Question 5 - Customer Loyalty.
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Monday, 31 May 2010
My essay on IC and sources of corporate competitiveness
Hi Guys,
Here's my essay which gives some insight into Question 2.
Enjoy!
Paulo
Brazil
Brazil
Identify intellectual capital and related intangible assets and intellectual property?
Why are they important for corporate competitiveness?
I. Introduction
Information and Communication Technologies have been re-shaping the way organisations do business since Tim Berners-Lee introduced the Worldwide web[1].
It is now widely accepted that computers and telecommunication technologies are influencing every aspect of our lives in inescapable ways (John Nirenberg, 2006).
The current economic slowdown has brought consumer confidence to a historic low, caused by plunging house prices and stock market declines, which made consumers feel less wealthy[2]. Nevertheless, as the access to broadband internet becomes widespread and an ever-greater percent of individuals around the world uses the web, there is a shift in consumer behaviour towards the online arena.[3]
Organisations doing business partly or totally over the internet are the beneficiaries of this trend. A recent survey by Shop.org and Forrester Research conducted on 70 US web retailers shows that 72% of the respondents have increased their sales in Q3 2009 by an average of 16% (against Q3 2008).
Technology-based innovations such as the internet and wireless communications have changed the way firms interact with each other and with consumers. This has allowed not only the creation of a platform where firms must perform at a higher, fast-paced level but also it has created new business opportunities (Lumpkin & Dess, 2004).
In spite of the fact that for companies such as eBay, Amazon and Google digital technologies and the internet in particular came as a ‘gold mine’, other firms continue to fail in adding value to their businesses by using technology in the digital age.
This article explores the role of digital technologies and intangible assets in re-shaping economies and organisations and adding value to their business, thus providing competitive advantages.
II. Knowledge-driven economies
Economies are increasingly based on knowledge and intangible assets. In the OECD economies, knowledge is recognised as the driver of productivity and economic growth (Candice Stevens, OECD Observer, Vol. a, 1996).
Knowledge has always been pivotal to economic development but only in the last few years has its importance been widely recognised following changes in the asset bases of firms.
The recognition of the impact of knowledge as an intangible asset, in particular at corporate level, has raised questions about how managers can apply it to add value across their businesses and translate it into a competitive advantage.
Intangible assets are thus an inseparable concept of knowledge-driven economies and are in the basis of the emergence of e-business. However, the impact of intangible assets cannot be limited to a ‘non-physical’ aspect of any given economy - manufacturing firms are also dematerialising into value-driven intangible assets (Andersen et al 2000).
Candice Stevens, Head of the Science and Technology at OECD (1996) points out that OECD economies are increasingly dependent on the production, distribution and use of knowledge and estimated that 50% of the GDP in OECD’s major economies was, in 1996, knowledge-based.
III. Importance of Intellectual Capital and Intangible Assets Today
Traditional capital had financial or physical characteristics. Nowadays, the emphasis is on an intangible asset, intellectual capital which can be defined as “the term given to the combined intangible assets which enable the company to function” (Annie Brooking, 1998).
It is generally accepted in business literature that the real value stemming from intellectual capital lies on firms being able to capture and deploy it (Thomas Stewart 1998, Andersen and Striukova 2004, A. Brooking 1998): “An understanding of [important intangibles] will help managers and policy makers trying to turn intangible resources into assets and capital” (Andersen and Striukova 2004) and “you cannot define and manage intellectual assets unless you know what you want to do with them” (Thomas Stewart, 1998).
The emergence of knowledge-driven economies in general, and e-business in particular has changed asset bases dramatically and consequently the enterprise market value.
Figure 1
Figure 1 illustrates how the US
Whilst the study shows the importance of intellectual capital on a specific industry, the same is true for the vast majority of the third millennium organisations.
The Brazilian Biofuel story
Driven by the desire of reducing dependency on oil and the impact on climate change, Brazil
The government has introduced laws in an attempt to incentive R&D and established IP as the central mechanism to promote innovation.
IP has generated more research and investment than ever before in the country. An IP law approved in 1997 made possible the increase of approximately 70% of local firms’ patent registrations.
Patents are stimulating new knowledge and improving technology. Brazil Brazil
IP rights have helped Brazil US
Whilst the example above aims at exploring the issue of identifying the role of intellectual capital and intellectual property in value creation, the following case-study procures to address the corporate realm and illustrate how firms capitalise on intangible assets to achieve competitive advantage.
Anthony Nicholas Group (ANG)
ANG is a leading jewellery business in Ireland
In 2000, the company saw the benefits from an online presence. At the same time, there was a need to fully upgrade the back-office systems and software.
The retail market is extremely competitive and most of the established companies were already using the internet as a sales and marketing vehicle. Fields of Dublin had a static website since 1996.
The overall aims of the project were to establish a B2B e-commerce capability, develop existing retail operations and replace the old back office system for a new integrated one that would allow the firm to be self-sufficient and implement a new e-business strategy.
1. E-Business Strategy
1.1. Fields of Dublin
The main purpose was to maintain competitive advantage by developing a customer focused web presence that would complement the ongoing store advertising investment.
Management saw the website as an additional distribution channel and marketing tool to develop business and promote Fields branch network, in particular to draw clients into the shops.
ANG clearly stated that they were not seeking to increase turnover in particular, rather add value to current service level.
1.2. Solvar
Solvar is the manufacturing and wholesale operation. The project focus on this case was on establishing an e-business capability through an integrated website and a sales and distribution system.
The aim was to improve customer service through modern ways of doing business and to a lesser extent, grow the sales base.
Before, orders were taken in writing, by fax or at trade shows and input into the system manually. The new system would ensure that orders are processed electronically and that an order tracking procedure is in place. Ultimately, Solvar would be able to link directly to client POS and stock systems, automatically refilling orders from stock.
Finally, it should stimulate sales without the need for a sales person to be physically present or to send the latest catalogue.
1.3 Back-office system and processes
The old system was unreliable and did not allow the firm to be self-sufficient. Therefore, as part of ANG’s strategic plan it was paramount a full restructuring of current system and processes in place.
2. Outcome
2.1. Customer viewpoint
The new website represented a dramatic increase of information for retail customers of Fields of Dublin, offering a wide range of services, including product information, photographs, product care advice, shop information and email ordering.
On the trade side of the business, the new Solvar website offered its trade partners an alternative way to operate with ANG. Instead of being dependent on a sales person, clients can now view portfolios, place orders, track orders and communicate online which proved to be particularly beneficial with US clients due to the time difference.
2.2. ANG viewpoint
The restructuring project allowed ANG to:
- Reduce operating costs and increase efficiency through less time consuming activities;
- Develop ‘Fields of Dublin and ‘Solvar’ brands, enhancing the profile of the group and increasing customer loyalty;
- Capture a share of the e-retail market;
- Maintain competitive advantage by increasing the ability to be present in different markets and develop jewellery sales both for ANG and for its trade clients.
Table 1 - Analysis of ANG’s successful restructuration using an integrated typology of different management theories:
Fields of | Solvar | Internally | |
Exploitation of market power approach (Porter, 1985, 2001) | ANG understood that it operates in an industry where there is a high threat of substitution and intense competition. Moreover, with the internet boom, entry barriers to the market were significantly reduced and clients saw their bargaining power increased. Faced with the loss of its competitive edge, the new e-business strategy allowed the firm to explore and target different markets. That was the case of the all-important | ||
Schumpeter’s Innovation Theory of Creative Destruction (Schumpeter, 1942) | Having benefited from a ‘pre-dot.com boom’ leading position in the jewellery market , ANG failed to add value across its business and benefit from a first mover advantage at both internal and external level upon the surge of e-commerce and generalisation of integration of micro-electronics into business operations | ||
Resource-based view (Penrose, 1959, Wemerfelt 1984, Barney 1991) | ANG strongly benefited from a relatively quick reaction from its managing director and IT manager. Both of them have been with the company for a long time, the latter has seen the ANG evolve from a single PC to a network of over 40 machines. The MD’s experience on similar projects and knowledge about the market was a clear key driver of success and so was the great amount of tacit knowledge brought in by the IT manager. In the particular case of employees, they learnt to accept the new systems and started demanding increasingly more from it. | ||
Dynamic Capability Approach on Competitive Forces (Teece 1988, Teece et al 1994, 1997) | It can be argued that ANG did not adapt to change in the market as quickly as some of its competitors but it did succeed in understanding the need to innovate later on and re-deploy its internal and external competences to add value across its business. Additionally, ANG perceived that a new e-business strategy could only be optimised if there was a full integration between its sales channels – B2B and B2C – and its back-office systems and processes. | ||
Strategic Network Theory (Dyer and Singh 1998) | ANG strategy for Fields of Dublin did not intend to increase turnover but rather add value to the service level. This clearly denotes an emphasis on lock-in. | 50% of the sales of Solvar were to the | |
Transaction cost economics (Coase 1937, Williamson 1975) | The new capabilities reduced impediments of time and distance barriers, being the latter particularly true for Solvar, therefore reducing the overall cost of transaction. | The main objective of the internal restructuration was improve efficiency, reduce time and effort and ultimately be self-sufficient. This proved to be particularly true for the accounting system, which became more accurate, reliable and less paper based. Therefore, ANG understood that by innovating in this particular field could reduce its transaction costs. | |
IV. Conclusions
ANG case study shows the importance of e-business in value creation across the firm. On the one hand, this is visible by the efforts placed on both B2B and B2C channels. In addition to the value drivers described on table 1 ANG capitalised on its strong and consolidated brand to increase customer retention. A prime reason for this was that customers are wary about online jewellery purchases and tend to favour the leaders in this market sector as a way of reducing risk. Another key driver for customer retention was Solvar’s new integration capabilities which enabled the company to meet individual needs of its customers and promote long-term relationships.
On the other hand, ANG saw its enterprise value increased by optimising its internal systems and procedures. Porter and Miller (1985) argued that market winners would be those who predicted first than their competitors the value of managing information as the core asset of the business. ANG’s new customer relationship management system ensured that the product offer was tailored to meet specific customer expectations.
Glazer (1999) proposed that winners are the ‘smart’ organisations that exploit advances in technology ahead of their ‘dumber’ competitors. Despite the fact that Glazer made this analysis in terms of strategic implications of operating in the information-rich world of e-commerce, a combination of his view with Penrose’s (1959) resource based view of the firm reveals that ANG was a ‘smart’ organisation not only because it invested in technology but managed to re-deploy intangible assets such as its managers, brand and long-term relationships with customers.
Using Andersen and Striukova’s (2004) taxonomy it is possible to argue that ANG’s intangible resources are embedded to a great extent in market structure assets. That is visible by the way the firm built new forms of communication and networking with its customers, focused on market positioning and customer loyalty and lastly used its brand name as an asset.
On the other hand, Brazil
According to the Schumpeterian theory of creative destruction ANG’s case would be deemed as a failure and Brazil
This reveals the need for an integration of the various theories in the analysis of value creation. Such integration becomes paramount when the intangible economy is estimated to be approximately 75% of GDP and employment in developed economies and accountancy practices generally ignore intangible assets as a source of value creation and competitiveness (Andersen and Striukova, 2004)
Monday, 17 May 2010
Answer to question 2 - Exam '09
The significance and value of intellectual capital (IC) and intangible assets
The broad meaning of value creation of Intellectual capital is difficult to quantify that is why there are various approaches and value drivers. As Porter’ s market power approach examines the more traditional views that existed in the industrial age it is argued that those forces are static as industry structures change over time; and thus there is a need for flexibility and adaptation to developing resources and dynamic capabilities (Porter, 1985). In addition, these resources may be seen as components of intellectual capital and are split into four types known as market, intellectual property, human centered and infrastructure assets. As prescribed by Annie Brooking, the importance of valuing each is key to managing corporate goals (Brooking 1998: 14).
The broad meaning of value creation of Intellectual capital is difficult to quantify that is why there are various approaches and value drivers. As Porter’ s market power approach examines the more traditional views that existed in the industrial age it is argued that those forces are static as industry structures change over time; and thus there is a need for flexibility and adaptation to developing resources and dynamic capabilities (Porter, 1985). In addition, these resources may be seen as components of intellectual capital and are split into four types known as market, intellectual property, human centered and infrastructure assets. As prescribed by Annie Brooking, the importance of valuing each is key to managing corporate goals (Brooking 1998: 14).
Market Assets
Market assets such as branding may give a company competitive advantage as it gives the company identity and ensures customer loyalty and provides for the continuity of revenues. Ultimately, the company may benefit from the sale of itself and thus having a great brand behind it may facilitate the sale of the company. One example is the case of the Nestle takeover of Rowntree, where Nestle recognized the value that Rowntree had in the brands it carried. One of the appealing factors was the longevity of the brands, plus the chocolate confectionary brands were virtually inflation proof and ensured great distribution of other house brands through sales outlets (Brooking 1998: 20).
Market assets such as branding may give a company competitive advantage as it gives the company identity and ensures customer loyalty and provides for the continuity of revenues. Ultimately, the company may benefit from the sale of itself and thus having a great brand behind it may facilitate the sale of the company. One example is the case of the Nestle takeover of Rowntree, where Nestle recognized the value that Rowntree had in the brands it carried. One of the appealing factors was the longevity of the brands, plus the chocolate confectionary brands were virtually inflation proof and ensured great distribution of other house brands through sales outlets (Brooking 1998: 20).
Intellectual Property Assets
It is commonly known in corporate environment that valuing the know-how, trade secrets, copyrights, patents and design rights a company covers the on-going concern that a firm has to maintain their key differentiators alive and away from competitors. This is very important when it comes to patents as they are embedded in the products as it protects them from others looking to imitate it. Alternatively and interestingly enough there are arguments by those who say that “a patent is only as valuable as the amount of money its owner is prepared to spend defending it.” (Brooking 1998: 37) This may be a valid point as supported by Anne Brooking and the view that a patent may be valued only if it is exploited and defended (Brooking 1998: 37). With respect to extracting value from intellectual property, there is the view that it may be only created by a marketplace success. Gregory E. Gardiner (former managing director of Yale University’s office of cooperative research) made a point of reminding his clients that “a substantial royalty rate from a firm that will fail in the marketplace is worthless, but an equitable royalty rate with a motivated and capable licensee will transform the technology into marketplace results and yield greater revenues on larger-volume product sales” Goldhem et al. (2005: 45).
It is commonly known in corporate environment that valuing the know-how, trade secrets, copyrights, patents and design rights a company covers the on-going concern that a firm has to maintain their key differentiators alive and away from competitors. This is very important when it comes to patents as they are embedded in the products as it protects them from others looking to imitate it. Alternatively and interestingly enough there are arguments by those who say that “a patent is only as valuable as the amount of money its owner is prepared to spend defending it.” (Brooking 1998: 37) This may be a valid point as supported by Anne Brooking and the view that a patent may be valued only if it is exploited and defended (Brooking 1998: 37). With respect to extracting value from intellectual property, there is the view that it may be only created by a marketplace success. Gregory E. Gardiner (former managing director of Yale University’s office of cooperative research) made a point of reminding his clients that “a substantial royalty rate from a firm that will fail in the marketplace is worthless, but an equitable royalty rate with a motivated and capable licensee will transform the technology into marketplace results and yield greater revenues on larger-volume product sales” Goldhem et al. (2005: 45).
Human centered assets
It is commonly discussed that intellectual capital includes the knowledge component of the employees known as ‘human capital’, and it is composed of all the specific skills that are gathered within the firm to include areas such as how to write in the firm’s IT environment, how to commercialize it, and what are the demands of the market, customer relationships, business strategies, competitive information, etc. (Kurz, 2000: 28). As such, human capital produces great benefits the firm must have to maintain competitiveness. Above all, Andersen and Striukova explain that explicit and tacit knowledge is embedded in human capital and argue that “mainstream theory mainly focuses on explicit (i.e. codifiable) knowledge, where as the tacit aspect of knowledge is the most important asset emphasized by institutional economists, evolutionary economists and organizational theorists as well as by resource-based theories of the firm.” (Andersen, Striukova, 2004) Altogether, it is mentioned that the different approaches agree that tacit knowledge can be obtained through the actions and experiences within the firm. (Anderson, Striukova, 2004: 8). To further assist the idea that value is created through tacit knowledge, it may be said that Schumpeter’s ‘entrepreneurial flair’ for innovation comes rooted with tacit knowledge.
Another aspect of intellectual capital and human centered assets in the workplace is the motivation and empowerment of the employee and how it contributes to the value of the overall company. According to Annie Brooking, “There is a mind shift which must take place within the work-force in order for them to accept the reality of companies equipped to operate in the third millennium. Those who make the transition will be motivated and become empowered, increasing their value to the organization” (Brooking, 1998: 58)
Infrastructure assets
Intellectual capital also exposes infrastructure assets such as management philosophy, corporate culture, networking systems to be a great asset to companies as they are an integral part of the collective firm. As mentioned by Annie Brooking, “Infrastructure assets provide strength and cohesion between its people and its process” (Brooking, 1998: 64). And thus it is very important for employees to consistently relate with each other and for the firm to have interactions in its marketplace.
Intangible sources of value in E-Business
Here the discussion will contrast sources of value creation in e-business based on the theoretical views of the value chain of (Porter, 1985), Schumpeter’s theory of creative destruction (Schumpeter, 1942), the resource-based view of the firm (e.g., Barney, 1991), the strategic network theory (e.g., Dyer and Singh, 1998), and transaction cost economics (Williamson, 1975). Thus to start, the value chain framework explores the primary activities of a firm, which have a direct impact on value creation in virtual markets; a good example is Amazon.com, as it built its own warehouses to increase speed and reliability. (Amit, Zott, 2001: 496) Where as, in Schumpeter’s ‘creative destruction’ the premise in value creation is based on technological change and innovation as is seeing in the emergence of virtual markets. In a resource based view of the firm, a specialized set of processes and capabilities may lead to value creation. An example of value creation process is the transfer of capabilities and in the area of virtual markets you have companies such as Barnes and Nobles, Dell and Wal-mart who have successfully integrated their brick and mortar models into e-commerce, Mahmood, et al (2004: 12). Another view in value creation is that of building strategic networks such as strategic alliances, joint ventures, buyer-supplier partnerships, and other ties which according to some practitioners “biotech start-ups can improve their performance by configuring alliances into networks that enable them to tap into capabilities and information of their alliance partners.” (Amit, Zott, 2001: 498). The key are the social network aspects where they are formal or informal strategic networks that help the firm increase the value of marketability. (Andersen, 2009). Having considered these theories, transaction cost economics is also relevant as it analyses transaction efficiency, and one of the main effects of transacting over the internet for companies is the reduction of transaction costs which is of great value.
Furthermore, the central observation of the discussion is that none of the theories mentioned fully explain the value creation in e-business. Amit and Zott in their study of 59 e-businesses found four interrelated value drivers that depict a business model which captures the value creation from multiple sources. (Amit, Zott, 2001) Their study identified four opportunities that create value with the help of e-business: efficiency, complementarities, novelty and lock-in. They noticed that the value creation in e-business goes beyond the framework of value chain, formation of strategic networks or the resource-based theories, and that E-Business firms innovate through novel exchange mechanisms that are not part of the more traditional firm. Cote, L. et al, (2005: 3). At the same time, these exchange mechanisms create new forms of connecting buyers and sellers in existing markets via a virtual market, and can create further value to the firm as it extends the product selection to include additional products to the buyer as it already knows the tastes from knowing its customers. Goldhem, et al, (2005: 45). To illustrate the four value drivers Amit and Zott identified three e-business firms and described how the value drivers are attributed to each. For instance, Autobytel.com shows us that its efficiency is created via the use of rich online content, vehicle valuation reports, and photos. Moreover, the customer is complemented with offers and discounts; future purchases are locked in by offering strong incentive schemes such as reward points; and lastly Autobytel.com is recognized for its ability to continuously implement customer centric innovative services. (Amit, Zott, 2001: 510). Given the theories at hand, none of the them can in and of themselves explain the sources of value creation in e-business and in addition, there is also the view of Zhu and Kraemer as they argue that the link between theory and measures is still weak as there is lack of empirical evidence to measure the use of e-business and the impact on the firm’s performance. (Zhu, Kraemer, 2005: 62).
It is commonly discussed that intellectual capital includes the knowledge component of the employees known as ‘human capital’, and it is composed of all the specific skills that are gathered within the firm to include areas such as how to write in the firm’s IT environment, how to commercialize it, and what are the demands of the market, customer relationships, business strategies, competitive information, etc. (Kurz, 2000: 28). As such, human capital produces great benefits the firm must have to maintain competitiveness. Above all, Andersen and Striukova explain that explicit and tacit knowledge is embedded in human capital and argue that “mainstream theory mainly focuses on explicit (i.e. codifiable) knowledge, where as the tacit aspect of knowledge is the most important asset emphasized by institutional economists, evolutionary economists and organizational theorists as well as by resource-based theories of the firm.” (Andersen, Striukova, 2004) Altogether, it is mentioned that the different approaches agree that tacit knowledge can be obtained through the actions and experiences within the firm. (Anderson, Striukova, 2004: 8). To further assist the idea that value is created through tacit knowledge, it may be said that Schumpeter’s ‘entrepreneurial flair’ for innovation comes rooted with tacit knowledge.
Another aspect of intellectual capital and human centered assets in the workplace is the motivation and empowerment of the employee and how it contributes to the value of the overall company. According to Annie Brooking, “There is a mind shift which must take place within the work-force in order for them to accept the reality of companies equipped to operate in the third millennium. Those who make the transition will be motivated and become empowered, increasing their value to the organization” (Brooking, 1998: 58)
Infrastructure assets
Intellectual capital also exposes infrastructure assets such as management philosophy, corporate culture, networking systems to be a great asset to companies as they are an integral part of the collective firm. As mentioned by Annie Brooking, “Infrastructure assets provide strength and cohesion between its people and its process” (Brooking, 1998: 64). And thus it is very important for employees to consistently relate with each other and for the firm to have interactions in its marketplace.
Intangible sources of value in E-Business
Here the discussion will contrast sources of value creation in e-business based on the theoretical views of the value chain of (Porter, 1985), Schumpeter’s theory of creative destruction (Schumpeter, 1942), the resource-based view of the firm (e.g., Barney, 1991), the strategic network theory (e.g., Dyer and Singh, 1998), and transaction cost economics (Williamson, 1975). Thus to start, the value chain framework explores the primary activities of a firm, which have a direct impact on value creation in virtual markets; a good example is Amazon.com, as it built its own warehouses to increase speed and reliability. (Amit, Zott, 2001: 496) Where as, in Schumpeter’s ‘creative destruction’ the premise in value creation is based on technological change and innovation as is seeing in the emergence of virtual markets. In a resource based view of the firm, a specialized set of processes and capabilities may lead to value creation. An example of value creation process is the transfer of capabilities and in the area of virtual markets you have companies such as Barnes and Nobles, Dell and Wal-mart who have successfully integrated their brick and mortar models into e-commerce, Mahmood, et al (2004: 12). Another view in value creation is that of building strategic networks such as strategic alliances, joint ventures, buyer-supplier partnerships, and other ties which according to some practitioners “biotech start-ups can improve their performance by configuring alliances into networks that enable them to tap into capabilities and information of their alliance partners.” (Amit, Zott, 2001: 498). The key are the social network aspects where they are formal or informal strategic networks that help the firm increase the value of marketability. (Andersen, 2009). Having considered these theories, transaction cost economics is also relevant as it analyses transaction efficiency, and one of the main effects of transacting over the internet for companies is the reduction of transaction costs which is of great value.
Furthermore, the central observation of the discussion is that none of the theories mentioned fully explain the value creation in e-business. Amit and Zott in their study of 59 e-businesses found four interrelated value drivers that depict a business model which captures the value creation from multiple sources. (Amit, Zott, 2001) Their study identified four opportunities that create value with the help of e-business: efficiency, complementarities, novelty and lock-in. They noticed that the value creation in e-business goes beyond the framework of value chain, formation of strategic networks or the resource-based theories, and that E-Business firms innovate through novel exchange mechanisms that are not part of the more traditional firm. Cote, L. et al, (2005: 3). At the same time, these exchange mechanisms create new forms of connecting buyers and sellers in existing markets via a virtual market, and can create further value to the firm as it extends the product selection to include additional products to the buyer as it already knows the tastes from knowing its customers. Goldhem, et al, (2005: 45). To illustrate the four value drivers Amit and Zott identified three e-business firms and described how the value drivers are attributed to each. For instance, Autobytel.com shows us that its efficiency is created via the use of rich online content, vehicle valuation reports, and photos. Moreover, the customer is complemented with offers and discounts; future purchases are locked in by offering strong incentive schemes such as reward points; and lastly Autobytel.com is recognized for its ability to continuously implement customer centric innovative services. (Amit, Zott, 2001: 510). Given the theories at hand, none of the them can in and of themselves explain the sources of value creation in e-business and in addition, there is also the view of Zhu and Kraemer as they argue that the link between theory and measures is still weak as there is lack of empirical evidence to measure the use of e-business and the impact on the firm’s performance. (Zhu, Kraemer, 2005: 62).
The bearing of Intellectual capital and intangible assets on Walt Disney
To show the importance of intellectual capital and intangible assets, one can demonstrate the advancements of various corporations and how they have benefited over time with the emergence and value of intangible assets. To give background, Parr (1996) reported on the management of IC of a number of large U.S. based corporations, that intellectual property and intellectual assets make up more than 80 percent of the corporation’s market value. (Kurz, 2000: 29). According to Parr, “in late 1997, the market value of Walt Disney was $66 billion. Working capital, fixed assets and other assets amounted to $7.3 billion, which means $58.7 billion, or 89%, of Walt Disney’s market value can be attributed to its intellectual property and intangible assets.”(Parr, 1996: 29). As is the case with Walt Disney, intellectual capital assets can contribute a lot of weight to the market value of a company and that is why it is very important for companies and their investors to monitor and manage their intellectual property assets.
To show the importance of intellectual capital and intangible assets, one can demonstrate the advancements of various corporations and how they have benefited over time with the emergence and value of intangible assets. To give background, Parr (1996) reported on the management of IC of a number of large U.S. based corporations, that intellectual property and intellectual assets make up more than 80 percent of the corporation’s market value. (Kurz, 2000: 29). According to Parr, “in late 1997, the market value of Walt Disney was $66 billion. Working capital, fixed assets and other assets amounted to $7.3 billion, which means $58.7 billion, or 89%, of Walt Disney’s market value can be attributed to its intellectual property and intangible assets.”(Parr, 1996: 29). As is the case with Walt Disney, intellectual capital assets can contribute a lot of weight to the market value of a company and that is why it is very important for companies and their investors to monitor and manage their intellectual property assets.
Conclusion
In summary, the early theories value creation of intellectual capital provide great context around how the organization has come to understand and value of such intangibles to give it advantages in business; hence the firm has grown to acknowledge that it values and must integrate these new types of intangible benefits in order to be competitive. Therefore, the firm is aware of the components of intellectual capital and how it must strategize to maximize the use of intangible assets; and overall it must weigh these intangible sources of value as we described in e-business. Lastly, the value of intellectual capital and intangible assets for the firm is inarguably important as we saw in the case of Walt Disney.
In summary, the early theories value creation of intellectual capital provide great context around how the organization has come to understand and value of such intangibles to give it advantages in business; hence the firm has grown to acknowledge that it values and must integrate these new types of intangible benefits in order to be competitive. Therefore, the firm is aware of the components of intellectual capital and how it must strategize to maximize the use of intangible assets; and overall it must weigh these intangible sources of value as we described in e-business. Lastly, the value of intellectual capital and intangible assets for the firm is inarguably important as we saw in the case of Walt Disney.
Answer to question 4 Exam 09
Hi guys
Following is my cwk essays on knowledge management. I think it can help answer question 4.
Feel free to add changes or comments
Intellectual capital, knowledge management and competitive advantage
Companies combine resources to operate and sustain their business. Tangibles and intangibles are the two types of assets. Tangible assets are buildings, machinery, computers, and other physical capital (physical means of transport), physical energy (coal, oil, etc.) and physical ‘labour ‘force’ (Andersen and Striukova, 2004). Intellectual capital which is related to intangible assets can be split into four categories: Market assets[1] , Intellectual property[2] (IP), human-centred assets[3], infrastructure assets[4] (Brooking, 1998). Intellectual capital which is not new and was referred as goodwill by Brooking (1998:12) has always been part of supplier-customer relationship. It is rather the importance management has given to intellectual capital which has grown. With companies such as Apple (for electronic devises) emerging and well competing the big Microsoft, companies realise that even with exclusivity competitors can still come up with substitutes. And it is now extremely difficult for an organisation to solely rely on production advantage because “the liberalisation and expansion of markets both domestically and internationally” has reduced the costs of transferring technology or relocating (Teece, 2000:35). As stated Kessels (2001:497) “our society is gradually moving towards a knowledge economy: an economy in which the application of knowledge replaces capital, raw materials, and labour as the main means of production”. So it is imperative for firms operating in today’s environment to be able to “develop core competencies by gathering information, generating new knowledge, disseminating, and applying this knowledge to improve and innovate processes, products, and services”. So let’s look at the actual benefit and implications of knowledge for management and the production process.
Implications of knowledge management and production
Based on what was said earlier, organisations’ in the new economy have to be able to sense and seize opportunities quickly and manage them proficiently (Nonaka, 1994). For example, when Ford (US) needed to manufacture smaller cars for its US customers, “it turned to its European subsidiaries for help. The subsidiaries transferred design and production groups to the US to help establish small car design and manufacturing competence in North America”. (Teece, 2000:36). And for Garvin (1993) organisations cannot continuously improve their production and processes without a required commitment to learning. Senge (1990) described learning organizations as places "where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together." Learning organizations are skilled at five main activities: systematic problem solving, experimentation with new approaches, learning from their own experience and past history, learning from the experiences and best practices of others, and transferring knowledge quickly and efficiently throughout the organization” (Garvin, 1993:81). During those activities, methods - such as: written, written, oral, and visual reports, site visits and tours, personnel rotation programs, education and training programs, standardization programs, surveys, questionnaires, and interviews- can be used to enhanced and trace learning(Garvin, 1993). It is now clear that knowledge can be embedded[5] in various locations[6], which is the reason why knowledge management requires organisations to design programs or arrange activities that will exploit the value of that knowledge to its fullest. Nonaka (1994) proposed practical model[7] for managers to implement more effective knowledge creation.
Kessels (2001:502) also provided the corporate curriculum which is a “framework for the learning functions that promote the ability to signal relevant information, to create new knowledge and to apply this knowledge to step by step improvement and radical innovation of work processes, products and services”.
But even with the most accurate model of knowledge management, organisations will fail to capture the value of knowledge if factors[8] impacting knowledge management are not taken into consideration.
Source: Teece, D. (1998)
Knowledge embedded in individuals for example has a tacit dimension which is not only difficult to codify but also carry risk of spill over once the information is readable (Andersen and Striukova, 2004). Knowledge assets include tacit and codified know-how, both technical and organisational. "Explicit or codified knowledge refers to knowledge that is transmittable in formal, systematic language, and tacit is deeply rooted in action, commitment, and involvement in a specific context (Nonaka, 1994; Polanyi, 1966). Managers can use “socialization, combination, externalization, and internalization” to convert knowledge and create value for their organisations (Nonaka, 1994). But managers need to understand that “individual knowledge is enlarged through interaction between experience and rationality, and crystallized into a unique perspective original to an individual” (Nonaka, 1994:22). Organizational learning will only happen if individuals involved in the process are committed and actually perceive any personal benefit. Now to avoid misappropriation of knowledge assets, managers can also choose to “protect them by the instruments of intellectual property such as trade secrets, copyrights and patents” (Teece, 2000:35). Information is also an important aspect of knowledge management as it is a flow of messages or meanings which might add to, restructure or change knowledge. So there is a need and an opportunity to match information and knowledge requirements because if knowledge is not supplied to the right people at the right time then it not only wasted but could also be costly (Teece, 2000:36). For example there was a funny story in October 2009 about Pepsi hit with $1.26 billion default judgment after its secretary, too busy arranging a meeting, put letter aside, and forgot about it. http://www.ontechnologycontracts.com/2009/10/pepsi-hit-with-1-26-billion-default-judgment-lawyers-secretary-was-distracted-put-letter-aside-and-forgot-about-it/. Moreover unless the knowledge created is used to process or produce a product or service does not have any signif9icant value (Teece, 2000). If Microsoft invents a new software which is incompatible with its workstation then the resource generate to produce that know-how is actually wasted. So the value of knowledge will vary according to where it is embedded. Hence depending on the factors, the value of knowledge might vary in favouring organisational sustainable position.
Following is my cwk essays on knowledge management. I think it can help answer question 4.
Feel free to add changes or comments
Intellectual capital, knowledge management and competitive advantage
Companies combine resources to operate and sustain their business. Tangibles and intangibles are the two types of assets. Tangible assets are buildings, machinery, computers, and other physical capital (physical means of transport), physical energy (coal, oil, etc.) and physical ‘labour ‘force’ (Andersen and Striukova, 2004). Intellectual capital which is related to intangible assets can be split into four categories: Market assets[1] , Intellectual property[2] (IP), human-centred assets[3], infrastructure assets[4] (Brooking, 1998). Intellectual capital which is not new and was referred as goodwill by Brooking (1998:12) has always been part of supplier-customer relationship. It is rather the importance management has given to intellectual capital which has grown. With companies such as Apple (for electronic devises) emerging and well competing the big Microsoft, companies realise that even with exclusivity competitors can still come up with substitutes. And it is now extremely difficult for an organisation to solely rely on production advantage because “the liberalisation and expansion of markets both domestically and internationally” has reduced the costs of transferring technology or relocating (Teece, 2000:35). As stated Kessels (2001:497) “our society is gradually moving towards a knowledge economy: an economy in which the application of knowledge replaces capital, raw materials, and labour as the main means of production”. So it is imperative for firms operating in today’s environment to be able to “develop core competencies by gathering information, generating new knowledge, disseminating, and applying this knowledge to improve and innovate processes, products, and services”. So let’s look at the actual benefit and implications of knowledge for management and the production process.
Implications of knowledge management and production
Based on what was said earlier, organisations’ in the new economy have to be able to sense and seize opportunities quickly and manage them proficiently (Nonaka, 1994). For example, when Ford (US) needed to manufacture smaller cars for its US customers, “it turned to its European subsidiaries for help. The subsidiaries transferred design and production groups to the US to help establish small car design and manufacturing competence in North America”. (Teece, 2000:36). And for Garvin (1993) organisations cannot continuously improve their production and processes without a required commitment to learning. Senge (1990) described learning organizations as places "where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning how to learn together." Learning organizations are skilled at five main activities: systematic problem solving, experimentation with new approaches, learning from their own experience and past history, learning from the experiences and best practices of others, and transferring knowledge quickly and efficiently throughout the organization” (Garvin, 1993:81). During those activities, methods - such as: written, written, oral, and visual reports, site visits and tours, personnel rotation programs, education and training programs, standardization programs, surveys, questionnaires, and interviews- can be used to enhanced and trace learning(Garvin, 1993). It is now clear that knowledge can be embedded[5] in various locations[6], which is the reason why knowledge management requires organisations to design programs or arrange activities that will exploit the value of that knowledge to its fullest. Nonaka (1994) proposed practical model[7] for managers to implement more effective knowledge creation.
Kessels (2001:502) also provided the corporate curriculum which is a “framework for the learning functions that promote the ability to signal relevant information, to create new knowledge and to apply this knowledge to step by step improvement and radical innovation of work processes, products and services”.
But even with the most accurate model of knowledge management, organisations will fail to capture the value of knowledge if factors[8] impacting knowledge management are not taken into consideration.
Source: Teece, D. (1998)
Knowledge embedded in individuals for example has a tacit dimension which is not only difficult to codify but also carry risk of spill over once the information is readable (Andersen and Striukova, 2004). Knowledge assets include tacit and codified know-how, both technical and organisational. "Explicit or codified knowledge refers to knowledge that is transmittable in formal, systematic language, and tacit is deeply rooted in action, commitment, and involvement in a specific context (Nonaka, 1994; Polanyi, 1966). Managers can use “socialization, combination, externalization, and internalization” to convert knowledge and create value for their organisations (Nonaka, 1994). But managers need to understand that “individual knowledge is enlarged through interaction between experience and rationality, and crystallized into a unique perspective original to an individual” (Nonaka, 1994:22). Organizational learning will only happen if individuals involved in the process are committed and actually perceive any personal benefit. Now to avoid misappropriation of knowledge assets, managers can also choose to “protect them by the instruments of intellectual property such as trade secrets, copyrights and patents” (Teece, 2000:35). Information is also an important aspect of knowledge management as it is a flow of messages or meanings which might add to, restructure or change knowledge. So there is a need and an opportunity to match information and knowledge requirements because if knowledge is not supplied to the right people at the right time then it not only wasted but could also be costly (Teece, 2000:36). For example there was a funny story in October 2009 about Pepsi hit with $1.26 billion default judgment after its secretary, too busy arranging a meeting, put letter aside, and forgot about it. http://www.ontechnologycontracts.com/2009/10/pepsi-hit-with-1-26-billion-default-judgment-lawyers-secretary-was-distracted-put-letter-aside-and-forgot-about-it/. Moreover unless the knowledge created is used to process or produce a product or service does not have any signif9icant value (Teece, 2000). If Microsoft invents a new software which is incompatible with its workstation then the resource generate to produce that know-how is actually wasted. So the value of knowledge will vary according to where it is embedded. Hence depending on the factors, the value of knowledge might vary in favouring organisational sustainable position.
End Notes
[1] The diagram below give a wide view of those factors but we will only pay attention to one two of them just to draw our point.
[1] The potential an organization has due to market-related intangibles (various brands, customers and their loyalty, repeat business, backlog, distribution channels, various contracts and agreements such as licensing franchises and so on).
[2] Include know-how, trade secrets, trade service marks, copyright, patent and various design rights.
[3] Comprise the collective expertise, creative and problem solving capability, leadership, entrepreneurial and managerial skills embodied by the employees of the organization.
[4] Technologies, methodologies and processes which enable the organization to function.
[5] See appendix for more details on knowledge location in other resources
[6] Knowledge is embedded in operating rules and practices, in customer, in supplier and competitor databanks, and in the company's own history.
[7]See appendix for other management models proposed by Nonaka
[8] The diagram below give a wide view of those factors but we will only pay attention to one two of them just to draw our point.
[1] The diagram below give a wide view of those factors but we will only pay attention to one two of them just to draw our point.
[1] The potential an organization has due to market-related intangibles (various brands, customers and their loyalty, repeat business, backlog, distribution channels, various contracts and agreements such as licensing franchises and so on).
[2] Include know-how, trade secrets, trade service marks, copyright, patent and various design rights.
[3] Comprise the collective expertise, creative and problem solving capability, leadership, entrepreneurial and managerial skills embodied by the employees of the organization.
[4] Technologies, methodologies and processes which enable the organization to function.
[5] See appendix for more details on knowledge location in other resources
[6] Knowledge is embedded in operating rules and practices, in customer, in supplier and competitor databanks, and in the company's own history.
[7]See appendix for other management models proposed by Nonaka
[8] The diagram below give a wide view of those factors but we will only pay attention to one two of them just to draw our point.
Question 6 - Exam revision '09
What are the elements of social capital, and how can we identify them in companies for management purposes?
Question 5 - Exam revision '09
Loyalty from business customers and consumers is a huge intangible asset for firms. Compare and contrast different economic principles of how firms use Information and Communication Technology (ICT) and the Internet to create loyal customers.
Question 4 - Exam revision '09
Use one or more theories of Knowledge Creation and Learning in Organizations to outline how firms capitalise on their individual or organizational knowledge assets.
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