Competitive Advantage - part 2: Why Intellectual Capital?
July 9, 2009
Welcome Back. We've got lots of in depth business strategy to share with you today.Why Intellectual capital?
It’s so popular, it’s nearly propaganda: the Industrial Age has surrendered to the quiet but ruthless Information Age. What you may not know is that analysts have lain to rest the short-lived Information Age, too. A business culture of technological information harvest is being replaced by a culture of actual knowledge creation. The distinction between the two is clear, says McKinsey: “‘information’ is generally a fact, whereas ‘knowledge,’ which focuses on linkages or relationships, is subjective.” Knowledge, not information, rules the world. Entire companies stem from it, and specific jobs revolve around it. Every company and job requires it.
The business environment of the twenty-first century is unpredictable and chaotic. Absolutely critical to a business’s success is adaptability to that environment. (See the article “Harnessing Chaos” for more information on adaptive strategy.) But the adage about new wine in old wine skins fits the current situation beautifully: adaptability cannot take place in the present, age-old business structure. As Thomas A. Stewart, author of Intellectual Capital: The New Wealth of Organizations, puts it, “structural capital [alone] cannot break the mold, because it is the mold.”1 Innovation requires a new, hybrid business paradigm.
Such a paradigm accounts for a variety of capital sources. Because shareholders appreciate the link between intellectual savvy and marketable adaptability, the intelligent company’s market price inevitably exceeds its book price. The difference between the two comprises intellectual capital. Luiz Antonio Joia offers a set of equations describing this phenomenon:
process capital + relationship capital + innovation capital = structural capital
structural capital + human capital = intellectual capital
monetary capital + physical capital = book value
book value + intellectual capital = market value
Intellectual capital adds raw value to a company. And not only monetary value, but also the value of flexibility: most companies with large market-to-book ratios are astute enough to morph quickly and innovatively. Adaptability, increased market price, harmony with a knowledge-based business environment: the case in favor of intellectual capital is closed and sealed.
Next week we’ll go into ‘How to Find Intellectual Property”.
Future Readiness Strategies
June 25, 2009
No one really knows when or if we’ll return to normalcy. I say, normalcy for the future will not be defined until after we have reached it.
However, there are several elements we should consider –
We must survive in the short term, be agile and be ready for the future.
We must identify the external trends that will potentially have a positive and negative impact on our business outcomes.
Management must take the time to define not only the element, but also define the potential impact on the business.
We know that we are entering a time of significantly less financial leverages. Our business model changes will rely on productivity improvements; the government – globally – will have an expanded role, and monetary policies may have both a positive and negative impact.
So, what do you do?
Tip #1: Categories
Using internal and external resources, determine the categories of trend s occurring in your external environment:
-
Distributors
- Customers
- End Users
- Technology
- Policy Makers
- Competitors
- Suppliers
- The Media
Tip #2: Data Base
Using internal and external experts, conduct a workshop to list all those industry trends. This data base should be segmented by the categories you defined in Step 1. You should create a data base that includes 250-350 trends. If market research is needed, go get the data and integrate into the lists.
Tip #3: Convergence
Now, that you have 12-15 categories with 250-350 Industry Trends in total, your goal is to converge this list into 6-8 mega trends. Studying trends in each category, start to list the trends together by integrating the outcomes of multiple trends occurring.
Competitive Advantage
June 22, 2009
Long gone are the days of reticence in the public display of knowledge. To the contrary, corporate strategy takes into account the technological trappings of the Information Age (see the Gates estate) have placed knowledge at a premium. Paparazzi-plagued computer programmers and $150,000 college degrees render the materials-oriented Industrial Age as obsolete as a decorously hidden pocket watch. In a world sliding toward Silicon Valley, time is not money, physical resources are not money—money itself, even, isn’t money. Knowledge is money, and knowledge is king. This is not unique to the sprawling IT industry. Every corner of the business strategy belongs to the knowledge culture. Every savvy strategic planner must learn to manage the world’s best wealth-creating resource—which happens to be almost inaccessible to traditional management.
Definitions
Two behemoth catchphrases—and industries in their own right—have grown from our obsession with knowledge. Each is central in
strategy management for any twenty-first-century enterprise.
Intellectual capital is “intellectual material that has been formalized, captured, and leveraged to produce a higher-valued asset,”i or “proprietary information and knowledge that lowers costs or increases customer value.”ii Intellectual capital, analogous to physical or structural capital, is any intellectual resource in your company that already is or could become an asset. This includes, but is certainly not limited to, employees’ personal knowledge; human-technology interfaces; databases; patents; archived information; and industry secrets.
Knowledge management is how intellectual capital is assessed, stored, maintained, and put to good use.
It begins as a mindset; it is first “the conceptualizing of an organization as an integrated knowledge system,” and then “the management of the organization for effective use of that knowledge” (emphasis added).iii Notice: knowledge management is management of the organization—not of the knowledge itself. It is not Orwellian invasiveness. It ystematically recognizes the personal nature of knowledge and encourages knowledgeable people to use their energies well. Next weeks we’ll continue with ‘Why intellectual capital’?
Strategic Planning Harnessing Chaos
June 22, 2009
Perhaps there’s no hope for the hall closet, but take the thought experiment to another arena—your business strategy, or your market. Naïve is the executive who claims to control her company’s smallest details; a degree of uncontrollable uncertainty exists in every people-dependent system. In the last fifty years, that common-sense statement has become quantified in the form of chaos theory and its daughter, complexity theory. The business relevance of these two models demands an active and adaptive response from forward-thinking strategic planning executives and managers.
The world is chaotic and complex. What’s new?
Chaos theory endeavors to explain any system whose end results are “sensitive to [the system’s] initial conditions.” This sort of system, though mathematically regular, seems random. Chaos science made its public debut when meteorologist Edward Lorenz serendipitously failed in his attempt to predict the weather by computer; the pattern the program produced became the model for chaotic behavior. The chaos theory phenomenon itself exploded from its starting point and has appeared in myriad arenas, revealing patterns in everything from family dynamics to dripping faucets. Theorists famously claim that a Japanese butterfly’s slightest flutter can wreak weather havoc in Iowa.
Chaos theory’s application to the business world depends on its close relative, complexity theory. Complexity theory offers an apparently anti-scientific approach to science: it rejects the investigative methods of breakdown and categorization. Instead, complexity theorists examine a system at its macro level, focusing attention on the interactions among individuals—not the individuals themselves. The theory assumes that a complex system—like a company—is only a bundle of interactive simple systems.
Stemming from complex-ity theory, and vital to business, is the biological concept of emergent properties. According to this theory, some of a system’s macro-characteristics are not shared by the system’s individual members. (None of the molecules in your body, for instance, becomes nervous—but you do; an individual raccoon cannot exhibit a birth rate, but a community of raccoons does.) Emergent properties do not violate principles that operate at lower levels of organization,” states one college biology textbook; “however, emergent properties usually cannot be detected or even suspected by studying lower levels.” The apparently random macro-properties of any system stem from interactions, not from individuals.
Most complex biological systems, left alone, adapt fluidly to their environments. If a herd’s life-or-death success depended on one antelope, one ill-timed rainstorm could be catastrophic. But the interactions of the herd’s members—not the members themselves—drive its success; mistakes are diffused and triumphs shared.
Why chaos and complexity matter in business?
Businesses are chaotic. Obviously, life in business is chaotic: employees are uncontrollable, shareholders seldom pleased, the market up one day and down the next. But “chaos” in the colloquial sense—craziness, unmanageability—isn’t chaos theory’s final frontier in business. And chaos’s application to business is not metaphorical. “It’s not about saying let’s look at business organizations as if they are complex systems,” says Roger Lewin, co-author of The Soul at Work: Embracing Complexity Science for Business Success. “They are complex systems.”
Any company is comprised of “parts”: business units, branches, hierarchical levels. The company depends on individual people and individuals’ individual projects. In theory, if all of these elements work together, the system functions perfectly: Accounting’s numbers agree with managers’ demands, and each department earns its keep. But it doesn’t take a chaos scientist to observe the results of one interaction—between departments, or even between individual people—gone awry. It is these unquantifiable, uncontrollable interactions that actually determine the dynamic of any company.
Markets are chaotic.
Markets are also complex systems, but they are not—nor can they be—top-controlled like individual companies. They are fluid and allow for change, and this keeps them afloat. According to Foster and Kaplan, markets generally “perform better than corporations because markets allow new companies to enter more freely.” In order for a company to perform well in a given industry, it must simultaneously mirror and lead that industry as often as possible. Only a company cognizant of the important interactions between its members can gain market-like flexibility. A corporation emphasizing rigid microcontrol is quickly shattered by industry’s chaotic elasticity.
