Benefits to Stakeholders and Organizations of Socially Responsible Values
The world is rapidly moving towards an information based economy where knowledge based assets within an organization are important for survival. Intellectual capital plays an important role in whether or not an organization has a sustainable competitive advantage over the competition. In this fairly new economy, an organization’s intangible assets such as knowledge in individuals and organizations determines what an organization is capable of. Therefore, “organizational performance and success depends on how well organization manages its knowledge-based assets” (Hamzah & Ismail, 2008, pg. 237).This paper will explain what intellectual capital is, the role intellectual capital plays within organizations, how intellectual capital has evolved, and the synergies between intellectual capital and the mission, vision and strategy of an organization. Experts recommend organizations foster learning environments where intellectual capital is utilized towards achieving the organization’s mission, vision and strategic formulation of goals, if the organization wants to create sustainable competitive advantages and remain viable. This paper will explain what intellectual capital is, the role intellectual capital plays within organizations, how intellectual capital has evolved, and the synergies between intellectual capital and the mission, vision and strategy of an organization. Experts recommend organizations foster learning environments where intellectual capital is utilized towards achieving the organization’s mission, vision and strategic formulation of goals, if the organization wants to create sustainable competitive advantages and remain viable.
Stronger corporate governance is also linked to CSR. Mason & Simmons (2014) discerned corporate governance has a major influence on CSR and vice versa, where a cause and effect relationship exists between the two. Strong corporate governance, which tends to align shareholder goals with stakeholder goals, creates a sense of salience towards social responsibility which stakeholders attribute CSR to long term value (Mason & Simmons, 2014). Furthermore, organizations have begun to build on CSR initiatives by creating boards, codes of conduct for CSR initiatives, and non-financial practices, which are aimed at creating an image that profits are not the most important factor in business; being ethical, trustworthy and transparent are more important (Gill, 2008). Companies that adopt CSR strategies create a branding image for themselves where consumers believe they too are buying into a socially responsible organization and ultimately are supporting a cause (Williams & Siegel, 2000). Organizations are then able to identify and market to these consumers, creating and building upon a niche, another differentiation strategy. Organizations that practice CSR have been linked to longevity and tend to retain high quality employees longer than those that do not (Gill, 2008).
Intellectual Capital Defined
Intellectual capital is often categorized into three major components: human capital, organizational capital, and social capital. Intellectual capital as a whole, is knowledge that can be converted into value providing competitive advantages for organizations (Edvinsson & Sullivan, 1996). Youndt and Snell (2004) define human capital as the knowledge, competences, and technical skills owned by the employees. Human capital is the knowledge, skills, and capabilities of employees within an organization. Bueno-Campos (1998) refers to organizational capital as the organizational culture that employees create and develop into a learning organization, which ultimately creates organizational competence. Organizational capital is the institutional knowledge that is collected and retained in the organization’s databases. Social capital is defined as the knowledge within the networks of relationships and interactions amongst individuals (Hsu & Sabherwal, 2012). Nahapiet & Goshal (1998) define social capital as the sum of resources embedded within the organization and its workers that are available to the organization and its members. Social capital is accumulated knowledge and knowhow that exists within organizations and its members.
The Role of Intellectual Capital in Organizations
The role of intellectual capital is to provide a competitive advantage to the organization, whereby the knowledge base of one organization is superior to that of others. Intellectual capital plays a key role in achieving sustainable competitive advantage and contribution to organizational performance. Organizations face uncertainty within the external environment, where customer preferences rapidly change, and competition works on obtaining a cost advantage or differentiation strategy that may impact other organizations and their products. Intangible assets and more specifically, people within an organization, have the ability to separate the organization from the competition by creating an advantage from the knowledge they obtain and deploy. “People and their collective skills, abilities and experience, coupled with their ability to deploy these in the interests of the employing organization, are now recognized as making a significant contribution to organizational success and as constituting a major source of competitive advantage” (Armstrong & Baron 2004, p37).To achieve superior performance and competitive advantage, companies have shifted their focus from investment in tangible assets to investment in intangible assets. Intellectual capital is one of these intangibles with human capital, organizational capital, and social capital as its components (Chang, 2004). Human capital consists of hiring, continuously training employees, and maintaining mentoring relationships between employees and managers, which will all increase human capital. With organizational capital, organizations should be learning organizations, creating and maintaining a culture where processes and knowledge is documented and utilized for all members to use. With social capital, organizations utilize social networks as resources and sharing centers for knowledge, provide assistance to members of the organization and build a trusting network of relationships. As the theme suggests, knowledge is a main source of sustainable competitive advantage. The organization with the most relevant knowledge will be in a stronger positon than its competition. To achieve superior performance and competitive advantage, companies have shifted their focus from investment in tangible assets to investment in intangible assets. Intellectual capital is one of these intangibles with human capital, organizational capital, and social capital as its components (Chang, 2004). Human capital consists of hiring, continuously training employees, and maintaining mentoring relationships between employees and managers, which will all increase human capital. With organizational capital, organizations should be learning organizations, creating and maintaining a culture where processes and knowledge is documented and utilized for all members to use. With social capital, organizations utilize social networks as resources and sharing centers for knowledge, provide assistance to members of the organization and build a trusting network of relationships. As the theme suggests, knowledge is a main source of sustainable competitive advantage. The organization with the most relevant knowledge will be in a stronger positon than its competition.
The Evolution of Intellectual Capital
It is believed that knowledge management and intellectual capital were meant to be the same, with Hiroyuki Itarni of Japan coming up with what he called “invisible assets” while studying the management of Japanese corporations (Joshi & Ubha, 2009). Sveiby (1997) is regarded as the founding father of knowledge management and intellectual capital movement in Sweden, who gave an explanation of how to properly manage organizations, by utilizing knowledge and creativity of their employees. These were seen as key elements of growth for business but not the traditional production function (Joshi & Ubha, 2009). Sveiby (1997) came up with a theory for measuring intellectual capital in three areas: “customer capital, individual capital and structural capital. His contributions have been widely recognized by various researchers in the field of knowledge management and are proven to be a guiding source for knowledge based companies” (Joshi & Ubha, 2009, pg. 577).
Although putting a value on intellectual capital may be difficult, intellectual capital creates value for an organization and sustainable competitive advantages. Edvinsson and Malone (1997) discuss a model for measuring intellectual capital that Edvinsson composed for a company called Skandia. The model measured the intellectual capital from five areas: financial focus, customer focus, process focus, renewal and development focus and human focus. Financial focus was used to measure revenue per employee, revenue from new customers/total revenue and profits resulting from new business operations. Customer focus was used to measure the days spent visiting customers, the ratio of sales contacts/sales closed and the number of customers gained versus lost. Process focus measured the number of computers per employee, the information technology capacity and the processing time of the organization. Renewal and development focus measured the number of satisfied employees working within the organization, training expense/admin expense and average age of patents. Finally, Human focus measured the number of managers with advanced degrees and the annual turnover of workers (Shatrevich & Sceulovs, 2015). The evolution of intellectual capital has come a long way, from an understanding that IC creates value, to being able to quantify that value and apply it to organizational goals and strategy.
Intellectual Capital and its Alignment with Mission, Vision and Strategy
A mission statement provides the answer as to why an organization is in business. Mission statements have shown to help organizations achieve important goals that are necessary for long term survival and market success (Bart, 2001). If the mission of the organization is well defined, intellectual capital from a worker perspective is easier to measure, as workers demonstrate their ability to carry out the company mission statement. “Employee knowledge of and commitment to an organization's mission statement should be considered as an important component of an organization's human intellectual capital which should lead to enhanced performance” (Bart, 2001, p. 323) as employees use their experiences to increase value to the organization. After all, if employees do not know the mission of the company, it would be impossible to add value to process of the company mission.
The mission and vision statements are foundations of organizational strategy. An organization may decide to have a low cost or product differentiation strategy. When it comes to a low cost strategy, it requires attention to detail on operations to keep costs low. It is expected that intellectual capital will facilitate and mange knowledge related to those activities to achieve operational excellence (Hamzah & Ismail, 2008). A differentiation strategy would put more emphasis on making products that meet customers’ needs and wants.
Intellectual capital will help determine what business the organization should be in based on its core competences. Intellectual capital will assist in creating strategic goals and strategy formulation towards the mission and vision of the organization by using accumulated knowledge of individuals to drive strategy, determine core strengths and assessing how best to differentiate and out maneuver the competition to earn customer’s business. The knowledge base of individuals and organizational databases are made up of many variables that have been successful, as the organization works towards determining the business they are in and why they chose to be in that business.
Without intellectual capital, an organization is ordinary and lacks sustainable competitive advantage. Without sustainable competitive advantage, the viability of an organization will become obsolete as the competition invests in intellectual capital and finds better ways to service the customer’s wants and needs. Intellectual Capital is formed while the organization and its members work towards the mission, vision and strategy creation process. The knowledge accumulated from working towards these will be stored in the database of the individual and the database of the organization. Intellectual capital is a constant rotation of knowledge that accumulates as the internal and external environment change. Little question exists about the importance of intellectual capital given the dynamics of today’s operating environment. Organizations who want to be superior to the competition, want to survive, and remain relevant, are required to find workers that are willing and able to continuously build their knowledge base as it relates to strategy, the organizations mission, vision and concepts relating to these. It is the organizations responsibility to determine how to maximize and create an environment where knowledge is harnessed and maintained within the organization, offering training, mentoring, and the social construct built upon trust.
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Posted in Business on Feb 01, 2016Industry News