Strategies for Information Technology and Intellectual Capital: Challenges and Opportunities

Strategies for Information Technology and Intellectual Capital: Challenges and Opportunities

Luiz Antonio Joia (Brazilian School of Public and Business Administration and Rio de Janeiro State University, Brazil)
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Release Date: February, 2007|Copyright: © 2007 |Pages: 276
DOI: 10.4018/978-1-59904-081-3
ISBN13: 9781599040813|ISBN10: 1599040816|EISBN13: 9781599040837|ISBN13 Softcover: 9781616927585
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Description & Coverage
Description:

Due to the increasing importance of the intangible assets of a company, firms are now concerned with how best to manage and measure knowledge and other intangibles. In addition to this, information technology has drastically changed the way these measurements are managed.

Strategies for Information Technology and Intellectual Capital: Challenges and Opportunities presents efficient ways for executives and practitioners to understand the impact of IT on the intellectual capital of their firms, as well as search for a new mandate for management in the knowledge economy that takes into consideration the pervasive role of IT on their competitive boundaries. Strategies for Information Technology and Intellectual Capital: Challenges and Opportunities provides a detailed synopsis on the history, origin, taxonomies, ontologies, measurement models, and dynamics of intellectual capital.

Coverage:

The many academic areas covered in this publication include, but are not limited to:

  • Financial Valuation of Intangibles
  • Human Capital Architecture
  • IC-Based Taxonomy
  • ICT for Knowledge and Intellectual Capital Management
  • Impact of Information Technology on a Firm’s Intellectual Capital
  • Impact of Intranets and Portals on Organizational Capital
  • Impact of RFID Technology on a Firm’s Customer Capital
  • Information Technology
  • Intellectual Capital
  • Intellectual Capital in Knowledge-Intensive Firms
  • Knowledge Sharing
  • Measurement Models
  • Social Capital
  • Strategic management research
Reviews and Testimonials

"The field of intellectual capital represents one of the most important management disciplines of this century. This particular volume represents some of the best ideas and research related to the field. The collection of contributors is truly top-notch and the significance of their contributions is well worth having this book in your library".

– Dr. Nick Bontis, Director. Institute for Intellectual Capital Research; Hamilton, Canada
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Editor Biographies
Luiz Antonio Joia is an Associate Professor and Academic Coordinator of the MBA Program at Brazilian School of Public and Business Administration - Getulio Vargas Foundation, in Rio de Janeiro, Brazil, and also an Adjunct Professor of Rio de Janeiro State University. He is B.Sc. in Engineering from the Militar Institute of Engineering, Rio de Janeiro, Brazil, M.Sc and D.Sc. in Production Engineering from Federal University of Rio de Janeiro and post-graduated in Management Studies – Oxford University. He has published widely in international journals like: Internet Research, Journal of Workplace Learning, International Journal of Information Management, Journal of Intellectual Capital, Journal of Knowledge Management. He serves as a Member of the Editorial Advisory Board of the Journal of Intellectual Capital, MCB University Press. He consulted with the World Bank from 1999 to 2000.
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Preface

The Genesis of the Intellectual Capital Theory

The consolidation of intellectual capital as a fully-fledged knowledge field is still in progress. It should be borne in mind that it was only fifty years or so ago that some pioneering thinkers foresaw the importance of intangible assets for a company, thereby laying down the initial foundations for this very recent discipline.

In 1945, Frederick Hayek presented research about the importance of knowledge in society (Hayek, 1945). Then, in a seminal work, Fritz Machlup, from Princeton University, produced an eight-volume work in 1962, under the general title Knowledge: Its Creation, Distribution, and Economic Significance (Machlup cited in Stewart, 1997, p. 11). In this work, using data gathered in 1958, it was established that 34.5% of the gross national product of the United States could be ascribed to the information sector. In 1993, Peter Drucker analyzed the new knowledge economy and its consequences (Drucker, 1993). Subsequently, academics, researchers and practitioners have increasingly highlighted the importance of the intangible assets of a corporation and even those of both countries and organizations, including non-profit entities (Dragonetti & Roos, 1998; Bontis, 2004).

A watershed was reached in July 1994, when a meeting took place in Mill Valley with a view to establishing how the knowledge of an organization could be adequately measured. Knowledge may be intangible, but that does not mean that it cannot be measured. Markets do precisely that when they value the stock of highly knowledge-intensive companies way above their book value.

In 1995, Skandia—the largest insurance and financial services company in Scandinavia—released its Intellectual Capital Annual Report, based on its Navigator framework (Edvinsson & Malone, 1997). Some other companies, such as Dow Chemical, the Canadian Imperial Bank of Commerce, Posco, and so forth, to name but a few, also entered this new era.

Several research articles have been published and timely praxis has been developed to measure the Intellectual Capital of an enterprise: Sveiby (1997); Roos et al. (1997); Bontis et al. (2000); Petty and Guthrie (2000); Low (2000); Sánchez et al. (2000); Joia (2000); Guthrie (2001); St Leon (2002); Rodov and Leliaert (2002); and Hunt (2003), among others.

The Impetus Behind the Intellectual Capital Theory

There is no single definition for intellectual capital (IC). Kaufmann and Schneider (2004), for instance, analyzed several definitions for this construct. Most of them are associated with the definition of intangible assets and knowledge resources, as stated by Rastogi (2003, p. 230): “IC may properly be viewed as the holistic or meta-level capability of an enterprise to co-ordinate, orchestrate, and deploy its knowledge resources towards creating value in pursuit of its future vision.” In line with this, Petty and Guthrie (2000, p. 158) define IC as “the economic value of the intangible assets of a corporation.”

According to Edvinsson and Malone (1997), Roos et al. (1997), Sveiby (1997), Stewart (1997) and Joia (2000), the impetus for the development of a theory of intellectual capital derives from the increasing value of the ratio between the market and the book (M/B) values of organizations. Indeed, some authors, such as Ordóñez de Pablos (2003, p. 63) not only agree with this, but also support the claim that a firm’s intellectual capital is the difference between its market (M) and book (B) values.

Some might say that different depreciation policies can influence the book value (B) calculation. It is a valid point, and is the reason why Tobin (1969) suggests the use of replacement cost, defining q as (market value)/(replacement cost of the assets). The replacement cost concept was developed in order to circumvent the differing depreciation policies used by accountants world-wide. If q is greater than 1, the asset is worth more than the cost of replacing it, thus it is likely the company will seek to acquire more assets of this kind. However, this reasoning has no longer been able to explain the recent increases in M/B values.

At this point, a very important question needs to be asked, namely: why should firms value or measure their intellectual capital? According to Andriessen (2004, pp. 232-233), this should be done for six reasons:

    a. What gets measured gets managed;
    b. To improve the management of intangible resources;
    c. To monitor effects caused by actions;
    d. To translate the organization’s strategy into action;
    e. To weigh up possible courses of action; and
    f. To enhance the management of the organization as a whole.

In addition to this, Marr et al. (2003, p. 443) reveal five main reasons why firms value their intellectual capital, as presented below:

    a. To help organizations formulate their strategy;
    b. To assess strategy execution;
    c. To assist in diversification and expansion decisions;
    d. To use these as a basis for compensation; and finally,
    e. To communicate measures to external stakeholders.

This is proof of the pressing need impinging upon organizations to evaluate their intellectual capital in order to improve their managerial praxis, as well as to achieve better outcomes.

In line with this, the intellectual capital theory purports to enable firms to understand their hidden assets better (Rastogi, 2003, p. 230). In this regard, it is important to understand the components of an organization’s intellectual capital, namely human, organizational, and relationship, as well as innovation, renewal and social, capital.

Linking Information Technology and Intellectual Capital

On the other hand, a movement was fomented by academics and executives since the early 1980s to use information technology (IT) not only as a tool for processing data more rapidly, but also as a powerful strategic weapon. The need to use IT as an enabler to reformulate old processes, rather than simply automate existing practices was perceived by these academics and executives (see, for instance, Davenport & Short, 1990, and Venkatraman, 1994).

As Internet technology became more readily available, the reformulation of productive processes in the business arena became a reality, leading most companies to strive for greater efficiency, efficacy and accountability in their relationship with their stakeholders.

Hence, this book draws on the fusion of these two former mainstreams, namely information technology and the strategic role of intellectual capital in firms.

In line with this, the main scope of this book is to show how information technology (IT) is linked to the intellectual capital of a firm, that is, to establish what the role of IT really represents in the human, organizational, relationship, innovation, renewal and social capital of a company, namely the components of its intellectual capital. In other words, the purpose of this book is to analyze how IT has created a new mandate for management in a knowledge economy, in order to develop new business models and frameworks. Thus, a specific chapter will show the role and impact of IT on a firm’s human capital, as well as new models to be used, while another will do the same for the company’s relationship capital, and so forth. In this way, we can grasp the massive transformation IT has wrought on the way corporations need to be managed and propose new models based on the pervasive role IT plays in the current business arena.

The Structure of the Book

This book contains 15 chapters, gathered under two section headings. Section I, Intellectual Capital: Origins and Future Prospects, analyzes the main facets of intellectual capital theory per se, in order to make it easier for the reader to grasp the potential of this new knowledge field.

Section II, Intellectual Capital and Information Technology, goes on to link the intellectual capital theory with information technology, revealing how the latter can impact the former in the business realm.

In Section I, there are seven chapters, as summarized below.

    Chapter I outlines how intellectual capital as a theme has evolved in different academic disciplines and discusses inter-disciplinary views on intellectual capital. The author also outlines some of the major issues to be addressed as well as some possible avenues on how to take this important field forward.

    Chapter II analyzes the concept of intellectual capital in strategic management research. The authors offer a comprehensive view of the key pillars and concepts formulated over the past twenty years in strategic management literature, thereby laying down the grounds for intellectual capital constructs and related components.

    Chapter III establishes what the main components or building blocks of an intellectual capital balance sheet are, taking the three most common components of intellectual capital (human capital, structural capital, and relational capital) and testing empirically if this grouping of intangible assets is supported by the evidence obtained from a sample of knowledge-intensive firms from Boston’s Route 128. According to the authors, the findings suggest a classification of intellectual capital according to four categories: human capital, structural capital, relational business capital, and strategic alliances.

    Chapter IV provides an alternative method for measuring and reporting human capital items in financial statements. The authors explain the need for disclosing human capital information adequately in financial statements. They show the results from an empirical study they performed to test the validity of the human capital architecture and its relationship with a firm’s performance.

    Chapter V presents a comparative evaluation of some of the most commonly used intellectual capital (IC) measurement models. These models include Skandia’s IC Navigator, the Intellectual Capital Services’ ICIndex™, the Technology Broker’s IC Audit, Sveiby’s intangible asset monitor (IAM), citation-weighted patents, and real option theory. According to the author, each model is classified using dimensions of temporal orientation, system dynamics and causal direction.

    Chapter VI proposes a method for the financial valuation of intangibles based on specific taxonomy that distinguishes between intangible assets and core competencies, while classifying the latter into (tangible or intangible) asset-driven core competencies and non asset-driven core competencies. According to the authors, this method is suitable for valuing the intangibles of large companies and smaller businesses where large databases are not available.

    Chapter VII examines how firms measure and report their knowledge-based resources. Based on the analysis of intellectual capital statements published by 28 pioneering firms from Europe and India, the authors explore key issues on drafting this innovative report. At the end of the chapter, the authors present major conclusions and implications for management.

In Section II, there are eight chapters, as summarized below.

    Chapter VIII examines the contribution of IT systems and tools to the emergence and use of different types of knowledge in a firm. The authors conclude that the bulk of IT applications assist in the dissemination, storage and acquisition of explicit knowledge. However, there are also some tools that serve to elicit tacit and potential knowledge and facilitate the conversion from tacit to explicit knowledge. At the end of the chapter, the authors evaluate the potential provided by IT in more general terms.

    Chapter IX examines how different types of virtual communities function as platforms for the formation of social capital, which in turn foster the production of new intellectual capital. The authors propose information technology-enabled social capital as a framework for understanding how organizations generate intellectual wealth. Specifically, the authors claim that social capital in physically-based virtual communities improves the incremental continuous development of existing intellectual capital, while in Internet-based communities it facilitates the generation of new intellectual capital through radical innovations and paradigmatic change.

    Chapter X discusses and introduces a quantitative method for aligning information technology resources with the knowledge management of an organization, the purpose of which is to quantify the intensity of the available software functions, so as to maximize the benefits and minimize the costs of the knowledge management process. According to the authors, the most important thing to emphasize about the method proposed here is its capacity for aligning investments in information technology resources with the organization’s knowledge management process. Other advantages include the capacity for defining priorities for investments in software functions and the creation of adequate algorithms for knowledge management.

    Chapter XI describes which information and communication technologies (ICT) can help in the process of managing knowledge and intellectual capital in organizations. The authors classify all of them according to their utility in assisting in knowledge management and intellectual capital management, and in which of the processes needed in organizations for managing knowledge and intellectual capital they can be used.

    Chapter XII analyzes the influence of knowledge-sharing in the context of IT project management. The research made it possible to establish that the factors that influenced knowledge-sharing and consequently the project itself can be related to the context and dynamics of the institution in which the system was implemented, to the way in which the project was planned and conducted, and also to the individual characteristics of the participants.

    Chapter XIII seeks answers to two questions, namely what types of intellectual capital are affected by IT and how IT can affect these types of intellectual capital? An analysis of intellectual capital indicators of the banking industry using an input-process-output model reveals that the process mediator variables, namely management capabilities, are highly affected by information technology. According to the author, information technology plays a key role in supporting decision-making, making business innovations possible and tightening controls of various processes through its tracking, information, dissemination, analytical, simulative, and detection capabilities.

    Chapter XIV analyzes the impacts of Intranet quality on organizational capital practices. The authors describe a research model empirically tested in 98 large Brazilian organizations. The variables proposed by the TAM (technology acceptance model) and the TTF (task technology fit) were converted into portal context, emphasizing the importance of leveraging classic information science and information system studies to understand the portal phenomenon better. Furthermore, the knowing organization model was applied in order to offer a theoretical backing for the intellectual capital-based variables. According to the authors, the results revealed evidence that portal quality has more influence on knowledge creation than on “sense-making” and decision-making.

    Chapter XV analyzes the potential of RFID technology with respect to the relationship between retailers and their clients, in order to understand how this technology is capable of increasing a firm’s customer capital, in line with intellectual capital taxonomy. Prospective scenarios are elaborated by the author concerning the use of this technology to enhance the relationship between retailers and their customers in order to increase a firm’s customer capital—which is an intangible asset.

Final Remarks

This book sets out to straddle two very important, albeit still separate knowledge fields, namely information technology (IT) and intellectual capital (IC). In a knowledge and network economy, such as the business environment is becoming today, it is of paramount importance to understand how information technology can enable the creation and leveraging of valuable intangible assets within a firm. Most resources that are considered sources of sustained competitive advantage are nowadays intangibles, accruing from the human, relationship, organizational, as well as renewal, development and social capital of a firm, namely the components of the intellectual capital of a company. Moreover, these capitals can also be strategically fostered through the use of information technology and the processes enabled by it, in order to lead the firm to a position of superior performance.

By the same token, information technology projects can also be assessed through the use of the intellectual capital theory, as most of the outcomes accrued from them are intangibles.

In conclusion, this book seeks to analyze this former virtuous circle, namely intellectual capital and information technology. By doing so, it sets out to enable the readers—academics, graduate students and practitioners alike—to understand more clearly how information technology can place the market value of a firm far above its book value, which is a phenomenon that industrial management praxis is as yet unable to explain.

References

Andriessen. (2004). IC valuation and measurement: Classifying the state of the art, 5(2), 230-242.

Bontis, N., Keow, W.C.C., & Richardson, S. (2000). Intellectual capital and business performance in Malaysian industries. Journal of Intellectual Capital, 1(1), 85-100.

Bontis, N. (2004). National intellectual capital index: A United Nations initiative for the Arab region. Journal of Intellectual Capital, 5(1), 13-39.

Davenport, T.H., & Short, J.E. (1990, Summer). The new industrial engineering: Information technology and business process redesign. Sloan Management Review, 11-27.

Dragonetti, N.C., & Roos, G. (1998, August). La evaluación de Ausindustry y el business network programme: Una perspectiva desde el capital intelectual. Boletín de Estudios Económicos, LIII (164).

Drucker, P. (1993). From capitalism to knowledge society, in post-capitalism society. New York: HarperCollins.

Edvinsson, L., & Malone, M. (1997). Intellectual capital. New York: HarperBusiness.

Hayek, F. (1945, September). The use of knowledge in society. The American Economic Review, 35(4).

Hunt, D.P. (2003). The concept of knowledge and how to measure it. Journal of Intellectual Capital, 4(1), 100-113

Joia, L.A (2000). Measuring intangible corporate assets: Linking business strategies with intellectual capital. Journal of Intellectual Capital, 1(1), 68-84.

Kaufmann, L., & Schneider, Y. (2004). Intangibles: A synthesis of current research. Journal of Intellectual Capital, 5(3), 366-388.

Low, J. (2000). The value creation index. Journal of Intellectual Capital, 1(3), 252-262.

Marr, B., Gray, D., & Neely, A. (2003). Why do firms measure their intellectual capital? Journal of Intellectual Capital, 4(4), 441-464.

Ordóñez de Pablos, P. (2003). Intellectual capital reporting in Spain: A comparative review. Journal of Intellectual Capital, 4(1), 61-81.

Petty, R., & Guthrie, J. (2000). Intellectual capital: Australian annual reporting practices. Journal of Intellectual Capital, 1(3), 241-251.

Rastogi, P.N. (2003). The nature and role of IC: Rethinking the process of value creation and sustained enterprise growth. Journal of Intellectual Capital, 4(2), 227-248.

Rodov, I., & Leliaert, P. (2002). FiMIAM: Financial method of intangible assets measurement. Journal of Intellectual Capital, 3(3), 323-336.

Roos, J., Roos, G., Dragonetti, N., & Edvinsson, L. (1997). Intellectual capital. London: Macmillan Business.

Sánchez, P., Chaminade, P., & Olea, M. (2000). Management of intangibles: An attempt to build a theory. Journal of Intellectual Capital, 1(4), 312-327.

St. Leon, M.V. (2002). Strategic intellectual capital creation: Decontextualizing strategy process research. Journal of Intellectual Capital, 3(2), 149-166.

Stewart, T.A. (1997). Intellectual capital. New York: Doubleday/Currency.

Sveiby, K.E. (1997). The new organisational wealth. San Francisco: Berret-Koehler Publishers.

Tobin, J. (1969). A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking, I, 15-29.

Venkatraman, N. (1994, Winter). IT-enabled business transformation: From automation to business scope redefinition. Sloan Management Review, 35(2), 73-87.

Luiz Antonio Joia
Brazilian School of Public and Business Administration – Getulio Vargas Foundation &
Rio de Janeiro State University, Brazil

Luiz Antonio Joia is an associate professor and MBA head at the Brazilian School of Public and Business Administration – Getulio Vargas Foundation and an adjunct professor at Rio de Janeiro State University. He holds a BSc in civil engineering from the Militar Institute of Engineering, Brazil, and aa MSc in civil engineering and a DSc in engineering management from the Federal University of Rio de Janeiro, Brazil. He also holds an MSc in management studies from Oxford University, UK. He was a World Bank consultant in educational technology.