Managing Knowledge and
Intellectual Capital
for profit
G Roland Kaye
Professor of Management Accounting
Norwich Business School
University of East Anglia
© GRKaye 2006
G Roland Kaye Biography
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Professor of Management Accounting, Norwich Business
School, University of East Anglia
Dean Open University Business School
Director of Management of Knowledge and Innovation
Research Unit
Professor of Information Management
Senior Consultant Management Development Associates
Academic Management Accounting and Computing
Industrial Career as Management Accounting in Engineering,
Food processing, Chemicals.
Consultancies to Financial Services, Utilities, Research
Establishments, Universities, Industry and Commerce
© GRKaye 2006
Where is Knowledge?
© GRKaye 2006
Agenda
Knowledge Management and Intellectual
Capital
 Process and assets
 Valuation and Audit of IC
 Protecting and exploiting
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© GRKaye 2006
Historical background
"Capital consists in a great part
of knowledge and organization
....
Knowledge is our most powerful
engine of production"
© GRKaye 2006
Historical background
"Capital consists in a great part
of knowledge and organization
....
Knowledge is our most powerful
engine of production"
Alfred Marshall 1890
© GRKaye 2006
Intellectual Capital
Traditional Economic view – Land,
Labour, Capital.
 Revenue v Capital
 Missing Knowledge as a resource
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Alfred Marshall 1890 (109yrs ago)
 Edith Penrose 1959 (40 years ago)
 Rensis Likert (Human Asset Accounting)
1967 (32 yrs ago)
 Peter Drucker 1969 (30 years ago)
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Know how
In tools, processes and even the
architecture
 In people and the way they do tasks
 In organisational structures and
departments
 In culture, language and style of doing
business.
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KNOWLEDGE CATEGORIES
Explanatory and theoretical
- Knowing why
Learning by doing
- Knowing how
Factual knowledge - prior experience
- Knowing that
Factual knowledge - acquired knowledge - Knowing what
Social knowledge of networks
- Knowing who
Cultural knowledge facilitating
communication
- Knowledge of
meaning
(Ryle 1949)
© GRKaye 2006
Knowledge Management Drivers
Human Resources:
people as locus of
knowledge
Wealth from
knowledge +
intangible assets
Knowledge
interdependence
KM
Organizational
learning
Innovation:
advantage through
knowledge creation
IT: limits
and potentials
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Intellectual Capital –definition
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‘the possession of knowledge, applied
experience, organisational technology,
customer relationships, professional skill
that provide competitive edge in the
market’ – Edvinson L & Malone M 1997
© GRKaye 2006
Intellectual Capital
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Human Capital - the ability of individuals to apply
solutions to customers' needs; competencies; and
mind-sets.
Customer Capital - the strength of the customer
relationship; superior customer-perceived value,
increasing customisation of solutions.
Structural Capital - the capabilities of the
organization; made up of codified knowledge from
all sources – knowledge bases, business
processes -- the shared culture, values and
norms.
Social Capital – networks and relationships (but
can be included within the above categories)
© GRKaye 2006
Resources, Capabilities & Competitive
Advantage Source: Grant, 1995
COMPETITIVE
ADVANTAGE
KEY
SUCCESS
FACTORS
STRATEGY
ORGANISATIONAL
CAPABILITIES
RESOURCES
Tangible
Physical
Financial
Intangible
Human
Technology Culture
Reputation
Skills &
Communication
knowledge
& interaction
Motivation
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Resource Based View of Firm
Core competencies:
Reputation
Architecture
Innovative capability
Core competencies do not diminish with use!
Knowledge based advantages
Prahalad & Hamel 1990, Kay 1994, Nonaka &
Takeuchi 1995
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Agenda
Human Capital - the ability of individuals
to apply solutions to customers' needs;
competencies; and mind-sets
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Customer and Stakeholder
Managing relationships with all
stakeholder: investors, customers,
unions, local community, politicians etc
 Responsibility focussed and not
dispersed
 Proactive management
 Value projection and protection
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Human Capital
Labour Cost v investment in talent
 Personal knowledge and expertise
 Group and team capabilities
 Learning and sharing
 Tacit and Explicit knowledge
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The SECI Knowledge
Conversion Model
Tacit knowledge To
Tacit
knowledge
Socialization
empathizing
Explicit
knowledge
Externalization
articulating
From
Explicit
knowledge
Internalization
embodying
Combination
combining
Source: Nonaka et al, various;
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Cook and Brown - Adding
‘Knowing’ to Knowledge
Individual knowledge
Explicit
knowledge
Group knowledge
Concepts
Stories
Knowing
as Action
Tacit
knowledge
Skills
Genres
Source: Cook and Brown, 1999;
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Organisations and Knowledge
Types
Focus on familiar problems
Emphasis on
collective
endeavour
Emphasis on
contributions
of key
individuals
Focus on novel problems
Knowledge-Routinised
Based on embedded
knowledge,
e.g. a factory
CommunicationIntensive
Based on encultured
knowledge,
e.g. a media agency
Expert-Dependent
Based on embodied
competencies,
e.g. a hospital
Symbolic-Analyst
Based on embrained
skills,
e.g. a software
consultancy
Source: Blackler, 1995;
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Communities of Practice
“….. act as resources to each other,
exchanging information, making sense
of situations, sharing new tricks and
ideas, as well as keeping each other
company and spicing up each other’s
working days.”
Source: Wenger, 1998;
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Agenda
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Customer Capital - the strength of the
customer relationship; superior customerperceived value, increasing customisation of
solutions.
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Brand Value
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A brand is a thing people will pay more
for.
It has a higher perceived value.
 The brand is the ultimate connection
with customer, staff, and all
stakeholders
 It adds asset value
 It enables choice
 It guides decisions and behaviours
 It creates something no one can take
away from you
© GRKaye 2006
Goodwill in Acquisitions
Acquiring Company
Acquired Company
Grand Metropolitan
Walt Disney
Nestle
Con Agra
Cadbury Schweppes
United Biscuits
Pilsbury
ABC
Rowntree
Beatrice
Dr Pepper
Verkade
Goodwill as % of
Purchase Price
88
84
83*
70
67
66
*Nestle paid £2.5 bn for Rowntree - 6 x net assets
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Life Time Value
Gaining CIMA membership might cost
£10000 in fees and opportunity cost.
 Lifetime value if this creates a premium
in employment of £10,000 pa might be
measured as discounted value of
20years = £124,620 at 5%!
 An increased discount might incorporate
declining value added without CPD!
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Reputation management
Can be destroyed at a stroke
 Takes years to build
 Do not rely on PR and agencies
 It is what your organisation stand for
 ‘live the dream’
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Agenda
Systems and Architecture
 Structural Capital - the capabilities of the
organization; made up of codified
knowledge from all sources – knowledge
bases, business processes -- the shared
culture, values and norms.
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© GRKaye 2006
Structural Capital
Information systems within and across
the firm
 ‘productive’, logistics, marketing
capabilities
 Innovative capacity and its exploitation
 Copyrights and royalties
 Culture – ‘way things are done’
 Organisational learning
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ICT- based innovation
global markets
- e.commerce
extended organization - networks
integrated organization - intranets
distributed team working - groupware
individuals' effectiveness - multimedia
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The Iceberg phenomena
2/3rd of the costs and benefits are hidden
 Tangible costs and benefits accounted
for – Intangible hidden
 Hardware and Software accounted for
but the heritage of information in data
bases is not, nor staff skill.
 Tendency to treat investment in
systems/structures as revenue and w/o.
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Agenda
Problem of accounting valuation
 Some examples of ‘the gap’
 Valuation methods
 Audit process
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Hidden Value Dilemma
Company Market
Value
GE
169
Revenue
Profits
Net Assets Hidden
Value
79
7.3
31
138
Coco-cola 148
19
3.5
6
142
Exxon
119
7.5
43
82
Microsoft 119
9
2.2
7
112
Intel
21
5.2
17
96
125
113
$bn- 1996
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Flaw in thinking
Economists suggest share price is
expected value of future cash flows
(EVA™ Stewart 1997)
 Stock market – price at which trade is
done
 Book value – historic evidence based
value (transaction)
 Book value – based on accounting
conventions & conservatism
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© GRKaye 2006
Intellectual Capital:
Tobin’s Q = Market Value/Book Value
Enterprise = Tangible Assets + Intellectual
Capital (Brooking 1969)
Intellectual Capital = Human Capital +
Structural Capital + Customer Capital
(Skandia)
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Tobin J (1969) , A general Equilbrium Approach to Monetary
Theory, Journal of Money Credit and Banking,Vol1 no1 pp15-29
© GRKaye 2006
Valuation or Measurement Methods
Human Asset Accounting – Likert 1967
 Balanced Score Card – Kaplan & Norton 1993
 Skandia Navigator 1994
 Intangible Asset Monitor –Sveiby 1997
 IC Index – Goran & Roos 1997
 IC Audit – OU 1999
 Andriessen identified 30 methods
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Andriessen classification 2004
Is there a value
scale we can use
that reflects
usefulness/
desirability
no
Can we observe
the variable
at
hand
no
yes
Measure
yes
Is money the
unit used on
the value
scale
exit
no
yes
Can the value
be translated
into observable
criteria
yes
Financial
value
Value
measure
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no
Value
assess
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Kaplan & Norton - Balanced
scorecard
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Sveiby – CELEMI monitor
Our
Customers
Our Structures
Our People
Growth/ Renewal:
Revenue
Image
Growth/ Renewal:
New products
R&D
New customer
enhancements
Intangibles
Growth/ Renewal:
Competence
CPD
Expertise
Efficiency:
Revenue per customer
Efficiency:
Direct /indirect staff
Efficiency:
Value added per employee
Stability:
Customer satisfaction
Repeat orders
5 largest customers
Stability:
Staff t/o
Seniority and promotions
Recruitment
Stability:
Employee satisfaction
Staff mix
Staff t/o
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Rambolls holistic model
Values &
Management
Strategic
Processes
Consultancy
Structural
Resources
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Employee
results
Societal
results
Financial
Customer
results
Human
resources
Problem of services
Service industries have problem of
intangibility
 Variability from day to day - Heterogeneity
 Simultaneity of consumption and
production
 Perish ability and synchronous in time and
place
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subjective and proxy measurements
© GRKaye 2006
Summary
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Elements of Intellectual Capital
Innovation and Intellectual Capital
 Human Capital
 Systems and Architecture
 Customer Capital

Valuation and Audit of IC
 Protecting and exploiting

© GRKaye 2006
Summary
Proactive management will add value
 Knowledge increase in value with usage
 Knowledge is in the heads of every
employee as they walk out the door
 IP can only be partially protected by law
 Knowledge takes surprising forms
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© GRKaye 2006