A Strategic Model for Measuring Intellectual Capital

7/28/2019 A Strategic Model for Measuring Intellectual Capital

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ECONOMIC ANNALS, Volume LIV, No. 183 / October December 2009.

UDC: 3.33 ISSN: 0013-3264

Scientific PaPerS

* Faculty o Economics, Belgrade

** Faculty o echnical Science, Novi Sad

JEL CLASSIFICATION: L60, M21

ABSTRACT: Measuring intellectualcapital contributes to organisational

success and brings managerial, culturaland organisational changes. In analysingthe relevant literature on intellectualcapital (IC), it emerges that the benetso IC measuring and reporting have beenlinked to value creation. In order to providea deeper understanding o the characterand role o IC and adequate IC indicators,the main aim o this study is to propose astrategic model or measuring intellectual

capital in Serbian industrial enterprises.

Te research ndings revealed a lack o bothemployee innovativeness and permanent

competence development o top managersand employees, which may be a signicantproblem in the potential growth o Serbianindustry. Te actor analysis showed thatthe proposed questionnaire (based onrelevant scorecard methods) is adequate orinvestigating the phenomena o intellectualcapital in industrial enterprises in Serbia.

KEY WORDS: measuring intellectual

capital, strategy, industry, innovations

Ljiljana Konti* and Slaana abrilo** DOI:10.2298/EKA0983089K

A STRATEgIC mODEl fOR mEASuRIngInTEllECTuAl CApITAl In SERBIAnInDuSTRIAl EnTERpRISES


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Economic Annals, Volume LIV, No. 183 / October December 2009.

1. InTRODuCTIOn

Many authors have argued that IC has become one o the primary sources o thecompetitive advantage o an enterprise (Edvinsson and Malone, 1997; Stewart,1997; Sveiby, 1997a; Bontis, 2001; Kaplan and Norton, 2004). IC can be dened interms o organisational resources, relating to wealth creation through investment inknowledge, inormation, intellectual property, and experience (Kong, 2007:725).

Enterprises intellectual capital is all capital that exists within the boundaries othe organisation, including relations with the external environment. Ideas, skills,and creative potential are the essence o intellectual capital (Webster and Jensen,

2006:82). Tere is a signicant dierence between intellectual capital, such ascorporate culture, corporate know-how, employees competence (knowledgeand skills), employees satisaction, customer loyalty and training costs, andintangible assets, which include projects, soware, data bases and intellectualproperty, including copyrights, ranchises, patents and brand names (Finchamand Roslender, 2003, Blair and Wallman, 2001).

In the past ve years, various methodologies and tools have been provided to helpenterprises identiy and assess their intellectual capital (Marr and Schiuma, 2001;

Roos et al., 1997; Sveiby, 1997). Despite the wide acknowledgement o knowledgeas a strategic resource, it is still not well understood how intellectual capitalinuences business perormance.

Measuring intellectual capital is a complex problem. With regard to its properties,IC completely diers rom its tangible counterparts. As a result, the traditionalnancial and managerial accounting instruments are not able to capture IC value,which leads to poor valuation (external communication problem) on the one hand,and poor usage (internal management problem) on the other. By having bothaccountings backward report on recent results and IC measurements orwardview o what might be coming, management has a better sense o what to do nextto develop or maintain a competitive advantage (Fintz-Enz, 2000:148).

Tere are various reasons why top managers need to measure intellectual capital.In reviewing relevant literature on IC, it emerges that the benets o IC measuringand reporting are linked to the design and implementation process, which leads tothe creation o new intellectual capital(Chiucchi, 2008:217). One study identiedve main reasons (Marr et al., 2003). Te ollowing our reasons are internal tothe organisation. First, measuring intellectual capital can help top managers to

ormulate business strategy. Second, good metrics acilitate implementation o


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A Strategic Model or Measuring Intellectual Capital

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strategy (Allio, 2005:255). Intellectual capital has little value unless it can be linkedto the organisations strategy (Edvinsson and Malone, 1997). Tird, measuring

intellectual capital can assist in evaluating mergers and acquisitions. Fourth, usingnon-nancial measures o intellectual capital can be linked to an organisationsincentive and compensation plan. Te h reason is external: to communicateto external stakeholders what intellectual property the enterprise owns (Holmen,2005).

Perhaps the best reason to measure intellectual capital is to consider the risks onot measuring it, such as unpredicted labour shortages, skills mismatches thatchoke o growth, talent eeing to competitors, and productivity levels that realise

only 70 percent o their ull potential (Schiemann, 2008). Adequate IC indicatorsmay provide key inormation about emerging trends, such as declining talentavailability, higher turnover o strong perormers, unionization vulnerability, andemerging ethics risks. Instituting these measures may be a competitive advantageto enterprises in a world o increasing competition and scarce resources.

Measuring intellectual capital brings managerial, cultural and organisationalchanges. As a process, it permits planning and managing intangible resourcesconsistent with the enterprise strategy or creating value. Tereore, the most

important benet obtained rom measuring intellectual capital is the spread othe intellectual capital culture within an organisation (Chiucchi, 2008:229).

Tere is increasing interest in the academic community and rom researchers inIC measuring and reporting that is rooted in business evaluation and planningactivities. Over the last decade there has been a minor explosion in the IC metricsindustry. One recent study categorized 12 dierent approaches to measuringintellectual capital, and others identied more than 30 (Pike and Roos, 2004;Andriessen, 2004a; Andriessen, 2004b).

Te main purpose o this study is to identiy specic characteristics o intellectualcapital in order to dene a group o relevant indicators that will be included in aproposed model or measuring intellectual capital in Serbian industry. We alsohave analysed intellectual capital and its inuence on the perormance o selectedindustry enterprises.

Even though there are numerous methods or IC measuring, this research providesan insight into the specic eatures o IC and enables the ne-tuning o the existingmethods. As a basis or the research questionnaire we used IC concepts such as

the Intangible Assets Monitor, Danish Guidelines, and Meritum Guidelines. In


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the relevant literature there is no standard measuring concept, and a combinationo the aorementioned concepts is rarely used.

Tis study presents preliminary diagnostics o IC in Serbian industrial enterprisesand points to important problems in the observed enterprises (competencedevelopment, innovation, leadership) and possible strategies, presented in astrategy map.

In general, the contribution o this research should be viewed as a renement othe existing IC reporting methods with respect to the unique characteristics o theenvironment and industry. Te suggested indicators can be useul or managers as

a basis o IC reporting in Serbian industry.

Tis study sets out to identiy the strategic model or measuring intellectualcapital by investigating 109 top managers in 13 industrial enterprises in Serbia.First, in order to dene the main categories or empirical research, an overviewo the relevant literature is presented. Te paper then introduces the researchmethodology, presents the research ndings, discusses them, and draws someconclusions and implications or primarily Serbian management in industry.Finally, the contributions and some possible directions or urther research are

presented.

2. ThEORETICAl BACKgROunD

Te origins o measuring intellectual capital lie in the pioneering work pursued atthe Swedish insurance giant, Skandia (Edvinsson, 1997; Edvinsson and Malone,1997). wo key contributions to the conceptual ramework were the value schemeand the Navigator. Te value scheme identies two main orms that intellectual

capital takes: 1. human capital, and 2. structural capital, which consists oorganisational capital and relational capital.

Tere are strong similarities between the Skandia Navigator and the BalancedScorecard, developed in the US and associated with Kaplan and Norton (1992,1993, 1996, and 2004). In this ramework, mission and strategic objectives can betranslated into a set o perormance measures. Te aim o the Balanced Scorecard(BSC) is to give managers a comprehensive view o the business and allow themto ocus on critical areas.


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Te concept o the BSC is based on the assumption that the efcient use oinvestment capital is no longer the key determinant o competitive advantage, and

that so actors such as intellectual capital and knowledge creation are increasinglybecoming more important. Te BSC balances the nancial perspective with theollowing three non-nancial perspectives: customer perspective, internal businessprocess, and the learning and growth perspective. Te BSCs our perspectives canbe characterized briey as ollows:

Tenancial perspective indicates whether the transormation o a strategyleads to improved economic success. Te two roles o nancial measures are:1) to dene the nancial perormance a strategy is expected to achieve, and 2)

to be the endpoint o cause and eect relationships reerring to the other BSCperspectives.

Tecustomer perspective denes the customer/market segments in which thebusiness competes.

Te internal process perspective identies those internal business processesthat enable the enterprise to achieve superior value or the customers andshareholders.

Te learning and growth perspective provides the inrastructures (e.g. skilledand creative employees) or the realisation o the aims o the other three

perspectives.

Te learning and growth perspective is the basis o an enterprises ability to generatevalue and underlies internal business processes, which, in turn, aect customersatisaction and consequently nancial results (Kaplan and Norton, 1996). Anybusiness strategy needs to address each o the our perspectives. Specic objectivesand critical success actors can then be developed or each perspective. Tesecritical success actors can then be measured using key perormance indicators andinitiatives linked to strategic objectives in each perspective. Te BSC is directed

top down, both in its contents and in its development as a management system.

Kaplan and Norton (1996) distinguish between lagging and leading indicators.Lagging indicators are ormulated or the strategic core issues o each perspectivederived rom the strategy, and they indicate whether the strategic objectives ineach perspective have been achieved. In contrast to the lagging indicators, theleading indicators express the specic competitive advantages o the enterprise andrepresent how the results should be achieved. Te integration o the indicators inthe our perspectives is achieved by dening goals and appropriate lagging andleading indicators (Kaplan and Norton, 1996) or a specic business strategy.


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Te Balance Scorecard, thereore, leads an organisation to identiy links and trade-os between dierent actors that aect business perormance. According to the

latest developments in the Balanced Scorecard, any achievement o the strategicgoals develops through causal links between the our perspectives, which can bedrawn in causal maps, which assure consistency between operating decisionsand business strategy. Te Balance Scorecard proposes the learning and growthperspective as the undamental dimension to evaluate and manage intellectualcapital. Te competitive success o an enterprise is interpreted as a cause-eectchain, which can be drawn in a strategy map.

Te third approach, which can be viewed as the rst generation o measuring

intellectual capital, is the Intangible Assets Monitor developed by Sveiby (1997a,1997b). Te intangible part o the balance sheet can be classied as a amily othree: 1. Individual competence is peoples capacity to act in various situationsand includes skill, education, experience, values, and social skills, 2. Internalstructure consists o a wide range o patents, concepts, models, and computer andadministrative systems, and 3. External structure consists o relationships withcustomers and suppliers, brand names, trademarks and reputation, or image.

Table 1. Tree IC conceptual rameworks

Sveiby Kaplan and Norton EdvinssonInternal

StructureInternal Processes

PerspectiveOrganisational Capital

ExternalStructure

Customers Perspective Customer Capital

Competence oPersonnel

Learning & GrowthPerspective

Human Capital

Source: Sveiby (1998)

A generic ormat or intellectual capital statements emerged rom research undedby the Danish Agency or rade and Industry (Mouritsen, 1998; DAI, 1999;DAI, 2000; Mouritsen et al., 2001a; Mouritsen et al., 2001b). Danish Guidelinesprovide a status o the companys eorts to develop its knowledge resourcesthrough knowledge management, and does so in text, gures and illustrations(DAI, 2000:14). Intellectual capital statements have three elements: a knowledgenarrative, management challenges, and reporting. Te knowledge narrativesets out how the business ensures that its products or services meet customersrequirements, as well as how resources will be organized to accomplish this.

Te management challenges are those aced by the business in implementing


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its knowledge narrative. Actions associated with management challenges aredocumented, as are relevant perormance indicators. Te reporting element can

be either internally or externally oriented.

Te ormat put orward by the Meritum Guidelines (Meritum, 2002) is similarlycomposed o three elements: a vision o the rm, a summary o intangible resourcesand activities, and a system o indicators. Te vision, like the knowledge narrative,communicates the businesss objectives and strategies as well as documentingcritical intangibles or drivers o value creation. Te summary describes the stocko intangibles available to the business and the activities in place to enhance these.Te system o indicators communicates the success o the business in managing its

stock o intangibles. It is necessary or management to identiy the most relevantcombination o indicators or their own business (Fincham and Roslender,2003).

What all these conceptual rameworks have in common is that they make adistinction between three types o intellectual capital, reerred to as human capital,structural capital, and relational capital(Bontis, 1998, 2002; Meritum, 2002; Roos,2004; Marr, 2004; ovstiga and ulugurova, 2007). It has become standard tosay that a companys intellectual capital is the sum o its human capital (talent),

structural capital (intellectual property, methodologies, soware, documents, andother knowledge arteacts), and customer capital (client relationships)(Stewart,2001:13).Nowadays, the majority o models are based on this taxonomy o three,or a urther subdivision. Te reasoning or this subdivision is that the concepto intellectual capital is too broad, and thereore needs urther specication. Tesubdivision provides a useul ramework or arranging the indicators. For thepurpose o our empirical research, we ollow the well-accepted subdivision o IC.

Human capital (HC) represents anything related to the people within the

organisation, including knowledge, attitudes, competencies, experience, skills,tacit knowledge, creativity, problem solving capacity, and the innovativeness andtalents o people (Guerrero, 2003; ovstiga and ulugurova, 2007). HC is importantto organisations as a source o innovation and strategic renewal (Bontis, 2002;Bontis et al., 2000; Webster, 2000). Tree attributes o human capital, competence(knowledge, skill sets, and experiential knowledge), attitude (level o motivation,behavioural patterns), and employees intellectual agility (innovation, creativity,exibility, adaptability) exhibit a high degree o tacitness. Te organisation doesnot own this capital. According to Baron (2007:71), human capital strategy consistso six interconnected actors:


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1. people (their skills and competencies in hiring, training and experience, theirqualication level, and the extent to which they generalize human capital);

2. work processes (how work gets done, the degree o teamwork, and the role otechnology);

3. managerial structure (management direction and control, spans o control,perormance management and work procedures);

4. inormation and knowledge (how inormation and knowledge are shared andexchanged among employees);

5. decision making (the degree o decentralization, participation and timelinesso decisions), and

6. rewards (how monetary and non-monetary incentives are used, individual

versus group rewards; current versus longer-term career rewards).

By contrast, structural capital (SC) is owned by the enterprise and includesthe structures, systems and processes that the organisation uses to support itsoperations, as well as brands, image, culture, prototypes, documented inormationand intellectual property. SC becomes the supportive inrastructure or HC. Itincludes all o the non-human storehouses o knowledge in organisations such as databases, strategies, routines, organisational culture, publications andintellectual property (e.g. patents, copyrights, trademarks, brands, registered

design, trade secrets and processes whose ownership is granted to the enterpriseby law (Ordez de Pablos, 2004).

Relational capital (RC) characterizes all orms o ormal and inormal relationswith its stakeholders (Bontis, 1998; Fletcher et al., 2003; Grasenick and Low,2004). Tese relationships could be licensing agreements, partnering agreements,contracts, or distribution arrangements. Tey also include customer relationshipssuch as customer loyalty and brand image. Tese resources are not owned bythe organisation and are at least partly controlled by the external stakeholders.

Te value o customer capital is mainly determined by the extent to which anorganisation is able to maintain condence in its reputation.

Te three IC categories are inter-dependent (Subramaniam and Youndt, 2005).Value creation is the product o interaction between the dierent classes oIC (Roos et al., 1997; Sanchez et al., 2000). IC renders the best possible valueto organisations through the combination, utilisation, interaction, alignment,and balancing o the three IC categories as well as through the managing o theknowledge ow between them. Roos et al (1997:417-423) stated that the vehicle ormeasuring intellectual perormance is a set o indicators used or each intellectual

capital category.


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3. RESEARCh mEThODOlOgY

Te results o one piece o research conducted in an insurance enterprise inSerbia using the application o two IC measuring methods (Intangible assetsmonitor and Danish Guidelines) indicated the necessity or modication o theexisting IC measuring methods, particularly in the eld o indicators, pertainingto characteristics o the environment, industry and the enterprise (Cabrilo,2005). Unortunately most Serbian industries are still using traditional nancialaccounting and perormance measurement methods or tangible assets. akinginto account that in Serbia IC measurement has not been considered important, thedata gathering systems are not customized to the known IC measuring methods.

Te knowledge-based environment o Serbia and other transition economiesrequires a new model that encompasses intellectual capital and includes thespecic environment.

Compared with world trends it is possible to conclude that there is a lack oawareness o the importance and the nature o IC measuring methods andreporting in Serbia. Hence, the ability o enterprises to choose a proper methodand apply it successully in order to achieve strategic goals is diminished. Tispresents a new research problem: conceptualisation o a model or measuring

intellectual capital in Serbian enterprises.

Te research methodology was based on interviews with 109 managers holdingkey managerial positions in 13 industrial enterprises. In the selected sample thestarting point was the structure o Serbian industry in 2006 by divisions, excludingpublic and ailing enterprises (e.g. textile, leather, leather products, and ootwearmanuactures). Public enterprises were examined in this study but preliminaryresults indicate a need or urther investigations: thereore we excluded them romthis report. An additional source or the selection process was a ranking o the 300most successul enterprises in Serbia in 2006 by operating revenues, according tothe Economist Journal. Tereore the industry structure o the selected sample is:

manufactureoffoodproductsandbeverages4enterprises; manufactureofchemicalsandchemicalproducts3enterprises; manufactureoftobaccoproducts1enterprise; publishing,printing,andreproduction1enterprise; manufactureofmetalproducts-1enterprise; miningofmetalores-1enterprise; manufactureofocemachineryandcomputers-1enterprise;and

manufactureofrubberandplasticproducts-1enterprise.


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Te number o participants varied across enterprises according to the enterprisesize (number o available managers) and the willingness o managers to be

included in the survey. Te vast majority o participants (56.07%) came rom largeorganisations (over 250 employees), while 43.93% came rom medium-sized (50-250 employees).

Personal inormation about top managers in the sample consisted o agestructure, degree o ormal education, and length o employment in the observedenterprises.

46% o top managers were aged 46-55, 26% were aged 26-35, and 24% were aged

36-45. Tere were no managers below the age o 26, which reects on innovationactivities in the observed industrial enterprises.

Te majority o observed top managers had a aculty degree (53%), then camethe managers with a high school education (25%) and college degree (17%). Tepercent o managers in industry with a PhD or Masters degree is considerablysmaller.

Te largest percent o managers had between 21-30 years o work experience

(37.38%) ollowed by those that had 11-20 years o work experience (21.50%) andthose with less than 5 years experience (16.82%). 13.09%, percent o managersin the total sample had been working longer than 31 years whereas the smallestpercentage o managers - 11.21% - had 6-10 years o working experience.

Considering the education levels and work experience o over 10 years o themajority o managers it can be assumed that they knew the resources, actors thatinuence business results, and the success o their organisations.

Te survey was conducted directly, i.e. the participants were aware they wereparticipating in a survey, but the questions were not known ahead o time. Tiswas important to avoid any behavioural bias in the responses. Te majority o thesurvey insiders used their business contacts successully. Te response rate wasoutstanding 90%.

Research design. Te research took place during September and October 2007.Te survey was developed in order to identiy key actors inuencing IC inSerbian industrial enterprises. Te questionnaire was designed based upon thescorecard measuring method and embodying Sveibys Intangible Assets Monitor,

Danish Guidelines, and Meritum Guidelines. Within the group o inuencing


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actors o IC (human, structural and relational) suggested in the initial methods32 inuencing actors were chosen: 12 o human capital, 10 o structural capital,

and 10 o relational capital. Each o the aorementioned inuencing actors wasdetermined by a group o questions. Moreover, questions were clustered aroundthree primary IC categories and the inuencing actors they comprise.

Considering the general lack o survey participants in Serbia, the ollowing stepswere undertaken to encourage participation:

the questionnaire provided a degree of anonymity (i.e., it did not includenancial inormation pertaining to the enterprise or personal inormation

about the participants), twoversionsofthequestionnairewereoered-electronicandhard-copyfor

the convenience o participants, the research team compiled a list of enterprises in Serbia where the team

members had business contacts or riends in managerial positions (surveyinsiders),

the selected enterprises were diverse with regard to ownership structure,number o employees and geographic location.

Data analysis. Analysis o answer requency, Pareto analysis o cumulativerequencies and analysis o percentage o occurrence o certain answers were used.Factors were extracted according to Kaiser Criteria. Aer extracting the actors,orthogonal analytic rotation (varimax criteria) was applied. Pareto analysis wasused to determine the impact level o particular HC inuencing actors on goalachievement and business success. Measures o suggested actors importance inSerbian industrial enterprises were identied based on their impact level.

4. RESEARCh fInDIngS AnD DISCuSSIOn

Te results o actor analysis showed that the questionnaire is adequate orinvestigating phenomena o intellectual capital in industrial enterprises(Cronbachs alpha is 0.7542). Te answers to the proposed questionnaire canexplain dominant characteristics o intellectual capital in industry. In addition,it is possible to identiy indicators o intellectual capital in Serbian industry. Teresults o empirical research have been presented according to the aorementionedgroups o intellectual capital (see able 2).


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Table 2. Summary o survey results

ICcategory Examined actor Cumulativerequency

Humancapital

Desirablecharacteristics otheir employees

Experience 88.8Cooperativeness 67.3

Dedication and efciency65.4

Innovationattitude

Knowledge codication 61

Procedures orimplementation

38.7

Stand unused 26.7Key inuencing

actorsEmployees efciency 91.5

Employees experience 84.9

Employees motivation 79.2

Structu

ralcapital

op managerscompetencedevelopment

within last six months 36.0more than a year ago 33.0

never 23.0

Employeesdatabases

personal inormation 93.0inormation on service

length90.0

inormation on ormaleducation 89.0

Key inuencingactors

employeescommunication and

interaction

64.0

managerial processes 63.0

Relationalcapital

Importantstakeholders

business partners 88.0

banks 41.0

state administration 36.0

Sources oknowledgeacquisition

co-operation withcustomers

50.0

employing individualswith proper competence

50.0

training and education 43.0

Key inuencingactors

customer relationship 90.0

supplier relationship 84.0

perceived image 56.0


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4.1. ha caita

Human capital analysis consisted o two parts, rstly, investigation o managerialattitudes towards employees desirable characteristics, employees motivation andinnovativeness, and secondly,identication o inuencing actors on enterpriseperormance.

Analysis o top managers attitudes towards desirable characteristics in theiremployees gave the ollowing results: experience, cooperativeness, dedicationand efciency, expertise, education, initiatives, loyalty, permanent learning, andinnovativeness.

Human capital results mainly ocused on responsibility and employee experience(employees having a good knowledge o their jobs, processes, procedures, andmarkets). Tese characteristics were more important than expert knowledgeand social skills (empathy, interactions with others). It is evident that the sourceo human capital was considered to be employees experience. Creativity andinnovativeness were ranked low by the top managers observed.

Analysis o motivational actors showed that the selected top managers thoughtthat employees are motivated exclusively by money (87.9%). Career movement(5.6%), and quality o work (4.7%) had a low impact. Non-nancial motivation wasinsignicant at 0.9%. Tis conclusion goes in line with the theory that money hassignicant impacts on employees motivation and their work-related behaviour incompanies (Opsahl and Dunnette, 1966; Whyte, 1955). o Lawler (1981) moneyis a motivator. Results o an empirical study conducted with 1,000 employeesshowed that younger employees with low incomes in non-managerial positionswere most concerned with money (Kovach, 1987). However the available research(e.g. Yamauchi and empler, 1982; Wernimont and Fitzpatrick, 1972) has verylimited application to the eld o organisational behaviour (ang, 1992:197).

Tis study also embodied the innovation value chain. Te innovation value chainconsists o three main links: source o knowledge, knowledge transormation intoinnovation, and exploration o innovation (Konti, 2008:25). Te attitude towardsinnovation o observed top managers in industrial enterprises showed that inmost cases innovations were implemented according to procedures or processinnovation. 24.5% o selected industrial enterprises did not have procedures orinducing process innovations.


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Te process o transorming knowledge into innovation was evident in the selectedindustrial enterprises, which represents a high percentage o codication1. Only

one industrial enterprise legally patented their innovations. More than a quartero innovations remained unused.

In some o the selected industrial enterprises employees were not willing toshare or were araid to expose their ideas, which indicates a lack o trust in theorganisational culture.

In the observed enterprises there was a problem with sharing knowledge, whichprevents development o employee competence. op managers should conduct

activities aimed to transer key competences though sharing knowledge (mentorwork) or codication o key competences (notication, knowledge basis etc).

Te participants in the survey were asked to choose, without ranking, the 5 outo 9 oered actors o human capital which have the greatest impact on enterpriseperormance. By distinguishing inuencing actors with the greatest inuence(the Pareto rule), the ollowing key inuencing actors o human capital weredetermined: efciency, experience and motivation.

Te act that employee efciency was seen as the primary key inuencing actoro human capital was unexpected, since it is opposed to the previous examinationo the managers attitudes towards the desirable characteristics o their employees.Upon urther examination, when we organised the presentation o results, wereached a conclusion as to what participating top managers meant by efciencyand why they thought that it determined business perormance: efciency impliesresources should be deployed and utilised to maximise returns, and in theindustrial era this is related to employees. Te quantitative measure o employeesefciency is output (in units) per employee.

Efciency being at the top o the list, innovativeness in the next to last position,and education o employees h, reect the existence o the industrial ratherthan the knowledge era in Serbia. More importantly, the management excessivelypointed out employee efciency, and this may indicate that the management tendsto transer responsibility to all individuals in the enterprise.

1 Innovation codication process comprises implementation according to dened procedures,

writing down the ideas and their patenting.


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Te ranking o employee experience in the group o key inuencing actors wasexpected, even though experience was not listed in the group o characteristics

most appreciated by top managers. Te act that motivation was listed in the groupo key inuencing actors o human capital indirectly reects the managerialawareness o its importance, which is rather encouraging. Motivation is perceivedas a powerul means o building relationships within the organisation and moreefcient goal achievement.

On the other hand the selected top managers in Serbia ound education andknowledge-sharing to have a relatively small impact on business perormance.

In the observed enterprises lack o employee innovativeness indicated a lack omanagerial initiatives aimed at encouraging creativity (motivation, competentdevelopment, reward), which results in insufcient product and processinnovation.

op managers preerred experience (number o years spent in the enterprises)to expert knowledge. Tis result has the positive connotation that organisationalcompetences were not based on a ew key experts (little instability on the part ohuman capital). But there is the problem that management needs to based more

on competences development and employees innovativeness: an enterprisesinvestment in all orms o employee development is an eective predictor o uturehuman capital capability (Fitz-Enz, 2000:155).

4.2. Strctra caita

Te structural capital analysis consisted o two parts: collecting data about topmanagers competence development and databases in the selected industrialenterprises. Te second part consisted o identiying inuencing actors onenterprise perormance.

Te analysis o managers competence development revealed that more thanhal o the managers in the Serbian industrial enterprises developed theircompetences insufciently, neglecting training and education. In order to keep upwith turbulent changes in the environment and to overcome new challenges wehave to accomplish obligatory pre-condition actors: managing competences andleadership. Te reasons or the lack o competitiveness in the observed enterprisesand Serbian industry as a whole are examined in the obtained results.


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I we consider the hypotheses that state that ormal education is not acomprehensive and accurate measure o employees knowledge and skills, and

that service length is not a comprehensive and precise measure o experience,the ollowing question arises: what data about their employees do industrialenterprises in Serbia document? Tis can help to learn whether and to what extentthese companies create knowledge bases. Knowledge bases can largely contributeto better organisation o human resources, in which each employee contributesto value creation to the highest degree. Additionally the knowledge base helps anenterprise to discover what it knows and contributes to the knowledge sharingprocess.

Employee databases in Serbian industrial enterprises mainly contain personalinormation and inormation on service length and ormal education, whereasinormation on employee knowledge and skills as well as their actual experienceis less documented. Based on these results, it is possible to conclude that theobserved Serbian enterprises are still not sufciently ocused on identication ovaluable knowledge, skills and experience: actors remarkably important in thevalue-creation process, their codication, and knowledge-base creation.

Participants were asked to chose the 4 out o 10 oered inuencing actors o

structural capital (without ranking), which were, in their opinion, primary keyinuencing actors on business perormance. Te ollowing inuencing actorswere emphasized as the key ones: employees communication and interaction,and managerial processes. Further analysis o the manner o employeescooperation, indicated that employee interactions are based on direct verbalcommunication rather than technology.

Neither actors related to innovation (product innovation development, processinnovation) nor R&D were seen as critical inuencing actors. We came to the

conclusion that innovations and research and development are again neglected,which is in line with the previous results o ranking key inuencing actorso human capital, in which innovation and competence development wereomitted. Tese ndings reveal obvious deciencies in innovation in Serbianindustrial enterprises. Tis could be the result o poor employee innovativeness,lack o managing initiatives aimed to encourage innovation, or insufcientimplementation o innovations.

Simplicity o procedures is an important element in process efciency andenterprises competitiveness. Inormation-communication technology is an

important element o structural capital and supports the knowledge-sharing


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process. Tis indicates that the problem is in human capital because employeesare not willing to share knowledge.

echnological opportunities or knowledge transer and acquisition were rankedlow in the observed enterprises, which implies an obsolete technology.

Organisational culture had the lowest rank. Tere is a lack o trust in organisationalculture in the observed enterprises which implies low employee satisaction.Employees are not committed to their tasks. Tey do jobs without energy, whichimplies a motivation problem.

4.3. Reatioa caita

Te analysis o relational capital actors was also conducted in two phases. Firstthe selected top managers exposed their opinions about partnerships with externalstakeholders, especially customers, and external sources o knowledge. In phasetwo, key actors o relational capital aecting perormance were identied.

Te process o identiying key external stakeholders is very important duringthe analysis o relational capital. Te selected top managers in Serbian industrial

enterprises ranked 10 oered stakeholders (customers were not included, sincethese relations were examined separately within other items) (see table 2).

Key stakeholders or the selected top managers in industrial enterprises in Serbiawere business partners, banks, and state administration. Tis is to be expected, asbusiness partners are relevant to business success, banks have nancial resources,and the state administration determines import and export quotes, custom rates,legal roles etc.

Te selected industrial enterprises rarely cooperated with local administration,shareholders, and research institutes. Te main reason or undeveloped cooperationwith shareholders is the relatively recent privatization o the selected enterprises.

Te rarity o cooperation with research institutes and universities reveals thatindustrial enterprises are not oriented to product innovation or have internal R&Dactivities. Undeveloped relationships with shareholders and R&D institutions alsoevidence that the observed enterprises primary nancing is though bank credits.

According to top managers rom the observed enterprises, key sources o

competitiveness (most appreciated by users/consumers) are:


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1. the quality o products and2. long tradition.

Relational capital is based on customer loyalty. Customer relationships, a parto relational capital, are unstable because there are ew key customers or theenterprises operations. Image, innovativeness and reliability are not listedamong the key sources o competitiveness. Te managers did not believe that thecompetitiveness o their companies was based on innovation, which is completelyinconsistent with the results o numerous researches that have ound innovationas the key driver o corporate value and competitiveness (Aramburu et al. 2006,Castellacci 2008, Ces and Marsilli 2005, Danneels 2002). op managers attitude

to innovations and innovation management is one o the reasons why there is a lowlevel o industrial growth in Serbia, and a low level o competition in industry.

op managers are aware o current and missing knowledge that is important togenerate new knowledge and knowledge implementation in the value addingprocess.

In Serbia, industrial enterprises acquire the decient knowledge mostly bycooperation with customers, employing individuals with proper competence,

training and education and benchmarking. Less common ways are cooperation withscientic research institutes as well as universities. Universities not only developacademic excellence in disciplines with direct research applications to industry,but also set out explicitly to develop linkages with industry or the purposes oeconomic development. In the UK an alliance between Cambridge Universityand the Massachusetts Institute o echnology (MI) the Cambridge-MIInstitute (CMI) is a joint government and industry-unded initiative, intendedto improve productivity, competitiveness and entrepreneurialism through thedesign and testing o innovative mechanisms that promote university industry

knowledge exchange.

Te second part o the analysis consisted o selecting 4 out o 10 oered inuencingactors o relational capital. Cumulative requencies determined the ranking orelational capital inuencing actors.

Key inuencing actors o relational capital in the Serbian industrial enterpriseswere customer relationship and supplier relationship. Te most signicantinuencing actor was the customer relationship, which was expected, as well assupplier relationship. Observed top managers had not developed relationships

with shareholders partly because these enterprises were recently privatized.


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It is surprising that the observed top managers did not recognize the importantrole o media in sustaining a positive image, nor o socially responsible activities

in local communities. Te lowest ranked was the relationship with the localadministration, which is consistent with the managers ranking o externalstakeholders in phase 1.

5. A STRATEgIC mODEl fOR IC mEASuRIng

Basic assumptions stated that dominant characteristics and key inuencingactors o IC largely select the group o relevant IC indicators. By combining the

signicance o certain IC actors (measures o IC actors inuence dened byPareto analysis) and dominant IC characteristics (quantity indices o IC actors,identied by actor analysis), the group o relevant IC indicators or Serbianindustrial enterprises was dened (presented in able 3). Te importance o ICactors, suggested in relevant scorecard measuring methods used in this study,was certainly acknowledged. Key inuencing IC actors in Serbian industrialenterprises were dominant in dening the group o relevant IC indicators. Foreach key inuencing actor o IC there are many indicators by which it can beappropriately highlighted and measured. However, since the number o relevant

indicators measuring a particular IC actor should be reduced to 3-5 indicators,specic eatures o IC in the observed enterprises aected the choice o the nalgroup o relevant IC indicators. In addition, indicators in the intellectual capitalstatement consist o three parts: statistical inormation, internal key actors, andeect measure. For each key IC actor, we proposed three indicators relevant to theconcept IC statement. For example, employees efciency was represented by thenumber o employees rewarded or outstanding results (statistical inormation),percentage o employees who realized goals beore deadline (internal key actor),and value added per employee (eect measure). In this way a group o relevant IC

indicators or observed industrial enterprises in Serbia was dened (see able 3).


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Table 3. Model or IC measuring in Serbian industrial enterprises

IC

category

Key IC actor Indicator

Humancapital

Employees efciency

Value added per employeePercent o employees who realize goals beore

deadlineNumber o employees rewarded or outstanding

results

Employees experience Average seniority o employees

Growth in proessional experience

Rookie ratio

Employees motivation Employee satisaction index (survey)Average number o absence days per employee

Sta turnover

Structuralcapital

Employeescommunication and

interaction

Interdisciplinary projects

Experience exchange meetings

Number o meetings with the aim o knowledge

transer

Managerial processes Average age o managersQuality o managing activities (employees survey)

Education days per manager

Organisational processes Internal knowledge and

inormation sharingShared knowledge documents

on the intranetProduct innovation rate

Relationalcapital

Customer relationship Customer structure (proportion o new, permanentand lost customers)

Customer satisaction index

Percent o total revenues o 5 largest customers

Suppliers relationship Percent o suppliers enhancing product quality

Proportion o turnover with 5 largest suppliers

Supplier quality index (1-5 scale)

Co-operation withscientic research

institutes and universities

Amount o assets or applied research

Numbers o relationships

Percentage o students mentioning the enterprise as

an ideal uture employer


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Tese indicators suggest that many types o metrics are possible and may varyacross enterprises. Tere is no unique model or measuring IC, and the proposed

table does not provide a bottom-line indicator o the value o intellectual capital oindustrial enterprises in Serbia. Indicators are not concerned merely with metrics,but always with change activities. It is also well known that there are biases in eachindicators coverage because o type o intangible capital and type o enterprise.

Intellectual capital is a powerul source o sustaining competitive advantage. Imanagers learn to measure the value o IC they could more accurately measure andmanage their organisations competitive position (Kaplan and Norton, 2004:52).

Measuring IC is not a goal in itsel. Te main purpose o measuring IC is to link itto value creation. It is necessary to conceptualize the strategic model that bridges avision- and values-based strategy with the IC perspective, and one important toolis the strategy map (Rylander and Peppard, 2003:318).

Developing the strategy map was an iterative process that built on inputs rom theobserved top managers. 41 interviewed top managers participated in this process.Te starting point was a presentation made to the top management teams, whichdescribed relevant results rom the empirical study o their enterprises. Te most

eective eedback came during the discussions ollowing these presentations. Tetop management teams then developed and rened a statement o values, whichwere analysed according to requency and ormulated in a strategy map or theaverage enterprise in the sample (see gure 1).

Most businesses will want to put the nancial perspective at the top, as their ultimateobjective is to satisy shareholders by generating a decent return. Te ollowingour nancial goals were most requent: achieving revenue target, increase assetutilization, selling cost reduction, and manuacturing cost reduction.

Under relational capital, we ocused on the critical importance o basing activitieson a deep understanding o customer needs, based on knowledge and sharinginormation. According to results o empirical research, top managers thoughtconsumers most appreciated the quality o the observed enterprises products.Tereore this is their rst goal, ollowed by: adequate price, sustaining a positiveimage, and urther development o customer relationships. Tis is in line withresults o empirical research in domain relational capital.


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Figure 1. Strategy map or average industrial enterprise in sample

Regarding structural capital, in order to compose a strategy map top managersneed to create a report that contains relevant organisational characteristics (e.g.culture, leadership, teamwork, communications etc.), strategic measures similarto indicators in table 2, and target values. Participant top managers identiedthe ollowing goals: optimization o supply chain process, introduction o newproducts, actively seeking partnership, and increased understanding o assets.


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Overall assessment ohuman capitalmay embody links to operations management,customer management, innovation, and the regulatory and social dimension. In

addition, we proposed that participating top managers should re-examine targetvalues or each human capital category which managers identied as part othe impact o human capital on business perormance (particularly efciency).Tis suggestion is in line with relevant literature in the eld o IC. Employeesexpect realistic rewards or their eorts: career and development opportunities.Accordingly participating top managers most requently proposed the ollowinggoals: improving knowledge management in the organisation, developingemployee and management skills, introducing reward or innovations, anddeveloping leadership capability and organisation culture. Tese were identied

decits in the observed enterprises.

Intellectual capital is the oundation o every enterprises strategy. Te measurementand management o IC play a vital role in transorming an enterprise into astrategy-ocused organisation (Kaplan and Norton, 2004:63).

Te main condition or sustaining competitive advantage is eective measuremento intellectual capital and management practices that aect employeesperormance.

6. COnCluDIng REmARKS

Te results show that human capital is more important than the other twocategories o intellectual capital. Te observed top managers selected employeeefciency as the primary key inuencing actor o human capital in Serbianindustry. Expertise, innovativeness, education, and knowledge-sharing were notconsidered key. op managers were not sufciently aware that innovation and

long-lie learning are the ultimate tools or uture business success. Tereore,they do not invest in proessional development, which could be one o the mainreasons or low competitiveness.

In addition, the results show that product/process innovation development, aswell as R&D, were not seen as key inuencing actors in structural capital. Te keyimportance o innovation and management initiatives or promoting innovationwas not recognized. Tis results not only in the low market competitiveness oSerbian industrial enterprise but o the Serbian industry as a whole.


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In the observed enterprises relational capital was based on customer loyalty.op managers were aware o current and missing knowledge that is important

to generate new knowledge and knowledge implementation, but they rely onthe business partner relationship. Co-operation with universities and researchinstitutes are neglected.

Te primary research objective was not to identiy precise IC measures orindividual enterprises, but to look at organisational IC rom a broad perspective. Inother words, the goal was to identiy specic eatures and dene general measuresthat are applicable to Serbian industry. Tese would in turn prescribe applicationso IC reporting and management in Serbian industry and enable enterprises

within this sector to compare their perormance rom the perspective o IC.

Identication o key inuencing actors and specic eatures o IC was not onlyconcentrated on dening relevant IC indicators and IC measuring, but also onstrategy and decision-making, based upon identied strengths and weaknesses oIC. Te process o selecting relevant IC indicators and dening the model or ICmeasuring in Serbian industry presents an opportunity or enterprises within thissector to assess their IC and integrate the ndings into their IC strategies.

Tis study has several limitations and only represents a rst step in understandingand measuring intellectual capital in Serbian industrial enterprises. Te researchsample is small or generalising results on the sector level. Tere are no enterprisesin industry divisions such as manuacture o electrical machinery and apparatus,o motor vehicles and trailers, or o urniture and related products. Furthermore,measuring intellectual capital requires understanding key inuencing actors:there was some misunderstanding about key inuencing actors o human capitalamong the observed top managers. Te implementation o the dened model(see able 3) and the strategy map (see Figure 1) are limited to the observed 13

industrial enterprises in Serbia, as the survey participants are rm specic. Tesuggested group o indicators should be viewed more as a basis or a generalapplication o IC reporting and management in Serbian industry, rather than anaccurate model or IC measuring.

Te results represent a basis or uture research that would enable industrialenterprises in Serbia to better understand and develop intellectual capital. Futureresearch should expand into all industrial divisions and embody a large sample.Considering the important role o industry or economic development, it is vital orleaders to reconsider the inuence o intellectual capital on business perormance


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Documents

A Strategic Model for Measuring Intellectual Capital