CHAPTER 2. THEORETICAL BACKGROUND AND LITERATURE REVIEW
2.2. Determination of the role of intellectual capital in business strategy development
Historically and conventionally, both academicians and managers have endeavored to find out a clear reason why some businesses perform better while others do not. The evident answer to this question may provide the key to opening new paths in managing the business strategy of firms (G. Roos, 2005). Based on the theory of business strategy in the extant literature, the aim of this subsection is to highlight the vital role of IC in constructing business strategy of firm industry in general and banking industry in particular.
First of all, it is necessary to understand the meaning of “strategy” that a business leans
on. Theoretically, G. Roos (2005) has identified “strategy” is seen as a series of approaches that assist businesses in accomplishing specific goals. This author also underscores that the formulation of strategy will depend specifically on the inventiveness coming from the human mind, while the action of strategy is to reach the strategic compromise between business goals and environmental requirements, suggesting that selling products and services has to meet demands of end-users. Previously, Andrews (1997) considers that strategy of corporate can
be seen as a mechanism of decision-making that helps to clarify the purposes, policies, as well
as plans by which companies can reach their business goals. From the view of this author,
strategy brings significant contributions (both economic and non-economic values) to multiple stakeholders.
Now, a question is that why the level of profitability tends to be different between companies, regardless of whether they operate in a same area. Looking carefully at the wave
of business strategy development, it is argued that there are generally two main perspectives
by which strategy may rely on (Marr & Roos, 2012). Accordingly, the first perspective is to focus mainly on the power of market, while the second one is to emphasize the efficiency of internal resources.
The former view of business strategy, namely “the paradigm of market power”, is seen
as the conventional strategy model leaning specifically on the power of market. From this perspective, benefits a firm achieves may spring from the interaction of five major forces including the level of power that buyers have, the level of substitutes for both products and services, the level of power that suppliers possess, the capacity of entry into market, and the level of existing competition (Porter, 1980). These forces are stronger meaning that the profitability of a company will be lower (Marr & Roos, 2012; G. Roos, 2005). The main argument of this view is that the fundamental difference in benefits of companies may come from the ability of barriers construction, also named “mobility barriers”, which will assist successful companies in protecting from imitation of their strategic models (Caves & Porter, 1977; Hatten & Hatten, 1987; Marr & Roos, 2012). In this light, the issue that may occur is how to create a set of forces to construct these barriers. Rexhepi et al. (2013) suggest that the answer may result from harnessing the intellectual capital of an enterprise when building business strategy, especially in industries relying much on this capacity such as educational and financial institutions.
The latter view of business strategy is known as “the paradigm of resource-based
model” is proposed and developed by some resource-rooted theorists such as Penrose &
Penrose (2009); Wernerfelt (1984). This paradigm explains that the distinction of profitability may originate from the valuable resources that companies possess and the way they employ these resources. Also, from this view, both resources and capacities are deemed as “the strategic assets” of enterprises. The more strategic assets applied to a huge number of
products and services, the higher benefits an organization can achieve (Prahalad & Hamel, 2009). However, it is argued that these resources and capacities cannot themselves produce
value-added creation (Penrose & Penrose, 2009), hence, to create value, they have to be embedded into the both products and services that companies offer (Marr & Roos, 2012; G. Roos et al., 2001). Such this sense has underscored the center role of IC in business strategy, because by leaning especially on IC view, the resources can be used effectively and companies can determine the way to which value-added creation (G. Roos, 2005; G. Roos et al., 2001).
To illustrate this issue clearly, it should take the business operations of banks as a typical example. G. Roos (2005) describes banks serve as conduits between clientele who needs financial support and a group of customers can fulfill this financial gap. In this vein, banks have to organize the cash flow appropriately to balance demands of both types of these customers. To perform this task well, banks have to transform various kinds of intellectual resources into effective remedies and solutions that will satisfy their clients. G. Roos (2005) also concludes that possessing valuable resources is not yet enough, instead, banks have to put these resources to value-added creation.
Source: Based on the strategy map constructed by Kaplan & Norton (2000, 2004)
Figure 2.2. The role of IC in business strategy map
As Figure 2.2 illustrates above, the strategy map developed by Kaplan & Norton (2000, 2004) has depicted the causal connection between IC drivers and the performance of organizations, indicating the fundamental role of IC in constructing business strategy. In other words, the strategy map shows clearly the way by which IC can drive organizational objectives and outcomes of organizations. These authors believe that by understanding the readiness of strategic assets, decision-makers can constitute strategic objectives. In short, it is clear that by using intellectual capital, the resources of organizations can be transferred into the end products and services which, in turn, will distribute organizational values (Marr & Roos, 2012).
In conclusion, along with the dramatic changes in business conditions, the strategy construction of an organization has to be adapted to suit the market needs, and the business perception of the pivotal role of IC in driving value-added creation also grows gradually (Marr
& Roos, 2012; G. Roos et al., 2001). Indeed, approaching business strategy has evolved from the conventional paradigm to strategic assets model, in which, IC has emerged as the key engine for performance outcomes, strategic objectives, and sustainable value-added creations
of most companies (Alvino et al., 2020). Therefore, leaders and managers in banks cannot neglect this pivotal factor in their business strategy construction.