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 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 © 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 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) © GRKaye 2006 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. © GRKaye 2006 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 © GRKaye 2006 Intellectual Capital –definition ‘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 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 © GRKaye 2006 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 © GRKaye 2006 © GRKaye 2006 Agenda Human Capital - the ability of individuals to apply solutions to customers' needs; competencies; and mind-sets © GRKaye 2006 © GRKaye 2006 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 © GRKaye 2006 Human Capital Labour Cost v investment in talent Personal knowledge and expertise Group and team capabilities Learning and sharing Tacit and Explicit knowledge © GRKaye 2006 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; © GRKaye 2006 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; © GRKaye 2006 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; © GRKaye 2006 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; © GRKaye 2006 Agenda Customer Capital - the strength of the customer relationship; superior customerperceived value, increasing customisation of solutions. © GRKaye 2006 Brand Value 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 © GRKaye 2006 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! © GRKaye 2006 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’ © GRKaye 2006 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. © 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 © GRKaye 2006 ICT- based innovation global markets - e.commerce extended organization - networks integrated organization - intranets distributed team working - groupware individuals' effectiveness - multimedia © GRKaye 2006 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. © GRKaye 2006 © GRKaye 2006 Agenda Problem of accounting valuation Some examples of ‘the gap’ Valuation methods Audit process © GRKaye 2006 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 © GRKaye 2006 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 © 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) 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 © GRKaye 2006 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 © GRKaye 2006 no Value assess © GRKaye 2006 Kaplan & Norton - Balanced scorecard © GRKaye 2006 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 © GRKaye 2006 Rambolls holistic model Values & Management Strategic Processes Consultancy Structural Resources © GRKaye 2006 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 subjective and proxy measurements © GRKaye 2006 Summary 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 © GRKaye 2006