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1. Introduction
Intellectual capital issues have undergone extraordinary
development since the beginning of the 1990s. The increasing difference
between company market value and company book value has prompted academics and
practitioners to consider the concept of “intellectual capital” as a key
determinant of the process of value creation for shareholders, managers, and
society as a whole.
The development of intellectual capital
theory has primarily been guided by the ideas and thoughts of a handful of
influential practitioners, including Sveiby (1997) and Edvinson (Edvinson and
Malone, 1997). These pioneers established the foundations of the way in which
intangible factors determine the success of companies. In the words of
Andriessen (2001), the pioneers established the basis of the “intellectual
capital standard theory”. Their respective models—“Intangible Assets Monitor”
(IAM) (Sveiby, 1997) and “Skandia Navigator” (Edvinson and Malone, 1997)—are
representative of the assumptions, principles, and foundations of the
intellectual capital standard theory. However, later contributions from other
academics and practitioners have developed and refined the standard theory.
Today, this
theory is the pre-eminent guide to the
management of intangible assets, and has facilitated success through
sustainable competitive advantage for leading companies and organisations.
The present paper is structured as
follows. Following this Introduction, Section 2 notes the representative
models and methodologies from the standard theory (or “prevailing
paradigm”)—the IAM, the “Balanced Scorecard”, and the “Skandia Navigator”.
These models and methodologies are not discussed in the present paper because
it is assumed that the reader is already familiar with the main features of
these models. Section 2 also contains an explanation of the assumptions and
principles that support the standard theory (or prevailing paradigm).
In Section 3, other models and
methodologies as alternatives to the standard theory are introduced. These
include the “IC Accounting System” (Mouritsen et al., 2001), the “Value
Explorer” (Andriessen and Tissen, 2000), and the “Intellectual Capital
Benchmarking System” (Viedma, 2001). These models and methodologies are not
discussed in the present paper because it is assumed that the reader will have
easy access to their main features and characteristics. The three models share
similar goals and, taken together, propose some new approaches that constitute
an alternative theory to the standard theory described in Section 2. Section 3
also examines, in some depth, the foundations and principles on which the new
theory is based.
In Section 4, the paper attempts to
synthesise both of these theoretical approaches with other new views and
contributions. These new views and contributions are carefully discussed.
Finally, in Section 4, the paper tries to develop the basis for a first
general theory of intellectual capital.
In Section 5, some of the most relevant
conclusions are presented.
2. Representative models and principles
underlying the standard theory (or prevailing paradigm)
2.1 Classification of intangible
assets
Although intangible assets cannot be
touched, they can be identified and reasonably classified. One such simple
classification is depicted in Figure 1
Figure 1: Intangible assets
monitor(Sveiby, 1997).
2.1.1 Assets of individual
competence
This term refers to assets such as the
employees’ education, experience, know-how, knowledge, skills, and values and
attitudes. These assets are not owned by the company, but the use of those
assets is accessed by the company’s hiring of employees. This type of asset is
also known as “human capital”.
2.1.2 Assets of internal structure
This term refers to the company’s formal
and informal organisational structure, work methods and procedures, software,
databases, research and development (R&D) systems, management systems, and
culture. These assets are owned by the company and some can be legally
protected (patents, intellectual property, and so on). They are also known as
“structural capital”.
2.1.3 Assets of external structure
This term refers to the company’s
portfolio of customers (generally known as “goodwill”) and its relationships
with suppliers, banks, and shareholders, its cooperation agreements and
alliances (strategic, technological, production, and marketing), its
commercial brands, and its image. These assets are owned by the company and
some can be legally protected (commercial brands, and so on). They are also
known as “relational capital”.
2.2 Representative models of
prevailing paradigm.
Because intellectual capital is the key
source of wealth creation, it is logical that firms pay close attention to the
effective management of such capital. Therefore, the ability to identify,
audit, measure, renew, and increase these intellectual assets is a key factor
for the success of companies in the modern environment. In this regard,
significant effort has gone into the search for methodologies and models to
improve the management of intellectual capital—although, it must be said, with
mixed success. The main reason for this is the nature of these assets and the
fact that each business has its own particular knowledge mix, specific
objectives, and market environment. Three authors have been of special
significance in this search for useful models of intellectual capital:
§ Sveiby (1997) who designed the
first intellectual capital model—the “Intangible Assets Monitor” (IAM);
§ Kaplan (Kaplan & Norton, 1992,
1996a, 1996b) who devised the “Balanced Scorecard” methodology (especially
with respect to effective strategy implementation); and
§ Edvinson (Edvinson and Malone,
1997) who was the architect of the “Skandia Navigator” (followed by Ross et
al. 1997, whose “Process Model” gave a strategic perspective to the “Skandia
Navigator”).
As noted above, these models and
methodologies are not discussed in the present paper because it is assumed
that the reader already knows their main features or has easy access to them.
2.3 Assumptions and principles
of prevailing paradigm
The main assumptions and principles that
support the standard theory (or the prevailing paradigm) can be summarised in
seven points:
§ The accounting view;
§ Breakdown of intellectual capital;
§ Cause-and-effect relationships;
§ Relatively static approach to value-creation processes;
§ Limitation of concept of intellectual capital;
§ Use of the same models and methodologies to manage and produce
reports; and
§ Attempts to treat intangible assets as if they were tangible.
Each of these is discussed briefly
below.
2.3.1 The accounting view
Basically, the models noted above try to
explain the causes of the difference between the company market value and the
company book value. The aim is to establish an intangible assets accounts plan
that allows identification of the relevant intangible assets and their later
valuation. This is an accounting approach to intellectual capital. It
identifies the company’s intangible assets and enters them in the
books—complementing the financial balance sheets with another kind of balance
sheet (of intangibles).
It should be noted in passing that the
“Balanced Scorecard” does not belong to this accounting approach—as it has a
strategic approach. Although the “Balanced Scorecard” has been included among
the intellectual capital models in this study, it is not a standard part of
the literature on this subject.
2.3.2 Breakdown of intellectual
capital
This is a common denominator of all
models. Despite the different terminology that they each use, the three models
previously mentioned all break down intellectual capital into its distinct
elements. These elements can be summarised as human capital, structural
capital, and relational capital. For each of these elements, the company
establishes a set of indicators that is used to take account, assess, and
manage each specific type of capital. That is, each type of capital is deemed
independent from the rest in the model’s intrinsic processes.
The actual daily operations of firms show
that this division is artificial because, in the value-creation processes, all
three types of intellectual capital act together, and such a division never
arises. Furthermore, physical and financial assets act together with the
intangible assets in the value-creation processes.
2.3.3 Cause-and-effect relationships
The models of the prevailing paradigm
examine cause-and-effect relationships between each of the three types of
capital (human, structural, and relational) and each of the objectives
(strategic and financial). These are extremely difficult to establish—due
mainly to the artificial division of the model’s intangible assets. In the
value-creation processes, the human assets act together with the structural
and relational assets, making it difficult for directors and managers to
determine such cause-and-effect relationships.
2.3.4 Relatively static approach to
value-creation processes
The artificial categorisation of
intellectual capital lacked consideration of how firms actually deploy their
resources through their organisational core activities. Because of this, the
above-mentioned models fall short in explaining how firms effectively compete,
and how they recreate the sustainable competitive advantages that give rise to
value creation.
Although Sullivan (2000) deemed the IAM
and the “Skandia Navigator” models to be oriented towards value creation, it
should be emphasised that they lack the dynamism and flexibility required in
the turbulence of the modern environment. By focusing on existing intangible
assets (human, structural, and relational intellectual capital), these models
become prisoners of a dangerous reductionism. Indeed, the most common reason
for failure in firms today is deficient strategy implementation—which actually
demands paying close attention to what the firm does (rather than what it
has). In short, the prevailing paradigm lacks an activity-based view (ABV).
2.3.5 Limitation of concept of
intellectual capital
Existing models limit discussion of
intellectual capital to ideas of means of production, and do not take proper
account of other non-intellectual intangibles—such as values, organisational
culture, and so on. The models described above consider intangible assets as
being mainly intellectual assets or knowledge assets—that is, those that
psychologists ascribe to the left side of the brain. However, other intangible
assets (such as values, organisational culture, talent, motivation, and
employee commitment) also exist. Even if these other affective assets cannot
be labelled as “intellectual”, they are of great importance to the success of
companies and organisations. However, because the emphasis is on intellectual
assets, other relevant intangible assets are neglected.
2.3.6 Use of the same models and
methodologies to manage and produce reports
The above-mentioned models are too often
identified with the reports of intangible assets that they generate—reports
that supplement the balance sheets of the company’s tangible assets. Usually,
the same models and methodologies that are used to prepare such reports of
intangible assets are also used to manage the same intangibles—even though the
requirements of management are quite different from those of preparing a
report. One exception is the “Balanced Scorecard”, which was especially
conceived as a management tool. Moreover, the end users of intangibles reports
are shareholders, suppliers, financial institutions, and so on—that is,
external stakeholders in general. In contrast, the end users of management
models and methodologies are the organisation’s internal managers.
2.3.7 Attempts to treat intangible
assets as if they were tangible
The use of the term “intangible assets”
is dangerous—in that it induces people to think of “intangibles” as assets
that can be entered in the books as if they were tangibles, using the extended
accounting system of double entry.
Several efforts have been made to
assimilate intangible assets with tangible assets. For example, there have
been attempts to establish a sort of general accounting plan in line with
traditional accounting methods—including the utilisation of universal
indicators that might serve to approach almost any situation. The most
comprehensive list of such indicators corresponds to the “Universal
Intellectual Capital Report” of Edvinson and Malone (1997). They attempted to
apply to intangible assets similar procedures to those that have been
universally applied to tangible assets—with the aim of generating balance
sheets and earnings statements that could be used to make comparisons among
any type of company, no matter its nature. Caddy (2000) followed a similar
approach in his attempt to discover and assess not only intangible assets but
also intangible liabilities.
3. Representative models and principles
underlying the new theory (or new paradigm)
3.1 Representative models of new
paradigm
In the late 1990s the problems
encountered (particularly by small and medium enterprises) when trying to put
into practice the prevailing intellectual capital models and methodologies led
to the development of new methodologies and an alternative theoretical
paradigm. Among these new methodologies, those that stand out because of the
relevance of their empirical applications (especially successful among small
and medium enterprises) are the “IC Accounting System” (Mouritsen et al.,
2001), the “Value Explorer” (Andriessen, 2001), and the “Intellectual Capital
Benchmarking System” (Viedma, 2001, 2003a, 2003b). These models and
methodologies are not discussed in the present paper because it is assumed
that the reader has easy access to their main features. However, the
“Intellectual Capital Benchmarking System” is explored in a little detail
because it represents an introductory methodology to the new theory of
intellectual capital.
3.1.1 “Intellectual Capital
Benchmarking System” (ICBS)
The “Intellectual Capital Benchmarking
System” (ICBS) has a strategic view—as does the “Value Explorer”. The starting
point for the ICBS is the firm’s mission, strategy, and objectives—but, in
this case, “the best in class” global competitor is also considered, thus
allowing benchmarking to be undertaken in a systematic and permanent way.
ICBS is also a management tool that
allows companies to compare their core competencies or intellectual capital
with those of the best world competitors from the same activity segment.
ICBS is grounded in certain factors and
criteria that determine competitiveness in the global market environment.
Those principal factors are:
§ Competitive environment: This
refers to the specific business unit environment. It includes Porter’s
competitive forces (customers, competitors, suppliers, entry barriers, and
substitutive products), as well as demand evolution (past behaviour and
foreseeable future), and the extent to which the activity in question is
internationalised.
§ Outcomes: Expected economic
and financial outcomes of the specific business unit.
§ Customer needs: Customer
segment needs that the company expects to cover through the business unit
activities.
§ Products and services:
Products and services with their attributes, characteristics, functions, and
embedded knowledge and technologies.
§ Processes: Value chain
activities, primary as well as secondary, that are necessary to produce
current products and services. These activities are made up of core business
activities, outsourcing activities, and strategic alliances and cooperation
agreement activities.
§ Competitive advantages:
Competitive advantages are generated mainly in the different value-chain core
business activities.
§ Company core competencies:
Essential knowledge or core competencies that will produce competitive
advantages.
§ Personal competencies:
Professionals, managers, and support staff competencies and capabilities that
will generate core competencies.
This eight-factor framework is a flexible
framework that allows identification and evaluation of the core competencies
or essential knowledge within each particular factor. The framework explains
how sustainable competitive advantages are achieved in final products and
services. Companies, if they want to be successful, need to produce
competitive products and services. That is, they must focus on their core
business activities, and outsource others. They must also work through
carefully chosen cooperation agreements and strategic alliances with suppliers
and other companies.
Nevertheless, competitive products and
services are not easily achieved. A lot of work is needed to be able to
establish competitive advantages in each core business activity of the value
chain. Core competencies in the value chain’s core business activities produce
products and services with competitive advantages and high knowledge or
intellectual capital content. Innovation and research and development play
fundamental roles in those core business activities. They allow acquisition of
new knowledge and new core competencies which, in turn, generates new products
and services, intelligent products, new processes, new technologies, and so
on—simultaneously improving both the present products and the processes and
technologies that follow.
Finally, the acquisition of core
competencies and the accomplishment of all these competitive advantages are
possible only by means of the actions of the different persons deemed to be
crucial to the company in its technological and managerial scope. The personal
competencies of these key people are responsible for the generation of core
competencies, which in turn produce competitive advantages.
The general model that has been described
above is depicted in Figures 2 and 3.
ICBS identifies the relevant factors and
criteria for a specific activity segment.
The systematic and continuous use of ICBS
allows firms to generate intellectual capital balance sheets that complement
the financial statements, and to improve their intellectual capital.
Figure 2: ICBS
Figure 3: ICBS II
3.2 Assumptions and principles
of the new paradigm
The main assumptions and principles that
support the new intellectual capital theory (or the new paradigm) can be
summarised in seven points:
§ The strategic view;
§ Not breaking down intellectual capital into its constituent parts;
§ Core competencies as the only intangible assets to manage;
§ Reality and dynamism in the value-creation processes;
§ Breaking down core competencies into their constituent intangible
assets;
§ Core competencies linked with core capabilities of professionals
who work independently or in teams; and
§ Evaluation and assessment of the value-creation potential of future
core competencies.
Each of these is discussed below.
3.2.1 The strategic view
According to this view, a firm’s mission,
strategy, and objectives are the principal points of reference for
intellectual capital management. According to this approach, it is not
important to determine and appraise every intangible asset—because only a few
are relevant to a firm’s strategy formulation and implementation. These few
relevant intangible assets are usually grouped according to the firm’s core
competencies or core capabilities—which are the true intellectual capital and
are therefore the key variables to manage.
The theoretical background to the
significance of core competencies is grounded in resources and capabilities
theory (Barney, 1991, 1999; Grant, 1991, 1998; Teece, Pisano and Shuen 1997).
In short, this view focuses on the fact that, in turbulent and changing
environments, competitive sustainable advantages are due mainly to resources
and capabilities—in particular, the core competencies or capabilities that
Andriessen (2001) describes in terms of a “coordinated bundle” of intangible
assets that constitute the roots of the firm’s competitive sustainable
advantage
3.2.2 Not breaking down intellectual
capital into its constituent parts
The new theory—freed from production of
annual reports and statements, and accounting principles and rules
conditionings—focuses on a strategic view in achieving the firm’s mission and
objectives and in surpassing its “best in class” competitors. Thus, the
artificial division of intellectual capital into human, structural, and
relational capital is of little use because the products and services that
result from a specific strategy have no relationship at all with these three
types of capital considered independently. Rather, these products and services
are associated with an integrated bundle of such assets as reflected in core
competencies and capabilities.
3.2.3 Core competencies as the only
intangible assets to manage
From the above discussion, it can be
concluded that, for each business unit in the operations value chain, and for
each project in the innovation value chain, the only assets to manage are
those grouped in the core competencies. A firm’s specific core competencies
are not usually very numerous. Moreover, because a relationship between
products and services and the core competencies that enable them is easily
established, an appraisal of core competencies can be made by estimating the
expected returns from the products in which they participate.
3.2.4 Reality and dynamism in the
value-creation processes
One of the main questions that has always
been at the core of the strategy theory is how firms compete in their
industries or, more broadly, in the global markets. This leads to another
question: ‘How do firms create and exploit value?’. This leads to an
examination of what is deemed to be the essence of the entrepreneurial
success—good strategy formulation and implementation. Seeking answers to these
sorts of questions leads back to both the resource-based view and the
activity-based view (because implementation is mainly about activities) to try
to explain how firms deploy resources in order to create sustainable
competitive advantages and to achieve superior performance.
From a knowledge perspective, this is
possible only if the models pertain to the new emerging paradigm of
intellectual capital—the ICBS and the Value Explorer. The focus of these new
models on a firm’s core competencies allows considerations not only of which
intangible resources are crucial to achieving success, but also which core
activities must be acted upon (if it is accepted that value creation and
exploitation are both intrinsically resource-oriented and activity-oriented).
As Haanes and Fjeldstad (2000) have stated, it is not only what the firm has,
but what the firm does, that matters in value creation.
The concept of sustainable competitive
advantages that underlies the processes of value creation and exploitation
presupposes a certain dynamism that is extremely difficult to capture if
attention is paid only to resources, and if an assessment tool based on a
false division of intellectual capital into three artificial categories is
used in the analysis. As Man et al. (2002, p. 128) have stated, “… the dynamic
nature [of the concept of competitiveness] involves the dynamic transformation
of competitive potentials through the competitive process into outcomes”. Both
resources (tangible and intangible) and activities exist in competitive and
non-competitive processes, and this makes it impossible to appraise the firm’s
intangible forces if only a resource-based view is taken—a view that requires
the creation of competitive advantages for attaining superior performance and
market value, but fails to take adequate consideration of the non-competitive
processes.
3.2.5 Breaking down core
competencies into their constituent intangible assets
Once the principle that core competencies
constitute the firm’s authentic intellectual capital has been accepted, the
improvement, strengthening, and enrichment of the intangibles “bundle” is
enhanced if they are broken down into their constituent parts. This should be
undertaken in a broader sense, including not only intangibles that are
intellectually based but also intangibles that are affective in origin. To
analyse and manage those intangible components the core competencies
classification included in the “Value Explorer” is of assistance.
3.2.6 Core competencies linked with
core capabilities of professionals who work independently or in teams.
Core competencies are the result of
aggregating intangible assets of different types. But each asset is made up of
knowledge and skills, and skills are always generated by human beings—working
either independently or in teams. Thus, core competencies management is
essentially dependent upon the effective management of the core competencies
of professionals who work either individually or in coordinated teams.
3.2.7 Evaluation and assessment of
the value-creation potential of future core competencies
Finally, the strong relationship between
future products and services and the competencies that support them allows an
assessment of the future potential of each core competency or core capability.
The “Value Explorer” appraises the strength of each core competency by means
of the following four criteria: (i) value-added to customers; (ii) future
potential; (iii) sustainability; and (iv) robustness.
4. A General Theory of Intellectual Capital
4.1 Other new views and
contributions
Following the above discussion, the
present paper attempts to synthesise both of these theoretical approaches with
other new views and contributions. The new views and contributions considered
in this context are:
§ The essential role of commitment and action;
§ Intellectual capital as the difference between intangible assets
and intangible liabilities;
§ Intellectual capital as a dynamic concept;
§ Intellectual capital identified with the concept of a ‘business
recipe’ in action;
§ Benchmarking as a strategic tool.
Each of these is discussed below.
4.1.1 The essential role of
commitment and action
Commitment and action have an essential
role in the process of wealth or intellectual capital creation. Firm
competencies are the ultimate creators of intellectual wealth or intellectual
capital. As such, they are a necessary but not sufficient condition for wealth
creation. However, firm competencies must be established with the
incorporation of certain personality characteristics and attitudes that
reflect a strong commitment to convert competencies into competitive and
profitable products and services. This positive emotionality embedded in the
concept of commitment, together with an appropriate bundle of competencies, is
what ultimately accounts for differences in human and organisational
behaviour. Commitment is the ‘copper wire’ that leads human competencies
through to superior organisational performance. It is the element that enables
these competencies, purposefully aligned with the firm’s strategy and
objectives, to find their way to market considerations.
Furthermore, commitment accounts for the
sustainability of the firm’s competitive advantages. The challenge of
consistently delivering superior performance requires extraordinary effort and
sustained commitment on the part of the key people in an organisation. The
demands for innovation that the knowledge economy has exerted on firms has, in
turn, emphasised talent as the main value-driver of capital creation (both
wealth and intellectual capital). Given that talent is acknowledged as a key
source of competitive advantage, the ability of a firm to manage this
intangible also becomes a core competence that adds to the firm’s value. In
such an environment, commitment needs to be managed as well as competencies
(Mayo, 2001; Gubman, 1998).
This view of commitment and action draws
upon Jericó’s (2001) conceptualisation of talent as being the result of:
competencies X commitment X action
It also draws upon Ulrich’s (1998)
definition of intellectual capital as being:
competencies X commitment
This view is also in accordance with the
work of Man et al. (2002) and Mayo (2002) whose contributions emphasise that
competencies alone cannot deliver superior performance in isolation from a
more complex bundle of human capabilities (including personal values and
attitudes).
It is therefore apparent that
intellectual capital theory needs to develop new ways of systematically
including commitment in its appraisals. It has long been recognised by
theorists in organisational behaviour that commitment is a basic driver of a
firm’s performance, and its explicative power has been clearly demonstrated in
entrepreneurship research (Beattie, 1999; Hood and Young, 1993). In
particular, the concept of ‘utility’, as adopted in the economic views of
entrepreneurship theory (Douglas and Shepherd, 2000), is important in this.
Perhaps what is missing, as Hitt et al. (2001) called for, is an integration
of entrepreneurial and strategic thinking.
4.1.2 Intellectual capital as the
difference between intangible assets and intangible liabilities
Practically all models (both those of the
prevailing theory and those of the new paradigm) make reference only to
intangible assets. Caddy (2000), in his article “Intellectual Capital:
recognizing both assets and liabilities”, was the first to consider the
existence of both intangible assets and liabilities in organisations. Whereas
intangible assets are oriented towards wealth creation, intangible liabilities
are oriented towards its destruction.
The systematic application of the
available intellectual capital measurement tools should provide hints as to
what is going wrong in a given organisation, and should thus point to the
presence of certain flaws (or intellectual liabilities) that are undermining
the firm’s potential for intellectual value creation. According to Powell
(2001), any assessment of a sustainable competitive advantage should consider
competitive advantages and competitive disadvantages simultaneously.
It is apparent that intellectual capital
should be defined as the difference between intangible assets and intangible
liabilities, such that positive and negative drivers of value creation are
both considered—thus allowing effective intellectual capital management. Given
that managing intangible assets is a difficult task, identifying and measuring
intangible liabilities would appear to be an even more difficult task.
However, intellectual capital theory is mature enough undertake this exercise.
4.1.3 Intellectual capital as a
dynamic concept
Most models approach intellectual capital
only in terms of a static concept, without reference as to how intangible
categories create and destroy wealth. They fail to consider wealth creation
and destruction as taking place through virtuous circles (Knight, 1999) and
vicious circles.
A virtuous circle can be said to be in
place when there is a good alignment of the personal and professional
objectives of key people with those of the organisation, thus leading to an
environment of creativity and positivity. In contrast, vicious circles reflect
a malalignment of the objectives of employees and those of the organisation.
It is possible to identify and manage these circles only through a dynamic
approach to intellectual capital assets and liabilities. This identification
of virtuous circles and vicious circles must be combined with the
identification of intellectual assets and liabilities (as noted above).
Vicious circles and virtuous ones can
take a long time to become apparent and, once they are identified, it can take
time for an organisation to reverse their effects. This is significant in a
competitive global environment. Once the market starts giving signals of a
misfit between its value parameters and the firm’s value offer, time for
adjustment can be very short. The presence of strong competition, together
with the time required to adjust internal vicious circles and intellectual
liabilities, can mean that firms are simply unable to adjust in a timely
fashion.
All of this emphasises the need to
include activity-based views (ABVs) within the new general theory of
intellectual capital.
4.1.4 Intellectual capital
identified with the concept of ‘business recipe’ in action
Core knowledge and core competencies are
brought to bear in creating value through a successful ‘business recipe’ (BR).
The difference between a successful business formula and a successful business
recipe is the same as that between a successful formulated strategy and a
successful implemented strategy. Superior performance that ends in value
creation is a natural consequence of a firm’s success in bringing a superior
business formula into the market.
This emphasis on implementation is thus
significant for any new general theory of intellectual capital—especially in
view of the comments already made (above) about the importance of
activity-based views in identifying intellectual liabilities and vicious
circles.
4.1.5 Benchmarking as a strategic
tool
Recognising the importance of
benchmarking as a strategic tool allows early identification of virtuous and
vicious circles, and facilitates the management of intellectual capital in
accordance with the new views and contributions outlined thus far. The only
intellectual capital measurement tools that introduce benchmarking techniques
in their appraisals are those of the Innovation Intellectual Capital
Benchmarking System (IICBS) (Viedma 2003a) and the Operations Intellectual
Capital Benchmarking System (OICBS) (Viedma 2003b). The objective of both the
IICBS and the OICBS is to determine whether the firm possesses superior core
competencies in relation to the world’s best competitor. This can be used to
account for sustainable competitive advantages that might lead to superior
performance and wealth creation.
In terms of assessing world
competitiveness, IICBS and OICBS benchmark a firm’s business recipe against
that of its world’s best competitor. A firm will be able to create value in
the long run as long as its BR has proven to be superior to the world’s best.
A detailed and thorough process of benchmarking will enable the identification
of superiority (or inferiority)—signalling the presence of virtuous (or
vicious) circles that will have to be subsequently managed.
Markets are changing with increasing
rapidity, making it very difficult for firms to keep track of the innovations
and performance of competitors. In this context, strategic benchmarking, if
applied systematically, becomes an effective and efficient tool to track the
firm’s value-creation processes in creating sustainable competitive
advantages. Benchmarking is effective because it focuses on what is strictly
relevant to value creation: a superior BR and core competencies. It is
efficient because it fosters a better assignment of organisational resources
as long as the unit of analysis is essentially the firm’s BR. Benchmarking the
firm’s BR with the best competitor’s BR informs its key people about how well
they have been doing and whether an in-depth analysis is required.
However, a firm’s intellectual assets and
liabilities, together with its virtuous and vicious circles, remain a matter
for the firm’s internal management. The effectiveness of management will
obviously influence performance—either transforming the firm’s BR to reach the
point of being a superior BR that creates value, or never reaching that point
and failing to create extra value.
4.2 The formulation of a general
theory of intellectual capital
As a result of the above discussion, the
main ideas of a general theory of intellectual capital can be depicted in
simplified form (see Figure 4).
Figure 4: General theory of intellectual
capital (main concepts)
The principles on which this new theory
rests are as follows.
§ A firm’s success is always the
result of both well-formulated and well-implemented strategies (Grant, 1998).
§ Successful strategy
formulation and execution crystallises in a successful business recipe (SBR)
that offers customers competitive and good-quality products and services.
Ultimately, an SBR is the market’s validation of the firm’s competitive
quality offer.
§ Strategy formulation and
execution is always a human task. It is in the hands of the top management
team (TMT) and the firm’s most important technicians and managers—its key
professional people (KPP).
§ The TMT and the KPP start from
a business formula (that is, a formulated strategy), work through the
innovations and operations value chains, and finally accomplish an SBR (as an
implemented strategy). Those activities can be performed in a superior way due
to the core knowledge and core competencies of the KPP.
§ Apart from the core knowledge
and competencies of the TMT and KPP, the process also requires commitment from
the TMT and KPP to convert the business formula into an SBR, and thus carry
the firm to success. Such a commitment fosters a climate of positivity and
trust that is essential for knowledge sharing, organisational learning, and
value creation. In short, this is an extended version of one of the most
relevant principles of leadership effectiveness—that of “engaging people”
(Ulrich et al., 1999).
§ A firm’s BR can only be judged
as being successful (that is, an SBR) when it has been proven to be clearly
superior to those of the best international competitors as a consequence of a
complete and detailed process of benchmarking.
§ For analytical purposes, core
knowledge and core competencies can be broken down into their constituent
parts of human assets, structural assets, and relational assets.
§ The engine of the process
leading to an SBR are the core knowledge, core competencies, and strong
commitment of the TMT and KPP who strategically manage value-chain activities
in a motivating and knowledge-sharing environment. This is dynamics of
intellectual capital creation through virtuous circles. An effective SBR must
constantly transform itself to fit the demands of an ever-changing
environment.
§ It should not be assumed that
the TMT always develops certain activities and actions that are perfectly
aligned with the firm’s strategy and objectives. Frequently these top managers
coexist with others whose professional and personal strategies are not aligned
with those of the organisation—thus producing vicious circles.
§ The engine of the process
leading to wealth destruction (BR deterioration) starts in the TMT—in those
managers whose personal objectives prevail against the organisation’s
strategic objectives. These managers put their core knowledge, core
competencies, and commitment into effect in a way that does not produce value
creation. Rather, they foster internal fights for power, intrigues, and a
culture that is negative in its effects in terms of the firm’s requirements
for innovation and competitiveness.
§ The above description of
virtuous and vicious circles represents two extremes in a continuum of
typologies. For a given firm, it is to be expected that several circles of
both types might coexist, each of them more or less important, thus placing
the firm in an intermediary position between the two extremes of ‘virtuous’
and ‘vicious’. These configurations evolve through time. They change, expand,
and contract—depending on the firm’s abilities to manage them effectively. It
is worth noting that the negative effects of vicious circle are generally more
pervasive than the positive effects of virtuous circles—causing a given firm’s
performance to shift to the left (thus invading the virtuous positive zone).
Figure 5 depicts these ideas.
Figure 5: The coexistence of virtuous and
vicious circles
5. Conclusions
An analysis of representative models of
the prevailing theory, together with those of the alternative new theory,
followed by a synthesis of the two and the integration of new views and
contributions, has enabled the present paper to advance a first general theory
of intellectual capital. By conceptualising intellectual capital as the
difference of intellectual assets and liabilities, this new general theory
attempts to unravel and tackle the fundamentals of the value-creation process
in firms. At the inner core of such an analysis is the concept of the
management of virtuous and vicious circles, and the importance of personal
objectives of top management and key personnel being aligned with objectives
of the organisation in a spirit of strong commitment.
The general theory of intellectual
capital introduces a new concept of superior business recipe (SBR) to
emphasise the importance of successful implementation in a context of a
dynamic understanding of intellectual capital.
Finally, in the search for new
methodologies to manage intellectual capital in accordance with the principles
of the new general theory, the OICBS and IICBS methodologies have been
emphasised in the belief that strategic benchmarking is the best available
tool to keep track of the innovations and value-creation processes of
competitors.
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