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Managing Knowledge and Intellectual Capital for profit

G Roland KayeProfessor of Management Accounting Norwich Business SchoolUniversity of East Anglia

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G Roland Kaye Biography

Professor of Management Accounting, Norwich Business School, University of East Anglia

Dean Open University Business School Director of Management of Knowledge and Innovation

Research Unit Professor of Information Management Senior Consultant Management Development Associates Academic Management Accounting and Computing Industrial Career as Management Accounting in Engineering,

Food processing, Chemicals. Consultancies to Financial Services, Utilities, Research

Establishments, Universities, Industry and Commerce

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Where is Knowledge?

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Agenda

Knowledge Management and Intellectual Capital

Process and assetsValuation and Audit of ICProtecting and exploiting

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Historical backgroundHistorical background

"Capital consists in a great part "Capital consists in a great part of knowledge and of knowledge and organization .... organization ....

Knowledge is our most powerful Knowledge is our most powerful engine of production"engine of production"

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Historical backgroundHistorical background

"Capital consists in a great part "Capital consists in a great part of knowledge and of knowledge and organization .... organization ....

Knowledge is our most powerful Knowledge is our most powerful engine of production"engine of production"

Alfred Marshall 1890Alfred Marshall 1890

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Intellectual Capital

Traditional Economic view – Land, Labour, Capital.

Revenue v CapitalMissing Knowledge as a resource

Alfred Marshall 1890 (109yrs ago)Alfred Marshall 1890 (109yrs ago) Edith Penrose 1959 (40 years ago)Edith Penrose 1959 (40 years ago) Rensis Likert (Human Asset Accounting) Rensis Likert (Human Asset Accounting)

1967 (32 yrs ago) 1967 (32 yrs ago) Peter Drucker 1969 (30 years ago)Peter Drucker 1969 (30 years ago)

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Know how

In tools, processes and even the architecture

In people and the way they do tasksIn organisational structures and

departmentsIn culture, language and style of doing

business.

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KNOWLEDGE CATEGORIES

Explanatory and theoretical - Knowing why

Learning by doing - Knowing how

Factual knowledge - prior experience - Knowing that

Factual knowledge - acquired knowledge - Knowing what

Social knowledge of networks - Knowing who

Cultural knowledge facilitating - Knowledge ofcommunication meaning

(Ryle 1949)

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Knowledge Management Drivers

Wealth from knowledge + intangible assets

Human Resources:people as locus of

knowledge

Organizational learning

Innovation:advantage through

knowledge creation

IT: limits and potentials

Knowledge interdependence

KM

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Intellectual Capital –definition

‘the possession of knowledge, applied experience, organisational technology, customer relationships, professional skill that provide competitive edge in the market’ – Edvinson L & Malone M 1997

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Intellectual Capital Human Capital - the ability of individuals to apply

solutions to customers' needs; competencies; and mind-sets.

Customer Capital - the strength of the customer relationship; superior customer-perceived value, increasing customisation of solutions.

Structural Capital - the capabilities of the organization; made up of codified knowledge from all sources – knowledge bases, business processes -- the shared culture, values and norms.

Social Capital – networks and relationships (but can be included within the above categories)

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Resources, Capabilities & Competitive Advantage Source: Grant, 1995

COMPETITIVEADVANTAGE STRATEGY

KEYSUCCESSFACTORS

ORGANISATIONAL CAPABILITIES

RESOURCES

Tangible Intangible Human

PhysicalFinancial

TechnologyReputation

CultureSkills &

knowledgeCommunication

& interaction

Motivation

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Resource Based View of Firm

Core competencies:ReputationArchitectureInnovative capability

Core competencies do not diminish with use!

Knowledge based advantages

Prahalad & Hamel 1990, Kay 1994, Nonaka & Takeuchi 1995

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Agenda

Human Capital - the ability of individuals to apply solutions to customers' needs; competencies; and mind-sets

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Customer and Stakeholder

Managing relationships with all stakeholder: investors, customers, unions, local community, politicians etc

Responsibility focussed and not dispersed

Proactive managementValue projection and protection

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Human Capital

Labour Cost v investment in talentPersonal knowledge and expertiseGroup and team capabilitiesLearning and sharingTacit and Explicit knowledge

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The SECI Knowledge Conversion Model

Source: Nonaka et al, various;

Tacit knowledgeExplicit

knowledge

Tacitknowledge

Explicitknowledge

Socializationempathizing

Externalizationarticulating

Combinationcombining

Internalizationembodying

From

To

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Cook and Brown - Adding ‘Knowing’ to Knowledge

Source: Cook and Brown, 1999;

Individual knowledge Group knowledge

Explicitknowledge

Tacitknowledge

Concepts Stories

GenresSkills

Knowing as Action

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Organisations and Knowledge Types

Source: Blackler, 1995;

Focus on familiar problems Focus on novel problems

Emphasis on collective

endeavour

Emphasis on contributions

of key individuals

Knowledge-Routinised

Based on embedded knowledge, e.g. a factory

Communication-Intensive

Based on encultured knowledge,

e.g. a media agency

Symbolic-Analyst Based on embrained

skills, e.g. a software

consultancy

Expert-Dependent Based on embodied

competencies, e.g. a hospital

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Communities of Practice

“….. act as resources to each other,

exchanging information, making sense of

situations, sharing new tricks and ideas, as

well as keeping each other company and

spicing up each other’s working days.”Source: Wenger, 1998;

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Agenda

Customer Capital - the strength of the customer relationship; superior customer-perceived value, increasing customisation of solutions.

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Brand Value

A brand is a thing people will pay more for.

It has a higher perceived value. The brand is the ultimate connection

with customer, staff, and all stakeholders

It adds asset value It enables choice It guides decisions and behaviours It creates something no one can take

away from you

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Goodwill in Acquisitions

Acquiring Company Acquired Company Goodwill as % of

Purchase Price

Grand Metropolitan Pilsbury 88

Walt Disney ABC 84

Nestle Rowntree 83*

Con Agra Beatrice 70

Cadbury Schweppes Dr Pepper 67

United Biscuits Verkade 66

*Nestle paid £2.5 bn for Rowntree - 6 x net assets

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Life Time Value

Gaining CIMA membership might cost £10000 in fees and opportunity cost.

Lifetime value if this creates a premium in employment of £10,000 pa might be measured as discounted value of 20years = £124,620 at 5%!

An increased discount might incorporate declining value added without CPD!

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Reputation management

Can be destroyed at a strokeTakes years to buildDo not rely on PR and agenciesIt is what your organisation stand for‘live the dream’

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Agenda

Systems and ArchitectureStructural Capital - the capabilities of the

organization; made up of codified knowledge from all sources – knowledge bases, business processes -- the shared culture, values and norms.

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Structural Capital

Information systems within and across the firm

‘productive’, logistics, marketing capabilities

Innovative capacity and its exploitationCopyrights and royaltiesCulture – ‘way things are done’Organisational learning

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ICT- based innovationICT- based innovation

individuals' effectiveness - multimediaindividuals' effectiveness - multimedia

distributed team working - groupwaredistributed team working - groupware

integrated organizationintegrated organization - intranets- intranets

extended organization extended organization - networks- networks

global markets global markets - e.commerce- e.commerce

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The Iceberg phenomena

2/3rd of the costs and benefits are hiddenTangible costs and benefits accounted

for – Intangible hiddenHardware and Software accounted for

but the heritage of information in data bases is not, nor staff skill.

Tendency to treat investment in systems/structures as revenue and w/o.

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Agenda

Problem of accounting valuationSome examples of ‘the gap’Valuation methodsAudit process

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Hidden Value Dilemma

Company MarketValue

Revenue Profits Net Assets HiddenValue

GE 169 79 7.3 31 138

Coco-cola 148 19 3.5 6 142

Exxon 125 119 7.5 43 82

Microsoft 119 9 2.2 7 112

Intel 113 21 5.2 17 96

$bn- 1996

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Flaw in thinking

Economists suggest share price is expected value of future cash flows (EVA™ Stewart 1997)

Stock market – price at which trade is done

Book value – historic evidence based value (transaction)

Book value – based on accounting conventions & conservatism

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Intellectual Capital:

Tobin’s Q = Market Value/Book Value

Enterprise = Tangible Assets + Intellectual Capital (Brooking 1969)

Intellectual Capital = Human Capital + Structural Capital + Customer Capital (Skandia)

Tobin J (1969) , A general Equilbrium Approach to Monetary Theory, Journal of Money Credit and Banking,Vol1 no1 pp15-29

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Valuation or Measurement Methods

Human Asset Accounting – Likert 1967Balanced Score Card – Kaplan & Norton 1993

Skandia Navigator 1994Intangible Asset Monitor –Sveiby 1997IC Index – Goran & Roos 1997IC Audit – OU 1999Andriessen identified 30 methods

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Andriessen classification 2004

Is there a valuescale we can usethat reflects usefulness/desirability

Can we observe the variableat hand

Is money the unit used onthe valuescale

Can the valuebe translated into observablecriteria

no

yes

no

no no

yes

yes

yes

exit

Measure

Valueassess

Valuemeasure

Financialvalue

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Kaplan & Norton - Balanced scorecard

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Sveiby – CELEMI monitor

Our Customers

Our Structures Our People

Growth/ Renewal:

Revenue

Image

Growth/ Renewal:

New products

R&D

New customer enhancements

Intangibles

Growth/ Renewal:

Competence

CPD

Expertise

Efficiency:

Revenue per customer

Efficiency:

Direct /indirect staff

Efficiency:

Value added per employee

Stability:

Customer satisfaction

Repeat orders

5 largest customers

Stability:

Staff t/o

Seniority and promotions

Recruitment

Stability:

Employee satisfaction

Staff mix

Staff t/o

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Rambolls holistic model

Values &Management

StrategicProcesses

Humanresources

Structural Resources

Consultancy

Customer results

Employeeresults

Societalresults

Fin

anci

al

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Problem of services

Service industries have problem of intangibility

Variability from day to day - HeterogeneitySimultaneity of consumption and

productionPerish ability and synchronous in time and

place

subjective and proxy measurements

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Summary

Elements of Intellectual Capital Innovation and Intellectual CapitalHuman CapitalSystems and ArchitectureCustomer Capital

Valuation and Audit of ICProtecting and exploiting

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Summary

Proactive management will add valueKnowledge increase in value with usageKnowledge is in the heads of every

employee as they walk out the doorIP can only be partially protected by lawKnowledge takes surprising forms