Goh, T. (2000), "Intellectual Capital: The New Wealth of Organisation", International Journal of Manpower, Vol. 21 No. 1, pp. 60-70. https://doi.org/10.1108/ijm.2000.21.1.60.1
Emerald Group Publishing Limited
Copyright © 2000, MCB UP Limited
The Industrial Age is over. The Information Age that replaces it creates wealth in a radically different way and has sidelined capital and labour as the main currency of business. Fuelled by the change in business climate, knowledge based organisations demonstrate higher market‐to‐book ratios than traditional, industry based organisations and knowledge workers pursue different career priorities.
That is how award winning editor of Fortune Magazine, Thomas Steward, starts the first of the three sections of his book. Wielding his talents in popular writing, he expresses complex ideas in simple language, making this book compelling reading. For readers who have been following his regular columns in Fortune magazine, this book can be treated as an extension of those landmark articles on intellectual capital.
Intellectual capital, according to Steward, is the “intellectual material – knowledge, information, intellectual property, experience – that can be put to use to create wealth.” Note that the definition itself focuses on the business outcome (“create wealth”), giving intellectual capital a pragmatic focus that makes its management and measurement important.
Indeed, the second section of the book is devoted to a discourse on intellectual capital, which, for purposes of discussion, is divided into three key elements: human capital, structural capital and customer capital. In reality, however, readers should note that all three elements must interact well with one another. From the business process standpoint, it should be a case of the right information collected from the right sources and passed on to the right person to act on it.
The lowest denominator of intellectual capital, human capital, is defined as the individual’s knowledge and expertise that contributes to the innovation and renewal of the organisation. The organisation does not own human capital but has the resources, structures and opportunities to cultivate and extract value from human capital.
When the organisation captures and owns this knowledge, it becomes its structural capital. This is a combination of the technical and organisational infrastructure in documented form, the organisational culture that drives its employees and the corporate image that shapes public perception.
But business cannot be conducted in isolation. The relationship with employees, suppliers, faithful customers and cooperative competitors contributes to its wealth and is classified as the customer capital.
Since Steward associates intellectual capital with wealth creation, it has to meet two criteria: it must be proprietary (few people have the same competency) and strategic (it must contribute to the competitive advantage of the organisations that employ them). One feels that this may be possible in a closed system but in reality, with the exception of selected industries such as the defense industry, intellectual capital can never be kept within an organisation for long. It is transmitted through commercial intelligence, discussion groups on the internet, professional and alumni networks and conversations.
If keeping intellectual capital within the organisation is difficult enough, taking the right steps to build it is even more challenging. Like money or equipment, knowledge assets are worth cultivating only if they increase the competitive advantage of organisations. Steward rightfully points out that the outcomes of knowledge products cannot be predicted and that there is no meaningful economic correlation between knowledge input and knowledge output. You can pour huge amounts of money into research but that does not necessarily yield proportionate financial returns.
Similarly, there is no meaningful correlation of organisational learning with training. Training is useful only if the knowledge and skills gained contribute to the competitive leverage of the organisations which sponsored them. The same piece of information may be useful to an organisation but not another simply because they operate in different industries or are in different phases of organisational growth. And with the quick obsolescence of skills, the method of skills acquisition for the organisation has changed.
First, many organisations do not look at training as the solution to building the right combination of talents and skills. Given the pressures of competition and rapid product development time, they rely on an outside pool of professionals who are hired on a contract basis to fill the skill gaps needed in value‐added activities. Blended teams comprising employees and contract workers are now the preferred team structure. As contract staff, their professional career objective is to seek a win‐win relationship with the organisations that recognise and nurture their skills and expertise. The challenge then, is for organisations to structure work around them and leverage their expertise during their tenure. This eliminates middle management and shift the traditional demarcations of power to the knowledge workers. This phenomenon gives rise to a pool of knowledge workers whose loyalty is to the profession, not the organisation.
Second, knowledge based organisations are hiring younger workers because in addition to their technical knowledge, they show greater flexibility and acceptance of change – traits on which older workers are usually not rated highly. It would be interesting for management writers to observe if the current generation of knowledge workers, having been conditioned to adapt to rapid change, will retain their flexibility and ease with technology even when they get older.
Whatever the situation may be, despite the organisational fluidity, there still needs to be a core group of workers in the organisation to ensure that the fundamental structural capital remains intact. This core group role would be filled by the management, as put across by Peter Drucker: “Knowledge will be primarily at the bottom in operations with specialists who direct themselves. There will be few specialists in central management” (Drucker, 1988, pp. 45‐53). The role of management will be more challenging in that it must be responsible for anticipating and reacting to market conditions in order for the organisation to remain profitable.
Thus, management needs to understand the dynamics behind the mechanics of human performance, while knowledge workers need to manage their careers well – which is the focus of the third section of the book. While not a discussion point in this book, readers may take comfort in the thought that a mobile contractors pool does not mean anarchy. On the contrary, human resource policies have to be so well structured that knowledge workers can be constantly challenged and adequately rewarded. Knowledge workers owe it to themselves to craft a work package that suits their needs, making career management as much within their responsibilities as the organisations that attract, hire and retain them.
Just as there is a need for organisational structure, its structural capital element has to be strong. One may feel that the corporate image is the most important component of structural capital simply because of it is the public manifestation of the organisation’s know‐how and services. For example, the association of Intel with computer chips, Coke with soft drinks and FedEx with overnight delivery are strong images that help them maintain customer loyalty and attract new ones.
But behind the façade of a favourable public image lies the tedious process of knowledge creation and management. Intranet technology and the demand for point‐of‐need information has made knowledge management a key tool of competitive advantage, provided there is no information overload. Also, with a mobile workforce, the organisation needs to capture their human capital and own it before these mobile workers bring it with them to their next jobs.
Rather than simply defining the differences between information and knowledge, Steward urges readers to focus on both the semi‐permanent body of knowledge (such as a scientist’s experience in genetic engineering) and the tools to deliver and distribute this knowledge (such as the scientist’s laboratory). Further to Steward’s pointers, readers may note that at the rate in which information is growing, the tools that deliver and distribute knowledge itself will have to be managed by professionals dedicated to encouraging and enabling knowledge capture and use.
Interestingly, Steward steers clear of a detailed discussion of the technological component in knowledge management. He illustrates instead, how managing knowledge well has contributed to the success of many companies, notably the consulting and accounting firms. However, the book does not outline fully the challenges facing these companies in structuring knowledge into an easily digestible and usable form, thus making the process appear oversimplified.
Despite its attractiveness, Steward should have highlighted, in detail, that some knowledge management programs failed because technology was seen as the sole answer to knowledge problems. Other issues such as culture, leadership, incentives and performance measurements were ignored at great expense. Also, knowledge management is more likely to succeed if it is linked to the common goals of the organisation and yields clear economic outcomes. Following the same reasoning, the growth in call centre technology and customer relationship management technology should not make customer capital any more technologically driven than the business and cultural context of the organisation.
Readers may argue that more than the other two elements of intellectual capital, customer capital is the element that can bring the most noticeable results from the perspective of wealth creation. In addition, customer capital has a longer shelf life and does not depreciate as easily as physical assets and technical knowledge. It may seem a paradox that the coverage of this element is noticeably less than the other two elements. Perhaps it is because forging relationships with customers and suppliers is a topic so well discussed in the business and academic circles that there is hardly any new ground to break. In comparison, structural capital is an area that is growing in importance with new enabling technologies and human capital is now acknowledged as a source of competitive advantage after learning the lessons of massive downsizing in the early 1990s.
While there are constant references to corporate strategies, this book does not outline how knowledge based organisations should pursue them. Readers who want to know more in that area may turn to D’Aveni (1995) for a deeper insight.
Despite its importance to business, intellectual capital is an area that people tend to overlook because it deals with intangibles. In a world driven by numbers, it is hard for people to put up a business case to justify its importance. Steward’s qualitative and quantitative assessment of the importance of intellectual capital is a brave attempt to break new ground, especially his step by step guide in building the knowledge balance sheet in the appendix of the book. However, his treatment of the measurement of knowledge does not cover as much scope as the Intangible Assets Monitor (Sveiby, 1997). It is also worth noting the Sveiby’s work influenced European organisations like Skandia AFS, WM‐data, Celemi and PLS‐Consult which include in their annual reports how intellectual capital is leveraged.
Steward does not cover much of the Asian’s perspective on intellectual capital, perhaps because of some fundamental differences in perceiving knowledge. For example, the Japanese believe more in knowledge creation than in managing it. To them, intellectual capital is the embodiment of personal experience and cannot be simply replaced by a database or a specific index (Nonaka and Takeuchi, 1995).
When all is said and done, intellectual capital is still in its infancy, so writing a book like this offers great challenges. Steward should be credited for his attempt to consolidate complex ideas into a well written book, thereby popularising its awareness and usage. To become an instituted science, there needs to be a standardised method of measurement and indices. This is probably the next stage of development for intellectual capital and management writers like Steward should encourage its use in all organisations to better reflect their level of competitiveness.
Meanwhile, recognising and accepting the forces sweeping past our organisations and our lives is just the beginning. We owe it to ourselves, our professions and our organisations to constantly keep in touch with the ever expanding body of knowledge in order to remain relevant. It is certainly not an understatement to urge readers to read the book “as if the future of (our) organisation and (our) career depend on it”.
D’Aveni, R. (1995), Hypercompetitive Rivalries: Competing in Highly Dynamic Environments, The Free Press, New York, NY.
Drucker, P. (1988), “The coming of the new organization”, Harvard Business Review, January/February, pp. 45‐53.
Sveiby, K.‐E. (1997), The New Organizational Wealth: Managing and Measuring Knowledge‐based Assets, Berrett‐Koehler Publishers, San Francisco, CA.
Nonaka, I. and Takeuchi, H. (1995), The Knowledge‐Creating Company: How Japanese Companies Create the Dynamics of Innovation, Oxford University Press, Oxford.