CHAPTER 7: IMPLICATIONS FOR MANAGING INTELLECTUAL CAPITAL
7.2. Implications for the management, policy and research of intellectual capital
Although physical and financial assets are crucial, the IC elements such as knowledge, a strong brand, right skills, a good corporate reputation or strong relationship with corporate stakeholders, the possession of market data, and etc. help to drive the success and sustainable competitve advantages. The success of leading companies like Amazon, Wal-Mart, Microsoft, Google are also based on their IC (Marr, 2008). Physical assets such as office buildings and stores, distribution warehouses are important, but not as much as the examples of technology, markets or knowledge of customers. For instance, organizations like Wal-Mart, with its huge store infrastructure, can not perform as well as it does without “(a) intelligence to build its stores in the right places; (b) knowledge of consumers for stock the right goods and (c) its expertise in replenishing inventory. Without the appropriate IC, physical assets cannot be leveraged and are only normal commodities that yield at the average rate” (Marr, 2008). Identifying and managing the right intellectual capital will increasingly be the key differentiator among successful, mediocre, and failing enterprises. Hence, the organizations that want to remain competitive in today's world need tools and techniques to manage their intellectual capital.
7.2.1. Recommendations for leaderships
This study indicates that IC has a positive impact on the performance of publicly traded enterprises in Vietnam. The other group of organizations (i.e. not-for-profit organizations) can use this study as the method basis of investigating to know whether the organizations have a similar condition as the sample firms. By notioning the influence of IC on the organization performance, these organizations may decide on how to enhance intellectual capital and by doing so improving corporate performance, and ultimately the competitive position. “As with the human body’s muscles, intellectual capital suffers from, if you don’t use it, you lose it” (G. Cohen, Kiss, & Le Voi, 1996). To stay alive, organizations must win the international organizational learning race (Hampden-Turner, 1990). Strategically managing IC should follow these steps:
Start at conducting an IC audit. Such an audit may include designing and administering the survey by using the Likert scales or calculating the VAIC value to obtain a snapshot of the standard level of IC in existence. However, each firm
has different characteristics and must thrive in the context of its industry.
Therefore, each organization should design its own management metrics for its own strategic purposes.
Facilitate IC managing with the aim of assessing each employee - designating individual targets for developing IC. For example, companies may have each employee aiming to research or to study something that the organization does not notion.
Formally determine the role of knowledge in your industry and your business – and ensure the greatest intellectual resources inside and outside your firm from many places such as suppliers, customers, the government, academia, industry associations.
Recruit a leader who is responsible for developing your organization's intellectual capital. This person must have an integrated background in human resources, strategy and information technology.
Classify your intellectual portfolio by creating a knowledge map of your organization – identifying in which people and system knowledge resides. For example, create a central database in which all competitive intelligence can be accumulated and accessed.
Utilize information systems and sharing tools that aid in knowledge exchange and codifying such as groupware technology, video conferencing, Intranets, corporate universities and storytelling amongst employees.
Reviewing SMA practices, Marr (2008) recommends five key steps to manage intellectual capital successfully (see Figure 7.2). The first step is to identify an organization’s intellectual capital. Once this is known, managers need to assess its value.
It is important to understand that not all intellectual capital is automatically valuable to an organization. It is only valuable if it helps to deliver the organizational objectives. In the second step, it is therefore suggested that managers need to assess the relevance of intellectual capital by mapping the strategy (with its intellectual value drivers) onto a strategic map. The third step is to extract meaningful management information from measuring the performance of intellectual capital. In step four, this management information can then be used to analyse performance and to develop management insights
that inform organizational decision making and learning. Finally, in step five, external reports can be produced to communicate the value of intellectual capital to internal and external stakeholders.
Figure 7.2. Five-step intellectual capital management model
Source: Marr (2008)
To conclude, IC efficiency is better than IC capability. If the starting stance is a little intellectual capital, in an effort to achieve higher firm values, managers focus their attention on managing IC efficiently to create further added intellectual capital. It requires managers to adjust their attitudes on intellectual capital and to start at relevantly measuring and strategically managing IC that may differentiate between mediocrity and excellence.
7.2.2. Recommendations for policymakers
In general, this study’s findings suggest the relationship between the efficiency of VA measured by a firm’s IC components and the four traditional aspects of corporate performance. Despite the efforts to improve its intellectual capital base in publicly traded companies, the Vietnamese business environment still appear to place greater weight on corporate performance based on physical capital assets because there are a large number of the Vietnamese small and medium enterprises which are not cautiously concerned about the issue of IC management. Therefore, a possible policy implication of these findings from this study may be that policymakers should have initiatives to encourage greater acceptance and understanding of the IC concept. An apathetic view toward IC amongst Vietnamese
SMEs may have negative consequences during the period when Vietnam continues efforts to join in the international community.
Although external reporting of IC is a secondary purpose in some of viewpoints guiding IC reporting framework while the primary focus is internal management IC reporting, the policymakers should encourage Vietnamese firms to provide IC reports voluntarily to capital and debt holders to converge on the worldwide trend of external reporting. Since most Vietnamese current accounting systems fail to record the value of intellectual capital, the necessary guidelines are required. The International Accounting Standards Board and other national standard setting bodies have currently taken an extremely conservative approach to accounting for intangibles (Brennan & Connell, 2000).
It is due to the obstacle of setting standards associated with how to measure intellectual capital. The main obstacle associated with setting standard is how to measure intellectual capital. To meet the enhanced qualitative characteristics of comparability, a set of indicators valuing IC to allow comparability amongst firms needs to be identified. Thus, a set of intermediary guidelines for companies may be the most appropriate for the present period (Brennan & Connell, 2000). Grojer and Johanson (1999) suggest it will more harmful if a compulsory standard is set, when IC is undergoing a period of rapid change.
It would be better for a voluntary standard, which can be changed or abandoned when necessary. The policymakers’ guidelines should direct firms to discuss three approaches for reporting IC information, based on the recommendations of Abhayawansa (2014) and IIRC (2013, p. 35), as follows:
“Explanation of how IC fits within business strategies and overall corporate objectives;
Assessment of IC indicators based on their importance in achieving organizational objectives and/ or strategies;
Disclosure of an inventory of IC indicators without linking these to organizational objectives and/ or strategies.”
However, the issue of loosing a competitive edge should be considered prudently when disclosing IC information in the capital market. As there is no mandatory standard for intellectual capital, information disclosed by voluntary organizations can quickly disappear due to being stolen or imitated by the undisclosed organizations. Hence, the
needs of IC disclosure in the capital markets need to be balanced with the risk of competitor stealing competitive advantages.
7.2.3. Recommendations for academic communities
Auditing intellectual capital would make IC information more credible. However, it is very difficult to audit them because their nature cannot be verified by the same approaches as tangible assets. Hence, the new auditing procedures need to be established to validate the measurement techniques for intellectual capital. Grojer and Johanson (1999) recommend that new auditing methods is an area requiring research.
Most IC reporting guidelines and frameworks are driven by an assumed demand for IC information from capital market participants. Hence, they attempt to address the information needs of users of corporate information that are not met by the traditional financial statements. However, only a few initiatives have consulted stakeholders in the process of developing the guidelines and frameworks or recommend that preparers of IC reports obtain user feedback. The continued relevance of IC reporting guidelines and frameworks can only be ensured by gauging whether IC reporting is achieving what it purports to achieve. Thus, research is required on the usefulness and relevance of IC reporting guidelines and frameworks to various stakeholders. In particular, there is a lack of research on the perceptions of stakeholders of SMEs and in the non-for-profit sector.
There are many questions to answer and there is a need for much more research, debate and discussion, policy and developmental work before any significant changes are likely to be made to existing reporting systems by most organisations.
This brief review of the management, measurement and reporting of IC highlights the case for re-engineering the traditional accounting and management reporting process.
If efforts are not made towards incorporating the value of intangibles like internal structures, external structures and employee competences into a formalised reporting framework then, for many public and private sector organisations, the management reporting and financial statements will become increasingly irrelevant as a tool supporting meaningful decision making. Granted, for most internally generated intangibles, we are not yet in a position to provide robust and entirely accurate measures and also assign a monetary value. However, we are able to assess whether the management of IC is headed in the right direction.