Intellectual Capital

Short Essay on Intellectual Capital Dr. Gene Benter Introduction An organization has been established because of human knowledge. All types of organization. Whether they are manufacturing or servicing firms, they still are based on organizing, developing, and taking advantage of a mandatory arrangement of fundamental knowledge. It is widely accepted that the core of managing an organization rests on knowledge. Every decision making process, planning, strategy implementation of an organization is reliant on a never-ending gathering, analyzing, and use of relevant data and knowledge. Knowledge sparks feedback that pushes the organization to act on an impending action. Thus, we can say that meaningfully collected information sends off commendable knowledge. This is to affirm that on-going learning, nourishment, and influential administration of knowledge would innovate and improve people and organization. With knowledge, organizations can enhance and develop their capability to face the challenges of constant change. On this paper, I will discuss the extent to which system thinking helps and develops the organization intellectual capital. My discussion is focused on the conceptual notion about intellectual capital based on human and structural knowledge that have been fueled with system thinking operating on both the technological and intellectual plane. Towards the end of the essay, I tied up the entire discussion with the extent system thinking help to develop organization intellectual capital.

The Essay Intellectual capital covers both the human capital and the structural capital putting them together for more rapid growth. The company value depends on and includes the entire worth of individuals together with company structure. In fact, as Davenport, et al (1996) stated, “intellectual capital increases company values and makes business operation more efficient”. In addition, Bucklew (1991) believed that the sharing of competencies requires management of information. Information Management and 1

Intellectual Capital (IC) are related. Intellectual Capital involves human resources, information technology, business strategy and the participation of employees in order to transfer rapidly necessary experiences in the company. It is energizing and charging both the national and international operation. To get people to share competencies in the organization, management must facilitate exchange of knowledge among employees. (Bucklew, 1991) The organization ought to inform the members of available information, make communication and intelligence accessible, and to train everyone to use the information and whichever supporting technology the firm may have. (Hunter, 2002) Intellectual Capital gives sharing of knowledge legitimacy, establishes the worth of competence in a company and places value on combined individual capabilities and experiences of co-workers. (Bucklew, 1991) Describing what Intellectual Capital is, Auer (2003) considered it as the difference between the market and the booking value of an organization. No one denies that Intellectual Capital is very vital for a knowledge-based firm. However, the company’s annual auditing report does not contain Intellectual Capital as an asset of the firm. Therefore, for Intellectual Capital to be noted as an asset of the firm, it must be transformed into knowledge resources so that the firm can come up with an Intellectual Capital statement. (Dearden, 1997) Furthermore, Auer (2004) presented his four classifications of knowledge resources to be included in the auditing report such as technologies, processes, stakeholders, and employees. Added to these classifications is the inter-active component of human capital that brings out the structural capital. Combining both the Human Capital and Structural Capital generates the Relational Capital that pertains to the firm’s customers. However, according to Gary Becker (1993) Human Capital refers to the stock of product skills and technical knowledge embodied in labor. Many early economic theories refer to it simply as labor, one of the three factors of production and consider it a fungible resource, homogeneous, and easily interchangeable. Other conceptions of labor dispense with these assumptions.

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In his book Intellectual Capital, Stewart (1997) introduces Intellectual Capital, offers taxonomy for organizing it and makes the case for managing it. Others have followed such line. Several people in the academic world followed more or less Stewart's proposal, although with some variations: intellectual capital includes human capital as the talent base of the employees, "structural capital" according to Bontis (2002), "the nonhuman storehouses of information", while Gartner (2003) enlarges this to include other organizational knowledge and "relational capital" which is the knowledge embedded in business networks. Samuel Bowles cited that Human Capital like in the United States for example, became considerably more valuable as the need for skilled labor came with newfound technological advancement. New techniques and processes required further education than the norm of primary schooling, which thus led to the creation of more formalized schooling across the nation. This early insight into the need for education allowed for a significant jump in US productivity and economic prosperity, when compared to other world leaders at that time. (Bowles, S. & Herbert Gintis, 1975) Leif Edvinsson (1997) in an interview said that today’s industrial value chain processes no longer dominate value creation but innovation. Companies and shareholders are seeking new ways of meeting market demands that can give the highest return of investment more than piously developing the company’s production line. This call for a need to invest into systematic innovation, knowledge upgrading, and new structures that can assist organization innovate and make a difference. Moreover, all of these boil down to investing in Intellectual Capital. The importance of people according to Stewart (1997) has become significantly urgent in today’s market. Money can talk but it cannot think. It is true that machines can perform twice faster than any human beings can but machines are not capable of inventing. Thinking and invention are the assets upon which knowledge works and knowledge-based companies depend. For Quinn, (1997) “Ideas and intellect not physical assets built great companies.”

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Kaplan and Norton (1996) backed up the idea that knowledge boom sparks the notion that people are important assets for the company. It is very surprising nowadays that the company efforts are concentrated on hiring and retaining people with best intellectual capabilities to perform their tasks as well as charismatic individuals that can contribute productive ideas on how to improve the company business. The norms and modes of knowledge that comprise Human Capital are skills, incremental innovation, expertise, capabilities, competencies, non linear innovation, cross fertilization of ideas, information technology based assets, combination of capabilities, creativity, and knowledge integration. (Restogi, 2002) However, the most common impression is that getting people to possess all these characteristics largely depend in motivating them. Auer (2003) believed that when people are equipped with the necessary attitude and unwavering commitment, what follows automatically is the learning process. That is why, many companies lay down new compensation programs, performance evaluation, and new corporate culture that are meant to drive in motivated and wellcommitted employees. Edvinsson (1997) added a change in leadership style, which is conceptual and interpersonal than technical, oriented. In addition, for Miller – Stewen, (1996) every member of the organization must be given freedom to incorporate new ideas into the entire Intellectual Capital. If the objective of Human Capital (HC) is to maximize employees’ knowledge deposits Koenig, U and A. Memhill (2004), agreed that communication within the organization should be maximized. The most important factor to have a successful business is to install with in the organization an excellent communication system in order to deliver to the members all the necessary information that they may need to fulfill their tasks productively. Kaplan and Norton, (1996) saw another angle and indicated that poor individual performance and idea generation may not always be the members shortcomings. The organization’s structure may have been influencing employee unsatisfactory behavior and results. On the other hand, Wilensky (1967) cautioned that an organization should not try to implement knowledge management by just any means but it has to be done

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systematically and very carefully. There are differences between the organizational knowledge and the individual way. The organization itself is liable to create and manage knowledge that is only valuable for itself and the individuals in the organization. This was validated by Hunter (2002) reiterating the point that innovation restructuring and many other concepts the members assimilate may have different impact to the organization’s Structural Capital. This can be the result of cultural differences and social interaction. The result could be a product knowledge gap, which have to be fulfilled by either buying or developing knowledge. Rastogi (2002) had another idea in relation to the linkages between Human Capital and Structural Capital. He believed that the productivity of Intellectual Capital depends on the strength and vitality of all of its components and the linkages among them. The Social Capital of the firm demotes the orientation of its people to collaborate simultaneously and with commitment in support of its business goals. Its strength stems from the trusting relationship based on an ethics of help and care, and a powerful sense of shared destiny. Those are grounded in the firm’s values and vision. Social Capital reciprocally affects both Human Capital and Knowledge thus supports the organization Intellectual Capital. (Rastogi, 2002) Human Capital represents people who constantly enrich and enhance their knowledge and skills, both individually and collectively. It is shaped by, and being shaped continually, both by the social capital and structural capital in order to achieve what the organization intends. (Stewart, 2001) The need to develop the Human and Structural Capital is essential in order to intensify the organization’s Intellectual Capital. The organization’s IC and HC can be enhanced in Systems Thinking, which nowadays are very popular among knowledgebased firms. (Wilensky, 1967) However, Forrester (1994) and Sanal (2004) still have to find out what systems thinking because they claimed that systems thinking have no clear definition or usage. The system thinking terminology is applied to the field of soft operation research as system thinking. However, Checkland (1998) had already been espousing the concept of system thinking since then and its practice is applied to develop Intellectual Capital. System

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thinking is also considered as a unique approach to problem solving because it views some problems as a part of the over all system and by focusing on the problem alone will only develop to another undesired element or problem. It is a framework that is based on the belief that the component parts of a system will act differently when the systems relationship are removed and it is viewed in isolation. The only way to understand fully why a problem or a difficult element occurs and persists is to know the part in relation to the entire body. (Checkland, 1998) Consistent with systems philosophy, systems thinking concern an understanding of a system by examining the linkages and inter actions between the elements that comprise the entirety of the system. (Forrester, 1994) Forrester elaborated that system thinking is coming to mean little more than thinking about systems, talking about systems and acknowledging that systems are truly important. In short, he claimed that system thinking implies a rather general idea and a rather superficial awareness of the system. System thinking can provide carefully a general public introduction to the existence and importance of systems. It can serve a constructive role as a door opening to system dynamics and to serious work towards understanding systems. If system thinking leads to a deeper understanding using system dynamics, then the result is positive. (Forrester, 1994) Sanal (2004) came up with systems thinking concept as a framework for seeing interrelationships rather than seeing things separately. In practice, system thinking is a group of activities ranging from conceptual to the technical. At the theoretical end of the group is the adoption of the system perspective or viewpoints. System thinking employs the concept of a system as an organized completely in which parts are related that generates developing properties and has some purpose. Checkland (1990) made presentations that there were two complimentary traditions within systems thinking. One was the hard system that refers to the technology and the other was soft thinking that pertains to human capabilities. Becker (993) clarified information by control and information theory hard systems included the systems of engineering, system analysis, and operation research. Hard systems involve simulations often with the use of computers and the techniques of

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operations research. Checkland (1998) stated that hard system could be an aid for organization’s problems that can be quantified and justified. However, it cannot take easily unquantifiable variables like opinions, cultures, politics, democracy and many other abstract realities. There is also a tendency that hard system may treat people as being passive rather than having complex motivations and varying behaviors and attitudes towards work. Checkland introduced the soft system methodology as differentiated from the hard system thinking which was apparently not with equal footing to Forrester (1994) soft operating research. The Soft System Methodology is used to analyze and to create models both for technology systems and for human systems. The Soft System Methodology is very helpful in understanding the nature of irrational behavior and granting possible solution to complex and unclear problems. Soft systems thinking are for systems that cannot be easily quantified especially those involving people holding multiple and conflicting frames of references. Soft system thinking is useful for understanding innovations, viewpoints, and interactions and addressing qualitative as well as quantitative dimensions of problem situations. In addition, this field utilizes foundation methodological work developed by Peter Checkland, with Brian Wilson and their colleagues at Lancaster University. (Checkland, 1999) Checkland exemplifies that the core of Soft System Methodology is the construction of models of the system being studied. These models can be used to discuss on how to bring about organization change. Participants are encouraged to engage in debates and discussion that could generate several points of view. The learning that is derived from the interfaces becomes a source of powerful action. (Checkland, 1998) Checkland classified human soft system as “collection of activities that people are purposefully engaged and the relationship between these activities”. The Soft System Methodology (SSM) is applied to find solution when there are difficulties and unclear organization objectives, or the organization problem at hand came up with varying degrees. The Soft System Method accepts these differences and explicitly tries to take

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these situations from the outset so that there would be an acceptable analysis for all the parties involved. (Checkland, 1990) The use of Soft System Method approach does not attempt to define single right method of action but through an interactive process. It shows an acceptable improved path of action What makes SSM valuable in the development of the people who are involved in the methodology not only the principal players within the designated systems but also the stakeholders and owners of the system. (Presly, A and Laura M, 2003) In other words soft system thinking crystallizes knowledge that builds Intellectual Capital for an organization as it recognizes the complex environment in which the human system operates. (Checkland, 1990) The introduction of the term knowledge is explained by the word itself and no further discussion is needed to understand knowledge. However, in relation to Intellectual Capital knowledge has to have some value before it is considered an asset to the organization. When is knowledge an asset then? (Seymour, 2003) Based on the treatise of Bowles and Gintis, knowledge has its own unique and justifiable characteristics unlike labor and the other factors of production. It is expandable and self-generating as it is constantly used like the knowledge of a physician when he gets more experiences in his field. It simply that knowledge base increases and its endowment in Human Capital. The higher the acquisition of knowledge the higher is its capital value. Transportable and shareable knowledge can be moved and shared but the transfer does not prevent its use by the original holder such as authors, poets, musician, and other specialized fields of learning. However, the transfer of knowledge may reduce its scarcity-value to its original possessor. (Bowles & Herbert Gintis, 1975) Robert Wilson agreed to Bowles and Guntis that knowledge then is increased and heightened with the person’s capability to incorporate in his job performance all the inputs he has acquired from study, reading, and long exposures to the organization. Furthermore, a person’s competence in handling the technologies of the current means of production and distribution qualifies his intellectual capital to comply with the needs of the firm. (Wilson, 2001)

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Knowledge creates value through its instilling into the company products. Knowledge importantly implies a firm’s ability to produce and deliver customer-valued outcomes. The forms and modes of knowledge that create value comprise a firm’s skills, incremental innovation, streamlining processes, non linear innovation, cross-fertilization of ideas, information technology based on knowledge assets, combination of capabilities, creativity and knowledge integration. It can be said that the organization knowledge is the nature of its knowledge resources that together account for its value creation capacity. (Rastogi, 2002)

Conclusion System Thinking becomes necessary in the world today especially for a person to develop his knowledge further and increase his productivity through application of every available hard system methodologies. The presence of every soft system methodologies in the organization serves as the organization’s competence in establishing a commendable Intellectual Capital that could catapult the firm to a higher standard of performance. The link between Systems thinking and Knowledge can be summed in the person’s willingness to increase his input so that he could contribute to the building of a stable organization capital. In order to establish the link between system thinking and Intellectual Capital the process evolves around the elements of human capital, social capital, structural capital, and customer capital. Every element on this classification should be taken with considerable attention so that communication within the organization becomes a powerful means in building the organization Intellectual Capital. The extent to which system thinking helps the organization Intellectual Capital evolves around the entire components of Intellectual Capital. System Thinking is instrumental in adding more value to Human Capital as it bridges the gap of production with Information System and Knowledge Management. System thinking guides Structural Capital and Social Capital to make the people in the organization performs

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their utmost capabilities. Lastly, system thinking both technology and human ought to be present within the organization Intellectual Capital.

References Auer, Thomas. “Benchmarking Intellectual Capital”. Wissen Management Magazine. Germany, 2004 Auer, Thomas. “Intellectual Capital Portfolio” Guidelines for Internal IC Measurements. Working Paper. Auer Consulting, Hediagen. 2003 Bontis, N. World Congress on Intellectual Capital Readings. Boston: Elsevier Butterworth Heinemann KMCI Press. 2002. Bowles, S. & Herbert Gintis."The Problem with Human Capital Theory--A Marxian Critique," American Economic Review, 1975. Bucklew, M. Intellectual Capital at Skandia. Ernst & young Center for Information Technology and Strategy, 1991 Checkland, Peter B. Systems Thinking. System Practice. Chichester, UK John Wiley and Sons. 1981 Checkland, P annd Jim Scholes. Soft Systems Methodology In Action. Chichester. UK John Wiley and Sons, 1990 Checkland, P.B. and J. Scholes. Soft Systems Methodology in Action, John Wiley & Sons Ltd. 1990, 1999. Checkland, P.B. and S. Holwell. Information, Systems and Information Systems, John Wiley & Sons Ltd. 1998. Checkland, P.B. Systems Thinking, Systems Practice, John Wiley & Sons Ltd. 1981, 1998. Checkland, P.B. & Poulter, J. Learning for Action: A short definitive account of Soft Systems Methodology and its use for Practitioners, Teachers and Students. Wiley, Chichester: 2006

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Davenport, T. et. Al. “Building Successful Knowledge Management Project” Managing the Knowledge of the Organization. Wilky. 1996 Dearden, A and P. Wright. “Experiences Using Situated Work and Non Situiated Techniques for Studying Work in Context. S. Howard, J. Hammond, and G. Lingaards Eds. Human Computer Inter-action. INTERACT’ 97. London: Chapman and Hall, 1997 Edvisson, L. & Malone, M. Intellectual Capital, Harper Collins Publisher. 1997 Forrester, Jay W. System Dynamics, System Thinking and Soft OR. System Dynamics Review. US Cambridge. Mass. Institute of Technology, 1994. Becker, Gary S. Human Capital: A Theoretical and Empirical Analysis, with Special Reference to Education. Chicago, University of Chicago Press, 1964, 1993, 3rd ed Hunter, Lauret. Intellectual Capital Accumulation and Apprpriation. Working Paper. Melbourne, Australia, 2002 Kaplan, R. and D. Norton. The Balanced Scorecard: Translating Strategy to Action. 1996 Koenig, U. & Membrillo, A. Impat of Individual Knowledge on the Increase of Sustenable Intellectual Capital of Organization. Working Paper, Manheim Univeristy, 2004. Quinn, J.B. Intelligent Enterprise. The Free Press, 1992 Rastogi, P.N. “Knowledge Management and Intellectual \Capital as a paradigm of value creation”. Human System Management. India: IOS Press., 2002 Seymour W. Itzkoff. Intellectual Capital in Twenty-First-Century Politics. Ashfield, MA: Paideia, 2003 Sherwin Rosen. "Human capital," The New Palgrave: A Dictionary of Economics, 1987. Stewart, T. Intellectual Capital. Doubleday Dell Publishing Group Inc. 1997 Stewart, T. A. Intellectual Capital: The New Wealth of Organizations. New York: Doubleday, 1999 Stewart, T. A. The Wealth of Knowledge Intellectual Capital and the Twenty-First Century Organization. London: Nicholas Brealey 2001 Sanal, R.P. “System Thinking”. The National Magazine. India, 2004 Wilensky, H. Organizational Intelligence Knowledge and Policy in Government and Industry. Basic Books, 1997.

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Wilson, B. Systems: Concepts, Methodologies and Applications, John Wiley & Sons Ltd. 1984, 1990. Wilson, B. Soft Systems Methodology, John Wiley & Sons Ltd. 2001

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