5. Renata Urbonė - Intellectual capital management

Intellectual capital management – new strategic function of the leader of successful
organization
Renata Urbonė1
1
Kaunas University of Technology, Lithuania, [email protected]
Abstract
Intellectual capital management is still a new area in management science resulting from changing
business environment conditions, where managing knowledge and other intellectual assets has become a
core source of strategic advantage creation. This article deals with the questions related to positioning of
the intellectual capital management as the new management subject and a new strategic function of the
leader of successful organization. The research defines the place of ICM in the overall management
system of the organisation and suggests the management strategies which are derived from the theoretical
analysis of the subject area on the strategic management and validated empirically. Concepts and
strategies developed during the research were validated in the knowledge business via semi-structured
interviews with knowledge employees, top level managers. The research should pave the path for
bringing ICM closer to practice and ensure the vast benefits it may deliver.
Keywords: Intellectual capital management, Strategic management, Intellectual capital strategies.
Introduction
The concept of intellectual capital is rather young, it exists only for few decades, and thus the
thesaurus of this approach only starts its formation (Užienė, L., Urbonė, R., 2008). Intellectual capital
management (further on ICM) is as well a new discipline in management science, which still does not have a
specified place in the management system, except that it is a clearly type of modern way of management of
the organization, part of the “leading edge practices and new frontiers in IP management” (McLean, 2006).
But still it is an area with scientific debates on what it is about, why it is not wide-spread in practice. On the
sceptical side of the debates, ICM is considered a fashionable, trendy title without changing the essence and
having no practical implications, recommendations, therefore not applied in practice. The supporters strongly
advocate that leaders of successful organisation should involve in the processes to reveal, exploit, capitalize
available intellectual resources and be able to attract them, employ them in the value creation chain.
An important aspect of intellectual capital (further on referred to as IC), excluding it from other related
management objects is concerned with the exclusive feature of intellectual capital to act as strategically
important value creation factor. Specific characteristic „potential to generate value” differentiates
intellectual capital from other objects treated as strategically important under new business conditions, i.e.
knowledge, innovations, networks, intellectual assets or intangible assets, which are the source of IC, but
may still be only in the level of ‘assets’ rather than ‘capital’ for the organization. In fact, the appearance of
IC concept is related to the need to consolidate strategically important intellectual resources, including
knowledge, culture, organization, structure, innovations and market relations, and manage them integrally.
Nevertheless, that importance if IC and ICM are rarely doubted in the academic discussion, the
practical applicability of ICM models and methods in the business society is rather vague. Kunjansivu (2008)
performed a doctoral research addressing the scientific problem, why Finnish companies do not apply ICM
methods and revealed that nevertheless some of the researched business community know about specialized
ICM models and practices, IC would be better applied if it is be integrated to traditional management
approaches and no special models are needed. Still the question not answered in the literature what is the
place of ICM in the whole management system of the organization and what specific directions, strategic
alternatives for managing ICM may be. It is critically important to show practitioners the place of ICM and
help them to know, who should be in charge and in what management level for taking care of it. Research
aims to answering what ICM is, reasons that is should be managed in strategic level and outlines the strategic
alternatives of ICM.
Methodology of Research
The research methodology used combines methods of literature analysis, modelling and validation.
The research background is theoretical and based on the analysis of literature from the strategic management,
intellectual capital management and knowledge management fields. Modelling of ICM strategic alternatives
were based on the capital development strategies matrix (Carrilo, 2002) and reasoned based on the literature
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sources from intellectual capital management research area. Concepts and strategic management alternatives
developed during the research based on the literature analysis and modelling were tested in the knowledge
intensive business organizations in Lithuania. The perceived scope of intellectual capital management and
the applicability of the strategic alternatives of ICM was empirically tested with over 30 top level knowledge
employees from the knowledge-intensive, high-tech industries, in specific laser technologies development
and information technologies development areas during the period of 2004-2014. Research results were the
input for improvement of the concept names for the strategic alternatives of ICM. Research is limited with
the number of business organizations researched. A more extensive research should be the next step in
investigating the context of the organizations in which one or another strategic alternative should be chosen.
Findings/Results
The analysis of ICM place in the overall management system of the organization and its essence was
started from the analysis of the ICM functions. Nickerson (1998) and Leliaert (2003) in the definitions of
ICM reflect some of the ICM functions: measurement, protection while structuring to organizational capital,
environment analysis, in search for the efficient use of intellectual assets. Nevertheless, definitions limit the
full list of ICM functions and indicate only the most visible and important.
Harrison and Sullivan (2000) list more roles of the intellectual capital and group them in two groups:
defensive roles and offensive roles. According to Harrison and Sullivan (2000), the roles assigned depend
very much on the context of the organization: its type, vision and chosen strategy. There are less defensive
compared to offensive intellectual capital functions and that confirms the idea of the intellectual capital as
the source for the long-term competitive advantage. All defensive functions are dedicated for to the
protection of the IC, by transforming it to intellectual property. That means that protective strategies may be
applied only to some parts of the IC. E.g. it is not applicable for the organizational culture, social capital,
human capital, as they are not the objects of the intellectual property by laws. In such cases, intermediary
strategies may be chosen, e.g. to codify the knowledge by documenting them, and then to protect
documented knowledge to intellectual property. he offensive roles of intellectual capital that are suggested
by Harrison and Sullivan (2000) are not all offensive in their nature. E.g. functions of the increase of income
are more related to the exploitation strategy, than to the offensive. And the function for creating barriers for
the new competitors to enter the market is more defensive in nature, because its purpose is to protect the
market. The function dedicated to establish standards in the new markets or for new products and services
may be considered more protective, then offensive, because for those who do not comply to standards, it is
more difficult to enter the market, and the standardisation is an expensive activity.
The connection between ICM functions listed by Sullivan (2000) and the strategic management
process may be noticed, because the latter starts with the analysis of the internal and external environments,
listing of the strengths, weaknesses, revealing the strategic possibilities, and formulating and implementation
the strategies for the exploiting possibilities. Thus, ICM is an integrated part of the organization‘s strategic
management process. The confirmation of such statement may be found both in the earlier management
papers Nickerson and Silverman (1997), as well as in the new researches performed in the area of ICM
(Cabrita, Bontis, 2008, Choo and Bontis, 2002, Al-Ali, 2003).
Strategic management process may take place in more than one level of the organization, depending
on is organizational structure. For example, large organization with many divisions or diversified
organization should plan strategy in at least two or even three levels (Cole, 1994). Various classification
systems exist which deal with strategy classifications. Some classifications aim to grasp the unique aspects
of strategic behaviour of the organizations (Chrisman, Hofer and Boulton, 1988; Miles and Snow, 1978;
Mintzberg, 1987, Porter, 1996). Other theories are based on the ways in which organizations develop, for
example, diversification, vertical integrations, mergers, acquisitions, etc. (Borys and Jemison 1989; Harrigan
1985, 1988; Mahoney 1992; Montgomery and Wernerfelt 1988; Rumelt 1974, 1982; Singh and Montgomery
1987). But in the broad sense, there are three or four levels in the strategic decision making (Hunger,
Wheelen, 1996, Newman, Logan, 1981, Thompson, Strickland, 1995, Hofer, 1980, Higgins, 1983, Lorange,
1980). The highest level is related with the positioning of the organization in the eyes of the society. Lower
levels deal with question of integrating functional areas and coordinating them with the strategies formulated
in the upper levels. The highest from the lower levels is related with structuring different business units in
the organization. This corporative strategy reflects the common goal of the business units, the portfolio type
and size that it aims to achieve, as well as it suggests the activity plan, how this desired portfolio will be
achieved. The middle level from the lower levels is related to the business strategy or strategic business unit
strategy, which defines the boundaries of the business and specifies the main competitive advantage of the
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business. The goals of business strategy contain the timeframe and should be measureable in clear measure
units. The action plans of the business strategy are mostly related with the strategic position of the
organization, with the scope of the product market, with the resources and definition of results, as well as
with synergy goals in the implementation of the strategy. The latter level contains functional strategies,
which reflect, how different functional departments contribute to the implementation of business level and
corporative level goals and implementation plans. The functional level serves as the guidelines for each
functional department of the organization.
Keeping in mind, that ICM object is whole or part of the intellectual assets (intellectual capital), which
may be undoubtedly treated as organizational resources in the value creation chain, the maximisation and
development of those resources, which often is underlined in the discussions of the essence of intellectual
capital management, cannot be a strategic purpose of the corporative or business level functions, because as
discussed above, their nature is different. One of the main missions of the intellectual capital management
specialists is to maximise the productivity of the resources and supply organization with extraordinary
resources. The mentioned functions belong to the scope of the functional level management of the
organization. Besides, intellectual capital is dealt in the strategic level – it is the strategic function at the
functional management of the organization. This strategy, same as with other functional strategy, contributes
to the realization of the strategic goals of the organization. Sharabati, Jawad and Bontis (2010) provide the
following practical recommendations to the organizations: it is recommended, that organizations identify key
human resources and would assign them the roles of the champions of the intellectual capital. This person
would be responsible for the preparation of the intellectual capital management plan and its alignment with
the strategic goals of the organization. In those recommendations, the strategic nature of the ICM and its
dedication to contribute to the implementation of the organizations strategic goals can be noticed.
This conclusion is also supported by Resource Based View (RBV) - one of the famous theoretical
perspectives in the area of strategic management. According to RBV, organizations are different in their
resources and that the heterogeneity of those resources is the main reason of the different results that
companies achieve. It is widely recognized nowadays, that current Knowledge-Based View (KBV) to the
business of the organization is the extension of the previous Resource Based View (Curado and Bontis,
2006; Sveiby, 2001). KBV states, that knowledge is the most important strategic resource, thus it should be
dealt with exceptional care. IC, which mainly contains knowledge, should be managed strategically as well.
Defining the place ICM in the whole management system of the organization does not completely
answers the question, how to apply it empirically. On the overall ICM should be performed following the
same logics of other functional areas management at the strategic level and contains the following stages
(Mikulėnienė, 2004): environmental analysis, definition of the strategic alternatives, selection of the strategy,
implementation of strategies and control. Selection of the ICM strategy is typical for every of the functional
areas. It contains such steps like selection of the criteria for the evaluation of strategic alternative,
formulation of the mostly relevant strategies depending on the type of intellectual resources, and formulation
of the united ICM strategy, which would help to perceive the road that organization choose for the
management of the intellectual capital.
The author of this article after analysing different literature sources has suggested intellectual capital
management strategies in the dissertational research (Mikulėnienė, 2004). The strategies since then were
validated with the experts from knowledge-intensive, high-tech industries via the semi-structured interviews.
The possible strategic alternatives of ICM were outlined combining the ICM functions suggested by
Harrison and Sullivan (2000) and the capital development strategy matrix suggested by Carrilo (2002). Such
research decisions were made because: a) ICM functions represent all possible goals and purposes of the
ICM, which relate closely with actions plans (strategies) to be selected; b) the capital creation strategy matrix
suggests possible ways for reaching the goals, depending on the current status of each IC component.
The roles of ICM suggested by Harrison and Sullivan (2000) may be reordered following the strategic
alternatives of capital development in the strategy matrix suggested by Carrilo (2002):
• to protect intellectual capital;
• to exploit intellectual capital;
• to increase the availability of the intellectual capital.
Following Klaila and Hall (2000), strategy of the intellectual assets may include investments, getting
rid of investments or prohibition to use intellectual assets. The latter strategy seems irrelevant in the case of
IC components, as it seems irrelevant to get rid of something which has potential to create value.
Nevertheless, depending on the corporate organizational strategy, potential may be considered very low for
today or may require high and unavailable investments. In such a case possible strategy may be not to invest
to the intellectual capital. The opposite strategy would be to invest into the intellectual capital (develop it).
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Concluding the literature analysis and validation results six strategic alternatives are suggested for the
management of intellectual capital and described further in the research.
ICM strategy No.1: Protect intellectual capital. This strategy should be chosen when there is a need
to protect owned intellectual capital from the external use.
ICM strategy No.2: Exploit intellectual capital. During the identification of intellectual assets one
may reveal the accumulation of intellectual resources that organization have not exploited up to date. In case
the potential of such resources to create value is high, then company may choose the strategy to exploit the
intellectual capital for the value creation.
ICM strategy No.3: Increase intellectual capital availability. In case during identification of
intellectual capital one reveals, that in order to realize own potential organization lacks some necessary
intellectual resources, third strategic alternative may be chosen to increase the availability of needed
intellectual capital.
ICM strategy No.4: Develop intellectual capital. In case an organization lacks some components of
intellectual capital, which are critically important and which would better belong to the organization, rather
than attract from the outside upon request – it may invest into the development of the intellectual capital.
ICM strategy No.5: Suspend investments to intellectual capital. An alternative not to invest into
intellectual capital may be chosen, even though the intellectual assets of the company may have potential to
create value in the future.
ICM strategy No.6: Transfer intellectual capital. This strategic alternative is only suitable, when
there is a demand for the company‘s intellectual capital, and the company do not have the possibilities or
strategic direction to exploit the intellectual capital properly.
Under uncertain and rapidly changing environmental conditions, strategy cannot be associated with
the projections for the five or ten years forward and adaptive strategy is needed, where it is only the basis for
the behaviour of the knowledge intensive organizations, which would give the guidelines for the knowledge
worker rather than the directive strategic plan (Rastogi, 2003, Rylander and Peppar, 2003).
Conclusions
ICM expresses the strategic management level of an organization and the ICM strategy itself belongs
to the level of functional strategies. It’s a new function of the leader of the successful organization of the
XXI century, as the absence of intellectual capital management does not allow managing the most important
resources in the knowledge economy – intellectual resources - efficiently. The purpose of the intellectual
capital management function is to show the main goals and directions of the intellectual capital through the
formulation of intellectual capital management strategy, and with the help of various tactical knowledge
management, organizational behaviour management, human resources management and other modern
management theories and methods to ensure its successful implementation. ICM strategy in its essence is
closely related to other functional strategies and it ensures the success of corporate and business strategies
implementation. Depending on the current status and characteristics of the intellectual assets one or
combination of several out of six strategic alternatives offered in the article may be chosen.
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