denotes premium content | May 21 2013 Feature
posted 1 Mar 1999 in Volume 2 Issue 6
Teaching
the imperceptible: Intellectual Capital
The relatively new discipline of
Intellectual Capital is leaving academics perplexed when it comes to actually
teaching the subject according to Mikko Arevuo. Developing a research base for
something so difficult to ascertain is no easy task. In order for Management
Education to make a contribution to the needs of companies learning for the
future, they must do exactly that - look to the future instead of the past for
guidance on new teaching methods.
'In business there is often a clash
of priorities between managing the short term bottom line and the longer term
view of increasing investment towards improved ability resulting from learning.
There needs to be new rules and mindsets, tying learning, traditionally
associated with operational effectiveness, with increased market values of
companies beyond their historical physical asset base.'
John Hutchinson, Group
Training Manager, The Miller Group Ltd.
The
current debate and research into the emerging field of intellectual capital is
producing a vast amount of material written predominately by practitioners and
a new breed of 'knowledge gurus' busily threading the intellectual
capital conference circuit. However, intellectual capital has been described by Tom Stewart as
a 'brand new tennis ball - fuzzy, but with a lot of bounce', and as such has met scepticism
from the academic community, some of whom tend to view it as a management
fad. Thus, academics wishing to study this phenomenon face
tremendous challenges: 'Intellectual capital has no legacy, no world-renowned academic researchers,
and no publication trajectory to follow. The academic state of this field is in
its embryonic stage and is being pursued by those academics who have a
strong managerial focus and an appetite for a field devoid of shape and
direction' (Nick Bontis 1998). As a new discipline, common language and terminology is
yet to emerge; intellectual capital cuts across several disciplines from
strategic management and accounting to information technology and psychology, making
it extremely difficult to 'compartmentalise'. Finally, intellectual capital is
intangible and it cannot be measured using similar tools such as are common in
historic cost accounting. Therefore, the old adage of what you cannot measure,
you cannot manage tends to put some academics and businesses off the
subject.
Where does this all leave business educators in places of higher learning as well
as in-house training departments? I think the simple answer is, in a state
of confusion! Based on my discussions with a number of business line and
training managers, the emerging picture shows there is a need for learning materials
that integrate the 'knowledge era' initiatives, including intellectual capital,
knowledge management and organisational learning. In addition, feed-back I have
received from businesses indicates that consultants who specialise in one
specific area of knowledge management are often not able to articulate the
knowledge revolution and how it impacts on the business and society as a
whole.
It is
quite clear that there is a need for new rules and mindsets to be integrated
into management education. If understanding of the intellectual capital concept
is so important to wealth creation why is it not central to the management
education agenda?
The first part of the answer lies in the fact that intellectual capital
is a new discipline. Academics are yet to conceptualise it and develop a
research base. However, the full answer is deeper than that.
The second part of the
answer is that the birth, growth and development of management education
parallels that of manufacturing. Further, some argue that business schools have
tended to react to business changes rather than lead them. In the 1920s, during
their formative years this meant shifting the emphasis of management education
away from tasks and towards implementation. The educational focus moved onto how
various organisational functions such as finance, marketing and production
relate to each other. As a result, over the years management has been taught
largely as a series of processes to be performed.
Subsequent changes in business
education have resulted in lack of focus on long term economic growth.
Management programmes reflect a view that management as a concept can be taught
in much the same way as tasks are taught, and that successful performance of
such tasks are motivated by short-term, financial initiatives and measured by
short-term financial results.
In the US and UK the emphasis of
business education on a set of process skills and financial results, has been
heightened by pressure from investment communities to focus on the latest
reported quarterly results of operations, return on capital analysis and
financial ratios, e.g. historical financial trend analysis. They demand that
business effectiveness be evaluated by such criteria. So, the genesis and rise
of modern management education and practice is orientated towards financial
results and reflects a basic manufacturing model which emphasises the
combination of capital, raw material and labour to create wealth and competitive
advantage. It pays relatively little attention to the management of intangible
and intellectual assets. Thus, modern management practice is a 20th century
phenomenon and the legacy of its research and education is deeply embedded in
set patterns for the allocation of physical assets which, unlike intellectual
assets, are viewed as scarce and inflexible with a decreasing utility over
time.
These set
processes have become more constrained by the compartmentalisation of business
into functional and specific areas of expertise, such as accounting, finance,
operations management, engineering etc. The power of professions and the
development of professional associations means that business education today
serves functional needs. This also tends to draw attention away from the longer
term effects on wealth creation and economic growth.
As a consequence, management research
and practice tend to be concerned with rent seeking, (profitable utilisation of
scarce physical assets), rather than innovation. This is achieved by way of two
broad management strategies. One is authoritarian and the other consensual. The
former, which includes business strategy, observes and decides what is being
produced, how and for whom, and re-directs physical inputs 'bricks and mortar'
and other financial capital to achieve set objectives. The latter, which include
human resource management and organisational behaviour, suggests that
organisational control is not the prerogative of management, but rather an
iterative process between interested stakeholders including managers, employees,
shareholders, customers and governments, each pursuing their individual
objectives. In this context, organisational direction and policy are the result
of a negotiated outcome.
In practice, businesses include elements of both authoritarian and
consensual management. It may be the case that the relative importance of
consensual processes are increasing, and this shift may reflect reactions by
business organisations to forces of change, as well as an apparent societal
trend to greater democracy, in which individuals are generally thought to have
more freedom and authorities are generally thought to be less
authoritative.
Notwithstanding this shift in emphasis it is not altogether clear that
either group of concepts will have much relevance in contributing to long-term
economic growth in a knowledge-intensive global business environment.
For companies to succeed
in the next century they will need to find ways of breaking away from rent
seeking behaviour which manages the present by looking to the past. The present
will need to be managed by looking to the future rather than the past. Doing
things inside old contexts will not be sufficient, as the derailment of many
leading companies proves. Successfully managing the present from the future led
to CNN surpassing the BBC and Canon gaining over Xerox.
In the late 1970s knowledge intensive
companies replaced manufacturing companies as the principal source of wealth and
employment in the US and the UK, as well in several other advanced industrial
economies. Over the past 10 years throughout the industrialised world there have
been significant increases in knowledge-intensive industries and the employees
who staff them. For example, since the early 1980s the US has experienced a 37%
growth in managerial and professional occupations while traditional industries
have shrunk by 10%. The US is not alone in this trend. By the year 2000 it is
estimated that the UK will have more than 10 million knowledge workers compared
with only 7 million manual workers.
It is also interesting to note
that between 1984 and 1991 in the UK, knowledge-intensive industries such as
legal and business services, accountancy and computer services grew by more than
40% compared to the total industries average growth of 3.5%. 'Remarkably, computer
services grew at a 97.5% rate, and was the only industry to continue to grow at
20% through the economic downturn between 1989 and 90' (Albert, Bradley,
1997).
The
wealth-creating industries of the future will include micro-electronics,
biotechnology, robotics, telecommunications and software. Uniting this group of
emerging industries is a common source of wealth creation and competitive
advantage. This growth of knowledge-intense industries and its effects on world
economies is associated with changing patterns of business organisations and
labour markets. Who works, what they work with, and where they work are all
factors which have contributed to the decline in the effectiveness of
traditional modes of wealth creation.
While these changes have
been relatively abrupt, management education and practice has changed much
more slowly, and has continued to adhere to a rent-seeking management
practice. Perhaps a more appropriate term for this is 'management orthodoxy', which has
been dominated by the manufacturing model and a relatively limited range of
processes and customs.
The difference in the relative speeds of these two changes has resulted
in an institutional inertia which tends to support the management orthodoxy. If
this continues in the same vein, management education will not make a
significant contribution to wealth creation and competitive advantage in the
21st century.
As
the wheels of academia turn slowly, businesses will be forced to look elsewhere
for learning opportunities. Additionally, academic content is bound to be
theoretical as new models are being developed and tested, prior to development
of best practice case studies and stories as a basis for learning.
Organisations who wish
to start a process of exploring the wealth creating qualities of intellectual
assets should, in the first instance recognise that this involves cultural
change.
Six
fundamental questions need to be asked during the introductory programme:
i. What is intellectual
capital and how can we, in our organisation, describe its
characteristics?
ii. How do we measure intellectual capital?
iii. What role is played by
intellectual capital in the generation of wealth?
iv. What is the difference between
intellectual and human capital?
v. How does intellectual capital
influence economic growth and wealth creation?
vi. What are the implications for
managing intellectual capital at both the government, societal, and organisation
level?
Such a
programme should also focus on two distinct levels of an organisation:
At an executive level
the programme should challenge traditional views of wealth creation, and focus
attention instead upon the value of intangible assets, and their potential for
increasing earnings and growth and subsequently greater profitability. As such,
the programme should focus on major strategic questions such as true competitive
potential, market position, relationship with customers and employees and
ability to change and renew the hidden value that resides within these
intangible assets.
By raising these issues in the context of a discussion about
intellectual capital and its impact on the future of business, the programme
will guide executives towards a strategic re-appraisal.
At an operational level, the programme
should be used by employees to validate and understand their input in the
context of wealth creation through intellectual assets. It should link their own
endeavours to wealth creation and provide a framework of linking individual
knowledge to the processes owned by the organisation to create intellectual
capital. The programme would provide a more coherent relationship between the
individual and the organisation, and would also lay the foundations for a
rational approach to change management.
Once the organisation has developed an
understanding and commitment to the wealth creating properties of intellectual
capital, it is feasible for the business to commence specific knowledge
management initiatives/pilots.
Intellectual capital is still an
emerging academic discipline, and barriers arising from the traditional,
industrial economy heritage will take a while to break down. For organisations
wishing to explore the richness of intellectual capital the path will not be
easy but it will be exciting. Breaking down barriers is the challenge for
management educators and trainers.
References:
Albert, S., Bradley, K.
(1997) Managing Knowledge: Experts, Agencies and Organisations. Cambridge
University Press, Cambridge
Beamish, P. W., Woodcock, C. P. (1996)
Strategic Management: Text, Readings and Cases. 4th edition. Irwin,
Toronto
Besanko,
D., Dranove, D., Shanley, M. (1996) The Economics of Strategy. John Wiley &
Sons, New York
Bontis, N. (1998) Managing Organisational Knowledge By Diagnosing
Intellectual Capital: Framing and Advancing the State of the Field. Michael G.
DeGroote School of Business, Ontario
Knowledge Exchange, The, Bradley, K.
(1998) Intellectual Capital: The New Wealth of Nations - Multimedia Knowledge
Management Series. Milton Keynes, Bedfordshire
Edvinsson, L., Malone, M. S. (1997)
Intellectual Capital: The proven way to establish your company's real value by
measuring its hidden brainpower. Judy Piatkus (Publishers) Limited,
London
Kaplan, R.
S., Norton, D. P. (1996) The Balanced Scorecard: Translating strategy into
action. HBS Press, Boston, MA
Roos, J., Roos, G. (1997) A 2nd
Generation of Intellectual Capital Practices. Intellectual Capital Services Ltd,
London
Roos, J.,
Roos, G., Dragonetti, N. C., Edvinsson, L. (1997) Intellectual Capital:
Navigating the new business landscape. MacMillan Business, London
Sveiby, K. E. (1997) The
New Organisational Wealth: Managing & measuring knowledge-based assets.
Berrett-Koehler Publishers, Inc. San Francisco, CA
M. Arevuo(The Knowledge Exchange Ltd.
1999)
Mikko Arevuo is consultant for The Knowledge
Exchange Ltd. and visiting lecturer in international strategy and marketing
management at South Bank Business School, London
