ic management handbook

... the key challenge of the economy in 21st century is to define, manage, measure, leverage and evaluate knowledge, in particular its relevant form in economy, intellectual capital ...

Intellectual CapitalHandbook of IC Management in Companies

Intellectual Capital Center Croatia

People

Organization

Customers /Relationships

Value

© All international rights are reserved to the author. The download of this booklet is free of charge - for personal use only! The contents may not be copied and distributed without notification of the author. Furthermore, the booklet, or parts of it, may not be translated into other languages nor used either for non profit or for profit purposes without agreement and written permission of the author.

... the key challenge of the economy in 21st century is to define, manage, measure, leverage and evaluate knowledge, in par-ticular its relevant form in economy, intellectual capital ...

Intellectual CapitalHandbook of IC Management in Companies

Intellectual Capital Center Croatia

Mesnička 1410 000 ZagrebCroatiawww.vaic-on.netwww.cik-hr.com

Zagreb, 2007.

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Handbook of IC Management in Companies

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1. Introduction ........................................................ 9

2. Why Read This Handbook? .............................. 11

3. Why Manage Intellectual Capital (IC)? ........... 13

4. Economic Context ............................................ 15

5. Trends ................................................................ 17

6. Value Creation – the Ultimate Objective of

Business ........................................................... 21

7. Intellectual Capital ........................................... 25

8. Classification of IC ........................................... 27

9. Managing lC ...................................................... 35

10. Measuring IC ..................................................... 39

11. Stages of IC Management ................................ 43

12. Knowledge – The New Production Factor ....... 47

13. Case Studies ..................................................... 53

14. Sources – Literature ......................................... 61

Contents

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Renowned experts consider in-tellectual capital to be the key fac-tor in becoming a relevant global player in the 21st century. I find this particularly relevant for de-veloping countries and those in transition, like Croatia, my home country. However, I have noticed an interesting phenomenon. On the one hand, at the international level, there is a strong notion of in-tangibles as being the key drivers of company, regional and national development. On the other hand, there is the local business practice, where hard currency and other tangible assets are still in the very centre of attention. Intangibles are something to be dealt with only marginally. What’s more, many people holding strategic positions do not have a real idea of what knowledge economy is about and fail to see the vital role of knowl-edge and intellectual capital in this context.

I am aware of the fact, that the transition from traditional into knowledge economy is a proc-ess requiring due time. However,

one of the things that can be done to speed it up is extensive educa-tion at all levels of business activ-ity. This motivated me to write a booklet providing readers with basic information on the concept of Intellectual capital and knowl-edge management. I wanted it to be interesting, simple, pragmatic, and appealing to a broad public; something that would be a com-fortable first contact with this field and hopefully motivate to deal with more demanding IC literature.

There were so many I wanted to share my knowledge with: manag-ers, stuck with outdated manage-ment and measurement tools; em-ployees, facing numerous changes inside and outside their companies; students, in search of new concepts and ideas; and politicians, strug-gling to shape a supporting business environment for wealth creation.

The „Handbook on Managing IC in Companies“ was published in 2001 and over 3000 hard cop-ies have been distributed free of charge in the course of the first

Foreword by the Author:

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Intellectual Capital Project in Croatia organised by the Croatian Chamber of Economy and the IC Center. Regular downloads of the electronic version show that it is still a popular reading mate-rial. Because of the positive feed-back from Croatia, but also from other countries, we have decided to translate key parts of the book-let into English with the following idea in mind:

The more people understand what the IC issue is about, and embrace it in their everyday activities, the more successful will be the transformation from industrial into knowledge econ-omy, anywhere in the world. Hope-

fully, this little booklet can contribute in achieving this great goal.

Finally, I would like to express my greatest admiration for all the pio-neers, thought leaders and social entrepreneurs, who have been and will be paving the way for knowl-edge economy in their countries, companies and institutions. From my own experience I know how hard it can be to introduce new concepts while ignorance seems predominant. Special thanks to Ante Pulić, my partner and great-est supporter in writing this IC booklet.

Karmen Jelčić

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The future is in our heads and in our hands. “As the industrial so-ciety gives way to the emergence of a new, digitalized knowledge-and service oriented society, it is im-perative that we think ahead and seek new perspectives, concepts and management tools”. (Skandia IC Prototype Report 1998).

Innovative companies are run by innovative managers, who en-courage their employees and re-ward them for their ideas. There are two components which are essential: focus and freedom. The focus sets the guidelines for or-ganizational activities and, at the same time, defines the company’s market position in the future, whereas freedom to act enables and encourages creativity, innova-tion, independent decision making and risk taking.

In order to be successfull each company should re-examine and constantly reconsider the follow-ing:

Introduction

In what way are we running busi-ness presently?

Which are our competitive advantages?

What should our business be like?

What do our customers need? What kind of clients would we

like to have and could have? Would our clients miss us if we

disappeared? Which market segments should

we pay special attention to? Which abilities represent the

core of our business activities? What are our views on tech-

nology and innovation? What are our weaknesses? In what ways does the manage-

ment look for new possibilities and reduces its weaknesses?

How do we manage strategic changes and innovation?

What are the moves and ac-tivities of our competitors?

What changes can we expect in terms of demographic, political and technological trends?

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These are just some of the prob-lems that intellectual capital is deal-ing with. The goal of this handbook is to provide basic knowledge of the

IC issue in order to help companies in coping with the challenges, which are imposed by the transition into knowledge economy (KE).

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In the course of reading this handbook, you will get an insight into the following: Which trends have laid the foun-

dations for the development of the IC concept

Which factors enhance value creation

How intellectual capital can be classified and visualized

Which are the key concepts of “new economy”

Why and how to manage in-tangible assets

How to measure the perform-ance of intellectual capital

What knowledge management is about

How certain companies manage intellectual capital

“When you can measure what you are speaking about and express it in numbers, you know something about it.”

Lord Kelvin

“The most important contribution of management in the 20th century

Why Read this Handbook?

was to increase manual-worker productivity fifty-fold. The most important contribution of man-agement in the 21st century will be to increase knowledge-worker productivity - hopefully by the same percentage.”

Peter Drucker

“The challenge for UK companies is to continue to grow their value added and the efficiency with which it is created, particularly for those companies that are currently below average in their sectors.”

Patricia Hewitt

Globalization has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital - the world’s best talents and greatest ideas.

Jack Welch

Recognizing our responsibilities as industrialists, we will devote ourselves to the progress and de-velopment of society and the well being of people through our busi-

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ness activities. Progress and de-velopment can be realized only through the combined efforts and cooperation of each employee of our company.

Matsushita

“How you gather, manage and use iformation will determine whether you win or lose.”

Bill Gates

“In the new economy, conver-sations are the most important form of work. Conversations are the way knowledge workers dis-cover what they know, share it with their colleagues, and in the proc-ess create new knowledge for the organization.”

Webber

We know that in today’s business world, it’s important to have the right knowledge at the right time to stay competitive.

Ernst & Young

Knowledge work does not pro-duce just products or services but adds value.

Ante Pulić

“A whole generation of man-agers refuses to accept reality and oversees a paradoxical decrease of productivity, because people, who determine motifs of economic power, have lost touch with eco-nomic reality.”

Glen Ricard

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“whether” but “how” to manage intellectual capital.

Managing intangible assets has always been handled in some way. The novelty is the disciplined and systematic approach to intellectual capital, and its treatment as a key resource of modern business. This refers to the effective and skilful governance of intangibles – that

Why Manage Intellectual Capital?

Because every company owns cer-tain knowledge, capabilities, values and specific traits that can be turned into value on the market.

If managing these resources can contribute to competitive advan-tage, an increase in productivity and in market value, then it is not a question of choice, but a neces-sity. Therefore the question is not

more efficient business

processes increase of market value

motivating employees

value creating HC

satisfied customers

better image increased value creation ability

better communication

optimal utilisation of

potential

Benefit of Managing IC

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is, non material factors within the company which can leverage in-tellectual assets with the ultimate objective of achieving global com-petitiveness and wealth creation.

Intellectual capital management means focusing all business ac-tivities towards the future - strength-ening the company’s abilities, while eliminating the weaknesses, and in such way continuously improving business operation.

Leif Edvinsson has been using a wonderful image for the company, that of a fruit tree. In our country managers consider the visible parts (e.g. trunk, branches and yield) the most important. Therefore, this as-

pect is carefully looked after and cul-tivated. The reports (financial state-ments, balance sheets etc.) focus mainly on this part and if the fruit tree is sold, the buyer will pay for what he sees. However, we should try to gain better insight into the capabilities of the fruit-tree to produce healthy and rich yield in the long run, look for additional information, not visible at first glance. These are hidden in the roots and vital veins placed inside the trunk and the branches. The taste of the fruit and the colour of its leaves only show how healthy the fruit tree is at the moment. But, we must look at what is happening with the roots, with the flow of vital juices, sap and substances hidden inside. This is what determines the value of the tree tomorrow. Rotten roots, which are degenerating and going to ruin under the ground, can easily destroy

the fruit tree which presently looks so healthy and promising.

That is the essence of in-tellectual capital management.

Taking care of and fostering the invisible factors, which are vital for tomorrow’s business success (the roots, vital veins flow…etc.).

Not many companies do that. How-ever, this should be day-to-day activ-ity and effort, equal to the atten-tion paid to physical and financial

capital. Numerous employees are engaged in analysing this resource; the whole financial department – finance manag-

er, head of accountancy depart-ment, book-keepers, warehouse

manager etc. The question is – who takes care of intellectual capital, the roots of the company?

Leif Edvinsson, fruit tree

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an increase in share of information and knowledge both in production technologies as well as in products and services. This has had a tremen-dous impact on communication and organisation. (Internet, Intra-net etc.).

Such an increased share of knowledge in products/services represents the key feature of the transition from industrial to the knowledge economy, since knowl-edge has become the key factor of business success (know-what, know-how, know-where and know-who).

Therefore we could say that the key challenge of the economy in the 21 st century is to define, man-age, measure, promote and evalu-ate knowledge, and especially its relevant form in economy, intel-lectual capital.

Economic Context

During the last fifteen years of the twentieth century there have been a whole range of technologic-al, economic, political and social changes. These were so far-reach-ing and profound that they caused structural changes in the economic systems, the setup of companies, the relations between companies, the individual and the working en-vironment and the modes of com-munication. Radical innovation in telecommunications, development of information technology as well as biotechnology, along with the use of new industrial materials, production technologies and de-sign – all these changes enabled the supply of goods and services that were unimaginable until a few years ago.

In addition to this, the devel-opment of information and tele-communication technology caused

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sector accounts for 65 – 70 % of total business activities.

In addition to reduction of share of material production, the pro-duction itself is increasingly based on knowledge, e.g. creativity of design.

Nowadays, these costs are al-most marginal in the total distri-bution, because the inputs, which are based on knowledge (e.g. skills, customer relations, image, brand, innovative marketing and sales) represent 60 % of the value of auto-mobile industry, and 95 % of the value of microchips.

This is the consequence of auto-mation, robotization, computer – controlled production and design. Modern technologies ensure pro-duction for the specific customer. Such a production once used to be a privilege of very few industries, for example shipbuilding industry and aircraft industry. Individual-ized production is nowadays com-mon in numerous products, espe-cially in service sector. A famous ex-

Trends

First Trend

The first trend we have noticed in the economies of the developed countries is that the economic growth is increasingly based on service sector, with decrease in material production. In other words, the trend is from tangible (material) to intangible (non-ma-terial) value creation. The essence of modern business activity is that the business strategy is directed towards value creation, instead of cost reduction.

In the United States the year 1986 was the first year that the investment channelled into in-tangible assets exceeded the value of material assets. Moreover, in the past 25 years in the US the share of the non-material sector in gross do-mestic product has increased from 50 to 85 %. The total production, measured in tonnes, in the United States has only slightly increased in comparison with the production 100 years ago. The situation is very similar in Europe, where service

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ample is the Levis company, which, among other things, produces cus-tom made jeans clothes.

Second Trend

For the transition from industrial era to knowledge era, it is important to increase the level of education and qualification of labour force, which is characterized by appear-ance of the “knowledge worker”. This is primarily true for profes-sional intellectual companies in technologically demanding sectors, and not so much for unqualified and poorly paid labour in retail or fast food outlets. The demands of labour are higher in terms of educa-tion and qualification of the labour force, which is not only important for intellectual activities, but also for production which is more and more dependent on intellectual input (e.g. detecting and correct-ing faults before product control will significantly decrease the cost of waste, multi-functional teams during the production prepara-tion stage can prevent unnecessary functional changes and modifica-tions in the course of production itself).

Third Trend

This trend is the most common in the companies where business is mainly based on knowledge and sophisticated technologies. In his book “The Future of Capital-ism”, Lester Thurow presented the development of 12 major compa-nies in the USA from the begin-ning of 20th century (agricultural or production sector). Only one of these 12 companies has survived,

namely General Motors, due to its exceptional abilities to adapt to the prevailing scientific and technological trends. Moreover, from top 500 companies ranked by “Fortune” magazine (the larg-est and most influential American economic magazine) in 1955, only 30 percent of these giants are still operating nowadays.

Three years ago the interac-tive multimedia industry had 10 % share in the gross national product GNP in the USA, with the total turnover at the end of the year 2005 estimated at 1.47 billion US dollars. The Department of Labour in the USA has come up with a rough es-timate that by the end of the year 2005 most new openings will be in the sectors based on highly edu-cated and technologically sophis-ticated intellectual activities. Most of these vacancies are expected to occur in small and medium – sized companies.

Fourth Trend

The fourth trend is the reduction in the share of unskilled industrial workers in the total working- age population. It has been estimated that by the end of the year 2002, the share of industrial sector will be approximately 15 % of total working-age population, whereas in Great Britain it will amount to 18 %. Since 1979 England has witnessed great increase in the number of employees in the health sector (2.5 million), finance sector (1 million) and business consult-ancy (650.000). Tony Blair has ex-pressed concern that the fashion

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design will have many more open-ings than automobile industry and ship-building industry together. In addition to this, there has been a marked trend of reduction in sala-ries of “blue-collar workers”, while at the same time the salaries of the “knowledge workers”, highly- skilled and semi-skilled employees have increased.

Twenty years ago the average university graduate in USA re-ceived a salary which was 32 – 49 % higher than the salaries of those employees with completed second-ary education. However, by 1993 this difference amounted to 71 % - 89 %. In the year 1975 the aver-age salary of the male employees with completed secondary edu-cation amounted to 28,000 US$, while nowadays they receive only 20,500 US$.

Fifth Trend

The fifth trend is characterized by the incredible development of information technology, especially personal computers and infor-mation networking: Internet, in-tranet and extranet. While in the year 1975 there were only 50,000 computers, nowadays the number of computers is estimated at 140 million.

Computer technology has had a significant role in the increase in productivity after the focus has shifted to communication, which has in turn revolutionized and globalized the financial markets, provided opportunity for estab-lishing new (less horizontal and virtual) ways of organizing and the means of communicating closely connected with IT systems. Increas-ing returns have justified for the large-scale investment in techni-cal infrastructure. However, many companies have faced problems due to uneasiness and reluctance of management to redistribute power, which is essential.

All these trends have had a ma-jor impact on the transformation from the industrial to post-indus-trial society, which is also called information society, and which is in fact turning into knowledge-based society. This transformation, among other things, has changed the role of the traditional factors of production: land, work and capi-tal.

Source: Matjaž Maček

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Intellectual capital management is not an end in itself, but it must always be in the function of value creation. Therefore it is inevitable to say something more about this issue.

Business logic nowadays is based on achieving growth and long term value creation. However, the prob-lem is that the traditional indicators of business success, such as an in-crease in revenue, cash flow, profit, market share, and technological leadership in fact do not provide information on, whether the com-panies really do create value for the shareholders and owners or not. Only when a company creates more than it has invested in re-sources can we speak of value crea-tion. It is therefore of vital inter-est to stakeholders (shareholders, strategic alliance partners, employ-ees…) that the business strategy should be directed toward that ob-jective – value creation – and that the measuring systems reflect the ability of management to achieve that objective.

Value Creation – the Ultimate Objective of Business

However, increasing pressure and responsibility towards share-holders and employees imply the focus on value creation as the new criterion for business suc-cess (research carried out on stock exchanges proves that there is a relationship between value crea-tion efficiency and the market value of the company).

The ultimate objective is to en-hance a company’s abilities in the long term, which can be achieved by investing in intellectual resources (especially in human capital, which is the key factor in value creation in modern business) and increased mobilization of the internal poten-tial of the company, first of all the intangibles.

The key premise for value cre-ation in the company is that all the contributions to value crea-tion but also value destruction can be measured without ambiguity, which frequently requires a new organisation scheme. In addition to this, the processes of planning and decision-making must be focussed

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on value creation. At the same time, responsibility and decision-making processes should be low-ered, since value is being created and destroyed both at the highest and the lowest levels. Executive management should, in addition to effective cost control, together with top management, identify the possibilities of increasing value cre-ation efficiency. Throughout this process all the available intellec-tual potentials within the company should be mobilized in order to achieve maximum value (both for the shareholders and the employ-

ees). Most of the companies which adopt new systems are under stress, since they are facing problems. It is a pity, since a timely orientation enables management to control the process of value creation, and in-stead of curing the consequences it can focus on continuous increase of value creation efficiency.

loyalty

price

Value Creation

Material and Non Material Forms of VC (source, Verna Allee)

feed back information for product development

product/service

feeling of belonging

personal contact

Company Customers

It is vital to consider intangible value creation as well, since it has an enormous impact on the over-all performance of a company. To put it simply, gone are the days when value was created in the way that the production produced certain goods, and the buyer was perfectly happy with anything he could buy. Nowadays value is cre-ated through complex relations between supply and demand, the supply being much higher than the demand.

Peter Drucker, a well-known and always innovative management de-

scribed traditional business activ-ity as follows: “Buy cheap, sell at a higher price, and the difference/ balance is your profit”. In this ap-proach the profits are lower be-cause of costs: the lower the costs, the higher the profits. This is why a special attention was paid to costs during the industrial era.

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Modern theory defines business activity as value added and wealth, which is far more complex than ever before. As we can see in the picture in order to create earn-ings, it is necessary to raise the re-lationship with the customers to a higher level. It is also important to realise that the tangible/material form of value creation (income) is dependent on intangible forms of value creation. A company which calls for and encourages actions that in the long run contribute to creation of intangible value, will also increase the value of intangi-ble assets. The key to success lies in creating cause-and-effect relation-ships between these two forms of value creation.

It could be said that one of the main challenges for management is creating conditions which will enable successful generation of intangible value (knowledge, ser-vices, experience, benefits, speed,

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quality, image) and its transforma-tion into tangible forms (income, value added, profit, shares, market value).

Systematic value creation ma-nagement is based on the premise that this concept is firmly embed-ded in the company as the ultimate business goal of. It is important that it is “lived” on all the levels of business in day-to-day activities, stimulated, rewarded, measured and communicated.

Such an orientation towards value creation is a long term stra-tegy which by no means includes in-creasing profits over the short term. On the contrary, the objective is to improve the ability of a company to create value over the long term, which can be realized by investing in resources, whereby intellectual capital is the key factor at present. In the course of this process it is necessary to analyse and constantly improve the value added chain.

rewarding VC directing goals towards VC

decision making in

accordance with VC

VC anchored in business

Value Creation (VC) the Main Goal of Business Activity

Market

measuring VC

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The former editor of the busi-ness magazine “Fortune” Thomas Stewart, and author of the famous column Leading Edge, described intellectual capital as “something that cannot be touched, although it slowly makes you rich”.

In general, the term “intellectual

Intellectual Capital

capital (IC)” is used to refer to in-tangible assets or intangible business factors of the company, which have a significant impact on its perform-ance and overall business success, although they are not explicitly listed in the balance sheet (if so, then un-der the term goodwill).

Human Capital

StructuralCapital

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Physical Assets

Money

Market Value

Financial Capital Intellectual Capital

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As can be seen, the value of the company does not only include physical and financial capital, but to a large extent intellectual capital as well. Let us take Microsoft as an example, the company which mana-

ged to create enormous profits in spite of the limited traditional re-sources (physical and financial cap-ital), due to the significant share of intellectual capital.

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Classification of IC

RelationshipsCompetences Values

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Human Capital – HC

It encompasses all the employees with all the individual and collect-ive knowledge they have accumu-lated, their capabilities, attitudes, capacities, behaviour, experience and emotions.

I would like to point out that the employees do not represent human capital per se for the employer, but only in the case, when they are able to transform their knowledge and capabilities into actions (in accord-ance with the business strategy), which contribute to tangible and intangible value creation for the company (value added, new clients, better image, more successful and efficient work organization, inno-vative and improved products, win -

win partnerships). Therefore, even the brightest people can be dead capital if they do not know how to contribute to their company’s value creation. All employees have cer-tain potential for value creation but not everybody will be successful in the same way.

Competences

First of all, this refers to the pro-fessional skills and expertise of the employees, meaning that they know exactly what, how and when to do things under given circumstances. Today, knowledge is outdated soon. Therefore, in order to be and stay human capital for the company, em-ployees have to be prepared for life long learning. The more demand-ing the position one holds in the

Human Capital

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company, the more it is necessary to update ones knowledge. In ad-dition to professional competence, social competence is important as well – it is related to the capabilities of employees to work with other people. (e. g. manners, behaviour, communication skills, team work, fitting into the corporate culture). Social competence is key with front line managers and anybody else working closely with customers. A company may have very qualified people, who are not able to work with other people - customers or colleagues - successfully. They must receive proper instructions and training in order to improve their social capability, otherwise they are not true HC. There are two more competences I would like to men-tion: commercial competence – the ability of employees to gear their actions at the key objective – value creation and emotional compe-tence – the ability to manage emo-tions (especially negative ones) in a way that enables motivated and successful work.

Relationships

I would like to distinguish be-tween the social and the economic category of cooperation. Employees can have very good social contacts with other colleagues, clients, ex-perts or partners - this is what I would refer to as social capital – which is not enough from an eco-nomic point of view. Professional relationships need to be focussed on value creation for the company. The more successful the employees are in establishing value creating

relationships with their colleagues, clients, partners or other profes-sionals, the better the overall per-formance of the company will be. Only in the interaction with others, a synergy effect can be achieved and collective knowledge is always much more extensive than the knowledge of the individual (2+2=5). This is why teamwork has become such an important issue. One of the forms of relationship capital of HC are Communities of Practice (a net-work of professionals who exchange knowledge and experience in order to broaden their horions, learn, solve problems easier and thus cre-ate new value for their company).

Values

It is often forgotten that Hu-man capital performance largely depends on the existing indi-vidual and collective values (value schemes). I am talking about the notion of employees about what is valued and appreciated in their company and what represents undesirable behaviour. These no-tions, which are often inarticulate, have a strong impact on the ways, models and modes the employees are doing their work. Therefore, values and value systems, are close-ly related to ways in which business is done and the management me-thods which are applied. They are also the base of a company’s corpo-rate culture. Examples of negative value schemes are employees, who regulary underperform, managers, who are closing deals with their individual benefit in mind and not the company’s one or those, ob-

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Innovation

Processes

Culture

Leadership

Potential

Relationships

Databases

structing positive changes because of fear of loosing their current posi-tion. In order to become HC for the company, employees ought to culti-vate values, which support business success such as loyalty, honesty, re-sponsibility, commitment, engage-ment, value orientation and ability to subordinate personal goals and ambitions to company’s needs and goals.

Not a single professional, not even those with top qualifications, can be considered human capital unless they contribute to value creation and thus justify the invest-ments of the company (salaries, bo-nuses, taxes, training, motivation programs). Whether someone is considered HC, has nothing to do with his/her IQ or the position this person holds in the company. All the employees of a company ought to be considered HC. A competent

maid or receptionist can contrib-ute more to business success (e.g. in the area of customer satisfaction or image) than a well educated, but incompetent, manager.

In “knowledge economy” human capital (HC) is a key factor of busi-ness success.

People are investing their knowl-edge and capabilities in the com-pany. Accordingly, it is inappropri-ate to treat this as an expenditure (which is the case with balance sheets). On the contrary, salaries, trainings, various benefits which the employer allocates for the em-ployees should be considered an investment.

This leads to an important trans-formation in the mind- set of both, the employer and the employees. It is in the nature of business to try to reduce expenditures, which is by no means the case with investments.

Structural Capital

Organization Customers

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If the employer considers invest-ing in his employees to be a real in-vestment, he will require, but also appreciate their intellectual con-tribution. This will in turn have a stimulating effect on all those who “can do and want to, but have not been given a chance yet”, as well as those who “have the opportunity, but do not want or do not know how to seize it”. It goes without saying that the investor expects a return on investment. This return might not be profitable and cost-effective in the short term, but generate sig-nificantly higher profits in the long term. Some companies had to come to terms with the painful fact that employees are not just business in-ventory like machines, computers and real estate the company owns, when it was too late. During the reengineering process (aiming at cost reduction and achieving com-petitive advantage) they had made numerous employees redundant and consequently lost precious capital (knowledge, experience, ca-pabilities, energy, enthusiasm, even the “organizational memory”).

Intellectual ability, complex combinatorial skills and manoeu-vring, problem solving, persistency and steadiness, initiative – these are all characteristics of human capital which differentiate it from some paper clip. I would like to point out here that it is possible and necessary to measure the return on investment from human capital and it benefits the employer and the employees.

Competent and committed peo-

ple are the key asset of any compa-ny. While they are employed, their intellectual input and the results of their work “belong” to the compa-ny. However, since they could leave the company at any moment, their knowledge and abilities should in a way be transformed into collective knowledge that remains in per-manent ownership of the company (for example in the form of written records, customer experience data-base, shared experiences, reports, drafts, programs, advice, mentor-ship etc.)

With this in mind it is useful to structure the organisation in an appropriate way: decentralization and increased autonomy at lower levels, acceptance and encourage-ment of informal relationships, op-portunity for the effective transfer of knowledge and experience, as well support of risk taking and act-ing proactively, establishing of a flexible and networked structure.

By mentioning this, we have al-ready come to the second compo-nent of IC, the structural capital.

Structural Capital – SC

Structural capital is the support-ing infrastructure of human capital, being actually the result of human capital activity of the past. There are two kinds of structural capital: organizational and customer capi-tal. As I am told, SC encompasses all the intangible factors, which re-main in the company once the em-ployees have left it and gone home, and which significantly contribute to business success and perform-ance:

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Organizational Structural Capital

Here we have the organizational structure of the company, the ways of running the business, manage-ment sub-systems, drafts, means of control, information and communi-cation systems, value management systems (finances, investments, accountancy), development, rela-tionship with other employees, da-tabase, documentation and intel-lectual assets: patents, copyright, licences etc. This type of capital enables an organization to function in a systematic and codified way.

Innovation

It is the ability of a company to continually redefine the products or services it offers anticipating the demands and high standards of the market. In addition to this, it also includes the ability of the company to be flexible about changing struc-tures, systems, processes and ways of doing the business if they no longer support optimal value crea-tion. Innovation processes include minor adjustments and improve-ments of production and service processes, which have been pro-posed by the employees at all lev-els of the hierarchy, as well as the activities of the R & D department, designing, marketing and all the other activities, which contribute to the creation of new, applicable knowledge.

It is essential to create awareness with the employees about the fact, that innovation means improve-ment of already existing structures, the ways in which business is man-

aged or things are done as well as the improvement of products or services. Accordingly, it is a skill which is necessary and available to everyone in the company. It is a key factor of competitiveness and progress, therefore management has to have a systematic approach to promoting innovation. Occasion-al and random stimulation of ideas or products is better than nothing, but it is by no means sufficient for rapid progress. Each development is based on innovation, from the individual level (ideas, concepts), company level (technologies, products, processes), the mezo level (technological and innovation centres, communication, coopera-tion, policies) to macro level (the core of innovative approach on all levels). I would like to stress that an innovative company can only be innovative due to the efforts of the people who work there. Therefore it is good to bear in mind that with-out a well - developed and clearly defined rewarding system, which will support the innovation process, the motivation of employees will be rather low .

Processes

This component of SC includes the various business processes (everything can be considered a process – production, learning, communication), techniques, qual-ity, personnel programs etc. – eve-rything that increases the efficiency of production and providing of services. In times when knowledge has become a key factor of business success, it is important to establish

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a process of continuous learning, which among other things means pin pointing the professional and creative potentials of the employees in order to determine their present potentials and thus the possibilities for further development of organi-sational knowledge. Continuous improvement of existing processes has to become an imperative. Pro-cesses ought to be checked regular-ly in order to see whether they still meet the requirements of present business and support the achieve-ment of future goals.

I consider corporate culture and leadership to be very impor-tant business factors in countries in transition and therefore I have included them into the presented IC model.

Culture

Culture could be described as an aggregated sum of individual opinions, common value systems, attitudes, norms and behaviour. It functions as a lever in the realiza-tion of business efforts and can be viewed from various angles: the concept of management about what the culture is and should be like, the real and existing culture (which represents the collective value system), and the customers’ perception, as well as partners’ and investors’.

The success or failure of a busi-ness, as well as introduction of new management and measuring sys-tems depends largely on the existing culture. Culture is extremely diffi-cult to change, since it is system-atically developed in the course of

time. Accordingly, management must work on shaping both indi-vidual and collective value systems which represent the base for acting. Intellectual capital management also means creating and encourag-ing a culture of learning, working, innovative efforts, effective com-munication and cooperation and constant improvement. Without an adequate motivation and rewarding system it is unlikely to expect any major breakthrough or moves in the right direction. Change man-agement helps achieve a transfor-mation of organizational culture.

Leadership

The role of top management could be, figuratively speaking, shown in the following way: without a magnet the pieces of iron in a box are scattered and turned in various positions. If we, however, place a magnet in the box, all the pieces will turn in one direction. The role of management is therefore to act as a magnet, directing the company in the desired direction by setting up clear goals and communicating them clearly top down. Leadership is the bridge connecting human, or-ganizational and customer capital, whose activities aim at creating suitable and multiple effects be-tween the strategy, structure, sys-tem and culture at workplace, in the market and work environment in which the company operates.

It is essential to point out that the key element of leadership is to articulate the vision and mission, which will be clearly elaborated to all employees. The modern ap-

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proach to development includes value creation through the realiza-tion of a strategic plan. However, without a clearly defined vision (what we want to be and what we want to look like), strategy (how to get there), objectives (what needs to be done and when), alligned and timely action plan (who does what) and identification of each and everyone in the company with the vision and objectives (what is my role/ position in that), there is no real power. The notion of the future in a dynamic sense is a rela-tive one, and it is largely depend-ent on the pace of changes in the environment. Because of that the vision has to be checked from time to time and management has to see it as an ongoing process: from vi-sion to reality and from reality to vision.

There are numerous market challenges that make this task diffi-cult, but it is essential for survival.

Organizational capital is fully in the ownership of the company, whereby the balance sheet shows just one of its aspects – intellectual property.

Customer Capital (CC)

Customer capital encompasses the relationships with customers (buyers, clients and guests) and data bases with relevant informa-tion on customers. If we encom-pass relationships with the suppli-ers and partners as well then the term relationship capital is more appropriate. However, in coun-tries, in which the provider of ser-vices still do neither see nor treat

their customers as a sort of capital, it is more useful to use the term customer capital, since it brings the customer more clearly into focus of attention. It refers to the value that is derived from and created through continuous relationships with customers. The customer should be in the beginning and in the end of the value added chain. The survival of all service and pro-duction activities depends on the customer, and it is therefore sur-prising to see how little attention is often paid to customer satisfaction, their demands and wishes.

Experience has taught us that when a company decides to become customer oriented, its objectives, products, services, organization and investments are to undergo major changes. Without explicit customer focus there is neither efficient resource allocation nor highly efficient value creation. The businessmen who fail to ana-lyse customer feedback perma-nently, cannot have a clear picture of the following: whether they are on the right path, how to promote and improve the existing products and services effectively, and which direction should be followed in product /service development. Many companies are still led by their own, internal wishes and am-bitions, rather than the demands and wishes of its customers (the market).

Serious and systematic customer focus enables the company to react in time to new trends, to develop innovative products, to educate

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and train their staff in the right way (e.g. sales, reception) and to build up the company image.

The ultimate goal is “customer satisfaction”, in other words meet-ing customer needs and require-ments. The competitive advantage of a company increases with the share of added value, which is of-fered with the purchased services or products. This can be achieved through uniqueness of solution, innovative products, image, ex-ceptional experience, bonuses, reward schemes, discounts, after-sales or other exceptional services and similar. Customer relationship management (CRM) should there-fore play an equally important role in the strategic and operative man-agement as human capital manage-ment. Moreover, some theorists claim that the customer is actually the real corporate employer.

Relationship Capital

Increasingly fierce competition and demanding customers make it necessary to include as many participants from the value added chain into the process of planning and production as possible. This way information and knowledge can be exchanged, value creation efficiency increased and survival in the market ensured.

Many companies still do not re-alise how important the high qual-ity multilateral relationships are and therefore they miss the benefits of the synergy effects, which are of great relevance at national, regional or local level. Since creating such “relationships” does not require

heavy investments, there is actually no excuse for “low-quality” relation-ships or destructive relationships with other companies or institutions. However, good will and time are the basic preconditions.

The relationship with suppliers and partners is of highest impor-tance since they are direct partici-pants in the value creation system for the end users, i.e. the custom-ers. These systems go beyond limits of individual companies and they provide opportunity for network-ing of various professions. E.g. if the quality of raw material or semi products is inadequate it will affect the quality of the end product/ser-vice and thus influence value crea-tion efficiency of the end producer in a negative way.

Image, reputation and brand are all features of relationship capital.

In the end of this part I would like to highlight that there are various IC models. They all have the same purpose: helping in the classifica-tion and visualisation of non mate-rial business factors (intangibles) in order to enable easier and more effective management. It is best if you make yourself familiar with the various models in order to be able to choose the one, which suits your company’s needs in the best way.

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and support such methods of work that will encourage and support the transformation of the individual ca-pabilities into organizational valu-es and vice versa (which in turn in-creases the synergy effects system-atically). Even more, management must do its best to eliminate the inhibiting factors which prevent the optimal utilization of the existing potentials within a company. The concept of IC and its implementa-

tion calls for a new perspective of strategic management, new taxonomy, new management methods and new measure-ment systems.

Systematic and continuous gap-analysis between the object-

ives and realisation, in other words “what should be achieved” and “what has been achieved” leads to insights which provide a base for action in the future. Continuous elimination of all the weak points contributes to the creation of a positive spiral of performance im-provement.

Managing Intellectual Capital

In a company value is cre-ated through interaction between various categories of intellectual capital (intra and interorganiza-tional processes). It is therefore of utmost importance to promote performance of each category of IC constantly, as well as different ways of their interaction. The role of the management is to introduce

Human Capital Organizational Capital

Customer/Relationship Capital

VALUE

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E.g.Through interaction with other experts (HC-HC) the em-ployees improve their knowledge and avoid making the same mistakes. Provided they dispose of suitable technical infrastructure (HC-SC), they will be able to use their capa-bilities optimally without wasting time. Analyzing the feedback from the customers (CC-HC) enables development and launching of new products, which is carried out in cooperation with the colleagues

from various departments (HC - HC). The experience gained from the project is documented and de-posited in the experience database (HC - SC), in order to use it when needed in some other projects… SC – HC – CC).

For that purpose project man-agement, multifunctional and vir-tual teams are engaged. While do-ing so methods and principles of knowledge management have to be applied.

Management PotentialsSuccess

Market Realization

Activities:

Identifying ICManaging IC

Generating ICExploiting IC

Measuring SystemsInterim GoalsWeak Points

Performance DriversSynergy Effects

Financial and Intangible Effects

Increase in:Work EfficiencyMarket ValueShare Value

Motivated EmployeesSatisfied CustomersPositive Image

Feedback

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Managing HC on:

Individual Level:The role of management is to co-

ordinate the activities of individuals with company goals. In the course of this, it is essential that manage-ment recognizes the potentials of individuals and finds ways to utilize them in the optimal way in order to realize corporate objectives. This process should include directing and encouraging the employees to improve their knowledge and skills, as well as creating a favourable working environment, which will enable individuals to work produc-tively (motivated, without fear).

Team Level:As circumstances require and

where necessary, management defines and organizes interdisci-plinary teams and provides sup-port, infrastructure and suitable working conditions for team work. The scope of activities is broad, and among other things it involves elimination of inhibition factors

that could disrupt the productive engagement of the members of the team (prejudice, lack of tolerance, insults). Management also defines the roles within the team.

Company Level:The existing relationship struc-

ture (hierarchy and company cul-ture) determines the fears, con-flicts, motivation and behaviour of the employees. Management, among other things, has to develop systems thinking and collective perception (sense of community), aim at reducing conflicts within the organization and system (ranking, influence, power), motivate de-partments, enhance responsibility and interdisciplinary cooperation (which reaches beyond limits of departments or projects). While doing so it is essential to turn the conflicts into an instrument of pro-motion and improvement of busi-ness and service processes, as well as establish free and open-minded communication at all levels within the company.

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COMPANY LEVEL

INSIDE COMPANY

Measuring Intellectual Capital

Measuring, documenting and keeping records represent an in-tegral part of any business activity. Without a measuring system busi-ness lacks orientation in corporate, national and global terms. We can formulate a clear strategy and di-

rect all efforts towards the future only if we are fully aware of the per-formance of resources in the past and present. If you can measure something, you can also manage it successfully.

The employees should be made

Existing methods for measuring intangible assets(source Karl Erik Sveiby)

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NON - MONETARY MONETARY

Human Capital IntelligenceSkandia Navigator™Intangible Asset MonitorBalanced Score Card

Market to Book ValueTobin’s qKnowledge Capital EarningsAccounting for the FutureEconomic Value AddedCalculated Intangible Value

Human Resource Costing AccountingTechnology BrokerCitation-Weighted PatentsInclusive Valuation MethodologyValue Explorer™Intellectual Asset ValuationTotal Value Creation

VAIC™

IC Index™

Value CreationEfficiency Analysis

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competent for independent measure-ment so that they are able to moni-tor how well the company’s objec-tives have been achieved and which is their contribution in it. Tangible assets of the company and financial capital are successfully measured and reported in balance sheets, since the traditional measuring system has been elaborated in detail and brought to the level of perfection. In addition to financial parameters, in-formation about the performance of intellectual capital is very important for modern business.

The impact of knowledge is widely accepted, but its role in value creation is still not recorded in a suitable manner nor valued accord-ingly in financial reports on compa-ny performance. There is another problem which is worrying – the al-ready mentioned gap between the book value of the company and its market value. This is reflected in a very negative way on information and knowledge –intensive business (e.g. software, design), and a ratio 1 : 10 (in favour of the market value of shares) has become common.

With regard to this trend, there are two key questions: What information value do the

traditional financial reports have for existing and potential investors, management, em-ployees and share-holders?

How to measure intellectual capital and its contribution?

The best answer to the first ques-tion can be found in international

business practice, which was actu-ally the source from which these problems stem. In order to answer the second question in detail, a separate article would be needed, so we will presently limit ourselves to basic information and a brief outline. In short, there are mon-etary and non-monetary measuring systems, which are applicable at various levels of business activity, both within the company as well as on macro – level. According to K. Erik Sveiby, eminent authority in the sphere of measurement, there is a basic classification which could be summed up as follows:

Direct IC methods: The finan-cial value of intangible assets is evaluated/ calculated, whereby a number of components can be identified. After establishing the appropriate approach, these ele-ments are evaluated, either sepa-rately or aggregated.

Market capitalization methods: The value of IC is calculated by

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defining the balance between the market value and book value.

Return on investment: The re-alized average profit/ value added (before tax) in a certain period is divided by average intangible as-sets. The result is the return on capital the company has realized, and it is possible to compare it with the average within the same line of business.

Balanced Scorecard System

(BSC): Various components of in-tangible assets or intellectual capi-tal can be identified, and it is the basis for creating indicators which are presented through the balanced scorecard system or in the form of graphs.

I would like to highlight that one of the widely accepted and recognized measurement methods in the world is the Value Creation Efficiency Analysis” (powered by

Evolution of Knowledge Economies(Croatian contribution included)

Source: Debra Amidon “Evolution of KN – Economics” (Evotation Inc.)

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VAIC™-www.vaic-on.net), which was invented by Dr. Ante Pulic, Croatian economist and a recog-nized global IC expert. What makes this method unique is the fact that it can be applied on all levels of business activity, ranging from the smallest organizational units, subsidiaries, to company, sector, city and regional level, as well as the level of national economy. This means that the efficiency of intel-lectual capital can be established precisely on all the above-men-tioned levels.

Knowledge/intellectual capital, are not explicitly shown in finan-cial reports (the consequence of such an approach is the fact that insufficient attention is being paid to managing this vital resource). Croatian accounting standards list intellectual capital in non-ma-terial long-term assets, which is only another proof that intellect, i.e. knowledge and everything de-rived from it, are still considered unreal.

“Intellectual Capital Efficiency EU and Croatia” – Croatian contribution to

measuring and managing intellectual capital on the national level (national index).

Until now many such IC reports have been published introducing new criteria of business success at national, regional and company level.

3

intelektualni kapital

INTELEKTUALNI

KAPITAL

Uspješnost na

nacionalnoj

županijskoj i

poduzetničkoj razini

1 - 9 / 2003.

Zagreb, veljača 2004.

HRVATSKA

GOSPODARSKA

KOMORA

INTELEKTUALNI

KAPITAL

Zagreb, listopad 2004.

HRVATSKA

GOSPODARSKA

KOMORA

Uspješnost na

nacionalnoj

županijskoj i

poduzetničkoj razini

1. - 6. / 2004.

INTELEKTUALNI

KAPITAL

Uspješnost na

nacionalnoj

županijskoj i

poduzetničkoj

razini 2003.

Zagreb, lipanj 2004.

HRVATSKA

GOSPODARSKA

KOMORA

Zagreb, veljača 2006.

HRVATSKA GOSPODARSKA KOMORA

Uspješnost na nacionalnoj, županijskoj

i poduzetničkoj razini 1.-9. 2005.

INTELEKTUALNI KAPITAL

ISSN 1845-6359

INTELEKTUALNI KAPITAL

Zagreb, srpanj 2005.

HRVATSKA GOSPODARSKA KOMORA

Uspješnost na nacionalnoj, županijskoj i poduzetničkoj razini 2004.

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The following stages of IC man-agement are to be seen as guide-lines only since each company has to develop its unique approach to managing IC in order to keep its competitive edge:

Stage 1 – Raising Awareness about the

Importance of IC

The approach is basically top – down. Awareness is gradually developed within the whole organ-ization through literature (books, periodicals and journals), lectures, discussions and workshops. All the employees will be ready to accept not only the idea, but also the efforts required to realize the project, only if they fully realize what it really is about and what benefits it can bring (both collective and personal). It is of uttermost importance that top management is fully aware of the significance of IC as key resource and determining factor of value creation. Only then it will truly back up knowledge management (KM) and intellectual capital man-agement (ICM) initiatives.

Stages of IC Management

Stage 2 – Visualizing and Categorizing the IC of

Companies

It is necessary that this project is carried out by a top management multi-disciplinary team, in order to gain a holistic picture of the situ-ation, which stems from various perspectives. Categorization of intangible fac-

tors of the company according to the IC scheme (human capi-tal, structural capital, organiza-tional capital, innovation capi-tal, relationship, i.e. customer capital) and then working the scheme out in more detail (for example, social and professional aspects of human capital)

Analysis of current state regard-ing IC in the company (strengths, weaknesses, potentials, limiting factors) – in other words, de-fining and stating reasons why the current situation is the way it is.

Defining objectives and the de-sired situation (including inter-mediate stages)

Determining the key intangi-

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bles. These key factors will be different in various lines of busi-ness (for example, for catering industry customer capital is a key factor)

Establishing priorities (focus should be directed at key value creators in the company).

Identifying critical factors (de-termining the factors which should have priority in terms of improvement)

Inclusion into the existing strat-egy (special focus on intangible factors means widening the strategy with the aim of man-aging resources in the optimal way)

Working out outlines (if we are to manage intangible factors with ease, it is important to visu-alize them in a certain way, for example in the form of drafts or graphs)

Stage 3 – Determining the Ways of Managing Key

Factors

There is no general way of man-aging IC. Each company is unique, and therefore it must work- out and elaborates its own, individual way to manage IC, while using existing models only as a base. The follow-ing components represent the pil-lar: strategy, culture, people, tech-nology, market environment. In this stage communication top down as well as bottom up is vital.

Stage 4 – Setting up the Measuring System for IC

Performance

The saying goes: If you cannot measure it, you cannot manage it. In order to manage intangible assets successfully, it is essential to imple-ment measuring systems suitable for monitoring the performance of intangible factors. Management has to be careful when choosing measuring systems with regard to information they really need in or-der to achieve their goals.

Continuity is a must. Regard-less of the current situation (good or bad) only continuous reassess-ment, pinpointing and highlight-ing the weaknesses and improving them, can lead to successful per-formance.

Stage 5 – Introducing New Reporting Systems

If there is no reporting about what is being done with regard to the IC issue we cannot expect understanding either from the em-ployees or potential investors (not to speak about banks). In order to direct the employees, they must be informed about what is happening, so that they can align their actions with the current situation. External reporting on IC (e.g. in the form of an annex to the annual report) helps the companies to provide an insight into the efforts which are to enable and facilitate successful per-formance in the long term. Various

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stakeholders appreciate this more and more so that it might become a standard procedure in some coun-tries soon.

Stage 6 – Motivating the Employees

Many people are afraid of the new and unknown since they fear it could endanger their present posi-tion. The clearer the consequences of introducing a new system and the possible benefits, both on indi-vidual as well as collective level, are presented, the easier it will be for

the employees to identify with the program. Rewarding and incentive programs play an exceptionally im-portant role, as well as facing and overcoming possible fears and di-lemmas. Company’s management must keep this in mind since radical structural transformations are a key feature of knowledge economy.

This is the reason why company managements have to create and pursue an adequate vision, mis-sion, strategy, policy and objectives and disperse them within the whole organization.

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of accumulating data when required and whether it is understandable.

Each company needs data, the only question is which ones, and in what quantity. The abundance of data available makes the selection of data that are really important quite difficult. It should be noted that data does not by itself contain or express knowledge. They are just a mere description of a certain con-dition, without value judgements or interpretations, and therefore are not a stimulus for action. Data is just the necessary raw material from which information is derived.

Information:

Is data to which the information user (recipient) added meaning, relevance and context. Information establishes a relationship between things or events and the recipient and also influences him. Data are transformed into information once we attach value to them by using them in an intellectual operation (ex. calculation, contextualization,

Knowledge – The new Production Factor

Knowledge is the foundation of the intellectual capital of a company. Since the expression “knowledge” is generally used in a rather superficial way, as a synonym for information, fact, intelligence or wisdom, first of all we should clearly define what knowledge actually means.

Data:

Data is an objective (undisput-able) presentation of a certain event or thing. Data is a visible dif-ference between alternative states or things. In economic context we mostly use the term for a structured record of transactions.

Organizations deposit data in in-formation systems (depositories) in order to enable the employees to use them. According to quantity, we are interested in data like evidence of costs, speed of something, the quan-tity of the data fed into the system, the time needed to find the data in the database. According to quality, we are primarily interested in accu-racy, relevance and clarity, the ease

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correction). The effect of informa-tion is that it modifies the expecta-tions of the recipient by confirm-ing or altering his perception of things and events. The higher the expectation level and contextual knowledge, the more informative the information will be.

In the process of managing in-formation, we can differentiate between a quantitative and quali-tative aspect.

The quantitative aspect involves ability to combine, connect and transact: e.g. how many e-mail mes-sages can be linked into an intergrat-ed unit or how many of them have been mailed at a certain moment. In terms of the qualitative aspect the principal issue is usefulness and in-formative quality: e.g. whether the information has enabled us to adopt a new standpoint or a new approach to understanding the situation, and whether it has facilitated the deci-sion-making process or finding so-lution to a problem.

Knowledge:

Intuitively we know that knowl-edge is a much broader concept than data and information, and that in fact it incorporates both. Knowl-edge refers to information that have value in interaction with human capital, and it refers to the ability of people to use information in a way that enables them to find solutions to complex problems or to adapt to changes in the environment – in other words it could be defined as an individual ability to grasp the un-known. It is the ability to act (Karl - Erik Sveiby). Knowledge could

be classified into two categories: direct, explicit knowledge (SC) or individual, implicit/ tacit knowledge (HC). (Ikujiro Nonaka).

Information is data to which a certain value is attached, and ac-cordingly knowledge is information to which a certain value is attached, in order to be able to pursue vari-ous intellectual operations (e.g. contextual knowledge, foreseeing consequences, combination, link-age and correlation, raising objec-tions). Knowledge is special as it comes much closer to action than facts or information. It is an activa-tor that prompts us to action.

With regard to communication, knowledge can be divided into two forms:

Tacit Knowledge (implicit)

Tacit knowledge is the knowledge that is not verbalized but intuitive, based on experience and practical (analogous). It can be disseminated and shared only to a certain extent, since no words can fully grasp it…. (playing the piano, riding a bicycle, ability to sell things, ability to re-pair a pipe).

Explicit Knowledge (explicit)

Knowledge which can be multi-plied, or can be given a certain for-mal shape (formatted or formalized knowledge), which in turn enables its transfer and general compre-hensibility. It is therefore declara-

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tive knowledge (propositional) and knowledge about acting.

Knowledge is transferred thro-ugh interaction between its implicit and explicit form.

Generating information is con-tinuously increasing, and the prob-lem is not a shortage of informa-tion but the fact that there is a surplus. If information is to be re-ally useful, it is essential to collect and use it selectively. This is where knowledge management comes in - treating knowledge as key resource, whereby we distinguish between applicable knowledge and funda-mental knowledge. Both include the tacit and the explicit form.

Knowledge management

Faced with rapidly changing markets and technologies, compa-

nies have to encourage and develop flexibility in order to be able to suc-cessfully respond to the challenges. This can be achieved by strength-ening the intellectual abilities of all the employees, and by transfer of knowledge into value creation activities/processes, which are the foundations of innovation. Knowl-edge is not an abstract notion in economic context – it refers to ex-pert, applied knowledge and the abilities of individuals and teams to contribute to value creation for the company, both material and intan-gible. The purpose of knowledge management is generating and networking of individual knowl-edge, transformation of individual into collective knowledge, and goal-directed usage of all forms of knowledge in the value creation processes. Knowledge, as a key fac-tor of production, should be used as efficiently as all other traditional

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Source: Hirotaka Takeuchi

To tacit knowledge To explicit knowledge

Socialization process

Externalization process

Combinationprocess

Internalizationprocess

From

taci

t KN

From

exp

licit

KN

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production factors (money, raw material etc.).

The fundamental model of knowledge management can be divided into three levels (source Austrian KM Forum, practical handbook) – knowledge level, fact level and activity level along with the five key processes (informa-tion, documentation, communica-tion, application and learning).

Knowledge management ac-tivities include: analysis of current knowledge, defining the knowledge goals , generating and developing new knowledge, transfer of knowl-edge, (knowledge exchange and dissemination), using knowledge, measuring and evaluating it.

According to many economists

applied knowledge is what matters most

Some relevant questions related to knowledge management are: Who needs which information? Who is responsible for docu-

mentation of various knowl-edge areas?

Who updates the existing knowl-edge?

Who is responsible for analysing new knowledge (e.g. customer feedback)?

In what way is knowledge trans-ferred among the employees?

Is the required information readily available?

Is there any time wasted due to lack of information?

What changes have we encoun-tered in the past years?

What have we learnt? In what way has it been recorded?

How do we utilize our experi-ence and acquired knowledge?

What do we know about … (e.g. employees, customers, suppli-ers, distributors)?

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Source: Group of Authors, Wissensmanagement Praxishandbuch: Wissensmanagement Forum, 2000, Austria.

Basic Knowledge Management Model

Activity level

Documentation

Information

Using KN Learning

Knowledge Knowledge area

Social system Technical working system

Data level

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survey, an awarding system had to be introduced (ranging from a candy, fruit, free coffee to a free night’s accommodation, lunch or dinner to one-week stay including full board and fitness program).

Based on the feedback from the surveys and in accordance with the capacities of the hotel, a new business improvement strategy has been developed.

Operational steps:1. Increasing the information level

at booking (information about various events at the hotel and the surroundings taking place during the client’s stay)

2. Additional services (booking theatre tickets, shuttle service, information about new restau-rants)

3. Improving the techniques of communication with clients (presenting arguments, solving difficult situations, positive com-munication, telemarketing)

4. Improving the hotel services based on benchmarking

Case Studies

Example 1:

HOTEL BUSINESS In order to gain status of a ho-

tel which is exceptionally customer oriented and customer friendly, the hotel corporation decided to intro-duce intellectual capital manage-ment, with the aim to upgrade the quality of its services.

Objective:

1. Transformation of services which could give the hotel com-petitive advantage with mini-mum investment

2. Increasing the satisfaction level of the clients

3. Continuous improvement of weak points (services)

4. Increasing the overall level of services within a year

Strategy:

Months-long conducting sur-veys and intensive benchmark-ing with domestic and foreign competition. In order to per-suade the existing and potential clients to actively take part in the

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5. Creating a knowledge and ex-perience database (positive and negative experiences) for all business activities at the hotel (accommodation, restaurant, receptions)

6. Appointing a person responsible for the continuous updating of all the required information, qual-ity control, customer feedback analysis, continuous updating of the knowledge database

7. Selecting measures which would reflect the success of the project (loyalty of regular guests, at-tracting new guests, increased returns, reducing the amount of complaints, increased satisfac-tion of guests…)

8. Defining the time framework9. Introducing a motivation sys-

tem (material and non-material) for staff-members and associ-ates, which will encourage them to share their experiences and knowledge and enhance their performance

10. Sharing information (through periodical bulletins) about the successes and failures achieved (both internally and externally)

Example 2:

PETROL STATIONS Objective:

1. Transforming the petrol stations into multi-functional centres (in addition to selling fuel, automo-bile services, sale of merchan-dise, introducing gastronomic services and information cen-tre)

2. Increasing the level of satisfac-

tion of the buyers and partners – suppliers

3. Increasing returns in all the spheres of activity

Stages:

Stage 1 – Headquarters develops a common concept, works out the details- the leaseholders of the pet-rol stations buy knowledge from the headquarters. Through the op-erative system, the so-called service plan, the project is managed from the headquarters, information is offered about all the factors rele-vant for business activity (com-petition, strategic advantages and disadvantages, target groups in the regions)

Stage 2 – Technological basis – close links of each petrol station with the company headquarters (computer courses for the lease-holders and their employees

Stage 3 – Interactive training – exchange of experiences and learning through the Internet and meetings

Stage 4 – Continuous feedback to the headquarters in order to permanently promote and improve the system (about difficulties, com-plaints or dissatisfaction of the cli-ents)

Stage 5 – Creating a joint knowl-edge/experience database (all the petrol stations actively take part in the knowledge exchange, they can avoid mistakes others have made or use their positive experiences in order to enhance their business)

Stage 6 – The leading petrol sta-tions in the region assume the role of the coach/group leader.

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Example 3:

LOGISTICS COMPANY– IN-TRANET

Goal:Achieving a higher level of infor-

mation of the sales staff (about the product, terms, prices) at lower cost of information material through establishing a central information point (constantly updated), in-creasing effectiveness (right infor-mation at the right time)

Realization:

The headquarters introduces an interactive system of information and sales on the web.

Up-to-date information about the products available, sales strategy, change in prices…

Opportunity to communicate with the whole system (answering all the questions and queries within 24 hours) and with the colleagues all over the world (virtual teams).

By motivating the staff and clients to communicate through the sys-tem, exchange knowledge, ask for information, within a year a system which is continuously improved and updated will be developed, with the assistance of all the users.

Example 4:

Case Study PIENIC

PROGRAM OF INCREASING EFFICIENCY OF NATIONAL

INTELLECTUAL CAPITAL

This is a low cost and time ef-ficient program designed as a first step in introducing changes with re-gard to the requirements of knowl-edge based economy.

PIENIC was designed by the In-tellectual Capital Center in Zagreb and has been realized in over 60 companies in the course of 2005/2006. The Ministry of Economy has been providing financial support (paying half of the invoice) and the Croatian Chamber of Economy its nationwide infrastructure. On the one hand, this program has proved very useful for the companies but on the other hand, it is significant for the entire national economy as well, because it helps creating a crit-ical mass that can enable successful transformation of traditional into knowledge-based economy.

Goal:

increasing bussiness efficiency of the participating compa-nies:

a) by educating employees (first the IC-teams and top manage-ment, then all)

b) measuring of value creation ef-ficiency of key resources, physi-cal, financial and intellectual capital

c) analysing of the current IC – situation and starting discus-sion of IC factors

d) starting an ongoing process of increasing business efficiency

e) providing a base for other re-lated activities (e.g. knowledge management)

sending a nationwide signal towards political and business management - they must start dealing with the phenomena of knowledge economy and knowledge society

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creating awareness of the fact that new ways of thinking and acting are necessary for becom-ing a competitive player in the 21. century

bringing focus on knowledge and intellectual capital (IC) as key resources

demonstrating responsibility on behalf of management to-wards all stakeholders

displaying long-sightedness in strengthening the company’s future earnings capability

Steps:

1. Establishing of Intellectual Capital Teams (Ic-teams)

A cross functional group of three to five people from various fields of expertise (finance, HR, other) and various generations, represent the IC team. Experience has shown that an IC team is stronger, more efficient and better motivated than one single person in charge of ICM&KM. Team members con-tinue with IC related activities after PIENIC is finished. The main focus is on increasing the efficiency and effectiveness of Intellectual Capi-tal (IC) in all parts of the company in order to enhance business per-formance and bottom line results. Activities are directed towards the top management (reporting and counseling on IC and VC) and other employees (education, collecting ideas and suggestions, motivation, focusing attention on competences, values, organization, customers, and value creation).

IC teams become internal con-

sultants beyond any organizational scheme and work jointly in achiev-ing goals beyond the borders of their own organizational units.

2. Awareness Creation and Education a) Education of top management In order to be able to lead com-

panies in the right direction, top management must be familiar with the following:

What are the characteristics of knowledge economy (KE)?

Which are the key economic success factors in this economic context ?

What is the role of non material or intangible factors – knowl-edge and intellectual capital (IC)?

Which indicators reflect the new economic reality ?

Which measuring systems are suitable for providing relevant information on the perform-ance of resources - physical and financial but also intellectual ?

b) Education of IC teamsThe basic education program in-

cludes lectures on current changes in economy and IC related topics, presentations of domestic case studies and success stories, reading of recommended literature (e.g. the handbook on managing IC in companies and the IC reports „IC Efficiency at National, Regional and Company level“). Furthermore they learn how to use VAIC™ and PIKA™ software and how to make reports and IC assessments based on insights provided by VAIC™ and PIKA™ analysis.

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c) Education of other employees All employees are human re-

sources of a company and there-fore it is important that everybody receives education on the above stated in order to be able to cre-ate value efficiently in their field of business and thus become true human capital of their company.

The IC teams become reference centers for others and organize education on KE and IC related matters.

3. Measuring Business Success by VAIC™ - Value Creation Efficiency Analysis

The Value creation efficiency analysis - VAIC™ is introduced as the appropriate measuring tool, enabling monitoring of the com-panies’ ability to create wealth as well as the performance of existing resources - physical and financial, and IC in particular. Measurement is applied at various levels: on the company level, but also inside the company, in processes, projects or product/service lines. Informa-tion provided by the VAIC reports enables benchmarking against competitors as well as with sector, regional or national efficiency.

4. IC Assesment - PIKA™ - Workshops

By means of a questionnaire consisting of 260 IC- related ques-tions, information is received on how non-material factors are being handled in the company (e.g. em-ployee’s knowledge and skills, valu-es, networking, knowledge shar-ing, leadership, vision, corporate culture, customer focus, capability

of innovation and efficient value creation). The teams assess their company’s IC, visualise it and dis-cuss possibilities of improvement.

5. Transformation into value-oriented business

This means “to think more about how to create value and less of how to cut costs.” In collaboration with all departments, the IC teams de-sign an action plan (short term, first 3 months, and longer term up to 1 year in the company) that aims at increasing the value creation ca-pability of the company by means of managing the company’s IC and measuring its performance.

6. Coaching

In the course of this program consultants do not function as problem solvers but provide: an impetus to start dealing with

issues not yet realized as criti-cal to business success

education on matters related to IC and knowledge economy and advice on ways in dealing with it

introduce new views on busi-ness performance, i.e. product-ivity

function as partners in estab-lishing new processes that shall go on successfully when con-sultants leave the company

Employees know their compa-nies - what is going on, how things are done officially and unofficially, who holds power positions, who is pro and contra and so forth. Con-sultants provide certain knowledge that the company needs to improve

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its performance. Therefore it is only natural to establish a close collaboration between consultants and employees (in this case the IC teams) in order to make changes happen.

Benefits of PIENIC for Companies

Introduces changes with focus on the requirements of knowl-edge economy

Provides insights into the way in which material and non-material factors participate in value creation

Helps detecting weak and strong value creation areas

Enables measurement of busi-ness efficiency in a new way

Example 5:

Croatian Success Stories 1. Shipyard “Uljanik”

The only globally competitive shipyard in Croatia not relying on

state subsidies for survival. It suc-ceeded to become the second best shipyard in Europe through some of the following activities: profes-sional expertise, constant learning, IC management, measurement of VA and IC-efficiency. (Graph 1, page 59)

2. “Cimos Buzet”, the Croatian partner of

French car manufacturer “Citroën”

They have succeeded to increase their business performance from year to year due to continuous measuring of value creation and ef-ficiency and improvement of busi-ness processes in a way that made them value adding. (Graph 2, page 60)

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“The case study of our company indicates that by applying the concept of intel-lectual capital, combined with the application of the VAIC™ methodology – which helps to visualise the intellectual ability of the whole system and the processes - as well as by using the knowledge, the talent and the creativity of our employees, it has been possible to achieve continuous improvement of business results.”

Dr. Klaudio TominovićDirector of Intellectual captal, Shipyard Uljanik d.d.

EXPERIENCE SHIPYARD ULJANIK

From:2000 - 2005- the time

needed to

build a ship

has been

reduced by

54%

- reduction

of effective

working hours

(ES) by 65%

(Graph 1)

Duration ship building processOverall ES

Mon

ths

Ship building

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“The key challenge for our company is to sustain and leverage the growth of value added and efficiency by which it is created. In order to achieve this objective it is vital to activate all the values of the company and increase value creation efficiency of existing resources continuously. PPC Buzet is a capital intensive company with a tendency towards becoming a knowledge based company.

With this goal in mind the management has decided to apply the VAIC™ analysis in order to monitor and increase business efficiency in the creation of value added. This concept has proved to be of great benefit to CEO and management. Of course, just for those who are capable of coping with reality, no matter how positive or nega-tive it might be.”

Klaudio Ipsa,CEO, CIMOS Croatia

EXPERIENCE P.P.C. Buzet d.o.o. CIMOS

(Graph 2)

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ic management handbook

Documents

intellectual capital

stages of ic management

classification of ic

relevant form

key challenge

relevant global player

key drivers of company

key factor