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MANAGEMENT OF INTELLECTUAL CAPITAL WITHIN

ORGANIZATIONS: THE HRM’S

CHALLENGE

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1. STUDY OBJECTIVE By the end of the discussion students shall have learned:

• the origins and nature of intellectual capital • the role of knowledge as a key building block of

intellectual capital • the components of intellectual capital • the different ways of measuring intellectual capital;

and • the HRM’s role in obtaining, building and retaining

intellectual capital

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1. INTRODUCTION • Knowledge is now acknowledged as a distinct

factor of production in an organization. Inspite of being intangible or hidden the asset helps in the achievement and sustainance of competitive advantage.

• Tangible assets (land, buildings, equipment, inventory and financial resources) alone cannot do the trick. Their central role no longer exists.

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• Organization success in this era depends on what it knows, how it is used, and how fast new knowledge can be obtained and used.

• People owning knowledge therefore have to be treated as important assets and not mere commodities.

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2. WHAT IS INTELLECTUAL CAPITAL?

• “ Intellectual material that has been formalized, captured and leveraged to produce a higher valued asset”.

Klein & Prusak (1994) • “ the intellectual material – knowledge,

information, intellectual property, experience that can be put to use to create wealth”

T.A. Stewart (1998)

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“Knowledge that is of value to an organization”.Laurie J. Bassi (1997)

• Intellectual capital is the sum of everything everybody knows that gives an organization a competitive edge over the others.

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WHY A CRITICAL ASSET?

• Most assets depreciate when obtained, intellectual capital appreciates.

• As the service industry grows, the intellectual capital’s importance increases.

• Employees, with intellectual capital can find work opportunities elsewhere in the wide business area

• The globalization of the economy is putting pressure on organizational adaptability and innovation.

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2. THE ORGINS AND NATURE OF

INTELLECTUAL CAPITAL • Intellectual capital represents knowledge transformed to

something of value to the organization.

Where does Intellectual capital (IC) come from? The employees within the organization

- they own knowledge, skills, abilities and ideas.

- organizations rent the same from employees.

- when used or converted into products, services or

work processes the organization takes their ownership.

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• The organization itself which has data (collected facts and figures) which when organized become information (logically sorted data). Leads to knowledge.

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BENEFITS OF POSSESSING

INTELLECTUAL CAPITAL • Improved efficiency of people and operations

• Increased responsiveness to customers

• Improved decision making

• Enhanced employee satisfaction

• Savings in research and development costs

• Reduced duplication of efforts; and faster innovation of products

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3. KNOWLEDGE: THE KEY BUILDINGBLOCK OF INTELLECTUAL CAPITAL

• What is knowledge?

“the understanding of why and how something works, for example how and why the customer reaches a decision to purchase a good or service”.

Pat clarke (1998)

- knowledge is generally related to the level of

education of a person. It can be acquired from

schools or universities or elsewhere.

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- knowledge is not always of an academic nature. Is not inborn but needs learning from books, teachers or mentors and society.

• Categories of Business knowledge - Advantaged knowledge – does or can

provide competitive advantage - Base knowledge e.g best practices form an

integral part of knowledge - Trivial knowledge – that with no major impact

on the organization

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CHARACTERISTIC OF KNOWLEDGE

- must be unique, valuable and impossible to

imitate by competitors which would kill the established

competitive advantage

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4. THE COMPONENTS OF

INTELLECTUAL CAPITAL

IC contains at least three components:

(Hubert Saint-Onge et al; 1996)

• Human Capital (or Employee Capital)

- the capabilities (usable knowledge, skills

and competence) of the individual to solve

problems

-could be a result of genetic inheritance,

education, experience and attitudes about life

and business.

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• Customer Capital (relational or external capital) - includes knowledge of market channels,

customer and supplier relationships and industry associations • Structural Capital (organizational or internal capital)

- the capabilities of the organization to meet market needs (eg. Organizational operating systems and manufacturing processes).

Different types of knowledge are held within the above components, both tacit and explicit knowledge. Tacitknowledge obtains as follows:

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• In human capital – it is the mindsets of individuals, their assumptions, biases, values and beliefs.

• In customer capital- it is the individual and collective mindsets of customers, which shape their perceptions of value provided by any given product or service

• In structured capital – it is the collective mindsets of the organization’s members, which shape the culture of that organization, including norms and values.

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5. THE MEASUREMENT INTELLECTUAL CAPITAL

“ What you manage you must be able to measure, and what you measure you must be able to manage”.

Ulrich, D (1997)

There are several approaches for measuring

Intellectual capital: (Robert Kaplan & David

Norton, 1992).

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• Relative value - The ultimate goal is progress, meaning and quality not a

quantitative target. • Balanced scorecard

- supplements traditional financial measures with added perspectives such as customers, learning or growth

• Competency models - observing and classifying the behaviours of successful

employees and the market value of their output

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• Benchmarking - identifying organizations that are recognized leaders in leveraging their intellectual assets; determining how wellthey score on relevant criteria, and comparing with yours.

• Business worth - evaluation focusing on the cost of missed or undertilized business opportunities

• Knowledge bank - treats capital spending as an expense instead of an asset and portion of salaries as an asset because it creates cash flow

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• Calculated intangible value -compares a company’s return-on-assets with a published average ROA for the industry

• Brand-equity valuation -measures the economic impact of a brand (or other intangible assets) on such factors as pricing power, distribution reach, and ability to launch new product’s as line extensions.

Source: Jean L. Greaf, The Montagu Institute, 1997.

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• Beyond the above, Kaplan & Norton suggest managers work at the business from four important perspectives:

• a customer perspective – how do customers see the organization?

• an internal perspective – what must the organization excell at?

• An innovation and learning perspective- can the organization continue to improve and create value?

• A financial perspective- how does the organization look to shareholders?

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6. HR’S ROLE IN OBTAINING BUILDING AND RETAINING INTELLECTUAL

CAPITAL

• The ultimate goal of any organization striving towards sustained competitive advantage is to have a workforce with a unique knowledge base.

• The HR’s challenge is to obtain, build and retain world-class workforce with the potential to create a competitive advantage.

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6.1 OBTAINING INTELLECTUAL

CAPITAL • Through recruitment

- of individuals with a broad competency base, higher-quality talent and ambitionto multiskill.

• Developing and unleashing internal human capital - by creating a culture of learning - by rewarding individuals for collecting, sharing, and creating new ideas

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• Better use of information technology by, - updating present systems - distributing information to different

groups by internet or WWW• Mergers and acquisitions

- benefiting from knowledge of the newemployees

• Creating a learning organization - where everyone is busy acquiring and sharing

new knowledge

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6.2 BUILDING INTELLECTUAL CAPITAL

• Continuous improvement and building of the workforce is necessary through:

- re-engineering the organization structures

and building a knowledge-leveraging

strategy

- developing a culture where everyone

becomes a knowledge leader

- making a commitment to management to

communicate clearly and share knowledge

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-developing a framework for capturing

knowledge to avoid losing it.

-making information systems accessible

and easy to use

-building technology which is human

-centred and focussed on solving problems

-creating, capturing and transferring knowledge

across internal boundaries; and

-providing time and resources for knowledge

sharing-tearing down internal barriers to

knowledge sharing

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- providing time and resources for knowledge

sharing-tearing down internal barriers to

knowledge sharing

- The process of building intellectual capital may also require hiring of a chief knowledge officer (CKO), or chief learning officer (CLO).

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6.3 RETAINING INTELLECTUAL

CAPITAL • How do we prevent knowledge workers from leaving the

organization?• The answer lies in obtaining a commitment from

employees to stay. What does that require?- Empowering-enabling employees

to control decisions on how to do their work - Strategy or vision-offering employees a vision and direction that commits them to working hard

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-Challenging work-providing employees with stimulating work that develops new skills

-Work culture -establishing an environment of celebration, fun, excitement and openness for work accomplished

-Shared gains -compensating employees properly for work accomplished

-Communication-candidly and frequently sharing information with employees

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-concern for people - ensuring that each individual is treated with dignity and differences are openly shared

-Technology - giving employees the technology to make their work easier

-Training and development - ensuring that employees have the skills to do their

work well

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Reference: Chris Brewster at al, Contemporary Issues in Human Resource Management, Oxford

University Press Southern Africa Capetown, 2000.