Teaching the imperceptible: Intellectual Capital

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