Strategic Intellectual Capital Management in Multinational Organizations: Sustainability and Successful Implications (Premier Reference Source)

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 All work contributed to this book is new, previously-unpublished material.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

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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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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

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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

25

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-

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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

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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 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.

Multinational Intellect

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

Multinational Intellect

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’?

REFEREnCEs Abrahamsson, P. (2001). Rethinking the concept of commitment in software process improvement. Scandinavian Journal of Information Systems, 13, 69–98. Abrahamsson, P. (2002). The Role of Commitment in Software Process Improvement. University of Oulu, Finland Abrahamsson, P., & Iivari, N. (2002). Commitment in Software Improvement – In Search of the Process. Proceedings of the 38th Hawaii International Conference on Systems Science. Adams, G. (2005). Technology: The internet is reviving the fractured conversation. [White Paper] Vision Inc. Retrieved from www.vision.com Allee, V. (2004). 360 Degree Transparency and the Sustainable Economy. World Business Academy, 18 (2). Brown, R. B. (1996). Organisational commitment: Clarifying the concept and simplifying the existing construct typology. Journal of Vocational Behavior, 49, 230–251. doi:10.1006/jvbe.1996.0042 Curtis, B. (1988). A field study of the software design process for large systems. ACM, 31(11), 1268–1287. doi:10.1145/50087.50089 Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice Hall. Flickstein, M. (2001). Journey to the Center. Boston: Wisdom Publications. Flores, F., & Spinosa, C. (1998). Information technology and the institution of identity – Reflections since Understanding computers and cognition. Information Technology & People, 11, 351–372. doi:10.1108/09593849810246156 Gadman, S. (1996). Power Partnering: A Strategy for Business Excellence in the 21st Century. Boston: Butterworth Heinemann.

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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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Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations, formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340–363. doi:10.1086/226550 Meyers, J. D. (1997). Qualitative Research in Information-Systems Quarterly, 21(2), 241–242. Mongiovi, G. (2000). Review of Social Economy, 58 (1), March 1st, 2000, 108-124(17) Mowday, R. T., Porter, L. W., & Steers, R. (1982). Organizational linkages: The psychology of commitment, absenteeism, and turnover. San Diego, CA: Academic Press. Newman, M., & Sabherwal, R. (1996). Determinants of commitment to information systems development: a longitudinal investigation. MIS Quarterly, 20, 23–54. doi:10.2307/249541 Numagami, T. (1998). The infeasibility of invariant laws in management studies: a reflective dialogue in defense of case studies. Organization Science, 9(2), 2–15. doi:10.1287/orsc.9.1.1 O’Reilly, C., & Chatman, J. (1986). Organisational commitment and psychological attachment: The effects of compliance, identification and internalization on prosocial behaviour. The Journal of Applied Psychology, 71, 492–499. doi:10.1037/0021-9010.71.3.492 Oliver, N. (1990). Rewards, investments, alternatives and organizational commitment: Empirical evidence and theoretical development. The British Psychological Society, 63, 19–31. Orlikowski, W. J. (1992). Learning from Notes: Organizational Issues in Groupware Implementation. Proceedings of CSCW’92 Conference (pp. 362-369). Orlikowski, W. J. (1993). CASE tools as organizational change: Investigating incremental and radical changes in systems development. MIS Quarterly, 17, 309–340. doi:10.2307/249774

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Sabherwal, R., & Elam, J. (1995). Overcoming the problems in information systems development by building and sustaining commitment. Accounting, Management, and Information Technologies, 5, 283–309. doi:10.1016/0959-8022(96)87272-9 Savage, C. (1996). Fifth Generation Management, (Revised Ed.). Boston: Butterworth – Heinemann.

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.

Dynamic Capabilities in R&D-Networks

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

Dynamic Capabilities in R&D-Networks

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)21:10/113.0.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.

Howells, J. (2008). New directions in R&D: current and prospective challenges. R & D Management, 38(3), 241–252. doi:10.1111/j.14679310.2008.00519.x Huy, Quy Nguyen & Mintzberg, H. (2003). The Rhytm of Change. Corporate Strategy. MIT Sloan Management review, 44(4, Summer), 79–84. Juntunen, A. (2005). The emergence of a new business through collaborative networks: a longitudinal study in the ICT sector. Acta Universitatis oeconomicae Helsingiensis A-series, (256). Printed in HSEPrint. Kim, D. H. (1993). The Link Between Individual and Organizational Learning. Sloan Management Review, 35 (1, Fall), 37-50. Kogut, B., & Zander, U. (1997). Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology. in Nicolai J. Foss (Ed.) Resources, Fims and Strategies – A Reader in the Resource-Based Perspective. Oxford: Oxford University Press. Leonard-Barton, D. (1995). Wellsprings of knowledge: Building and sustaining the sources of innovation. Boston: Harvard Business School Press. Lundgren, A. (1991). Technological Innovation and Network Evolution. The Emergence of Industrial Networks. Stockholm: EFI, Stockholm School of Economics. March, J. G. (1991). Exploration and exploitation in organizational learning. Organization Science, 2(1), 71–87. doi:10.1287/orsc.2.1.71 Miles, M. B., & Huberman, A. M. (1994). Qualitative Data Analysis: An Expanded Sourcebook (2nd Ed.). Thousand Oaks, CA: Sage Publications, Inc.

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Mintzberg, H., Ahlstrand, B., & Lampe, J. (1998). Strategy Safari. The complete guide through the wilds of strategic management. London: Prentice Hall Financial Times. Mohr, J., & Spekman, R. (1994). Characteristics of partnership success: Partnership attributes, communication behavior, and conflict-resolution techniques. Strategic Management Journal, 15(2), 135–152. doi:10.1002/smj.4250150205 Nonaka, I., & Takeuchi, H. (1995). The Knowledge-Creating Company. How Japanese Companies Create the Dynamics of Innovation. New York: Oxford University Press. Nonaka, I., & Teece, D. (Eds.). (2001). Managing Industrial Knowledge: Creation, Transfer and Utilization. Thousand Oaks, CA: Sage. Paija, L. (Ed.). (2001). Finnish ICT Cluster in the Digital Economy. Helsinki: ETLA The Research Institute of the Finnish Economy.

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)18:73.0.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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Pettigrew, A. M. (1997). What is a processual analysis? Scandinavian Journal of Management, 13, 337–348. doi:10.1016/S0956-5221(97)000201

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Prahalad, C. K. & Hamel, G. (1990). Core Competence of the Corporation. Harvard Business Review, (May–June).

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Radjou, N. (2002). The Collaborative Product Life Cycle. Forrester Research, May. Rumelt, R. F. (1974). Strategy, Structure, and Economic Performance in Large Industrial Corporations. Boston: Harvard University Press. Sanchez, R., & Heene, A. (Eds.). (1997). Strategic learning and knowledge management. Chichester, UK: Wiley. Senge, P. (1990). The Fifth Discipline. New York: Doubleday/Currency.

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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.

Intellectual Capital Measurement and Reporting

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 (