CHAPTER 7: IMPLICATIONS FOR MANAGING INTELLECTUAL CAPITAL
7.3. Implications for integration of strategic management accounting practices into
7.3.2. Orientations to manage intellectual capital by competitor accounting
By the research outcomes presented in the Section 6.6, there exists an impact of competitor accounting approaches on both structural capital and relational capital. These relationships steam from the fact that competitor accounting approaches are practical to manage unanticipated economic events by better understandings and relations with the
investors and competitors facilitating to understand external reactions before the changes of turbulent business environment, that in turn supports managers to build up strategies.
To understand the role and strategic importance of intellectual capital in any organization therefore requires a clear understanding of the firm’s strategic direction and objectives.
Benchmarking and competitive analysis are multifaceted techniques to identify operations and strategic gaps. The actions to increase company competitiveness can be only conducted when the organization finds the reasons that produce competitve gap between it and the international market leader in the same industry. A great amount of studies suggest that the cause of the competitive gap could be intellectual capital that are specific and relevant to each specific business activity (Wiig (1994); Viedma-Marti (2001);
Dumay (2009)). Once determined, managers may use it as a comparison basis in order to benchmark the world best competitors in the same business activity. For example, if a company operates in the fast-food industry, McDonald’s relevant intellectual capital will be the model to benchmark. Viedma-Marti (2001) recommends the intellectual capital benchmarking system framework (ICBS) to analyse its local and best world competitors, leading to a comparison and an improvement of intellectual capital. Please refer to the ICBS in Appendix 29. The ICBS model is developed on the core competencies of your company (company A) compared to that of its best world competitor (company B in Appendix 29). However, due to the fact that your company is not uniform with the entire best world company, it needs to rely on the corresponding business units as the appropriate basis of comparison. With each business unit, the value chain mechanism is applied to identify core competencies that explain the success of the best world company’s business unit. These core competencies are the benchmarking items in order to know the reasons of the competitive gaps (see Appendix 29).
Furthermore, competitive analysis (i.e. competitive position monitoring, competitor cost assessment, competitor performance appraisal) comprises the analysis of IC information from accounting relating to competitors. Competitor cost assessment includes a regularly updated forecast of competitors cost per item (Guilding et al., 2000). According to Heinen and Hoffjan (2005), competitive position monitoring represents a more holistic mode of competitor accounting than competitor cost assessment. It broadens the analysis to include appraising major competitors' sales, market share, volume, unit costs and sales.
Lastly, competitor performance appraisal based on published financial statements is
defined by Simmonds (1981) as the numerical analysis of a competitor's published statements as part of an assessment of a competitor's key sources of competitive advantage.
All easily accessible sources like direct observation, mutual suppliers, mutual customers, former employees and published accounting data should be used to analyse the competitors’ IC performance. General speaking, the comparison of one’s own unit cost with those of the competitors requires a systematic procedure that includes an assessment of structural capital (i.e. the technological product design, the economies of scale, organizational structure), relational capital (i.e. the relationship with the cost-influencing stakeholders such as suppliers, customers, the outsourcing companies). The results of this comparison may have a lasting influence on one’s corporate strategies and business strategies. In case of a cost disadvantage, the well-directed cost reduction programs can possibly prevent the impending cutthroat competition.
What is more, after identifying and mapping the intellectual capital value drivers, organizations can start the technique of integrated performance measurement to measure them. An integrated performance measurement system considers of both financial and non- financial measures to acquire performance knowledge (Kaplan & Norton, 2001). Measures allow organizations to manage intellectual capital. Without relevant measurements, it is impossible (a) to understand current performance levels, (b) to know whether the intellectual capital has improved or deteriorated, and (c) to understand whether any activities and initiatives have affected performance. Organizations that have meaningful information on the performance of their intellectual capital can use it to inform decision making, to test and to control strategy, and to manage risks associated with intellectual capital. For example, it is likely to apply balanced scorecard in the strategic management cycle through the four perspectives to develop strategies and to evaluate intellectual capital performances (Kaplan & Norton, 2001). Moreover, organizations need to manage any potential risks related to intellectual capital.
Although organizations are familiar with managing financial risks and disaster risks, the management of intellectual capital risks is usually underdeveloped. The key risk associated with human capital that is regularly overlooked in organizations is the risk associated with their employees and the knowledge they own. Organizations often do not realize that some individuals with critical knowledge and expertise could leave any day.
Another related risk is the fact that knowledge is an important but also a very vulnerable
resource - they are exhausted if they are not nurtured. In today's network economy, relationships are key components for all organizations in both the private and public sectors. Their reputation hangs on these vital relationships and it is often necessary to manage the risk throughout the supply chain that helps to deliver the products or services that the organization provides. Therefore, performance measurement to assess risk is a highly important factor in managing intellectual capital in today's business environment.
Given that intellectual capital is a key value driver in most organizations, it is advisable to start accumulating data to have useful information about the greatest risk exposures.