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Measuring intellectual Capital

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					Consequence of an IC-index Approach
                                     Where is IC?: Business Value Chain
               Firm Infrastructure
Support       Human Resource Management                                           M
Activities
              Technology Development ( R & D )                                        A
              Procurement                                                                     R

                                                                                              G
             Inbound     Operations        Outbound      Marketing   After-Sale           I
             Logistics       OR                             &        Service
                         Manufacturing      Logistics                             N
                                                          Sales



                                    Primary Activities                                    IC
              The Yankee Ltd.,
Strategic Alternatives
     •   Relational capital
     •   Human capital
                                  15 indicators
     •   Infrastructure capital
     •   Innovation capital
  – Weigh the indicators
  – Plotted the aggregated indices
              Yankee index relation

                       Relation

                                     IC index
                                           Innovation
Index value




                                     Human




                    Infrastructure




                   Time / Year
            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 relation

                                   IC index
                                         Innovation
Index value




                                 Human        Relation

                                            Infrastructure




                   Time / Year
       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 1996

                                     Relation



                                      Human
Index value




                                                  IC index


                                                  Process
                                                Innovation




                       Time / Year
Trade off effect [Adjust]: Skandia 1996

                                     IC index

                               Relation
                                          Innovation
                             Human
 Index value




                                            Process




               Time / Year
  Connecting IC to Shareholder Value

• Shareholder value = market value
• The impact of IC is stronger in
  opportunities than in operations.
• The best : Balance the IC & Financial
  Capital
  Connecting IC to Shareholder Value

The impact of IC is stronger in opportunities:
 rule of increasing return

The impact of FC is stronger in operations:
 rule of diminishing return

• The best : Balance the IC & Financial
  Capital
                   FC & IC
                 Financial Diminishing return




                                          IC
Efficiency




                                            increasing return




             Accumulate Investment
             Yankee case FC & IC
                                      MV
             Financial
Efficiency




                              IC




                         Accumulate Investment
              Yankee Finance [Adjust]
                                         MV


               Financial
Index value




                                         IC




                             Manage IC




                           Time
              Machine ple Inc.,

                                         MV


              Financial
Index value




                                        IC




                            Manage IC •Develop new product
                                        (human capital => structural capital
                                       •Develop new business
                                        (structural capital => Financial capital



                          Time
TRADITIONAL ACOUNTING VIEW &
THE REPORTING OF IC
Conceptual roots of IC                               LO

                                                Conversation
                     Knowledge                  management
                    Development

                                                Innovation
       Management
                                                     KM

                     Knowledge                     Core
IC                    leverage                  Competencies


                                                Invisible assets



                         Report
                                    Narrative

      Measurement
                                    indicator


                       scorecards
                                    Financial
            Hidden Value




How much?
             Monetary value for its IC

Three approaches to calculate a monetary value for a
company IC:
(1) the cost-based approach – determining the value of
an asset by ascertaining its replacement costs.
(2) the market-based approach – determining the value
of an asset by obtaining a consensus of what others in
the market have valued the asset at.
(3) the income-based approach – determining the value
of an asset by looking at the income-producing capability
of the asset.


                                      Marr, Schiuma, and Neely, 2004
      International Accounting Standards Board
ได้กำหนดกฎเกณฑ์สำหรับ สิ่ งที่จะเป็ นสิ นทรัพย์และสำมำรถแสดงมูลค่ำได้ใน
รำยงำนกำรเงินขององค์กร (balance sheet)

 – Asset: a resource controlled by an enterprise as a result
   of past events and from which future future economic
   benefit are expected to floe to the enterprise
 – Intangible asset: “an identifiable non-monetary assets
   without physical substance held for use in the production
   or supply of good and service, for rental to others, or for
   administrative purpose
                            IC
• Most IC resources do not fulfill all of the IASC
  requirements
   – Company do not own employee
   – Company do not have full control over employee
   – Research may not be certain that a piece of technology
     will generate future economic benefits
   – Company do not have a full control of its reputation
• Intangible assets [IASC]: is part of Structure Capital
  and exclude Relational Capital & Human Capital
                 Goodwill
• The excess of the cost of an acquired
  company over the sum of identifiable net
  assets
  – Goodwill occurs when an acquisition takes
    place [the price is determined, it can be
    recognized as an asset in the transaction-
    based accounting system]
The need to start measuring and valuing IC

 Valuation methods

1.Financial valuation of IC
2.Indicator approach valuation of IC
3.Narrative approach valuation of IC
  1. Financial valuation of IC
1.1 Cost approach
1.2 Market approach
1.3 Income approach
can be used in combination bandwidth to
develop value of IC
  IC financial valuation: 1.1 Cost approach


• Principle: Substitution & Price equilibrium
  – the investor will pay no more for an
    investment than the cost to obtain an
    investment of equal utility
  – IC price = cost to obtain that resource
  – Appropriate for setting transfer price, royalty
    rates, or estimate the amount of damages
    suffered by infringement
 IC financial valuation: 1.1 Cost approach


Flaws
  – Many important factors that drive value are
    not reflected in the cost approach
    • The amount of benefits associate with IC
    • The trend of the economic benefits
    • The duration over which the economic benefits will
      be enjoyed
 IC financial valuation: 1.2 Market approach

• Principle: competition and equilibrium
  – Free and unrestricted market
  – Supply and Demand factor will drive the price
    of any goods to a point of equilibrium

  – ควำมต้องกำรแปรผันโดยตรงต่อรำคำ
IC financial valuation: 1.2 Market approach


• Flaw
  – Can be used only if data is available
    regarding the transaction of IC resources are
    similar to the subject resources .
  – When the resources are unique, this
    approach is not appropriate
IC financial valuation: 1.3 Income approach

• Principle: anticipation
  – The value of IC resources = the expected
    economic income generate by the IC
    resources
  – Requires assumptions about the future
    income that will be produced
IC financial valuation: 1.3 Income approach

• Flaw
  – Require good and validly assumption about
    the future income
        2: Indicator valuation
• Indicator valuation can be used when
  financial value of IC can not be determined
  and no other direct measurement can be
  found
• Indicator: a reasonably trustworthy
  estimate of an unknown value [Stam,
  2002]
• Using of proxy for valuation
        2: Indicator valuation
Proxy valuation
  – Need several indicators to cover the
    usefulness of and IC resources
  – Need a criteria to measure
  – Difficult to judge whether the level of a
    particular indicator can be considered “good”
    or “bad”
           3: Narrative valuation

 Most annual reports contain section about
 the strategy and resources of the company
 [tell the stories about the intellectual
 capital of the firm]
Topics are IC related
  – Employee
  – Process
  – Best practice
  – QA
  – IT & ICT
           3: Narrative valuation

example: the Intellectual Capital Statement
For the Danish government
  – Explicit contains a narrative section called
    “the knowledge narrative”
  – The section tells the story of how IC helps to
    create value for companies.
REPORTING OF IC
               IC reporting
• The process of creating a story that shows
  how a company uses its intellectual capital
  to create value for its customers

• Involves
    Identify, Measuring & Reporting of IC as well
    as constructing a coherent presentation of
    how the company uses its knowledge
    resources
               IC reporting
• IC statement which combines numbers,
  narrative and visualization of the company
  intellectual capital

• IC statement can fulfill two functions
  1. Internal management function
  2. External reporting function
1. Internal management function
• IC statements are a part of a company’s
  knowledge management strategy
  – IC can systemize KM [a coherent and
    systematic approach to managing and sharing
    knowledge which support general strategy]
• IC statement can develop specifically
  management of knowledge resource for a
  company
1. Internal management function
• IC statement helps develop the firm’s
  strategy and focuses on its innovative
  capabilities
  – Develop customer relation
  – Develop innovation
  – Develop effective processes
  – Develop new business model
1. Internal management function
• IC statement is a monitoring system that
  helps firms to account for their intangible
  resources and relate them to innovation
  – Survey the composition of intangibles and
    explain their development
  – Survey the investments made in developing
    intangible resources and highlight the firm’s
    effort to make greater use of intangibles
  – Monitor the effect of intangible resources and
    throw light on the results gained from
    intangible resources
1. Internal management function
• IC statement benefits the firm’s innovation
  ambition by linking efforts and objective to
  make the firm a more innovative one.
IC Statement
  2. External reporting function
• IC statement can be used to communicate
  to various stakeholder groups
  – To the company itself [identity]
  – To potential employees
  – To customers
  – To co-operative partners
  – To investors
  – To citizens
  – To political system
IC Statement
IC report
  Intellectual Capital Reporting
1. Improving internal management
2. Improving external communication
3. Statutory and transaction issues
the wealth in communities, regions, and nations

IC: BEYOND A BUSINESS APPROACH
  The IC concept is being developed to another
  level that is beyond a business approach.

• The new perception is that IC is the basis for
  wealth in communities, regions, and nations.
                                       (World Bank, 2005)

• Social values such as connections, relations,
  and interactions in a networked society must be
  considered as value added for a community.
                                             (Jay, 2006)
 The wealth in communities, regions, and nations


• Many countries in Europe, America and Asia are
  seriously acknowledging and attempting to get basis to
  operate knowledge-based capability and intangible
  wealth especially in the private sector, educational
  community and government institutions.
• These non-profit organizations start to study and
  research in the field to develop a framework example of
  a knowledge based community.
                                (Salmador, Bueno & Rodriguez, 2004).
IC & non-profit organization

• With their unique characteristic, the non-profit
  organization’ nature makes it difficult to assess its’ value.
  It is impossible to use traditional financial report to
  measure cost efficiency.
• These organizations’ value can be assessed and
  measured by the IC process while other methods cannot.
                                                  (Chu, et al., 2005)

• One of the IC advantages is that this application is
  suitable for a non-profit organization
                                                 (Bontis et al., 1999)
• In the late 1990s, the concept gained popularity, by
  serving as the focus of the World Bank research
  program and has become the main subject of several
  mainstream books.
• The following are four main approaches to social capital.
          Table I. Main conceptual approaches of social capital
                     Source: Eduardo, & Mari, 2004

Social Capital Approach

                                                                                Main Ideas


 Economic development       Confidence, civic behavior and associativity strengthen the social networks, contributing to the sustainable

        theories            economic development




Social responsibility and   Social capital expresses the degree of social integration and responsibility with respect to the whole society and

         ethics             its agents and group. It is based on values and attitudes, such as confidence, corporation, safety, principles,

                            ethics, and compromise




 Corporate governance       Ethics and corporate governance codes have a positive impact on the creation of social capital, stimulating the

                            solidarity and overcoming market imperfection




           IC               Social capital is a component of IC. It is based on a set of values and the subsequent indicators such as

                            confidence, royalty, sincerity, compromise, transparency, solidarity, responsibility, honesty and ethics
   A new political leadership agenda is evolving around
   intellectual capital of nations and other communities, with
   the focus on:
• How to visualize the knowledge capital of nations;
• How to develop intelligence flows within and between
   knowledge capital clusters;
• How to cultivate efficiency and renewal of the knowledge
   capital of regions;
• How to capitalize on knowledge capital, by new innovative
   social systems, in terms of the collective wealth of
   nations;
• How to make cities “intelligent”.
IC: the development of Social capital
• Since the start of the Skandia model in mid 1990s, the
  model has been criticized for its failure for not taking into
  account a major component of intangible value called
  social capital.
                                                        (Mark, 2002)
IC: social capital

• Social Capital refers to connections within and between
  social networks.

• Social capital focuses on the value of relationships
  between people forming an organization or community
  which is a core concept in business, economics, political
  science, and sociology.
• According to social capital concept, the speeding of the
  information transfer and the development of new
  knowledge depends largely on relationships.
                                             (Eduardo, & Mari, 2004)
Social capital
Relational capital: business capital & social capital




   Bueno, Salmador, & Rodriguez (2004)
Development of IC:
Relational capital: business capital & social capital

•   According to Bueno, Salmador, & Rodriguez (2004), they suggest that the
    relational capital which is one of the major components of IC consists of
    business capital and social capital.

    In addition, social capital can be categorized into six areas which are
•   solidarity and social cohesion
•   economic development of the environment
•   commitments of efficient corporate governance
•   commitments acquired with the scientific and technological development
•   environmental protection
•   defense of cultural and artistic heritage

    Thus, IC approach can be applied not only to the business domain, but also
    to the social domain; in particular to the intangible traditional knowledge.
Social capital: self organizing pattern




                                          McElroy, 2002
IC: social capital
• Social capital is also a part of IC because it facilitates the behavior
  rules of the organization or community: reducing transaction cost
  and promoting corporation (Eduardo, & Mari, 2004).

  The IC model had been modified with social capital.
• Intra social capital refers to the relationship in an organization or
  community.
• Inter social capital refers to the relationship between organization
  and its stakeholders (clients & share holders).
• Social innovation capital refers to the set of process and relationship
  that initiate the innovation .
INTELLECTUAL CAPITAL
IN THE PUBLIC SECTOR
            New Public Management

• The worldwide new public management movement, requires all
  government agency to restructure totally the Civil Service by
  devolving functions of the service delivery emphasis more on
  efficiency.
• Another initiative, required public sector organizations to publish
  their aims and objectives as well as the performance measurements
  that would be used to assess whether the objectives have been
  achieved.
• This had an effect on government agency and local authorities to
  disclose a number of performance indicators.
               New Public Management
• Some of the areas measured by the various indicators used
  by either central or local government organizations are
  examined it can be seen that the three categories
       For example the measurements of the Water Service agency (2002)
  include:
   – the development of an environmental management system (organizational),
   – response to citizen correspondence (customer)
   – the continued accreditation of Investors in People (human),
• Likewise some local authorities measure items such as:
   – percentage of total waste received which is recycled (organizational)
   – percentage of citizens satisfied with council services (customer)
   – proportion of working days lost to sickness or unauthorized absence (human)
          IC in the Public Sector

• However, public administration lags far behind
  the business realm.
• Unlike the private sector, in which performance
  can be evaluated by financial measures, public
  agencies have multiple objectives of a
  nonfinancial nature.
• Thus, effectiveness in attaining these goals
  rarely can be measured by quantitative amounts


                                            Wall, 2005
           IC in the Public Sector

• Although using similar production inputs –
  human resources, knowledge, money, raw
  materials, and physical plant – the public sector
  takes greater advantage of the first two, which
  are intangible assets.
• The main output of public agencies is service,
  rather than products, and service cannot be
  measured directly.
           IC in the Public Sector

Public sector
• Lower motivation for the adoption of new
  management practices and methods in the
  public administration realm and
• Public managers have less room to maneuver,
  as two significant hurdles to the implementation
  of intellectual capital-based projects in public
  administration.
Major difference between IC in the business and public realms

• The business sector validates its intangible
  asset measurement models statistically, by
  correlating the results accrued from them with a
  firm’s M/B (market value/book value) ratio.
• Public agencies are generally considered not to
  have market value.
• The solution for this problem is to be found in the
  body of knowledge gathered from performance
  measurement
   – The way to validate the measurement model must be
     found for Public agencies.
         IC in the Public Sector

• In public projects, accountability must be
  evaluated.
• Government accountability tends to follow
  the advance of democratic values such as
  equality, human dignity, participation,
  transparency, and responsibility.
             IC in the Public Sector
• The four dimensions are consolidated into a
  single dimension, could be helpful to avoid
  misconceptions on the part of the respondents.
  –   Effectiveness
  –   Efficacy
  –   Efficiency
  –   accountability
• It could also replace the M/B ratio in order to
  validate the results accrued from the use of the
  intellectual capital theory to measure the
  intangible asset variation in the public sector.
                                              Joia, 2007
IC in public sector
                                      Government
                                      Endeavour



                           Organizational
     Human capital                                External capital   Innovation capital
                              capital
       variation                                     variation           variation
                             variation




                                    Intellectual capital
                                          variation



                                        Civil servant’s
                                        Value creation




          Accountability                                              Efficacy
                                Efficiency       Effectiveness
 Questions in order to evaluate the impact of the Government project

1. How have the improvements in terms of skills and competence of
   the organization’s personnel accrued from this specific undertaking
   been perceived? (to evaluate the human capital variation)
2. How have the improvements in terms of processes in the
   organization accrued from this specific undertaking been perceived?
   (to evaluate the organizational capital variation)
3. How have the improvements in terms of relationships between the
   organization and its main stakeholders accrued from this specific
   undertaking been perceived? (to evaluate the external capital
   variation)
4. How has the innovation capability of the organization accrued from
   this specific undertaking been perceived? (to evaluate the
   innovation capital variation)
Key drivers of the intellectual capital variation
             in G2G endeavors.
                     IC in public sector

• In order to improve the human capital of public agencies, training
  initiatives in issues must be undertaken not only for the public
  managers, but also for civil servants.
• in order to enhance the organizational capital of public agencies, the
  cultures must be taken into consideration. Each public agency
  has its own identity and specific culture.
• In order to improve the external capital of public agencies, a
  workgroup environment must be set up, as was done with the
  Courts of Justice and the so that they can learn to work together.
• in order to enhance the innovation capital of public agencies, the
  innovation must be fully aligned with the demands of society,
  enabling the government to become closer to the business world.

				
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