, level of economic development, and cultural characteristics. Because of this diversity, one popular means of entering new territories has been through the formation of strategic alliances called international joint ventures (IJVs). As host countries desire to maintain some control over the operations of MNCs, in some settings an IJV is the only entry option available to foreign investors. As well, an IJV arrangement helps to ensure that local stakeholders share in the economic and social benefits. From the entry options granted by the Iranian government to foreign firms, the IJV is the only possibility for establishing a long-term presence. The buy-back scheme where a foreign firm supplies plants and machinery in exchange for the goods that will be produced by means of such facilities is more of a financing instrument and a compromise solution for foreign investment in the short-run. The build-operate-transfer (BOT) arrangement allows foreign firms to invest in projects that are operated for a certain period of time by the foreign investor before being fully transferred to the Iranian government. For these reasons, IJVs are the only entry option for investment by foreign companies seeking to establish a long-term presence in Iran. The high level of
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political instability in Lebanon has made the IJV arrangement very popular as a means of entry for foreign companies. By having a local partner, a foreign firm can reduce the risks of operating in a highly uncertain business environment and minimize the losses resulting from potential disruptions to operations. The prevalence of IJVs in the globalization of business activities has been the subject of numerous studies (Cyr, 1995; Geringer & Hebert, 1991; Harrigan, 1985; Killing, 1983), many of which investigate the human resource practices of MNCs that pertain to their local operations (Bjorkman & Lu, 1999; Lu & Bjorkman, 1997, 1998; Tayeb, 1998; Wang & Satow, 1994; Wasti, 1998). The question that arises is if human resource practices should follow the established policies of the MNCs or those of the local partner (Beechler & Yang, 1994; Hannon, Huang, & Jaw, 1995; Lu & Bjorkman, 1997, 1998; Monks, 1996; Rosenzweig & Nohria, 1994). In this regard, firms have a continuum of options in trying to operate effectively. At one extreme is a policy of standardization of human resource practices across all international operations. At the other end is a policy of complete customization to local practices. In between these two extremes are many combinations of blending standardization with local responsiveness (Doz & Prahalad, 1981; Hannon et al., 1995; Lu & Bjorkman, 1997; Prahalad & Doz, 1987; Schuler, Dowling, & De Cieri, 1993; Taylor, Beechler, & Napier, 1996). The manner in which employees are treated in international operations have taken on increased importance with the realization that in much of the business world of today wealth is created increasingly by off-balance sheet assets, often called intangibles. These intangible assets include, in part, reputation, corporate responsibility, talented people, relationships, efficient and effective internal processes, and relationships, often referred to as intellectual capital (IC). IC is generally recognized as having three broad dimensions which are instrumental to wealth creation:
National Intellectual Capital Stocks and Organizational Cultures
structural, human and relational capital. Structural capital refers to the processes, technology, databases, and communication avenues that aid in development of both knowledge and relationships. Human capital refers to the knowledge and capabilities of the employees. Relational capital refers to the customer and supplier loyalty and other stakeholder relationships that an organization has developed. To the extent that an organization is able to derive wealth from its IC depends not only on its national infrastructure of education technology and trade policies but also on its ability to align its structure, culture, climate, and value systems to support wealth-creating assets (Chandler, 1962; Collins & Porras, 1997; Elliott, 1992). Previous research has found a relationship between the extent of an organization’s IC and certain positive characteristics in its culture. This chapter investigates the extent that micro-organizational characteristics might help or hinder the development of IC management processes when a nation appears equipped with the appropriate foundation for wealth creation, as measured by macro-level, socio-economic indicators. It explores the following research question: What macro and micro characteristics are conducive to IC management processes in developing countries? The rest of this chapter is organized in the following manner. First, Iran and Lebanon are compared on the level of national IC stocks. This is followed by a discussion of organizational climate and culture variables that are conducive to the IC management processes. Methodology and data collection is discussed next. Then, the results of our statistical analysis are explained. Finally, the conclusions, implications and potential future studies are reported.
BACKGRounD Beck (1998) in her book about the knowledge economy, suggested that certain characteristics must exist to gain the advantages of developing knowledge-related resources, a sub-component of IC. In part, she suggested that countries with flexibility and transparency, access to electronic information technologies, and attractiveness of quality of life will have a foundation on which to develop wealth-creating IC assets. These characteristics, at a minimum, will allow human knowledge to develop and for countries to retain their asset base of knowledge workers. Her suggestion was further investigated by Hervas-Oliver and Dalmau-Porta (2007). They found technological capability and a government policy oriented to business to be key variables to what they refer to as IC stocks within nations that can lead to wealth creation. Bontis (2004) also investigated the IC stocks of a nation to determine their relationship to the nation’s financial capital, as measured by GDP per capita. Although Bontis (2004) studied the Arab region, neither Lebanon nor Iran was included in the study. Bontis (2004) used a number of macroindicators that he termed human, process, market (relationship), and renewal capital to measure the nation’s relationship between these indicators and its GDP per capita. However, none of these studies combined macro readiness indicators (or what are referred to as IC stocks) with micro-organizational indicators of culture and climate to determine if one might support or hinder the other. Initially, a nation must lay the foundation for IC development through macro infrastructure (such as education, GDP, Internet access, and more). However, stocks or inventories of IC might lie dormant and fail to create wealth for organizations if the structure, culture, and climate within those organizations are
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not integrated with appropriate IC management processes for extracting the potential from these IC inventories.
Comparison of lebanon and iran: national iC stocks Previous studies of IC have called for additional research at the national level (e.g. Beck, 1998; Bontis, 2004; Hervas-Oliver & Dalmau-Porta, 2007). Therefore, we now discuss the national IC stocks that build the foundation for organizations to create their own IC stocks. We compare Lebanon and Iran by beginning with a general overview of the two countries. Then, we provide macro-level indicators that proxy for financial and IC stocks. National IC stocks are separated into three categories: structural, human and relational.
General Overview and Financial Capital Despite continued political instability, Lebanon, a small country with an approximate population of 4.06 m (Economist Intelligence Unit, EIU, 2008) on the Mediterranean coast is working on repositioning itself as the hub linking the Arab East and the European West. According to Lebanon’s 1926 constitution, the country is a secular Arab state with a parliamentary democracy and a free economy (EIU, 2008). Based on the quasi-democratic political system, the power in Lebanon’s political system is shared among three largest religious sects: Sunni Muslim, Maronite Christian, and Shia Muslim. Individuals support the heads of political groups from their own religious communities (EIU, 2008). Lebanon’s government has facilitated and encouraged investments by foreign companies. According to the US Commercial Service Report (2008, p. 5), the incentives include “a free market, a strong laissez-faire commercial tradition, a highly dollarized economy, the absence of controls on the movement of capital and foreign exchange, strict bank secrecy, a highly educated labor force,
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a good quality of life, and limited restrictions on investors.” The country experienced a high degree of stability and attracted many tourists until 2006. After the imprisonment of two Israeli soldiers by Hezbullah in 2006, a month-long conflict with Israel destroyed infrastructure across the country and caused massive loss of life. Since the call by the UN Security Council for the cessation of hostilities, Lebanon’s economy has been recuperating from the damages. Iran is a country that has been receiving a lot of attention in the current media. Unfortunately, most of this attention has been highly negative and focused on Iran’s nuclear programs and its political influence in the region. Iran, a vast country that covers an area as large as Germany, France, UK, and Spain has many unique characteristics and presents itself as an interesting possibility for a cross-cultural study in IC management. Iran is an Islamic republic, with an Islamic constitution and legal system which is administered in conjunction with Sharia law. The clergy act as judges although the country is a republic and a democracy. Since the Islamic Revolution in 1979 there have been forces at play attempting to revamp the Iranian consciousness away from the globalizing values advocated by the previous regime. An inward looking ideology has been espoused and defended on the grounds of religious beliefs. The argument put forward has been that there is a need to counter and reject universalistic and hegemonic Western ideologies by reverting to particularistic local traditions. The ultimate effect of these trends has been a cessation and indeed a reversal of the integration of Iran into global social forces. Attempts have been made to attract foreign investment, reduce red tape, and boost non-oil exports. Privatization initiatives have been undertaken by the government due to a realization that it cannot ignore the forces of globalization and the demands of international agencies. Defined as the total market value of all final goods and services produced within the country generally within a year, GDP (gross domestic
National Intellectual Capital Stocks and Organizational Cultures
product) is used as a proxy for the nation’s financial capital (Bontis, 2004). Because countries traditionally move from an agricultural to a manufacturing to a service economy, there is generally a high correlation between GDP and IC stocks. In 2006, Lebanon’s GDP (nominal) per capita is $5,603, whereas Iran’s is $3,108. Market capitalization of listed companies as a percentage of GDP is 36% for Lebanon and Iran’s is 17%. In current US dollars, market capitalization for Lebanon is approximately $8 billion and Iran’s is approximately $38 billion. However, the presence of a strong service economy is also an important indicator. In 2007 Lebanon’s service economy as a percentage of GDP was 77.1 percent, and Iran’s was 44 percent (WDI Online, 2007). In summary, on all financial capital indicators, Lebanon’s economy outperforms Iran’s.
Structural Capital Good technology, telecommunication systems, and electronic access lay the basis for building assets in human and relational categories of IC in organizations. Technology aids in gathering, organizing, and sharing a company’s information by developing databases to house and access knowledge. Systems of communication help to link a company to its suppliers, customers, employees, and other stakeholders to help build strong relationships. Good technology also aids in creating work environments for sharing and transferring knowledge among workers. Lebanon’s telecommunications system was severely damaged by the civil war and more recently by the Israeli invasion in 2006. Reconstruction efforts are well under way. According to a recent estimate, this small country has 6,998 Internet hosts and approximately 600,000 Internet users (EIU, 2008), resulting in 10.2 personal computers and 23.4 Internet users per 100 persons. Iran, a much larger country, has 5,269 Internet hosts and approximately 4.3 million Internet users, result-
ing in 10.6 personal computers and 25.7 Internet users per 100 persons. In Lebanon there are 678,000 telephone lines in use and approximately 775,100 mobile phone users. Per 100 persons, Lebanon has 27.2 mobile phone subscribers. Since 1994 the government of Iran has taken aggressive initiatives to improve the telephone system. The number of long-distance channels in the microwave radio relay trunk has grown. The number of main lines in the urban system has doubled; thousands of mobile subscribers have been served; many villages have been connected; and the technical level of the system has improved. According to a recent estimate there are 14,571,100 telephone lines and 13,659,123 mobile users. Per 100 persons, there are 19.5 mobile phone subscribers (WDI, 2007). The EIU (2006) has published an annual e-readiness ranking of the world’s largest 69 economies since 2000. The purpose is to evaluate the technological, economic, political, and social assets of the countries examined. The major variables used to achieve the aggregate score are: connectivity and technology infrastructure, business environment, social and cultural environment, legal environment, government policy and vision, consumer and business adoption. Thus, it provides a comparative indication of a country’s information and communications technology infrastructure and the ability of its consumers, businesses and governments to use information communications technology to their benefit. Unfortunately, Lebanon has not been ranked by the EIU, and therefore no score is available. Iran’s aggregate score for 2007 was 3.08 out of 10 giving it the very last rank among the 69 countries. On the component measuring connectivity and technology infrastructure Iran’s score was 2.8 compared to 8.1 and 7.9 for the US and Canada respectively. For structural capital, there is not a clear leader between Lebanon and Iran, although Lebanon leads on most indicators. (See Table 1 for more information.)
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National Intellectual Capital Stocks and Organizational Cultures
Table 1. Comparison of Iran and Lebanon: Socio-economic macro-level indicators Iran (2006)
Lebanon (2006)
Financial Capital GDP (nominal) per capita
$3,108
$5,603
GDP growth (annual %)
3.06%
(1.10)%
Market capitalization of listed companies (% of GDP)
17.41%
36.44%
$38 billion
$8 billion
13,659,123
1,103,376
19.5
27.2
10.6
10.2 (2005 figure)
26.8
48
43.7 (2007 figure)
76.5 (2007 figure)
International Internet bandwidth (bits per person)
53.2
111
Internet users (per 100 people)
25.7
23.4
82.4 (2005 figure)
87.4 (2003 estimate)
Exports of goods and services (% of GDP)
41.59
23.71
Exports of goods and services (annual % growth)
36.66
8.51
Market capitalization of listed companies (current US$) Structural Capital Mobile phone subscribers Mobile phone subscribers (per 100 people) Personal computers (per 100 people) School enrollment, tertiary (% gross) Service economy as a percentage of total GDP
Human Capital Literacy rate, adult total (% of people ages 15 and above) Relational Capital
Source: World Development Indicators Online (2007)
Human Development Although level of education and literary are input indicators, they are often used as proxies for level of knowledge within a country and therefore a representation of human capital. The EIU provides a Quality-of-Life Index which incorporates nine factors such as health, family life, community life, material well being, political stability and security, climate and geography, job security, political freedom and gender equality. Unfortunately, there is no ranking provided for Lebanon. The most recent ranking for Iran on the Qualityof-Life Index is 5.344 giving it a world position of 88 among 111 countries. The US and Canada were ranked 13 and 14 respectively with scores
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of 7.615 and 7.599. The Quality of Living Survey conducted by the British Mercer Human Resource Consulting organization covers 215 cities in the world. In 2008 Beirut’s ranking was 171 worldwide. In a point system Beirut scored 53.5 points compared to 52.5 in 2007. Regionally, the Lebanese capital came ahead of Damascus in Syria and Tehran in Iran. However, Dubai (83) and Abu Dhabi (87) are the Middle Eastern cities with the best quality of living. The Human Development Index measures three dimensions of human development: living a long and healthy life (measured by life expectancy), being educated (measured by adult literacy and enrolment at the primary, secondary
National Intellectual Capital Stocks and Organizational Cultures
and tertiary level) and having a decent standard of living (measured by purchasing power parity and income). According to the UN’s 2007-2008 Human Development Report, Lebanon received a score of 0.772 based on the year 2005, giving it a rank of 88 and Iran’s score is 0.759, ranking it 94 out of 177 countries (1 is the best rank). Regarding literacy, Lebanon’s estimated adult literacy rate was 97.4 percent in 2003, and Iran’s, 82.4 percent in 2005. In summary, Lebanon’s scores for human development are better than Iran’s for most indicators. (See Table 1)
Relational Capital A country’s imports and exports, willingness to participate in international agreements, and openness to foreign investment can indicate the types of relationships that it has with other countries. Both Lebanon and Iran are eager to attract inflows from other countries and provide a liberal investment climate. In Lebanon a framework for privatization law was passed in 2000 which opened possibilities for privatization initiatives in many industries including electricity, water, and telecommunications. The government will seek strategic partners for these projects among local and foreign companies. As of 2002, French, Italian, German, British, Korean, and Finnish companies were the predominant investors in Lebanon. Their presence is most strongly felt in the fields of electricity, water, and telecommunications (U.S. Commercial Service, 2008). Since the lifting of the passport restriction in 1997 many large US firms have opened branches or regional offices in Lebanon. These include Microsoft, American Airlines, Arthur Anderson, Coca-Cola, FedEx, UPS, General Electric, Parsons Brinckerhoff, Cisco Systems, Eli Lilly, Computer Associates and Pepsi-Cola, some of which specialize in knowledge products. Regarding Iran, in an attempt to encourage diversification of investment initiatives to include non-petroleum industries, the government has
liberalized investment regulations in recent years (Nouraei & Mostafavi, 2008). In Iran, there are no limits on repatriation of earnings if investments are in industry, mining, or agriculture. Foreign companies are limited in their entry options. Foreign direct investment must be in the form of joint ventures. However, there are no restrictions on the percentage of ownership in these joint ventures (Nouraei & Mostafavi, 2008). Among developed nations the most active investors have been Germany, Norway, UK, France, Japan, Russia, South Korea, Sweden and Switzerland. Some of the MNCs with operations in Iran include Svedala Industri of Sweden, Tata Steel of India, Kia of South Korea, Nissan of Japan, Peugeot and Renault of France, Nestle of Switzerland, Coca-Cola and Pepsi-Cola of USA, Alcatel of France, MTN Group of South Africa, Siemens of Germany, Total of France, Shell of UK/Holland, Gasprom of Russia, and Lucky Goldstar of South Korea (Library of Congress, 2006). Dr. J. Graf Lambsdorff of the University of Passau was commissioned by Transparency International to produce a Corruption Perception Index (CPI). The score relates to perceptions of the degree of corruption as seen by business people and country analysts. The score can range from 10 (highly clean) to 0 (highly corrupt). In 2006 Lebanon had a score of 3.6 and a regional ranking of 8 among 14 Middle Eastern countries. Its world ranking was 63 out of 180 countries. In 2007 its score decreased to 3.0 giving it a regional ranking of 9 among 14 Middle Eastern countries and a world ranking of 99. In 2007 Lebanon was one of the first countries in the Middle East to ratify the United Nations Convention Against Corruption. In 2006 Iran’s Corruption Perception Index (CPI) according to Transparency International was 2.7 giving it a regional rank of 11 among 14 Middle Eastern countries. Its world rank was 105 out of 180 countries. In 2007 Iran’s CPI score slipped to 2.5, while its regional rank improved slightly to 10. Its world rank slipped to 131. In 2001 Iran joined the Convention on the Recognition and
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Enforcement of Foreign Arbitral Awards (Nouraei & Mostafavi, 2008). An indicator sometimes used as a proxy for relationship capital representing a countries’ willingness to do business with other countries is its percentage of exports. In terms of exports of goods and services as a percentage of GDP, Iran’s exports were 42% of GDP and Lebanon’s were 24%.
issuEs AnD PRoBlEMs The previous discussion provides evidence that due to the national IC capital, as measured by socioeconomic macro-level indicators, there is potential for capitalizing on the opportunities for creating stocks of IC assets within organizations, such as MNCs, operating in Lebanon and Iran. The countries’ GDP per capita, existence of a service economy, level of education and literary rate, availability of technology, and transitions toward increased foreign investment and transparency suggest a degree of readiness for organizations to create their own stocks of IC assets. A cursory examination of the macro-level indicators used as proxies (See Table 1), along with the background information we have provided thus far, suggests that organizations in Lebanon might have a slight advantage over organizations in Iran in embracing IC management as a strategic means of achieving competitive advantage. However, previous studies have shown that these macro-level indicators must be coupled with appropriate organizational characteristics, such as culture, climate, and structure, to extract wealth from stocks of IC assets through IC management processes. Some of these previous studies have studied the relationship between organizational characteristics and one aspect of IC management, such as information sharing (Chow, Harrison, McKinnon, & Wu, 1999), information technology (Powell & Dent-Micallef, 1997) or knowledge creation (Chua, 2002; Leonard-Barton, 1992,
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1995). Some other studies have investigated only a few characteristics of culture or climate (Chua, 2002; Lee, Kim, & Kim, 2006) and their relationship to IC. Jafari and Akhavan (2007) adopt a macro perspective to knowledge management by discussing essential changes to be implemented on a national level. The authors state that most knowledge management activities are conducted on a voluntary basis and are personal. A society must therefore foster a culture of motivation, a sense of belonging, empowerment, and trust and respect so that such knowledge exchanges can occur freely and frequently. In contrast, at the organizational level Nazari et al., (in press) investigated the relationship of three culture variables, four climate variables, and two additional organizational traits that could impact the level of IC management processes and compared those culture, climate, and organizational traits between Canada and the Middle East. The authors observed strong associations for the three components of IC (structural, human, and relational), and all variables. The findings strongly point towards the importance that the roles culture, climate, and traits play in relation to IC management. The current study builds on the findings of Nazari, et al. (in press) by providing a comparative analysis of Iran and Lebanon, two Middle Eastern countries. The question that this chapter attempts to address is whether organizations in these two respective countries have appropriate cultures and climates that will build on the foundation of macro-level socioeconomic indicators for development of IC assets within these organizations. Although we are not attempting to investigate national culture, we do call on that literature to help determine what we might find at the organizational level. We provide a comparative study of three dimensions of organizational culture (tendency toward cooperation; deference to power; and fear of the unknown) and four dimensions of climate (risk-taking, ownership; openness; and trust) from data collected at the organizational level in Lebanon and Iran.
National Intellectual Capital Stocks and Organizational Cultures
organizational Culture and iC Management Tendency Toward Cooperation Development of IC assets, especially the knowledge category, requires some degree of individualism to spur creative ideas but also sufficient tendency toward cooperation to share those ideas with others in a give-and-take process of improving and making those ideas into a feasible product. Without cooperation among employees, the ideas may remain in the domain of an individual employee’s mind rather than becoming an asset of the organization, owned by the organization’s employees in total. The results of the GLOBE (Global Leadership and Organizational Behaviour Effectiveness) study (House, 2004), which examined 62 countries including Iran and Lebanon, showed Arab societies scoring high on group and family collectivism (Kabasakal & Bodur, 2002). In a study specific to Lebanon, Jabbra (1989) found that Lebanese place high emphasis on social conformity. Iranian cultural practices show strong in-group collectivism. Although initially this tendency toward cooperation may seem beneficial, if too strong, it may discount human reasoning and the exercise of opinion in questions of law, leading to less openness and transparency. Confirming the GLOBE study, Ali & Amirshahi (2002) studied 768 managers in Iran, randomly selected from state, private, and mixed organizations, and found that the majority displayed a high tendency toward collectivism and a weak commitment to individualism (Ali & Amirshahi, 2002). A strong emphasis on consensus may create an obstacle to acceptance of new knowledge. In Hofstede’s (1984) cross-cultural study of work values Lebanon and Iran received scores that were very similar. Iran received a score of 41 on the Individualism/Collectivism dimension which is very close to the score for the Arab countries (Egypt, Iraq, Kuwait, Lebanon, Libya, Saudi
Arabia, and UAE) which was 38. However, the data for this seminal work was collected in 1972, and many of the Arab countries were grouped together. Due to a lack of more current literature providing a more direct comparison, it is likely that in both Lebanon and Iran employees may perceive similar levels of cooperation in their organizations.
Deference to Power Deference to power relates to the willingness of employees to place higher value and respect on decisions or ideas based on level of authority over expertise. It respects an uneven distribution of power in an organization and employees’ acceptance of this. Deference is paid to individuals located further up in the hierarchy in organizations. In contrast, weaker respect for authority, power, and hierarchy intensifies communications (Chaminade & Johanson, 2003) and provides a basis for more participatory decision-making (Chow et al., 1999). Deference to power within organizations could act as an impediment to knowledge sharing and a building of relationships, both important categories of IC (Ardichvili et al., 2006; Chow et al., 1999). Arab culture is characterized by large power distance in comparison to the West In Hofstede’s study of national cultures (1984), Lebanon was grouped with Arab countries, which received a score of 80 on this dimension. This would mean that obedience to authority and control are reflected in the Lebanese culture. The patriarchal nature of the Lebanese society has important implications for how people behave at work. Individuals’ outlook toward work is affected by their decisions to give up independence and submit to the father’s rule at home (Sharabi, 1988). Most employees would display little initiative to exercise independent judgment and creative thinking and would take comfort in simply following the suggestions of their superiors. The results of the GLOBE (Global Leadership and Organizational Behaviour Effectiveness)
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study (House, 2004) showed Iranian culture to be characterized by high power distance also. In Hofstede’s (1984) original study Iran received a score of 58. This indicates a culture in which authority takes precedence over competency. The recent developments in the country have had a profound effect on the work environment in that technocrats were replaced by ideologists and a competent skilled workforce was replaced by a loyal work force (Namazie & Frame, 2007). Managers tend to put loyal and ideologically-sound employees into key management and strategic positions, regardless of knowledge and expertise, which most likely is detrimental to IC development. As both Lebanon and Iran tend to show high deference to power, it is likely that employees in organizations in their respective countries may perceive similar levels of deference to power.
Iranian managers showed a preference for loyalty over competence. These initiatives can be viewed as steps taken to mitigate the negative effects of the unknown. Using the scores for uncertainty avoidance in Hofstede’s (1984) study, we find that Iran and Lebanon are similar when compared to Western countries. Iran’s score was 59 while that for Lebanon was 68. In both societies we would expect employees to exhibit a preference for clear rules and procedures in order to attain greater career stability. They would tend to be more tolerant of unfairness and more believing in absolute truths. Therefore, employees in these countries would be less open to experimentation with new or untested initiatives and may perceive similar levels of fear of the unknown.
Fear of the Unknown
organizational Climate and iC Management
Fear of the unknown suggests that employees feel threatened by uncertainty. In organizations in which employees wish to avoid uncertainty, there is greater observance of rules to lower risks and promote stability and uniformity (Chaminade & Johanson, 2003). In organizations in which employees are comfortable with some degree of uncertainty, there is greater tolerance and less rigidity (George & Jones, 1999). Fear of the unknown can impede the development and implementation of new ideas, the sharing of knowledge, and the strength of relationships. On this characteristic it is difficult to find studies that would highlight differences in cultures between Iran and Lebanon. However, it may be said that the instability of the business environment in Iran has had the greatest impact on human resource management in that country (Namazie & Frame, 2007). The ever changing laws and regulations and the complexity of Iranian labor laws has caused many managers to be ever more selective in their recruitment and selection procedures in hiring new staff. As indicated earlier in this paper,
Because there is a scarcity of research on organizational climate in general, and even less on the Middle East, we provide a broad discussion on climate comparing national characteristics of Iran and Lebanon. Then, we frame this discussion with a model by Golembiewski (1979), which includes risk-taking, ownership of ideas, openness, and trust, but first we explain the relationship between culture and climate. Few researchers draw a distinction between organizational culture and climate and indeed culture creates climate (Reichers & Schneider, 1990; Schein, 1988). However, because culture is a more enduring organizational characteristic than climate, we felt that MNCs wishing to develop IC assets may find the distinction useful. MNCs may more readily find changing the organizational climate easier than the culture, as employees would be more conscious of climate than culture. Culture is defined as “a pattern of basic assumptions...” (Schein, 1984, p. 3) and shared values, beliefs (Sathe, 1985), ideologies (Beyer, 1981), attitudes (Fishbein & Ajzen, 1975). In comparison, climate
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describes an organization’s personality (Forehand & Vonhaller, 1964). Regarding organizational climate in Lebanon and Iran, Mikdashi (1999) used the KEYS instrument developed by Amabile et al., (1996) to evaluate various aspects of work environment in Lebanese firms that affected creativity. The instrument was administered to 300 Lebanese managers working in different lines of business. Finding solutions to problems requires employees to have the freedom to break the rules (Nemeth, 1997), feel safe about their ideas (McGowan, 1996) and feel free to take risks because failure is tolerated (Eisner, 1996). The study found that most Lebanese managers were lacking in creativity and perceived creativity and challenging work to be a unitary phenomenon. Dirani (2006) also echoes the finding that Lebanese shy away from exercising creative thinking. In terms of our study, this would indicate a low incentive for risktaking, a reluctance to take ownership of ideas, a lack of openness, and a high level of mistrust in Lebanese firms. The same analysis holds true for Iran. Ali and Amirshahi (2002) argued that in public institutions in Iran there was a centralization of power and authority at the top. In the private sector he identified lack of motivation, absence of participation and centralization of management practices. Iranian managers also show a high level of nepotism in their hiring activities (Namazie & Frame, 2007). This is because of the national culture emphasizing distrust of outsiders. The argument is that it is easier to teach a loyal person new skills rather than teaching loyalty to a competent individual. In a study investigating the critical factors for developing a knowledge management culture in the Iran Aerospace Industries, Jafari and Akhavan (2007) asserted that organizations in Iran have to restructure their way of thinking which is deeply rooted in tradition. IC measurement and management as a major component of knowledge management initiatives takes on increased importance in such industries. The authors suggested that
to achieve organizational competitiveness there needs to be a change in culture and beliefs. This is because openness and trust that are so essential to knowledge management initiatives are lacking in most organizations.
Risk-Taking Within any organization, attempts to engage in innovation are greatly affected by attitudes toward risk-taking (Detert, Schroeder, & Mauriel, 2000). Different organizations may show varying degrees of acceptance of risk-taking (Lynn, 1999), and varying degrees of tolerance of failure which is important in knowledge creation (Leonard-Barton, 1995). Uncertainty avoidance hampers the creation of new ideas and impedes attempts by organizations to introduce IC management practices (Chaminade & Johanson, 2003). Nazari et al., (in press) demonstrated that more sophisticated IC management systems were found in organizations which encouraged calculated risk-taking. Both Lebanon (as part of the Arab country group) and Iran are characterized by Hofstede (1984) as possessing high uncertainty avoidance as a cultural characteristic compared to Western societies. In such environments employees would be risk averse. They would shy away from taking initiatives to try new approaches or ideas in fear of failure which might trigger the disapproval of a superior. The desire to maintain job security and achieve collective harmony would discourage any step that might be perceived as threatening the status quo. Therefore, in connection to IC management processes we suggest Iranians and Lebanese will perceive similar levels of perceived risk-taking in their respective organizations.
Ownership of Ideas Our discussion of this dimension is closely related to risk-taking. All the factors that would hinder risk-taking would also discourage employees from taking pride in putting forward novel ideas. In a
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study of an international engineering and construction company, De Long and Fahey (2000) concluded that after layoffs had occurred in the company, engineers were less inclined to admit making errors. DeLong and Fahey (2000) provide evidence for the importance for employees to take ownership of their ideas, have pride in their work, and receive recognition for their contributions. Nazari et al., (in press) found a strong relationship between ownership of ideas and all three categories (structural, human, and relational) of IC management processes at the organizational level, further supporting the importance of this variable for the extraction of wealth from IC assets. Without ownership of ideas, employees would find few incentives for proposing ways of improving performance and would be less inclined to stand by such proposals and claim them as their own. Therefore, in connection to IC management we suggest that Iranians and Lebanese will report similar levels of perceived tendencies toward taking ownership of ideas in their respective organizations.
Openness Gold et al., (2001) emphasized the extreme importance of interaction and dialogue among employees as a factor in converting tacit knowledge into explicit knowledge. These processes are instrumental in transmitting knowledge and giving birth to new ideas. Such an open culture is especially important with regard to IC management (Lynn, 1999). In another study, Nazari et al., (in press) found a high correlation between openness and IC management processes, suggesting that a climate characterized with openness will allow organizations to better manage their IC assets for wealth extraction. In light of the general description and macro indicators related to openness, we would expect a low perception of openness in the organizations in these two countries. Their cultural similarities along Hofstede’s (cultural dimensions) would
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indicate similar attitudes toward openness. Therefore, in connection to IC management we suggest that Iranians and Lebanese will report similar levels of perceived openness in their respective organizations.
Trust Trust is essential in creating an environment among employees that is conducive to the transmission of knowledge from individuals into the firm’s best practice archives, data bases, and other records (De Long & Fahey, 2000, p. 120). Studies have shown the importance of a relationship between trust and sharing of knowledge within organizations (Alavi, Kayworth, & Leidner, 2005; Gold et al., 2001) and in international settings. Nazari et al., (in press) found that organizations with a strong trust climate are more likely to have more appropriate IC management processes for creating wealth from IC stocks of assets. Performance appraisal systems in Iranian firms show a lack of clarity in setting performance indicators and failure to measure indicators objectively. Employees show a high level of distrust of managers because they believe there is much favoritism and subjectivity in such appraisals. As well, there is a high degree of nepotism in recruitment practices and a high degree of ambiguity in drafting of employment contracts and conducting performance appraisals in Middle Eastern firms. Managers are not seen to be investing in the development of their subordinates. Furthermore, Iran’s labor laws do not allow employees to strike or bargain collectively. In fact, sometimes employers have demanded prospective employees to sign “blank contracts” in order to get jobs. The employer later fills in the conditions of the contract (Namazie & Frame, 2007). All these factors contribute to a high level of distrust. In a similar study that assesses the potential of Iran’s software industry, Nicholson & Sahay (2003) state that skepticism and mistrust that are so prevalent in Iran may act as obstacles to
National Intellectual Capital Stocks and Organizational Cultures
the cross-fertilization of ideas among various domestic organizations as well as hampering collaboration with foreign companies. They find evidence of a reluctance to engage in low level data processing work that would facilitate trust building. A factor that compounds this even further is the current ideology that is driven by religion and discourages experimentation with new ideas, particularly from the outside. Tayeb (2001) attributes the general level of suspicion and mistrust amongst Iranians to the historical upheavals that took Iran from a powerful empire builder to being occupied by the Allies during World War II. Furthermore, during the Shah’s time the country embraced Western values and secularism only to reject all Western ideology after the revolution and to be immersed by the clergy in religious teachings. Although most of the preceding discussion is about Iran, we could find nothing that suggests that the level of trust would be different in Lebanon. Therefore, Iranians and Lebanese will likely perceive similar levels of trust in their respective organizations. In summary, the literature on socio-economic macro-level indicators suggests that Lebanon has a slightly better national foundation for development of IC stocks of assets. In contrast, the literature on organizational culture and climate suggests that the two countries could be very similar. Consequently, if organizational culture and climate act as obstacles to IC management, we may find that Lebanon has organizational IC management processes similar to Iran due to the similarity in their organizational cultures and climates.
Methodology We used a questionnaire to gather data from organizations in Lebanon and Iran for three major constructs: intellectual capital management, culture, and climate. To establish content validity, subject matter experts pre-tested the instrument to determine if each question captured the intended
domain. Each of these constructs was comprised of a number of subscales. The Intellectual Capital construct (19 items) consisted of three subscales characterizing Structural Capital (five items), Human Capital (eight items), and Relational Capital (six items). In harmony with the literature, the combination of these three subscales portrays the level of IC management processes desired to keep and foster capabilities for competitive advantage. Organizational Culture had three subscales which include Tendency toward Cooperation (five items), Deference to Power (three items), and Fear of the Unknown (three items). Organizational Climate included subscales of Risk-Taking (two items), Trust (three items), Openness (three items), and Ownership of Ideas (three items). We delivered the questionnaires to the MBA students at two universities in Iran and Lebanon. We also provided the MBA students with an online link where their interested colleagues could fill out the questionnaire electronically. The respondents were asked to rank the items on five- point Likerttype scale with the anchors 1 = strongly disagree, 2 = disagree, 3 = neither agree nor disagree, 4 = agree and 5 = strongly agree. Some questions were reverse scored to ensure that subjects moved back and forth along the scale as they answered questions. All surveys were in English as the level of employee asked to complete the survey in the Middle East had a sufficient command of the English language.
Results Similarity between demographic characteristics enabled us to do cross-sample comparisons. Using list-wise deletion approach to eliminate the cases with missing data left us with 61 cases (30 respondents from Iran and 31 respondents from Lebanon- see table 2). The sample is deemed to be sufficient to conduct statistical analysis.
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Table 2. Demographic characteristics of Iranian and Lebanese samples Demographic Characteristic
Iran N= 30
Lebanon N=31
Male
72%
62%
Female
28%
38%
Age
23-52
19-70
Upper level managers
10%
10%
Middle level managers
48%
24%
Lower level managers
24%
13%
Non-management (professionals)
18%
53%
Organization size (full-time equivalent)
10-44,000
6-15,000
Functional Areas
Engineering, consulting, operations, IT, finance, human resource, accounting, marketing and academics.
Education, accounting, engineering, marketing, human resource, consulting, finance, business administration and research and development.
Correlational Analyses Due to exploratory nature of our work, we ran a correlation analysis. Using pooled data from both countries, we conducted bivariate correlation to assess the strength and significance of the relationship between organizational characteristics and IC constructs. All IC constructs (Structural, Human, and Relational) were significantly and positively correlated with one another. The correlations among these dimensions were not high enough to indicate collinearity (Structural with Human r = .68, Structural with Relational r = .67, and Human with Relational r = .73). With regard to the relationship among three IC constructs with culture and climate, we observed that all three dimensions of IC (Structural, Human, and Relational) were significantly related to all the dimensions of Organizational Culture and Organizational Climate, (see Table 3).
ANOVA Results and Sample Specific Descriptive Statistics We conducted analysis of variance (ANOVA) to determine the extent to which the study constructs
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differed in two samples (Iranian vs. Lebanese). Summated scales were created using items for each sub-scale. The intent was to determine if differences occurred between Iran and Lebanon across the constructs of IC management, culture, and climate. Table 4 shows a summary of results for each sample; no significant differences were found. Intellectual Capital: Using a summated scale for the IC construct, the Iranian sample did not rate the items significantly different (F (1, 61) =.732, p =.396) from the Lebanese sample, indicating a similar level of IC management in these two samples. Furthermore, when the IC management construct was separated into its three dimensions, the differences in ratings were not significant for structural capital (F (1, 61) =.878, p =.352), human capital (F (1, 61) =.397, p =.531), relational capital (F (1, 61) =.679, p =.413) (see Table 5) Culture: When the subscales for the culture construct were aggregated the difference was not significant (F (1, 61) =1.769, p =.189). However, individual analysis of the cultural constructs indicated varied results. No differences were found between the two countries on the tendency for cooperation (F (1, 61) =.470, p =.496) or fear of
National Intellectual Capital Stocks and Organizational Cultures
Table 3. Correlations: IC management and organizational culture and climate Intellectual Capital Concept and Dimension
Structural
Human
Relational
Tendency toward Cooperation
.49**
.62**
.65**
Deference to Power
.32*
.48**
.42**
Fear of the Unknown
.34**
.45**
.40**
Risk-Taking
.67**
.53**
.68**
Ownership of Ideas
.52**
.53**
.56**
Openness
.42**
.42**
.56**
Trust
.57**
.68**
.73**
Organizational Culture
Organizational Climate
Notes: * p < 0.05 ** p < 0.01
unknown (F (1, 61) =1.708, p =.196). However, we did find evidence that the organizational culture in Lebanon is characterized by less deference to power (F (1, 61) =11.417, p <.01) than in Iran. (see Table 4 and 5). Climate: When the subscales for the climate construct were aggregated, the Iranian sample did not rate the subscales significantly different (F (1, 61) =.007, p =.934) from the Lebanese sample. When tested on separate constructs, the Iranian sample did not rate risk taking, ownership, openness, and trust significantly different (see Table 5) from the Lebanese sample.
ConClusions, iMPliCATions, AnD FuTuRE REsEARCH In today’s global village, MNCs are exploring possibilities in untapped markets that are quite different from their home countries. MNCs invest in host countries to exploit valuable strategic intangible assets. The competition for acquiring and leveraging intangibles in untapped markets relies on learning how to manage operations in new environments (Kogut & Zander, 2003). This knowledge cannot be gained without an under-
standing of the impact of different host country characteristics on the strategic decisions. We studied macro-level indicators and micro-level characteristics that have been known to have impacts on strategic management of IC. For the macro-level indicators, we studied the readiness to create wealth from IC asset stocks using nationwide socioeconomic statistics. Lebanon shows a higher degree of readiness to create wealth from IC assets due it is higher GDP per capita and greater percentage of service economy. Lebanon also has higher levels of literacy and school enrollment, availability of personal computers and Internet use, and higher exports and foreign direct investment when compared to Iran. However, the opportunity does not play out in the respondents’ perception that Lebanese organizations employ IC management processes to a greater extent than Iran. Prior studies (Alavi et al., 2005; Nazari et al., in press) have emphasized the critical importance organizational culture and climate in fostering the management of IC. The significant statistical results obtained from running correlation among the organization’s culture/climate and all categories of IC management confirmed the results of prior studies. The cultural constructs examined
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Table 4. Descriptive statistics: IC management, culture and climate Variables Total IC (Summated Scale)
Structural Capital
Human Capital
Relational Capital
Culture (Summated Scale)
Culture- Tendency toward Cooperation
Culture -Deference to Power
Culture- Fear of Unknown
Climate (Summated Scale)
Climate- Risk Taking
Sample
Mean
Std Deviation
N
54
11.697
30
Lebanon
56.613
12.137
31
Total
55.328
11.896
61
Iran
17.5
4.1
30
Lebanon
18.387
4.303
31
Total
17.951
4.193
61
Iran
14.033
3.828
30
Lebanon
Iran
14.938
3.767
31
Total
14.5
3.793
61
Iran
22.467
5.538
30
Lebanon
23.313
5.025
31
Total
22.903
5.253
61
Iran
30.733
6.633
30
Lebanon
28.452
6.762
31
Total
29.574
6.742
61
Iran
12.7
3.659
30
Lebanon
13.355
3.8
31
Total
13.033
3.715
61
Iran
8.967
2.748
30
Lebanon
6.71
2.466
31
Total
7.82
2.826
61
Iran
9.067
1.999
30
Lebanon
8.387
2.06
31
Total
8.721
2.042
61
Iran
31.379
7.243
30
Lebanon
31.226
7.07
31
Total
31.3
7.093
61
Iran
6.367
1.81
30
6
1.673
31
Total
6.18
1.737
61
Iran
8.31
2.123
30
Lebanon
9.29
2.148
31
Total
8.817
2.175
61
Iran
8.233
2.046
30
Lebanon
8.065
2.476
31
Total
8.148
2.257
61
Iran
8.6
2.513
30
Lebanon
7.871
2.553
31
Total
8.23
2.539
61
Lebanon
Climate- Ownership of Ideas
Climate- Openness
Climate- Trust
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National Intellectual Capital Stocks and Organizational Cultures
Table 5. Tests of between-subjects effects for IC management, culture and climate (Iran vs. Lebanon) df
F
Sig.
Total IC (Summated Scale)
1
0.732
0.396
Structural Capital
1
0.878
0.352
Human Capital
1
0.397
0.531
Relational Capital
1
0.679
0.413
Culture (Summated Scale)
1
1.769
0.189
Culture- Tendency toward Cooperation
1
0.47
0.496
Culture -Deference to Power
1
11.417
0.001
Culture- Fear of Unknown
1
1.708
0.196
Climate (Summated Scale)
1
0.007
0.934
Climate- Risk Taking
1
0.676
0.414
Climate- Ownership of Ideas
1
3.154
0.081
Climate- Openness
1
0.084
0.773
Climate- Trust
1
1.262
0.266
within a sample of Middle Eastern organizations (tendency toward cooperation, deference to power, fear of the unknown) are strongly associated with three dimensions of IC management (structural, human, and relational). Furthermore, the climate constructs (risk-taking, openness, ownership, and trust) had strong associations with the same three dimensions of IC management. Based on the existing literature, we suggest that the difference in the IC management levels might be due to organizational characteristics that act as obstacles or initiatives for IC wealth creation. The results of our comparative study revealed that other than deference to power, all other cultural and climate variables are not significantly distinct in our two sample contexts. One possible conclusion to be drawn from the results of our study is on the importance of organizational (micro) level characteristics in fostering IC management. These findings are important to MNCs currently operating or planning to operate in these two countries with high reliance on off-balance sheet and intangible assets for the success of their operations. Given that climate is a less enduring, more observable characteristic (Denison, 1996), our findings suggest that managers should attempt
to create a climate with positive characteristics through incentives that promote risk-taking, openness, trustfulness, and ownership of ideas. Our study suffers from a small sample size and a weak literature on which to build a theoretical foundation for our findings. Due to a lack of availability of macro-level socio-economic indicators and studies on organizational human resource management in these two countries, it is difficult to make rigorous scientific predictions. Therefore, we encourage academics to conduct similar studies in other developing countries, which are attractive for foreign investment. Several interesting research questions remain to be investigated in future studies. Most of the studies related to the role of culture and climate in the development IC management are theoretical. More studies need to be undertaken to explore this interesting research area. We only focused on two developing countries in our study. Additional studies need to explore the role of organizational and national IC stocks in the organizational IC management processes in other developing or developed countries. Our study focused on the IC management processes, and we did not study the role that the
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organizational characteristics might have in improving the actual existence of IC in an organization. Therefore, another fruitful area of research would be to investigate how the improvement in the IC management processes might lead to development of IC stocks for organizations operating in developing or developed countries. Finally, the results of our study indicated that managers can benefit from improving the organizational characteristics. However, the suitable management control systems that would promote these climates were not discussed in our study. Future studies can investigate the incentive mechanisms that should be put in place to promote such an atmosphere.
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APPEnDiX A items used in the Questionnaire: intellectual Capital - structural Capital 1) People have access to the information systems they need to fulfill organizational objectives. 2) Our organization possesses processes to develop fully its unique capabilities, skills, and knowledge. 3) Features of our information systems capture the knowledge that exists in this organization. 4) Most co-workers/associates are familiar with organization information systems that assist job performance. 5) We have good systems within our organization to measure the value of our knowledge.
intellectual Capital – Human Capital 1) The knowledge that each co-worker/associate has is not really appreciated until that person leaves the organization. 2) Most co-workers/associates clearly understand “why” they do what they do in their jobs. 3) Extensive knowledge sharing occurs between experienced and new people in our organization. 4) Because knowledge is shared non-systematically (e.g. sporadically, informally), dependency on a few key individuals for success is high. 5) Bureaucracy within our organization does not slow down the application of new ideas. 6) We are able to link the success of our organization to our knowledge and expertise. 7) We often develop techniques or processes based upon what we have learned from earlier experiences. 8) It is easy to spread individual knowledge throughout this organization for others to use.
intellectual Capital – Relational Capital 1) We maintain appropriate communication with our stakeholders. 2) Suppliers and customers have a clear picture of who we are and what we offer. 3) Our clients believe that we work towards their best interests. 4) We emphasize getting to know one another in this organization. 5) Co-workers/associates generally confide in one another. 6) The structure within this organization promotes caring relationships.
organization Culture –Tendency toward Cooperation 1) Most people in this organization think that teamwork provides appropriate recognition. 2) People in this organization get ahead working on their own rather than in a team. 3) The most valuable people in this organization are team players. 4) Most members are willing to put team objectives ahead of personal objectives. 5) In this organization, common core values guide co-workers/associates in a unified direction.
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organization Culture – Deference to Power 1) Most members of this organization would feel comfortable disagreeing with their supervisors. 2) Employees are frequently asked to participate in our organization’s decision-making. 3) There is a willingness to allow anyone on the team to take the lead, based on who is most experienced.
organization Culture – Fear of the unknown 1) Mistakes are acceptable in this organization as long as we learn from them. 2) We are enthusiastic about taking on challenges in which we do not have complete information. 3) We are comfortable with uncertainty in our organization.
organization Climate – Risk-Taking 1) Taking reasonable risks is acceptable in this organization. 2) Tolerating mistakes when trying new ideas is accepted in this organization.
organization Climate - ownership of ideas 1) It is best not to take credit for your ideas in case they don’t work out. 2) People who offer innovative ideas really get ahead in this organization. 3) Expressing original ideas is encouraged in our organization.
organization Climate – openness 1) It is best not to tell others too much in this organization. 2) Constructive comment is well received among colleagues. 3) People are not reluctant to speak out when in meetings.
organization Climate – Trust 1) Employees trust that the organization is concerned about their welfare. 2) We follow through on what we say we will do in this organization. 3) Levels of trust among employees in this organization are generally high.
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Chapter 7
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability Herbert Robinson London South Bank University, UK
ABsTRACT The significant development in knowledge management (KM) literature in recent years is a reflection of the growing interest to academics and practitioners/consultants involved in organisational change and business transformation. Knowledge is a major source of competitive advantage and knowledge assets/intellectual capital has to be managed effectively. The importance of implementing a knowledge management strategy to understand the relationship between physical and intellectual capital, to increase the market value of organisations and achieve corporate sustainability is examined. Using case studies of construction organisations and applying the STEPS knowledge management framework, it was found that there is a greater need for multinational organisations to implement KM. This is because they have knowledge that is diverse and geographically dispersed across a network of organisations. It is concluded that knowledge management has a catalytic role in developing intellectual capital to achieve corporate sustainability. The STEPS framework will enable multinational organisations to identify the reform, resource implications and the results of KM activities.
inTRoDuCTion Knowledge is seen as a major source of competitive advantage and managing knowledge assets or intellectual capital is important. This is increasingly recognised as crucial in many sectors, industries and type of firms, particularly in multinational organisaDOI: 10.4018/978-1-60566-679-2.ch007
tions. Knowledge is vital for business improvement but “it is not the knowledge of the organisational members per se which is of critical strategic importance, it is the firm’s productivity in building, integrating and utilising its intellectual capital which is vital” (Jordan & Jones, 1997 p393). Multinational organisations recognise the value of knowledge assets as a source of wealth creation. The need to bring knowledge assets to the centre
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A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
stage in formulating strategic business objectives is critical in creating and maintaining a competitive advantage. Demarest (1997 p383) noted that ‘firms without knowledge management systems will be effectively unable to achieve the re-use levels required by the business model implicit in the markets they enter, and will lose market share to those firms who do practice knowledge management’. As multinational organisations transform to global network organisations, they face a number of challenges relating to their human resource policies and practices, strategy and performance (Novicevic & Harvey, 2004). Human capital and knowledge strategy such as advice and knowledge sharing networks plays a pivotal role in the transformation process and in knowledge transfer across organisational boundaries and borders. Knowledge management is therefore important in multinational organisations because of their global networks; and the difficulty to determine ‘who knows what’ in such geographically dispersed organisations (Robinson et al 2005a). Whilst an increasing number of multinational organisations now perceive managing knowledge assets or intellectual capital as crucial, there are major challenges associated with the implementation of knowledge management activities. This chapter examines the importance of managing knowledge assets and presents a knowledge management framework to facilitate a structured approach in developing intellectual capital for corporate sustainability. The chapter starts by exploring the relationship between knowledge assets and business performance. The rationale and business logic for managing knowledge assets and measuring intellectual capital is explained. The role of knowledge management in corporate sustainability, the concept of the STEPS knowledge management maturity framework and its application are discussed drawing on the recent experiences of multinational construction organisations. Organisational readiness to implement knowledge management such as identifying the resources required, reform needed and the
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results monitoring mechanism that underpins the STEPS framework as well as future challenges are also discussed.
KnoWlEDGE AssETs AnD BusinEss PERFoRMAnCE The traditional view is that business performance is measured in terms of physical capital such as buildings, plant and equipment. They remain essential for the production of goods and services and the capital required (debt and equity) for financing business operations. Financial measures are normally incorporated in conventional balance sheets and accounting systems enabling managers to provide information on how much a company is worth in terms of cash in the bank, value of its land, plant and buildings, working capital and inventories. The dominance of financial indicators in measuring business performance such as sales and turnover, profit, market share, return on investment, and number of new customers is a reflection of traditional business and accounting practices. However, the emergence of the knowledge intensive organisations such as professional services firms in accounting, engineering, architecture, surveying, law and management consulting has seen intellectual capital replace physical capital. Samuel DiPiazza Jr, Global Chief Executive Officer of PricewaterhouseCoopers, and Robert Eccles, former professor at Harvard Business School, in their book titled ‘Building Public Trust: The Future of Corporate Reporting’ recognised the need for organisations to provide a broader range of information than financial reporting regulations require (DiPiazza & Eccles, 2002). However, there is a need for better understanding of how the key drivers of ‘soft’ knowledge assets or intellectual capital influences financial performance. This view is supported by many academics and practitioners, hence the importance of intellectual capital as a method for quantifying the knowledge assets of an organisation and to
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
establish the link between knowledge and financial performance. For example, Moustaghfir (2008) argued that it is critical to understand the dynamics of the knowledge value chain and how they impact on business performance to effectively manage these assets.
understanding the link Between Knowledge Assets and Performance Financial measures such as market share, sales turnover and share prices are indicators partly reflecting the business climate. But they are also affected by knowledge assets such as business processes, competence of staff and customer relationships influencing business performance. The knowledge assets include, for example, the quality of leadership in an organisation and board structures (e.g. composition of directors, number of directors serving on board or its independence). It also focuses on customer knowledge and related market intelligence such as company brand, knowledge and creativity of staff, efficiency of business processes and, flow of new ideas and innovation from research and development expenditure. Stewart (1997) argued that an organisation’s innovation capacity depends considerably on the knowledge of its staff, business processes and customer relationships. The impact of knowledge such as creativity and innovation on profitability and business growth are beginning to be recognised. For example, the value of patents and intellectual property rights is increasingly acknowledged, and therefore proactively managed by multinational organisations investing heavily in research and development (Chiu & Chen, 2007). The value of a brand and its effects are appreciated by the financial markets and are often reflected in the valuation of a firm (Peppard & Rylander, 2001). Ho & Williams (2003) also detected an association between board features and corporate performance. However, Khurana (2003) questioned the inferences that can be drawn from testing such association in the international
setting studied, given cultural barriers and other factors can impact on multinational organisations. There is, at least, some recognition of the value of leadership, brand, patents, goodwill and other knowledge assets of a business. This value is realised when a company is sold or bought for more than its book value. For example, IBM paid $3.5 billion for Lotus which was seven times its book value in 1995 (Jordan & Jones, 1997). Knowledge assets or intellectual capital, complementing traditional financial information, can provide an explanation of the high market valuation of some companies (Peppard & Rylander, 2001). In other words the significant value added is due to knowledge in business processes, staff and customer relationships. As Stewart (1997 p5556) puts it ‘you don’t buy Microsoft because of its software factories; the company doesn’t own any. You buy its ability to write code, set standards for personal-computing software, exploit the value of its name and forge alliances with other companies’. Reliance on ‘hard’ physical capital without understanding the role of ‘soft’ knowledge or intellectual capital as key business drivers can therefore be misleading at best. At worst, it could result in corporate failure.
Types of intellectual Capital According to Roos (1998), intellectual capital surfaced as a response to vaguely defined domain of knowledge management and to address the specific needs of companies. Hence, intellectual capital is seen more as a practitioner created concept (Bontis et al, 1999). Originally, intellectual capital was seen as the sum of human and structural capital (Roos, 1998), supplementary information to financial information, non-financial capital often seen as a debt item - not an asset (Edvinsson, 1997). There is now a gradual refinement and convergence of the terminology ‘intellectual capital’ (Peppard & Rylander, 2001). In recent academic literature, intellectual capital is defined as comprising human capital, structural capital
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and customer or relational capital, increasingly recognised as knowledge assets. Human capital is the tacit knowledge in people’s heads, acquired mainly through education, training and experience. Tacit knowledge is stored in individuals’ heads. Examples of tacit knowledge include estimating and tendering skills in construction acquired over time through hands-on experience in preparing bids for new projects and understanding of construction tender markets. This type of knowledge is experiential, judgmental, context-specific and therefore difficult to codify and share. Structural capital on the other hand is explicit knowledge, codified or embedded in business processes such as organisational manuals of procedures, brands, patents and trade marks. Explicit knowledge is stored as written documents or procedures. As this type of knowledge is codifiable, it is reusable in a consistent manner and therefore easier to share. Examples of explicit knowledge in construction include design codes of practice, performance specifications, drawings in paper-based or electronic format, and construction techniques. Customer capital, sometimes called relational or reputational capital, is the tacit and explicit knowledge developed about an organisation’s customer relationships, products and services, marketing channels and market intelligence. Organisational knowledge is therefore a mixture of tacit and explicit knowledge. New knowledge is created through the dynamic interaction of tacit and explicit knowledge associated with people, processes and products (services) created by the organisation (Nonaka & Takeuchi, 1995). As a result, there is a complex relationship between the different forms of intellectual capital. Structural capital influence or support the use of human capital in an organisation. But it also conditions how human capital is deployed and codified as organisational knowledge. Structural capital (the nature of business processes), influences the product (or brand), which in turn affects customer capital (i.e. the type and number of
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customers). Changes in customer capital could signal the need for changes in the type of people employed (human capital) and the business processes (structural capital). The effect could be the improvement of customer services in an attempt to expand the customer base (customer capital). Chang & Birkett (2004) noted that managing intellectual capital creates a paradoxical challenge for knowledge intensive organisations or professional services firms. This is due to the need for innovation, on the one hand, requiring creative processes (changes in structural capital) ‘to do things differently’. On the other hand, there is a need for profitability ‘by doing the same things better’ through workforce productivity (changes in human capital). Whilst creativity is important in knowledge intensive organisations, Chang & Birkett (2004) argued for a balanced between creativity and productivity.
The Business logic for Measuring and Managing intellectual Capital Thomas Stewart (Stewart, 1997 p222), Editor and Managing Director of the influential Harvard Business Review, in his book titled ‘Intellectual Capital - The New Wealth of Organisations’ argued that ‘ if it would be a mistake to mingle measures of intellectual capital with financial data; it would be a greater one not to use them at all’. Garcia-Meca & Martinez (2007) noted that in organisations with high market-to-book value ratios, often seen as knowledge intensive organisations; analysts tend to incorporate more information on intellectual capital to justify recommendations. They found that an organisation’s profitability influences the extent of intellectual capital information use and concluded that the findings will have implications for accounting and financial reporting policy. Measuring intellectual capital is therefore important as ‘you cannot manage what you cannot measure’. Intellectual capital provides a holistic view of how to quantify knowledge assets of an organisation and helps to create a framework of
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 1: Skandia’s Tree Metaphor
how knowledge assets and resources interact to create value (Peppard & Rylander, 2001). Skandia, a large Swedish insurance and financial services company appointed a Director of Intellectual Capital in the early 1990’s. It was one of the first organisations to introduce an intellectual capital report in 1994 to persuade investors of the value of the organisation’s knowledge (Edvinnson, 1997). Skandia argued that the knowledge is the hidden assets of organisations, which have to be nurtured like the roots of a tree for long-term success and corporate sustainability. The value creation concept showing the relationship between financial and intellectual capital of an organisation is illustrated by Skandia’s tree metaphor in Figure 1. If knowledge assets (or the roots of the tree) are managed well, the ‘tree will bear fruits’ and the market value of the company will exceed its book value resulting in intellectual capital. However, failure to manage knowledge assets (or the roots of the tree) can result in the ‘tree collapsing’ or intellectual liabilities, characterised by a situation
were the market value is less than the book value of the organisation. Market value is sometimes interpreted as the sum of financial capital and intellectual capital in an organisation. However, there is considerable debate on the nature of the relationship. Understanding the key drivers in knowledge intensive organisations and how it affects market value is crucial. Improvement in intellectual capital arises from, for example, positive leadership and staff changes (human capital) and improvement in processes (structural capital) resulting in new products and higher sales turnover (customer capital). Outdated business processes/ products (structural capital) will lead to a drastic reduction in customer base and deterioration in customer relationship (customer capital). Changes in share prices or market value of an organisation is therefore as a result of changes in financial capital (e.g. debt, equity, sale of assets, unsold stocks etc) of the company and/or changes in intellectual capital. Other companies around the world such as Dow Chemicals, Canadian Imperial Bank of Commerce, Hughes Space and Com-
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munications also adopted the intellectual capital approach to understand the key drivers of value creation in knowledge intensive firms (Peppard & Rylander, 2001). If knowledge assets are the roots of organisations, then knowledge management is about nurturing the roots to develop intellectual capital for corporate success and sustainability. Bukh et al (2001 p87) noted that the “relationship between intellectual capital and knowledge management is important because intellectual capital statements report on the activities that management supports in the name of knowledge management” and not about knowledge which is a difficult and ambiguous concept.
KnoWlEDGE MAnAGEMEnT FoR CoRPoRATE susTAinABiliTY Knowledge management (KM) is central to sustainability as the way knowledge assets (human, structural and customer capital) are managed, alongside traditional physical capital or financial assets, can lead to improve corporate governance. Developments in sustainability reinforced the need for a change in business logic, requiring organisations to simultaneously address traditional financial indicators and intellectual capital measures. Intellectual capital relate to human, structural and customer capital. But it could also capture the sustainability dimensions of economic growth, environmental quality and social equity. Unlike financial or economic issues, some environmental and social issues relating to human, structural and customer capital are sometimes perceived as difficult to measure. But this is gradually changing. Investors, customers and society are increasing the level of commitment and support for organisations embracing the concept of corporate sustainability (Knoepfel, 2001). Developing intellectual capital to capture the economic, social and environmental dimensions therefore makes business sense particularly for
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multinational organisations increasingly subjected to global initiatives. Such initiatives include the Global Reporting Initiative (GRI) for promoting sustainability reports by capturing non-financial information and the Dow Jones Sustainability Group Index for ranking organisations according to corporate sustainability performance. There are other significant developments such as the SIGMA Guidelines (2003) for embedding sustainability principles within core business processes. This is achieved by explicitly incorporating the dimensions of human and social capital, alongside, other types of capital to achieve the goals of sustainability. The guidelines are supplemented by the Environmental Accounting and Sustainability Accounting toolkits to enable organisations to translate sustainability principles into practice. A knowledge management strategy is crucial to incorporate the goals of sustainability as it enables an organisation to unlock and leverage intellectual capital to become a forward thinking and learning organisation. The growing interest in knowledge management has resulted in a ‘renewed attention for the question of how to measure the value of knowledge’ (Dekker & de Hoog, 2000; Robinson et al, 2005b). There is also a shift from the first wave of knowledge management with a narrow focus to the second wave capturing a much broader view of all knowledge resources. The idea of knowledge management has moved to emphasize the value of knowledge on an organisation’s products and services (Mouritsen & Larsen, 2005). Jennex and Olfman (2005 & 2006) developed a useful framework and model for assessing success in knowledge management and knowledge management systems. Kujansivu (2008) argued that intellectual capital management is still theoretical and managers do not know the most appropriate approach to operationalise the concept of intellectual capital. However, the difficulty for many organisations is that the implementation of knowledge management strategies and activities to measure and develop intellectual capital has often been ad hoc, without a coherent framework
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 2: Concept of KM maturity
and the steps required. There is a need for a more structured approach to implement knowledge management for benchmarking progress, measuring and managing intellectual capital.
sTEPs Framework: Five steps to sustainability The STEPS (Start-up, Take-off, Expand, Progress, and Sustain) maturity framework was developed to facilitate the management of knowledge assets and measurement of intellectual capital. The concept of the STEPS framework is illustrated below (see Figure 2). The vertical scale reflects key attributes of knowledge management activities to develop intellectual capital from low to high level. Low level activities such as understanding the concept of knowledge management and awareness of the
benefits are the dominant attributes at the start-up stage. High level attributes, such as measurement of intellectual capital and diffusion across business sectors, units and networks of organisations in the case of multinational enterprises, are associated with the advanced stage. The attributes reflect current themes in KM and organisational readiness in terms of the reform required the resource implications and the availability of a result monitoring system to review the impact of KM on intellectual capital of the organisation. The horizontal scale reflects ‘attribute dimensions’ from low to high performance. For example, the dimensions for the attribute ‘resources’ could vary from limited (low performance) to sufficient (high performance), and for ‘goals’ from vague (low performance) to more specific and refined (high performance) as KM implementation becomes more mature. Similarly, the dimensions for attribute ‘awareness of benefits’
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Figure 3: The STEPS Maturity Framework
is from preaching (low performance) to practice and realisation (high performance), and for ‘diffusion’ it is from localised in a business unit or particular organisation, applied either vertically, horizontally or diagonally in the business unit or organisation (low performance) to widespread application across all functions and business units within the organisation or between a network of organisations as in multinational enterprises (high performance). The STEP maturity framework is shown in Figure 3 and the five key steps associated with it are discussed in detailed below.
Stage 1: Start-Up Organisations at this stage are the least advanced, characterised by a gradual understanding of the concept of KM, and the evolution of different perspectives. There will be an awareness of some of the practical implications and an appreciation
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of some of the benefits of KM, at least, in theory. The goal of knowledge management (KM) or the role of a knowledge manager is sometimes misunderstood to be an information technology manager or a librarian. A knowledge manager is simply a facilitator or, using Skandia’s concept of a tree metaphor, a ‘gardener’ to nurture the roots of organisational knowledge to develop intellectual capital. There is clearly a difference between knowledge and information management. As Malhotra (2000 p11) explained ‘this strategic difference is not a matter of semantics; rather, it has critical implications for managing and surviving in an economy of information overabundance and information overload’. There has to be some recognition at this stage of the potential of KM in building the value of knowledge assets and developing intellectual capital.
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Table 1: Knowledge management tools KM techniques
KM technologies
Key characteristics – focus on tacit knowledge of people and require strategies for learning. The goal is to link people so that tacit knowledge is shared. The emphasis is on creating people sharing networks within and between a network of organisations in multinational enterprises.
Key characteristics – focus on explicit knowledge and requires IT infrastructure and skills. The goal is to connect people with explicit knowledge. The emphasis is on creating IT networks to facilitate codification and knowledge sharing within and between a network of organisations in multinational enterprises.
Examples are: Brainstorming, Communities of Practice, PostProject Reviews, Recruitment and Training
Examples are: Intranets/Extranets, Groupware, Expert Systems, CAD/Virtual Reality Systems, Data and Text Mining
Stage 2: Take-off The take-off stage involves establishing the goals of KM and exploring the strategic options for implementation. It is important to develop a KM strategy with a working definition to facilitate consensus. However, experimentation with KM on an ad hoc basis, localised or very small scale will be required to refine the strategy. The KM strategy could be demand driven (delivered in real time where and when it is needed) or supply driven (available in a central repository). It could focus on people interactions (personalisation strategy) with IT providing a supporting role. At the other extreme, it could be a codification or computerisation strategy where IT plays the dominant role. However, in practice the strategy is likely to be a mixture of both personalisation and computerisation to manage tacit and explicit knowledge more effectively. Table 1 shows various KM tools (techniques and technologies) used to implement knowledge management strategy. The selection of the most appropriate tools will depend on important dimensions such as type of knowledge, business goals, knowledge transfer requirements between groups and individuals, different organisations or a network of the same organisation.
Establishing leadership, identifying resources for external support and consultancy is essential. Identifying barriers and risks associated with the development of the knowledge management strategy is also crucial at this stage. Dent & Montague (2004) suggested that it is better to scrutinise, review and celebrate success rather than develop specific KM measurement at the early stage. They foresee a need for more detailed measures when KM activity matures during the expansion and subsequent stages.
Stage 3: Expansion This stage is characterised by increasing scale and application of KM initiatives. It involves rolling out KM strategy to other business units, projects and offices. KM can be expanded either horizontally, vertically or diagonally with performance measures to evaluate KM activities and specific measures for intellectual capital. There will also be a further strengthening of the KM team, better integration of KM activities with specific business objectives to increase both the visibility of the strategy, the team and its leadership. The role of knowledge manager and the team should be communicated not only to facilitate knowledge sharing but to dispel fears sometimes associated with KM such as job insecurity. KM strategies should be fully resourced in terms of dedicated teams, a budget and an infrastructure to support the leadership and expansion programme. Change management programmes are required to deal with major barriers such as culture. Organisational culture is one of the most crucial factors contributing to the success of a KM project, and ‘perhaps the most difficult constraint that knowledge managers must deal with’ (Davenport et al, 1997 p14-15). KM is not only a technical problem involving the use of IT but a socio-cultural one involving motivating people to contribute knowledge for organisational use (Marshall & Sapsed, 2000). There is therefore a need to proactively tackle organisational culture, and associated barriers such as people’s fears, at-
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titudes or resistance to knowledge sharing. The choice of KM tools to support specific initiatives is important. An increasing amount of corporate knowledge is available on Intranets and other information technology systems. However, there is widespread evidence that most organisational knowledge is in people’s heads and processes. Information technologies are not capable of capturing some tacit knowledge without losing its context. However, there is a powerful symbiotic relationship between knowledge, and the use of information technology to enhance the knowledge management strategy (American Productivity and Quality Center, 1997).
Stage 4: Progressive Proper alignment of knowledge management activities to strategic business objectives and specific measures for intellectual capital is crucial. This enables the justification of KM initiatives and to demonstrate the impact on business or financial performance. The progressive stage is therefore characterised by integrating knowledge management activities (KM) activities to strategic business and measurement frameworks such as the Balanced Scorecard (Kaplan & Norton, 1996) and the Excellence Model (European Foundation of Quality Management, 1999). The benefits can be communicated by widespread publication of intellectual capital reports alongside traditional balance sheets and profit and loss reports. Introducing incentive schemes to strengthen KM activities and to facilitate implementation is crucial. However, financial reward systems are difficult to put into operations. As one Chief Knowledge Officer put it ‘the real things in KM are the soft rewards, feeling good about being contacted or appreciated by colleagues as an expert’. This view is supported by Sheehan (2000) who argued that peer acclaim is more likely to be successful. Imposing incentive schemes for knowledge sharing may, at best, be difficult to monitor and, at worst, be seen as divisive. It may even be wasteful leading to what
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Lawton (2000) described as the ‘development of knowledge landfills’.
Stage 5: Sustainability At the sustainable stage, KM is institutionalised, characterised by KM activities becoming aligned to business objectives and specific measures of intellectual capital. KM practices will be diffused in the entire organisation. It will also become embedded in organisational culture, employees’ behaviour, business processes, product development and in dealing with customers. This final stage is also characterised by widespread reporting on the performance of knowledge assets or intellectual capital statements to support corporate sustainability. Table 2 shows some measurement tools used to evaluate knowledge management activities to support intellectual capital reporting. There is no universal standard for measuring or evaluating knowledge assets and/or knowledge management programmes (Robinson et al, 2005b). However, two distinct aspects of knowledge management are often measured. The first relates to knowledge assets (stocks). The knowledge stocks are, for example, leadership and talents of people employed (human capital), the efficiency of the processes used (structural capital), the nature of products and customer relationships (customer capital). The second relates to knowledge management projects, programmes or initiatives (flow) aimed at improving or increasing the value of knowledge assets (stocks). Failure to embark on appropriate KM projects could decrease the value of knowledge assets (stocks of intellectual capital). For example, the absence of knowledge sharing networks could create difficulties in updating staff knowledge. People may not be able to understand new business processes or changing client requirements. The consequences will be a depletion or reduction of intellectual capital. Choosing an appropriate tool for measurement is crucial in assessing the effectiveness and efficiency of knowledge management programmes and the
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Table 2: Examples of Measurement Tools used for Knowledge Management or Intellectual Capital Type of Tool
Brief Description/Focus of Tool
Links to Strategic Objectives
Application Area Knowledge Assets (Stocks)
Advantages and/or limitations
KM initiatives (Flows)
Skandia Navigator
Five areas; financial, customer, process, renewal and development, and human capital with metrics for each area
Strong
X
Easy to implement but using too many measures can make it confusing. Does not deal explicitly with the quantification of the value and benefits of KM
Intangible Assets Monitor
Three families of intangible assets: external structure, internal structure and individual competence
Strong
X
Easy to implement but using too many measures can make it confusing. Does not deal explicitly with the quantification of the value and benefits of KM
Intellectual Capital Index
Consolidate different indicators into a single index and correlate the changes in IC with changes in the market
Strong
X
Easy to implement but problems with obtaining standardised metrics and industry benchmarking
KM Benefits Tree Approach
Relates knowledge benefits to organisational benefits
Strong
Degussa-Huls Approach
Relates KM initiatives to transfer effects and successes based on six dimensions (people, management, processes, technology, innovation, customers and market)
Strong
IMPaKT Assessor
Relates KM initiatives to performance metrics, strategic objectives and provides for quantification of value
Market-tobook value ratio
Based on the concept that intellectual capital can explain the difference between the value assigned by the stock market and its book value.
X
Focussed on three levels of benefits: knowledge, intermediate and organisational benefits
X
X
Focussed on the impact of key measures and provide an assessment of the impact on business results.
Strong
X
X
Focussed only on measures related to strategic objectives and provides an assessment of the impact on key measures and business. Also facilitate the diagnostic of KM problems and the development of KM initiatives
Weak
X
Provides a very good overall indicator of value subject to stock market volatility. Limited information for developing strategies on knowledge assets and knowledge management
Adapted from Robinson et al (2005b)
value of intellectual capital (knowledge stocks).
Application and Discussions The STEPS maturity framework was used to assess the maturity of eight construction organisations. Figure 4 shows the position of the organisations in the KM maturity scale. The black ovals indicate ratings based on the interviewees’ perception of the current positions of their companies. The white ovals show the research team’s objective assess-
ment of the relative positions of the organisations following the studies. The researchers’ ratings are based on the analysis of key attributes using the STEPS maturity framework. Within each stage, ratings were used to indicate whether the characteristics are partially evident or fully evident. The assessment show that four organisations have over-estimated their level of maturity and one has under-estimated it. The remaining three made a reasonably accurate estimate. The case studies further illustrate that
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A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 4: KM Maturity Levels of case study organisations
construction organisations are at various levels of maturity in implementing KM. One organisation is at the expansion stage and has made reasonable good progress. Two are at the take-off stage and have made limited to modest progress, and the others are at the start-up stage. All four case study organisations (A, C, E and H) leading in the maturity scale are multinational companies that are knowledge intensive organisations with significant presence in other parts of the world. The remaining four, (B, D, F and G), are all national, UK-based companies at the start-up stage. The UK-based companies are exploring KM, without a strategy, resources and a dedicated leadership. The findings confirm that there is a greater need for multinational organisations to implement KM as they have a significant amount of knowledge that is more diverse and geographically dispersed. However, none of the organisations have a coherent structure for knowledge management in terms of the relationships between people (human capital), processes (structural capital) and products (customer capital). Understanding the dynamics between knowledge assets is crucial for the long-term development of intellectual capital reports.
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The initial focus of the work reported on the STEPS knowledge management maturity framework was based on analysis from construction organisations (Robinson et al, 2006). However, the framework is applicable to other business or industrial sectors. The knowledge management framework can be used as a tool to identify weaknesses and to develop an action plan with appropriate measures to facilitate the implementation of knowledge management. This will therefore facilitate the development of appropriate measures for intellectual capital to achieve corporate sustainability. More significantly, the framework will enable organisations to assess their readiness to implement knowledge management. Organisational readiness assessment is critical as it will help to identify the reform necessary, the resources needed to support KM and the monitoring system to evaluate the results of KM activities. Depending on the positions of organisations, action plans reflecting various gaps in reform, resources and results monitoring systems required, could be developed to improve KM implementation. Organisations are more likely to realise the full potential of KM if the five steps to sustainability are translated into action plans necessary to successfully implement
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
Figure 5: Sustainability Agenda for Construction Organisations
KM incrementally and develop the intellectual capital of an organisation.
FuTuRE CHAllEnGEs Corporate sustainability is a key issue for many sectors and industries, particularly in the construction industry. A survey of the top 100 companies shows that the construction and building materials sector is one of the worst with 9% producing separate non-financial reports, significantly lower than the average of 23% (KPMG International, 2003). The figures for other sectors are 50% for utilities, oil and gas (38%), pharmaceuticals (30%) electronics and computers (25%) and retail (15%). Knowledge management strategy can help in producing intellectual capital reports by capturing non-financial information to improve corporate sustainability. But there has to be a clear sustainability agenda to underpin KM implementation. Figure 5 shows some of the factors considered or the sustainability agenda for construction organisations in implementing a KM strategy and to develop their intellectual capital for corporate sustainability.
Sustainability is not only about environmental damage limitation but improving understanding and the responsiveness to investors, employees and customer needs to develop an organisation’s intellectual capital. The benefits for multinational construction organisations includes improved access to global clients, better bid/win ratio, increased value of investment from ‘green’ clients, improved human development though higher staff retention and lower staff turnover or absenteeism. This could also facilitate the improvement of construction and business practices through reduction in carbon emissions, better health and safety regimes to reduce the high risks often associated with dirty and dangerous construction sites. The overall effects will be significant in terms of repeat clients and business due to regulatory compliance including corporate social responsibilities. Cost savings from avoiding high levels of rework, defects and wastage, and potential revenue gains will be achieved from an improved public and global profile. Multinational organisations need to focus on (1) the development of appropriate sustainability objectives for both local and international con-
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struction projects to reflect differences in country situation or context, (2) assessing the implications for knowledge management strategy (3) determine how sustainability objectives can be linked to knowledge assets or various dimensions of intellectual capital (human capital, structural and customer measures) and (4) appropriate measures should be selected. For example, designing out waste is a major issue for many construction firms. However, using ‘number of skips’ as a measure of wastage may inform the finance/accounting department about the level of waste in monetary terms but such information is of limited use to the environmental department and the environmentally conscious clients. This is because it is important to understand the nature and origin of waste – i.e. composition by type of materials, void space, causes of waste, etc. Understanding the nature of the problem will enable the development of an appropriate knowledge management strategy for waste reduction. As a result, it will improve the environmental image or intellectual capital of the company. High level of wastage could affect the image or how a construction company is perceived by its customers, both local and global clients as well as society. Negative image could have significant consequences leading to a reduction in business opportunities. However, a positive corporate image will result in more prestigious projects, loyalty and brand value, with significant improvement on financial performance. Bringing sustainability to the forefront of an organisation’s business and knowledge management strategy, particularly multinational organisations will therefore, have a significant impact on future wealth creation.
ConClusion This chapter has demonstrated the importance of knowledge management by establishing the relationship between knowledge assets and business performance. The rationale for measuring (and
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managing) intellectual capital and the catalytic role of knowledge management in the process is explained. Both the principles of knowledge management and corporate sustainability have resulted in a fundamental shift in business logic. This requires multinational organisations to simultaneously address environmental and social issues, alongside traditional financial and economic issues within a knowledge management and intellectual capital framework. Developing a knowledge management strategy is central to understanding the link between knowledge and business performance. This facilitates an understanding of the way knowledge assets are managed and how it is related to intellectual capital. The STEPS knowledge management framework presented is a structured approach to determine the steps involved and the actions required to implement a successful knowledge management strategy. It also enables benchmarking implementation efforts and to develop intellectual capital necessary to achieve the goals of corporate sustainability. Multinational organisations are expected to embrace the concept of sustainability and to apply its principles as a way of doing business. Success in knowledge management is crucial in developing intellectual capital which could lead to improved corporate governance, business processes and products. It could also result in increased market value and enhanced customer/stakeholder value. However, managing intellectual capital remains a major challenge for multinational organisations. There are substantial benefits associated with KM, which includes enabling organisations to assess the impact of knowledge management activities on their knowledge stocks and flows. KM also help to identify competencies and knowledge gaps, learn from the corporate memory and share best practices within an organisation or a network of organisations to improve business processes, products and services. This is essential if multinational organisations are to remain dynamic and innovative in the global market place.
A Knowledge Management Framework to Manage Intellectual Capital for Corporate Sustainability
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Khurana, I. K. (2003). International comparative analysis of the association between board structure and the efficiency of value-added by a firm from its physical and intellectual capital resources: A discussion. The International Journal of Accounting, 38, 493–497. doi:10.1016/j. intacc.2003.09.006 Knoepfel, I. (2001). Dow Jones sustainability group index: A global benchmark for corporate sustainability. Corporate Environmental Strategy, 8(1), 6–15. doi:10.1016/S1066-7938(00)000890 KPMG International. (2003). Best Practice for the Retail Sector: Briefing on KPMG’s Corporate Sustainability Reporting Survey 2002. KPMG: London. Kujansivu, P. (2008). Operationalising intellectual capital management: choosing a suitable approach. Measuring Business Excellence, 12(2), 25–37. doi:10.1108/13683040810881171 Lawton, P. (2000). Moving Knowledge Management Beyond Technology. PricewaterhouseCoopers. Retrieved May 2, 2000 from http://www. pwcglobal.com Malhotra, Y. (2000). Knowledge management for e-business performance: advancing information strategy to “internet time.” . Information Strategy: The Executive’s Journal, 16(4), 5–16. Marshall, N., & Sapsed, J. (2000). The limits of Disembodied Knowledge: Challenges of InterProject Learning in the Production of Complex Products and Systems, Knowledge Management. Paper presented at the Concepts and Controversies Conference, Univ. of Warwick, Coventry, UK, February 10-11.
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Mouritsen, J., & Larsen, H. T. (2005). The 2nd wave of knowledge management: The management control of knowledge resources through intellectual capital formation. Management Accounting Research, 16, 371–394. doi:10.1016/j. mar.2005.06.006 Moustaghfir, K. (2008). The dynamics of knowledge assets and their link with firm performance. Measuring Business Excellence, 12(2), 10–24. doi:10.1108/13683040810881162 Nonaka, K., & Takeuchi, H. (1995). The Knowledge Creating Company: How Japanese Companies Create the dynamics of innovation. New York: Oxford University Press. Novicevic, M. M., & Harvey, M. G. (2004). The political role of corporate human resource management in strategic global leadership development. The Leadership Quarterly, 15, 569–588. doi:10.1016/j.leaqua.2004.05.008 Peppard, J., & Rylander, A. (2001). Using an intellectual capital perspective to design and implement a growth strategy: The case of APiON. European Management Journal, 19(5), 510–525. doi:10.1016/S0263-2373(01)00065-2 Robinson, H. S., Anumba, C. J., Carrillo, P. M., & Al-Ghassani, A. M. (2006). STEPS: A knowledge management maturity roadmap for corporate sustainability, special issue on managing business processes for corporate sustainability. Business Process Management Journal, 12(6), 793–808. doi:10.1108/14637150610710936 Robinson, H. S., Carrillo, P. M., Anumba, C. J., & Al-Ghassani, A. M. (2005a). Knowledge management practices in construction organisations. Engineering, Construction, and Architectural Management, 12(5), 431–445. doi:10.1108/09699980510627135
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Robinson, H. S., Carrillo, P. M., Anumba, C. J., & Al-Ghassani, A. M. (2005b). Performance measurement in knowledge management. In C.J. Anumba, C. Egbu, and P.M Carrillo (Eds.), Knowledge Management in Construction (pp. 132-150). Oxford: Blackwell Publishing. Roos, J. (1998). Exploring the concept of intellectual capital (IC). Long Range Planning, 31(1), 150–153. doi:10.1016/S0024-6301(97)87431-6
Sheehan, T. (2000). Building on knowledge practices at arup. Knowledge Management Review, 3(5), 12–15. Sigma Guidelines. (2003). Putting Sustainable Development into Practice: A Guide for Organisations. Retrieved December 12, 2003 from http:// www.projectsigma.com Stewart, T. A. (1997). Intellectual Capital: The New Wealth of Nations. New York: Doubleday.
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Chapter 8
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines Tomás M. Bañegil Palacios University of Extremadura, Spain Ramón Sanguino Galván University of Extremadura, Spain
ABsTRACT In line with the increasing importance of the intangible economy within the last few years, a higher number of models have been published. In this sense, the authors main original contribution when measuring Intellectual Capital is related to comparing and assessing the different existent Guidelines, unlike previous published papers.The purpose of this chapter is to present and compare some of the most recent and significant contributions from researchers to the field of the measurement and management of intangibles.
inTRoDuCTion Intangible assets comprise one of the principal factors in the current and future success of organizations. The multidisciplinary character of this work is demonstrated by the fact that an increasing number of specialists, such as sociologists, psychologists, economists, philosophers, intellectuals and professionals, are working in these questions. At the same time, attention has been drawn to the growing importance of the intangible Economy by the publication of a growing number of models. Nevertheless, we have observed that there are no DOI: 10.4018/978-1-60566-679-2.ch008
generally accepted models for measuring Intellectual Capital in organizations. In recent years, several have been proposed, with a number of similar aspects, but differing with regard to their complexity and adaptability. Knowledge Management is a very recent management tool, which, although it has been greatly discussed in the business world, still does not have a significant number of organizations with a formally implanted management program. The results of different studies carried out by consultants, university researchers and innovative companies have materialized in different guidelines for classifying, measuring and reporting on intangibles. Nevertheless, considerable confusion still
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An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
exists between the concepts used, the practices recommended and the final Intellectual Capital Reports obtained. All these studies follow the line of introducing supplementary information, external to the company’s financial condition, basically a new “information layer” using “narrative reports”. The concept of “value reporting” effectively follows the line of complementing the traditional annual statement of accounts (balance sheet, profit and loss account and management report) with information on intangible assets and non-financial indicators. Our main objectives in this research consist on • •
Performing a comparative study among well-known IC models and Presenting most significant international guidelines which contributed to develop such models.
BACKGRounD In an effort to find instruments capable of “capturing” the real value of a company, many academics and professionals have started to develop models and measurements to quantify and visualize intangibles, directing their attention in particular to a new type of report called Intellectual Capital Reports (also known as Intellectual Capital Statement). Considering the different studies and analyses that have been carried out in the past decade and taking into account the lack of an adequate business practice, launching generalised models for the implementation of Knowledge Management systems and the Measurement and Management of Intangibles in the business world (Intellectual Capital) seems premature. According to the MERITUM Project (2002), there isn’t actually an internationally accepted frame of reference for the identification, measure-
ment and diffusion of information on intangibles that determine the value of organisations, instera just some isolated efforts in different parts of the world. In the light of this fact, it would appear opportune to dedicate effort to the development of general guidelines that would make it easier for companies to identify, measure and follow-up their intangibles. The International Community should ensure that the process of elaboration and diffusion of intangible assets produces homogeneous and comparable reports and that, as a result, these be useful for estimating future profits, the risk associated with investments, etc. In the moment we are at, we can consider that the fairly complex task of acquisition, production, use, diffusion and measurement of knowledge is essential. According to Carter (1996), although various attempts have been made to measure knowledge, both at a microeconomic and a macroeconomic level, there is still a long way to go. The inclusion, in their annual accounts, of capital sums invested in intangible elements decreases the results announced by companies. This is the reason why certain professional sectors (managers, analysts, consultants,…) are reticent to invest in intangibles, even though they affirm that they contribute to the creation of value. In recent years, different associations and companies have made great advances in the identification, measurement, management and diffusion of their intangibles; even if the criteria adopted for this process have been, in the majority of cases, heterogeneous and, as a consequence, the results obtained difficult to compare and/or verify. For all the foregoing, we understand that it is necessary to have a commonly accepted international frame of reference, which provides companies with a basis for the identification and measurement of their intangibles. These Guidelines will not constitute a proposal for the modification of accounting rules. According to the OECD (1999), changes in accounting rules may be necessary in the future
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but, for the moment, all the efforts concentrated on the measurement and publication of information, should be subject to testing and applied voluntarily. As it turns out, in the depths of the OECD a certain consensus has been established that, little by little, steps should be taken in the development of voluntary Guidelines to measure, report on and manage intangibles. The European Commission has also commenced a process, similar to the preceding, based on the idea that the key to future competitiveness and wellbeing lies in increasing the knowledge base shared by European citizens. In this regard, Chaminade and Johanson (2002) have summarised the conclusions of the conference held by the European Commission in Växjö in March 2001, in the following way: •
•
•
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There still does not exist a commonly accepted conceptual frame of reference to understand, measure and report on intangibles. This means that the coordination and “fertilization” of initiatives between countries from different parts of Europe is very complex (and due to the growing importance of intangibles, the need for a useful, understandable and commonly accepted conceptual framework -or Guideline- seems urgent). The policies of government agencies, the initiatives of the European Union, as well as the possibility of incorporating organisations from different sectors, is the crucial starting point to initiate a Project and for the acceptation and diffusion of the methodologies. Although there is no consensus over how to structure the important questions and that it is not possible to develop a serious and adequate empirical study without the necessary (financial) support, this does not mean that there is not a real interest in the question of intangibles in the business world.
Nevertheless, and despite all the reasons already expressed, there are countries that have not developed their own Guidelines (or have not participated as members of the research team of a European project).
intellectual Capital Models Next we will make an overview of the main inputs in the last years, in theorist and practical ways. Following table 1 and having in mind the temporal evolution, we can say that there are three different steps: •
•
•
In the first step, which refers from the first works until 1998, the investigations were centered in making definitions, classifications, establishing the different components of the Intellectual Capital and develop methodologies in a theorist way which have to be then empirically refuted. It is develop an important and diverse conceptual frame with some consensus relating to Intellectual Capital components2. In this step we highlight the pioneer models of Kaplan and Norton, Edvinsson and Malone, Sveiby and Bontis.3 In the second step, which comes from 1999 until 2001, the investigators are dedicated, mainly, to make a review of the existent literature with comparison models, establishing synergies and differences. Also, empiric studies are made which try to validated the before established models proving the relations between the Intellectual Capital and the value creation in a company. Finally, the publications from 2002 until today reflect a new step in which the models are being improved and adapted to the reality of the organizations, in which they are starting to be implemented (financial entities, services companies, insurance companies, knowledge intensive enterprises, public administration, etc.)
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
Table 1. Relevant investigations in Intellectual Capital Definition and
Macro Conceptual Development
Kaplan and Norton (1992)
Empirical Study
Indicators
X
X
Petrash (1996)
X X
Edvinsson (1997)
X
X
Edvinsson and Malone (1997)
X
Ross et al (1997)
X
Sveiby (1998)
X
X X
X
Cañibano et al (1999)
X
Bornemann et al (1999) Backhuijs et al (1999)
X
X
Westphalen (1999)
X
X
Andriessen et al (1999)
X
Hoogedoorn et al (1999)
X
X
X
X
Guthrie et al (1999) Petty and Guthrie (2000)
X
Bontis et al (2000)
X
Mouritsen et al (2001)
X
Viedma (2001)
X
Ordóñez (2002)
X
Seetharaman et al (2002)
Measurements
X
Brooking (1996)
Bontis (1998)
Literature Revision
X
X
Bueno et al (2003)
X
X
X X X
X
X
X
X
X
Serrano et al (2003) Marr et al (2003)
X
X
X X
X
X
Source: Own work1
The Guidelines We shall specifically seek to justify the need for general guidelines that provide an adequate reference framework for companies and organization’s interested in developing systems of Knowledge Management and the Measurement of Intellectual Capital. To this end, a comparative analysis of the most rigorous efforts developed in recent years has been carried out. Considering the different studies and analyses that have been carried out in the past decade and
taking into account the lack of an adequate business practice, launching generalized models for the implementation of Knowledge Management systems and the Measurement and Management of Intangibles in the business world (Intellectual Capital) seems premature. There isn’t actually an internationally accepted frame of reference for the identification, measurement and diffusion of information on intangibles that determine the value of organizations, instead just some isolated efforts in different parts of the world. In the light of this fact, it would appear
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An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
opportune to dedicate effort to the development of general guidelines that would make it easier for companies to identify, measure and follow-up their intangibles.
Comparisons between European Guidelines Due to the growth of the Intangible Economy, a growing number of Guidelines, Recommendations, and similar documents dealing with reporting on intangibles and the state of Intellectual Capital have been published in recent years. There has even been an element of competition between them (Del Bello, 2002). Guimón (2002) agrees that this type of document (Guidelines) consists of a series of recommendations, directed towards company directors, on how to manage and report on Intellectual Capital. At a business level, empirical studies show that innovative companies are more financially robust and generate more employment. The key to the continuity of a company is the successful management of its Intellectual Capital.
1. Presentation of the Guidelines The comparative study of the various Guidelines, to which we have been referring, will concentrate on the most important European ones, those with prestige both in the scientific world as well as in professional and business sectors. The first Guideline is one of the main results of the MERITUM Project (Measuring Intangibles to Understand and Improve Innovation Management). “Guidelines for the Management and Diffusion of Information on Intangibles (Intellectual Capital Report)”, is the final document published in January 2002, which gathers up the principal conclusions of the three-year study. The second Guideline we analyzed is the result of close cooperation between researchers,
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companies, organizations, consultancies and official organisms in Denmark. It was financed by the Danish Agency for Trade and Industry (from now on Guidelines DATI4). The third Guideline is the principal outcome of NORDIKA (Nordic Project for measuring Intellectual Capital), an Intellectual Capital project initiated by the Nordic Industrial Fund, in collaboration with a Commission set up by the countries involved and a Round Table or Expert Panel formed by professional and business associations in the Nordic countries (Finland, Iceland, Norway, Sweden and Denmark). The analysis was carried out on two levels. Firstly, a study was made of the manner in which the Guidelines were developed and the end result of the research. The following elements were considered (Bañegil and Sanguino, 2007): 1. 2. 3. 4.
Terminology employed Conceptual framework adopted Objectives sought in the development of the Guidelines Research methodology
The second level of the analysis related to the recommendations incorporated into each Guideline for the elaboration of Intellectual Capital Reports by companies, taking into account the following aspects: 1. 2. 3.
4. 5.
Practices used in its development (Who is going to carry it out?) Procedures for implementation (How is it going to be carried out?) Recommendations for the structure of the proposed Intellectual Capital Report (What will the result be?) Character of the proposed Indicators (What instruments will be used for measuring?) Users of the Intellectual Capital Report (To whom is it directed?)
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
Table 2. Summary of the first level of the analysis Terminology and Conceptual Framework
Objectives
Methodology
MERITUM
“Intellectual Capital Report” There is no definition of knowledge
Points of connection between resources and critical activities are suggested
Developed by a wide range of researchers from six countries using the DELPHI methodology
DATI
“Intellectual Capital Statement” Knowledge in action
Communication tool that involves clients, employees and other users in the process
Works very closely with companies. Prepares reports on these same companies
NORDIKA
“Intellectual Capital Report” Knowledge as a flow not stock
Tool to manage knowledge and other intangibles
Revision of examples, establishment of comparisons and best practice.
Source: own work
2. Methodology of the investigation Evidently, the use of different methodologies in the development of the Guidelines will have a clear impact on the final results. The MERITUM Project can be considered the most ambitious because it includes various countries. It describes how to prepare an Intellectual Capital Report and also proposes a model for managing intangibles. As it was developed by a wide range of geographically dispersed researchers there were difficulties in arriving at a consensus. The best practices of approximately eighty European companies were analysed and the conclusions validated by a group of experts using a Delphi analysis. The Intellectual Capital Report is, therefore, presented as the logical conclusion of the process of managing intangibles. The DATI researchers (university professors, members of government and consultants, amongst others) worked much more closely with companies; the majority of which already had experience in managing intangibles and were guided and supervised by the DATI team in the development of Intellectual Capital Reports. On the other hand, the NORDIKA Guidelines are supported by a thorough conceptual revision of the different models in existence, as well as numerous examples and comparisons of com-
panies. The final document is arrived at through a detailed study of the best practices currently employed in the Nordic countries. In table 2 the principal differences and similarities in the first part of the comparative analysis are set out. Reference is made to the final document produced by the studies, the Guideline.
FuTuRE TREnDs For all the foregoing, we understand that it is necessary to have a commonly accepted international frame of reference, which provides companies with a basis for the identification and measurement of their intangibles. These guidelines will not constitute a proposal for the modification of accounting rules. According to the OECD (1999), changes in accounting rules may be necessary in the future but, for the moment, all the efforts concentrated on the measurement and publication of information, should be subject to testing and applied voluntarily. As it turns out, in the depths of the OECD a certain consensus has been established that, little by little, steps should be taken in the development of voluntary guidelines to measure, report on and manage intangibles.
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An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
Table 3. Comparative elements in the established recommendations MERITUM
DATI
NORDIKA
Practices used and implementations procedures
Designation of tasks to different subjects in three well defined phases
Directors should commence the process, which will have four phases.
More subjects involved and the organisation must get ready for that
Structure
The most clear: includes vision, resources, activities and indicators
Semi-closed structure, including Auditor’s Report on Intellectual Capital
Doesn’t propose any particular structure
Indicators
Doesn’t establish any, they are specific to each company
Must be strictly related to actions
Lacks a fixed scheme, they should be developed with strategic purposes
Users
Internal (fundamentally directors) and external
Stakeholders
Principally internal, also external
Source: own work
ConClusions We have to emphasise that, despite not finding significant differences between the Guidelines analysed, the similarities are still far from configuring a single Conceptual Framework offering comparability and homogeneity for carrying out Intellectual Capital Reports. An effort at benchmarking and cooperation between the researchers of the Guidelines studied, in order to complete the actualisations that are contemplated, would be an excellent starting point for exploiting synergies and achieving a wide consensus in different basic aspects of the measurement of intangibles in general and Intellectual Capital in particular. So that researchers, consultants, politicians and professionals who work in the field of intangibles can achieve the necessary and desired degree of comparability, governments should promote the development of a commonly accepted Guideline. For this purpose, the identification of best practice in the existing Guidelines, should be the starting point of any initiatives that seek to harmonise the measurement practices for intangibles. Nevertheless, there are forces pushing in the opposite direction. In some countries that are in an early stage of research, and which do not have
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an established theoretical framework, the main problems to be overcome are: resistance to change and groups that promote certain approximations (research groups, business and professional associations, government, etc). In addition, companies demand freedom and flexibility when they then decide how to handle and report on intangibles and therefore oppose specific regulations and obligations. The final purpose of our efforts seeks to enfazise the fact that those specific guidelines should be internationally accepted. This would allow further empirical studies on those businesses that decide to implement them, particularly and mainly at a sectorial level. In this sense, those indicators used for this purpose should be adjusted to the specific characteristics of each sector. Fortunately, various Spanish sectors have been recently mobilizing to set common standards in order to elaborate homogeneous Intellectual Capital Reports. The Banking and Electrical sectors are examples of entities leading this new tendency.
REFEREnCEs Bañegil, T., & Sanguino, R. (2007). Intangible measurement guidelines: a comparative study in Europe. Journal of Intellectual Capital, 8(2), 192–204. doi:10.1108/14691930710742790
An Overview of International Intellectual Capital (IC) Models and Applicable Guidelines
Brennan, N., & Connell, B. (2000). Intellectual Capital; current issues and policy implications. Journal of Intellectual Capital, 1(3), 206–240. doi:10.1108/14691930010350792 Carter, A. (1996). Measuring the performance of a Knowledge-based Economy. OCDE Report Employment and Growth in the Knowledge-based Economy, Paris, OECD. Chaminade, C. (2002). Can guidelines for Intellectual Capital reporting be considered without addressing cultural differences? An explorative paper. In Proceedings The Transparent Enterprise. The value of intangibles. Madrid: Autonomous University of Madrid. Danish Agency for Trade and Industry –DATI. (2000). A guideline for Intellectual Capital Statements. A Key to Knowledge Management. Retrieved June 1, 2009, from http://en.vtu.dk/ publications/2001/a-guideline-for-intellectualcapital-statements/a-guideline-for-intellectualcapital-statements-a-key-to-knowledge-management DATI. (2003). Intellectual Capital Statements – The New Guideline. Retrieved June 1, 2009, from http://www.pnbukh.dk/site/10186.htm Del Bello, A. (2002). A regulatory competition? A critical comparison of the existant guidelines and recommendations on ic statements and intangibles reports. In Proceedings The Transparent Enterprise. The value of intangibles. Madrid: Autonomous University of Madrid. Guimón, J. (2002). Guidelines for intellectual capital management and reporting. Comparing the MERITUM and the Danish approaches. In Proceedings The Transparent Enterprise, The value of intangibles. Madrid: Autonomous University of Madrid
MERITUM. (2002). Guidelines for managing and reporting on intangibles. Intellectual Capital Report, Ed. Fundación Airtel Móvil. Retrieved June 1, 2009, from http://www.pnbukh.com/site/ files/pdf_filer/MERITUM_Guidelines.pdf. Nordic Industrial Fund. (2001). Intellectual capital. Managing and reporting. A Report from the Nordika Project. Retrieved June 1, 2009, from http://www.nordicinnovation.net/_img/ nordika_report_-_final1.pdf Nordic Industrial Fund. (2002). Nordika – Frame Market Survey. Norway: Author. OCDE. (1999). International Symposium on Measuring and Reporting Intellectual Capital: Experience, Issues and Prospects. Amsterdam: Author. Retrieved June 1, 2009, from www. oecd.org/dsti/sti/industri/indcomp/act/Ams-conf/ symposium.htm
EnDnoTEs 1
2
3
4
Related to it we can read the article published by Brennan and Connell (2000). Its structure is defined having in mind three capitals: Human Capital, Structural Capital and Relational Capital (or Client Capital). The Kaplan and Norton model can not be considered specifically as a Intellectual Capital Model but, seen that it has been the first which exceeds the only financial vision, we think we must incorporate it to this study. This guideline is base on empirical research as well as a thorough research in this field, lead by the Copenhagen Business School and the Aarhus School of Business, in cooperation with the consulting enterprise Arthur Andersen in Denmark. Additionally, more than a hundred Danish companies have finalized their intellectual capital reports based on these guidelines.
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Chapter 9
The Role of ICTs in the Management of Multinational Intellectual Capital Mirghani S. Mohamed New York Institute of Technology, Bahrain Mona A. Mohamed New York Institute of Technology, Bahrain
ABsTRACT This chapter provides a systematic multidisciplinary framework that defines the role of technology in leveraging IC across borders and between headquarters and subsidiaries. In reaching this conclusion, this chapter investigates the strategic importance of Information and Communication Technologies (ICTs) in the management of Intellectual Capital (IC) within a Multinational Company (MNC) ecosystem. The chapter addresses the transubstantiation of MNC into boundaryless Global Knowledge-Based Organization (GKB-MNC) which ultimately propagates into Learning MNC (LMNC). The latter is a suggested MNC category that sustains competitive advantage through systemic adoption of “Knowledge Iterative Supply Network (KISN)” model proposed by the authors. The chapter suggests a new multinational ICT/IC governance strategy that handles the emerging complexities associated with modern intangible resource synthesis. In effect, these complexities originate from the introduction of functionalities such as just-intime knowledge supply, elicitation of tacit knowledge, and leveraging of the core competencies for the
PRolEGoMEnA The current global economical transformations have resulted in a turbulent marketplace that needs continual IC value rejuvenation to create and sustain companies’ competitive advantage. This fact has been highlighted by Guthrie (2001) DOI: 10.4018/978-1-60566-679-2.ch009
who reports that “the rise of the ‘new economy’, one principally driven by information and knowledge, international competitiveness and changing patterns of interpersonal activities is attributed to the increased prominence of intellectual capital (IC) as a management and research topic.” Hence, this evolution in the IC is highly correlated with the growth of Knowledge Management (KM) as a new management discipline. Meso & Smith (2000)
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The Role of ICTs in the Management of Multinational Intellectual Capital
testify that with the developments in KM, intellectual capital is gaining a reputation as the only strategic asset. It has been reported by many investigators that ICTs help to establish social networks through their deployment via digital networks. In addition, ICTs provide channels for communication and learning for the improvement of products and services (Jitsuzumi et al. (2001), Hedelin & Allwood (2002), Mansell (2002), Baddii & Sharif (2003,Mohamed (2007b) . Galán et al. (1999) report that ICTs form one of the pillars for global competitive advantage, in which there is a high competition in the marketplace. Furthermore, Stromquist & Samoff (2000) report that “as globalization expands the twin forces of the market and information technologies are pervading the educational arena. One instance is the Knowledge Management System (KMS), which proposes to produce easily retrievable materials via the Internet and hypertext. KMS attempts to be more than a mere data bank, for it seeks to provide highly selected and targeted knowledge”. However, Duffy (2001) states that it is difficult to capture all valuable knowledge needed by the organization. There is an opportunity now to harvest, transform, share, and reuse knowledge instantaneously though modern technology. We would add that it is unlikely that competitors will have the same mixture of technology and human capital to replicate the same kind of knowledge. Nevertheless, Mohamed (2007b) states that “ICT tools compress global business life-cycle through the ease of data exchange and analysis at various global levels. The mobilization of explicit knowledge through virtual communication significantly contributed to the sharing of knowledge, but mostly at the operational levels and less at the managerial level; this can be attributed to the fact that ICTs lack the ability to transform knowledge as they transfer it.” This article argues that although the world is experiencing the upshots of the knowledgebased economy (Havens & Knapp (1999), Civi
(2000), and Lubit (2001), in which knowledge is the most important sustainable competitive advantage (Williams (2001), Bristow (2000), Gupta et al. (2000), IC elements for many MNCs still exist in disconnected islands. This scattered IC, in various MNCs’ subsidiaries, resulted in loss of what could have been a significant added value for these companies. ICTs may contribute to the solution of such a complex problem; however, one of the bona fide challenges facing the use of technology to manage IC is “knowledge de-contextualization” or “knowledge dilution”. These effects happen during the codification and externalization processes. However, proper consolidation of different types of ICs with diverse types MNCs may help in lessening such negative impacts. Nonetheless, this may happen only, if a true synergetic integration of IC stream from different MNCs’ subsidiaries is reached.
MnCs’ Typology and iC Classification Perlmutter developed the first typology of MNCs that consists of three categories: ethnocentric which is a home-country oriented MNCs, polycentric that describes host-country oriented MNCs, and geocentric that is characterized by a world orientation profile (Michailova & Nielsen (2006), Maclean (2006) and Downes et al. (2000)). In a modification of such a classification, Kaye & Little (1996) reported that Heenan and Perlmutter presented four different approaches to internationalization, namely, ethnocentrism, polycentrism, regiocentrism and geocentrism. These categorizations are based on the power of the headquarters, and the cultural effects. However, the classification does not consider the interconnectedness of subsidiaries to mobilize IC, and the leverage the core competencies need to create value proposition and consequently market value. Mcconnachie (1997) defines intellectual assets at the Dow Chemical Company as knowledge with value and the cornerstone for creat-
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Figure 1. The interaction effects of the three most common categories of IC.
ing the company’s wealth. Similarly, Miller et al. (1999) define IC as “intangible resources within an organization related to information and knowledge that are not generally measured or appreciated, but contribute to an organization’s success.” The author classified IC into human capital, structural capital, and customer capital. Human capital (employees) refers to what is in the minds of individuals, while structural capital (internal) is anything other than human capital within a company including process, procedures, policies, networks, software, databases, intellectual properties, while customer capital refers to customer relations. However, Seetharaman et al. (2004) used the same classes, but the author replaced customer capital with relational capital. The relational capital governs external relations with customers, alliances, licensing and agreements. Moreover, Cohen & Kaimenakis (2007) modified Skandia’s classification scheme into only two major classes, namely, human capital and structural capital. However, the authors divided the latter into two other sub-classes described as
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relational capital, which is previously described by Seetharaman et al. (2004), and organizational capital. The latter consists of databases, organization charts, strategies, manuals, etc. The customer capital has been subdivided into more sub-capitals as Allee (1999) suggested an expanded scheme that in addition to human capital, structural capital and customer capital also includes social capital and environmental capital. From the above description, it is obvious that the definition of IC is as blurred as its components. However, the relationship between the three main components of IC and their interaction effects can be depicted as in Figure 1 and explained in Table 1.
The hybridization of MnCs and iC Even though, classification of MNCs and typology of IC have been attempted by many investigators, surprisingly, there is no correlativity between the two spheres in the literature. This chapter proposed three types of MNCs that can be defined based
The Role of ICTs in the Management of Multinational Intellectual Capital
Table 1. The Three IC Component Interactions and their Meaning Relative to their Cumulative Final Effect on Intellectual Capital Area
Description 1
Emphases are on human capital that intensifies tacit knowledge, the know-how, and consequently innovation. But, due to lack of means of knowledge mobilization this intellectual agility remains confined to its own subsidiary. Consequently, MNCs with this type of IC will suffer from “intellectual capital divide” between various subsidiaries due to poor knowledge brokering.
2
The focus in this area is on strengthening outward relations with the business community to promote value networks, customer loyalty, and communication channels to nurture and share knowledge. The full benefit of this capital cannot be attained, unless MNCs employ it for the benefit of the structural and human capital (inward networks) advancement.
3
In this area, emphases are on structural capital where policy and procedures are potent and ICTs are robust in transferring knowledge. Moreover, property rights are protected and the MNC will be culturally prepared to accept the growth of IC. However, these cannot be properly employed because of the human and relational capital negligence.
4
In this area, poor relational capital results in inadequate communication with the external business community and stakeholders. Exotic knowledge and feedback from stakeholders and customer will be minimal. Response to customer requirements will always be poor. Consequently, the MNC will have a poor reputation and that will make customer loyalty ephemeral.
5
This interaction shows poor structural capital has a negative effect on both human and relational capital. Both tacit and explicit knowledge of the firm will be impacted due to poor management of ICTs infrastructure, intellectual property, procedures and culture. Accordingly, the company will lose control over its human resources and its knowledge repositories.
6
Due to this interaction employees will be characterized by poor skills, expertise, core competencies and capacities. The learning process will be restrained and the organization will depend on explicit knowledge more than tacit knowledge (Figure 2). Consequently strategic innovation, value creation, and organization competitiveness will be at their minimal levels.
7
In this triple relationship the optimal IC value obtained, MNCs stability and maturity levels are reached, and there is a high level of tacit and explicit knowledge integration. The company at this stage must de-layer the rigid cultural strata and become organic and flat. All three capitals will work in harmony and according to the needed proportionality.
Figure 2. Mapping the transformation of MNCs based on IC types and a modified Perlmutter’s MNC classification.
on IC management practices, namely, Traditional MNCs, Global Knowledge-Based MNC (GKBMNCs), and Learning MNCs. This proposal is shown in Figure 2.
Traditional MNCs There are many differences between IC activities within MNCs and IC processes in national
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companies. These differences are the result of geographic distance, cultural diversity, and managerial style (Stewart et al. (2000), Kaye & Little (1996), Davis et al. (2005) (Granell (2000), Higgs (1996), Alexander Kouzmin (1999) and Kidd (2001). However, many MNCs still live in their ethnocentric contexts, because of their management ignorance of what the authentic MNC needs. Morrison & Beck (2000) found that “98 percent of the USA and UK managers have no clue how to be global; still they are responsible for global operations. This is because mangers restrict their thinking to the management of physical assets. Furthermore, “they intended to give the rest of the world a lesson on how to do things according to their way”. Traditional MNCs disregard crosscultural diversification as a factor affecting IC creation, hence, their knowledge mobilization is very limited to the time before the real meaning of globalization is understood. These companies fall into the old pathogenic closed system that is characterized by intense “cultural collisions” i.e. physically exist in the global market, but managed by local companies mentality. IC in traditional MNCs is dominated by subsidiary intra-communication, but with minimal interaction between subsidiaries and the headquarters except what is dictated by the rigid hierarchical structure of the firm. The scope of innovation is limited to the boundaries of these subsidiaries, because the tap on knowledge that transcends national borders depends on the individual subsidiary decision i.e. it is not part of the MNC policy. Consequently, Mohamed (2007b) reports that globalization is “misunderstood and misused by many egotistical multinationals that arrogated the ownership of globalization and shoehorned it to their purpose, then call upon the rest of the world to comply.” With various developments of the distributed systems and the advancement in communication systems a different kind of knowledge-based MNC has emerged.
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Global-Knowledge-Based MNCs Global Knowledge-Based type of MNC (GKBMNC) is significantly affected by the management of human and structural capital (Figure 2), therefore, it is flatter than the rigid traditional MNCs. Besides ICTs, intellectual property protection and procedures, structural capital helps in harmonizing cultures of different subsidiaries. The cultural differences between Eastern and Western hemispheres have great influence on which side of the GKB-MNC companies will take. For instance the former depends on structural capital and the latter depends on human capital. Vignali (2001) observed that McDonald’s in Beijing depend on personal interaction with customers; on the contrary, it depends on technology in the US. Due to the distances between knowledge source and knowledge receiver, MNCs attempt to transfer knowledge within and between subsidiaries through explicit knowledge channels. These channels are represented in knowledgebases and other means as shown in the butterfly framework depicted in Figure 3. This may be due to the dominance of technology that encourages the emergence of this type of MNC. Lang (2001a) attributes the major changes in the business processes to the rapid growth in technology and the international competition; the former transformed into knowledge-based competition. Furthermore, Mohamed (2007a) states that the progression of distributed computing up to the emergence of grid computing in the mid 90’s emulates social networks in its intent to nurture and mobilize knowledge attributes across global communities. The butterfly effect is depicted in Figure 3 is a framework named after the famous butterfly concept in chaos theory, in which patterns exist in all chaotic natural behavior. Equally, human capital processes affect structural capital which ultimately affects the construction of the GKB-
The Role of ICTs in the Management of Multinational Intellectual Capital
Figure 3. The Effects of Human capital and Structural capital in the (Adopted and modified from the butterfly framework suggested by Mohamed (2007b))
MNC. For instance, the teaming and communities affect the expert networks, alliances and eventually all will result in the creation of network externalities. Similarly, knowledge economy has a rippling effect on GKB-MNC as shown in the backbone of the butterfly framework. Mohamed et al. (2004) states that the recent shift of the economy towards intangibility (knowledge assets) curtails command and control behavior and boosts cross-functionality in an attempt to exploit the intellectual capital for a differential competitive advantage in the market place. The structural capital wing mainly expressed explicit knowledge
through ICT applications and intellectual properties, and referred to the knowledge mapping for sharing. Stewart (1999) reports that the reasons for managing structural capital are rapid knowledge sharing, collective knowledge growth shortened lead times, and more productive people.
The Learning MNC The traditional MNCs, and to some extent GKBMNC, are characterized by inflexible isolated silos that inhibit critical IC flow and suppress MNCs innovativeness which is quintessential for MNCs
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profitability. The intromission of new IC management principles employing ICTs into MNCs and practice cross-learning between subsidies is imperative. This needs the organization to reconfigure itself in a way that smoothly mobilizes IC between different stakeholders and over different time zones and geographical locations. Such requirement can be satisfied with a Learning MNC (LMNC) milieu. LMNC is a learning organization with geographically separated, but epistemologically connected entities. In other words, it is a flat learning organization with physical distances. LMNC is continuously nurtured as an organic organization that de-layers its rigid hierarchical strata through IC sharing processes. This may lead to a reliable global ‘cognosphere’, in which the company can tap on domestic and exotic IC from stakeholders. Therefore, LMNCs must establish interconnected learning process that comply with the firm’s intellectual capacities asset within its subsidiaries, stakeholders, customers, suppliers, alliances, and even competitors in a “coopetitive” setting. In LMNCs environment companies are pushed into the direction of holistic system thinking in which people envision the whole interacting system with its all components rather than focusing on isolated elements that are under the control of their own subsidiary. Hence, for MNCs to sustain their competitiveness, they must build a strategic global learning scheme that creates a perpetually valuable knowledge, and ensure knowledge equitableness between subsidiaries that belong to the same MNC. Learning is the main determinant of profitability and competitiveness. Pemberton & Stonehouse (2000) report that the development of many companies into learning organizations was the main reason behind the success in their competition. Hall (2001) also supports this argument by analyzing the value-added by knowledge in the global arena. He found that the most optimized knowledge gain is within learning organizations, which is a determinant of the organization success. Furthermore, Venugopal & Baets (1995) report that
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globalization forced firms to transform themselves into learning organizations. More specifically, Kagia (2002) suggests that learning agenda have been pushed by the global knowledge economy. The author adds that besides new technologies, the know-how and new ideas are the source of the economical growth and development. LMNCs predict the requirements of their customers through pattern recognition, modelling, and market segmentation. This can be achieved through robust data mining tools that work against warehouse of transactions, documents and customers’ feedback. This may lead to the development of clear-cut core competencies needed by the customer. Quinn (1999) found that the core competence form the quintessence of value propositions and offer the inspiration for clients to favor the firm business model of services or product over its rivals. For nurturing and streaming the synergetic effects of IC and core competencies within LMNCs, ICTs must be augmented by conglomerations of human capital ‘Network externalities’ (NE) that originate from autonomous teaming structure such as Cross-Function Teams (CFT), Virtual Communities of Practice (VCoPs) and “expert networks”. One of example of these networks is the Epistemic Community (EC), which is described by Tiessen (1999) as universal experts team that think in concert to allow MNCs to innovate as a result of pooling knowledge from different geographies. The accumulation of such structures will allow for synergetic pooling of experiences, knowledge and best practices. The increase in such network size leads to exponential increase in LMNC innovativeness and competitiveness.
The Role and Governance of iCTs for iC The strategic importance of ICTs in shrinking the time and geographic distances of MNCs is undeniable. Friedman (2005) observed the flatness of the world due to whole set of technology
The Role of ICTs in the Management of Multinational Intellectual Capital
convergences. The author states that different technologies including the fiber-optic networks made it easy for people to work together, and that leveled the playing field for workers to share their work. Mohamed (2007b) states that “in the globalization realm, ICTs are the driving force behind shrinking physical and temporal distances and transmitting knowledge across different cultures. In general, ICTs play a major role in progressing globalization through simulating social networks within the physical networks, opening communication channels, fostering human development and improving services and products”. Therefore, ICTs become differentiating factor for many MNCs, Galán et al. (1999) believe “technology as one of the elemental pillars of competitive advantage in the international market, in which intense competitive capabilities are required from companies.” Knowledge Management System (KMS) automation as a platform for IC provides irrefutable services for mobilizing just-in-time knowledge for decision-makers around the world, Mohamed (2007a) states that KMS with all of its components of networking, clustering, hardware and software, is becoming critical for mobilizing knowledge in the global knowledge-based economy. Technology, through its smart devices, agents, alerts, mining and semantics, is becoming more than an enabler for KM. In fact, purposefully using technology in KM programs is inevitable, and becoming a necessity in the global arena. Lang (2001b) reports that “globalization is driven by Internet and Infocomm technologies in many ways. The economies of the world are progressively interconnected through people and ideas, investment, goods and services. This resulted in new formats of competition and cooperation as companies push for greater productivity and better efficiency”. ICTs offer an adaptable channel for communiqué of intangible assets in dispersed geographies (Duffy (2000); and Lang (2001a). Shariq (1997) observed that the world is getting into a new state where opportunities are shaped by people who
have the ability to utilize their knowledge which embodied in technology and human capital. Mohamed (2007b) states that “globalization altered many KM conventional processes and procedures due to mobilization of knowledge through itinerant agents augmented by avant-garde ICT channels. The resultant knowledge spans across multinationals and commit ‘bidirectional transmutation’ due to different cultures and heritages of knowledge nurturing.” ICTs facilitate the diffusion of exotic (interMNCs) knowledge across the multinational body, and ease the infusion of domestic (intra-MNCs) knowledge in various subsidiaries. The exotic knowledge sources such as customers, manufacturers, distributors, suppliers and even competitors are vital for relieving MNCs from the traditional lock-in effect. On the other hand, the hybridization of the already inextricably interrelated domestic and exotic knowledge increases MNCs’ innovativeness and minimizes the intricacy caused by the unidentified attributes in the evolving global marketplace. In its natural progression, ICTs shift from supporting disintegrated functional systems to facilitating integrated processes. The latter is accomplished through emerging ICTs architectures such as grid computing, fiber optic, federated hubs, object-oriented technologies and business conglomerations establishments such as technology parks, incubators and knowledge villages. ICTs governance needs to be aligned with the new global knowledge governance. This can be achieved through building proper architecture, system development, and customized application to fit the role of ICTs in managing IC throughout different phases of Knowledge Iterative Supply Network (KISN) (Figure 4). During knowledge discovery ICTs play a major role in the conversion of data to information when human capabilities are slow in such process. This conversion can be achieved through statistical analysis and data mining tools. However, ICTs may not be helpful
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Figure 4. Knowledge Iterative Supply Network (KISN) processes that facilitates the transformation of traditional MNCs into Learning MNCs. The dotted lines represent the role of ICTs. Adopted from Mohamed (2008)
during the conversion of information into knowledge, where human cognitive dimension is needed for synthesizing and organizing knowledge. The analysis phase depends on human thinking more than it depends on ICTs. While classification can be performed better with ICTs; organization, assimilation and synthesis are human activities that require the power of double loop thinking and reflectivity. Presentation of procedural knowledge
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can be carried out by ICTs channels; however, deeper knowledge layers may need intervention of humans. Additionally, the transfer of data for validation at different levels can be fulfilled via ICTs tools with robust convertibility, mobility and interactivity. Nevertheless, the feedback that results in new data and originates from communities of practice or other networks must be carried out by humans.
The Role of ICTs in the Management of Multinational Intellectual Capital
Figure 5. The Effects of time zone and geographic distances on communication media selection.
The role of ICTs in intra- and enter-subsidiaries communications vary according to the geographic remoteness and time zone (Figure 5). For short distances under the same time zone a face-to-face interaction is preferred as it is the best way to sharing tacit knowledge. Metzker (2001) justifies this kind of communication as “The hormones stimulated when we are face-to-face with people lead to trust and bonding, and possibly enhance pleasure and reduce fear. Large or completely virtual organizations cannot support physiological responses that are most needed for accomplishing work and for providing the trust needed for sharing knowledge and other resources”. When the face-to-face interaction is difficult due to stretched distances, then the use of proper distributed technology is permissible. Collaboration through real-time synchronous technologies is preferred over any-time asynchronous technologies. However, this synchronicity depends on many intermingling factors such as the availability of the proper technologies and the confidentiality of the shared knowledge.
ICTs and IC Challenges Although there is a chimera that ICTs is the utopian panacea for globalization communication prob-
lems, the contribution of ICTs to the synthesis of IC and other intangible assets remain debatable (Brockway (1996), Reneker & Buntzen (2000), Eito (2002). The success of deploying ICTs across MNCs boundaries depends on human capital, and how much these ICTs are effective depends on the relational capital. In general, ICTs ease information storage, retrieval, and transfer, but it cannot replace people. At the global level, the challenge of ICTs as a tool for IC management comes from the fact that ICTs infrastructures are founded on the basis of bivalent logic i.e. 0 or 1, true of false, black or white etc. The following represent major challenges for ICTs when used to manage IC in MNCs settings: •
Codification effects: the fundamental notion of information theory is centered on entropy, where decisions can be made under uncertain conditions and incomplete information. When ICTs are used as a conduit for IC flow, entropy may result from the ‘knowledge de-contextualization’ or ‘knowledge dilution’ during tacit knowledge externalization or during the process of codification. Mohamed (2007b) argues that due to knowledge de-contextualization during externalization, ICTs are not
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•
•
•
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the utopian panacea. Indeed, ICTs without human cognitive intervention broaden the scope of information overload, widening the IC inequitableness and other discrepancies between subsidiaries within the globalization equation. Mohamed et al. (2006) states that ICTs assimilation and representation of knowledge intangibility, dynamism, experience and other humanistic cognitive dimensions remain debatable, unless technology shreds its bivalent logic image and instead learn to operate within an authentic continuum. The development of ICTs in areas such as natural language, XML, neural networks, grid computing and search engines offers new opportunities to the codification process. Binary logic barrier: Due to the binary logic fundaments of ICTs, the synthesis and representation of knowledge intangibility, dynamism, experience and other humanistic cognitive dimensions remain debatable when ICTs employed for IC elucidation and redistribution over global distances without human interference. Mohamed (2008) states that so far, KMT is not mature enough to deliver bona fide KM processes. The distance from data to knowledge cannot be handled by the existing technology unless technology cast off its bivalent logic. Despite the recent leaps in technology, the situation is still perplexing and elusive. This is because KMT deals with the knowledge continuum either as discrete unrelated events or as one class with no different technological requirements. Infrastructure disparity: The disproportionately of the ICTs physical infrastructures and the differential learning capacity in various MNCs hosting locations result in an unequal distribution of knowledge and flow channels. Tools selection: If IC is a subset of knowledge and knowledge is a superset of information,
•
then it is logical that information technology cannot be used to handle intellectual capital with the same efficiency. Due to the complexity of IC requirements, selecting the most appropriate KM technology is a perplexing issue. The process must consider unique social, behavioral as well as technological factors of the targeted environment. IC Metrics: It is difficult to explicitly define the relationship between business strategic objectives, metrics, and the intellectual assets (Gibbert et al. (2001), Kennedy (1998), Caddy (2000) and Brennan & Connell (2000)). In addition, the common accounting system has not considered itemizing and reporting IC in the general ledger spreadsheet (Petty & Guthrie (2000), Koenig (1997), Kennedy (1998), Caddy (2000), and Brennan & Connell (2000)). For such determination, MNCs must define their ‘CI level’. IC leveling is the depth of the dependency of MNC on specific type of IC, which in turn based on the degree of globalization and the degree of ‘tacicity’ within the MNC milieu. There is the process of determining the need for policy and control objectives to govern the ReturnOn-Investment (ROI) from IC, especially then ICTs deployed at a wide range as a means of communication. However, MNCs face genuine challenges in measuring and reporting IC due to the non-subjectivity of tacit knowledge.
ICTs Role in IC Metrics If the measurement of IC is important for any firm to be properly managed, it is even more imperative in the case of MNCs due to the difficulty of management over geographic distances and cultural differences. Reports that show the value of the company’s intellectual assets are even more important than those detail physical assets because IC is the fundamental for value creation and cash flow.
The Role of ICTs in the Management of Multinational Intellectual Capital
Furthermore, a proper IC management is required for properly managing the customer requirements through the response to their feedback. Hence, many companies have been obligated to investigate the measurement of their IC to provide a better foundation for its management. The process of IC creation is very dynamic in the MNC environment, and so is its measurement process. Therefore, valuing IC is difficult in both of its forms both qualitative and quantitative evaluations. Many investigators suggested tying of IC measurements to KM measurements (Pablos (2003), Liebowitz & Suen (2000) and Liebowitz & Suen (2000)). Guthrie (2001) emphasized the importance of management, measurement and reporting of IC as a result of re-engineering the orthodox accounting system procedures. The author recognizes the difficulty of measuring the intangible assets by assigning specific monetary value to it, but he warned that, if the intangible assets are not incorporated in the formal accounting system, then the financial and management reporting will become irrelevant as a tool that support the decision making process. The difficulty comes from the unfeasibility of correlating human capital indictors to accounting parameters such as Return-On-Investment (ROI) and Net Present Value (NPV). In addition, unlike structural capital, human capital is less controllable, more dynamic and can easily be lost when people leave the organization. Hence, human resources policies may have a significant impact on such capital. Pablos (2003) predicted that the approaching knowledge economy will require different tools for measuring and managing organizational knowledge. Furthermore, the author chose Tobin’s as a valid measure for the firm’s intellectual capital which is a ratio between the market value and the reposition value of physical assets. Although human capital is the most valuable capital, it is the most difficult to measure. However, developing software or creating a procedure is one form of manifestation of the transformation of hu-
man capital into structural capital i.e. this capital externalization produces confounding effects on its measurement. Liebowitz & Suen (2000) state that “direct measures will normally be size-oriented metrics like thousand lines of code/person-month, defects/ (thousand lines of code), and others. Indirect measures are function-oriented metrics such as the number of user inputs and outputs, function points per month, years of experience, number of dollars invested/used, years of education/research/ management, and the like.” It is relatively easy to measure the structural capital components because they are either tangible or related to ICTs measures. Austin (1998) described technology helpfulness in the comprehensive measurement of management parameters. However, that depends on the measurement technology design and implementation. Nevertheless, Mohamed et al. (2006) argued that using technology in measuring the KM is a direct process because you can clearly see patterns such as database access or number of hits for certain knowledge objects. In these cases the associated innovation can be accounted for, but it may not be easy to quantify; therefore, KM measurements using technology should be used with care taking into account the confounded effects of nonquantifiable non-financial measures.
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Stromquist, N., & Samoff, J. (2000). Knowledge management systems: On the promise and actual forms of information technologies. Compare, 30(3), 261–264. doi:10.1080/713657475
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Chapter 10
The Link Between Learning Capability and Business Performance in MNEs: The Role of Intellectual Capital Isabel Ma Prieto Universidad de Valladolid, Spain Elena Revilla Instituto de Empresa, Spain
ABsTRACT It is widely recognized that the development of learning capability is key to achieve a durable competitive advantage. This is especially true in the context of MNEs. When MNEs operate in disparate host countries, they enhance their knowledge bases, capabilities, and competitiveness through learning processes. The analysis of the relevance of learning capability to improve business performance and, thus, the organizational competence has been an important issue developed in literature. This chapter explains the link between learning capability and the improvement of business performance by comparing how the main dimensions of learning capability –knowledge resources and learning processesimpacts on performance, in terms of both non-financial and financial performance. It is argued that those MNEs with the highest levels in both their knowledge resources and learning processes obtain a superior performance.
inTRoDuCTion In the present competitive environment, characterized by continuous changes and profound dynamism, companies widely identify learning capability as a critical attribute for achieving and retaining competitive success. Firms need to transform and refine their knowledge resources in accordance
with the environmental conditions, and this is possible through learning processes. In essence, it is often recognized that organizations learn for two basic purposes: to explore new opportunities and to exploit existing ones (March, 1991). Literature has shown a growing interest about learning capability (Easterby-Smith, 1997) and, specially, on the consequences of learning capability on business performance and competitiveness.
DOI: 10.4018/978-1-60566-679-2.ch010
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The Link between Learning Capability and Business Performance in MNEs
The importance of learning capability for MNEs’ survival and effective performance has been emphasized widely in the literature (Bartlett & Ghoshal, 1987; Huber, 1991; Barkema & Vermeulen, 1998). International expansion can promote learning capability, which facilitates the development of knowledge and competences that help MNEs achieve competitive advantage. The diversity of a MNEs international business environment enhances its knowledge resources through the learning processes developed through interactions with local knowledge bases and through exposure to different foreign markets (Hsu & Pereira, 2008). Given that learning capability is recognized as a critical practice in MNEs, a deeper understanding of the learning capacity-performance link offers substantial value and importance to MNEs managers and researchers. But the absence of good conceptual models about the MNEs’ learning makes difficult the understanding of the effectiveness of learning capability in MNEs. In light of this situation, MNEs increasingly demand frameworks able to explain how learning capability influences the scope and deployment of internationalization and thereby differentiates firm performance. The main objective of the present chapter is to explain the link between learning capability in MNEs and business performance and, ultimately, to determine how learning capability is associated with a better performance of the MNEs. The key concern is to characterize how organizations differ in their learning capability to analyze the consequences for business performance and, specifically, to address the differences that lead to superior performance. The differences are characterized on the basis of both knowledge resources and its associated learning processes as main dimensions of learning capability. With this aim, the chapter first characterizes learning capability and the concerns relative to business performance in MNEs. Then, the chapter gives a snapshot of where differences exist and how learning capability in MNEs may thus relate to business performance.
learning Processes and its Essential Forms The concept of learning is understood from various perspectives, and mainly developed in the psychological field over a long evolutionary history. The application of learning at the organizations has been one of the most critical developments of management literature, where it has been emphasized the crucial role of organizational learning processes in firms’ survival and success. Different definitions of organizational learning have in common their attempt to explain what happens or, more specifically, what changes in individuals and organizations when they learn, that is, when they acquire knowledge or get to know more. Learning is in this regard seen as a relatively permanent change in organizational knowledge that is produced by experience, where the change in knowledge entails both change in cognition and change in behavior (Vera & Crossan, 2003). Because of this notion of change, research on organizational learning has dealt with questions about how organizations adapt (Lawless & Finch, 1990), evolve (MacIntosh, 1999), grow (Land and Mezias, 1990; Lant and Mezias, 1992), and renew (Crossan, Lane & White, 1999) themselves in order to face the challenges of an increasingly complex and dynamic environment (Argyris & Schön, 1978; Cangelosi and Dill, 1965; Fiol & Lyles, 1985; Senge, 1990). Accordingly, an organization’s knowledge transformation in order to get adapted and aligned with its environment is a result of learning processes. Activities in the international market stimulate the need to fit new information into MNEs existing knowledge, and presents an opportunity to change their existing knowledge. Although organizations need to learn through experience and refine their existing knowledge and capabilities, they also need to create variety in their knowledge and experience through experimenting, innovating and risk taking. In other words, organizations face the dilemma of allocating resources to the exploitation of their
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existing knowledge or to the exploration of new alternatives. Accordingly, March (1991) notes two alternative forms of learning processes: exploration learning processes and exploitation learning processes. These forms of learning reflect other classifications into different dichotomies of learning, such as double-loop versus single-loop learning (Argyris & Schön, 1978), generative versus adaptive learning (Senge, 1990), and feed-forward versus feed-back flows of learning (Crossan et al., 1999), in example. The distinction between exploration and exploitation captures a number of fundamental differences in firm behavior that may have significant consequences.
come the challenges of unfamiliarity with foreign markets and the liability of foreignness (Hsu & Pereira, 208). In fact, the diversity of national and organizational cultures makes available a broad set of knowledge, experience, and background, and increases the potential to scan the environment, to recognize the existence of an opportunity, and to create customer by properly seizing it. However, even when the presence of such diversity could be positively related to MNEs performance, the diversity could also lead to problems by adding situations that increase potential disagreements and conflicts.
Exploitation Processes Exploration Processes March (1991, p.85) defines exploration as a learning process that has the goal of “experimentation with new alternatives that have returns that are uncertain, distant and often negative”. Exploration is thus a manifestation of organizational learning (Slater & Narver, 1995) that entails the challenging of existing knowledge, ideas and competences with entrepreneurial and innovative concepts. It is about studying the environment for new opportunities and includes activities such as search, variation, discovery, innovation, risk-taking, and research and development. Accordingly, exploration involves the search for new organizational routines and the discovery to new approaches to technology, businesses, processes, and products. It thus requires new knowledge or departure from existing knowledge. Accordingly, exploration and new knowledge can expand the capabilities and the range of responses available to the firm. March (1991) posits that the outcome of exploration can be difficult to measure in the short term, and thus it might lack a high degree of efficiency. Exploratory learning processes are especially stimulating in the presence of multinational enterprises (MNEs). In the context of internationalization, MNEs need to explore knowledge about their foreign markets and operations in order to over-
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March (1991, p. 85) defines exploitation as a learning process that entails “the refinement and extension of existing competences, technologies and paradigms”. The central thesis of exploitation is that it is possible to secure a comfortable position in the marketplace by committing sufficient resources to ensure the current viability of a firm against its competitors. Thus, the emphasis is on the organization refining and fine-tuning of existing knowledge and competences. Though exploitation, organizations learn to refine their capabilities, apply their current knowledge, and focus on current activities in existing domains (Holmqvist, 2003). Exploitation includes, but it is not limited to, those activities such as refinement, production, efficiency, selection, implementation, and execution (March, 1991). The primary emphasis is on control, efficiency, and reliability or conformance to specification (Auh & Menguc, 2005). The returns from exploitation are typically positive, proximate and predictable. In the context of MNEs, exploitative learning processes are especially critical. An effective exploitative learning across geographically and cultural boundaries is not a trivial matter. MNEs are network firms by their nature. This means that, in order to strengthen local competences, they must be able to leverage their networks to
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Table 1. Exploratory and exploitative learning Exploration Definition Outcomes
Exploitation
Learning mechanism that entails the refinement and extension of existing knowledge and competences New designs, new markets, new technologies
Learning mechanism that involves the variation and regeneration of knowledge and competences Existing designs, existing markets, existing technologies
Knowledge base
Require new knowledge and departure from existing knowledge
Build and broaden existing knowledge and skills
Result from
Search, variation, flexibility, experimentation, risk taking
Refinement, production, efficiency, execution, control
effectively provide their local subsidiaries with dispersed knowledge. Regardless of these internal mechanisms, the receiver (the local subsidiary) must identify potentially important knowledge, absorb it, and then exploit it to be able to react as fast as possible to dynamic changes in relative location advantages. To put it somewhat simply, the benefit of exploitation is based on increased efficiency, while the benefit of exploration is based on innovation. Table 1 summarizes the main differences between exploration and exploitation.
The Balance Between Exploration Processes and Exploitation Processes Despite the differences between the two learning processes, it is commonly stressed in the organizational learning literature that, in order to learn, organizations in general and MNEs in particular need to achieve a balance between exploration and exploitation rather than emphasizing one at the expense of the other. As stated by March (1991, p. 71) “Adaptive systems that engage in exploration to the exclusion of exploitation are likely to find that they suffer the costs of experimentation without gaining many of its benefits. They exhibit too many undeveloped new ideas and too little distinctive competence. Conversely, systems that engage in exploitation to the exclusion of exploration are likely to find themselves trapped in
suboptimal stable equilibria”. It is true that, since March (1991) disclosed the inherent challenges of managing these contradictory processes, some researchers suggest that the two forms of learning are incompatible and firms need to make choices that favor one form over the other (Barney, 1991; Ghemawat & Costa, 1993). However, a good number of studies argue that the most successful firms are those able to reconcile both exploration and exploitation and in so doing enhance their long-term competitiveness (Tushman & O’Reilly, 1996; Katila & Ahuja, 2002; He & Wong, 2004; Auh & Menguc, 2005). Arguments in favor of both exploration and exploitation are thus well established and accepted. Although near consensus exist on the need for balance between exploration and exploitation, there is less clarity on how this balance can be achieved. A fraction of theory identifies punctuated equilibrium patterns involving a series of discrete periods, each focused on exploration and exploitation, as a mechanism to help MNEs to achieve this balance. But most of the theoretical approaches sustain a different continuous evolutionary solution, where the need for an appropriate balance between exploration and exploitation has been crystallized by Tushman and O´Reilly’s (1996) conceptualization of the ambidextrous organization. These authors argued that an ambidextrous firm is one capable of operating simultaneously to explore and explore its knowledge and competences. The balance between exploration and
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exploitation is also implicit in the conceptualization of dynamic capabilities by Eisenhardt and Martin (2000), who suggested that overall dynamic capabilities require a blend of the two different learning logics, namely the logic of exploration and the logic of exploitation. According to Knott (2002), exploration and exploitation coexists in Toyota, and the two are likely to be complementary since it is non-optimal to combine them if they are substitutes. The notion of balance between exploration and exploitation also reflects the resourced-based view tenet that competitive advantage is a function of the unique bundling of heterogeneous resources and capabilities that increase the complexity and ambiguity of organizational actions (Barney, 1991). From this perspective, the balanced interaction between exploration and exploitation reflects a complex capability whose provides an additional source of competitive advantage beyond those provided by each one individually. In the context of MNEs, exploration is obviously necessary in order to learn from foreign markets, but it does not guarantee that the local subsidiaries benefit from existing knowledge on a larger scale. At this point, the problem MNEs face is adapting their knowledge and business practices to fit them to foreign environments. Simultaneously, it is also necessary that exploration gets materialized in the operational systems of the local subsidiaries, improving thus their activities. Accordingly, MNEs need to find a model to allocate resources between both activities to achieve a “synchronized capability” that leads to create competitive advantage through the synergistic effects of exploration and exploitation. Such a model would probably be conditioned by the type of industry, the nature of knowledge, and the characteristics of the firm and its activity (Choo & Bontis, 2002).
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inTEllECTuAl CAPiTAl As An EssEnTiAl KnoWlEDGE REsouRCE In the present economy, more and more business based their value not on their tangible resources, but on their intangible resources such as people and their expertise, business processes, customer loyalty, repeat business, reputation, and so forth (Bontis, 2002). These kind of intangible resources, which are a source of value to organizations, are generally labelled as “intellectual capital”. In defining intellectual capital, consensus is far from achieved (Vera & Crossan, 2001). Stewart (1997) defines intellectual capital as the intellectual material –knowledge, information, experience, etc- that can be put to use to create value. Edvinsson and Malone (1997) refer to intellectual capital as the possession of the knowledge, applied experience, organizational technology, customer relationships, and professional skills that provide a company with a competitive edge in the marketplace. Further, Brooking (1998) argues that intellectual capital are combined intangible resources which enable the company to function. Nahapiet and Ghoshal (1998) define it as “the knowledge and knowing capability of a social community” (p. 245). There is no consensus about the presence of knowledge (as cognition) or knowing (as behaviour) in intellectual capital. Another disagreement is about the inclusion of intellectual property as part of intellectual capital (Vera & Crossan, 2001). However, we can say that intellectual capital, also called intangible assets or intangible resources, are resources found in knowledge. More specifically, intellectual capital is knowledge resources, both tacit and explicit, that can be converted into value (Edvinsson & Sullivan, 1996).
The Link between Learning Capability and Business Performance in MNEs
Classification of Knowledge Resources If we consider intellectual capital as knowledge resources that can be converted into value, it should contain human knowledge as well as the knowledge embedded in the organization’s structures, processes, routines, systems, intellectual property, and relationships with external stakeholders (Vera & Crossan, 2001). In fact, most of the specialized literature argues that intellectual capital consist of human capital (i.e. the tacit knowledge embedded in the mind of employees), structural capital (i.e., the organizational routines, structures and processes that contain the non-human storehouses of knowledge) and relational capital (i.e. the knowledge embedded in customer and supplier relationships). The human capital is, in essence, the intelligence of the organizational members defined as a combination of factors such a genetic inheritance, education, experience and attitude. It is important because it is a source of innovation and strategic renewal (Bontis, 2002). Structural capital contains the knowledge resources that allow an organization to function in a coordinated way, giving support to employees in their quest for optimal intellectual performance and therefore overall business performance. Its essence is the knowledge resources embedded in the systems and routines of the organization. Finally, relational capital represents the potential an organization has due to knowledge resources external to it, such as knowledge embedded in relationships with customers, suppliers, the government, or related industry associations (Bontis, 2002). Due to its external nature, it is difficult to achieve and control. MNEs that want to maintain a presence in various geographically disperse and culturally and politically distinct international markets must have a substantially larger relational capital than firms that operate on a more restricted basis. Likewise, the coordination of oversees operations, which must consider substantial variations in
time zones, organizational structures, and business environments, also demands a well-built structural capital. In addition, as stated by Vera and Crossan (2001), there is general agreement among scholars that learning occurs and thus that knowledge resources exist at the individual, group, organizational and inter-organizational levels. Furthermore, it is possible to establish a parallelism between individual and group knowledge resources and human capital; organizational knowledge and structural capital; and inter-organizational knowledge and relational capital. Since the intellectual capital literature do not explicitly address these assumptions about the individual, group, organizational and network levels of analysis, the organizational learning literature has gone further by providing a theory that links the levels and explains the learning capability through the learning processes by which knowledge resources at one level change and become knowledge resources and learning at another level. In order to understand the role of knowledge resources –intellectual capital- in MNEs’s success, it is thus important to integrate the intellectual capital with research in the organizational learning domain.
Knowledge Resources and learning Processes: The learning Capability Numerous descriptions (Bontis, 1999; Decarolis & Deeds, 1999; Dierickx & Cool, 1989; Vera & Crossan, 2003) of the organizational potential to learn are made by using the link between knowledge resources and its associated learning processes at the different levels of analysis. On this matter, several authors (Crossan et al., 1999; Diericks & Cool, 1989; Bontis et al., 2002) suggest that, at a general level of analysis, intellectual capital represents the knowledge resources that exist in an organization at a particular point of time. The way that intellectual capital (knowledge resources) changes and evolves over time depends on learning processes. Accordingly, it is possible
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to argue that all organizations uphold a stock of knowledge resources which needs to continually flow through learning processes to act in agreement with the environmental requirements. Knowledge resources compel all that is already known or needs to be known, which includes knowledge at the human, structural and relational levels. Learning processes are more concerned with evolution and interconnections. They are about the interaction of knower(s) between themselves and with the world (using knowledge resources as a tool). In essence, learning may be considered, nor not just as an individual, but as a social process developed through the interaction of learners within specific contexts (Brown & Duguid, 1991; Cook & Yanow, 1993; Nicolini & Meznar, 1995; Wenger, 1998). It is also considered that learning processes are the flows through which knowledge resources are generated, retained, transferred and utilized (Prieto, 2003). They are essential to understand how knowledge resources are integrated and translated into competence (Elkjaer, 2001; Grant, 1996). Learning processes employ knowledge resources and result in new or modified knowledge resources for making sense of the world and taking action in it (Sanchez, 2001). Learning processes and knowledge resources are then intertwined in an iterative, mutually reinforced cycle (Bontis, 1999; Crossan et al., 1999; Nonaka & Takeuchi, 1995). The link between learning processes and knowledge resources is reflected in the tension between the exploration and the exploitation of knowledge (Crossan et al., 1999; March, 1991). MNEs renew itself through the exploration processes and new knowledge is created and assimilated (institutionalized). At the same time, past knowledge guides local subsidiaries, which produce the exploitation of what is already learnt. The efficiency of learning depends on how exploration and exploitation processes continuously to provide knowledge resources to the MNEs and its local subsidiaries by elaborating, supporting, and contradicting existing knowledge resources (Bontis, 1999).
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According to previous arguments, MNEs’ learning capability is composed of continually evolving knowledge resources (human, structural and relational) that flow through learning processes to continuously exploit and explore knowledge resources in accordance with the environmental conditions. Knowledge resources and learning processes are so tightly intertwined that it may be counter-productive to define learning capability as dependent on either one or the other. Thus both knowledge resources and learning processes must be combined to define the learning capability of any organization. In addition, MNEs that engage in learning capability are more likely to recognize the importance of cultivating and integrating the varied knowledge resources from their different foreign markets. Learning capability facilitates the combination of new and different knowledge resources with existing ones and thereby creates superior performance. Learning capability also compels managers to consider the knowledge resources gained from the diverse local subsidiaries, and to deliberate how to use it to overcome deficiencies in the MNEs knowledge base. Building on these assumptions about learning capability, the next step is to relate it to business performance. The theoretical distinction between learning processes and knowledge resources is important in evaluating the contributions of learning capability to business performance in MNEs.
lEARninG CAPABiliTY AnD BusinEss PERFoRMAnCE Past studies fail to arrive at a consensus about the link between learning capability and business performance (Crossan et al., 1995; Huber, 1991; Popper & Lipshitz, 2000). In spite of divergences, it is possible to find arguments to defend the idea that learning processes and knowledge resources may improve business performance. Even when the link may be tenuous, Cangelosi and Dill (1965) mention that improved business performance is
The Link between Learning Capability and Business Performance in MNEs
learning. Fiol and Lyles (1985) suggest that it is possible to presume that learning will improve future performance. Senge (1990) indicates that, over time, superior performance depends on superior learning. Other authors have also recognized the importance of learning capability as beneficial to overall business performance (Nahapiet & Ghoshal, 1998; Soo et al., 2004; Stata, 1989; Stewart, 1997). Recent empirical efforts give support to the impact of learning processes and different forms of knowledge resources on performance (Bontis et al., 2002; Decarolis & Deeds, 1999; Prieto & Revilla, 2006; Davis & Daley, 2008; Olavarrieta & Friedmann, 2008). Specially, knowledge resources and learning processes have become increasingly accepted in the international business literature as pivotal strategic tools that differentiate firm performance (Hsu & Pereira, 2008).
non-Financial Performance and Financial Performance The notion of a substantive link between learning processes, knowledge resources and improved business performance often relates the potential effects to the economic and financial success. It is possible, in fact, to use some kind of indicators about the financial success. However, business performance is a multidimensional concept, not easily measurable, and more complex than the financial ratios and indicators that are usually applied to it. Therefore, the potential effects of learning capability on business performance cannot be determined exclusively by a financial assessment. Effects also deal with the reaction of others (e.g. customers, employees, etc.) to the actions of the organization. This reaction will be more favourable when the capability to learn guides the identification and fulfilment of others’ expectations along with the organizational purposes. Hence, it is logical to suggest that both financial and non-financial performance must be assessed in order to evaluate overall business performance resulting from learning capability
in organizations (Goh & Ryan, 2002; Zahra et al., 1999). This approach is consistent with the numerous efforts to measure intellectual capital in organizations (Kaplan & Norton, 1992, 1993; Martin, 2000; Stewart, 1997). This field has included several discussions about performance measurement by arguing that it is necessary to balance the traditional financial valuation with a non-financial valuation of business performance. The EFQM Excellence Model also asserts that customers’ satisfaction, employees’ satisfaction, and impact on society results are key to performance criteria (what an organization achieves) that must be considered together with financial performance (EFQM, 2001). The Performance Prism model by Neely and Adams (2001) is another example that explicitly adopts a stakeholder centric view of performance measurement together with more traditional aspects of it. This stakeholder view emphasizes the increased influence of customers, employees and general society when evaluating performance. In reality, there is an essential way to enlarge an organization’s financial performance, and it is through the identification and satisfaction of market demands and customers’ expectations (Neely & Adams, 2001). At the same time, customers want to gain knowledge of every transaction in order to become well informed and self-reliant. Hence, customers’ satisfaction relies on both their perception and their diagnostic about the organization’s activities, products or the value of its service. Customers’ perceptions will be improved by the extent to which an organization develops its potential to create, deploy, and offer them its active knowledge resources, in the form of products, services and processes, which will satisfy their needs, and will strengthen the established relations. In other words, the organization must use knowledge to provide a vital service to its customers, making it harder for them to switch to another supplier. Therefore, quality in products and services will lead to customer satisfaction
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Figure 1. The link between the learning capability and business performance
and durability of the relationships, being then only a question of time to gain a positive result on financial performance. These arguments reflect the central importance of acquiring foreign country knowledge through learning processes during the international expansion. When MNEs operate in disparate host countries, they enhance their knowledge base. As such, MNEs continuously strive to learn about foreign countries and transfer their knowledge across borders in the global marketplace. MNEs’s ability to accumulate human, structural and relational capital during their international expansion enhances their performance. Specifically, the internationalization strengthen the explorative and exploitative process, so that MNEs’ managers should take full advantage of their local subsidiaries in foreign markets to better satisfy local customers and improve performance. In an attempt to organize previous arguments, Figure 1 shows the essential relations between learning capability and business performance. Both learning processes and knowledge resources are intertwined so that the former are decisive to strengthen and manipulate knowledge resources and, knowledge resources themselves are a basis for the learning processes. This way, learning capability can be sustained as a source of nonfinancial performance through the creation of value for stakeholders and, thus, as a decisive
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channel for financial performance. Finally, it is worth noting that business performance may provide important feedback about the efficiency of learning and, ultimately, it affects how an organization continues to learn as a long-lasting core competency (Calantone et al., 2002; Dragonetti & Roos, 1998; Mintzberg et al., 1995). In other words, business performance is not an ultimate consequence of learning capability, but may help to discern the existence of a knowledge gap that needs to be filled.
learning Configurations and Business Performance: A Two Dimensional Categorization As stated earlier, both knowledge resources and learning processes combine to create a learning capability. Therefore, it is feasible to presume that differences in the relationship between knowledge resources and learning processes may produce variations in the MNEs’ capability to learn. Consequently, it may be suggested that, rather than describing learning capability as a particular state of knowledge resources and learning processes, different configurations of learning capability may exist as a result of the way knowledge resources and learning processes interact. These configurations may be transitional or not, but are the root of distinctions in learning capability between MNEs
The Link between Learning Capability and Business Performance in MNEs
Figure 2. Combinative differences of the learning capability
(Gnyawalli & Stewart, 2003). Despite its simplicity, Figure 2 highlights the possibility of different combinations of knowledge resources and learning processes that result in four extreme configurations of learning capability. Where there are low levels of both knowledge resources and learning, there is a minimized learning capability. In the current turbulent business environment, this configuration matches to MNEs that barely change, and they are probably mature or simply stagnated. This is a critical or recessive situation that quickly reduces the effectiveness of MNEs. MNEs belonging to this group do not take full advantage of the internationalization. In marked contrast to former situation is an advanced inclusive learning capability where there are both large levels of knowledge resources and learning processes. This characterizes a configuration where the interrelation between knowledge resources and learning processes balances the potential to develop, maintain, apply, and improve abilities, qualities and activities in such a way that they become a source of sustainable competitive advantage. In this case, MNEs understand the importance of developing a learning capability within and across local subsidiaries and wield these knowledge base advantages effectively in the global market. Configurations with unbalanced levels of knowledge resources and learning processes are more difficult to describe. When there is a bias towards high levels in learning processes, we have a dynamic learning capability prompted
by the need to exploit temporary competences that are rapidly substituted through knowledge exploration. However, it is a risky situation that produces only a limited opportunity to accumulate permanent knowledge resources. Finally, when learning capability is biased to large immobile basis of knowledge resources there is a static learning capability. This is possible in the case of big and/or experienced MNEs, with a strong tradition or with some kind of well-established competitive advantage. However, just knowing that organizations may have different learning capabilities is not particularly compelling. What makes this of interest is that these divergences significantly and differentially affect business performance. In this sense, it is possible to assume that making sense and understanding differences in learning capability may have implications on what can be expected in terms of performance outcomes. In other words, different orchestrations in knowledge resources and learning processes may have different effects on business performance. Prior literature suggests that the link between learning processes and performance is more indirect that the link between knowledge resources and performance (Crossan et al., 1995; DeCarolis & Deeds, 1999; Prieto & Revilla, 2006). Learning capability depends on the MNEs potential to use available knowledge resources and to continually renew those knowledge resources to fit global market. Gaps between knowledge resources stored from the past and knowledge resources required
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for acting in response to changing local market conditions trigger learning processes to produce new knowledge. New knowledge joins the existing basis of knowledge resources, so that it can be used to fit market conditions. But contrastingwith learning processes, which may be adjusted automatically, knowledge resources cannot. The shaping, reshaping, and deployment of knowledge resources is a slow and gradual process, specially in the context of internationalization. This is why, as depicted in the dynamic learning capability of Figure 2, it is feasible to find situations where learning processes are being developed –especially at the human level- while their outcomes are not yet materialized in terms of effective knowledge resources (it is even possible that knowledge is never assimilated and retained). It is possible to expect this situation to start producing positive evaluations by stakeholders, but it is unlikely that it will have a direct effect on financial performance. Consequences of financial success are not clear when it is failure that enables learning processes (Cangelosi & Dill, 1965). Moreover, learning processes may negatively impact financial performance in the short term when they involve replacing familiar practices with new and unfamiliar ways of operating (Crossan et al., 1995). Considering that knowledge discarding activities are also an important part of adding new knowledge resources, slow unlearning is a crucial weakness that well may obstruct the beneficial influence of learning processes on performance (Hedberg, 1981). Accordingly, it is reasonable to assume that differences in learning capability as a result of learning processes do not lead to differences in business performance, especially in terms of financial performance. While nothing conclusive is apparent concerning the contribution of learning processes to improved business performance, the relationship between the positive knowledge resources and business performance has often been assumed (Prieto and Revilla, 2006). The existence of knowledge resources in MNEs implies that, together
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with the specialized knowledge of individual members, knowledge is efficiently integrated in a complementary manner. It is when new knowledge enriches existing knowledge resources that it will lead to adjustments in the original knowledge, and may lead to decide the MNEs’ competitive intentions. Knowledge resources underpin the decisions and competences needed to efficiently develop the MNEs’ processes, products, and value of service (Marr & Schiuma, 2001). From this position, the static and the inclusive learning capability should represent the most advantageous ones. A strong basis of knowledge resources has been found to increase efficiency in new product development (Brockman and Morgan, 2003), organizational improvisation (Weick, 1993), recombination of prior routines (Holland, 1975), and absorptive capability (Cohen & Levinthal, 1990). In particular, it has been argued that knowledge resources that are valuable, rare, inimitable, and non-substitutable, would lead to competitive advantage (Barney, 1991). And it is accepted that complementarities appear between these knowledge resources and organizational resources (Grant, 1996). This all entails a potential to satisfy stakeholders’ expectations better than competitors on a sustainable basis. If stakeholders satisfy their expectations about the MNEs, it is expected that it will finally lead to the MNEs’ financial enhancement. Hence, knowledge resources provide awareness of local customer’s needs and ways to serve the foreign market, so they ought to be a significant determinant of MNEs performance. Hence, it is feasible that the differences in learning capability as a result of knowledge resources do lead to differences in business performance, especially in terms of non-financial performance. Finally, in addition to the absolute levels of knowledge resources and learning processes, the levels of interaction between them may be considered significant (Bontis, 1999; Prieto, 2003). It is logical to presume that low levels in both knowledge resources and learning processes, as is the situation of the minimized learning capability,
The Link between Learning Capability and Business Performance in MNEs
do not lead to enhanced business performance. According to Bontis et al. (2002), MNEs with a learning capability involving a misalignment between knowledge resources and learning processes may even obtain negative consequences on business performance. This would be the situation of the dynamic learning capability and the static learning capability. On the contrary, MNEs with a proper alignment between knowledge resources and learning processes, as is the case of the inclusive learning capability, exhibit a learning capability that may have a positive association with improved business performance. In fact, this alignment involves an MNE’s potential to shape knowledge resources and to use them by learning processes in such a way that it all continuously channels the satisfaction of stakeholders’ needs –non-financial performance- as a first step to improve the financial returns. Learning processes are essential to avoid knowledge resources to become ‘core rigidities’ (Leonard Barton, 1992), so that knowledge can be sustained as a source of competitive advantage. Hence, MNEs that properly combine knowledge resources and learning processes exhibit a better business performance, in terms of both nonfinancial and financial performance
ConClusions The main objective of this chapter is to emphasize the relationship between learning capability and business performance in MNEs. With this aim, the chapter addresses different configurations between knowledge resources and learning processes for an improved business performance. Business performance is valuated in both financial and non-financial terms. The essential proposition is that differences in MNEs performance exist as a result of differences in learning capability. Most importantly, the proper interaction between knowledge resources and learning processes is considered critical to obtain performance enhancements. In principle,
it is argued that learning processes by themselves do not seem to lead to long-term success, and that improved MNEs performance is in large derived from knowledge resources. Learning processes may occur, but it does not necessarily follow that those processes will directly enhance MNEs performance. If high levels of learning processes take place together with low levels of knowledge resources, it involves that there is learning not being absorbed. Learning is thus being forgotten, not allowing shaping and deploying an effective knowledge basis, and almost never yielding profitability in the long term. Therefore, learning processes can be considered a necessary but not sufficient condition for improved and sustained business performance. Improved business performance largely lies in the knowledge resources they create and mobilize. However, it must have in mind that knowledge resources depreciate with time, especially in international dynamic environments. Learning processes are then necessary to strength and rebuild knowledge resources so that the MNE may preserve its competitive advantage. Therefore, knowledge resources may be a sufficient condition to improve MNE performance, but not to sustain that level of competence. Previous assumption comes to say that to continually reinforce knowledge resources by means of the appropriate paths of learning processes is as important as possessing them at a certain point as a basis to obtain an improved business performance (Diericks & Cool, 1989). So, when managing knowledge, MNEs managers must not forget that it is the high levels of interaction between knowledge resources and learning processes that lead to achieve and to sustain positive consequences on MNEs performance. An inbalance may exist between knowledge resources and learning processes, but this should be a transitional position if MNEs are aspiring to build and rebuild competitiveness. Learning processes depend on past knowledge in its emergence and can be adjusted nearly instantaneously. On the other hand, knowledge resources emerge from learning
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processes, but cannot be adjusted instantaneously. In this sense, it is important to keep in mind that knowledge resources may result not only from parent company’s learning processes, but also from the assimilation of local subsidiaries knowledge. This last point depends on absorptive capacity of the local subsidiaries, which is largely intertwined with learning capability since both relate knowledge resources and learning processes, and relate these variables to the creation and sustainability of competitive advantage. Finally, it is worthy mention that it would be possible to presume that improvements on financial performance are seemingly preceded by improvements on non-financial conditions related to customers’ satisfaction, organizational reputation, and employee satisfaction. Hence, managers must also realize that the reaction of others (customer, employees, etc.) to the organizational activity is as important as the realization of superior financial performance. Indeed, how the market and people perceive the value of an organization’s products, services, and processes is required to strengthen established relations and to enlarge the economic value produced by organizations.
Barney, J. B. (1991). Firm resourc es and sustained competitive advantage. Journal of Management, 17(1), 99–120. doi:10.1177/014920639101700108
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Section 3
Implementation
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Chapter 11
Managing Corporate Responsibility to Foster Intangibles: A Convergence Model
Matteo Pedrini Altis – Postgraduate School Business & Society, Italy
ABsTRACT This paper presents a model for the integrated management of Corporate Responsibility (CR) initiatives and intangible resources. The model defines an approach for structuring a company’s social efforts (stakeholder management) in such a way as to increase competitiveness through the development of the intangible resources. After having presented an analysis of the studies conducted on the benefits of CR initiatives on the development of intangible resources, the text proposes a protocol to evaluating each CR initiative according to the model.
inTRoDuCTion The growing importance of Corporate Responsibility (CR) dates back to the 1970s, a time in which debate surrounding it began to gradually involve society as a whole. Initially the conflict of interests was between believers in an economic formula that limited the responsibility of corporations solely to the maximization of profit (Friedman 1962) and promoters of a new business concept that extended the responsibility of corporations to results of a social nature, an idea which was only completely codiDOI: 10.4018/978-1-60566-679-2.ch011
fied in time (Freeman 1984). Springing from that idea, over time the following schools of thought were established: •
the sustainable development spread globally by way of the Bruntland Report (1987) and was affirmed in the successive UN summit held in Rio de Janeiro (1992). In particular, studies to that end attempted to comprehend how corporations could operate in order to guarantee that “the needs of current generations are met without comprising the ability of future generations to meet their own needs” (World Commission on Environment & Development 1987, p. 43);
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Managing Corporate Responsibility to Foster Intangibles
•
•
•
•
the corporate citizenship theorized the recognition of corporate responsibilities in line with the role that a company plays as distributor of civil and social rights not to mention facilitator of the diffusion of rights of a political nature (Matten, Crane 2005); the corporate responsiveness claims that «being responsive enables organizations to act on their social responsibilities without getting bogged down in the quagmire of definitional problems that can so easily occur if organizations try to get a precise fix on what their true responsibilities are before acting» (Carroll 1979, p. 502); the social contract is based on the hypothesized existence of a contract between a corporation and society, in which the company concerns itself with responding to social pressures receiving in exchange society’s approval to operate (Scconi, 2006). The company therefore must demonstrate that its operation: «reflects a positive normative evaluation of the organization and its activities, a prosocial logic that differs fundamentally from narrow self interest» (Suchman 1995, p. 579); the corporate social performance considers business performance in the light of the existence of responsibility (Wood 1991). Such a model appeared incapable of fully merging the existence of ethic and moral values in corporate decisions with respect for the principles of economic rationality into a single theory (Swanson 1995).
It is the aim of this paper to supply a contribution to the last school of thought: corporate social performance. It suggests a new approach to the study of social performance, in particular to the analysis of the existing connection between it and the financial performance of a company. The intention is therefore to demonstrate how the adoption of an instrumental approach to CR initiatives results in a competitive advantage that results in financial improvement.
BACKGRounD The relationship that exists between the protection of the shareholders’ economic interests (bottom line) and the extension of corporate responsibility to other stakeholder has been widely investigated, so much so that in time a mass of empirical studies was constructed having been accumulated in the attempt to respond to a twofold question: what relationship binds the social and financial performances of a company? Is the relationship negative, neutral, or positive? Lee E. Preston and Douglas P. O’Bannon (1997), referring to the mass of studies conducted, identified four different categories of interpretation for such a relationship: (1) financial performance as an independent variable; (2) social performance as an independent variable; (3) the existence of a relationship of reciprocal influence; (4) the absence of a relationship. 1.
The first group of studies concluded that CR initiatives positively influence financial performance, suggesting that the financial performance was subject to a dependent relationship. These studies pointed out a positive connection in certain cases and a negative one in others. Two distinct motives were given in support of the existence of a positive relationship. The first is the existence of society’s ability to influence a corporation, justifying the financial performance’s dependence on the social performance as related to the ability of stakeholders to influence and be influenced by the corporation (Cornell, Shapiro 1987). The second is the capability of management, as the prime support of the existence of a positive relationship, in obtaining optimal results in a social, environmental, and economic sense. At the same time, the studies that identified a negative relationship sustained their ideas referring to the theory of arbitration. This theory states that the assumption of responsibility
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2.
3.
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by a corporation leads to inefficient use of corporate resources that could result in a more successful financial performance if invested in productive activities (Aupperle, Carroll & Hatfield 1985). Although it was not widely circulated, a second group of studies proposed the social performance as a dependent variable. In that vein of studies, two explanations were made in support of the existence of a positive relationship: first, the excess of resources, which favours the generation of discretionary power in the use of the exceeding resources, making it possible therefore to use them to increase stakeholder satisfaction resulting in improved social performance (Kraft, Hage 1990); and second, the stability of the organization manifested in companies capable of maintaining good financial performance which can more easily pay heed to demands of a social nature allowing management to dedicate more time to satisfying the expectations of stakeholders beyond the limits imposed by the law (McGuire, Sundgren & Schneeweis 1988). The prevalence of self-interest with respect to company objectives was given as support in the studies maintaining that the financial performance negatively influences social performance. It was observed how the personal goals of management can present elements that conflict with the interests of a company, explaining therefore the existence of inefficiency tied to company costs (Williamson 1985). In the case in which the financial performance produced is unsatisfactory, management is led to justifiably forego potentially damaging investments of a social nature with the aim of improving the short term financial performance, the principal criteria by which the quality of their conduct is evaluated. A third vein of studies examined the existence of a reciprocal relationship between social and financial performance. According to
4.
this approach, the relationship between the two dimensions is based on the existence of a complex of synergies, and, consequently, the character of the relationship depends on the prevalence of the positive or negative effects associated with it. Therefore, the relationship is positive when the interactions between the two performance types display a prevalence of positive over negative effects, and vice versa, therefore, if negative synergies are prevalent then the relationship will be negative (Waddock, Graves 1997). In this sense the CSR consists in the extent to which a firm internalize non-market costs (Heal 2005). Companies may behave in a socially responsible manner because they anticipate benefiting from these actions. So the results of the relationship between social and financial performance depends on the difference between social costs internalized and benefits achieved in term of higher capability to manage stakeholders (Coombs, Gilley 2005). One last category of contributions to the theory of the existing tie between the social and economic performances, which presented a limited number of empirical studies, proposed the hypothesis of the absence of a causal connection (McWilliams, Siegel 2001), and therefore a neutral relationship. A model based on the supply and demand of responsibility was given as the support for the absence of the relationship. The theory presented is based on the fact that, in a microeconomic dimension, investments connected to the assumption of responsibility are carried out in order to respond to existing demand on the part of stakeholders for such initiatives. A company’s effort to achieve positive social performance does not relate to the financial performance obtained. From this perspective then, the two performance types are independent of each other. According to the authors, the level
Managing Corporate Responsibility to Foster Intangibles
of social performance is correlated to the intensity of the demand for assumption of responsibility on the part of companies: there where stakeholders manifest an increasing demand for social performance, it is possible to observe a determined effort of a company towards some theme, but once social demand lessens, company efforts also decrease. Despite the studies conducted through the years that allowed for greater awareness of the relationship existing between social and economic performance, a degree of confusion still persists as to the nature of such a relationship, accentuating the necessity for an authentic perspective on all the studies conducted. The most detailed attempt towards such a perspective was conducted by Joshua D. Margolis and James P. Walsh (2003), who analyzed the empirical evidence of 122 studies conducted from 1971 to 2001. The analysis conducted shows how fifty-nine studies sustained the theory of a positive association, thirty supported the existence of a neutral relationship, while only seven concluded a negative one. Therefore, the majority of the studies furnished proof to support the concept of a positive relationship between social and economic performance. Marc Orlitsky, Frank L. Schmidt, and Sara L. Rynes (2003), later developed a critique of the Margolis and Walsh study founded on the inadequate consideration attributed to the methods of analysis used in the synthesized studies, so much so that it appears to also include studies of contestable results using statistical methodologies that can lead to miscalculations. The authors analyzed a part of the literature used by Margolis and Walsh and corrected the results in light of the methodological errors identified. The analysis observed how the majority of studies that demonstrated a negative relationship presented problems of a methodological nature limiting the weight of their findings, in particular because of excessive residual variances. In addition Orlitsky, Schmidt, and Rynes maintained that the explanation for different
results obtained in the study of the relationship between social and financial performance can be derived from the various research methodologies employed and the use of performance indicators that differ substantially from study to study. The debate around environmental responsibility began in the 1970s, as governments increasingly focused on environmental issues related to industrial operations. Industry topics of social concern have evolved over time focussing on different aspects. Initially the attention was on emission to water and air (1970s), then on recycling and chlorine bleaching (1980s) and on forestry and forest management, and forest (1990s) certification and, in recent year, on global climate change (Panwar et al. 2006). In response to these environmental issues of public concern, the firms has developed a renewed focus on sustainable use of natural resources and prevention of climate change through energy efficiency and the reduction of pollutant emissions. In this way a large number of firms are engaged in environmental management, often by adopting standards or management system (i.e. ISO 14001). Nowadays the environmental management issue of the most relevant issues a top-manager has to face and a lot of studies were done on the relation between operations and environmental responsibilities. So discuss about the Corporate Responsibility means deal with social, environmental and financial performance. Starting from the compilation and its critique, the following paragraphs furnish a contribution to the studies with regard to the hypothesis of a relationship of reciprocity between the different performance types. A new functional approach is presented in order to demonstrate how the assumption of responsibility can lead to improved financial performance if directed at maximizing the creation and development of intangible resources. Before diving into the study of the existing relationship between CR and intangible resources, it is useful to clarify to which realms this second
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category refers. The many studies of intangible resources do not seem to have led to the acceptance of a common definition, but they have certainly allowed researchers to determine a series of characteristics that in time came to be recognized by both the academic and entrepreneurial communities. By now, it is common to identify the intangible resources by the following characteristics: •
•
•
the lack of tangibility, that represents the primary characteristic of such resources, and is the cause of the majority of problems management encounters in the monitoring of such resources; the presence of probable future profits, in as much as intangible resources « are the real source of competitive power and the key factor in corporate adaptability for three reasons: they are hard to accumulate, they are capable of simultaneous multiple uses, and they are both inputs and outputs of business activities » (Itami, Roehl 1987, p. 12); the possibility of monitoring by the company, since this same characteristic of intangible resources is connected to the possibility of control of goods.
THE inTEGRATED APPRoACH The study of existing synergies between CR and intangible resources represents a new perspective on interpreting the relationship between social and financial performances since it views intangible resources as a variable on the relationship (Molteni 2004). The integrated management model upholds that CR initiatives can influence the wealth of intangible resources and thus, can positively influence a company’s financial performance, through variation of that wealth. The new model is useful for promoting the inclusion of CR related initiatives into the range of tools used to increase competitiveness, given
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their capacity to develop resources that primarily contribute to it. This is a new paradigm in the management of business activities as well as in the interpretation of connections between social and financial performances. In this model, CR initiatives are an integral part of the structure needed to sustain the performances, as they make up the basis for the company development potential. Specifically, these initiatives act as the pillars of a temple, and as such, they sustain the architraves: the intangible resources. Thus, implementing CR initiatives means setting the conditions to guarantee positive financial performance in the future.
CR initiatives The initiatives a company undertakes to satisfy stakeholders’ expectations beyond the precepts of the law and as expressions of a management that respects the principles of fairness in both value creation and distribution fall under the heading of stakeholder management. Following this model, every company should develop a CR initiative system consistent with the intangible resource wealth it intends to build and its existing relationships with stakeholders. Consequently, the initiatives undertaken within this system are often creative and represent original solutions. This characteristic is at the heart of CR proliferation over the years, transforming the landscape of CR practices focused on the assumption of corporate responsibility in a broad sense, making it highly varied. It would be difficult, if not impossible, to present an exhaustive list of initiatives that relate to corporate assumption of responsibility in a broad sense. Facing this difficulty, it seems appropriate to trace CR initiatives back to a set of themes, before focusing on the explanation of the model’s basic connections. Every initiative, though it has an impact on the totality of company stakeholders, concentrates its effects on certain prevalent categories. So it can be affirmed that every stakeholder management practice has an orientation given by the prevalence of certain
Managing Corporate Responsibility to Foster Intangibles
effects. Based on this assumption, it is possible to divide stakeholder management activities into three categories, which vary according to their prevalent orientation towards: •
•
•
satisfying the expectations and requests of internal stakeholders, whose main areas of concern are linked to themes of company welfare and the expansion of the corporate governance system; satisfying the expectations and requests of external stakeholders, whose predominant areas of interest can be identified in the development of a social accountability system, in the management of community relations and in activities of socially responsible investing; developing productive processes expressed through the implementation of company management systems, which have the objective of integrating attention to internal dynamics with the operating processes while assuring ethical and social correctness of the supply processes.
Following are the explanations of the main initiative areas leading back to every orientation identified, along with the explanation behind each initiative categorization. Every CR initiative can thus be traced back to one of the following areas: (1) company welfare; (2) corporate governance; (3) social and ethical accounting; (4) corporate philanthropy; (5) socially responsible investing; (6) environmental management; (7) ethical supply chain management. 1.
Company welfare consists in a structure of initiatives that offer collaborators a series of services that go beyond those required by current regulations. For example, company welfare programs can cover topics such as: workplace security, workers’physical health, supplemental insurance or pension offers, work-related stress management, spread of
2.
awareness on smoking-related problems, or more generally, activities focused on increasing or safeguarding the workers’ well being. The development of such activities should be carried out while taking into consideration a series of factors that significantly influence the programs’ efficacy, including (Davis, Gibson 1994): company size, history of the company, service and resource availability, the unionization rate, the organization’s administrative structure, the existence of processes which allow the correct identification of personal and collective workers’ problems. The introduction of a stakeholder view in a company requires the rethinking of interests within the corporate governance system. This change renders the goal set in traditional systems obsolete: that is, assuring the (main) shareholders an adequate safeguarding of their investments by the managers (agents) (Schleifer, Vishny 1997). The CR approach suggests that the groups towards which a company is responsible and whose interests define its management include many other groups than simply the shareholders (Hemphill 2004). The extension of corporate responsibility leads the corporate governance system to evolve from a traditional principal-agent relationship to new guidelines based on a company-stakeholder relationship. Companies are pressed to redesign the corporate governance system, with the objective of considering the stakeholders’ expectations. This inclusion can take place through a representative democratic system – based on the introduction of worker representatives in decision making bodies – or through participative democracy – where stakeholders are involved in the broader decision making process (Mintzberg 1983). The broadening of the corporate governance system is manifested through company introduction of tools such as ethical codes,
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3.
4.
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internal social auditing systems, ethical boards, or through the development of highly innovative tools created to respond to specific company requirements. Social accounting includes all activities encompassing the collection and successive communication of independent evaluations as to financial, social, and environmental performances (Elkington 1997). In practice social accounting is «the preparation and publication of an account about an organization’s social, environmental, employee community, customer and other stakeholder interactions and activities, and, where possible, the consequences of those interaction and activities» (Gray 2000). Social accounting allows for the establishment of a communication process focused on educating stakeholders and implementing a democratic participation system in the company (Owen et al. 2000). The activity is based on a performance indicator system, but its true purpose is that of encouraging dialogue in order to improve stakeholders’ perceptions of the importance given to the company’s direct and indirect impact on stakeholders’ areas of concern (O’Dwyer 2005). The ultimate goal of social accounting is to offer a method by which stakeholder expectations are discussed and considered in company decisions (Ball 2004, Kerr 2004), thus allowing increased participation in the company’s operation (Thomson, Bebbington 2005, Unerman, Bennett 2004). Stakeholder management systems find significant expression in initiatives carried out in the local community, specifically in the form of donations and philanthropic-type activities performed by a company. Those activities represent a discretional corporate responsibility acceptance, which does not only materialize in the unequivocal transfer of wealth, in money or otherwise, from the company to the local community (Kotler,
5.
Roberto & Lee 2002). The philanthropictype activities can also contribute to the creation of advantages for the company through the so-called strategic philanthropy (Post, Waddock 1995). This denomination represents the aim to establish an interpretation of community-oriented stakeholder management activities which distance themselves from wealth redistribution operations (Margolis, Walsh 2003) and move towards the achievement of increased company community involvement, and thus versus a winwin operational paradigm (Elkington 1994). To achieve positive community relations, companies can: publicize the philanthropic initiatives undertaken, in order to boost the benefits in terms of reputation (Fombrun 2005, Levy 1999); manage philanthropy so as to obtain advantages regarding a differentiation of the company position (Porter 2003, Porter, Kramer 2002) or to create new business opportunities thanks to the development of new services or products (Smith 1994). It is possible to define socially responsible investing (SRI) as the process of integrating personal values and social concerns into investment decision-making. During the 90s, SRI involved a growing number of companies and persons, and began to represent a widely valued investment opportunity (Sethi 2005, Stone 2000). For a company, SRI specifically means realizing activities that allow it to cope with two challenge areas: one regards financing and consists of the need to meet responsible investors’ requirements and thus attract capital investments following ethical and social criteria (Schueth 2003); the other challenge regards investment – in concrete terms, the necessity of assuring that the company’s portfolio of businesses participations is aligned with ethical-social criteria, whilst assuring promising investment profitability (Ahrens 2004).
Managing Corporate Responsibility to Foster Intangibles
6.
7.
The acceptance of wide-ranging company responsibilities also leads to an evaluation of the effect its production has on the environment. Responsible companies are motivated to develop strategic environmental management activities: a system that allows the assumption of corporate responsibility regarding the environmental effects of its production with the goal of matching the increased attention to environmental needs that now characterizes consumers (Orsato 2006). The target of environmental management systems is thus to alleviate clients’ environmental concerns, and consequently to access clients with particularly high attentiveness towards the environmental aspect of the services or products offered by a company, thus creating a differentiating advantage that would be difficult to imitate (Reinhardt 1999). The systems mentioned contribute to the company’s environmental sustainability and to the positive effects that an improved environmental performance creates on a company’s competitiveness (Cohen, Fenn & Naimon 2000, Christmann 2000, Dowell, Hart & Yeung 2000). Management of the production line currently needs to face regulatory and consumer pressures, since social and environmental dimensions are implicated in supplier relations. Thus, stakeholder management can be realized as an activity within the supply chain, which – when directed towards a responsible management system – integrates environmental and social dimensions into the processes that assure the efficiency of delivering the right product at the right moment (Jamison, Murdoch 2004). Development of responsible management of the production process system entails a revision of the operational processes, of the objectives and the criteria to ensure that supplier relations are handled conscientiously (Mamic 2005). The development of the aforementioned
system leads to a rethinking of the supply chain and mainly leads to the consideration of ethical and social criteria when choosing suppliers. Therefore, the company works to ensure that the supply operations are able to: guarantee the efficiency of the supplying processes; permit the company to take on indirect responsibilities tied to supplier behavior (Jamison, Murdoch 2004).
The intangibles The core element of the integrated approach consists in maintaining that the attention given to the social dimension in stakeholder relations during the development of the productive process can and should uphold the support beam of company performance: the intangible resources. The CR initiatives should thus be chosen and implemented with the perspective of favouring the development of at least one of the cardinal elements of intangible resources. A broad discussion about what are the different components of IC took place in the last years. A first construct posits IC in a two-level construct (Sveiby 1997): human capital, definite as the knowledge created by and stored in a firm’s employees, and structural capital, defined as the embodiment, empowerment, and supportive infrastructure of human capital. Then the structural capital is divided into organizational capital, that includes the knowledge created by and stored in a firm’s information technology system and processes, that speeds the follow knowledge through the organization) and customer capital, that are the relationships that a firm has with its customers (Edvinsson, Malone 1997). The customer capital was also discussed as one aspect of relational capital, the capital that encompasses all external relationships (Bontis, 1996). This view is similar to that referred to as external social capital by sociologists (Bourdieu, 1985; Burt 1992; Coleman 1998) and management theorists (Abler and Kwon, 2002; Nahapiet and Ghoshal 1998; Pennings et al. 1998; Stewart 1997; Yundt
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et al 2004). Finally the proposed classifications of intangible resources agreed on the existence of three cardinal elements: •
•
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the human capital, which implies all of the immaterial resources not incorporated in the company, but who are present anyway as the individuals who work within it. This capital can disappear the moment an individual decides to quit his cooperation with a company. Thus, the company does not own this capital, but it may include it among its resources as a consequence of a worker’s choice to perform for the company. This category includes dimensions such as employee motivation and involvement, competency and ability of the people working within the company, and the overall shared company environment (Sveiby 1997). the organizational capital, results from activities that have the effect of transferring knowledge and competence from workers to the company, allowing it to acquire ownership thanks to knowledge that is transformed from tacit to explicit. This capital is independent of individual workers and thus, even if the working relationships end, it remains available to a company. This category is further subdivided into two categories: the totality of company processes and the activities of innovation and development. The totality of company processes is the combination of information available to a company, strategically speaking – including the company mission; the main economic-social positioning features; the awareness of the competitive advantage maintained in the past and to be maintained in the future, as well as activities necessary to encourage and expand it – in activities carried out cooperatively, and the product and service portfolio offered by the company. Generally speaking, the idea is to use the processes to identify the methods,
•
procedures, and operational systems, which together have the objective of positioning collaborators to effectively apply competence and ability in order to produce value. Innovation and development activities, on the other hand, include initiatives aimed at modifying the specialization level of the company, improving operational processes, developing new products/concepts for company implementation, and carrying out sales and marketing activities. the relational capital, gathers the company relations and collaborations held with individuals and organizations outside of the company. This includes four sub-categories: the value of customer relations, the value of the relations with suppliers, the value of company-investors relations, and the value of the relations with all other interest holders present in the context, generally referred to as network relations.
The commitment to CR initiatives, thanks to the resulting development of intangible resources, allows a company to benefit from the improvements in financial performance that such resources generate. In fact, intangible resources are marked by a heightened capacity of generating value when compared to other resources. This capacity is explained by certain economic properties which characterize them (Lev 1999): •
scalability, since the principle of competitive usage is not applicable to intangible resources given that the use of a resource by one individual or organization does not exclude its use by another. This characteristic entails that once the development of an intangible resource has been established, the only limitation to its use are set by the dimensions of the market itself (Romer 1998), thus allowing a company limitless possibilities in generating value from a single intangible resource;
Managing Corporate Responsibility to Foster Intangibles
•
•
possibility of obtaining growing economic returns, since the “knowledge is collective, every idea is based on the idea preceding it, while machines wear and need to be changed. In this sense, every dollar invested in knowledge brings about a positive contribution to earnings, while a good three quarters of private machinery and equipment investments are needed just to cover their depreciation” (Grossman, Helpman 1994, p.34). This possibility can be fuelled by four factors (Teece 2000): the creation of standards, since the standard’s owner reaps larger advantages in the growth of the organizations or the people that have adopted that standard; the so-called customer lock-in phenomenon (Farrell, Shapiro 1988), since the consumer acceptance of a standard heightens the transaction costs from one technology to another, thus creating an entrance barrier for new technologies; the high impact of development costs; knowledge economies, since increased knowledge favours the producer, who accumulates experience within a specific category of goods and can thus take advantage of the acquired experience. imitation difficulty, fuelled by three different phenomena: casual ambiguity, since the cause and effect relationship that allowed for immaterial resource development is difficult to replicate; path dependency, since the development of intangible resources generates a process of knowledge accumulation, which makes it so that the obtainable results are influenced by and dependent on choices made previously; time compression, because intangible resource development requires a long period of time, thus discouraging imitation (Liebowitz, Margolis 1999);
•
the relevance of the network effect, which expresses its potential if an initial control of the network is gained, so that the potential users, seeing the benefits for current members of the network, decide to join, further incrementing the positive returns (Shapiro, Varian 1999). However, observations show that “the centre of an important network holds an innovation, which was further developed and transformed into a product or service, whose ownership rights are guaranteed by patents, brands or by a strong name” (Lev 2003, p. 34). Often the availability of an immaterial good is characterized by a cycle, which includes the creation of an idea, its production, and network control. Therefore, intangible resources open up the possibility of taking hold of the centre of a network thus offering advantages connected to growing returns of a network.
Within the scope of the model, CR initiatives should be undertaken as useful ways to profit from the results of intangible resources: scalability, increasing returns, difficult imitation and the network effect. But which are the relationships that link CR initiatives targeted towards stakeholders and processes with the development of the three intangible resource dimensions? How do the three pillars encourage the development of intangible resources and thus assure the company’s long-term competitiveness? Following is a detailed relation of this engine of change, including a discussion of the combined synergies that link the social dimension with that of intangible resources, also in light of an analysis of theoretic studies investigating those relationships.
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THE FunDAMEnTAl RElATionsHiPs in THE MoDEl
• •
Before describing the relationships that constitute the model, it is useful to point out how the correct application of the new paradigm requires adaptation of the model to fit each corporation in which management intends to develop a joint strategy between assumption of responsibility and development of intangible resources. Each practice of CR could produce different levels of benefits in each corporation, as related to the usefulness of the intangible resources generated for the strategy and the nature and quality of the relationships maintained with the stakeholders. Given the diversity that characterizes corporations, the purpose of this paper is to propose a model that specifies the potential synergies that link up the activities of stakeholder management, the generation of intangible resources, and, subsequently, the financial performance. The goal is to draw attention to the benefits available to a company and to propose the assumption of responsibilities in a form coherent with the win-win model in which benefits generated for society as a whole are also advantageous to a company. After that, the paper will proceed to an analysis of the ways in which each pillar of the model sustains the development of intangible resources, and, therefore, the competitiveness of the company. Figure 1 shows a map of the overall complex of ties that bind the different elements that make up the model.
CR Activities, Human Capital, and Financial Performance The activities aimed at satisfying the demands of employees beyond the standards required by law are positively related to the development of human capital. In fact, the realization of activities in the best interests of employees allows management to obtain:
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•
increased motivation and involvement of the personnel; improvement in the overall effectiveness of the company; enrichment in office environment.
Stakeholder management activities directed prevalently at the internal company structure, demonstrate attention to non-economic appeals resulting in an increased sense of belonging and employee motivation (Drumwright 1996). The establishment of a positive opinion of the company appears to present a positive relationship with employee loyalty to the company. Confirming the aforementioned relationships, some studies pointed out how the companies that satisfy employee requests beyond standards set by law have a turnover rate lower than those that do not utilize such methods (Greening, Turban 2000, Krackhardt, Hanson 1993). The positive relationships between the implementation of stakeholder management activities directed at the internal company structure and the level of employee motivation is upheld by studies that demonstrated how in responsible companies employee behaviour motivated solely by self-interest is less present (Dyne, Graham & Dienesch 1994, Schein 1999) favouring the existence of an alignment between corporate goals and stakeholder behaviour (Gottschalg, Zollo 2007). Attention to the non-economic expectations of the employees also allows for an expansion of competencies available to the company (Hess, Rogovsky & Dunfee 2002). This connection finds justification in the ability of companies attentive to the needs of employees to attract highly qualified persons, placing the company in such a position as to acquire the finest honed competencies available in the job market (Backhaus, Stone & Heiner 2002). Empirical evidence has demonstrated how such attractiveness represents an advantage for companies especially in periods during which
Managing Corporate Responsibility to Foster Intangibles
Figure 1. The relationships in the model
the job market is subject to intense competition (Albinger, Freeman 2000). Another factor that supports the ability of CR initiatives to improve the competencies available to a company is observable in the attention responsible companies pay to equal opportunity between employees. Attention in this area leads to the establishment of human capital marked by an increased variety of personalities, experiences, and management styles. The presence of such increased variety allows a company to benefit from an elevated degree of creativity, resulting in a extremely valuable human capital (Edvinsson, Malone 1997). A third advantage gained through activities of stakeholder management aimed primarily at the people within the company structure is a more
collaborative office environment. (Paine, Organ 2000). Activities that demonstrate a company’s attention to non-economic appeals accentuate the importance employees give to satisfying the requests of other stakeholders and environmental conditions. Generally speaking, such activities favour the development of adaptability on the part of employees (Katz, Kahn 1966). Likewise, the amplification of the collaborative dimension in the office environment allows for improvements in the efficiency of inter-functional work groups (Hatten, Rosenthal 1999) as well as in groups which share resources and competencies between various company departments (Gabbay, Zuckerman 1998, Tsai, Ghoshal 1998). A collaborative working environment favours the intensification
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of employee contributions to strategy formation. Since employees are more advantageously positioned than top management to be able to identify and correct company problems (Wright et. Al 1999), their contributions favour the development of strategies that allow for an improved market position (Azzone, Noci 1998, Handfield et al. 2001, Polonsky et al. 1998). The progress observed in human capital through activities of stakeholder management directed at the internal company structure, specifically in the employment of such increased capital in management, allows for advancements in the financial performance of the company first and foremost in terms of productivity (Estes 1996, Korten 1995, Makower 1994, Van Buren 1995). In fact, the development of human capital obtained through stakeholder management allows an organization to contain their costs sustained for: •
•
•
•
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substitution of personnel, since the drastic reduction in the turnover rate leads to improved motivation leading to cost reductions for the training of newly hired personnel (Hillmer, Hillmer & McRoberts 2004) and recruitment activities (Greening, Turban 2000); company inefficiencies, since the company can benefit from the development of personal competencies as a way to reduce costs related to possible structural shortages in the company (Spender 1996); knowledge enhancement, since a more collaborative office environment benefits from more efficient and effective processes of reciprocal learning (Mowery, Oxley & Silverman 1996, Powell, Koput & SmithDoerr 1996); operative processes, since improved motivation, results in increased productivity among employees as well as a widespread reduction in operative costs (King, Lenox 2000, King, Lenox 2002). For example, empirical evidence demonstrated
how concessions of days off for illness of a family member, the possibility to work from home, the proposal of flexible working hours and part time positions have a positive relationships with productivity (Siegwarth, Meyer, Mukerjee & Sestero 2001). The development of human capital resulting from CR initiatives focused on internal stakeholders, in addition to reduction of operational costs, also favours an increase in productivity thanks to a more efficient use of resources. Specifically, the development of human capital results in: •
•
•
increases in long-term efficiency of the productive processes, thanks in particular to activities of employee training (Cook, Seith 1991). Some studies demonstrated how stakeholder management activities cantered around training lead to increases in individual and collective productivity (Koch, McGrath 1995); improvements in each employee’s productivity, since the company as a whole benefits from increased motivation. To that end some studies identified employees who have a high respect for company values as among the most efficient ways to increase productivity (Dyer, Reeves 1995, Getzner 1999, Macduffe 1995, Dyer, Singh 1998); Growth in the ability to identify and take advantage of synergies existing among resources (Hitt et al. 2001), in as much as it is possible to observe how improved motivation of the human capital allows for raising the potential for development and innovation. Such growth is manifested in: a more efficient sharing of resources (Christensen, Anthony & Roth 2004); and improved production and knowledge sharing (Choo, Bontis 2002, Nonaka, Takeuchi 1995, Zander, Kogut 1995).
Managing Corporate Responsibility to Foster Intangibles
CR initiatives, Relational Capital, and Financial Performance The implementation of CR initiatives intended primarily for those outside of the company structure leads to substantial improvement in the value of the company’s relationships, and therefore, in the many resources comprising relational capital. The assumption of responsibility was proposed by certain authors as a useful way to improve the overall opinion external stakeholders has of the company thus developing the best possible company reputation (De Man 2005, Fombrun 2005, Schnietz, Epstein 2005). Therefore, the initiatives aimed at external stakeholders improve the intangible resources represented by relationships with clients, suppliers, investors, and farther reaching networking relationships. Expressions of the intention to assume corporate responsibilities in an extended dimension permit a company to benefit from an improved opinion on the part of customers, particularly when considering the positive opinion that said customers have concerning the social and ethical orientation that characterizes the company (Brown, Dacin 1997). The theory that stakeholder management represents an opportunity to achieve improvement in customer relations can be observed in efforts made by companies to enhance their actions of assumption of responsibility through publicity and advertisement campaigns, trying in this way to maximize the benefits obtained in terms of customer relations (Stroup, Neubert 1987). As for relationships with the suppliers, the activities aimed at reconciling interests of a social and environmental nature nourish the reciprocal and collaborative dimension of the relationships, accentuating the importance that such dimensions have for a cost-efficient and proficient management of the supply chain (Bell, Oppenheimer & Bastien 2002, Meel, Saat 2000). Some studies have noted how increased attention to social appeals favours stability in relationships with suppliers (Uzzi 1997), allowing companies to obtain benefits
resulting from the possibility to involve suppliers in the development of new products and services (Kamath, Liker 1994). The assumption of responsibility also produces positive effects on the relationships that company maintain with investors, in particular it favours enrichment thanks to an increased transparency that activities of responsibility induce in management (Richardson, Welker & Hutchinson 1999). The development of attention to stakeholders’ need to be informed, along with the identification of the company as ethical and responsible, favours a positive attitude on the part of investors in their assessment of the company and boosts the stability of relationships. In particular, as previously discussed, the activities of stakeholder management directed at investors allow for increases in the capital invested by those who contemplate ethical and social concerns when choosing investments. Improvement in relational capital generated by activities of stakeholder management encompasses all the relationships held by persons from the categories previously discussed, seen together as a company’s networking relations. Initiatives aimed at those outside of the company structure, in particular, allow a company to accelerate the process of social legitimization (Wokutch, Spencer 1987). Such increased legitimization is cemented in collaborative relationships with political and administrative institutions (Handelman, Arnold 1999), with social movements (Davis, McAdam 2000, Maignan, Ralston 2002), and with the communities in the region in which the company operates. Collaboration can be attained in through engaging in philanthropic activities coherent with company values (Godfrey 2005) and activities of integration in the local community (Adler, Kwon 2002, Fukuyama 1995). The development of legitimization helps to improve the quality of the relational capital available to a company, and, through improvements in the opinions of those in the network, reinforces the company reputation and reduces the vulnerability of the company to the media (Shane, Spicer 1983).
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The development of relational capital resulting from activities of stakeholder management allows a company to observe improvements in productivity. The consequent improvement in the quality of the relational capital through stakeholder management also allows for a reduction in costs sustained for: •
•
insurance, thanks to the reduction in probability that economic damages could emerge as a result of activities of boycotting by individuals or organizations attentive to social and environmental themes (Pruitt, Friedman 1986); transactions with suppliers, since improvement in the relationships with suppliers allows for a higher rate of collaboration with them and therefore, a containment in part of costs tied to inefficiency in transaction processes (Dollinger, Golden & Saxton 1997). It is possible for the company to take advantages of benefits generated by the gradual transformation of relationships with suppliers towards partnerships, with consequential reductions in supervision costs (Dore 1985).
The activities of stakeholder management that fuel relational capital also allow for increases in growth of the company, in particular because of a higher number of development opportunities resulting from the quality of relationships entertained (Fombrun, Gardberg 2000). Relational capital enrichment resulting from the attention to appeals of external stakeholders allows a company to generate benefits in terms of future growth because of the widened range of strategic opportunities available to a company. In that direction, a particularly significant opportunity lies in being able to develop valuable processes of co-creation with customers, who have an opportunity to inform themselves as to what the consumers desire and expect (Edvinsson, Malone 1997). Given this inside information not available to its competitors, a company can take the opportunity
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to be the first to take action (Lieberman, Montgomery 1988). The development of corporate responsibility initiatives aimed at external stakeholders allows, in addition, for an improvement in the company reputation and subsequently all the opportunities stemming from such an improvement. The development of a good reputation allows a company to obtain benefits in terms of premium price (Porter, Van Der Linde 1995); to contain the threat of possible damages to the reputation deriving from information of a negative nature (Kytle, John 2005); to attract an increased number of customers thanks to a differentiation of the company founded on mechanisms of the reputation as a responsible company (Brown, Dacin 1997); and to obtain improvements in terms of market shares (Srivastava et al. 1997, Vergin, Qorofleh 1998).
The CR Activities, the organizational Capital, and Financial Performance The activities of stakeholder management aimed prevalently at the processes seem to primarily impact the organizational capital available to a company, inspiring activities of innovation and development conducted by the company and improving the effectiveness and efficiency of the productive processes. The development resulting from activities of stakeholder management allows for enrichment in company innovation and development due to the existence of two relationships. The first relationship comes from the innovation that the introduction of systems of responsible management produces in the productive processes. The introduction of a management system founded on principals of responsibility leads to a necessity to revise the overall company processes with the aim of bringing them into coherence with the extended assumption of responsibility. Such a revision leads to the establishment of activities of innovation and development that are then implemented in the partial revision of the productive processes. The second relationship is manifested in increased involvement of external persons who
Managing Corporate Responsibility to Foster Intangibles
are inspired by the stakeholder management initiatives. This proves that stakeholders can directly contribute to company innovation and development. Their involvement affords a company improved innovative capacity in as much, as confirmed by some studies, that capacity is primarily determined by the cognitive network established with other economic individuals or organizations rather than with the internal capacity of the company (Pisano, Teece 1994, Shan, Walzer & Kogut 1994). The activities of stakeholder management, acting in an efficient way directly on the company’s cognitive network, favours the organizational capital development of the company, thanks to a higher degree of company innovativeness (Pittaway et al. 2004). Upon attainment of improvement in organizational capital obtained by way of stakeholder management activities aimed at processes, it is possible to associate progress both in productivity and company growth. In terms of productivity, a company engaged in activities of stakeholder management directed at processes, thanks to the partial or total revision of the processes, can benefit from a reduction in company inefficiencies, and, consequently, observe a reduction in operational costs. The most consistent benefits gained in terms of productivity are in the fine tuning of the processes and the attainment of improved effectiveness and efficiency. Along with this, improvements in terms of both costs of production and use of company resources are generated by the increased capacity to innovate and develop (Lev 1999, Parisi, Schiantarelli & Sembenelli 2006). Company growth is positively associated with activities of innovation and development. In particular it is interesting to note the tie existing between the activities of stakeholder management and the possibility to develop patented products and services. Some studies have demonstrated how statistically a positive relationship exists between the number of patents a company holds and its future growth (Bloom, Van Reenen 2002).
Therefore, the development of systems of stakeholder management aimed at processes allow a company to benefit from increased growth opportunities. In particular, the assumption of corporate responsibilities creates opportunities to create a line of products and services with heightened environmental or social characterizations. Innovation activities carried out to those ends allow companies to gain in the category of responsible customers and, consequently, to generate new strategic opportunities. Consumer choices seem increasingly more considerate of the ethical and environmental characteristics of products and services offered by a company (Mohr, Webb & Harris 2001), attributing, therefore, an increased strategic relevance to the market segment of responsible consumers or those sensitive to environmental concerns (Hart, Ahuja 1996, Johnson, Greening 1999).
The Model Toolkit But how does a company draw benefits from the combined synergies previously discussed? How do they go about choosing the most efficient CR initiatives from among the many possible projects? To assist management with incorporating the model in the decision making process, the following simple, useful toolkit helps to put the theoretical design previously described into practice. Considering the widely recognized difficulty in attributing a monetary value to intangible resources, it was decided to objectively evaluate tools designed for that purpose. It was decided to propose a tool that favours a qualitative and descriptive analysis of the benefits in terms of intangible resources connected to each CR initiative, without however making estimates as to the potential financial benefits. The following paragraphs describe a useful protocol for prioritizing CR initiatives within the outlook of the model, analyzing them as to the effects produced on the three dimensions of intangible resources. That protocol is subdivided
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Figure 2. The model toolkit: expected figures
into four steps: (1) the evaluation of the portfolio of doable initiatives (2) the choice of the initiatives to embark on, (3) the determination of a working plan, (4) the monitoring of the results of the initiative. 1.
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The first step towards rendering the model functional consists of evaluating the possible impacts that each CR initiative could have on the company’s intangible resources. All the initiatives, whether they are characterized by being subjected to constant modifications in order to adapt to company goals or by a high level of creativity (including cause-related marketing activities) or by being regulated
by standards (including the publication of a sustainability report), must each be objects of evaluation. In order to proceed to the definition of such a conclusion, it is suggested to use a practical tool for rendering this analysis organic (figure 2). The goal of using this tool is to define the level of benefits that a CR initiative could generate throughout the different components of intangible resources. One must then proceed to an evaluation of the expected benefits for each of the intangible resources the tool addresses attributing an opinion on a scale from 1 to 5 (1=bad, 2=improvable, 3=fair, 4=good, 5=very good). The attribution of
Managing Corporate Responsibility to Foster Intangibles
such an opinion should be assigned with respect to the benefits expected in terms of intangible resources that could be produced by the tool. The expression of such opinions permits evaluators to differentiate between the different sectors of the model presented, which, once completed with the compilation of opinions expressed, represent the benefits of the initiative on the intangible resources in a synthetic way. The primary goal of the tool is not to reach an objective quantification of the benefits, as much as to favour the confrontation between the people charged with identifying relevant initiatives with reference to the synergies existing between CR and intangible resources. The necessity to express a team opinion favors dialogue held to reinterpret each member’s duty of CR in the perspective of the model. Should people make contrasting opinions, they will be called upon to explain the reasoning behind their judgments. A discussion about the synergies existing between the activities of CR and the development of intangible resources naturally leads to more specific identification of a company’s intangible resources and its existing synergies. The toolkit aids in structuring a discussion centred on the interrelations existing between the dimensions of corporate responsibility and intangible resources. 2.
Once a profile has been compiled and approved for each CR initiative from among those possible to implement, comparing each of their graphs, it is possible to display a general perspective of the synergies each CR initiative would be capable of activating. The analysis of the various graphics produced aids in the selection of future projects to undertake, concentrating investments in CR where the benefits would be most consistent. Such a tool helps to identify the practices that present the best benefits expected in terms of intangible resources at the same time as best responding to the contingent demands of the enterprise. The
3.
authenticity of the evaluations conducted allows a company to implement the CR initiatives in line with their own strategies of development, preferring those that assure the development of intangible resources in line with the strategy. If, for example, management identifies the development of employee motivation as a priority, it will be opportune to direct choices towards those CR initiatives that generate benefits in that area, even if the overall number of benefits is inferior to other areas. The choice criteria for CR initiatives does not reside therefore in the maximization of the overall general benefits in terms of intangible resources, as much as in generating intangible resources selected in the implementation of the company strategy. The toolkit was not designed to help companies impartially identify CR initiatives that deserve the most attention, but rather support the implementation of those strategic choices leading to company development. Once the initiatives top management believes most opportune have been identified, it is necessary to consider each possibility critically, specifying a working plan for their implementation. Such a plan should include the following: the project budget, the project leader, an implementation timeline and any possible secondary activities of involvement/ information of the stakeholders that allow for the maximization of benefits in terms of intangible resources obtained through the project. Though the first four categories are typical of the activities of project management, and therefore do not warrant closer examination, the last category deserves a short explanation. In order to understand this category, it is necessary to begin by stating how often implementation of CR initiatives are insufficient in order to favour the maximization of benefits, a scenario easily improved should they have been implemented
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with the involvement of the stakeholders themselves. In this case, in addition to the activity of publicity that constitutes the first level of involvement, other activities can be identified with the aim to directly involve stakeholders in the project. The benefits in terms of intangible resources will grow to the measure by which forms of stakeholder participation in the project have been anticipated, whether in the decision-making phases or in those operative or in the evaluation of the results obtained. The optimal situation that leads to maximization of the benefits in terms of intangible resources anticipates the involvement of the stakeholders at all levels. In order to understand what this entails, let’s identify the practices of involvement that can be realized with reference to company initiatives of a philanthropic nature. At the decision-making level, from the perspective of maximizing the intangible resources, it is currently standard to distribute and collect survey forms to employees and local communities as to the definition of initiatives to support. An effective, widely used practice is to administer the employees a questionnaire so as to gather their opinions as to a pack of initiatives that could potentially gather donations. With reference to functional involvement, the company can provide sign-up forms of active support for the initiative to the workers, who may then, for example, concede volunteer working hours. In this way, in addition to allocations in money, employees become participants in as much as they may dedicate a portion of their working hours to time to support the project. Finally the evaluation can be structured foreseeing the presentation of a financial statement of the outcomes obtained in the balance of sustainability, favouring in this way continued dialogue with stakeholders and putting the employees in a condition to understand the produced benefits.
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4.
The last phase of the protocol consists in the periodic monitoring of the results obtained so as to understand if the expectations in terms of improvement of the intangible resources have been achieved. The process of evaluation conducted in the first phrase of the project can be repeated more than once, periodically, or at the project’s conclusion. It would therefore involve holding discussions about the opinion of the benefits attained, compiling a profile with respect to the real benefits generated by the project on the intangible resources. Superimposing the two evaluations on a single tool, it will be possible to proceed to an analysis of the differences existing between the expected and actual benefits. An example of such a result is given in Figure 3.
The analysis of such contrasts encourages a discussion concerning the strong and weak points of the project, allowing participants to understand the reasons behind the decreased or increased results obtained. Such contrasts, in fact, may be due to various causes: the conditions previously established may have been unexpected, there may have been excessive expectations with respect to the project, a change in the project conditions different from those foreseen may have developed, or still other explanations that would have been impossible to anticipate. This phase is of particular importance since, operating on a partially unexplored plane, it becomes indispensable to start a process of gradual learning and fine-tuning that, in time, allows a company to significantly develop the intangible resources it has available. Continual improvement is an essential element of the model, since the development of intangible resources and the sustainability of the model itself are conditioned to the continual adaptation of the existing practices. Only a careful process of evaluation may allow a company to develop those skills necessary to better respond to the needs for intangible resources dictated by the strategy
Managing Corporate Responsibility to Foster Intangibles
Figure 3. The model: expected and actual figures
as well as respond to the fluctuating demands of external stakeholders. The toolkit is intended to support the development of a CR strategy that best serves the financial performance. The endeavour is to equip top management with a methodology that allows them to carefully review choices of CR practices that present an accentuated capacity of generating intangible resources. The tool is deliberately simple and flexible in order not to restrict the creativity that, necessarily, distinguishes the search for solutions capable of taking advantage of those spaces in which the initiatives undertaken are capable of satisfying the expectations of stakeholders while contributing to the competitiveness of the company.
ConClusions The model presented consists of a new approach to the development of CR initiatives, which contrasts the idea that upholds that the attention to stakeholders’non-economic expectations is detrimental to the shareholders’ interests. On the contrary, CR activities can be an opportunity for shareholders, being that the latter can benefit from financial performance improvements produced by a pragmatic attention to the stakeholders’ non-economic requests. If attention towards stakeholders’ requirements is part of a strategy directed at exploiting the relationships with intangible resources, it is possible that these activities may generate higher values, both for the shareholders and the stakeholders, bringing the
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company closer to the implementation of strategies that are responsible and successful from a competitive perspective. Thus, an adoption of this model eases the tension existing between stakeholder and shareholder interests, allowing the assumption of responsibility to directly contribute to the process of increasing company value. In this perspective, CR initiatives are not limited to donations or philanthropic activities, which consist in redistributing wealth produced amongst stakeholders, but insofar as they can support the intangible resource development, they become essential elements of company competitiveness. The model’s central thesis thus consists in proposing that CR activities management needs to take place within a new perspective, taking different approaches as to concerns of stakeholders, approaches which are creative and better able to exploit the existing links with intangible resources. In this respect, an attentive management of social investments becomes strategic, since insufficient or overstated situations can be damaging for the company. Overextension of CR activities can certainly favour the structure’s stability over time, but it can also remove resources from company development, requiring higher investments for performance maintenance over time. On the contrary, insufficient appropriations for those activities can lead to difficulties in sustaining business performance over time, leading to the disappearance of intangible resource development, which fuels a company’s financial performance. Thus, the necessity emerges for an increased commitment of attention towards CR activities’ impact on intangible resources. Specifically, the many possibilities offered by the model’s implementation– done successfully and complete with all proposed connections – seems to suggest different paths for optimizing the benefits proposed by that paradigm. The first path consists in assisting companies currently developing CR practices in recognizing the convenience of giving corporate responsibility strategic relevance. Thus, the suggestion is to oper-
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ate in the direction of increased awareness amongst top managers about opportunities offered by the integration of responsibility in company strategy, highlighting specifically how an approach, which intends to derive benefits from such practices, is not opposed to and does not deny the philanthropic nature of these operations. The development of the attention towards company benefits, in fact, does not reduce the social value of the realized actions, and furthermore does not diminish participants’ philanthropic interests. Thus, it is a question of favouring a management culture change towards the increasingly creative orientation for the implementation of win-win strategies, able to reconcile philanthropic and competitive tensions. A second path consists in developing the awareness of synergies and instruments to support creativity. The commitment to benefiting from the synergies proposed by the model requires entrepreneurial creativity in looking for innovative activities sure to benefit from the suggested cause and effect connections. The use of such creativity is thus a necessary condition for the optimization of the benefits suggested by the proposed paradigm, but it does not seem to be sufficient to guarantee achievement. In this respect, it seems necessary to proceed with the development of a specific knowledge package regarding efficiency conditions for every stakeholder management system area. These forward-thinking steps seem necessary to overcome the deceptive conflict between the tension towards profit and the attention to social responsibility, thanks to the possibility of CR activities contributing directly to the value creation process of a company. The proposed model thus suggests how such activities should not be limited to wealth redistribution amongst stakeholders, since they can become fundamental elements in the company’s competitiveness to the extent that they support the development of intangible resources.
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Chapter 12
Intellectual Capital Management in Long-Lasting Family Firms: The DuPont Case Rosa Nelly Trevinyo-Rodríguez EGADE Campus Monterrey, México
ABsTRACT How to acknowledge, manage and measure intangible strategic resources embedded in organizational settings—such as intellectual capital—has been a widely discussed topic during the last two decades. However, when referring to unique organizational forms such as family-owned or controlled firms, the topic is understudied. Considering that approximately one third of S&P 500 are family-controlled firms— i.e. DuPont—, which have survived beyond a lifetime, the author asks herself how these long-lasting family businesses managed to balance the strategic and parallel creation, development and use of their intellectual capital both at the family and business levels in order to support growth and regeneration. She introduces the ICFB-Family Wealth matrix in order to describe our findings.
inTRoDuCTion Intellectual Capital is one of the key-success factors a multinational company has to care about in the new economy. And, although much has been said about how to value, measure and analyze intangible assets, not many authors have focused their efforts in determining how the strategic use of intellectual resources could leverage not only the firm productivity and owners’ reports, but also its people’s creativity, innovation and well-being. DOI: 10.4018/978-1-60566-679-2.ch012
This chapter discusses how the strategic administration of these intangible resources could become a sustainable competitive advantage over time, making a company achieve market dominance and a leading position in the industry. We analyze the DuPont Case, a family-controlled business, and examine how the family background provided a set of qualitative resources that impacted (and interacted with) other assets in the organization, creating a unique way of doing and viewing things (e.g. initiatives, values and conduct policies). How long-lasting family firms such as DuPont managed to balance the strategic and parallel cre-
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ation, development and use of their intellectual capital both at the family and business levels in order to support growth and regeneration is our main question. Three propositions were generated and summarized in the ICFB-Family Wealth Matrix we introduce here. We put forward the idea that family firms tend to move along the different quadrants, depending on their “family first” or “business first” focus, intending to find an equilibrium and stability that could help them outlive and outperform beyond a lifetime.
intellectual Capital and its strategic use The field of intellectual capital (IC), as well as the tools and models in order to manage, transfer and develop knowledge, has experienced a break through during the last twenty eight years—since Itami’s first publication (1980)--, increasing the current level of interest in measuring and accounting IC. The latter, has been basically due to the implications IC has on the strategic attainment of core business objectives, as well as by the role it plays when referring to valuation of the firm’s market value. Measuring and accounting for IC has become a main objective for researchers and practitioners due to the heavy flows of information firms receive from internal and external sources. Environmental changes, global trends, internationalization of firms (which push further the compatibility/ comparability of accounting standards), and the creation of new business models have made IC a valued resource not only in the knowledgeinformation businesses (hi-tech firms), but also in the brick and mortar ones. Knowledge is power, and when referring to intellectual resources, IC means “competitive advantage”. The reason is simple: it translates into financial performance and impacts the firm’s market value. In fact, differences between firms, including variations in performance, may represent differences in their ability to create and exploit
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their internal resources and capabilities (Penrose, 1959; Andrews, 1971), including intangible assets such as IC. Special capabilities of organizations for creating and transferring knowledge are being identified as a central element for organizational advantage. Indeed, from a perspective of the value-added, intellectual capital brings value to the corporation in two ways: strategic position and financial/economic value (Sullivan, 2000). According to the resource-based view of the firm (RBV), a firm’s endowment of resources is what makes its competitive advantage sustainable in time, stressing the importance of intangible resources as a key to sustainability (Wernerfelt, 1984; Rumelt, 1984; Barney, 1996; Itami, 1987). Going further, the intellectual capital-based view (ICV) of the firm (K.K. Reed et. al. 2006), being an elaboration of Leonard-Barton’s (1992) knowledge-based view, and grounded on RBV, seeks to explain the hidden knowledge based dynamics that underlie a firm’s value focusing on the stocks and flows of knowledge capital embedded in an organization. To acknowledge and measure IC and its direct associations with financial performance (Youndt et. al., 2004) –based on ICV--, we have to be clear on its structure/design. In order to do so, next section analyzes the different forms of IC and its components when referring to the business arena.
Forms of intellectual Capital A firm’s intellectual capital consists of the unique collection of intangible resources, and their transformations and interrelationships (Bontis, 1999; 2001; Bueno et. al, 2004). Edvinsson and Malone (1997) define IC as a two-level construct: human capital and structural capital. According to them, human capital is the knowledge created by, and stored in, a firm’s employees, while structural capital is defined as the embodiment, empowerment and supportive infrastructure of human capital. They then divide structural capital into
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organizational capital and customer capital, being them defined as: a)
b)
Organizational Capital: Knowledge created by, and stored in, a firm’s information technology systems and processes, that speeds the flow of knowledge through organizations. Customer Capital: The relationships that a firm has with its customers—called by Bontis (1996) relational capital (and encompassing all external relationships).
In addition, other management authors such as Nahapiet and Ghoshal (1998) have also referred to another component: Internal Social Capital or the capital associated with internal relationships i.e. among employees, between employees and supervisors, etc. To make it simple, in this text we consider that IC consists of three basic components: human, organizational, and social capital--both internal and external dimensions—(in line with K.K. Reed et. al., 2006). These three basic components incorporate all the above-mentioned constructs, being therefore an integrative umbrella that allows us to manage one general arrangement and definition. Viewed statically and on their own, these components do not create value. However, when combined, they do--they interact with each other, creating resource synergies--. As a matter of fact, intellectual capital is created through a combination and exchange of existing intellectual resources, which may exist in the form of explicit or tacit knowledge and knowing capacity (Nahapiet & Ghoshal, 1998). The latter suggest that IC exists as a set of interrelationships intertwined in the organizational system of the enterprise; being therefore, socially embedded and representing a capability of a social collectivity. If that’s the case, IC is primary concerned with social relationships (Nahapiet & Ghoshal, 1998), being predisposed by the social context individuals and/or teams work in, develop, and grow.
From the many different types of existing businesses, there is one-of-a-kind where social relationships and context matter the most: Family firms. This is so, due to the reciprocal relationships between the “family” and the “business”. Recognizing that the family and the business systems are intertwined and that the family firm continuity depends on the reciprocal impact of family on business and business on family, as well as on the resources, especially intangible ones, of both systems is an essential when dealing with the firm long-term competitive advantage and survival.
Family Firms and intellectual Capital Family firms are the most common type of organization worldwide, representing more than 60% of the current worldwide enterprises, and generating from 40 to 60% of the world’s GNP (TrevinyoRodríguez & Bontis, 2007). And, although there is no unifying paradigm for research and practice in the field of family business studies (Wortman, 1994), there is agreement on the fact that family firms are complex, dynamic and rich in intangible resources (Habbershon & Williams, 1999). Family firms are enterprises with specific cultures and ways of doing things, being them unique in nature and behavior. The latter is understood, because behind every family business is a unique “family”. Indeed, what distinguishes a family business from a non-family business is precisely the “family”, since it imprints its set of family values, know-how, social capital, reputation, meaning and culture to the enterprise. Indeed, many of the potential advantages–and disadvantages—family firms are said to possess are found in their family and business processes/dynamics. Over the last quarter of a century, the field of family firms has evolved significantly in understanding how family enterprises are different from non-family businesses, not only in composition, capabilities, resources, character, and perspectives/goals, but also in performance
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(included economic costs –monitoring, control, etc.). Important contributions have been made in identifying the holistic nature of family and business behavior--systems theory (Davis & Stern, 1980; Lansberg, 1983; Davis & Tagiuri,1989), in pointing out the interrelationships of family and business as a source of both benefit and disadvantages (Kets de Vries, 1993; Trevinyo-Rodríguez, 2008), in establishing that family firms have certain competitive advantages related to their values and tradition (Brokaw, 1992; Aronoff, Astrachan & Ward; 1996; Habbershon & Williams, 1999; Trevinyo-Rodríguez & Bontis, 2007), as well as in emphasizing family relationships as a tool to enhance motivation, loyalty and trust not only among family members, but also among employees (Tagiuri & Davis, 1996; TrevinyoRodríguez, 2007). It’s precisely on this last point that we want to build on, since when referring to family firms, family relationships translate into family ties and values (Trevinyo-Rodríguez & Bontis, 2007). These family ties and values are important not only at the family level, but also at the business organization, since it can reduce transaction costs, facilitate information flows, knowledge creation, accumulation (Burt, 2000; Arregle et.al., 2007) and dissemination, improving creativity, innovation and people’s well being (Trevinyo-Rodríguez, 2007). Family ties and values provide a basis for action for family members and employees—creating a family culture, which may impact the development of intangible resources. In fact, much of the knowledge of the company is tacitly embedded in the experiences of workers and/or family members. These experiences, actions and interactions within the family cultural patterns and traditions may act –when positive-- as a source of competitive advantage since they cannot be imitated. When a resource is valuable, rare, costly to imitate and without substitutes, it provides the basis for a competitive advantage (Barney, 1991), providing superior performance. Family firms
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have been shown to over-perform when compared with non family firms, reporting superior profit margins, faster growth rates, more stable earnings and lower dividend rates (McConaughy et. al., 1995). In addition, a study by Anderson and Reeb (2003) depicts how even among the S&P 500, firms that are under the influence of founding families outperform those that are not—in USA, Business Week (2003) reports that approximately one third of the S&P 500 firms have founding family members active in their management and/or board--. Thus, when examining the links between the firm’s internal characteristics (capabilities), processes and performance outcomes in order to see if family businesses have a sustainable competitive advantage, we conclude that they do –when resources are managed strategically (in absence of opposite negative characteristics; i.e. conflict among family members)--; this competitive advantage is based on the bundle of the intangible resources they possess (e.g. IC), as well as in their “family and business” interactions. In order for family firms to sustain their competitive advantage over time, they must be able to administer and measure their intangible resources competitively, taking into account that the development and sustainability of social relationships in the family business must be aligned with the enhancement of the intangible resources of the family (as a social nucleus). Given that IC encompasses all the human, organizational and social assets of the organization, which in turn include individual and team/ organizational competences, attitudes, intellectual agility, relationships, processes, as well as renewal and development areas (Roos et. al., 1997), we establish a division between the intellectual capital assets of the family business and the resources of the family (social context). We base our separation on the fact that when referring to the family firm, intellectual capital contributes to creating shareholder’s and stakeholder’s value (market value), while when referring to the intellectual capital of the family, it contributes to the development of the family wealth (collectivity of kin).
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iCFB and the Family Wealth Trevinyo-Rodríguez and Bontis (2007) developed the ICFB (Intellectual Capital of Family Businesses) notion, which consists of the sum of qualitative and quantitative intangible assets family firms possess. Those intangibles include the people, processes, culture, traditions, brands, patents, trademarks, etc. affecting the firm performance and market value. It’s interesting to say that the ICFB can be either positive or negative. That means, it can add or detract value to the family enterprise. It will add value when the family intangible and tangible resources –from now on called family wealth--, are aligned with the firm’s soul, brain and heart –human capital, structural capital, and relational capital respectively--. That is, when a parallel planning process between family wealth and family business resources is achieved. The wealth of the family is composed by three kinds of capital: human, intellectual and financial. However, the genuine “wealth” of a family consists basically of the human and intellectual capital of its family members, while the family financial capital is a tool to support the growth of the former resources (Hughes, 2004). The human capital of a family consists of the individuals who make up the family. When referring to individuals (family members) we have to take into account their physical, mental and emotional well-being. On the other hand, the family intellectual capital is comprised by the knowledge gained through the life experiences of each family member, or what the family members know tacitly and explicitly regarding the business, its relationships, its customers, etc., plus the family shared values –traditions--, and wisdom transmitted from generation to generation (craftsmanship). “The strength of a family rests on what it knows” (Hughes, 2004, p. 17). Is precisely this kind of corresponding “firm & family-specific resources” which can either become a competitive advantage or disadvantage
when dealing with the new economy. If they are aligned, they can help the company to develop. If not, they can sow the seed of conflict, disunion, and failure. When family firms develop exponentially over the years and generations, ownership structures change and the family-owned business becomes a family-controlled business. It’s precisely at this point in time when dealing with strategic planning of intangible resources, both in the family and the business, becomes crucial. “Renewal and development” (one of the 6 areas composing IC, included in the ICFB), which Roos et.al. (2007) describe as “the intangible side of anything and everything that can generate value in the future… but has not manifested that impact yet” (p. 51) becomes key. The latter, due to the business reinvention and survival necessities (growth): major problem in family firms (Trevinyo-Rodríguez & Bontis, 2007). In addition, environmental complexities, uncertainty, globalization trends, and continuous change in customers’ needs, push family firms to overcome organizational rigidities that may develop due to conservativeness, tradition and/or established processes and values, since these rigidities undermine their ability to function effectively, and as a consequence, to survive. Therefore, both external plus organizational factors and family issues (“family wealth”) must be administered simultaneously and strategically to facilitate survival and growth, letting next generation members innovate and reinvent the business (intrapreneurship). Entrepreneurial orientation on the part of next generation members reflects the extent to which the family engages in business innovation and new ventures. “Characteristics of risk-taking, innovativeness, and proactiveness, which constitute entrepreneurial orientation (Miller, 1983) are key to fully implementing intellectual capital in order to create higher levels of innovation” (Wu et. al., 2008, p. 272). As a matter of fact, reinventing the family business is not only a next generation member’s duty, but also, a right.
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Applying this insight to the ideal strategic balance between ICFB and Family Wealth, we can formulate a set of propositions regarding the strategic focus families and family firms must have regarding the “business” and the “family” development, as well as about the consequences on long-term sustainability of the enterprise and/ or business family. 1.
2.
3.
Families that manage their family-business dynamics with the “business first maxim”, will focus on developing the ICFB (at the business level), putting in second term the family wealth preservation/development (human, intellectual and financial capital of family members). The latter, will put the business and the family units at stake, since the strategic competitive advantage the firm may get in the short-term is not sustainable over time--the family next generation members won’t be prepared to run the enterprise. Families that manage their family-business dynamics with the “family first maxim”, will focus on developing their Family Wealth (at the family level), considering the ICFB sustainability/development as a counterpart. The latter, will put the business unit in a difficult position, since its survival will depend entirely on the family members’ abilities and relationships. Families that find an ideal balance between their ICFB-Family Wealth Strategic administration, will outlast and outperform (long-lasting family firms), sustaining their unique “family-business” resource base over time. These enterprises will tend to innovate constantly, reinventing themselves as they pass on from one generation to the other.
We summarize our arguments in the ICFBFamily Wealth Matrix below (Figure 1). A case of a multinational family-company which has been reinventing itself during the last 206 years—long-lasting firm--, and which has
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invested a lot in strategically developing its intangible assets, especially, its people’s intellectual capital--both at the business and family level--, is DuPont (nowadays located in the positive/high right-upper corner quadrant of the ICFB-Family Wealth Matrix). A world leader in science and technology in a range of disciplines–including biotechnology, electronics, materials science, safety and security, and synthetic fibers, it operates globally and manufactures a diverse range of products, employing 59,000 people worldwide. When analyzing its history, we can see how each generation not only invested in acknowledging, developing and measuring their employees’ and family members’ human and intellectual capitals, but also successfully preserved its financial capital by establishing governance mechanisms that promoted joint decision making over longterm planning periods. By forming a social set of shared values and relationships that each successive generation reaffirms and readopts, plus adapting it to the environmental demands, the family increases the chances of passing to the next generation not only a family heritage, but also a long-lasting familyowned or controlled firm. Below, we analyze how the DuPont family developed different actions over time –e.g. strategic exploration, organizational change and development, financial restructuring, etc.—encouraging the strategic use of ICFB, the wise preservation and development of the family wealth, as well as the family business growth (performance), reinvention and endurance.
The DuPont Company Family and Business History1 The DuPont Company, the most important chemical company in the United States, was founded in July 19th, 1802; with French capital by Eleuthère Irénée (E. I.) du Pont (chemist and industrialist). E.I. du Pont de Nemours & Company, originally a gunpowder manufacturer on the banks of the
Intellectual Capital Management in Long-Lasting Family Firms
Figure 1. ICFB-Family Wealth Matrix (Source: Trevinyo-Rodriguez, 2008)
Brandywine River, has become nowadays one of the world’s most innovative firms. “It managed to do this because a succession of talented sons, nephews, and grandsons of E. I. du Pont were able to keep the business going” (Blair, 2003, p. 449). After his death in 1834, the company changed its structure from a controlling owner stage to a sibling partnership. DuPont siblings, Alfred, Alexis and Henry took charge of the family firm, buying the French stockholders (those who financed their father) in order to assure full-control of the enterprise. In 1889 however, Henry du Pont, “who had ruled over the gunpowder empire with an iron fist” (Blair, 2003, p. 449) died, leaving control to his nephew Eugene du Pont (son of Alexis)
who also believed in tight control of the firm, sharing little power with the next generation. In 1899, the firm was incorporated in the State of Delaware; however, the act of incorporation appears to have been just a technicality, with all the stock held by those family members who had been partners (Blair, 2003; Frazier Wall, 1990). Henry A. du Pont (a cousin of Eugene’s) had pushed for incorporation as a mechanism to weaken the control Eugene had as president and sole executive officer of the partnership. And, although Henry A. never led DuPont, he was an important figure within the family company as a senior partner. In fact, his idea of reorganizing the partnership as a corporation in 1899 was intent to distribute control rights (Blair, 2003; Frazier Wall, 1990). According to the Delaware law at the time, the
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newly formed corporation would need a set of officers. Nonetheless, Eugene du Pont set as his main prerequisite for the incorporation the fact that he would still be president. There’s no need to say that he continued unwilling to delegate authority. When Eugene died in 1902, three young cousins Pierre, Alfred and Coleman took over control of the one-century-old family business. The process they followed was indeed interesting. The fact is that when Eugene died, the elder members of the du Pont family feared that none of the next generation members had the qualifications to run the company; they feared that they might dissipate the wealth if they took over the management (Colby, 1984; Blair, 2003). After analyzing it a lot, the du Pont elder members reached a decision: They will sell their interests in the firm to their major competitor (at that time, Laflin & Rand). Yet, during a shareholders’ meeting where the sell of the company should be approved, the three cousins Pierre, Alfred and Coleman stepped forward to ask if they could buy the company from their older relatives (surviving partners). They did, transforming it from an explosives manufacturer into a science-based chemical company. “The junior members of the clan bought out the position of the senior members for notes worth $12 million and 28% of the common stock in the newly reorganized firm” (Blair, 2003, p.450; Colby; 1984). Although a widely respected company but also weighted down by tradition, the young cousins modernized company management, built research labs, and marketed new products like paints, plastics and dyes. Pierre and Coleman possessed financial expertise and led the family company to unprecedented success; Coleman was president, Pierre treasurer, and Alfred vice-president of E.I. du Pont de Nemours & Company. The company was reincorporated in 1903 in New Jersey (whose corporate law by then permitted corporations to own the stock of other corporations), consolidating all the various firms of the DuPont Company into a single firm. In addition, Pierre, Alfred and Cole-
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man reorganized the company: they established an executive committee and a fifteen member board of directors (consisting of the three cousins plus four other members of the executive committee, three members of the elder generation and five directors who were minority shareholders). In 1915, a group headed by Pierre, which included outsiders, bought Coleman’s stock. Alfred was offended and sued Pierre for breach of trust. The case was settled in Pierre’s favor but his relationship with Alfred suffered greatly and they did not speak after that. Pierre served as DuPont president until 1919, giving the company a modern management structure, modern accounting policies and made the concept of return on investment primary. During World War I, the company grew a lot due to advance payments on Allied munitions contracts. The Du Pont’s made over $250 million in profits from World War I (Colby, 1984). As chief supplier to the Allies, DuPont shipped an astonishing 1.5 billion pounds of explosives. By the war years, there was an active market for DuPont shares, and the stock soared to $775 from $182 (Lowenstein, 1999). Du Pont supplied the Allies with about 40% of needed explosives which transformed the company into a giant in just 4 years. It was during this time that members of the du Pont family created a holding company named Christiana Securities (Christiana) as a means of liquidating some of their substantial holdings in E.I du Pont de Nemours & Company without diminishing their control of the corporation. They wanted to preserve family control of the company. The three brothers, Pierre, Irénée and Lammot, owned more than two-thirds of Christiana. Pierre was President; Irénée was treasurer and Lammot vice-president. Nephew Belin du Pont was secretary and there were but three other directors: A. Felix du Pont, R. R. M. Carpenter and John J. Raskob. Named after a tributary in Delaware, Christiana Securities held 3,049,000 shares of DuPont com-
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mon stock, constituting 27.56% of the 11,000,000 odd shares outstanding. On July 1st, 1935, the Christiana holdings had a value on the New York Stock Exchange of $307,949,000 (Winkler, 1948). Christiana Securities, the family holding company for DuPont, was later (under antitrust pressure from the Justice Department,) merged into DuPont during 1977. Today, it is certain that fewer than twenty individuals, most of them du Pont’s and in-laws, own more DuPont stock than do all of its 51,865 stockholders.
Reinvention, Growth and Endurance DuPont, since its beginnings has been a science company and science plays a prominent role for the company’s business growth. There are over 5,000 scientists and engineers working for DuPont’s 75 research and development facilities across the world (over 40 in the US and more than 35 located in 11 other nations). As a matter of fact, DuPont is the home of one of the world’s first and largest industrial research and development facilities: the Experimental Station (Wilmington, Delaware)—which celebrated its 100th anniversary in 2003. The Experimental Station research and development facility has been the home to some of the world’s most important scientific discoveries developed by DuPont since 1903, including: Neoprene - the world’s first synthetic rubber; Tyvek® nonwovens; Kevlar® fiber; Mylar® polyester film; Corian® solid surfaces; Butacite® polyvinyl butyral; Suva® refrigerants; and Nomex® fiber. DuPont R&D covers both basic and long range research aiming at creating new business and new products, as well as mid and short range research aiming at improving existing products and inventing new products. Electronics, biotechnology, safety and security, as well as material science are the company’s future growth drivers. Research and development now under way includes nanotechnology, emerging displays technologies, fuel
cells energy sources and biomaterials produced from renewable resources such as corn. In addition, being a company interested in having the best possible research staff–which translates into a competitive advantage for the enterprise--, DuPont not only invests in training its employees, but also offer a huge variety of internships for PhD and/or MBA students with high potential. Actually, to translate more of its ideas into value – both on Wall Street and on the bottom line – DuPont is marketing its knowledge base by establishing a five-year, $35 million research and development alliance with the Massachusetts Institute of Technology (MIT). The partnership will help the company lay out a path to long-term materials and biotechnology goals. Relationships such as these are expected to grow in number and scope and will be strategic to future growth for DuPont.
DisCussion As could be seen, intellectual capital management is important in all kind of businesses, but crucial when referring to family firms. Family-owned or controlled businesses are unique due to their family background, and strategically administering both the business and the family is vital when coping with continued existence. The case of DuPont, a long-lasting family firm, shows how the growth of the ICFB must be aligned with the development of the family human, intellectual and financial capital. The best form to do this is a challenge, since each family has its own way of dealing with it. However, in order to support intrapreneurship (renewal and reinvention –important part of IC) and continued growth in the family business, the family must strive to: 1)
Promote emotional, physical and mental well-being among its members –let them choose their individual career and personal goals (pursuit of individual happiness).
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2)
3)
Clarify the next generation members’ roles within the family and the business, establishing rules in order to participate in the governance mechanisms of the firm (and/ or of the family –e.g. family council). Encourage the knowledge-sharing of family values, traditions, behaviors from one generation to the other, since this provides a cultural wisdom that will guide the family business strategic exploration, development and adaptation.
Additionally, family members must also increase their intellectual capital baggage by transmitting from one generation to the other the “family & business” acumen they have, establishing governance mechanisms that promote cooperation, joint-decision making and cohesion among family members. Training of next generation members (promoting entrepreneurial spirit over time–innovation--), as well as the clarification of their roles within the family and the business units will help family members to acknowledge their human and intellectual capital. Family wealth preservation is a dynamic process. A family whose wealth—human, intellectual and financial capitals—is simply maintaining value, but not increasing it is in danger of entering a state of decay, entropy, or to call it in simple terms: organizational inertia. Next generation members must be trained and prepared to innovate (family wealth bet). In this sense, investing in their exposure to other cultures and languages and in their education may help them get ideas that could be applied in the business to overcome competition. Investments in the family wealth should be translated in advances in the ICFB. If the latter is not achieved, then the “family first” maxim may put in danger the sustainability of the business. The DuPont Company passed through the proposed stages (matrix) when dealing with ICFB-Family Wealth strategic management:
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“family first”, “business first” and “balance”. More specifically: 1.
Family First – Origin until 1889: E. I. du Pont was a French immigrant who started the chemical company in order to get the means to survive in the US, two years after he and his family left France to escape the French Revolution. Like his father, he was initially a supporter of the French Revolution. After his father narrowly escaped the guillotine and the family house was sacked by a mob in 1797 during the events of 18 Fructidor, the entire family left for the United States in 1799. They hoped to create a model community of French émigrés. Starting the DuPont Company was their first attempt: It would not only help the entire DuPont family to make a living, but also would provide other French émigrés (original non-family stockholders) the commercial opportunities they needed to succeed in the new country.
It’s important to note the fact that in 1834 the DuPont siblings bought back the French stockholders who financed their father—assuring full control of the enterprise. The latter may be evidence of the “family first maxim”, since the eight siblings of E.I. du Pont—Victorine Elizabeth du Pont, Lucille du Pont, Evelina Gabrielle du Pont, Alfred V. du Pont, Eleuthera du Pont, Sophie Madeleine du Pont, Henry du Pont and Alexis Irénée du Pont—might have wanted to “feed their family” based on the earnings they got from the family enterprise. 2.
Business First – 1889-1902: Incorporation and expansion. The incorporation of the DuPont Company meant the beginning of a corporation; in other words: Professionalization of the family firm. It’s precisely at this stage where the “business
Intellectual Capital Management in Long-Lasting Family Firms
3.
first maxim” seems to be valid. Although, it has to be said, professionalization did not occur right away after the incorporation. The main problem was that it had been a forced process, not a “family” and “business” agreement. Strategic parallel planning was not accomplished, causing power struggles at the family level. Nonetheless, expansion of the company was achieved: DuPont moved into the production of dynamite and smokeless powder. Balance – From 1902-Nowadays. When Pierre, Alfred and Coleman took control of the 100-year old company, they transformed the business from an explosives manufacturer into a science-based chemical company. They had clear ideas of their family background—E.I. du Pont was a chemist—plus their own initiatives (adapted future vision).
At this point, governance mechanisms where family and non family members participated were established—e.g. Board of Directors--, the modernization of the company was achieved, financial restructuring and consolidation of the various firms the DuPont Company owned was accomplished, and strategic exploration of new products and services carried out. Research labs were undertaken as major projects and innovation was promoted. A balance between the “family” and the “business” was evident. As could be expected, this “balance” was just temporal. In family firms, dynamic relationships and emotionality is a must. Conflicts arise from time to time breaking the hard-to-find “family & business” balance—ICFB & Family Wealth strategic balance--, however, after a while, calm returns and stability brings over again a sense of equilibrium. Today, DuPont invests more than $1 billion a year on research and development (R&D) in multiple disciplines and is home to one of the world’s largest industrial R&D facilities (Experimental
Station). The result of such sustained R&D efforts is discontinuous innovation, the sudden appearance of a major breakthrough in technology that can yield entirely new products, processes, or services. As the Chief Science and Technology Officer—Tom Connelly states: “When the Experimental Station opened 100 years ago, our focus was to turn from explosives to become a global chemicals and materials company…Today, as part of our next transformation, we are putting our science to work by making real differences in everyday life. Our ability to change in response to the changing external environment has established DuPont as one of the world’s most innovative companies. The Experimental Station and all of its people over the years have truly provided advances that have helped make the world a safer and better place”. Therefore, broadly speaking, our interpretations of the DuPont case study seem to confirm our propositions. The 2x2 matrix summarizes our conclusions regarding the firm analyzed, its ways of dealing with strategic management of its intellectual capital at the family and business levels, and how that impacted in their preservation of family wealth and ICFB.
ConClusion When analyzing the DuPont family history we see how family members’ continuous training, knowledge, and ability to overcome competition by expanding their horizons and probing new strategic orientations based on innovation–one of the shared-family values—helped them to build up and keep going a long-lasting enterprise (206 year-old company). How did this company make its vision of growth and regeneration happen? One possible answer is by supporting entrepreneurial activity across generations. In order to do so, they had to
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invest in both the family and the business intangible assets, specifically in intellectual capital. Finding an ideal balance between the Family Wealth and the ICFB is relevant when dealing with sustainable competitive advantages. It’s in particular this continuous practice –finding the “family & business” balance-- across generations which is the brick and mortar with which families build organizations that will last beyond a lifetime. In the age of intellect, DuPont has proved itself that reinvention of its business based on its people’s acquisition, accumulation-development, and transformation of knowledge pays off. In addition, it also highlighted that commitment to its family heritage and management not only influences up to now its core values and strategic actions, but also its own perspective of the future. This Enlightened Organization invests in creating value through people, challenging them intellectually and supporting disruptive and adaptive learning. In order to help practitioners, we introduce the ICFB-Family Wealth matrix, describing “family & business” relationships and dynamics that affect intellectual capital creation, development and sustainability over time at the business and family levels. The latter, has important implications when referring to the firm’s growth and survival—e.g. personnel and human resource management--, as well as in the family unit dynamics—i.e. next generation members’ training. Our ICFB-Family Wealth Matrix describes several configurations family firms tend to pass through as they grow. None of the quadrants is better or worse, but the core idea is that in order for a family business to become a long-lasting enterprise, the family and the business need to move strategically from one quadrant to another, until they find a stable state (balance) between the intellectual resources generated, sustained and enhanced in the business, and the ones nurtured within the family.
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Chapter 13
Knowledge Management and the Links to Human Capital Management: Leadership, Management Capabilities and Sustainability Marianne Gloet Abu Dhabi Women’s College, UAE
ABsTRACT This paper explores various linkages between knowledge management (KM) and human capital management (HCM) in the context of developing leadership and management capabilities to support sustainability. Based on the prevailing literature, a framework linking human resource management (HRM), KM and HCM is applied to the development of leadership and management capabilities to support sustainability. The framework identifies ways to promote sustainability through creating effective links between KM and HCM by which organizations can develop their leadership and management capabilities to support sustainability across business, environmental and social justice contexts. This approach provides managers with a framework for addressing sustainability issues and for developing individual and organizational capabilities to support sustainability through KM and HCM practices.
inTRoDuCTion The significance and impact of sustainability is growing rapidly in the age of globalization. With an increased emphasis on sustainable development, discourses on sustainability now cross many boundaries. The context of sustainability today is both trans-disciplinary and trans-organizational. Operating at the economic, social and environmental DOI: 10.4018/978-1-60566-679-2.ch013
level, sustainability is driven by a strong belief that socially responsible development is the way of the future. For instance, scholars like Avery (2005), Elkington (2004) and Parkin (2000) advocate that individuals and organizations worldwide should be engaged actively in protecting the environment. This worldview adheres to sustainable development concepts. A range of factors must be taken into consideration if sustainability issues are to be dealt with in an effective manner. In this setting, organizations, institutions, agencies, industry sec-
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tors, national boundaries and regulatory agencies are interdependent players in creating a sustainable future. Sustainable development in a knowledge economy requires consideration of the optimum way to make knowledgeable interpretations and recommendations to support sustainability, which meets the needs of a diverse range of stakeholders. Certainly, strong commitment is required from these stakeholders if sustainable development, not only from an economic standpoint, but also from a social and environmental perspective is to be supported in an enlightened manner within organizations and governments. Part of this process includes managing risk in new and uncertain environments. Moreover, committing to practices that promote and achieve sustainable outcomes, particularly in a global context has the supply of sound knowledge for decision-making as a prerequisite. Effective knowledge management (KM) approaches to support the crucial processes of knowledge creation, sharing and dissemination are also obligatory. KM is a rigorous process compared to knowledge sharing because it denotes a specific structure and strategy, which accompanies the dissemination of knowledge to produce value-added activities for an organization. In contrast, without an accompanying structure and strategy, it is unlikely that knowledge sharing per se will produce value-added outcomes. Without the oversight of KM, both knowledge sharing and knowledge dissemination run the risk of becoming ad hoc activities. KM includes not only recognizing the fundamental role of knowledge and information in the process but also recognizing implicit imperfections in knowledge and information processes (Laszlo & Laszlo, 2002; Sage, 1998). Knowledge for sustainability highlights the need for new knowledge, for new ways of managing knowledge and for new work practices to support this process (Gloet, 2006). Today, the ways in which sustainability knowledge can be effectively captured, managed, shared and disseminated to achieve
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effective decision making in a sustainability context is not well understood (Malone & Yohe, 2002). Nevertheless, developing management and leadership capabilities to support a commitment to sustainable development will assist in improving the present situation. Sustainable development globally requires significant change, an increasing awareness of social and shareholder contexts, and developing a sense of social responsibility, both at the individual, corporate and government levels. Sustainable development also demands major changes in work practices where these practices drive the vision and approaches to management in contemporary organizations. Successful sustainable development supports economic, social and environmental needs simultaneously with the benefits derived from meeting such needs in a sustainable fashion. Here, trade-offs and synergies are involved in meeting competing needs and achieving desired benefits. This is the new frontier where organizations can demonstrate leadership and model desired strategies and behaviours associated with a strong and enduring sustainability platform. Appropriate sustainability knowledge and information emerges as a key aspect of effective decision making in this regard, particularly when multiple perspectives and stakeholders are involved. Thus, a strong imperative exists to develop strategic leadership and management capabilities within today’s organizations to meet the challenges of working effectively to promote the economic, social and environmental forms of sustainable development. This is a realm where the nexus between KM and human capital management (HCM) may prove to be effective.
KnoWlEDGE MAnAGEMEnT AnD THE linKs To HuMAn CAPiTAl MAnAGEMEnT Considerable interest in KM endures when competitive advantage is perceived to be linked directly to knowledge. Within the interdisciplin-
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ary nature of KM, this interest covers functional and professional boundaries that range from IT professionals, to those involved in accounting, marketing, organizational development and change management. One feature common to the widely divergent activities of any organization is the emphasis on knowledge work, knowledge workers and the nature of knowledge. While this debate results in professional turf wars, it has the potential for identifying new opportunities for collaboration across professional and functional boundaries. One area ripe for collaboration is the emerging group of professionals who have as their number one priority a focus on managing knowledge resources in their organizations. This job is often independent of their levels of formal training or their designated title within the organization. KM work also cuts across the established and functionally embedded group of HRM professionals. Indeed, the relationship between KM and HRM has developed in recent years to the extent that both KM and HRM have grown to become more sophisticated and complex (Gloet, 2006). In this light, HCM emerges at the frontier of conventional HRM practice. Therefore, the linkage between KM and HCM offers managers significant potential to share common understandings of the strategic value of knowledge in organizations. The processes of acquiring, developing, deploying and retaining the collective knowledge, skills and abilities (KSAs) of an organization’s employees by implementing processes and systems that match employee talent to the organization’s overall business goals become the characterizing feature of HCM. Human capital, as a measure of the economic value of an employee’s skill set or KSAs, recognises the value inherent in the educational attainments, the range of experience, levels of skills and abilities of employees. Arguably, the HCM operational platform is broader and more strategic than conventional HRM. This is particularly the case because those engaged in HCM are cognizant of the strategic value of organizational
knowledge, especially that knowledge which resides within the employees of an organization. Worldwide, HRM in many organizations lacks a strategic thrust and operates without a strong underlying focus on knowledge. This mindset occurs when HRM is viewed as being synonymous with managing employment law or when the HRM strategy tied to the overall business strategy is weak or non-existent. In other circumstances, the potential to move beyond conventional HRM is reduced because the economic value of knowledge in general and employees’ KSAs in particular are marginalized. While HCM is an emerging area of influence, traditional functional approaches to HRM retain their dominance in most organizational contexts (Gloet 2006). A reasonable consensus on the nature and scope of HRM stands in contrast to understandings about the nature of KM. Much of the literature of KM continues to be flavoured with a techno-centric focus, which posits knowledge as an entity that can be captured, manipulated and leveraged. However, perceptions of this type are limited and ultimately hazardous. Any critical understanding of knowledge per se and its incorporation into the management of organizations requires an acute awareness of the diversity of views about what knowledge is and what it can do for an organization. The range of views on the concept include perceptions of knowledge as an entity (akin to information), as a resource, as a capacity and as a process. In the context of HCM, knowledge is interpreted as a social creation that emerges at the interface between people and information. Especially relevant here are the communities engaged in communication, knowledge-creation, knowledge sharing and learning. Operationally, KM encompasses all the systematic processes used by an organization to identify, create, capture, acquire, share and leverage knowledge (Rumizen, 2000). For example, although knowledge as such may be difficult to manage, the related technologies, systems, instruments, stocks, flows and people engaged in the process are susceptible to manage-
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ment structures. Both people and activities can be controlled and held accountable for particular outcomes concerning KM. However, given that such activities today largely concern intangibles, we are well beyond Daniel Bell’s (1973) venture in social forecasting. The implications for organizational structures, resources, cultures and strategies, management styles and the roles and expertise of staff become even more complex when notions of sustainability infiltrate the relationships between these elements. Complexity increases with thinking about sustainability within organizations in particular. Within the traditional function of HRM, the rise of the knowledge economy has prompted managers to rethink the profession. The notion of HRM as purely a bureaucratic personnel management operation has waned over the decades. This decline has been accompanied by a fresh conceptualization of HRM to integrate its activities to support the overall business strategy with a view to achieving competitive advantage. Nevertheless, even today, experts caution that HRM faces extinction if it fails to respond to the new environment of a knowledge economy (Lengnick-Hall & Lengnick-Hall, 2003; SaintOnge & Armstrong, 2004; Stewart, 1997; Ulrich, 1997, 1999). If HRM is unable to add value under the new economic conditions, it will come under extreme pressure (Stewart, 1997; Stone, 2002). According to Chatzkel (2002) and Gloet (2004, 2006), HRM can overcome the odds and evolve through contributing to creating effective linkages between HCM and KM within organizations. In order to shift the focus of HRM to a broader HCM perspective, an increased emphasis on the role and value of KM in organizations is required. The intangible aspects of knowledge are fast becoming one of the defining characteristics of economic activity today. Standing in contrast to tangibles like goods and the productive processes, there is a proliferation of information and communication technologies, coupled with greater organizational complexity, the growth of virtual
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and global organizations and rapid change. A rapidly changing environment that features the growth of knowledge and technology highlights the need for new sources of competitive advantage (Lengnick-Hall & Lengnick-Hall, 2003). In turn, this search suggests that drastic changes within HRM are also required if HR professionals are to respond positively to the changing demands of a knowledge economy. Traditional HRM can be characterized as operating within narrow boundaries. In a knowledge economy, the role of HRM must expand, looking both within and outside the organization for its raison d’être. Part of this evolution is a move beyond the traditional focus on managing people to managing organizational capabilities, relationships, learning and knowledge (Coates, 2001; Saint-Onge, 2001; Lengnick-Hall & Lengnick-Hall, 2003; Ulrich, 1997). The emphasis on discrete HRM practices has also broadened to include a focus on developing themes and creating environments conducive to learning. In addition, HR professionals have recently embraced the processes of acquiring, sharing and disseminating knowledge within organizations. In particular, a focus on learning can facilitate a transition from a traditional HRM focus to a broader HCM perspective. According to Gloet (2006), a revitalization of the HRM function is necessary to respond adequately to the new demands of the knowledge economy by developing linkages with KM requires fundamental changes within four key areas: Roles, Responsibilities, Strategic Focus and Learning Focus. A mapping of the relationship between these areas is set out in Figure 1.
Roles Lengnick-Hall and Lengnick-Hall (2003) adopt a view that in a knowledge economy, organizations will need HRM that is characterized by a new set of roles that can assist in generating and sustaining organizational capabilities. Such HRM roles
Knowledge Management and the Links to Human Capital Management
Figure 1. Mapping the Relationship between KM and HRM
include those of the human capital steward, the knowledge facilitator, the relationship builder and the rapid deployment specialist. HR specialists in the first role recognise the value of intellectual capital and supply the resource to ensure that it will grow in value. This involves brokering the services of an organization’s knowledge workers. The knowledge facilitator places an emphasis on learning and development, effective KM and creating environments conducive to knowledge creation, sharing and dissemination. Relationship builders focus on creating and sustaining networks and communities of practice. These relationship builders join people in various parts of the supply chain in new and creative ways. The rapid deployment specialist meets the challenge of operating in rapidly changing markets where information, business processes and organizational design may be combined to meet the dynamic business environments characteristic of organizational life in a
knowledge economy. In this environment, KM has the capacity to broaden and enrich significantly the role of the HRM professional.
Relationships HRM in a knowledge economy ideally entails responsibility for developing and sustaining organizational capabilities through activities that cut across traditional business functions. In this setting, strategy formulation and implementation, finance and marketing as well as new functions such as KM fall within the scope of the HR professional. Given that KM is increasingly thought of as a means of competitive advantage, it should, therefore, be viewed in the same way as other recognized business functions because it contributes to an organization’s bottom line. According to a range of scholars, this requires developing new relationships that reflect a shared responsibility among
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managers, employees, customers and suppliers for HRM (Lengnick-Hall and Lengnick-Hall, 2003; Saint-Onge, 2001; Soliman and Spooner, 2000; Ulrich and Smallwood, 2003; Yahya and Goh, 2002). KM has the capacity to bring forth a new role for HRM, which provides the basis for forging new organizational relationships.
strategic Focus In a knowledge economy, a strategic focus is imperative to developing human capital and KM. As MacDonald (2003) suggests, HR professionals should identify and channel intellectual capital toward the development of a concise set of organizational core competencies, strengths and capabilities. An emphasis on traditional long-term strategic development and long-range planning in HRM needs to be complemented by shortterm strategic approaches employed to counter the often unpredictable, dynamic, fluid environments, which characterize the contemporary business world. However, in combination with a short-term strategic focus, HR professionals must also think about long-term sustainability as well as constant renewal and revitalization. As Lengnick-Hall and Lengnick-Hall (2003) suggest, a rapid deployment specialist has the capacity to respond quickly to the needs of business - teams that can be rapidly assembled, deployed, and subsequently reconfigured to suit the changing needs of business environments characteristic of a knowledge economy are a major source of competitive advantage. In order to gain additional sources of competitive advantage from KM and HCM, the identification of both core competencies and the integrated the knowledge sets that distinguish organizations from one another is an essential goal because this identification adds value for the clients and customers of an organization (Bohlander, Snell and Sherman, 2001). According to Ulrich (1997, 1999) knowledge sets are organizational capabilities. Ulrich further suggests that HRM’s important
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role is related to creating and developing organizational capabilities, especially those required to compete successfully in a knowledge economy. Saint-Onge (2001) too reinforces the need for the HR function of an organization to be transformed in order to respond to changing requirements of the knowledge era. For Saint-Onge (2001), a strategic capabilities approach is the road forward where resources are structured across individual capabilities, organizational capabilities and the knowledge architecture. With this focus, the role of the HR professional focuses on integrating individuals, teams and organizational learning for the benefit of all stakeholders. With changes of this type, HRM is in a position to play a determining role in creating and developing those organizational capabilities, which form part of contemporary KM strategies geared to creating wealth from intellectual capital while maintaining a commitment to sustainability imperatives. This also represents a shift from traditional HR practices to approaches more in line with HCM strategies.
learning A knowledge economy implies the need for learning. Today, the emphasis on creating distinctive HRM practices includes developing themes and creating environments conducive to learning and the acquisition, sharing and dissemination of knowledge within organizations. Creating and sustaining learning environments and nurturing communities of practice are part of this new world for the HR professional. Managing intellectual capital and developing human capital within the organization creates a strong emphasis on constant renewal or revitalization of the organization. Scholars like Chatzkel (2002) posit human capital as an active organizational asset. In referring to the four human capital domains of acquiring, maintaining, developing and retaining, Jac Fitz-enz (2000) views the developmental aspect as unique in the sense that only people can be developed. Thus, the domain of deveflopment holds the key to achieving orga-
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nizational change, growing individual and team capabilities and creating value while simultaneously attending to sustainability imperatives. In a setting that places the collective knowledge of employees as a source of competitive advantage, the HRM function is pivotal in realizing the potential of KM programs aimed at capturing, using and re-using employees’ knowledge (Soliman & Spooner, 2000). Moreover, HRM has a direct role in enabling employees to develop and build high quality, creative problem solving skills in a leadership context (Yahya & Goh, 2002). HRM contribution to developing expertise in how to manage learning, re-using knowledge through lessons learned and surfacing knowledge, know-how and best practice behaviours can be significant (Martin, 2000). For example, Lengnick-Hall and Lengnick-Hall (2003) view HRM as central to developing and sustaining a learning focus through facilitating continuous learning, identifying sources of employee knowledge, understanding the mediators that facilitate knowledge sharing and more importantly ensuring that knowledge of this type is made available to employees. Through such a learning focus, a broader HCM platform can be developed and supported.
DEVEloPinG lEADERsHiP AnD MAnAGEMEnT CAPABiliTiEs To suPPoRT susTAinABiliTY Information and communications technologies and various organizational forms may not necessarily deliver success in KM within knowledge intensive organizations. Research, for example, suggests that cognitive models of KM based on the capturing, sharing and leveraging pattern will be less effective than those community based models, which display clearer understandings of the characteristics of knowledge work and knowledge workers. Undoubtedly, the future success of sustainable development lies largely within in the human realm.
For Doppelt (2003), leadership is the ultimate key to organizations successfully embracing sustainability. Effective leadership results in effective dialogue, which is a prerequisite of change. Leadership commitment to sustainability, for example, would highlight change and provide realistic pathways for breaking down those barriers erected to prevent sustainable outcomes. Such barriers include tunnel vision, past practices, old ideas and cultural frameworks, which combine to discourage new visions of the future from being realized. For Doppelt (2003), these ingrained ideas reside within an organizational culture and are mediated via policies and procedures. In this light, the development and strategic nurturing of any alternate vision of a future driven by a strong and committed approach to management and leadership is paramount. Broadening Ulrich’s (1997, 1999) notion of organizational capabilities, developing the leadership and management capabilities necessary to support sustainability is a crucial endeavor. Supporting sustainability through the development of various leadership and management capabilities enables organizations to make certain that ideas concerning ecology, sustainability and social justice constitute the criteria for managing and the setting of priorities. This realm is where partnerships between KM and HCM have the potential to make a significant contribution to organizational development (Perez & Ordonez de Pablos, 2003). Capabilities that support sustainability include the capacity to work across a myriad of boundaries as well as across disciplines. Jackson, Farndale and Kakabadse (2003) see the need to articulate a vision that clearly supports sustainability concepts and engenders social responsibility through clearly identified capabilities. The need to act as a role model and to convince others of the positive impact of a commitment to sustainability are also essential attributes among leaders. Simultaneously, effective change managers can help reduce resistance to notions of sustainability
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(Barton, Figge & Routledge, 2000; Marshall, 2004; Wood, Bobenrieth & Yoshihara, 2004). In this context, relationships become anchors to stabilize the change management process. Other capabilities supporting sustainability include the ability to think across boundaries and establish new relationships, a capacity to work across organizations, value chains and markets (Marshall, 2004; Rowledge, 2002). Leaders in these change environments must excel at interpersonal, organizational and inter-organizational communication and possess the inherent capacity to develop and maintain broad social and business networks. In establishing a wide range of relationships, effective leaders recognize the paramount role of collaboration. Other related capabilities include the ability to be flexible and adaptive when dealing with people and relationships. From a strategic perspective, purpose-driven leadership and the ability to provide strategic leadership through the development of sustainable business models is characteristic of both managers and leaders. Moreover, the need to implement sustainability strategies and plans across various organizational levels requires leaders who can align business goals with sustainability targets and objectives and produce solid returns on investment for all stakeholders. Leaders who focus on renewal and revitalization in not only economic terms but also in social and environmental terms are significants assets for the sustainable organization (Rowledge, 2002; Wood et al., 2004). In terms of a learning focus, management and leadership capabilities include the capacity to pose reasoned questions, to engage in critical inquiry and to be cognizant of the values underpinning issues framing debates about sustainability (McElroy, 2002). In such environments, systems thinkers with a holistic worldview thrive. Other capabilities include the ability to recognise that all systems are fluid and evolving. The ability to pursue sustainability from an action learning perspective and the capacity to identify ongoing, reflective active learning opportunities are also
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among the most desired capabilities (Marshall, 2004).
Context The issue of context is paramount in the dynamic world of KM. Understanding how contextual factors affect an organization will nurture the development of appropriate KM approaches and processes, which will serve to position an organization in a sound competitive niche while still maintaining a commitment to sustainability. KM can effectively serve these purposes if it is developed and maintained skilfully. As the essence of knowledge work and the people who perform it is connected to the acquisition of skills and expertise, a willingness of people to share these attributes and collaborate with others is essential (Newell, Robertson, Scarborough & Swan, 2002). While organizational capabilities and individual competencies – human attributes, skills and knowledge – combine to create the potential for effective action (Saint-Onge and Wallace, 2003), effective HCM and KM require a sound understanding of the environmental, organizational, team and individual contexts underpinning any organization. Knowledge itself is of little value to an organization unless these contextual aspects are clearly understood. Much of the tacit and explicit knowledge remains largely untapped in most organizations and without a thorough understanding of context, neither HCM nor KM can brace the development of the management and leadership capabilities required to support sustainability.
THE nEXus BETWEEn susTAinABiliTY, HCM AnD KM Sustainability remains a novel and elusive concept, which is hardly surprising in that disposability is an inherent element in the consumerism that powered the previous industrial economy. In today’s knowledge economy, where importance
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Table 1. Mapping management and leadership capabilities to support sustainability ROLES
RELATIONSHIPS
• Ability to work across organizational, national and international boundaries and disciplines • Leader as visionary: the vision must support sustainability • Demonstrate problem solving capacity across a wide range of complex issues, including environmental, technical, social, political and economic issues • Role model – must be able to convince others of the positive impact of commitment to sustainability, and model behaviour accordingly • Change manager – must be able to formulate a vision and ‘sell’ it, also reduce resistance to notions of sustainability • Capacity to demonstrate and model self-renewing behaviour
• Ability to think across boundaries, establish new relationships, work across value chains and across expanded markets • Demonstrate excellent communication skills • Capacity to build and maintain networks • Capacity to broaden relationships, for instance not only across an organization but also consumers, suppliers, the value chain and the ecological chain. • Able to collaborate widely • Valuing principles of equity, justice, collaboration in all relationships • Flexible and adaptive
Knowledge creation Knowledge sharing Knowledge dissemination Communication CONTEXTUAL FACTORS Processes Enablers Relationships Measurement Feedback Infrastructure Self-awareness Learning Education Boundary spanning STRATEGIC FOCUS • Ability to implement sustainability strategies and plans across various levels • Capacity for purpose driven leadership • Understand need to set benchmarks and measure results • Understanding the need to provide strategic leadership through the development of sustainable business models • Delivers ROI for all stakeholders (as opposed to only shareholders) • Ability to align business goals with sustainability goals and targets • Focus on renewal, revitalization in economic, social and environmental terms
is increasingly attributed to the need for sustainable resources and institutions, knowledge-based theory should underpin strategic thinking in organizations. Within a knowledge-based view, organizational knowledge is recognized as the most valuable organizational asset (cf. Curado & Bontis, 2006; Reinmoeller, 2004). Following from a resource-based view of the firm (cf. Barney, 1991; Halawi et al., 2005; Wernerfelt, 1995), which posits that a firm’s available and accessible resources are its basis for competitive advantage, managing knowledge strategically is a significant source of competitive advantage (Barnes, 2002). Knowledge is both a key resource and a basis for sustainability. In this light, knowledge and associated KM practices must too be sustainable. In the wider search for sustainability, issues of context, culture and appropriateness are
LEARNING FOCUS • Identifying ongoing, reflective, active learning opportunities • Poses questions and engage in critical inquiry • Values-aware • Ability to pursue sustainability from an • Action learning orientation • Ability to accelerate the learning curve to achieve results faster • Systems thinker, seeing holistically • Ability to recognize that all systems are fluid and evolving
of overriding importance. In the realm of context, there should be a focus on community as well as on process. With this association, KM enhances the potential for knowledgeable practices that are “envisioned, pursued and disseminated, with other actors encountering these new practices and learning from them to develop their own local knowledge” (Cushman, Venters, Cornford & Mitev, 2002). The scope of KM exists largely in the contextual filter that spans the boundaries between the various interactions between people, organizations and national cultures. Effective linkages, which support sustainability, require mutual understanding of the contextual aspects related to the broad ranges of situations and frameworks in which sustainability issues are cast. KM involves managing the context and thereby, the interface between
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the HRM strategy and situational factors. In the realm of context, KM offers a range of boundary spanning activities and support mechanisms for the HR professional to engage. These include knowledge creation, knowledge sharing, frameworks, enablers, infrastructure, measurement, feedback, learning and education. The application of knowledge and expertise, through KM and HCM, acts as a platform to support sustainable development. The deeper the intensity of knowledge and information exchange, the better the chances for developing effective management and leadership capabilities to support sustainability. While situated and contextual understandings related to sustainability goals and practices are required, new modes of KM are also necessary to facilitate this development because the drivers of mainstream approaches to management development have largely reflected different visions and objectives. The focus must be on creativity, internal organizational dynamics and the social processes of human interaction, especially given that the latter is central to knowledge creation and transfer. KM helps to shape organizational routines that house useful knowledge, which can be exploited as an organizational rather than an individual resource (Carlisle, 2000). Knowledgebased theorists argue that a firm’s unique capabilities in the management of knowledge processes can be developed into distinctive competencies based upon exploiting the growing knowledge generated by these processes (Carlisle, 2000). The capability for integrating knowledge from a wide range of disparate sources is an obvious example in this context. Such organizational knowledge-based capabilities are culturally bound and contextually dependent and hence, they are difficult for competitors to imitate or replicate. It is in the synergies between these capabilities and competencies, the learning, cultures and behaviours that the richness of the potential relationship between KM and HRM is most evident. From the standpoint of HCM, several things need to happen because traditional HRM ap-
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proaches still dominate the majority of modern organizations and even so-called ‘strategic’ HRM fails to recognize sufficiently the significant and intrinsic value of knowledge. Therefore, the transformation from traditional HRM to knowledge-based HCM approaches is of utmost importance to organizations wishing to operate in the modern knowledge environment. The best way to accelerate this transformation process is through the development of strong linkages and partnerships between KM and HCM. Strong links between KM and HCM support sustainability through the identification of those capabilities specific to sustainability and by aligning recruitment and selection practices to these capabilities. Through supportive management development programs and learning support, capabilities of this type can be developed further. This includes identifying key individuals to be fast-tracked into sustainability roles, normally based on their personal values and extensive relationship networks. Sustainability goals can be built into the HR strategic plan to support the same goals in the overall business plan (Barton et al., 2000). Connectivity between sustainability, KM and HCM is further leveraged through the inclusion of a strategic provision for human capital development, both in the context of knowledgerelated capabilities and competencies and the cultural infrastructure that supports knowledgecreation and sharing, communication, learning, and networking necessary for the formation of communities of practice. Performance management and remuneration can also be tied to specific indicators related to identified capabilities and desired behaviours. Finally, the key to maximising the contribution of KM to a management practice such as HCM is to promote awareness and understanding concerning the implications of the essential, deep-seated and often obscure differences in approaches to KM. This requires an understanding of deeper underlying values and assumptions, coupled with an appropriate alignment between overall, strategy
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(in this case with a sustainability dimension), KM and HCM.
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Curado, C., & Bontis, N. (2006). The knowledgebased view of the firm and its theoretical precursor. International Journal of Learning and Intellectual Capital, 3(4), 367–381. doi:10.1504/ IJLIC.2006.011747 Cushman, M., Venters, W., Cornford, T., & Mitev, N. (2002). Understanding Sustainability as Knowledge Practice. Paper presented to the British academy of management conference: Fast-tracking performance through partnerships, September 9-11, London. Retrieved on August 15, 2008 from www.c-sand.org.uk/Documents/ BAM2002.pdf Doppelt, B. (2003). Leading Change Toward Sustainability. Sheffield, UK: Greenleaf. Elkington, J. (2004). The ‘triple bottom line’ for 21st century business. In R. Starkey & R. Welford (Eds.), The Earthscan Reader in Business and Sustainable Development (pp. 20-43). London: Earthscan. Fttz-enz, J. (2000). The ROI of Human capital: the economic value of employee performance. New York: Amacon. Gloet, M. (2004). Linking KM to the HRM Function in the knowledge economy: A new partnership? Driving Performance through Knowledge Collaboration: Proceedings of the KM Challenge 2004. Sydney: SAI Global. Gloet, M. (2006). Knowledge management and links to HRM: Developing leadership and management capabilities to support sustainability. Management Research News, 29(7), 402–413. doi:10.1108/01409170610690862 Halawi, L., Aronson, J., & McCarthy, R. (2005). Resource-based view of knowledge management for competitive advantage. Electronic Journal of Knowledge Managment, 3(1). Retrieved on November 29, 2008 from http://www.ejkm.com
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Jackson, S., Farndale, E., & Kakabadse, A. (2003). Executive development: Meeting the needs of top teams and boards. Journal of Management Development, 22(3), 185–265. doi:10.1108/02621710310464823 Laszlo, K., & Laszlo, A. (2002). Evolving knowledge for development: the role of knowledge management in a changing world. Journal of Knowledge Management, 6(4), 400–412. doi:10.1108/13673270210440893
Parkin, S. (2000). Context and drivers for operationalizing sustainable development. Proceedings of ICE, 138, 9–15. Perez, J., & Ordonez de Pablos, P. (2003). Knowledge management and organizational competitiveness: a framework for human capital analysis. Journal of Knowledge Management, 7(3), 82–91. doi:10.1108/13673270310485640
Lengnick-Hall, M., & Lengnick- Hall, C. (2003). Human Resource Management in the Knowledge Economy. San Francisco: Berrett-Koehler.
Reinmoeller, P. (2004). The knowledge-based view of the firm and upper echelon theory: exploring the agency of TMT. International Journal of Learning and Intellectual Capital, 1(1), 91–104. doi:10.1504/IJLIC.2004.004425
MacDonald, J. (2003). Profession at a crossroads. In M. Effron, R. Gandossy & M. Goldsmith (Eds.), Human Resources in the 21st Century. Hoboken, NJ: Wiley.
Rowledge, L. (1999). Knowledge management for sustainable value creation. EKOS International. Retrieved on July 24, 2005 from http://www. ekosi.com/
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Rumizen, M. C. (2002). Knowledge Management. Madison, WI: Pearson.
Marshall, J. (2004). Matching form to content in educating for sustainability. In C. Galea (Ed.), Teaching Business Sustainability (pp. 196-208). London: Greenleaf. Martin, B. (2000). Knowledge management within the context of management: an evolving relationship. Singapore Management Review, 22(2), 17–36. McElroy, M. (2002). Deep Knowledge Management and Sustainability. Centre for Sustainable Innovation. Retrieved on July 20, 2005 from http:// www.sustainableinnovation.org/Deep_KM_and_ Sustainability.pdf Newell, S., Robertson, M., Scarborough, H., & Swan, J. (2002). Managing Knowledge Work. London: Palgrave.
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Sage, A. P. (1998). Risk management for sustainable development. IEEE International Conference on Systems, Man and Cybernetics, 5, 4815-4819. Saint-Onge, H., & Armstrong, C. (2004). The Conductive Organization: Building Beyond Sustainability. Oxford, UK: Elsevier ButterworthHeinemann. Saint-Onge, H., & Wallace, D. (2003). Leveraging Communities of Practice for Strategic Advantage. New York: Butterworth-Heinemann. Snowden, D. (2002). Complex acts of knowing: paradox and descriptive self-awareness. Journal of Knowledge Management, 6(2), 100–111. doi:10.1108/13673270210424639 Soliman, F., & Spooner, K. (2000). Strategies for implementing knowledge management: role of human resources management. Journal of Knowledge Management, 4(4), 337–345. doi:10.1108/13673270010379894
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Stewart, T. (1997). Intellectual capital: the new wealth of organizations. New York: Doubleday. Ulrich, D. (1997). Human Resource Champions: the next agenda for adding value and delivering results. Boston: Harvard Business School Press. Ulrich, D. (1999). Integrating practice and theory: towards a more unified view of HR. In P. Wright, L., Dyer & J. Boudreau (Eds.), Strategic Human Resources Management in the Twenty-First Century (Supplement 4). New York: Elsevier Science. Ulrich, D., & Smallwood, N. (2003). What is next for the people function? A missing link for delivering value. In M. Effron, R. Gandossy & M. Goldsmith (Eds.), Human Resources in the 21st Century. Hoboken, NJ: Wiley.
Wernerfelt, B. (1995). The resource-based view of the firm: Ten years after. Strategic Management Journal, 16(3), 171–174. doi:10.1002/ smj.4250160303 Wood, K., Bobenrieth, M., & Yoshihara, F. (2004). Sustainability in a business context. In C. Galea (Ed.), Teaching Business Sustainability (pp. 253267). London: Greenleaf. Yahya, S., & Goh, W. (2002). Managing human resources toward achieving knowledge management. Journal of Knowledge Management, 6(5), 457–468. doi:10.1108/13673270210450414
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Chapter 14
Building and Maintaining Human Capital with Learning Management Systems Tom Butler University College Cork, Ireland Audrey Grace University College Cork, Ireland
ABsTRACT In this chapter, the authors examine how building, integrating and maintaining human capital with Learning Management Systems acts as an enabler for the management if intellectual capital within multinational organizations. They draw upon learning theory and training practices to demonstrate that human capital is best viewed through a competence lens; that is, accounting for human capital should focus on matters of individual and organizational competence, and that the development of human capital is, in essence, an exercise in competence development, which involves training and learning. This, then, is this chapter’s point of departure in understanding how IT-based systems can enable training and foster learning, thereby building an organization’s human capital.
inTRoDuCTion In an intensely competitive, rapidly evolving, and increasingly knowledge-based high-tech sector, the ability to learn is critical to the success of multinational organizations. It is now clear that building and maintaining a firm’s human capital through organizational learning represents the only sustainable source of competitive advantage. Barney (1991), for example, illustrates that the strategic resources which underpin the success of business DOI: 10.4018/978-1-60566-679-2.ch014
enterprises include an organization’s physical, human, and organizational capital. Physical capital includes plant and equipment, geographic location, and access to raw materials. Human capital includes the training, experience, judgment, intelligence, relationships, and insights of managers and workers. Organizational capital includes firm structure and processes, internal and external relations, both formal and informal. It is clear, however, that human capital lies at the foundation of both physical and organizational capital (Nordhaug, 1994). This chapter argues that human capital can be enhanced through the application of IT (as physical capital)
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and organizational learning processes (organizational capital). Human capital is manifested in the individual and the collective competences of social actors in an organization (Nordhaug, 1994). Over the last number of years, a strategic, human capitaloriented approach to competence development through the management of learning has been adopted by many organizations. This has, in turn, led to the appearance of a new breed of Information Systems (IS) known as Learning Management Systems (LMS) (Dunne & Butler, 2004). Learning Management Systems are now replacing isolated and fragmented learning solutions with a systematic means of assessing and raising competency and performance levels across organizations. Practitioners and IT vendors have led the promotion and adoption of IT-based learning management solutions. Accordingly, there is a dearth of empirical academic research in this area. Therefore, an important challenge for the management and information system disciplines is to better understand LMS, and to examine the roles and limitations of such systems in building human capital in order to better inform practice. This chapter informs both research and practice through its presentation of the findings of an indepth case study of LMS implementation and use by a large US multinational high-tech firm (CEM Corp.). As such, it provides insights into the roles that LMS can play in the continued commercial success of such organizations. The findings of this case study illustrate that LMS offer a strategic IS solution for planning, delivering and managing all learning events, including both online and classroom-based learning. Practitioners recognize the need for such systems; for example, many world-class organizations are employing learning management to foster and manage learning within their organizations—such organizations include Amazon.com, Cisco Systems, Continental Airlines, Deloitte Consulting, EDS, Ford Motor Company, General Electric, and Procter & Gamble. CEM adopted the KnowledgeLink Learning
Management System for the same reasons. Of significance is that this chapter presents an inventory of roles that Learning Management Systems plays in this organization. Also described are the practical experiences and issues encountered by CEM in their approach to building human capital using their LMS. The findings of this study indicate that, to some extent, the KnowledgeLink LMS fulfilled all of the roles suggested in the proposed conceptual framework; however, because the system was still at an early stage of use, some of the functions were found to be more highly developed than others. Furthermore, the case study identified a number of additional roles for LMS in enhancing human capital that were not suggested in the framework, but were operationalized by the KnowledgeLink technology. The chapter then closes by offering some suggestions for future research directions and outlining the implications for practice.
HuMAn CAPiTAl AnD lEARninG MAnAGEMEnT sYsTEMs The importance of facilitating and managing learning within organizations is well accepted. Zuboff (1988), for example, argues that learning, integration and communication are critical to leveraging employee knowledge; accordingly, she maintains that managers must switch from being drivers of people to being drivers of learning. Harvey and Denton (1999) identify several antecedents which help to explain the rise to prominence of organizational learning, viz. •
• •
The shift in the relative importance of factors of production away from capital towards labor, particularly in the case of knowledge workers. The increasing pace of change in the business environment. Wide acceptance of knowledge as a prime source of competitive advantage.
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• •
•
The greater demands being placed on all businesses by customers. Increasing dissatisfaction among managers and employees with the traditional ‘command control’ management paradigm. The intensely competitive nature of global business.
A HuMAn CAPiTAl PERsPECTiVE on TRAininG AnD lEARninG The challenge facing organizations is, therefore, to build and enhance their stock of human capital. Drawing on human capital theory (Becker, Murphy, & Tamura, 1993), and on later insights in transaction cost theory (Williamson, 1985), Nordhaug (1994) delineates how this can be achieved by illustrating how training and learning underpins the development of knowledge and skills, which, in addition to aptitude, shapes individual and organizational competences. Nordhaug (1994) distinguishes between the role of informal (i.e. part of the socialization process in organisations) and formal (through training, education etc.) learning in competence development. He illustrates that unique organizational competences, which are highly firm specific, are a function of firm specific intra-organizational competences, non-firm specific industry and technical trade competences, and, ultimately, general meta-competences and standard technical competences. Most important, however, is his assertion that human capital is best viewed through a competence lens; that is, accounting for human capital should focus on matters of individual and organizational competence, and that the development of human capital is, in essence, an exercise in competence development, which involves training and learning. This, then, is this chapter’s point of departure in understanding how IT-based systems can enable training and foster learning, thereby building an organization’s human capital.
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iT-BAsED lEARninG MAnAGEMEnT sYsTEMs It is perhaps time to admit that neither the ‘learning organization’ concept, which is people oriented and focuses on learning as a process, nor the knowledge management concept, which focuses on knowledge as a resource, can stand alone. These concepts complement each other, in that the learning process is of no value without an outcome, while knowledge is too intangible, dynamic and contextual to allow it to be managed as a tangible resource (Rowley, 2001). She emphasizes that successful knowledge management needs to couple a concern for systems with an awareness of how organizations learn. Researchers believe that what is needed is to better manage the flow of information through and around the “bottlenecks” of personal attention and learning capacity (Wagner, 2000; Brennan, Funke, & Andersen, 2001) and to design systems where technology services and supports diverse learners and dissimilar learning contexts (McCombs, 2000). In response to these needs Learning Management Systems (LMS) evolved; accordingly, an increasing number of firms are using such technologies in order to adopt new approaches to learning within their organizations. This new ‘learning management’ approach has been led primarily by practitioners and IT vendors: as it is a relatively new phenomenon, there is a dearth of empirical research in the area. Therefore, an important challenge for researchers and practitioners to better understand LMS and to examine the role that these new systems play in developing human capital in organizations.
REsEARCH METHoD This study’s primary objective is to examine how LMS may be utilized in an organizational context to facilitate and manage organizational training learning and develop organizational competences and, ultimately, human capital. A
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case study approach was selected for three key reasons. Firstly, the case study research method is particularly suited to information systems (IS) research (Benbasat, Goldstein, & Mead, 1987; Myers, 1997), since the objective is the study of IS in organizations and “interest has shifted to organizational rather than technical issues” (Benbasat et al., 1987). Case research, with its emphasis on understanding empirical data in natural settings (Eisenhardt, 1989) is an appropriate method for studying IS issues and practices. Furthermore, Benbasat et al. (1987) maintain that IS researchers should learn and theorize primarily from studying systems in practice, as much IS research trails behind practitioners’ knowledge. Indeed, this is the case with respect to the availability of empirical research on LMS. Secondly, the objective of the research is exploratory in nature and the single case study is considered to be a potentially rich and valuable source of data and is well suited to exploring relationships between variables in their given context, as required by exploratory research (Benbasat et al., 1987; Yin, 1994; Stake, 1994). Thirdly, the main argument against single cases has been answered by Lee (1989). He points out that single cases differ from multiple cases only in their degree of generalizability and in this sense, the ‘lessons’ learned from our case have been formulated as postulates, with specific view to their validity being confirmed, or otherwise, in future research. Field work was undertaken over a period of 10 months, commencing approximately a year and a half after the LMS went live. A range of key informants and users of the LMS were interviewed and observed during this period, from the company’s engineering, technical training, and HR functions.
A CAsE sTuDY oF CEM’s lEARninG MAnAGEMEnT sYsTEM CEM Corporation is a global US-based high-tech company with over 20,000 employees spread
across several continents. In February 2001, CEM Corporation deployed a Learning Management System known as Saba Learning Enterprise™ to employees across the entire organization, as well as to CEM customers and business partners. This corporate-based system is used to deliver and track training programs and formulate learning across multiple functions within the organization, including technical functions; business functions; IT professional functions; and management functions. The system is also used to deliver and track individual personal development training. Hosted at CEM’s corporate offices in the United States, the system is accessible through the internet via a virtual private network and has been customized for CEM. CEM employees may sign on to the system through an CEM specific web application interface called KnowledgeLink. A separate web application interface known as PowerLink provides customized access for customers and partners. The business drivers for deploying this enterprise learning solution were: • • • • • •
Decrease time-to-competency. Develop and manage skill sets for all employees. Leverage global, repeatable and predictable curriculum. Integrate competency assessments to development plans. Accelerate the transfer of knowledge to employees, partners, and customers. Provide a single learning interface for all internal and external users.
Subsequent to the rollout of this system, CEM Corporation encountered tough economic conditions globally and entered a period of rationalization and cost cutting. According to the KnowledgeLink Manager, “from the perspective of CEM, the new Learning Management System provided an opportunity to decrease its own costs by extending online learning from a primarily technical focus, to incorporate the skills and aptitudes
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Figure 1. CEM Enterprise Learning Solution Components
needed throughout the organization. It presented many new possibilities including more efficient use of the existing Learning Centre facilities for delivery of internal courses, the maximization of learning across the organization and improved performance though increased competencies.” He added that “all in all, it was seen as a mechanism which would enable CEM to position itself strongly as a learning focused organization, and potentially as an exporter of knowledge within CEM Corporation.”
Enterprise learning solution Components As illustrated in Figure 1, CEM’s Enterprise Learning Solution consists of many components. Much of the learning material is created and maintained by CEM employees using a number of products including Microsoft Office, Adobe Acrobat and
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Saba Publisher. Content is stored on CEM’s own storage repository, on site. In addition, courseware that is created and maintained directly by third parties is stored offsite in the storage repository of the third party organization. Courseware is provided to CEM by a number of third party learning content suppliers, including KnowledgeNet and Netg. While all learning content is primarily provided to CEM employees through KnowledgeLink, it is also possible to access some of the third party courseware directly through the internet. Employees may use KnowledgeLink to manage their own learning processes, for example – they may enroll in classroom courses, search for learning material, engage in an online learning activity, or look at what development options are suitable for their role within the organization. Managers may use the system to manage the learning processes of their employees, for example, they may examine the status of learning activities
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for their employees; assign learning initiatives to their employees; and generate reports on learning activities. Administrators and training personnel may use the system to administer and manage employee training, for example, they may publish and manage learning content; manage the catalogue of courses; and create reports on learning activities. While much of the required reporting is provided by KnowledgeLink, administrators also use third party software called Brio to generate more sophisticated reports. KnowledgeLink has the capability of managing and tracking both offline activities (e.g. books, ‘on the job’ training, mentoring, classroom training) and online activities (e.g. video and audio, rich media, webcasts, web-based training, virtual classroom training). In the case of online activities, learning content may be accessed and delivered through KnowledgeLink either from CEM’s repository or from the third party’s storage repository. Certain testing is built into the learning content itself, but additional pre-training-testing and post-training-testing may be invoked and this is provided by another third party product called QuestionMark.
learning Management system Roles This section presents the findings of the case study and answers the question: “What are the roles of the Learning Management System in managing learning within the organization?” This question is addressed chiefly by reviewing the potential roles of Learning Management Systems. These roles are listed as: • • • •
Support training administration. Support diverse learners within diverse learning contexts. Facilitate competence development to meet particular business objectives. Enable cohesive learning throughout the enterprise.
• •
Encourage accountability for learning among employees. Enable monitoring/analysis of the status of learners within the organization.
This part of the research will establish if KnowledgeLink fulfils these roles and if there are any additional key roles that it serves. The findings for each of the roles are presented in turn.
Supporting Training Administration One of the key roles of Learning Management Systems is to support training administration (Barron, 2000; Brennan et al., 2001; Zeiberg, 2001). Many of the interviewees agreed that KnowledgeLink was primarily used by training facilitators to automate training administration and that this is still one of the more important roles of the system. The Training Manager within the Customer Services Organization Asia Pacific commented that “the main role of KnowledgeLink is to automate training administration tasks and then to add value.” Through the ‘Catalogue Management’ function, trainers enter details of upcoming training classes, invite people to register for these classes online and then subsequent to the training program, they use the system to record and track the details of the class. The interviewees confirmed that the areas primarily supported by KnowledgeLink in the area of training administration are: •
•
Training registration: Employees may register for a course or learning activity from many areas within KnowledgeLink including: the enrolments page; through clicking on the product title when viewing development options in the competency function; and by searching the learning catalogue. Scheduling training: Instructor led classes are all scheduled on KnowledgeLink and this gives visibility to all potential learners
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•
•
of upcoming training which they may wish to attend. Delivery of training: KnowledgeLink is used as a central gateway to deliver electronic courses and electronic learning content. Training testing and tracking: While much of the pre-learning and post-learning testing for both electronic learning and classroom-based learning is carried out outside of the system (either as part of the learning content itself or through the QuestionMark software), the results are recorded and tracked on KnowledgeLink and may be viewed within the transcript of learning activity, maintained for each learner.
A number of the Training Managers interviewed spoke about the difficulties they had in getting administration rights in order to administer their own training on KnowledgeLink, though they have had administration rights for some time now. They are using these administration rights to manage learning content, manage the catalogue of learning activities and to generate reports on training programmes and individual learning activities. One interviewee commented that “if you want to get a system out there and get people to use it, you cannot centralize the administration of it. If you have to go to someone, ask them can you do this for me and get someone’s time, you’re just not going to use it...the more red tape you have, the less effective it becomes.” Access rights are slowly being given to the appropriate individuals in other divisions of CEM. At this point in time, some of the administration is still being carried out centrally in the United States – for example, entering of development options for competency models, logon and access rights, reporting capabilities, etc.
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Supporting Diverse Learners within Varied Learning Contexts McCombs (2000), Wagner (2000) and Brennan et al. (2001) maintain that one of the biggest factors to the success of information technologies in learning is the ability to support diverse learners within diverse learning contexts. KnowledgeLink does support a large number of learners with varied roles, responsibilities and training needs across the organization, as it supports over 17,200 across the CEM Corporation. KnowledgeLink provides access to a large central repository of varied learning material which is organized in a structured way. As one interviewee who is a user of the system put it, “people can identify their role and cross reference KnowledgeLink for recommendations…the system also provides guidance with paths through the training courses.” Courses supported include; technical courses; customer service focused courses; sales focused courses; soft-skill or personal development courses; product courses; accountancy-based courses; and many more. KnowledgeLink was found to be able to support diverse learning contexts including; in class instruction; training manuals or books; audio and video training; multimedia training and virtual classroom training. However, the HR Information Systems Specialist stressed that KnowledgeLink may be more suitable for corporate training and standard training that can be rolled out across the organization on an ongoing basis, rather than specialist or once off training. She said “manufacturing guys use it quite a bit for their technical training programmes because the manufacturing training is generic across the manufacturing sites in CEM…it’s the same for Customer Service.” She explained that software engineering has very much done their own thing and that they use a separate website for training administration and tracking. This system
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is ISO9000 compliant and was in place before KnowledgeLink was implemented. A Software Engineer commented that “there doesn’t appear to be a large amount of suitable training available for software development through KnowledgeLink…..it seems to be focused at Manufacturing and Customer Services.” He added that the company’s Open Software Group produces its own training videos and disseminates these directly to software organizations throughout CEM. However, KnowledgeLink is used by the Software Engineering Organization for training on CEM application programs and for corporate training.
Facilitating Competence Development to meet Particular Business Objectives A typical Learning Management System should permit competency mapping and facilitate mapping of career development paths by measuring an individual’s competency level and then guiding the learner to the most appropriate course to fill any skill gap (Brennan et al., 2001). Hall (2001) argues that when used to their full potential, Learning Management Systems enable mapping of knowledge and competencies to specific business objectives. CEM is now beginning to facilitate competence development to meet particular business objectives through KnowledgeLink in two distinct ways. The first of theses is ‘from the top down’. Many departments within CEM have begun to use KnowledgeLink to automate the training needs analysis process and thus centralize training planning. Previously, this was primarily a manual process whereby training managers would survey employees within a department in relation to their skills and abilities. They would then collate the results on an excel spreadsheet, subsequently they would draft training plans which attempted to address the main training needs of that department. Through KnowledgeLink, competencies are assessed using role-based competency models, and thus trainers can identify all training needs for each job role type. Subsequently they
can develop training plans to meet those needs. From a management perspective, it is possible for a manager to get an overall picture of the competency levels within their department that will help them to identify competency deficiencies or indeed, competency overlaps. Furthermore, a manager will be able to see how competency levels within their department compares with similar departments elsewhere within CEM. The Service Support Manager, EMEA pointed out that “although it started as just automation of training needs analysis, managers then saw that they can get a picture of training gaps and average competency levels world-wide…they can also see overlaps in competencies.” The second manner in which CEM is beginning to facilitate competence development to meet particular business objectives is ‘from the top down’. KnowledgeLink facilitates a competency assessment process which enables an employee to identify gaps or shortfalls in their competency levels with respect to the competency model associated with their own specific job role. As outlined earlier, learners may select development options which will help develop deficient competencies and subject to the passive approval of their manager, the learner can carry out the necessary learning activity to acquire the competence. These development plans may also specify pre-requisite training or knowledge, thus facilitating a certain amount of control over the order and structure of training. The competency model for Product Software Engineers (PSEs) within Global Technical Support, EMEA, contains 165 competency assessment questions which examine competency levels within 29 competency categories (questions on each category are not grouped together and are dispersed throughout the questionnaire) and also contains a free text area for additional information. This model was created by the training manager within Global Technical Support, EMEA, in consultation with a number of individual PSEs. The model assesses both technical skills (65%)
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and soft skills (35%) and takes approximately 25 minutes to complete. Competency levels range from between ‘competence level 1’ and ‘competence level 5’. While competence models already exist on KnowledgeLink for many roles, standard competency models do not yet exist for all role types. Training managers in each area are currently working through a process of drawing up a standard competency model for each role type by collaborating with groups of employees who hold that particular role type. The KnowledgeLink Manager pointed out that many roles (particularly senior roles such as manager, supervisor and team lead) have generally standard competencies and that devising competence models for these roles is straightforward because they can be benchmarked against similar roles in the industry. However, he emphasised that “as you drill down, you find that there are a lot of specialist functional competencies and you get into the ROI question. Because there is such a large investment in time and effort involved in devising competence models for all technical roles, it has to be driven by the local business needs.” It was emphasized by the KnowledgeLink Manager that although competency models facilitate the specification of certain skills which are needed to fulfill a particular job role, there are some limitations to this approach. One limitation was stated as “…the difficulty in having accurate competency models for all roles when there is such a vast array of diverse technical positions.” This was re-iterated by two other interviewees, who explained that a particular group of employees in their department held only a small number of common competencies, yet they had a lot of specialist skills. One interviewee asked “do you have a separate competency assessment for each specialist skill, or do you have a competency assessment model with 500 questions in it?...if you do, people will strike ‘not applicable’ to it.” Furthermore, this interviewee highlighted the difficulty in measuring the same competencies across two
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areas which have a different emphasis on depth, versus breath, of knowledge. For example, one area where depth of product knowledge is critical is in ‘technical problem solving for a particular CEM product’, yet another area like ‘technical problem solving for general customer queries’ may require a greater breath of knowledge on various products, but may not require a profound knowledge in any one product area. Another limitation of the competence models highlighted by a number of interviewees related to when these models are used for the purposes of a performance review. The apportioning of a weighting of 25% to the learner and a weighting of 75% to the manager/mentor was questioned as it may be inappropriately geared in favour of the manager/mentor. This may cause difficulties if the manager/mentor is not entirely familiar with all of the competencies assessed or if the manager/ mentor is not fully aware of the learner’s abilities in each of these areas. The KnowledgeLink Manager argued that “performance assessment must be a joint agreement, which has the buyin and support of the assessee. They must both jointly generate a development plan which uses the KnowledgeLink competency models, but also incorporates suggestions from both the assessor and the assessee.” Another interviewee pointed out that the ideal scenario in allowing an employee to develop and grow involved a two pronged approach. He stressed that “one approach should be geared towards a training plan that enables the employee to do their job properly and the other approach should be geared towards the career development of the individual by helping him/her to establish what training they would need in order to develop their own career ambitions.” In sum, the research findings illustrate that KnowledgeLink is beginning to fulfill the role of facilitating competence development to meet particular business objectives. This is being achieved through both a top down approach and bottom up approach to learning management. From a top down perspective, Training Managers within CEM are
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beginning to use KnowledgeLink to automate the ‘training needs analysis’ process which will assist them in the identification of training needs and will support training planning. From a bottom up perspective, CEM is encouraging employees to self manage their own learning using KnowledgeLink. They may carry out competency assessments against the standard competency model related to their own particular role, and subsequently they may review learning options available and devise development plans to acquire the competencies in which they are deficient. Finally, although rolebased competency models have been set up on KnowledgeLink for many of the customer facing roles, CEM is still in the early stages of constructing workable competency models for all job roles within the organization.
Enabling Cohesive Learning throughout the Enterprise Greenberg (2002) maintains that LMS replace isolated and fragmented learning programs with a systematic means of assessing and raising competency and performance levels throughout the organization. This study illustrates that learning plans for individuals are not coordinated in sync with any overall learning plan, but are aimed to meet particular role competencies and are either self directed or are controlled by the manager of the individual. From this perspective, KnowledgeLink facilitates consistency and cohesion by allowing standardized competency models to be defined and by enabling development plans to be constructed in order to achieve the competencies outlined in the competency model. Furthermore, although curricula are not yet provided for all roles, some curricula or training maps are provided on the system for key technical, sales and customer service roles, and these may be used to guide the sequencing of developmental plans. The KnowledgeLink Manager stated that “although KnowledgeLink does not provide a learning development plan for the entire organization…..it can, however, provide
status report on all competency levels and these may be analyzed manually in order to establish an overall learning development plan.”
Encouraging Accountability for Learning among Employees Hall (2001) suggests that Learning Management Systems increase employee and manager accountability for learning and performance results. It was found that KnowledgeLink has the capability to be very ‘learner focused’ and to be strong in encouraging accountability for learning among employees and managers. The KnowledgeLink Manager pointed out that “self assessment is facilitated and self directed learning is offered, which has passive approval.” The Training Manager of Customer Services in Asia Pacific stated that “the development of an individual may be guided by a number of factors including: corporate compliance requirements; competencies required to fulfill a particular role; and self assessment carried out by the individual themselves.” However, it was stressed by the KnowledgeLink Manager that “at the end of the day, the onus is back on the employees to develop themselves.” It was also generally agreed among the respondents in this study that this depends to a large extent, on the level of motivation of the individual. It was found that the process of self planning of career development has for the most part, not been taken up as yet within the organization. A number of potential reasons for this were discovered and these are outlined below. One interviewee highlighted that “many employees may still feel that the system is primarily designed for course registration and the other elements of the system may need to be emphasized more internally.” He was also of the opinion that CEM may not be entirely effective in promoting and marketing the downloadable learning material that is on KnowledgeLink. This was supported by his observation that “if people venture in there and snoop around, they’ll find some good stuff,
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but they’ll stumble across it…but it won’t be presented to them to say that this is now available on KnowledgeLink.” Furthermore, another interviewee pointed out that notification about upcoming training courses is emailed to managers currently, but not to employees. This interviewee pointed out that “some courses like new product training or web-based training may get missed.” It was claimed by one interviewee that “although the initial rollout of KnowledgeLink seems to have been good and although there is a growing awareness of the system, people still have not got to grips with using it…..we should possibly promote it more internally and formalize its use within the review process.” Another interviewee argued that “some employees may fear that if they use the system to log their competencies, their career may be negatively affected.” It was found that the mobilization of KnowledgeLink may lack the support and buy-in of senior management. Within CEM the initiative is being driven by a number of key Training Managers. They have been running a number of pilot projects which aim to get buy-in from employees to engage with the competency assessment process and following on from this, they hope to get more support from senior management and directors within the organization. Ensuring that adequate training and learning takes place in the organization is part of the remit of the Human Resource Directors, but this is only one of their many demanding priorities. Therefore, no one director at CEM is primarily focused on training and learning, and no one director has the objective of maximizing learning using KnowledgeLink. One cultural difficulty outlined by one of the interviewees was that “some supervisors may object to individuals on their team engaging with KnowledgeLink and seeking additional training for themselves.” He had seen this happen in the organization and maintained that these supervisors may have felt that it would upset the status quo of their team, in which all members tend to have a similar set of skills and competencies.
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Finally, one interviewee stated that “there has been some discussion about running an organizational wide re-grading program that requires everyone to sign onto the system within a specified timescale and to carry out a self assessment.” The key difficulty with this is that competency models for all role types would have to be in place prior to the running of the program. A more realistic scenario is that competency models will be done, ‘piecemeal’, throughout the organization and employees will over time, be migrated onto KnowledgeLink for the management of their own competencies, though there is no structured plan or roadmap in place to guide this migration process.
Enabling the Monitoring and Analysis of the Status of Learners Learning Management Systems can help administrators and management to target, deliver, track, analyze and report on their employees’ learning status within the organization (Nichani, 2001). The KnowledgeLink Manager explained that “the status of competencies within the organization may be reported by KnowledgeLink at a number of different levels.” Status of competencies may be reported at an individual level; at project team level; at section level within a department; and at department level. This report may be time-based or may specify all competencies that have been acquired by those employees. While status of competencies is not reported at organizational level, the usefulness of such a report was questioned by a number of interviewees, because this would contain large numbers of diverse and unrelated competencies within a large organization, such as CEM. The KnowledgeLink Manager also argued that “through the competency assessment process, KnowledgeLink can support a manager in assessing an employee’s role-based competencies… and having agreed development plans with that employee, a subsequent competency assessment can help that manager to determine the employee’s
Building and Maintaining Human Capital with Learning Management Systems
‘learning performance’ in acquiring the new competencies, as per the development plan. This ‘learning performance’, he added, “may then form part of the overall performance review for the employee.” CEM also has a database called SkillsCentre, which contains a skills inventory matrix for everybody in the organization and this database is updated regularly by each employee. Currently, there are no links between KnowledgeLink and SkillsCentre. One interviewee raised the concern that this database may not be widely used because it may be “at a level of granularity that is not useful.” Another issue raised and potential source of confusion was that the ratings for skills on SkillsCentre range between level 0 and level 4, whereas the ratings for skills on the KnowledgeLink system range between level 1 and level 5.
The KnowledgeLink Manager highlighted that another key role of KnowledgeLink is the provision of post learning support. He outlined that “although this function is not yet extensively used, KnowledgeLink enables employees to access their transcript, and through this transcript they may rerun material from a course or download documents associated with it.” A less obvious role of KnowledgeLink was outlined by an interviewee who carries out a technical role within CEM. He maintained that “KnowledgeLink acts as a flagging mechanism for the changing nature of CEM’s own products because when new training becomes available on KnowledgeLink, this normally signals either that new product features have been released or that product changes have taken place.”
Additional Key Roles and Attributes of the lMs
ConClusions
A number of other key roles of KnowledgeLink were identified by the interviewees. It was the view of a number of the interviewees that KnowledgeLink increases training productivity. As one Training Manager put it “with KnowledgeLink, the volume of work that you can get through is greater…it improves the efficiency of delivering and managing training.” Because KnowledgeLink contains a central repository containing details of all available training within the organization in a structured way, it emerged during the interviews that KnowledgeLink has helped to improve the profile of the training organization and has also stimulated an increase in the use of training within CEM. One Manager argued that “KnowledgeLink has really improved the profile of the Training Organization…before it was known that the Training Organization facilitated training, but you couldn’t put your finger on something…now there is a central repository and you can see all the training that is being delivered.”
The deployment of CEM’s LMS enabled the corporation to address many of the challenges that it faced prior to the system’s implementation. For example, the company now has a single Enterprise Learning Solution which supports the administration of all training across the entire organization. From the point of view of the employees, the system provides a centralized mechanism which enables them to search for and to enroll in selected courses or training programs: it also offers guidance on recommended training paths and curriculums. Furthermore, the competency assessment facility enables employees to determine and rectify competency gaps as well as providing management at CEM with a means of monitoring and managing overall employee competency levels within the organization. In addition, the LMS solution supports all training content whatever its subject matter or form and enables the management and control of access to this content using one system. This has the added advantage of highlighting duplication of training material in different parts of the organization and
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paves the way for streamlining the efforts of different training services within the company. In addition, the flexibility and dynamic nature of the system allows CEM Corporation to unilaterally introduce and to quickly implement new training requirements across the organization in response to changing business needs or new technical advances. The LMS may help to attract or retain key personnel by offering them a unique opportunity to monitor and develop their competencies and to manage their careers within the organization. As indicated, CEM Corporation is a hi-tech organization which operates in a very competitive and dynamic business environment. Managing learning and measuring learning outcomes are in themselves difficult tasks, but they are made even more problematic within complex technical and engineering learning domains, such as those that exist at CEM. It is unlikely that the LMS will enable the full management of all of the learning and develop the organization’s human capital in a ‘truly scientific way’ (cf. Nordhaug, 1994), though it will assist greatly in managing the diverse and extensive array of learning contexts and learning processes that must be supported. The system’s strengths lie in the new approach and attitude that it will encourage and inspire in the hearts and minds of individuals within the organization, as it enables training, learning and competence development that is highly visible, structured, and more accessible within the organization. This is achieved by improving the control and management of employee competency levels, and also by empowering employees to be creative in managing their own learning and competency development. Thus, the key challenge for management at CEM is to increase their influence and control over training and learning within the organization, while at the same time increasing employee commitment to managing their ongoing self development by taking responsibility for improving their knowledge of the business and building unique and intra-organizational competences, as per Nordhaug (1994). It is clear that
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these objectives are delicately balanced and must therefore be handled carefully. Too much control may de-motivate employees and discourage them from engaging with the system, but at the same time, enough control must be exerted to ensure that employees are developing competencies that support the day-to-day operational requirements of the organization, as well as being in sync with the overall goals and objectives of the company. One important consideration facing CEM Corporation is that it has a long way to go to before all of the benefits offered by their LMS can be fully exploited. Not all formal training is currently being tracked and managed through the LMS and some departments independently organize their own training outside of the system. One engineer argued that “there doesn’t appear to be a large amount of suitable training available for our department.” The benefits offered by this Enterprise Learning Solution will not be fully realized until sufficient training or learning programs are offered to all employees in all departments within the organization. Furthermore, while it is possible to take certain online training directly through the Internet, it is not possible to track or manage associated learning outcomes, as this training is initiated and completed outside of the LMS, and is not currently recorded by it. It is understandable that it will take some time to incorporate all every training program for all employees onto the system, but it is critical that this is achieved as quickly and efficiently as possible, to ensure support for the system and ongoing use of the system across the entire organization. At the time of study, role-based competency models had not yet been drawn up for all roles within the organization. Competency assessments are instrumental to determining if positive learning outcomes have been achieved and they will also demonstrate if the organization is obtaining a return on its investment in implementing and deploying the LMS. Furthermore, competency assessments offer management at CEM an opportunity to identify and rectify gaps or overlaps in
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competency levels as well as providing a means of assessing and managing overall competency levels within the organization. Even where competency models are available, the study revealed that the process of self management of career development has, for the most part, not yet been taken up within the organization. Moreover, many employees, and indeed managers, have not yet engaged with the competency assessment process. A structured plan or roadmap needs to be formulated in conjunction with local business needs for the formal migration of all employees onto the system for competency assessment and competency development planning to take place.
REFEREnCEs Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage. Journal of Management, 17(1), 99–120. doi:10.1177/014920639101700108 Barron, T. (2000). The LMS Guess. In Learning Circuits, American Society for Training and Development, from http://www.learningcircuits. org/apr2000/barron.html. Becker, G. S., Murphy, K. M., & Tamura, R. (1993). Human Capital, Fertility, and Economic Growth. In G. S. Becker (Ed.) Human Capital—A Theoretical and Empirical Analysis, with Special Reference to Education (3rd Edition). Chicago: The University of Chicago Press. Benbasat, I., Goldstein, D. K., & Mead, M. (1987). The Case Research Strategy in Studies of Information Systems. MIS Quarterly, 11(3), 369–386. doi:10.2307/248684 Brennan, M., Funke, S., & Andersen, C. (2001). The Learning Content Management System: A New eLearning Market Segment Emerges. An IDC White Paper. Retrieved from http://www. lcmscouncil.org /resources.html
Dunne, A., & Butler, T. (2004). Learning Management System: A New Opportunity. In IT Innovation for Adaptability and Competitiveness, Proceedings of the IFIP WG 8.6 Working Conference, Leixslip, Ireland. Eisenhardt, K. M. (1989). Building Theories from Case Study Research. Academy of Management Review, 14(4), 532–550. doi:10.2307/258557 Greenberg, L. (2002). LMS and LCMS: What’s the Difference? In Learning Circuits, American Society for Training and Development. Retrieved from http://www.learningcircuits.org/2002/ dec2002/ greenberg.htm Hall, B. (2001). Learning Management Systems 2001. Sunnyvale, CA: Brandon-Hall. Harvey, C., & Denton, J. (1999). To come of Age: Antecedents of Organizational Learning. Journal of Management Studies, 36(7), 897–918. doi:10.1111/1467-6486.00163 McCombs, B. L. (2000). Assessing the Role of Educational Technology in the Teaching and Learning Process: A Learner Centered Perspective. In The Secretary’s Conference on Educational Technology, US Department of Education. Retrieved from http://www.ed.gov/Technology/ techconf/2000 / mccombs_paper.html, 2000. Myers, M. D. (1997). Qualitative Research on Information Systems. MIS Quarterly, 21(2), 221–242. doi:10.2307/249422 Nichani, M. (2001) LCM S = LMS + CMS [RLOs]. elearningpost. Retrieved from http://www.elearningpost.com/features /archives/001022.asp Nordhaug, O. (1994). Human Capital in Organisations: Competence, Training and Learning. New York: Oxford University Press. Rowley, J. (2001). Knowledge Management in pursuit of learning: the Learning with Knowledge Cycle. Journal of Information Science, 27(4), 227–237. doi:10.1177/016555150102700406
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Stake, R. E. (1994). Case Studies. In N.K. Denzin & Y.S. Lincoln (Eds.) Handbook of Qualitative Research. Newbury Park, CA: Sage Publications.
Yin, R. K. (1994). Case Study Research, Design and Methods (2nd Ed.). Newbury Park, CA: Sage.
Wagner, E. D. (2000). E-Learning: Where Cognitive Strategies, Knowledge Management, and Information Technology converge. In Learning without Limits, 3. San Diego, CA: Informania Inc. Retrieved from http://www.learnativity.com/ download/LwoL3.pdf
Zeiberg, C. (2001). Ten steps to Successfully Selecting a Learning Management System. In L. Kent, M. Flanagan & C. Hedrick (Eds.), an Lguide publication. Retrieved from http://www. lguide.com/reports
Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: The Free Press.
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Zuboff, S. (1988). In the Age of the Smart Machine: The Future of Work and Power. New York: Basic Books.
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Chapter 15
Multinational Companies and their Link to the Intellectual Capital of Territories: A Proposal of a Tool to Evaluate the Sustainable Development of the Region through its Intangible Assets Agustín J. Sánchez Medina University of Las Palmas de Gran Canaria, Spain
ABsTRACT Nowadays it seems to be widely accepted that a multinational company has many different environmental, economic or social impacts on a territory. Moreover, every region has the right to aim to achieve sustainable development. For those reasons, this work proposes a tool based on the territory’s intangible assets. This tool allows the management of the sustainable development of a region where a multinational company has located, paying special attention to the way that this type of company can influence the development of the region.
inTRoDuCTion One of the unexpected consequences of the current stage of globalisation is that academics, national governments and some supranational organisations must think again about the nature and purpose of the development that is taking place in territories and the way in which multinational companies must contribute to that development (Dunning, 2006; Dunning & Fortanier, 2007).
It is clear that the location of a multinational company in a territory causes economic, social or environmental impacts. Proof of that can be found in the works of Cantwell and Iammarino (2001), Collings (2003), Dunning (2006), Dunning and Fortanier (2007), Escobar and González (2006), Evans (2003), Innes and Morris (1995), Kumar (2001), OECD (2000), Rondinelli (2007), Rondinelli and Berry (1999), Rosenzweig and Singh (1991), Yannaopoulus and Dunning, (1976) and Young et al., (1994) among others. The aforementioned impacts can be positive for the region, such as higher em-
DOI: 10.4018/978-1-60566-679-2.ch015
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ployment or the economic improvement of the regional suppliers of multinational companies, and that is why the territories themselves sometimes encourage the location of this kind of company (Evans, 2003; Yannopoulus & Dunning, 1976). However, there may also be negative effects, such as damage to the environment, or even serious problems such as those that occur when a determined region’s economic and population growth is fundamentally based on the economic contribution of, and the jobs directly or indirectly created by, a multinational which, with the passing of time, decides to withdraw from the region. Stiglitz (2002) states that the development of regions must be considered in a more balanced overall way, with higher social inclusion and in a much more participative way than previously. It is notable that economists such as Amartya Sen consider that the development of a region has to take into account, on the one hand, issues such as the decreasing of poverty, tyranny, the lack of economic opportunities and public services, government repression and, on the other hand, the promotion of free choice of opportunities, with freedom as the main aim of development (Sen, 1999). However, according to Dunning (2006), some multinational companies have not understood development in such a comprehensive way. In spite of that, corporative social responsibility is now becoming a more important issue for companies as a consequence of other issues, such as the financial scandals in which large companies like Enron and Worldcom (Escobar & González, 2006) have been involved, greater citizen awareness of social and environmental problems and the will to have a better image and customer loyalty. Moreover, companies have noticed that having a good reputation for social responsibility facilitates their access to funds and even improves their financial results (Williams et al., 1993). That is how concern for social responsibility has spread among multinational companies, and this is applicable in developed and undeveloped countries alike. A large number of multinationals have cre-
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ated volunteer environmental programs in order to manage the environmental impacts of their facilities, installations and operations more efficiently. Moreover, if these kinds of measures are always important, they are even more important when the multinationals are located in undeveloped countries with sensitive environmental and social conditions and non-existent or underdeveloped legal regulation (Rondinelli, 2007). In his well-known work “The Prince”, Nicolas Maquiavelo states that, when the Prince wants to gain prestige, he must take grand actions, set an example in the inner affairs of the Principality and be a true friend. The Prince must also avoid the things that could make him hated or despised (Maquiavelo, 1998). Making a parallel between those words and a multinational’s social responsibility to the territory where it is located, we could say that its image improves when the company is involved in great actions that are positive for the sustainable development of the region, when it establishes internal practices that are coherent with this kind of development and when it is really in tune with the region’s authorities and inhabitants and pursues a common objective with them. Moreover, companies should avoid bad practices that could lead to image problems among the population. In spite of that, there is still some debate among experts about corporate social responsibility. Some of them think that companies, as legal entities, have just two kinds of responsibility: to earn money for their shareholders and to comply with the legal regulations to which they are subject. However, others believe that the stakeholders should also be taken in consideration. This work is framed within the latter hypothesis. The World Business Council for Sustainable Development defines corporate social responsibility as the ethical behaviour of a company towards society, in other words, responsible action in their relationships with other stakeholders that have a true interest in the business, and not only with the shareholders (WBCSD, 1998). AECA
Multinational Companies and their Link to the Intellectual Capital of Territories
(2004) states that corporate social responsibility is the voluntary commitment of companies to the development of society and a social commitment to conserve the environment and behave responsibly toward the people and social groups with whom they interact. Sen (1999) states that, if a more sustainable development is be achieved, it is essential to improve the region’s institutions. Another Nobel Laureate, Douglass North, also stresses the importance of the territories’ formal and informal institutions to their appropriate development (North, 1990; 1994; 2005). However, according to Dunning (2006), there are few empirical works that support North’s opinion; some works, such as that of Rodrik, et al., (2002) which analyses the social development of 140 countries in the last century, conclude that the quality of regional institutions and their corporate capital are key indicators to distinguish those that achieve rapid development from those that develop slowly. Moreover, Dunning (2006) states that many recent studies of the determinant factors in the location strategy of multinationals consider different indicators of institutional development and social abilities. Thus, market deregulation, entrepreneurship, educational improvement, the reliability of communications, less bureaucracy, and policies to increase competitiveness are among the key variables in this kind of decision. However, Sen (1999) acknowledges the difficulty of measuring or evaluating the kind of development that he suggests but states that it must begin with an increase in freedom and the establishment of indices that allow the wellbeing of human beings to be measured. To start with, and in order to respond to the above questions, this work proposes and develops a tool based on intangible assets, which allows the management of the territory’s sustainable development: this management will also pay special attention to the relationship between the company and the territory. The tool could be useful to test compliance with the OECD Guidelines for the Multinational Enterprises (OECD, 2000). If we follow the state-
ment of North (1990), in which he says that the institutions are the rules of the game in a society, the model can be considered an institution, and, subsequently, it can contribute to responding to the need, stated by Sen (1999) and North (1990; 1994), to have institutions in order to promote proper development of the regions.
susTAinABlE DEVEloPMEnT No accurate date can be given to the origin of this concept, however, it was in 1987, when the World Commission on Environment and Development, directed by the Norwegian Prime Minister Gro Harlem Brundtland, published its report Our Common Future, that this term came into use (Selman, 2000). That report suggests that sustainable development is the way of development that satisfies present needs without compromising future needs. Moreover, the report stresses that the sustainable development concept is not a fixed status of harmony but, on the contrary, a dynamic process of change in which the exploitation of resources, the destination of investments, the orientation of technological development and institutional changes are oriented to satisfy present and future needs (World Commission on Environment and Development, 1987). The previously mentioned Brundtland Commission was followed by the UN Commission on Environment and Development at the Rio Meeting (UNCED, 1992), statement Agenda 21 (Helminen, 2000), and the Global Conference on the Sustainable Development of Small Island Developing States, held in Barbados (UN, 1994). Although the concept of sustainable development proposed in the Brundtland report has been shared by many authors –i.e., Bass and DalalClayton, (1995) and Naredo, (1998)-, Gladwin et al., (1995) consider it an unclear and ideologically controversial concept. Starik and Rands (1995) maintain that this definition, although been widely accepted as Naredo (1998) states, is just
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Multinational Companies and their Link to the Intellectual Capital of Territories
Figure 1. The Three Domains of Sustainable Development
a normative abstraction full of incongruence. On the same lines, Giddings et al. (2002) state that the definition proposed in the Brundtland report is a political definition which, based on its ambiguity, aimed to obtain widespread acceptance. The combination of environment, economy and society guaranteed a wide debate on sustainable development. However, the lack of depth of the concept makes it senseless and not rigorous. Since it was explained, this definition has been subject to multiple modifications and has been reformulated from different points of view, with major variations (Keiner, 2005). However, and in spite of the mentioned problems, Giddings et al. (2002) still use the term “sustainable development” because they believe that this way of observing society-economy-environment related concepts is commonly accepted. Thus, as Figure 1 shows, the usual representation of the sustainable development is made through three circles that represent society, economy and environment in a balanced way. This balance between the those three elements does not necessarily have to be
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like this in all cases. In fact, as Shearlock et al. (2000) state, the importance of each of the factors in the achievement of sustainable development is not clearly defined. Selman (2000) also states that there are multiple definitions of sustainable development; all of them include environmental, social and economic parameters. Similarly, Shearlock et al. (2000) indicate that policies for sustainable development require the integration of three political environments that have been traditionally separated: the economic, the social and the environmental. On the same lines, García Falcón and Medina Muñoz (1999) indicate that, from the environmental, social and economic points of view, sustainable development is increasingly seen as a long-term challenge. Another criticism of the term “sustainable development” is that it has many meanings, and a different interpretation depending on who uses it –i.e., governments, company managers, ecologists- (Giddings et al., 2002; Selman, 2000). After their review of the different definitions of the term “sustainable development”, Gladwin et al. (1995)
Multinational Companies and their Link to the Intellectual Capital of Territories
state that, although the debate about this concept will go on for years, the concept itself is subject to the following five restrictions: • •
•
•
•
To have a space-temporal vision. To have an understanding of the world’s economic, ecological and social problems in an interdependent and interconnected way. To have a fair distribution of the resources among the generations, members of the same generation and species. To be prudent from the technological, scientific and political points of view. It is necessary to be cautious and modest when pursuing sustainable development since the great complexity and dynamism of the ecological and social systems make reliable predictions difficult. To avoid dangerous imbalances, in other words, trying to obtain an objective must not entail harming or impeding others.
Giddings et al. (2002) think that the principles required for sustainable development can be reduced to: a) consideration of the needs of future generations, b) social balance between races, genders, etc.), the people’s participation of in the design of their own futures and d) the importance of the biodiversity and integrity of the ecosystem. Apart from the balance between the social, environmental and economic aspects, Haughton (1999) believes that five principles of equity must be taken into account in any debate on sustainable development. That author states that, if these five principles are not considered individually and collectively, then the capacity for achieving sustainable development is critically undetermined. Those principles are: a) intergenerational equity or the principle of futurity, which aims to build the present without destroying the future; b) the intra-generational equity, which seeks social equity; c) geographical equity, which aims to adopt
local policies in order to solve local and global environmental issues; d) procedural equity, which aims to ensure that the participative and legislative system guarantees open and fair treatment for all people and finally, e) inter-species equity, which aims to achieve equal consideration of the survival of other species and that of humans. A review of the literature on sustainable development reveals two schools of thought, the strong sustainable, and the weak sustainable (Simon, 2003). In the former, maintenance of natural capital is sought, and this implies renouncing economic growth, since the creation of manufactured capital requires natural capital (Simon, 2003). Therefore, if economic and demographic growth is not stopped, automatic adjustments will be made in order to stop those unsustainable trends (Goldsmith, 1972; Ehrlich, 1990; Meadows, 1991). On the other hand, the weak sustainable school is, according to Simon (2003), more optimistic since it considers that there can be a substitution between man-made capital and natural capital, so development can exist but will not be unlimited. However, as the Brundtland report highlights, the limit is not fixed, but related to issues such as the current status of technology or the existing social organisation (WCED, 1987). As can be seen in the design of the proposed model, this work is undertaken under that last conception of sustainable development.
inTEllECTuAl CAPiTAl oF A TERRiToRY The theory of intellectual capital, its framework and its measures were initially developed to be used from the company perspective (Bontis, 2002; 2004). However, some authors such as Bontis (2002), Edvinsson and Stenfelt (1999), Malhotra (2000), Pasher (1999) and Sánchez Medina (2003) were soon using this theory for territories. In that respect, Edvinsson (2002) proposes the following questions: Where (in which part of a country,
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region or city) is value being created? Which knowledge is being created in the nation? What do the intellectual and knowledge capital maps of the country look like? What have the main social innovations been in the last few years? and Who will be in charge of the creation of intellectual capital within the territory? In short, we are at a point where the study of intellectual capital is not just important for companies, but also must be undertaken for national and international economies, especially when they are immersed in a rapid transition to knowledge-based societies (Malhotra, 2000). Edvinsson (2002) states that, if intangible assets are important for private companies, they are also important for the productivity and competitiveness of public companies. Thus, Malhotra (2000) states that the leaders of the world’s national economies must try to find reliable tools to measure knowledge resources in order to understand how those assets are related to the future actions of their countries. On that line, Bradley (1997a) defines a country’s intellectual capital as its capability to transform knowledge and intangible assets into wealth. In the same way, Malhotra (2000) defines it as those hidden assets that sustain the growth of the country and the added value of the stakeholders that live in it. It is also important to stress that the value of this kind of capital is represented by the potential financial returns that are attributable to the nation’s intangible resources. Furthermore, Bontis (2002; 2004) and Edvinsson and Stenfelt (1999) state that a country’s intellectual capital includes the hidden values that lie in individuals, companies, institutions, communities and regions and are, or may be, a source of the creation of wealth. Moreover, those hidden values are the roots that provide the territory with the fuel to face its development and future wellbeing; thus, this capital is characterised by the long term view that the territory has. In that respect, intellectual capital can be perceived as the value of the ideas generated by the combination of human capital and structural capital that allow the production
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and sharing of knowledge and form the basis for the creation of value and the development of new wealth structures (Edvinsson & Stenfelt, 1999). In other words, intellectual capital is the force that drives nations to create future wealth by providing the roots that will make it possible to harvest the results in the future (Amidon, 2001). Moreover, Bradley (1997b) states that national governments can influence the intellectual capital that exists and that is generated. Thus, the existence of institutions and policies that favour knowledge sharing or recognise intellectual property contributes to a better development of this kind of capital. Other factors that affect the growth of this kind of capital are a flexible labour market, easy access by the companies to this capital, the existence of quality technological infrastructures, educational quality and the culture of the country (Malhotra, 2000). Therefore, it seems logical to think that, if countries are to grow, they must confront the economy of the intangibles. In this new era, the wealth of nations is increasingly obtained from elements of intangible capital, such as knowledge or global reputation. Therefore, countries that wish to grow must be strong in those sectors where intangible assets are paramount (Daley, 2001). On that line, Stewart (1998) considers that the wealth of nations is not in their rubber trees or in their acres of diamond mines but in the processes and technologies they use to exploit them; that is, in the intellectual capital. Similarly, Edvinsson (2002) maintains that the regions that will be wealthier in the future will be those with knowledge-based activities. Furthermore, Azua (2000) states that knowledge has become the vertebral axis of the differentiation between countries while Nonaka and Byosiere (1999) indicate that continuous innovation and knowledge have become important sources of the survival and sustainable competitive advantage of nations. Intellectual capital represents the most important value when facing the competitive challenges that characterise the knowledge society (Bueno
Multinational Companies and their Link to the Intellectual Capital of Territories
Campos, 1999). In fact, only knowledge offers nations the opportunity of creating sustainable wealth. Thus, it will not be surprising that countries that are theoretically less developed but with a good position in terms of technological resources may take a leap forward and find themselves among the most developed countries (Malhotra, 2000). Following that idea, Bontis (2002) states, on one hand, that the unavailability of knowledge to the undeveloped countries may lead to greater differences from the most developed nations, and, on the other hand, that the differences between the various sectors of a single society can increase because of the imbalance in the availability of intellectual capital. In fact, the OECD (2001) states that, on average, each additional year of education that a country’s population receives leads, in the long-term, to an average increase of between 4% and 7% in per capita income. Thus, education, which is one of the components of a country’s intellectual capital, not only offers benefits to its recipients but also has a positive economic impact on society as a whole. However, although intellectual capital has become a key factor for national economies, traditional accountancy is still dominated by the traditional production factors (Malhotra, 2000). Edvinsson (2002) states that the current obsession with planning, budgeting and accounting based on tangible indicators will only end up impoverishing society and devaluing the wealth of nations mainly because it ignores the contribution of intangible assets. In that respect, Pasher (1999) states that traditional economic indicators are habitually used in analyses of a country’s internal and external potential. The above begs the question: Do traditional economic indicators give a complete and accurate measure of a country’s resources and a correct evaluation of the potential for future growth? Pasher (1999) says not, because to achieve those objectives it is necessary to have tools that allow a reliable evaluation of the nation’s intangible assets. Malhotra (2000) states that the traditional measure of the economic performance
of countries was based on their Gross Domestic Product and in terms of the traditional production factors: work, land and capital. In spite of the increasingly important role of knowledge-based resources and the performance of countries, many nations base their evaluation of performance on traditional production factors. Schneider (1998) shares that opinion and states that since traditional accountancy does not reflect the value of intangible assets, it is not suitable to capture the dynamic nature of national economies. Moreover, that author points out that, since these assets are key factors for the future success of nations, tools that reflect their value adequately must be established. A tool of this kind could be useful for national leaders when taking decisions since it would allow them to have control of the achieving of national objectives (Pasher, 1999). Consequently, and in order to manage a territory’s intellectual capital properly, there must be a measurement system that enables it to be described by entering it in the accounts and systematically monitoring the evolution of that national intellectual capital (Edvinsson & Stenfelt, 1999). Edvinsson (2002) argues that the decreasing importance of the tangible assets in comparison with intangible assets in the development of countries makes it necessary to have an accounting system that includes all the non-financial assets linked to knowledge management, culture and the territory’s foreign relations. In other words it is necessary to establish systems that enable accurate measurement of a region’s intangible assets of (Malhotra, 2000) since that will provide leaders with a tool to facilitate better management of these assets, which, as has been said throughout this chapter, increasingly determine the success of national economies (Bontis, 2002).
PRoPosAl oF A MoDEl As has been already mentioned, the location of a multinational in a territory affects both the ter-
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ritory and the company. Only if the relationship between the two is properly managed will both parties benefit. The region’s authorities must consider not only the economic aspects that may improve the income of the area and its inhabitants but also other aspects, such as the possible loss of cultural identity, the immigration resulting from the company’s need for workers, the possible environmental impacts of the company’s activities, etc. In short, they have to reconsider all those aspects that condition the development of the territory or have the potential to do so. This work proposes to provide a tool that is based on a territory’s intellectual capital and permits the management of the territory’s development model and the multinational’s involvement in that development. In other words, the aim is to manage, in a balanced and integrated way, the development of the territory and the multinational’s involvement in that development. Consequently, the proposed model may serve as a “road map” to the achievement of a sustainable development that clearly indicates what is expected of the multinational in that respect. The model also allows an overall evaluation of the multinational’s direct and indirect impact on society, the environment and the region’s economy. It should be stressed that the model aims to be generic and flexible enough to be adapted to the particular case of each territory. Thus, a single organization could consider different assets depending on the regions in which it locates. Moreover, we should clarify that the aforementioned relationship will not be the same in all cases. Figure 2 shows that the territory’s level of risk in its relationship with a multinational depends mainly on two multidimensional variables: the intensity of the impact of the multinational’s operations on the region and the territory’s sensitivity to those impacts. Those impacts could be social (i.e., cultural changes, increased immigration, technological transfer), environmental (i.e., environmental degradation, higher water consumption) and, finally, economic (i.e., higher income, increased competition, greater
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dynamism of the economy). Obviously, since both variables are multidimensional, we have a multidimensional matrix that will have as many layers or dimensions as types of impact of the multinational on the territory. The more impacts there are placed in squares 1, 2, 3 and, especially 4 in Figure 2, the more useful the application of the proposed model will be. In other words, the model has been well thought-out and, therefore, will be more useful in those cases where the location of one or several multinationals in a territory has a significant influence on its development. Thus, the establishment of a multinational that undertakes a potentially environmentally harmful activity and that generates much employment in territories with a low level of economic and social development will not have the same impact as the establishment of a similar multinational in a developed country with good infrastructures. The objectives that we pursue with the application of the proposed tool are the following: Main objectives: •
•
•
To create a map with the most relevant intangible assets so that the region can achieve the kind of development it wants, paying special attention to those related to the relationship between the multinational and the territory. The aim is to respond to the issues raised by authors such as Bontis (2002), Edvinsson and Stenfelt (1999), Malhotra (2000), Pasher (1999) and Schneider (1998) regarding the need for territories to have a system for entering their intangible assets in the accounts. To monitor, in an integrated and balanced way, the development of the territory and the multinational’s role in that development. To quantify what is understood in the territory by sustainable development, by means of a set of intangible assets that reflect its economic, social and environmental situation.
Multinational Companies and their Link to the Intellectual Capital of Territories
Figure 2. Risk Matrix of the Relationships between the Multinational Companies and the Territories
•
To plan the required type of development for the territory and to establish the roles that the different agents participating in that development (including the multinational company) must play.
Derived objectives: •
•
• To establish the necessary mechanisms to measure and evaluate the territory’s most important intangible assets. To establish a framework of coexistence between the multinational company and
•
the territory. Once the long and short term objectives to be achieved from the intangible assets of the model are established, both parties know what is expected of them and whether the management of those assets is of use in achieving the desired type of development. To promote social dialogue in order to decide which development model is needed in the territory. To promote dialogue between the company managers and the territory’s authorities.
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The structure of the model is adapted from that proposed by Sánchez Medina (2003) for the evaluation of the sustainability of the development of a specific type of territory, islands. Thus, to establish the categories, we have decided to distribute the intellectual capital according to its functionality, in other words, grouped according to whether they are social environmental, economic, etc., and not according to the nature of the assets as is done in the Skandia Navigator for countries (Edvinsson & Stenfelt, 1999). The reason for this decision lies in the fact that this way of organising the model coincides, to a greater extent, with the typical model for public administration, and this facilitates the implementation of the model and its identification with the objectives of the latter. Thus, as shown in Figure 3, the model is divided into seven dimensions or categories: one for each of the six types of intellectual capital identified in this study, and a seventh that shows the result of accumulating the intangible assets of the other dimensions. The identified categories are “economic activity” capital, “society” capital, “environmental” capital, “public administration” capital, “multinational company” capital, “training and development” capital, and “result” capital. None of these categories should be seen as an isolated compartment; on the contrary, one must be aware of the existence of important links between them, which must be taken into consideration in order to apply optimum management. Finally, we should mention that each category may include subcategories; in other words, categories of intellectual capital can be established at a second level. Once the structure of the model is defined, the relative weight of each proposed category and subcategory must be established. This weight represents the importance of each category and subcategory in achieving the objective of sustainable development. The next step is to determine, for each of the categories and the subcategories (where they exist), which intangible assets are interesting to
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manage and the most appropriate indicators to measure them. Moreover, those intangible assets and indicators must be selected on the basis of the needs, characteristics and circumstances of the territories and the multinational. Thus, each case will have its own intangible assets, which may, or may not, coincide with those of other cases. The value of each asset will be formed by adding the weights of its indicators. Similarly, the value of each subcategory will be obtained by adding the weights of the assets that it comprises. The values of the categories will be obtained by the same means, but in this case, the added values will those of the subcategories. Of course, if a category has not been divided, the calculation will be made in the same way as for the subcategories. Finally, the value of the result category will be obtained from the sum of the other categories. Thus, at the end of the process, not only will the value of each of the indicators be obtained, but also an index value for each asset, subcategory and category. Obviously, this offers great possibilities to exercise control of the entire development of the territory since analyses can be conducted at all the aforementioned levels. In order to create these aggregate values, we must establish a base value or reference value for each indicator. These values may be those obtained in the first year of measurement or values that represent the objectives to be achieved. Once this task is accomplished, the value of each indicator will be the measurement value divided by the base value. Thus, the distance of any index or indicator from 1 must be interpreted as the difference in status between the measured result and the base result. Hence, if the result of the index calculated by this formula is below 1, it means that the situation has worsened while if it is above than 1, it would have improved. Obviously, in order to do this, all the indicators must be designed to measure the asset in positive numbers. That is, if we measure the citizens’ awareness regarding saving water consumption, we could not establish the indicator as the cubic meters of water consumed
Multinational Companies and their Link to the Intellectual Capital of Territories
per person, but the inverse of that measure. The way to proceed is as follows: if the indicator is positive, that is, if a positive value is beneficial to the territory, the actions to be taken are: Firstly, a base value is chosen; this could be the measurement of the indicator for a specific year. Let us suppose that the percentage of recycled
urban waste is used to measure environmental awareness and a base value of 50% is obtained. Then the current measurement of the data must be taken. The result of that measurement, which may be 60%, is divided by the base value, giving a result of 1.2 (60%/50% = 1.2). The fact that the result is higher indicates a positive evolution; more
Figure 3. Measurement Model for Intellectual Capital in a Territory where a Multinational Company is Located.
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specifically, it means that there has been a 20% improvement on the base value. However, it is not possible to use indicators with negative values, such as water consumption. In that case, if one wishes to use the measure, it must be converted into a positive value: Thus, it is sufficient to use 1/consumption since high values of this ratio will be positive for the territory since they involve low water consumption.
Result Category As occurs in the Balanced Scorecard (Kaplan & Norton, 1997) with the financial perspective, we propose this category as the result of the figures obtained in the rest of the categories of the model, thus, if the other proposed capitals are well managed, result capital must increase. Result capital is conceived as a whole that summarises what occurs in the other categories. Moreover, and as we have already mentioned, the objective of this model is to contribute, by means of intangible asset management, to the sustainable development of the territory where the multinational company is located. Taking into account the fact that variables such as economic competitiveness, social balance or the good condition of the environment have an impact on sustainable development, and that these assets are also included in other categories, in this category, we aim to obtain a measure that is the aggregate of all the intangible assets that play a part in achieving sustainable development. In other words, we aim to obtain a measure that determines the degree of sustainability of the development that is taking place in the territory: therefore, as well as including specific assets, it integrates overall measures of the accomplishment of the objective for which the model was created. Two indicators will be used to make that measurement and, through them, we aim to determine the level of sustainable development in the territory under study. The first of these indicators must measure the territory’s wealth –i.e., the Gross Domestic Product (Pasher, 1999; Bontis, 2002).
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We must consider that, although the intangible assets are becoming increasingly important, the wealth generation process is also conditioned by the tangible assets of the territory. However, for there to be sustainable development, mere economic development is not enough because a territory can create wealth without respecting the environment and without social equity. In order to avoid this problem, and to measure not only the creation of wealth, but also the sustainability with which it is created, a second indicator is introduced. This will be an index that is obtained as a result of calculating the weighted average of the indices obtained in each of the other categories of the model, which, in turn, are also calculated on the basis of the weighted values of the different intangible assets comprising the previously mentioned categories.
Economic Category As we have repeatedly mentioned, the economy is one of the fundamental elements for the achievement of sustainable development (Helminen, 2000; Shearlock et al., 2000; Springett, 2003). Sustainable development at a company level has been called “eco-efficiency”; a term that can be defined as the process through which the exploitation of resources, destination of investments, technological orientation and corporate changes aim to maximize the added value while minimising the consumption of resources, waste production and pollution (Helminen, 2000). Thus, this category includes all the intangible assets that are essential for the development of the economic activity of the territory. Obviously, those that are linked to the relationship between the multinational company and the region are excluded but, due to their importance to the region, they will be placed in a separate dimension. Moreover, in order to capture the reality of the intangible assets of this category in a more accurate way, it would be interesting to divide it into subcategories. In this work, we propose the
Multinational Companies and their Link to the Intellectual Capital of Territories
following subcategories: a) agriculture, livestock and fisheries capital, b) industry and construction capital c) trade and services capital. The first must include all the intangible assets needed for the sustainable development of the agricultural, livestock and fishery activities of the territory. Similarly, the second and third will include all the intangible assets needed to achieve sustainable development of the economic activities related to industry and construction, and to trade and services, respectively. However, a different division is possible if it leads to a more accurate reflection of the reality of the territory. This last comment is applicable to all the categories proposed in this work. Examples of intangible assets which fall into this category are the competitiveness, productivity, image, opening to foreign markets, the accident rate at work, innovation, quality, etc., of the companies in the sector.
Environmental Category The relevance of this category is unquestionable given the importance of the environment to the achievement of sustainable development (Shearlock et al., 2000; Willson & Buller, 2001). In fact, this category has, on many occasions, attained greater importance when an attempt to achieve sustainable development has been made (Giddings et al., 2002). Environmental capital includes those intangible resources whose development is determinant for the environment. This category will include the intangible assets that are related to issues such as water, waste, energy and the environment. In this work, we propose to divide this category into four subcategories: energy and water, waste and recycling, rural environment and urban environment. The first includes the intangible assets that are related to the production and consumption of water and energy. In the same way, the second subcategory includes the non-material assets that are linked to the generation of waste and to recy-
cling. Finally, the subcategories rural and urban environments include those intangibles that are essential for the protection and conservation of the natural and urban spaces. Examples of the intellectual capital within this dimension are environmental health, air quality, deterioration of the territory, the impact on obtaining energy, the degradation of water sources, concern about the environmental health, etc.
society Category The dimension called social capital covers all those intangible assets whose development improves the territory’s social strength. This category will include the intangibles linked to areas such as health, housing, employment, immigration, culture, sports, women, youth, security, justice, etc. The importance of this dimension within the model is clear since it is impossible to conceive commercial, training or public activities without considering the social aspects. In fact, as stated in Gladwin et al. (1995), Gobierno de Canarias (2002), Selman (2000), Shearlock et al. (2000) or Willson and Buller (2001), sustainable development cannot be understood if it is not accompanied by efforts to achieve balance and social justice. Therefore, it is a category that must be captured by means of certain intangible assets, the level of equity and social integration in the society of the territory as a whole. Furthermore, and due to the great diversity of aspects linked to the social environment and in order to make a more structured study, we have decided to establish seven subcategories: a) employment capital, which aims to capture the intangible assets related to work, b) housing capital, which includes the intangible assets related to housing in the region, c) the groups under social protection capital, which includes the intangible assets linked to the population groups the that need social help, d) population and immigration capital, which includes the non-material assets related to demography, e) public safety capital
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comprising those intangible assets closely linked to the guarantee that citizens are not victims of crime, f) culture and sport capital, which includes all those non-material assets linked to the cultural and sport habits of society and g) community health capital, which is comprises the intangible assets that are strategic for the population to enjoy good health and health care. Some examples of intangible assets of this category that can be valid for any territory are: equality between the sexes, the integration of immigrants, population density, health education, job security, the unemployment rate, police efficiency, sports practice, etc Finally, we should add that this category must not be mistaken for the concept “social capital” as defined by authors such as The World Bank (2002), Bertucci (2002), Coleman (1998), Hazleton and Kennan (2000) and McElroy (2002) and others, because they consider that this term is a reference to those aspects of the social structure which allow social interactions. Consequently we must conclude that these two concepts are not fully equivalent.
Training and Development Category Bradley, (1997b) states that there are two key factors for promoting a country’s intellectual capital. The first is to have a good R+D network, and the second is to have a good education system. Due to its importance, we have decided to establish our own category for this kind of asset. The intangible assets that are vital to training and research and development in the territory are included in the training and development category within this model. As examples of this kind of capital, we can mention education quality, technological independence or the applicability of what is researched. Thus, improvements within this block of capital will have future direct or indirect positive consequences on the other categories. As we have already mentioned, the economy of the territories is increasingly dependent on
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intangible assets, and therefore it is essential to join the knowledge-based economy. However, in order to achieve that, regions must have the raw material, which, in this case, is knowledge. In order to acquire this kind of asset, the region must commit to the training of people and research and development. Obviously, another way to acquire this kind of asset is to hire qualified people from other regions or to buy patents or production methods. However, those last options, which in many cases may be faster and cheaper, might have some disadvantages. The first is that they may create technological dependence; the second is that they can relegate the territory’s inhabitants from positions that are essential for the development of the region. This may happen if the multinational urgently requires qualified staff, and the territory does not have them. However, in spite of the possible negative effects, this option can be used to obtain the capital needed in the short term and to train new professionals. Of course, in this aspect, multinationals represent a highly relevant opportunity for knowledge transfer. Finally, we should stress that territories wishing to achieve sustainable development must have a well trained workforce (Mehmet & Tahiroglu, 2002) and that if they wish to have well qualified human resources, there must be good level of education and training (Armstrong, 2001). In order to conduct an analytical study, we have created four subcategories of this kind of capital. The first comprises the intangible assets related to primary and secondary education while the second includes the non-material assets linked to university education, science and technology; the third covers the intangible assets that are determinant for professional and vocational training; and the fourth is made up of intangible assets linked to the information society
Public Administration Category This block of intellectual capital comprises all those intangible assets that are critical to correct
Multinational Companies and their Link to the Intellectual Capital of Territories
management by the territory’s public administration, including the relationship with the multinational and its impacts on the region. We must also take into account that sometimes the region even offers public resources (i.e., financial grants, tax incentives, etc.) for the multinational to locate or remain in the region. We must not forget that the public administration must ensure the welfare and development of the territory. Moreover, what this category seeks is to capture, by means of intangible assets, the administration’s capacity to adapt to the citizens’ needs and their social, environmental and economic expectations of development. In that respect, it is necessary to stress that García Falcón and Medina Muñoz (1999) consider that the achievement of sustainable development requires the design and implementation of policies that pursue sustainability in the environmental, economic and social areas. Finally, and by way of example, some of the intangible assets included in this intellectual capital block are: agility in the resolution of expedients, the adaptation of laws to social demands, modernity, efficiency, adaptation to social changes, etc.
the administration, includes those intangible assets related to the link between the company and the administration. This dimension will include aspects such as communication between the two institutions, the fulfilment of commitments by both parties (subject to the multinational’s legality and the implementation of the incentives promised by the administration). The other three subcategories are the social, economic and environmental impacts. These include the intangible assets related to the multinational company’s impacts on the social, economic and environmental aspects of the territory. Only the direct impacts are listed since the indirect ones, if they exist, will be captured by means of the other dimensions. Examples of assets which could be included in this category are:
Multinational organisation Category
• •
This dimension comprises those intangible assets that mark the relationship between the multinational company and the sustainable development of the territory. Thus, this category includes the multinational’s short and long term commitment to the territory. Thus, the multinational’s short-, medium- and long-term commitment to the territory manifests itself in this category. Clearly, compliance does not guarantee the achievement of the sustainable development in the territory since the stakeholders are also a conditioning element in this factor. However, if the objectives proposed in this dimension are achieved, it is evident that the multinational has fulfilled its commitments to the territory. Four subcategories can be established within this category. The first, called relationship with
• • •
•
•
• • •
Employment for the inhabitants of the region The quality of the generated employment The percentage of the multinational company managers that are natives of the region. The multinational’s capacity for creation of wealth for the territory. The multinational’s technological transfer. The multinational’s technological transfer to firms in the region. The multinational’s participation in the education, culture, etc. of the territory’s inhabitants. The multinational’s environmental impact. The multinational’s contribution to the conservation of the environment The dependence of the territory on the multinational company for economic and technological issues, for employment, etc.
Relationships between the Different Categories As mentioned before, there are relationships between certain assets of the different categories. We will give some examples of these possible
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relationships, which are represented by arrows in Figure 3. Intangible assets from the research and development dimension, such as the impacts caused by production of energy, or the degradation of the aquifers are clearly influenced by the quality of the relevant research and development, which is an asset in the university, science and technology subcategory. Moreover, if we consider that governments, through their actions, aim to selectively mitigate environmental and social issues and to establish economic policies that are sustainable from an ecological point of view (Shrivastava, 1995), it is reasonable to think that there is a link between public administration capital and environmental capital. There is also a two-way relationship between social capital and environmental capital (Pretty & Ward, 2001). Factors such as culture or demographic pressure affect the environment or the deterioration of the territory, while in the opposite direction, assets such as water quality or pollution directly affect assets included in social capital, e.g., the health of the population. Other possible relationships are those between the training and development capital and environmental and social capital. There is no doubt that an academically well-prepared society has a positive impact on the environment and social tolerance. Finally, there is a relationship between assets of the multinational dimension and the rest of the assets. As an example, we can mention that the environmental impact caused by the multinational can affect the health of the population (social category), or that technological transfer contributes to the strengthening of the company network of the region, making it more competitive (economic category).
APPliCATion oF THE MoDEl First of all, we should mention that the step prior to the implementation of the tool proposed in
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this work must ensure the highest commitment from the top managers of the territory and of the multinational since, without their support, the viability of the work will be in doubt. Moreover, it would be appropriate to involve the stakeholders who live in the territory, i.e., business associations, cultural groups, ecological groups, etc. in the application The following stages are considered suitable for the correct implementation of the model: 1.
2.
3.
To choose the work team to be responsible for executing the project. This work team must mainly comprise staff from the public administration. Moreover, it is recommendable that the team is a multidisciplinary team with an open and broad view of the reality of the territory. To choose the experts to take part in the different stages of the Project. This group must include agents from all social, economic and environmental groups of the region. Thus, it is guaranteed that issues will be addressed from many different points of view and that all those groups will be involved in the project. Moreover, agents who are experts from the multinational company and from the public administration must be included. In this stage, the work teams that are going to take part in the building stage of the model and in the planning stage will be divided into areas. The experts will take part in the project from Stage 3 to Stage 11. To define what is understood by sustainable development in the territory. The main aim is to obtain maximum agreement on the model of sustainable development that the region must have. Obviously, this is not easy; however, the stronger the agreement is, the fewer the problems that will arise later and the better understood the actions of the multinational and its impacts will be, whether they are positive or negative.
Multinational Companies and their Link to the Intellectual Capital of Territories
4.
5.
6.
7.
To draw up the risk matrix. This previously mentioned matrix will give us a first impression of which assets are going to be most important in the relationship between the multinational company and the territory and of their possible impacts on the region’s sustainable development. To establish the structure of the model. Starting with the proposed base model, there must be some consideration of whether the established subcategories are appropriate for the region or whether it is necessary to make an alternative division that is better suited to the territory’s characteristics. In the case of different subcategories being established, it should be borne in mind that this decision will restrict the possibility of making comparisons with other territories. However, although that limitation means that no comparisons with other territories can be made at a subcategory level, they can be made at a more aggregate level, such as the category level or at a more fragmented level, such as the asset level. This must be a joint work by the managers of the territory and the technicians who are going to manage the tool. Once the structure of the model has been established, we must consider the importance of each category and, within them, the importance of each subcategory. Therefore, we have to consider that, although the sustainable development includes social, economic and environmental aspects, those aspects may be of varying importance. More specifically, what we aim to do is to quantify the contributions of the different categories and subcategories to the development of the territory. To determine which intangible assets are the most relevant in each category and subcategory to achieving the desired model of sustainable development.
8.
To establish the importance of each asset within the category or subcategory to which it belongs. It is obvious that, in order to achieve sustainable development, not all the assets will have the same importance. Therefore, the importance of each asset within each category must be established. 9. To establish the most suitable indicators to measure the intangible assets defined in the previous stage. Firstly, it is appropriate to start from a proposal by the experts, who would have aimed to establish indicators that they deem ideal. Secondly, the technicians who are going to implement the tool should test the feasibility of achieving the proposed measures and the cost that they entail. If the indicators are not viable, the technicians may recommend possible alternatives, which should be validated by the experts. 10. To establish the importance of the indicators. If an asset has more than one indicator assigned, the extent to which the indicators reflect the intangible asset must be established. This establishes the weight of each indicator in the value assigned to the asset. 11. On completion of the previous stages, in which the tool to be implemented has been defined, the planning stage begins. In this stage, the objective values for all the assets comprising the model will be established. We should stress that, in this stage, objectives must be established not only for the short term, but also for the long term. It is always important to establish that last kind of objective, but it will be even more important in cases where the multinational located in the territory will only remain there for a certain time, as is the case of multinationals dedicated to the extraction of natural resources that will be exhausted in a determined period. In these cases, the territory’s objectives must seek to compensate the loss of the multinational company
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after a certain time with the intangible assets accumulated in the other categories. 12. To put the methodology into practice. Once the previous stages are completed, it only remains to start gathering the measures of the indicators and calculate the values of the assets, subcategories and categories. 13. To analyse the results. This stage consists of a critical analysis of the results obtained and comparing them with the expected results. 14. To take decisions. This final step entails, if necessary, the adoption of measures that, in light of the results of the previous stage, enable us to resolve the negative deviations and to strengthen the positive ones.
ConClusions The importance of intangible assets in organisations has increased in recent years; however, that fact is not exclusive to the companies’ environment since it also affects territories, which makes intangible assets essential for the future development of the regions. Thus, regions are interested in achieving sustainable development and understand that concept as the way of development that satisfies present needs without compromising future needs (WCED, 1987). Moreover, the location of a multinational company in a territory generates a series of positive and negative impacts on the territory. With the model proposed in this work, we have aimed to provide multinational companies and territories with a tool that serves as a map for them, so that they can achieve a mutually beneficial relationship. By means of a selected set of intangible assets, the sustainable development of the territory can be planned and controlled, and the roles to be played by the multinational and the administration can be defined. In that respect, we should stress that the implementation of the proposed tool will constitute a step forward in the multinational’s social responsibility. This is because, by means
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of this tool, multinational companies will be encouraged not only to contribute to the sustainable development of the territory but also to do so in such a way that the cited activities are agreed by the territory and coordinated with the actions that the territory itself has planned. In addition, the tool allows short and long term planning and any possible deviations to be controlled. Therefore, the main contribution of this work is the proposal of a model for the management of the intangible assets which contribute, or may contribute, to the achievement of sustainable development in a territory with one or more multinationals located within its borders and that is highly sensitive to the impacts caused by them. Moreover, the model includes the management of the relationship between the multinational and the territory, and allows an integral evaluation of the multinational’s impact on the economy, society and the environment of the region. The practical implications of this work are mainly for the managers of the public administrations of the territories and for the managers of the multinational companies, who, with this tool, have a clear, user-friendly methodology for managing sustainable development of the territory and the way in which the multinational company contributes to that development.
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Chapter 16
International New Ventures, Organization Structure, and IC Management Irene M. Herremans University of Calgary, Canada Robert G. Isaac University of Calgary, Canada
ABsTRACT Flare Solutions Limited is an entrepreneurial international new venture (INV). Of particular interest is the manner in which the firm developed a strategy by combining a special set of resources to provide knowledge products to markets in various countries. The firm realized early on that its knowledge, systems, and relationships were to be the keys to its success. With this in mind, the founding partners took steps to ensure that the firm’s structure and controls were conducive to management of its intellectual capital (IC). The chapter discusses the formation of the INV and the management of its IC in special ways to sustain its entrepreneurial activity. In part, this involved creating management processes consistent with its objective of creativity and innovation for the broad purpose of knowledge development. Consequently, the firm has been able to mobilize its IC to sustain its competitive edge in providing knowledge services.
inTRoDuCTion Early research regarding multinational enterprises generally ignored most small- and medium-sized enterprises (SMEs), believing that they rarely attempted to internationalize their operations beyond exporting. This line of research assumed that firms wishing to operate in foreign countries require large commitments of resources, generally unavailable DOI: 10.4018/978-1-60566-679-2.ch016
to SMEs. Until the early 1990s, most multinational enterprise (MNE) research was based on the stage theory, suggesting that an enterprise begins operations in domestic markets and once settled there, then progresses to exporting to similar countries. The next stage might be exporting to dissimilar countries or setting up a marketing office in a similar country. The enterprise moves slowly in stages, gradually committing resources in foreign operations, then ultimately becomes a mature MNE in multiple countries with a large and visible presence. Coun-
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tries compete heavily to make foreign investment attractive to the tangible resource-heavy MNEs. Incentives offered to MNEs by governments often include among others, tax holidays, favorable environmental regulations, lax labor standards, and attractive locations. The original concept of the large and mature MNE, with its subsidiaries or franchises visible in a multitude of countries, still exists (e.g. General Motors, General Electric, Royal Dutch Shell, and Pizza Hut). However, due to electronic forms of communication, the rise in the service and information economy, and the growth of e-commerce, the barriers to internationalizing operations are now disappearing. These characteristics allow more SMEs to reap the benefits of operating in a variety of different countries without heavy commitments of tangible resources. The Internet has blurred borderlines, changing the way we conceive MNEs. And the movement to a heavier reliance on knowledge as a wealth creating activity allows many SMEs to cross borders with little trace and less controversy associated with traditional multinational enterprises. Compared to traditional MNEs, international SMEs have less political, economic, and social impact but add value in their own special manner. A new wave of studies in the business literature recognizes that many SMEs also operate internationally without large commitments of resources; however, little is known about international new ventures (INVs) (Zahra, 2005), global small firms (Prasad, 1999), or micromultinationals (Ibeh, Johnson, Dimitratos, and Slow, 2004; Dimitratos, Johnson, Slow, and Young, 2003). In their seminal paper on INVs, Oviatt and McDougall (1994) pointed out that owning resources does not necessarily define MNEs; rather their actions should be more indicative of such classification. Oviatt and McDougall (2005) defined an INV as “a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and sale of outputs in multiple countries” (p. 31) with the distinguish-
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ing feature being that it starts with a proactive international strategy rather than evolving in stages. Using entrepreneurial theory to explain the emergence of INVs, DiGregorio, Musteen, and Thomas (2008) suggested that INVs come into existence when either of two opportunities arises: 1) to leverage internationally resources that are based domestically, and 2) to exploit resources internationally that are located internationally. The authors suggested that an entrepreneur has the ability to combine resources or markets in novel ways to provide a product or service. This suggestion is rooted in the Schumpeterian and Austrian perspective of entrepreneur activity, Based on the work of Venkataraman (1997), Shane and Venkataraman (2000) defined scholarly investigations of entrepreneurship as the “study of sources of opportunities, the processes of discovery, evaluation, and exploitation of opportunities, and the set of individuals who discover, evaluate, and exploit them” (p. 172). To extend this definition to the international arena, DiGregorio et al. (2008) suggested that opportunities can exist for either unique resource combinations (by combining resources distributed internationally) and/or unique market combinations (by finding special markets internationally). In an age of knowledge assets, combining resources internationally may mean pooling specific capabilities, knowledge, and skills held by individuals located in different countries, and distributing resources internationally may mean using technology to deliver or market products in different countries. Organizations recognize these conditions and exploit them, thereby creating an INV. In a comparison of a sample of publicly-owned domestic and international new ventures, McDougall, Oviatt, and Shrader (2003) found certain variables to be significantly different in these two types of ventures. INVs had higher levels of the following variables: 1. 2.
International work experience; Industry experience;
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3.
4. 5. 6.
Aggressiveness (measured by entry order into the industry, market share objectives, and growth objectives); Differentiation strategies (product innovation, quality, service and marketing); Channels of distribution; and Presence in industries characterized by a high degree of global integration.
McDougall et al.’s (2003) work answers an important question: What characteristics do INVs possess? Zahra (2005) presented an equally important question: How do INVs “create value by developing and protecting their unique intangible assets, especially those that enhance their entrepreneurial activities in foreign markets?” (p. 21). In this chapter, we address both questions by presenting a case study of a special INV. Initially, we discuss the situational context that motivated Flare Solutions Limited, our case study firm, to form an INV. In so doing, we integrate the literature and discuss how the management of knowledge, processes, and relationship resources helped the INV to sustain competitive edge. Furthermore, this led the organization to become recognized as one of the leading international consulting companies in the oil and gas industry. In the next section, using our case study, we will show how Flare meets the definition of an INV as defined by McDougall et al. (2003). We then discuss how the company developed as an economically sustainable INV by developing and managing its intellectual capital in an exceptional manner.
BACKGRounD Flare Solutions Limited was incorporated in 1998 and at that time was known as Flare Consultants. The firm has been in existence for almost a decade. It started out with a global strategy, receiving revenues in a variety of different currencies in its first year of operations. The global customer base
has expanded, including companies primarily in oil and gas, such as Petro-Canada, BP (Norway), Gaz de France, Danske Oil and Natural Gas, Shell International E&P, IBM, and Wood Mackenzie (Deutsche Bank) to name just a few. All five partners of Flare Solutions had prior international experience in a number of industries through their employment with IBM and various oil and gas companies. Recognizing a niche in the oil and gas industry and feeling some constraints to their creative and innovative tendencies, the partners formed their own consulting firm. The mission of Flare is to provide consulting services related to information management, as well as other services and software products, for the energy business (oil, gas, pipelines, associated suppliers, and regulators). Flare’s major expertise is in the area of information systems development which aligns technical expertise with strategy decisions in exploration of oil and natural gas. In other words, Flare provides executives with information necessary to fulfill their business strategy in areas such as geosciences, economics, engineering, etc. As mentioned, Flare’s start-up was global in nature. Although the holding company is headquartered in the United Kingdom (UK), it operates as a virtual organization with only a server that connects the five partners. The Flare organization in the UK employs four of the five partners. The fifth partner is employed by a separate Flare company incorporated in Canada. All five partners develop Flare’s strategy and its major knowledge products. However, the firm’s operations are project driven, with each of the partners assigned to projects depending on the capabilities needed. The project manager also hires the necessary associates in the United States, Europe, South America, and elsewhere, depending on the nature and the location of the project. Another characteristic of INVs identified by McDougall et al. (2003) is involvement in industries which are globally integrated. Roth and Morrison (1990) identified global integration as
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characterized by intense competition domestically and internationally, with competitors having a presence in all key markets. The products marketed by these companies are standardized worldwide as customer needs are also standardized. Therefore, worldwide operations provide economies of scale. But, the crux of the issue is how do these characteristics fit the oil and gas industry? McNee (1958) describes oil as a flow product, continuously in demand, inherently international, and worldwide in character. Because of the difficulty of storing the product in large quantities, the functions in the industry are integrated to reap efficiencies and avoid waste (McNee, 1958). Therefore, we classify Flare as working primarily in an industry that is characterized by high global integration, one in which Flare’s products can also be standardized worldwide, without a need to customize characteristics based on local customs and tastes. Regarding differentiation strategies of product innovation, quality, service, and marketing (McDougall et al. 2003), Flare has stated that it is open and transparent with its clients, readily sharing its innovative ideas. The philosophy of the firm is that a knowledge-sharing policy motivates the partners to continue to “invent” innovative products and stay one step ahead of their clients. This policy resulted in a two-way sharing policy. By sharing ideas with clients, clients will also share information that helps Flare to refine ideas into useful products. This knowledge sharing technique is part of the reason that both Flare and Royal Dutch Shell received the best Knowledge Management Project Award by the BCS IM Awards in 2006. The award represents the highest recognition of innovative excellence in the management information field within Europe and it is a great honor. The E&P Catalog™, which was the product responsible for the award, represents only one of many systems and processes developed by Flare Solutions that are innovative. As well, most of Flare’s new clients are the result of its reputation and word-of-mouth marketing.
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Flare operates in a non-traditional manner. The firm’s method of entry is unusual in that it is a virtual corporation, with no physical building, other than each partner’s office in the respective country. Hiring, marketing, management of projects, and interaction with the clients are done primarily through electronic means (i.e. phone calls, Internet, etc.). However, partners meet with clients face-to-face when necessary. In addition, they periodically meet two to three times each year for planning purposes. Flare is characterized by developing new, innovative products that meet clients’ information needs. Although initially concerned if their clients were willing to accept a firm that operates with little physical presence, the partners discovered that this method of operation is quite appealing to most clients, who are willing to learn how they too can incorporate some of Flare’s techniques in their own operations. To summarize, DiGregorio et al. (2008) suggested that opportunities can exist for unique resource combinations by combining resources distributed internationally. They also suggested an alternative strategy of unique market combinations by finding special markets internationally. To use Flare as an example, Flare has combined special knowledge, relationships, and processes to take advantage of these assets located in a variety of global locations. By hiring associates in specific projects locations or with specific expertise needed to complete a project, the firm has been successful in finding special markets around the world in an industry that is highly integrated. Because its client corporations have similar information systems needs regardless of their location, there is little need to customize products. Starting in the year 2000, the authors working with the Flare partners, embarked upon a journey relating to the identification and valuation of Flare’s intellectual capital (IC) assets. The partners knew that the only important assets that the company possesses are of an intangible nature, and they desired to identify, classify, and
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eventually be able to affix monetary values to them. Over time and with collaboration between the authors and the partners, these goals were eventually accomplished as will be shown later in this chapter.
THE CHAllEnGE oF MAnAGinG inTAnGiBlE AssETs Why INVs exist and how do they differ from domestic start ups are important research questions. However, Zahra (2005) suggested that we must also investigate beyond start-up to determine how INVs achieve economic sustainability. Zahra asks: How do INVs “create value by developing and protecting their unique intangible assets, especially those that enhance their entrepreneurial activities in foreign markets?” (Zahra, 2005, p. 21) In this section, we address this important question. Essentially, when the major assets possessed by the firm are the expertise and knowledge, knowledge capturing and sharing at several levels is crucial for the success of this organization. For Flare, the capturing and sharing of knowledge and expertise includes the following: 1) among the partners; 2) between the partners and their clients, and 3) among the partners and their associates. In the next section, the theoretical basis for a number of organizational characteristics is discussed along with examples of how these characteristics exist in the Flare organization.
soluTions Intellectual capital (IC) has been defined by Stewart (1997, p. xx) as “intellectual material, knowledge, information, intellectual property, and experience—that can create wealth” for an organization. Generally, IC is described as having three categories: knowledge, processes, and relationships. To create IC within an organization, certain conditions must be present.
Herremans and Isaac (2007) in an empirical study identified several variables important for the management and development of IC within organizations. These variables include the type of structure a firm possesses, levels of interaction among employees, and the extent to which employees trust one another. Essentially, an organic structure rather than a mechanistic one favors the development of IC. We discuss how Flare’s organic structure enables high levels of interaction and trust among the partners. Finally, given these characteristics Flare was able to develop a method for identifying, classifying, and affixing monetary value to IC.
structure and Controls: organic vs. Mechanistic Certain types of organizational activities are more easily accomplished if the structure of the organization is conducive to the outcomes desired. Two terms, “mechanistic” and “organic” have been used to describe the characteristics of internal organizational environments (Burnes & Stalker, 1961). Mechanistic structures describe highly centralized organizations with formal operating policies, procedures, and processes. There are clear lines of reporting and responsibilities that are generally documented, in part, in an organizational chart. In contrast, organic environments describe decentralized organizations with informal and flexible structures, capable of adapting quickly to changing environmental conditions. Mechanistic structures emphasize vertical communication lines, whereas organic structures emphasize lateral communication and participatory decision making authority. Authority in mechanistic organizations is often based on seniority, whereas authority in organic organizations is based on expertise. Mechanistic structures are more appropriate in static environments, and organic structures are more appropriate in dynamic external environments (Burns & Stalker, 1961). Robbins (1990) characterized organic environments as having
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flexible task definition, lateral communication, low formalization, expertise as influence, and diverse control. Variation, flexibility, and renewal motivate the innovation necessary for knowledge generation (Bennett & Gabriel, 1999, p. 220). Organic structures support the development of knowledge, rather than mechanistic structures, as they contain such elements (Hong, 1999; Ferguson-Amores, García-Rodríguez, & Ruiz-Navarro, 2005; Shivers-Blackwell, 2006; Bennett & Gabriel 1999). One of the reasons for organic structures is to develop creativity to ensure that the organization is continuously in a state of renewal (Chakrabarti, 1974; Jin, Drozdenko, & Bassett, 2007; Spender, 2006; Ståhle & Hong, 2002). Creativity as defined by Amabile, Barasade, Mueller, and Staw (2005, p. 368) is “the production of novel, useful ideas or problem solutions.” Glynn (1996) suggests that organic structures provide an opportunity for more flexible and innovative capabilities. In contrast, bureaucracies as in mechanistic structures inhibit innovation (Bennett & Gabriel, 1999; HoffiHofstetter, & Mannheim, 1999; Kwaśniewska & Neçka, 2004). Organic environments are inconsistent with high level of formal controls, such as policies, procedures, and rules. On the contrary, organic environments are consistent with a high level of informal control, such as trust, leadership, integrity, and similar values. As well, organic environments with more informal controls tend to develop generative thinking on the status quo, rather than adaptive thinking which is more suitable for mechanistic environments. All companies have both organic and mechanistic structures and control. However, creating mechanistic controls for activities that are more conducive to organic controls can inhibit renewal and creativity, thus preventing exploitation of a company’s IC stocks. Flare has incorporated both mechanistic and organic controls where each is appropriate. The type of control and how it helps to develop and manage IC will be discussed next.
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Organic Operating as a virtual company makes Flare a very organic structure overall. Essentially, the firm has three types of employees: partners, associates (hired based on the needs of a project), and permanent employees who are supervised by the partners. Compensation for the partners, based on the annual profits, is divided equally among the partners with the assumption that each contributed equally. The associates are supervised by the partners, but who is supervising and who is assigned to a particular project depends on the needs and location of specific projects. Consequently, the partners assign themselves to specific projects based on the expertise needed. These characteristics are indicative of an organic structure as defined by Robbins (1990): flexible task definition, lateral communication, low formalization, expertise as influence, and diverse control. Regarding IC development and management, this organic structure provides Flare Solutions with a number of advantages over traditional business structures that possess a more mechanistic nature. Operating organically provides the partners with the flexibility necessary to provide fast turnaround time for clients. Because the partners are linked electronically and have complete access to the company databases, wherever they may be individually located, they enjoy high levels of flexibility and can operate anywhere in the world and at anytime. Due to their virtual nature: •
•
Discussions can occur through the use of e-mail outside of real time due to time zone differences in relation to where the different partners live or the countries in which they happen to be working. Individual partners working on a project can minimize interruptions due to the virtual nature of the business. They can work for ten or more hours in isolation and not be interrupted, unlike a typical worker in a
International New Ventures, Organization Structure, and IC Management
•
•
more traditional office situation. A partner becoming fatigued can electronically communicate with another partner living in a different time zone to continue working non-stop on the project, thus reducing turnaround time and increasing customer satisfaction. There is a large reduction in overhead costs, as well as administrative work, leading to greater efficiency in operations.
Low formalization and diverse control also allow the firm to benefit from the client’s ideas. Replacing a formal control (such as protection of ideas with copyrights) with an informal control of trust and interactivity, the partners freely provide a client access to relevant parts of the database so as to actively involve the latter in various projects. The partners believe that their thinking will always be slightly ahead of their clients; consequently, Flare is relatively open with the information it is willing to provide clients. The benefit to Flare of this openness is the valuable insight into the client’s expertise on the project. Through flexibility in structure, informal control, and generative thinking, the partners find it easier to emphasize the “why” rather than the “how” when it comes to doing things both among themselves and with their clients. Flare believes that the “how” of getting things done is relatively easy, but it’s the “why” that it is critical to achieve agreement among the parties, and to generate new ideas and question current practices.
Mechanistic While Flare depends fundamentally upon its organic nature, the company, through necessity, must have some mechanistic elements built into its structure. Flare has devised some mechanistic structures that allow the partners to create an appropriate context for creativity. Research has shown that certain culture and climate characteristics will lead to the development and management of
IC. For example, a culture that encourages collectivism, a willingness to deal with some degree of uncertainty, and low power distance is conducive to development of IC (Nazari, Herremans, Isaac, Manassian, and Kline, in press). As well, a climate that encourages trust, risk-taking, openness, and ownership of ideas is also supportive of creating IC inventories (Nazari et al. in press) All of these characteristics are usually easier to generate from an organic environment, compared to a mechanistic environment. Knowing this, the partners take special efforts to ensure that Flare creates a context within which creativity and innovation can grow. Prior to the formation of the INV, the partners clearly voiced their values, personal mission, and personal objectives. Consequently, the firm could determine whether the partnership could work as a virtual organization. Although values, missions, and objectives are organic informal controls, after formation, the company prepared a formal policy that requires the partners to meet face-to-face, along with selected associates, on a reasonably frequent basis to discuss new ideas, address issues, and resolve problems. Included in these meetings are social activities for the partners to get to better know and understand each other. Then, when they are at distance, they feel comfortable presenting what might initially appear to be “wacky” ideas. Of course, in between these face-to-face meetings, where much business must be carried out, conference telephone calls are made when necessary. The partners have a mechanistic control that requires the partner who calls the meeting to ensure that all of the necessary documents are sent ahead of the meeting time. In this way, everyone can be prepared to discuss the items on the agenda, leaving additional time for creative activities. Evidence that the firm is successful in developing creative and new ideas is demonstrated by some of their systems and processes. For example, their award-winning E&P Catalog™ constitutes an innovative and holistic approach
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to managing information. It permits employees to locate relevant information in a timely manner by bringing together various organizational information sources through a user interface that is intuitive in nature. Essentially, the E&P Catalog™ permits access to all data storage sites and integrates data, knowledge and information with processes, applications and people-related information to provide a complete picture for the user. For example, a well site, which operates for 20 years, likely was initiated with technology very different from what is available today. Also, the geologist who was instrumental in determining future reserves may not still be employed by the company. The E&P Catalog helps Flare’s clients store individual human knowledge within the confines of the organization. In this manner, this valuable knowledge does not leave the organization when the employee does. The system provides a knowledge history for each well site, project, or facility. The E&P Catalog™ represents only one of many systems and processes developed by Flare Solutions.
interactivity Cognitive diversity can be defined as “generat[ing] multiple perspectives, engender[ing] well thoughtout alternatives, and ultimately lead[ing] to better decisions” (Olson, Parayitam, and Bao, 2007, p. 200). Cognitive diversity is essential to develop creative new products that are outcomes of the organization’s IC inventories. However, avenues to the development of cognitive diversity must also be available. Cognitive diversity can be developed through interactive behaviors (Isaac, Herremans & Kline, in press). Interactivity among colleagues is defined as a willingness to challenge one another, leading to further refinement and sophistication of a creative idea. Interactive behaviors lead to the willingness to attempt to understand others’ perspectives and suggest alternatives even if they could lead to conflict. An organic structure and controls set the stage for the partners and associ-
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ates to engage in interactive behaviors. One example of this interactivity among the Flare partners, leading to cognitive diversity, is the manner in which they brainstorm virtually. The virtual nature of the business has itself brought an advantage in relation to promoting creativity. In a traditional office brainstorming session, an employee might come up with an idea and another employee might immediately criticize it. The point is that the idea does not get recorded anywhere nor is it subject to modifications which might turn it into a feasible product. Interestingly, although an overall organic environment will lay the ground for cognitive diversity, Flare Solutions devised a mechanistic control that requires partners to keep e-mail files of messages containing creative ideas, no matter how infeasible they might appear at first. This requires the partners to think about these ideas more thoroughly and not respond to them immediately (whether they think they are good ideas or not). After a period of gestation, another partner might e-mail back and suggest a slight modification to an original idea, causing a third partner to enter the discussion and suggest another change. Over time, the original idea evolves, and even though it may bear little resemblance to the one first proposed, it may eventually lead to a saleable product. Through iterations and an audit trail of the partners’ thoughts, the final idea is now robust and highly creative due to the input of the partners, and it was not lost as might have happened in a traditional meeting. Thus, cognitive diversity has resulted through interactivity.
Trust Based on the work of Mayer, Davis, and Schoorman (1995) and McEvily, Peronne, and Zaheer (2003) trust has been conceptualized as an expectation, which is perceptual or attitudinal, [and] as a willingness to be vulnerable, reflecting a degree of risk-taking. Jin, Drozdenko, and Bassett (2007) determined that building trust is easier in an organic rather than a mechanistic structural
International New Ventures, Organization Structure, and IC Management
environment. An organic environment, which implies employee freedom and the granting of freedom, must be accompanied by significant levels of trust that employees will fulfill their responsibilities. Trust is essential for building the relationships, which are prevalent in IC processes (Mayer et al. 1995). The Flare partners have voiced separately and without prompting that the most important characteristic motivating their success is the trust that they have in each other. Operating virtually makes it impossible to “check on one another” to determine if each is contributing his fair share. As each partner is working on projects in various parts of the world, they simply have to trust that each is working the number of hours required to complete projects. Consistent with a trusting context, Flare has created a no blame culture, and the team members strongly support one another when developing and testing new ideas. Flare will quickly abandon or modify a process when it is not achieving company’s and/or client’s goals.
intellectual Capital (iC) By managing IC, Flare has put structure to a very ambiguous concept. One might say that Flare created mechanistic structures to manage a very organic concept. We now describe both the creating of an IC inventory and the placing of a monetary value on certain IC elements by tracing their use to the cash flow from various projects. The partners wished to develop more insight into their own intangible assets as IC constitutes the lifeblood of the company. Therefore, Flare identified and measured IC in 2000. The technique used is called the Intellectual Capital Realization Process (ICRP) (Herremans & Isaac, 2004). The ICRP seeks to identify specific company knowhow, relationships and processes which result in the creation of corporate wealth, thus creating an inventory of IC specific to the firm. The ICRP differs significantly from other systems that attempt to measure IC because it identifies specific IC
elements (ICEs) rather than the inputs or outcomes relating to intellectual capital management. For example, other IC measurement systems attempt to determine an organization’s IC by using proxies, such as customer satisfaction levels or employee retention levels, whereas the partners wanted to identify the know-how, processes, and relationships that lead to such outcomes. Initially, the partners attended a company virtual workshop to understand better what constitutes IC and ICEs (sub-components of IC). ICEs are specific elements of knowledge, organizational processes, and relationships that create wealth for the company. They are not what a company possesses but rather what it does with what it has to create wealth. Each partner was requested to identify at least 20 ICEs. After the workshop and without talking to the other partners, the partners sent their lists to the authors for refinement, eliminating any duplication. The above procedure resulted in the identification of 127 ICEs. Generally IC is thought to be categorized in three ways - human, process, and relational capital. However, by identifying sub-categories of ICEs under these traditional categories, the ICEs fell into 11 categories. Some examples of such categories include technical knowledge, marketing, team psychological processes, team dynamic/culture, and concept formulation. As 127 different ICEs are too many to manage at one time, the partners rated each ICE on three separate Likert five-point scales. This procedure helped to identify the ICEs most critical for the firm. The first scale related to each partner’s Level Of Knowledge (LOK) regarding each ICE. Then, each partner rated each ICE on the basis of its Value-Added (VA) aspect. For this scale, the partners were asked to consider how important the ICE was to getting a job done, as well as to the entire organization. Finally, each partner rated each ICE on the basis of the Need To Share More (NTSM) among the partners and also other stakeholders. The first two measures (LOK and VA) relate to the present time, but the
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Table 1. Classification of the Intellectual Capital Elements (ICEs) Level of Knowledge
Need to Share More
Low
High
Low
Quadrant A Characteristic: Knowledge level low and no desire to learn more. (vulnerable to organization memory loss) Strategy: document, train others, develop systems to capture.
Quadrant B Characteristic: Knowledge level high, but no need to learn more. Strategy: Maintain the status quo by training and mentoring new employees.
High
Quadrant C Characteristic: Knowledge level low but a desire to learn more Strategy: Knowledge sharing through mentoring, discussion groups, and experts
Quadrant D Characteristic: Knowledge level is high and a desire to learn more. Strategy: Brainstorming and creativity sessions
Adapted, with permission, from Herremans & Isaac (2004).
last measure (NTSM) relates to the future. Those ICEs that were rated with low value added by the partners were not given further consideration. This procedure reduced the number of ICEs to 74, all high value-added in nature. The remaining ICEs were placed in a matrix (please see Table 1), resulting in four quadrants, based on low or high LOK and low or high NTSM (Herremans & Isaac, 2004). Each quadrant suggests a different strategy in terms of ICE management. For example, Quadrant A suggests that these items are vulnerable to organizational memory loss. In essence, these high value-added ICEs are very well known by at least one partner, but not by the other ones, and there is little desire to learn more by the latter (low NTSM ratings). Thus, the organization needs to capture this know-how in the event that the partner leaves the organization. Some techniques for avoiding loss of such ICEs could involve writing things down, training other people, and developing systems/processes that capture the ICEs. For Quadrant B, there is a high level of knowledge and little desire to learn more so the appropriate strategy is to maintain the status quo by training and mentoring new employees. For Quadrant C, the level of knowledge is low, but there is a strong desire to learn more. This involves learning through knowledge sharing, perhaps through
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mentoring, discussion groups, and experts to share their knowledge. In Quadrant D, the level of knowledge is high and so is the desire to share. Here the emphasis is placed on the creation of sophisticated levels of common knowledge. Some strategies for ICEs falling in this category might be the brainstorming, creativity sessions, and other tactics (Herremans and Isaac, 2004). In summary, the authors and the partners of Flare concluded that the company benefited from the ICRP report (Herremans and Isaac, 2004) in ten different ways: 1. 2. 3. 4.
5.
6.
The ICEs for the organization were concretely identified. The ICEs were classified into conceptually natural categories. The bearers and non-bearers of ICEs were identified. The partners now had a sense of the company’s vulnerability should a partner leave (i.e. who possesses Quadrant A ICEs). The value-added levels of specific ICEs were determined to enable decision making as to which ICEs merited further developmental attention. The partners now knew which ICEs needed to be shared.
International New Ventures, Organization Structure, and IC Management
7.
ICEs could now be monitored over time to determine if the development strategies were effective. 8. Differentiated strategies could now be developed depending upon which ICEs fell into which quadrants. 9. The partners now had a realistic sense of the potential to create wealth resulting from their high value-added ICEs. 10. The partners gained peace of mind knowing Flare had identified and could now manage its ICEs and that Flare could communicate and share some of these ICEs with clients. After completing this initial activity, the partners soon realized that the ICEs could be sorted and classified in a rather specific manner. Labeling the ICEs as generator, facilitator, and capacity helped the partners to understand the ICEs role in bringing revenues into the organization (Herremans & Isaac, 2004). Generator ICEs directly generate cash flows from client projects and may be thought of as being similar to labor and raw materials in manufacturing products. The E&P Catalog™ discussed earlier is an example of a generator ICE. Facilitator ICEs are indirectly associated with client projects in that they support generator ICEs. In a manufacturing company, such ICEs are analogous to factory overhead and costs of producing the product. Examples of such ICEs include databases maintained by the company, and logging client project progress. Capacity ICEs are not readily traceable to client projects, but they must exist for the company to operate. They provide the capacity of the organization to operate and are similar to operational expenses or general overhead in companies, such as administrative, selling and general expenses. Some specific examples would include the company structure, image, and organizational logo. Next, the Flare partners wished to affix real dollar values to their ICEs. To accomplish this task, the partners selected generator and a few facilitator ICEs from their inventory (42 in total)
to trace their project invoices on a monthly and quarterly basis. Each partner indicated for each ICE whether it was used to secure or complete the contract. Additionally, they rated each ICE on a seven-point scale regarding the significance of the ICE during the specified period in relation to achieving contract goals. The anchors follow: critical (7) meaning that without the ICE, the company could not have secured and/or completed the client contract; important (4) meaning the ICE helped in securing or completing the contract by enhancing quality levels or shortening time periods to achieve project goals; and finally useful (1) meaning that without this ICE the contract would still have been secured or the project could have been completed. Nevertheless, this ICE did prove useful in securing and completing the project and with higher quality levels or within shorter time periods (Herremans, Isaac, and Bays, 2007). By collecting this information over the course of a full calendar year, the partners could visualize the dollar value arising from cash flows attributed to each of these ICEs, as well as each ICE’s frequency of use. For example, for every $100 Flare generated from its IC, the E&P Catalog™ ICE contributed $7.55. Although one might suspect that the partners should know which of their bits and pieces of knowledge, organizational processes, and relationships were critical in developing cash flows, this information was not really available to them because Flare was operating virtually on different projects and in different countries. Therefore, the partners could now see which ICEs were most critical to the firm and its success. With this procedure, Flare was also able to note how the ICEs were evolving over time. The partners could readily see both frequency of use and annual contribution of each ICE by classifying them in a matrix (Herremans, Isaac, and Bays, 2007). Twenty three of the ICEs fell into Quadrant C, 12 ICEs fell in Quadrant D, and the seven ICEs that accounted for the greatest contributions as noted above all fell in Quadrant B (please see Table 2). None of the ICEs fell into Quadrant A.
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Table 2. Annual Contributions to Cash Flow and Frequency of Use for 42 ICEs Low Frequency
High Frequency
High Contribution
Quadrant A Undesirable to have ICEs here. Represent failure to exploit their potential
Quadrant B Generator ICEs that are often used on projects and are an important source of revenue
Low Contribution
Quadrant C Monitor to determine evolutionary stage. Could be new, undeveloped ICEs, moving to Quadrant B, or mature ICEs, moving from Quadrant B
Quadrant D ICEs that facilitate the completion of many projects but are low contributors to revenues
It is best if none of the ICEs fall in Quadrant A as this would mean that these ICEs create high dollar amounts of revenues but are rarely, if ever, used. Quadrant B containing the top seven contributing ICEs are used very frequently. The 23 ICEs in Quadrant C require monitoring as some of these ICEs are in the early stages of their evolutionary paths and may move eventually into Quadrant B. Others in this quadrant may be nearing the mature stage of their life cycles. The 12 ICEs in Quadrant D are facilitator ICEs and are all important in contributing towards the completion of projects (Herremans et al. 2007). The Flare partners have gained considerable knowledge as a result of using this technique. From the partners’ point of view this exercise has provided the following benefits (Herremans et al., 2007):
4.
5.
6. 1.
2.
3.
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The tracing exercise has assisted the partners in strategy formulation in light of ICE dollar contributions and frequency of use. Flare is now in a position to track the evolutionary life cycle of each ICE, and therefore it is able to make strategic decisions based on concrete information. The partners can determine which ICEs must be protected, differentiated from competitors, licensed, sold or commercialized (Barney, 1991) or retired, depending upon factors such as life cycle, dollar contribution, and frequency of use.
The partners learned that of the eleven categories of ICEs, six categories contained the 42 ICEs and these categories contributed the following dollar amounts towards cash flows for every $100 earned: technical knowledge - $41; marketing - $36; concept formulation - $9; team psychological processes - $5; knowledge management support systems $5; and communications - $4. This kind of information is crucial for strategic planning purposes. The exercise has ensured that all partners are aware of all of the ICEs. The partners often do not work on the same projects; and even though knowledge sharing is often difficult, it is crucial for the company. Thus, making tacit knowledge explicit and shared is an important activity within this company. Finally, the partners gained further peace of mind knowing which ICEs bring in the greatest revenues and which ones do not.
This procedure provided greater insight into the roles these ICEs play and their importance through the assignment of dollar amounts.
FuTuRE TREnDs As we continue to evolve in a society in which many of our products are composed of bits and pieces of knowledge, processes, and relationships,
International New Ventures, Organization Structure, and IC Management
more MNCs will be grappling with how to build, and then create and extract, wealth from their intangible assets. Through the use of electronic forms of communication and the ready market for knowledge products, it is likely that more new ventures will choose to participate in markets located around the world immediately upon their start ups. It is essential that these INVs recognize the necessity to ensure that organizational characteristics are conducive to knowledge creation and extraction.
ConClusion Flare Solutions Limited, operating as an INV, has been successful both in combining resources located internationally and finding markets for their products in various locations around the world. The partners set up their firm with a global strategy and have developed appropriate organic and mechanistic controls to ensure creativity for the development of innovative new products, even though Flare operates virtually. Interactivity and trust have been central to their success. Given that their only valuable resources are the knowledge, processes, and relationships that they have developed, Flare began to investigate and manage its IC with deliberate systems. The partners learned that the management of IC does not have to be an elusive and vague process. While most of the literature on IC treats it as an intangible asset and therefore suggests measures in terms of its inputs and outcomes without actually identifying it concretely, Flare went much further. Flare went through a process that made its intangible assets appear more tangible and therefore more manageable, making it possible to attach monetary values. The firm’s emphasis on organic controls, with appropriate mechanistic controls to provide concreteness to their virtual operations, allowed interactivity and trust to grow and prosper within the organization, leading to better management of its IC.
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About the Contributors
Kevin J. O’Sullivan is an Associate Professor of Management specializing in Knowledge Management and Information Systems at New York Institute of Technology. He also holds the posts of Associate Dean and Chair of the Management and Marketing Department. He has over 16 years of experience IT and KM experience in multinational firms and consulting both in the private and public sector in American, Middle Eastern, European and Far Eastern cultures. Dr. O’Sullivan has delivered professional seminars to global Fortune 100 organizations on subjects such as global collaboration, knowledge management, information security and multinational information systems. His research interests include knowledge management, intellectual capital, security and information visualization. He has been published in journals such as the Journal of Knowledge Management, The Journal of Information and Knowledge Management and the International Journal of Knowledge Management among others and has published many book chapters, books, proceedings and papers as well as presenting at and chairing international academic conferences. *** Tom Butler is a Senior Lecturer in Business Information Systems, University College Cork, Ireland. A former IT professional, he worked for 27 years in the telecommunications sector. Since 2005, Tom has been conducting research on issues of corporate environmental responsibility through the applications of Green IS/IT. Indeed, this strand of research grew out of his interest in institutional theory and his experiences as lead researcher (2003-2006) on two action research projects on the design, development and deployment of knowledge management systems (KMS) in public sector organizations. His work has been published in the Information Systems Journal, the Journal of Strategic Information Systems, the Journal of Information Technology, among others, and in the proceedings of major international conferences such as ICIS, ECIS, and IFIP 8.2 and 8.6. Jan Carrell, D.M., is a tenured professor of Business at Northwestern College and a registered nurse. She received her Doctorate in Management from Colorado Technical University and her Masters from Trinity in San Antonio, Texas. Her current field of interests includes Human Resources, Intellectual Capital, and Organizational Behavior. She has presented most recently at Texas A & M American Management Seminar and 2007 IABP AD Conference in Florida, and accepted for publication in The Business Renaissance Quarterly. She is currently a full time professor at Northwestern College in the Business Department and an adjunct professor at Colorado Technical University in health management and services where she teaches undergraduate and graduate courses in business and healthcare. Her base of experience is derived from 30 years of hospital administration and years in teaching traditional and non-traditional students. Copyright © 2010, IGI Global, distributing in print or electronic forms without written permission of IGI Global is prohibited.
About the Contributors
Suresh Cuganesan is a Professor in Accounting at Swinburne University of Technology and also holds an appointment as Visiting Professor at the Macquarie Graduate School of Management. Suresh has worked in the areas of management consulting and finance. He currently occupies a position on CPA Australia’s Business Management Centre of Excellence, and is a member of the Asian Board of the American Academy of Financial Management. Suresh’s research interests are in the areas of strategic costing, business performance, intellectual capital measurement and the design of management control systems. He has published 3 books and over 50 articles, conference papers and book chapters and is also on the editorial boards of a number of leading national and international academic journals. In addition to his research, Suresh also advises and trains organizations in the fields of finance, business performance measurement and intangibles management across private- and public sector organizations. Leslie Gadman is a leading expert in the field of business and innovation strategy and organizational change. As a former Managing Director at DukeCE, a spinoff of the Fuqua School of Business at Duke University USA. he has delivered customized management education related to change management worldwide. His clients include Sita, United Utilities, Hagemeyer, Hydro, GM, New England Life and Bosch. He has written several books on change leadership and Innovation and as a former Cap Gemini consultant has advised clients in multinational firms and new ventures in several countries, including the United States, Switzerland, France, Lebanon, Jordan and United Kingdom. Leslie is the author of “Power Partnering: A Strategy for Excellence in the 21st Century” and has a second book forthcoming entitled “Open Source Leadership” which will be on the bookshelves this spring. He has published in journals such as the Leadership and Organizational Development Journal, Journal of Management Science, the Asian Journal on Quality, MIT’s Sloan Management Review. His research interests are strategic innovation and change leadership; cooperative strategies; strategic processes including organizational learning, knowledge and competence development and strategic management practices in emerging industries. Ramón Sanguino Galván has served as a full-time professor of the Economical and Business Sciences Scholl of the University of Extremadura. Years: 2000/2001 and 2001/2002, A full-time assistant professor of the Economical and Business Sciences Scholl of the University of Extremadura. Years: 2002/2003 to 2005/2006 and a Professor with contract, Economical and Business Sciences Scholl of the University of Extremadura. Since 26th October 2006. He has served as Secretary of the Department of Business Administration and Sociology of the University of Extremadura since 01/02/2008. He earned his European Doctorate in Economics and Business Science in January 2005 with his Doctoral thesis in “Knowledge Management and Competitiveness: Spanish cities analysis”. Mark: Excellent Cum Laude unanimously. Marianne Gloet has a wide range of consultancy experience in Asia and North America in the areas of knowledge management, HRM, HRD, management development and sustainability. She has worked on projects in Canada, the USA, Vietnam, Hong Kong, Singapore, Malaysia and the United Arab Emirates. Marianne’s 25 years of experience as a human resources consultant includes being the President of her own successful technology company in Canada. Currently, Marianne is Chair of Business at the Abu Dhabi Women’s College, Higher Colleges of Technology in Abu Dhabi, UAE. She can be contacted at:
[email protected]
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About the Contributors
Audrey Grace is a College Lecturer in Business Information Systems at University College Cork. She has over 12 years of industry experience, principally in the development, implementation and mobilization of business solutions, from both a business and a technical perspective. Audrey is currently completing a PhD with the Business Information Systems Department at UCC and already holds a BSc in computer science; a CDip in accounting and finance; a HDip in management and marketing; and an MSc in management information systems. She has had a number of research papers published in the proceedings of IS international conferences and in refereed journal publications. Her current research focuses on service co-creation between service professionals and clients, client-facing processes, and information systems that enable individually tailored customer service interactions. Her research interests also include learning in an organisational context, management of learning and the use of technology to promote and manage learning. Irene M. Herremans is the CMA-Alberta Faculty Fellow for the Haskayne School of Business at the University of Calgary. She teaches in the accounting, tourism, and environmental management programs within Haskayne. She is also an adjunct professor for the School of Environmental Design. Irene supervises graduate students in Haskayne, Environmental Design, and the Interdisciplinary Graduate Program. Her research investigates sustainability performance and reporting, intellectual capital, and management control systems. Irene has taught management courses in Mexico, Cuba, Slovak Republic, Ecuador, China, the United States, and Canada. She has received many awards both for her teaching and research. Rob Isaac is a Senior Instructor for the Haskayne School of Business at the University of Calgary, where he teaches both graduate and senior undergraduate courses. He conducts research in intellectual capital and organizational culture. Apart from publications in these areas, he has also published articles in organizational design, leadership, motivation and teamwork. Rob has worked abroad on numerous occasions for the university in countries such as Poland, Cuba and Ecuador. He has given academic presentations in Costa Rica, Australia, The Republic of South Africa, and other countries to academies and business school faculties. He completed his PhD. at the University of Strathclyde, Strathclyde Business School in Glasgow, Scotland. Arla Juntunen holds a PhD in Marketing from the Helsinki School of Economics (HSE), Marketing and Management Department, Finland and a Master’s degree in Administrative Information Systems from the University of Helsinki. She is a post-doc researcher at the University of Helsinki, researcher at the HSE and a Senior Advisor in Finland’s Supreme Command of the Police. Her research interests focus on strategic management, innovation and business networks, and Management Information Systems (MIS). Armond Manassian is an Assistant Professor for the Olayan School of Business at the American University of Beirut in Lebanon. He teaches undergraduate courses in financial accounting and management accounting and a graduate course in financial reporting and analysis. He also administers the financial accounting and management accounting modules in the Executive MBA program at AUB. He conducts research in international accounting and issues pertaining to culture and its influence on accounting systems with a more recent focus on intellectual capital. He conducts management accounting workshops on a regular basis for participants from the Gulf countries including Saudi Arabia, Kuwait,
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About the Contributors
Qatar, Oman, Bahrain, and the Emirates. He completed his PhD at the Haskayne School of Business at the University of Calgary in Alberta, Canada. Agustín J. Sánchez-Medina was born on Gran Canaria, Canary Islands, Spain. He is a PhD in Business Organization and Management and has a Higher Degree in Business Administration and Management and Degrees in Business Studies and Informatics. He is currently a lecturer at the University of Las Palmas de Gran Canaria, where he teaches the subjects of Management Control, Enterprise Creation and Business Administration within the area of Business Organization. Those teaching activities take place in the Faculty of Economic and Business Sciences and in the University School of Informatics, where he is also Deputy Director. His principal lines of research focus on intellectual capital, both in firms and in territories, entrepreneurship, and sustainable development. Mirghani Mohamed is an Assistant Dean with the School of Management, New York Institute of Technology (NYIT)-Bahrain campus, teaching information systems technology and Knowledge Management principles. Before joining NYIT, Drs. Mohamed was the Associate Director for Technology Operations and Engineering at The George Washington University in Washington, D.C., USA, he also serves as the Director of the Knowledge Management (KM) Technology Center at the same university. Drs. Mohamed holds M.Sc. and Ph.D. in Agronomy/Statistics, M.Sc. in Computer Science and D.Sc. in Systems Engineering and Engineering Management with emphasis on Knowledge Management. Drs. Mohamed is an Oracle and ITIL Certified Professional. He worked as a technical lead for deployments of complex ERP and many other critical enterprise systems. Mona Mohamed is an adjunct professor with New York Institute of Technology (NYIT)-Bahrain teaching management and anthropology. Before joining NYIT, she worked as a communication coordinator for Applied Knowledge Sciences (AKS). She also worked as a project planner for Nebraska Women of Color Network. Mona was a graduate research assistant at the University of Nebraska- Lincoln carrying research in the area of women’s rights. Before joining UNL Mona practiced law as a certified lawyer in Wad Medani, Sudan. She can be reached at
[email protected] Jamal Nazari, is a PhD candidate in Accounting at University of Calgary and full time faculty at Mount Royal College. His teaching responsibilities are in the areas of financial and management accounting. He has taught accounting courses at Mount Royal College, University of Calgary, and Sharif University in undergraduate and graduate levels. Jamal’s research interests include intellectual capital, managerial accounting, and sustainability. He has conducted and intends to pursue research on the contemporary issues of accounting in national and international contexts. His studies have been presented in numerous conferences and published in publication outlets. Tomás M. Bañegil Palacios has served as a Professor, Economical and Business Sciences Scholl of the University of Extremadura since 1987. Since 2007 he has served as Director of the Department of Business Administration and Sociology of the University of Extremadura. He received his doctorate in Economics and Business Science and an MBA from the London Business School. Matteo Pedrini is research fellow in ALTIS-Postgraduate School Business & Society of Catholic University of Milan. In 2007 he discuss his PhD thesis in Management and Firm’s systems on “Corporate
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About the Contributors
Responsibility and Stakeholder Management. The generation of intangible resources”. In his research activities, started in 2002, he focused the attention on different issues regarding the relation between business and society. In particular he leads studies on the relation between corporate responsibility and performance, the intangible asset management, and social and ethical accountability. He collaborates in teaching Introduction to Management and Corporate strategy at the Catholic University of Milan and he teaches Corporate Responsibility in post-graduate courses. Richard Petty is Associate Dean and Professor in Management (Accounting & Finance) at the Macquarie Graduate School of Management, Sydney, Australia. He is Deputy President, CPA Australia and serves on the organization’s Board of Directors. Richard is also Chairman of an investment company headquartered in Hong Kong, and Chairman of the Hong Kong Annual Reporting A wards. Richard is on the editorial board of The International Journal of Accounting Literature, and The Journal of Intellectual Capital. His academic work has appeared in The Australian Accounting Review, The Journal of Management Accounting Research, The Journal of Intellectual Capital, and The Accounting, Auditing and Accountability Journal. Richard is a university medalist. He graduated with first class honors in Accounting and Finance. He holds a Masters degree (with honors) in Commerce, and a Ph.D. Richard is Fellow of CPA Australia, and also holds the CMA and MFP professional designations. Isabel M. Prieto is an assistant professor of business administration at the Department of Business Management and Market Research at the University of Valladolid, in Spain. She received her Ph.D. from the University of Valladolid with a concentration in knowledge management and learning in organizations. Her current research is still focused in this topic, but looking to its application to the field of human resources management and organizational capabilities. She is also involved on research about organizational ambidexterity. Elena Revilla is a professor of Operations management in Instituto de Empresa, Spain. She received her Ph.D from University of Valladolid. She received the 1996 award for the best doctoral dissertation granted by the Club Gestión de Calidad. She is the author of the book “Factores determinantes de aprendizaje organizativo. Un modelo de desarrollo de productos”. Her major research interest is organizational learning, innovation and management of technology. She has participated in national and international research projects and published studies in different peer-reviewed academic journals and collective books. Robert Richardson received his Doctor of Medicine degree from the University of Florida, in June 1980 and completed his Intern, Resident & Chief Residency in Psychiatry at the Medical University of South Carolina between July 1980 and June 1984. He is a member of the American Board of Psychiatry and Neurology. Rob works in general psychiatry in the Mt. Washington Valley, New Hampshire and his subspecialty is Integrating Psychopharmacology, Psychotherapy and Psycho spiritual Development. Rob’s mission since 1971 has been to explore the human condition with the operating assumption that the basic rules that guide the evolution of the universe are applicable at every level of integrative emergence. In his own words: “I’ve encountered nothing in physics, chemistry, biology, medical science, psychology, philosophy, information technology or the literature of the major religious and spiritual traditions to dissuade me from the working hypothesis that we humans are active expressions of and participants in the universe’s evolutionary nature. I’m confident that understanding human nature is
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About the Contributors
necessary for understanding the nature of the universe and vice versa. Realizing that our universe is at once interactive, integrative and emergent has fostered the revelation of three rules that are relevant at all levels of evolutionary emergence. I’m suggesting that applying these three rules serves to clarify our vision, deepen our shared understanding of evolutionary process and empower our creative participation in any domain of experiencing.” Herbert Robinson is currently a Reader in construction economics and project management and the Director of the MSc Programme in Quantity Surveying in the Department of Property, Surveying and Construction at London South Bank University (United Kingdom). He teaches knowledge management to postgraduate students in construction project management, quantity surveying and planning buildings for healthcare. He was previously a Senior Research Associate at Loughborough University (UK) where he was involved in major research projects on knowledge and performance management. Dr Robinson has published several book chapters and numerous journal articles on knowledge and performance management and he is the co-author of a book titled ‘infrastructure for the Built Environment: Global Procurement Strategies’ recently published by Elsevier Butterworth-Heinemann. After graduating from Reading University with a BSc (Hons.) degree, he worked with international consultants Arup and in a World Bank funded project before returning to academia. He holds a Master’s degree in infrastructure planning and a PhD in infrastructure investment and resource management. Rosa Nelly Trevinyo-Rodríguez is the TEC de Monterrey Family-Owned Business Chair at the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), Campus Monterrey, and EGADE Monterrey Family Business Center Director. She received her PhD from IESE Business School, University of Navarra, specializing herself in family business management. She worked for the legal firm Cuatrecasas (Barcelona) within the civil, administrative law and tax litigation department writing family business constitutions and offering advice to several governmental institutions and foundations in Spain, U.S., Mexico, Ecuador, Chile and Argentina. Her main research interests include intergenerational knowledge management and transfer in family business contexts, as well as business families’ next generation members training. Alan M Thompson is knowledge manager for Production Services Network Ltd. (PSN), headquartered in Aberdeen, Scotland. Following a career in shipbuilding and marine consultancy, he joined the oil and gas industry in 1980 and has held a variety of project management roles, including managing research and development projects for a national oil company. A chartered naval architect and European registered engineer, Alan also holds a BA in mathematics, an MBA in project management and organizational development, and an MSc. in knowledge management. He is a guest lecturer at The Robert Gordon University’s Aberdeen Business School, regular presenter at knowledge management conferences in Europe, and has authored several articles on knowledge management, and on oil field development. Alan is also an inventor and patent holder, mainly in oil field conceptual development, and in marine rescue, which have spurred his academic research into how companies respond to “intrapreneurs” and related intellectual capital issues.
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Index
A
customer capital 146, 209
Amiedu 65, 68 assimilation 152, 154
D
B benchmarking 142 bivalent logic 153, 154 build-operate-transfer (BOT) 96 business performance 160, 161, 165, 166, 167, 168, 169, 170, 171, 175
C capital markets 81, 82 CEM Corporation 235, 237, 238, 239, 240, 241, 242, 243, 244, 245, 246 codification 144, 145, 153, 154 commitment 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57 commitment based value networks 44, 46, 54 commitment, synergistic 45 community of practice (CoP) 6 competitive advantage 160, 161, 164, 169, 170, 171, 172, 173, 207, 208, 209, 210, 211, 212, 215, 218 continuous learning 227 control systems 271, 276, 277, 278, 285 core values 7, 11 corporate citizenship 179 corporate responsibility 179, 182, 183, 184, 185, 192, 195, 198 corporate social responsibility 199, 203, 205 corporate sustainability 119, 120, 123, 124, 128, 130, 131, 132, 134 country’s intellectual capital 254, 255, 262
Danish Agency for Trade and Industry (DATI) 141, 142, 143 decontextualization 144 differential reporting 83 diffusion of innovation 44 disconnect 17, 27, 38 disruptive events 7 downsizing 9 E. I. du Pont de Nemours and Company (DuPont) 207, 212, 213, 214, 215, 216, 217, 218, 219
E Elisa 60, 63, 64, 65, 66, 67, 68, 72, 73 epistemic community 159 exploitation processes 166 exploration processes 166 externalization 145, 153, 155
F family firms 207, 208, 209, 210, 211, 212, 215, 217, 218, 219, 220 family firms, growth stages of 216 family wealth 210, 211, 212, 216, 217 fiduciary reporting 83 financial performance 179, 180, 181, 182, 186, 188, 190, 197, 198, 200, 203, 204, 206 financial reporting 75, 76, 77, 78, 80, 85, 86, 89, 92 Foreign Investment Advisory Service (FIAS) 70
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Index
G gap 17, 18, 27, 28, 29, 34, 37, 38, 43 globalization 145, 148, 150, 151, 153, 154, 158
H Hewlett Packard 65 human capital 145, 146, 147, 148, 150, 151, 153, 155, 185, 186, 188, 189, 190, 200, 202, 234, 235, 236, 246 human capital management (HCM) 221, 222 human resource management (HRM) 221, 223, 224, 225, 226, 227, 230, 231 human resources 17, 18, 19, 20, 22, 29, 39, 41, 42
I IC disclosure 83, 84, 86, 87, 88 IC information 78, 82, 86, 87, 88 ICL 65, 68, 73 IC measurement 75, 76, 77, 78, 80 IC models 138 IC report 79, 81, 82, 83, 84, 85, 89 IC reports 137, 140, 141, 142 ICT 58, 59, 60, 62, 63, 68, 69, 70, 71, 72 ICT-sector 58, 59, 60, 62, 63, 69, 70 identity building 46 identity, corporate 46, 53, 54, 55 identity creation 47 identity defining commitments 44 identity, national 53, 54 identity, personal 45, 46 identity seekers 46 individual identity 45, 46, 49, 51, 53, 54, 55 information technology (IT) 234, 235, 236, 237, 247 intangible assets 23, 24, 25, 26, 28, 41, 137, 144, 146, 151, 153, 155, 157, 249, 251, 254, 255, 256, 257, 258, 260, 261, 262, 263, 265, 266 intangible capital 136 intangible resources 178, 181, 182, 185, 186, 187, 188, 191, 193, 194, 195, 196, 197, 198 integrative interactive emergence 55
intellectual capital (IC) 1, 2, 3, 5, 6, 8, 11, 13, 17, 18, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31, 34, 35, 37, 38, 39, 40, 41, 42, 43, 58, 59, 68, 69, 75, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86, 87, 88, 89, 90, 91, 92, 93, 95, 96, 97, 98, 99, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 112, 113, 114, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 160, 164, 165, 167, 172, 173, 175, 176, 207, 208, 209, 210, 211, 212, 215, 216, 217, 218, 219, 220, 234, 271, 274, 275, 276, 277, 278, 279, 281, 283, 285 intellectual capital of family businesses (ICFB) family wealth matrix 207, 208, 211, 212, 213, 215, 216, 217, 218 intellectual capital of territories 249 interactivity 271, 278 international joint ventures (IJVs) 96 international new venture (INV) 271, 272, 273, 277, 283 Iran 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 106, 107, 108, 109, 110, 111, 114, 115
K knowledge 271, 272, 273, 274, 275, 276, 278, 279, 280, 281, 282, 283, 284 knowledge assets 119, 120, 121, 122, 123, 124, 125, 126, 128, 129, 130, 132, 133, 134 knowledge, corporate 128 knowledge-creation 223, 230 knowledge, explicit (codified) 122, 127 knowledge intensive organisations 119, 120, 122, 123, 130 knowledge management (KM) 58, 61, 62, 72, 119, 120, 121, 124, 125, 126, 127, 128, 129, 130, 132, 133, 134, 135, 136, 137, 139, 143, 221, 222, 231, 232, 233, 236 knowledge management tools (KMT) 154 knowledge, organisational 122, 126, 128 knowledge resources 160, 161, 164, 165, 166, 167, 168, 169, 170, 171, 172 knowledge sharing 222, 223, 227, 230 knowledge, tacit 122, 127, 128
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Index
L
O
leadership capabilities 222, 228, 229, 230 learning capability 160, 161, 165, 166, 167, 168, 169, 170, 171, 172 learning environments 226 learning management systems (LMSs) 235, 236, 237, 243, 245, 246, 247 learning processes 160, 161, 162, 163, 165, 166, 167, 168, 169, 170, 171, 172, 174 Lebanon 95, 96, 97, 98, 99, 100, 101, 102, 103, 104, 105, 107, 108, 109, 110, 111, 113, 114, 115 local subsidiaries 163, 164, 166, 168, 169, 172 long-term sustainability 226
oil and gas industry 2, 3, 4, 5, 9, 13 open source (OS) 48, 51, 54, 56 organic structure 275, 276, 278 organisation for economic co-operation and development (OECD) 137, 138, 141, 143 organizational capital 185, 186, 192, 193, 209, 234, 235 organizational characteristics 95, 97, 102, 108, 111, 112 organizational climate 95, 97, 104, 105, 113 organizational culture 9, 95, 102, 104, 107, 109, 112, 113, 115 organizational learning 226, 234, 235 organizational processes 279, 281 organizational structure 1, 4, 5, 14 organization, matrix 4, 13 organization, multinational 1, 6 organizations, evolution of 17, 22, 29
M macro-level socio-economic indicators 95, 111 management theorists 17, 18 managers 1, 2, 5, 6, 8, 9, 14, 15 managers, middle 9 market value 119, 123, 132 measuring intangibles to understand and improve innovation management (MERITUM) 137, 140, 141, 142, 143 mechanistic control 277, 278 The Middle East 95, 101, 102, 104, 107 multinational corporations (MNCs) 95, 96, 101, 102, 104, 109, 111, 113, 115 multinational enterprises (MNEs) 160, 161, 162, 163, 164, 165, 166, 168, 169, 170, 171
N national IC stocks 97, 98, 111, 113 national intellectual capital 255, 268 nation’s intangible assets 255 network externalities 149 networks, expert 149, 150 Nokia 60, 62, 63, 64, 65, 66, 67, 68, 72, 73 non-financial indicators 137 Nordic Project for the measuring Intellectual Capital (NORDIKA) 140, 141, 142
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P physical capital 119, 120, 121, 124, 234
R R&D 58, 59, 60, 63, 65, 66, 68, 69, 70, 71 region’s intangible assets 255 relational capital 185, 186, 191, 192, 279 relationship risk matrix 265 relationships 271, 274, 275, 279, 281, 282, 283
S social responsibility 249, 250, 251, 266, 270 stakeholder management 178, 182, 183, 184, 185, 188, 189, 190, 191, 192, 193, 198 strategic direction 6 strategic focus 226 strategic intention 8, 11 subject matter expert 5 subsidiaries 144, 145, 147, 148, 150, 151, 153, 154 sustainable development 249, 250, 251, 252, 253, 256, 258, 260, 261, 262, 263, 264, 265, 266, 267, 268, 269, 270 sustainable development evaluation tool 249, 251, 255, 256, 264, 265, 266
Index
synthesis 144, 152, 153, 154
T The National Technology Agency (Tekes) 65 toolkit 193, 194, 195, 197 trust 271, 275, 276, 277, 278, 279, 283, 284 21st century environment 22, 27
V value networks 44, 45, 46, 53, 54, 55 voluntary reporting 81, 82, 84
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