INTELLECTUAL CAPITAL MANAGEMENT

The problems IC management tries to solve

1. Internal management problems. Lack of awareness about, and not being able to identify the intellectual capital leads to poor (internal) communication about these resources, distorted resource allocation, and subsequently to under-performance, because, if you do not know what you have, you probably will not use it either.

2. External reporting problems. The loss of relevance of financial statements leads to poor valuation, because, if you do not know what you have, how can you report about it and how can external stakeholders (shareholders, clients, future employees) assess the value of your company.

Main drivers for conducting IC management

• to help organizations formulate their strategy;• to assess strategy execution;• to assist in diversification and expansion

decisions; • to communicate with external shareholders.

Intellectual capital management

The intellectual capital process (4 steps approach).

1.Matching with the organizational epistemology: 1.The vision and mission of the organization.

2.Translating the vision into strategies.

3. Identifying key success factors (KSFs).

4.Measuring the KSFs (put indicators to reflect each KSF)

Intellectual capital System: the process model

Human Capital

Customer Capital

Business Process Capital

Renewal & Development

Capital

OWNERS

Step 1: Matching with the organizational epistemology: The vision and mission of the organization.

Understand Who you are & Who you want to be?

Visionmission

Step 2: Translating the vision into strategies

• Identification of strategy• No limited to the number of strategy• Top level management’ duty

Visionmission Strategies

Step 3: Translating the trategies to key success factors

• Identification of KSFs is the most important step• KSFs are the must do action• No limited to the number of KSFs• Should be prioritized• Senior managers’ duty

StrategiesKSFs

Step 4: Measuring the KSFs (put indicators to reflect each KSF)

• KSFs => indicators (proxies number)• The manager of the business unit suggests

indicators

KSFsIndicators

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Visionมีครอบคร�วที่�อบอ��นและมี

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Mission & Strategy KSF Indicators

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Developing an IC System

Mission / strategy: to be the marketplace for the movement of selected

investment funds and optional insurance

KSFs (ranged No. 1): To establish long-term relationship with satisfied customer

Indicators: (proxies number / should be ranged)• Satisfied customer index (2)• Customer barometer (3)• Number of news sales (5)• Market share (4)• Lapse rate (1)• Average respond time at the call center• Average handling time for completed cases • New customer (5)

Human Capital indicators : Prioritizing example

• Management experience/abilities 43.46• Change in number of employees 16.54• Agreements with employees 4.62• Breakdown of employees by age or experience 3.85• Experience of employees 3.46• Recruitment policy 3.46• Description of competence development program 2.69• Production/Income per employee 1.54• Remuneration systems 1.15• Education and training policy 0.77• Pensions 0.77• Job rotation opportunities 0.38• Dependence on key employees 0.38• Value added per employee 0.38• Career opportunities 0• Insurance policies 0

Customer Capital indicators : Prioritizing example

• Customer breakdown by product or business 46.15• Market share by segment/product 43.08• Sales breakdown by product or business 42.31• New customers 38.08• Customer relationships 21.54• Relative market share to competitors 18.08• Sales breakdown by customers 14.62• Market share 9.62• Dependence on key customers 7.31• Value added by customer or business 3.08• Education and training of customers 1.54• Production by customer 1.15• Customers by employee 0.77

Organizational Capital indicators : Prioritizing example

• Efficiency 42.69• Installed capacity 42.31• Investment in technology 33.08• Business model 31.15• IT systems 25.38• Utilization of energy and other input goods 23.46• Organizational structure 20.38• Information and communication within the firm 13.46• Corporatize culture 8.46• Environmental policies 3.46• Litigation 2.69• Efforts related to the working environment 2.31• External and internal failures 0.77

Innovation, research, and development Capital indicators : Prioritizing example

• Patents and licenses 25.77• Strategy, objects of I and R & D 6.54• I and R&D in basic research 1.15• I and R&D in product design/development 1.15• Future projects regarding I and R&D 0• Patents pending 0

Putting It Together

• The indicators needs to be expressed in term of capital identified by the company

• Create a common language between the theoretical thought behind the IC model and the practical indicators

• The org. have the same picture of doing business

Company 1

Putting It Together

Company X

FC

HC

Company X

Process capital

Relationalcapital

Renewal & Development capital

FC HC • Relational• Renewal & Dev • Process

Flow of IC: Systematic Approach

Company X

Why should firms value or measure their intellectual capital?

1. What gets measured gets managed.

2. To improve the management of intangible resources.

3. To monitor effects from actions.

4. To translate the organization’s strategy into action.

5. To weigh possible courses of action.

6. To enhance the management of the organization as a whole.

The selection

• Selecting the capital form: strategy is the key• Selecting indicators: bottom-up process• Selecting weight: value in particular business

(relative importance each capital form)

The selection of capital forms, weights and indicators

• Making choice of indicators is a bottom up process (day-day operation)

• Making choice of weights is a manager consideration

• Making choice of capital is a creation value in the business (top manager)

IC-Index: distinct features

• It is context specific• it is an idiosyncratic measure• it focuses on the monitoring of the dynamics of IC• it is capable of taking into account performance from prior periods• it sheds light on a company different from an external view typically

based on an examination of physical assets• it is a self-correcting index in that if performance of the IC-Index

does not reflect changes on the market value of the company, then the choice of capital forms, weights, and/or indicators is flawed.

Note: IC weak spots• Trade-off between two alternatives

– No. of customers has declined but remain customers

• Comparisons difficulty – Inter-company comparison: homogeneous – Two total different industries: genetic factors

• Lack of relation between IC and the financial and physical side of the company

• satisfaction: depend on the size

CONSEQUENCE OF AN IC-INDEX APPROACH

After-SaleService

Procurement

Technology Development ( R & D )

Firm Infrastructure

Where is IC?: Business Value Chain

SupportActivitie

s

Human Resource Management

InboundLogistics

Operations ORManufacturing

Outbound

Logistics

Marketing&

Sales

Primary Activities

M

AR

G

I

N

IC

The Yankee Ltd.,

Strategic Alternatives • Relational capital • Human capital• Infrastructure capital• Innovation capital

– Weigh the indicators– Plotted the aggregated indices

15 indicators

Consequence of an IC-index Approach

• Strategic Alternatives • Visualizes the company hidden value

creation process• Comparison possibility

– Benchmarks can be established at different levels of aggregation, from marketing segment to industry.

Yankee index relationIn

dex

valu

e

Time / Year

Relation

Infrastructure

Human

IC index

Innovation

The Yankee Ltd.,

• The conflict of dynamic (big trade-off)– Relationship and infrastructure index were

negatively related• IC dynamics are linked

– Year 1: focused on customer =>sent efficiency down– Year 2: cost –control program: efficiency up => sent

customer down because they were not given the same excellence service anymore

The Yankee Ltd.,

• IC dynamics are linked• Take the best solution for the company

– A gradual increase in customer satisfaction would have been desirable (not affect the efficiency) because the company had time to adjust.

Yankee index relationIn

dex

valu

e

Time / Year

Relation

Infrastructure

Human

IC index

Innovation

Trade off effect: Skandia 1996

• In crease customer satisfaction and retention rate = customer capital increased

• The process capital & renewal and development declined

• IC dynamic linked: focus on customers had made a difficulty for employees to improve internal efficiency and keep up product development

Trade off effect: Skandia 1996In

dex

valu

e

Time / Year

Relation

Human

IC index

Innovation

Process

Trade off effect [Adjust]: Skandia 1996In

dex

valu

e

Time / Year

Relation

Human

IC index

InnovationProcess

How much?

Hidden Value