4-1 4-2 recognizing a firm's

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Recognizing a Firm’s Intellectual Assets: Moving Beyond a Firm’s Tangible

Resources

McGraw-Hill/IrwinStrategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter four

Part 1: strategic analysis

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Learning Objectives

After reading this chapter, you should have a good understanding of:

Why the management of knowledge professionals and knowledge itself are so critical in today’s organizations.

The importance of recognizing the interdependence of attracting, developing and retaining human capital.


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Learning Objectives After reading this chapter, you should

have a good understanding of: The key role of social capital in

leveraging human capital within and across the firm.

Why teams are critical in combining and leveraging knowledge in organizations and how they can be made more effective.

The vital role of technology in leveraging knowledge and human capital.


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Learning Objectives

After reading this chapter, you should have a good understanding of:

How technology can help to retain knowledge even when employees cannot be retained by the organization.

How leveraging human capital is critical to strategy formulation at the business, corporate, international, and Internet levels.


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Ratio of Market Value to Book Value for Selected Companies


Annual Market Book Ratio of Sales Value Value Market to

Company ($ billions) ($ billions) ($ billions) Book Value

Google 3.2 60.4 2.9 20.8

Genentech 3.9 75.0 6.8 11.0

Yahoo! 3.6 47.9 7.1 6.7

eBay 3.2 42.8 6.7 6.4

Southwest Airlines 6.5 11.7 5.5 2.1

Union Pacific (Railroad) 12.2 16.7 12.7 1.3

Note: The data on market valuations are as of May 1, 2005. All other financial data is based on the most recently available balance sheets and income statements.

Ford Motor Company 171.6 16.7 16.0 1.0

Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies

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The Central Role of Knowledge in Today’s Economy

Creation of wealth in a knowledge economy

Effective management of knowledge workers

Intellectual capital Assets such as

Reputation Employee loyalty and commitment Customer relationships Company values Brand names Experience and skills of employees


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The Central Role of Knowledge in Today’s Economy

How do companies create value in the knowledge-intensive economy?

Human capital (individual capabilities, knowledge, skills, and experience of the company’s employees and managers)

Social capital (the network of relationships that individuals have throughout the organization)

Knowledge Explicit knowledge Tacit knowledgeMcGraw-Hill/Irwin

Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Intellectual capital = Market value of the firm – Book value of the firm

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Human Capital: The Foundation of Intellectual Capital


Exhibit 4.2 Human Capital: Three Interdependent Activities

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Attracting Human Capital


Hire for attitude, train for skillEmphasis on

General knowledge and experienceSocial skillsValuesBeliefsAttitudes

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Attracting Human Capital


Sound recruiting approachesScanning pools of available candidatesChallenge becomes having the right job candidates, not the greatest number of them

NetworkingCurrent employees may be best source of new onesIncentives for referrals

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Developing Human Capital


Train and develop at all levelsTraining is not the sole responsibility of the human resource department

Rapid changes in technologyEmployee skills become obsoleteTraining is cost effective

Monitor progress and track development

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Developing Human Capital


Evaluate human capitalEmployees must share knowledge and work together, collectively, to reach organizational goalsFirms often use 360-degree evaluation and feedback systemsManagers’ success cannot compromise the organization’s core values

4-14 360-Degree Leadership Assessment


Has developed and communicated a clear, simple, customer-focused vision/direction for the organization.

Forward-thinking, stretches horizons, challenges imaginations.

Inspires and energizes others to commit to Vision. Captures minds. Leads by example.

As appropriate, updates Vision to reflect constant and accelerating change affecting the business

VisionCustomer/Quality FocusIntegrityAccountability/CommitmentCommunication/Influence

Shared Ownership/Boundary-lessTeam Builder/EmpowermentKnowledge/Expertise/IntellectInitiative/SpeedGlobal Mind-Set

Per

form

ance

Cri

teri

a o

f “V

isio

n”

Ten Characteristics of Leadership

Adapted from Exhibit 4.3 An Excerpt from General Electric’s 360-Degree Leadership Assessment ChartSource: Adapted from R. Slater, Get Better or Get Beaten (Burr Ridge, IL: Irwin Professional Publishing, 1994), pp. 152-155.

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Retaining Human Capital


Provide mechanisms that prevent the transfer of valuable and sensitive information outside the organization

Identify with organization’s mission and valuesStrong alliance to organization (strategic intents)

Challenging work and stimulating environment

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Retaining Human Capital


Financial and Nonfinancial Rewards and Incentives

Rewards are a vital organizational control mechanismHowever, money may not be the most important reason why people take or leave jobsExodus of employees can erode a firm’s competitive advantage

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Enhancing Human Capital:How Diversity Benefits the Organization


1. Cost argument2. Resource acquisition argument3. Marketing argument4. Creativity argument5. Problem-solving argument6. System flexibility argument

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The Vital Role of Social Capital


Attraction, development and retention of talent is a necessary but not sufficient condition for creating competitive advantageKnowledge workers often are more loyal to their colleagues and profession than to their employer

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How Social Capital Helps Attract and Retain Talent


Hiring via personal (social) networksSome job candidates may bring other talent with themEmigration of talent from an organization to form start-up venturesCan provide mechanism for obtaining resources and information from outside the organization

4-20 Microsoft Employees Who Have Left the Company for Other Businesses


Company What It Does Defectors from Microsoft

Crossgain Builds software around 23 of 60 employeesXMl computer language

ViAir Makes software for Company declines towireless providers specify

CheckSpace Builds online payment Company says “a good service for small businesses chunk” of its 30 employees

digiMine Sells data mining service About 15% of 62 employees inaddition to the 3 founders

Avogadro Builds wireless notification 8 of 25 employeessoftware

Tellme Networks Offers information like stock About 40 of 250 employees;quotes and scores over the another 40 from the formerphone Netscape

Exhibit 4.4 Microsoft Employees Who Have Left the Company for Other BusinessesSource: Reprinted by permission of the Wall Street Journal, Copyright ©2000 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License number 397221136576.

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The Potential Downside of Social Capital


GroupthinkCost of financial resourcesManagerial commitment

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Using Technology to Leverage Human Capital and Knowledge


Sharing knowledge and informationConserves resourcesDevelops products and servicesCreates new opportunities

Technology can leverage human capital and knowledge

Within the organizationWith customersWith suppliers

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Using networks to share information and develop products and services

E-mailElectronic or Virtual teams

Enhance speed and effectiveness with which products are developedCan be applied to new business ventures

Using NetworksUsing Networks

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Codifying knowledge for competitive advantage

Tacit knowledgePersonal experienceShared only with the consent and participation of the individual

Explicit (codified) knowledgeCan be documentedCan be widely distributedCan be easily replicatedCan be reused many times at low cost

Codifying Codifying KnowledgeKnowledge


4-25Using Technology to Leverage Human Capital and Knowledge


Retaining knowledge when employees leave

Information technology can save some tacit knowledgeNeed to create motivation for people to contribute their knowledge to the system

Retaining Retaining KnowledgeKnowledge

Codifying Codifying KnowledgeKnowledge


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Creating Value Through Human Capital, Social Capital, and Technology


Does the organization assess attitude and “general make-up” instead of focusing primarily on skills and background in selecting employees at all levels?

How important is creativity and problem solving ability? Are they properly considered in hiring decisions?

Do people throughout the organization engage in effective networking activities to obtain a broad pool of worthy potential employees? Is the organization creative in such endeavors?

Human Capital

Recruiting “Top-Notch” Human CapitalRecruiting “Top-Notch” Human Capital

Adapted from Exhibit 4.5 Issues to Consider in Creating Value through Human Capital, Social Capital, and TechnologySource: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.

4-27Creating Value Through Human Capital, Social Capital, and Technology


Does the development and training process inculcate an “organizationwide” perspective?

Is there widespread involvement—including top executives—in the preparation and delivery of training and development programs?

Is the development of human capital effectively tracked and monitored?Are there effective programs for succession at all levels of the

organization—especially the top-most levels?Does the firm effectively evaluate its human capital? Is a 360-degree

evaluation used? Why? Why not?Are mechanisms in place to assure that a manager’s success does not

come at the cost of compromising the organization’s core values?

Human Capital

Enhancing Human Capital through Employee DevelopmentEnhancing Human Capital through Employee Development


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Are there appropriate financial rewards to motivate employees at all levels?

Do people throughout the organization strongly identify with the organization’s mission?

Are employees provided a stimulating and challenging work environment that fosters professional growth?

Are valued amenities provided (e.g., flextime, child-care facilities, telecommuting) that are appropriate given the organization’s mission, strategy, and how work is accomplished?

Is the organization continually devising strategies and mechanisms to retain top performers?

Human Capital

Retaining the Best EmployeesRetaining the Best Employees


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Are there positive personal and professional relationships among employees?

Is the organization benefiting (or being penalized) by hiring (or by voluntary turnover) en masse?

Does an environment of caring and encouragement rather than competition enhance team performance?

Does the organization minimize the adverse effects of excessive social capital—such as excessive costs and “groupthink”?

Social Capital


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Does the organization effectively use technology to transfer best practices across the organization?

Does the organization use technology to leverage both human capital and knowledge both within the boundaries of the organization as well as among its suppliers and customers?

Has the organization used technologies such as e-mail and networks to develop products and services?

Has the organization effectively used technology to codify knowledge for competitive advantage?

Does the organization try to retain some of the knowledge of employees when they decide to leave the firm?

Technology


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The Central Role of Leveraging Human Capital in Strategy Formulation


Leveraging human capital and business-level strategy (Chapter 5)

Sustainable over timeIntegrate primary and support activities in the firm’s value chain

Leveraging human capital and corporate-level strategy (Chapter 6)

Manage businesses to create synergyCreate more value by working together across business units

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Leveraging human capital and international-level strategy (Chapter 7)

Achieve economies of scaleAdapt to local market needsFacilitate the flow of information and knowledge between business units in different countries

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Leveraging human capital and internet strategies (Chapter 8)

Create competitive advantages through digital and Internet-based technologiesLower costsEnhance customer serviceImprove performance

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