The Strategic Management of Intellectual Capital

David A. Klein

• Publisher: Routledge
• Year: 2009
• Print ISBN: 9781138148369
• eBook ISBN: 9781136355936
• Topic: Negocios y empresa
• Subtopic: Negocios en general

The fourth in the readers' series Resources for the Knowledge-Based Economy, The Strategic Management of Intellectual Capital analyzes the link between the strategic and operational roles of intellectual capital in the organization. The Strategic Management of Intellectual Capital is the perfect resource for the growing number of companies pursuing a strategic approach to managing their intellectual capital and harnessing and leveraging their knowledge, experience, and expertise more systematically to attain a competitive advantage.

1

The Strategic Management of Intellectual Capital: An Introduction

David A. Klein

Organizations increasingly compete on the basis of their intellectual assets. We hear it echoed in the buzzwords of the day: Companies compete in a “knowledge economy,” skilled functions are performed by “knowledge workers,” and firms that improve with experience are “learning organizations.” We see it in some of the innovative management agendas of recent times: Reengineering involved doing more with less by working smarter; continuous quality improvement derived from learning how to do things better and better over time; and the development of new core competencies entailed building fresh organizational know-how. In an environment where innovations are replicated by competitors expeditiously and where smaller firms often gain market share from larger ones by introducing superior products and services, it is firms’ intellectual capital—their knowledge, experience, expertise, and associated soft assets, rather than their hard physical and financial capital—that increasingly determines their competitive positions.

And with this shift in competitive emphasis has come an explicit recognition by a growing number of organizations that their intellectual capital is an essential source of competitive advantage that should be managed more systematically. In particular organizations are devising enterprise strategies and portfolios of initiatives to capture and disseminate what they learn over time, to facilitate the sharing of new ideas and experiences across functional and organizational boundaries, to leverage their best practices, and to manage their intellectual capital by other deliberate means rather than continuing to rely on haphazard approaches. And they are finding, for example, that insights captured on the factory floor, when properly cataloged, interpreted, and disseminated, can lead to changes in processes that yield cost advantages; that a re-examination of what every player in the industry knows versus what their particular organizations know uniquely can lead to new knowledge-sharing partnerships with competitors; and that performance-measurement systems designed to reward the creation and exchange of ideas can enhance the firm’s decision making and increase innovation. In short, firms adopting a strategic approach to managing their intellectual capital see an opportunity to enhance their market positions relative to organizations that continue to manage such capital opportunistically: If indeed “knowledge is power,” then harnessing it and channeling it make better business sense than simply letting the sparks fly.

Elements and Challenges Of Managing Intellectual Capital

To manage its intellectual capital more systematically, the firm must devise an agenda for transforming from an organization simply comprising knowledgeable individuals to a knowledge-focused organization that stewards the creation and sharing of knowledge within and across internal business functions and that orchestrates the flow of know-how to and from external firms. The fabric of such an agenda comprises many threads—people, incentives, technology, processes, and other elements—that need to be woven together carefully in a fashion commensurate with the organization’s particular strategy, culture, capabilities, and resources. Although each firm’s program will be likewise unique, a common set of themes, issues, and challenges underlies the objectives and implementation of such programs.

Understanding the Strategic and Operational Roles of Intellectual Capital in the Organization, and the Links Between Them

What kinds of know-how could improve the organization’s products and services today? What intellectual capital is required to support its key processes and functions more effectively? What knowledge will be needed in the future? Does the firm currently possess this intellectual capital, and if not, how should the firm develop or acquire it? How can the firm share selected intellectual capital with customers, suppliers, and competitors to create cost and performance advantages? Meeting the firm’s strategic intellectual-capital requirements has broad competitive implications, but historically such requirements have not occupied center stage in boardrooms. Firms that expressly consider the strategic role of intellectual capital in their businesses by addressing such questions increase the likelihood of taking the actions needed to meet their intellectual-capital requirements.

Ultimately, the firm’s strategy for managing intellectual capital is embodied in a portfolio of management and technology initiatives at the operating level. In part, management’s challenge is to orchestrate the transformation of raw intellectual material generated by individuals into intellectual capital—knowledge packaged in forms that can be invested directly in the same spirit as the firm’s hard assets. For example, the sales force that employs an explicit intranet-based repository for capturing and disseminating the competitive rumors of the day as soon as they become known is harnessing and channeling knowledge that might otherwise be shared by only a small collection of colleagues, rendering it available for direct investment in lead generation, product positioning, and executive decision making; the engineering firm that establishes regular forums for sharing design insights enables their reinvestment in product-development cycles beyond their discovery. Organizations possess immense unstructured storehouses of informal know-how, which in the absence of intellectual-capital programs is physically distributed in a haphazard fashion across the minds of individuals and a plethora of recording media, such as memos, books, voice-mail messages, paper files, and databases. And even less-tangible intellectual assets are embedded implicitly in the workings of the organization itself—in its culture and in its informal routines and processes. By more deliberately forming intellectual capital from this sea of unstructured intellectual material, management can more readily invest such capital in opportunities targeted to meet strategic knowledge requirements.

But how does a firm decide what set of operating-level initiatives would best meet its strategic goals? In the context of knowledge-based competition, management faces the new challenge of linking strategy with execution at the knowledge level by supporting scanning for strategic opportunities to form investable intellectual capital from raw intellectual material, by monitoring and measuring its intellectual capital to evolve its intellectual-capital programs, and by designing other such processes and initiatives to connect the strategic and operational elements of intellectual capital.

Creating an Infrastructure for Cultivating and Sharing Intellectual Capital

The strategic management of intellectual capital necessitates a fundamental shift in thinking about the dissemination of the firm’s intellectual assets. In particular, firms are accustomed to delineating such assets largely in the context of rigid legal definitions of intellectual property, which focus on restricting the use, sale, and transfer of intellectual capital in forms such as patents and copyrights. In contrast, leveraging intellectual capital generally requires that managers cautiously promote rather than restrict its use, reflecting an expansionist approach rather than a reductionist one that includes deliberately seeking out opportunities to form and leverage such capital throughout and across organizations. At the implementation level, capturing large volumes of knowledge and facilitating such orchestrated broadcasting are enabled by an explicit management and technology infrastructure for capturing and leveraging intellectual capital.

Although the designs of particular infrastructures naturally will vary with the firm’s particular goals and initiatives, there are at least three general characteristics that such infrastructures should embody. First, a firm’s intellectual-capital infrastructure should connect the unconnected, providing a foundation for creating and linking communities of knowledge workers with similar interests and tasks. Second, an intellectual-capital infrastructure should be designed to facilitate the capture of know-how in context. In particular, firms cannot pragmatically pursue approaches that require professionals to address general questions about their knowledge as a process outside normal workflows. Rather, firms need to build a community-based model of organizational knowledge acquisition that integrates seamlessly into knowledge work and that embodies the richness of the particular business contexts at hand. Finally, the flip side of capturing intellectual capital in context is delivering it directly to the point of execution. Well-formed, investable intellectual capital is of relatively little value unless it is delivered to where it is needed at the time it is needed.

More broadly, the prospect of creating an explicit infrastructure for managing intellectual capital raises new implementation issues at the intersection of management thinking and technology innovation. In particular, a shift to an intellectual-capital focus provides an opportunity to rethink the roles of people and machines in designing knowledge work to incorporate organizational memory, explicit knowledge sharing, and other elements of managing intellectual capital. Beyond straightforward design decisions to employ foundational technology, such as email, groupware, and discussion groups, the synthesis of a competitive infrastructure design evokes new questions about what knowledge is flowing through a firm, how it can be collected and formalized, and how most appropriately to allocate intellectual work to people and machines as processors of knowledge at various stages of knowledge work.

Framing the capabilities and benefits of machines as knowledge media and as the foundational glue of a knowledge-based enterprise boils down largely to questions concerning the representation of knowledge. In effect, the technology infrastructure must provide a mirror view of how knowledge is used in the organization, but formalizing that view remains an art rather than a science. In an analytical sense, issues of organizational knowledge representation evoke some of the fundamental enduring questions: What, exactly, is knowledge? What are the uses of knowledge? How can knowledge be formalized and organized? In that the use of knowledge recommends its representation in technology infrastructures, the design of competitive knowledge technology is driven largely by the capability of the firm to match tools with tasks in the context of a knowledge-centric view of how the firm actually uses knowledge in performing knowledge work, and by the firm’s ability to devise new representations to meet new knowledge requirements.

Also germane is the extent to which the firm’s infrastructure balances the benefits of systematizing intellectual capital with the flexibility to meet unanticipated requirements. As firms depart from opportunistic approaches to managing their intellectual capital, they likewise need to exercise caution not to venture too far toward rigid infrastructures under which knowledge work is constrained rather than enlightened. In designing an intellectual-capital infrastructure, management must seek balances between the directed and the undirected, between the specified and the unspecified.

To create a management and technology infrastructure for forming and investing intellectual capital, designers and managers need to address these and related questions concerning the interplay between knowledge work and supporting foundational tools and management structures.

Creating a Culture That Encourages Intellectual-Capital Formation and Investment

Although the firm’s strategy and supporting infrastructure for managing intellectual capital may be newly conceived, its existing web of attitudes, reward systems, and behaviors often are inconsistent with the firm’s goals for managing intellectual capital, reflecting yesterday’s competitive environment. Asking consultants, lawyers, and other professionals who compete essentially by selling intellectual capital to share it in up-or-out environments for the good of the firm has its obvious obstacles; so does expecting engineers and researchers to reuse each other’s work after they’ve been socialized in graduate school to exalt innovation and shun rote application; and asking any sort of knowledge worker to play an active role in the conversion of his or her personal intellectual assets to corporate assets begs questions of incentive. The achievement of the firm’s knowledge strategy and the success of its operating-level intellectual-capital initiatives must be enabled by fostering a culture that values and rewards the creation and sharing of intellectual capital.

The nature of the firm’s current culture in large part suggests its transformation path. For example, in organizations where personal intellectual achievement is at center stage, managers may focus on creating an environment where professionals also attain special recognition for influencing the work of others. In firms where autonomous decision making is particularly emphasized, managers may afford special attention to the process of nurturing change in the processes by which intellectual capital is created and shared, rather than imposing change. A firm’s culture also has implications for the preferred means by which its intellectual-capital programs are marketed internally: In some firms, visible support from top management for intellectual-capital programs is among the most critical success factors, whereas other firms have deliberately pursued their intellectual-capital efforts as grass-roots initiatives to facilitate knowledge-worker buy in from the bottom up.

Beyond firm-specific concerns in effecting transformation to a knowledge culture, participation in any firm’s intellectual-capital programs necessitates that knowledge workers see value in them, and the need to close the gap between new knowledge objectives and old knowledge behaviors gives rise to new questions: What sorts of programs can facilitate the creation of environments that embody the cultivation and sharing of intellectual capital as core values? How can management communicate the importance of intellectual-capital formation and investment toward supporting the behaviors of the knowledge workers who ultimately need to integrate learning, sharing, and innovating into the fabric of the firm’s operations? Organizations that address such issues explicitly take essential steps toward making viable their agendas for managing intellectual capital.

Monitoring, Valuing, and Reporting Intellectual Capital

In tandem with the cultivation of an appropriate knowledge culture and infrastructure, management can give knowledge workers incentive to contribute to the firm’s base of intellectual capital by supporting such contributions with explicit transactions. From an economic standpoint, the challenge is to create an internal market for intellectual capital, where buyers and sellers can exchange it at fair market prices. The firm that pays a royalty or otherwise recognizes the author of a frequently referenced model work product, for example, provides greater incentive for the author to make that work product widely available.

Beyond rewarding knowledge workers for their intellectual-capital contributions, management needs to monitor the formation and investment of intellectual capital toward evolving the firm’s intellectual-capital programs and work processes over time. By more systematically accounting for organizational know-how, firms also provide a basis for reporting intellectual assets to external stakeholders and for valuing selected repositories of intellectual capital for sale or transfer to other organizations.

But how should intellectual capital be measured? How can management determine its value? Our established disciplines have surprisingly little to say about these issues. Intellectual-property law makes a contribution only in its treatment of the most well-delineated intellectual assets, such as patents and trademarks. At the firm level, the disparity between the market and book values of firms in intellectually intensive industries underscores the associated limitations of modern accounting, which focuses on measuring physical and financial capital. What is needed is a more expressive system that defines the component elements of intellectual capital and provides a calculus for valuing and aggregating them.

But what are these building blocks of intellectual capital? In our traditionally unsystematic treatment of intellectual capital, we have employed gross proxies for delineating and valuing such intangibles: We retain professionals as storehouses of intellectual capital and measure their intellectual capital by rough indicators, such as education and years on the job. We count proposals produced, papers published, and take other uncompelling inventories of work products to measure intellectual output. We mostly ignore the problem of depreciating such intellectual assets in a systematic fashion, missing unseen signals to unlearn processes, techniques, and general know-how that have expired. To support the monitoring, valuation, and reporting of intellectual capital, management ultimately will need systems and processes that support knowledge accounting with a rigor comparable to our traditional systems for managing hard assets.

Purpose and Organization of this Reader

The strategic management of intellectual capital involves rethinking how the organization creates value from a knowledge-centric perspective and redesigning and orchestrating the role of intellectual assets in the firm’s strategy and operations. Firms of different character naturally will pursue correspondingly different approaches, but a growing community of managers and researchers has articulated general ways of thinking about the nature of the enterprise, its essential challenges, and emerging methods toward design and implementation that can be matched with the requirements of particular firms, The papers included in this volume explicate some of that thinking, which I have organized in terms of the classes of challenges in managing intellectual capital that I described earlier in this introduction.

In Part One of this volume, which focuses on understanding the strategic and operational roles of intellectual capital in the organization, Ann B. Graham and Vincent G. Pizzo describe case studies in managing intellectual capital and address issues underlying the design and execution of knowledge-driven business strategies. Henry W. Chesbrough and David J. Teece present a framework to assist managers in determining appropriate str...

Table of contents

• Cover
• Half Title
• Title Page
• Copyrights
• Contents
• Introduction to Series—Why Knowledge, Why Now?
• 1. The Strategic Management of Intellectual Capital: An Introduction
• Part One: Understanding the Strategic and Operational Roles of Intellectual Capital in the Organization and the Links between Them
• Part Two: Creating an Infrastructure for Cultivating and Sharing Intellectual Capital
• Part Three: Creating a Culture That Encourages Intellectual Capital Formation and Investment
• Part Four: Monitoring, Valuing, and Reporting Intellectual Capital
• Index