July 22, 2009
What to do with it now
The true beauty of intellectual capital management lies in its implementation. First and foremost, recognize that—unlike structural, physical, and monetary capital—intellectual capital is people-dependent. Brook Manville and Nathaniel Foote note that “executing a knowledge-based strategy is not about managing knowledge; it’s about nurturing people with knowledge.” The first step toward “nurturing” management is trust of employees and of their knowledge-building practices. Encourage collaboration and group innovation among employees. In order to make this work (among humans, who tend toward selfish hoarding), create a culture of sharing, not of competition. Knowledge silos are deadly:
knowledge, unlike information, grows healthily only when it is debated, massaged, and passed around.
Stewart’s basic intellectual capital policy closely mirrors Strategy International’s fundamental strategic concept. Stewart encourages executives to DNA :1
Define. Why does your business exist? (See the white paper “Strategic Navigation” for descriptions of purpose, mission, and vision, which together comprise a business’s self-definition.)
Nurture. What intellectual resources are necessary to fulfill that definition? To whom do these resources belong, and how do those people best use their talents? What ensures an innovation-friendly environment?
Allocate. Where should resources be funneled for the greatest innovation and new knowledge generation? How can knowledgeable people be managed well?
Like anything, intellectual capital is fragile; it is by no means a panacea. The dot.com implosion perfectly illustrates the need to combine this new resource with extant ones—to ensure teamwork among intellectual capital and structural, physical, monetary, and relationship capital. The key is to make the most of your company’s every facet, without needless and ineffective overlap. Allow people to do what they do best and technology to do its job, as well. Yogesh Malhotra of Brint.com explains this idea:
“Knowledge management caters to the critical issues of organizational adaptation, survival, and competence in the face of increasingly discontinuous environmental change. Essentially, it embodies organizational processes that seek synergistic combination of data and information-processing capacity of information technologies, and the creative and innovative capacity of human beings.”
The strategic planner of the future will create competitive strategy through strategic planning that uses this “creative and innovative capacity” that too often hides untapped, even unnoticed, by otherwise brilliant and successful companies. Experience has shown, though, that true business brilliance is a dazzling, eminently flagrant display of knowledge, creativity, and innovation.
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July 13, 2009
Like almost any strategic change, a commitment to intellectual capital demands an adjustment of focus. And since knowledge (unlike information) is by definition personal, you must focus on people. Stewart recommends a move from “paying people to investing in them” and looking for specific ways to invest. Don’t expect employees to be walking databases. Instead, tap their experiential knowledge; even if it seems irrelevant, it could prove useful at an unexpected juncture.
Scheffman and Thompson of Vanderbilt University recommend an “intellectual property audit” wherein managers and front-line employees brainstorm a list of the company’s intellectual resources. Some hidden ones include branding, which capitalizes on customer knowledge; patents; and the tacit, wide-range knowledge of all employees.
When identifying and cataloging intellectual capital, consider three categories: commodity skills (nonspecific knowledge that is equally valuable to all businesses), leveraged skills (industry- but not company-specific knowledge), and proprietary skills (company-specific knowledge; trade secrets).
July 9, 2009
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.
July 9, 2009
The State of the Environment
It hardly takes a rocket scientist to point out the economy’s unpredictability. It is painted vividly all over business today: the Herculean rise and Icarean fall of dot.coms; the ever-present fear of “getting Amazoned” by the newest phenom; fickle and unrepresentative market data; a “winner takes all economy” that rewards aerodynamic little prodigies with world-power status; and heavy dependence on intangible assets. This—an environment stocked with and characterized by uncertainty—is the market we inherit. Our only hope of navigation is strategy—the sort that flooded the explorers with both order and industrious creativity.
Getting Started: The Need for Strategic planning
Unpredictability offers managers three options: to idly float with the environment’s current and winds; to drop anchor and cling to the present (albeit mediocre) position; or to harness the currents and charge ahead. The first two represent stasis and, therefore, death. To survive, an organization must be dynamic. Does your company exhibit “a sense of urgency, or complacency?” If you recognize the urgency of the present, be proactive and commit to strategy. If complacency defines you, move.
What I do with my organization, Strategy International, is partner with companies to develop business strategy according to a time-tested, proprietary strategy design: a choice blend of plan and action that has produced visible change for clients in a range of industries. In our experience, the process of designing a strategy (defined by CEO Bob Jonas as “a plan for the skillful conduct of a large field of operations towards the achievement of a known goal”) consists of seven elements:
Current Reality Assessment
Define Future demand
Craft Competitive Strategy
- Strategy initiatives
Plan Strategic Actions
Execute the plan
All of these, by necessity, happen in the market environment. The secret is to create a competitive advantage strategy that both adapts to and controls that unpredictable medium.
June 25, 2009
Let us Consider:
Our corporate strategy research has determined that firms that lack acceptable profitable growth are driven by one or more of these five issues:
1.Lack of Profitable orientation
2.Not enough focus on customers to drive the competitive advantage
3.Lack of cross-functional, cross-border, intra-hierarchical teamwork
4.Lack of sense of urgency
5.No shared vision or common strategy planning
This business strategy report expresses a solution for the strategic planner to solve these problems.
Every American third-grader is taught to chase her dreams—if not by Oprah, then (surprisingly) through the oft-dreaded academic discipline of social studies. Textbooks regale children with stories of the great explorers (Cortés, Drake, Erickson), whose adventures are celebrated with pomp and circumstance. When Columbus Day meant a class popcorn party, the explorers’ heady determination was the stuff of heroic myth. As Columbus Day became less important—coincided with the high school marketing test or, later, the marketing managers’ meeting—so did the explorers. Our new heroes are successful entrepreneurs who command wealth from mahogany desks instead of wresting it from foreign mud. Upon reflection, though, it becomes apparent that in a New Economy as vast and exhilaratingly uncertain as the (old) New World, today’s successful manager more resembles explorers half a millennium away than s/he does the CEOs of two decades ago.
Consider Ferdinand Magellan, who piloted the first global circumnavigation. Magellan’s ambition drove him to forsake his unsupportive Portuguese government, relinquish military titles, and bargain for patronage with the king of rival Spain. Having found support, Magellan set his sights on reaching the Spice Islands, a globally coveted commodity, via a circuitous and uncertain route around South America. In September of 1519, Magellan left Spain with five ships, 250 men, broad sailing experience, a general plan, and a fistful of chutzpah. While at sea, he encountered and over-came mutiny, debilitating storms, malnutrition and scurvy, the loss of ships and theft of supplies, and ambi-guous direction. In order to discover and navigate the now-famous (and globally indispensable) Strait of Magellan, the crew tried inlet after inlet without success. 38 backbreaking days after its discovery, the icy-cold Strait coughed them into the Pacific Ocean, a vast field of adventurous potential. Magellan’s navi- gational strategy was simple: goal in sight, he set off with a general master plan—and trusted his knowledge and intuition to guide him through waves of uncertainty.
The New Economy and the New World may not be physically identical—but in an age when knowledge is gold and markets depend on the windy whims of innovation, a comparison between managers and Renaissance explorers is apt. It was the explorers’ well-defined missions and plans, combined with capitalization on uncertainty, which facilitated profitable serendipity. Like Magellan, every company needs a strategic navigational tool that’s strong but flexible; that impels, inspires, and self-enforces; and that encourages creativity, adaptability, and surprise. Next week we will discuss the State of the Environment and How to Get Started.