ORCI: A Validated Method for Measuring Dynamic Intellectual Capital

Introduction

As knowledge has become the primary driver of competitive advantage in the contemporary economy, new approaches for measuring organizational performance are needed which recognize the knowledge-based aspects of value creation (e.g. Edvinsson & Malone, 1997; Sveiby, 1997; Roos et al., 1998; Bontis, 1999). Also organizational measures are needed which recognize and help to manage the knowledge-based aspects of value creation. Intellectual capital research aims to tackle this challenge and construct methods for identifying, describing, measuring, reporting and valuating intangibles in organizations, regions, networks and nations. It attempts to overcome the limitations of conventional indicators that are used to explain, measure and manage organizational performance and to provide classifications for intangibles that go more in-depth than the resource-competence-capability distinction, and examine intellectual wealth from a comprehensive perspective.

In turbulent environments, sustained competitive advantage derives from the firm capabilities for continuously modifying, changing and creating knowledge assets and capabilities through learning and innovation (e.g. Leonard-Barton, 1995; Teece et al., 1997; Eisenhardt & Martin, 2000). Even though mastering continuous change has become an important issue for an increasing number of organizations, the IC literature has so far remained quite isolated from the themes of innovation, learning and organizational change (Kianto, 2007, 2008b). Most of IC research adopts the viewpoint of IC as a static stock (Bontis, 1999), and ignores that especially in dynamic environments, it is necessary to be able to renew the intangible assets continuously. The existing IC literature has mainly conceptualized intellectual wealth as a static asset rather than a dynamic capability.

This paper adopts the concept of dynamic capabilities to examine how an organization is able to use its knowledge resources for learning and innovation. Dynamic capabilities have been defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (Teece et al. 1997, pp. 516). Thus, in constantly changing environments, the dynamic capabilities approach can give a more substantive picture than traditional views of how competitive advantage is gained and sustained (Levitas & Ndofor, 2006).

However, at the moment, most of the research on dynamic capabilities is based either on theoretical argumentation and some case studies, and there is a lack of quantitative instruments that would enable reliable assessment, internal management and development of dynamic capabilities, as well as inter-firm benchmarking comparison and external communication of them.

To bridge this gap in the existing literature, the paper addresses three intertwined issues:

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  how the static and dynamic aspects of IC are related

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  what elements does dynamic capability consist of

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  how dynamic capability can be measured

By addressing these issues, the paper contributes to the literature on intellectual capital by clarifying the connections between the static and dynamic dimensions of intellectual capital and their role in value creation. It also provides a theoretical framework and systematic technique called ORCI (Organizational Renewal Capability Inventory) for collecting, analyzing and interpreting data about dynamic capabilities (Kianto, 2008). Furthermore, the paper illustrates how the method can be used for developing organizational ability for continuous learning and innovation.