A Layman Guide To ICM

Enterprise Renewal
and
Innovation
A Layman’s guide
to
Intellectual Capital Management
Enterprise Renewal and Innovation:
A Layman’s guide to Intellectual Capital Management
Copyright©2009
By
Manufacturing Enterprise Integration and Innovation Association Limited
Editorial Support
Asia Intellectual Capital Alliance Limited
All right reserved. No part of this book may be reproduced in any
forms or by any means, electronic, mechanical, photocopying,
recording, or otherwise, including information storage and retrieval
systems, without permission in writing from the publisher, except by a
reviewer who may quote brief passages in a review.
Printed in Hong Kong
First Edition
Published by
Manufacturing Enterprise Integration and Innovation Association Limited
Flat B, 15/F., Winsan Tower, 98 Thomson Road, Wanchai, Hong Kong

Contents
Acknowledgments iii
The Publisher iv
The Editor v
Preface vii
Chapter 1 Introduction 1
Chapter 2 Managing Intellectual Capital in Organisations 11
Chapter 3 Intellectual Capital Management Applications 19
Chapter 4 Case Studies 39
Chapter 5 Benefits of Intellectual Capital Management 51
Chapter 6 Concluding Remarks 55
i
ii
Acknowledgments
Manufacturing Enterprise Integration and Innovation

Association (MEIIA) is happy to present you with this
booklet. We would like to express our gratitude to
Professional Services Development Assistance Scheme
(PSDAS) of the Commerce and Economic Development
Bureau of the HKSAR Government for the financial
support that make the publication of this booklet, with
the associated seminar and workshops, possible.
MEIIA would also like to thank Asia Intellectual Capital

Alliance Limited for the editorial work in support of the
publication of this booklet.
Wallenius Wilhelmsen Logistics, Billerud and InterQoS

have been very kind in sharing their experience in
Intellectual Capital Management. A brief description of
their cases appears in Chapter 4.
The Project Steering Committee of MEIIA and a group of

layman serving on the booklet review panel have made a
number of comments and suggestions and these have
been incorporated in the present edition.
iii
The Publisher
Manufacturing Enterprise Integration and Innovation

Association Limited (MEIIA)
MEIIA is founded in November 2006 as a not-for-profit

cross-industry organisation that focuses on integration
and innovation to help enterprises increase their
competitiveness. They believe the key to leverage
technology is the attention to organisation culture,
business process and performance measurement. The
scope should not cover only the enterprise itself but also
the entire supply chain. Their mission is to help
manufacturing companies in Hong Kong to survive and
prosper irrespective of where their plants may locate.
Furthermore, as an information platform in industrial

manufacturing sector, they facilitate manufacturing
enterprises in making use of human resources,
information technology and business plan through
practical experience exchange, which would also
integrate organisational structure, process, technology,
investment and strategic innovation.
iv
The Editor
Asia Intellectual Capital Alliance Limited (AICA)
AICA is founded by a group of Hong Kong and Swedish

Intellectual Capital (IC) practitioners and entrepreneurs.
It is a collaboration of local and overseas angel investors
as well as researchers and developers of Intellectual
Capital Management (ICM) tools and methodologies. Its
founders have experience in orchestrating the release of
hidden values with a number of partners through its
Enterprise Renewal and Innovation (ERI) programme.
The ERI partners of AICA ranging from new start-up to
multi-national companies. AICA helps companies
increase their growth innovation and performance, thus
enhancing their competitiveness.
In addition, AICA aims at assisting companies to

accelerate their business growth through the use of the
most advanced Intellectual Capital Management
methodologies. It works as a business partner and
investor in assisting the newly-formed enterprises in their
development stage, and the well-established companies
in their reorganisation stage to formulate the strategy,
implementation and evaluation.
v
vi
Preface
In March 2009, the Intellectual Property Department, the

Innovation and Technology Commission and the Trade
and Industry Department of the HKSAR Government
jointly launched an Intellectual Capital Management
Consultancy Programme to provide free consultancy
services to enterprises, in particular SMEs, in Hong Kong.
The aim is to help enterprises to gain an understanding of
Intellectual Capital Management and to learn to use
appropriate tools to exploit business opportunities and to
compete more effectively in the market. These kinds of
public sector initiatives to help business to compete using
Intellectual Capital are not new. For example, the
Ministry of Economics, Trade and Industry of Japan,
together with its SME agencies, have been involved in
setting guidelines and in promoting the use of Intellectual
Capital Management amongst SMEs in Japan.
While the Consultancy Programme has been successful

in exposing enterprises to the power of Intellectual
Capital Management, Manufacturing Enterprise
Integration and Innovation Association (MEIIA) has
identified the need to develop a pool of change agents,
business and IT consultants who are knowledgeable in
Intellectual Capital to serve the business community in
vii
Hong Kong. MEIIA therefore applied for funding support
from the Professional Services Development Assistance
Scheme (PSDAS) of the Commerce and Economic
Development Bureau of the HKSAR Government to run a
public seminar and two one-day workshops, entitled
“Enterprise Renewal and Innovation”, to build up such a
pool of Intellectual Capital professionals. Part of the
PSDAS funding also supports the publication of a
layman’s guide to Intellectual Capital Management (this
booklet), as well as a DVD for self-learning of the tools of
Intellectual Capital Management. Both the booklet and
DVD can be obtained from MEIIA.
Companies that have started to adopt Intellectual Capital

Management in their business planning and practices
have found this set of framework and tools extremely
helpful in sharpening their competitive edge and in
protecting their valuable intellectual assets. We hope you
will enjoy reading this book, have fun in your Intellectual
Capital Management journey, and a happy future!
viii
Chapter 1
Introduction
Why Intellectual Capital?
Running a business in an increasingly competitive

economy is not easy, especially after the recent global
credit crunch and financial crisis. While demand may
recover somewhat, corporate buyers and consumers are
increasingly looking for value for money. Investing heavily
in physical resources such as factories, offices, shops or
machinery may not necessarily leads to growth,
above-average earnings and sustainable competitive
advantages. Even before the present crisis, strategies
based on economy of scale many a times cannot compete
with those using open, web 2.0 like supply chain.
Although financial and physical assets are still important,
what helps drive success and create values are
components of intellectual capital such as the right kind
of experience, knowledge and skills; a reputable brand,
strong partnership with suppliers of key materials and
components; an in-depth knowledge of clients and
markets; and a culture of innovation.
Enterprise Renewal and Innovation: A Layman’s guide To ICM 1

Some of the heavy weight
companies in terms of market
capitalisation such as Google,
Microsoft, and Apple
Computers do not have much
physical assets and their
success is derived from their
intellectual capital. Even for
industries that involve
substantial physical assets
such as Tesco and Carrefour of
the supermarket sector, they
derive value from their
physical assets through the
knowledge of where to locate
their stores; the profile of their
local clientele and hence what
and how much goods to stock; and their skill in refilling
their shops at the appropriate time. In another words,
they release values from their physical assets through the
use of their intellectual capital. Without the right kind of
intellectual capital, physical assets are just me-too
commodities that do not confer any uniqueness, and
hence no competitive advantage.
2 Chapter 1 Introduction
Does Intellectual Capital Really Exist?
In modern day economies, people emphasize on the

market capability and capital budgeting aspects of an
organisation such as tangible and financial assets.
However, book value, which acts as an indicator
reflecting the value of tangible and financial assets of a
company, is valued at multiples of times less than its
market capitalisation. The difference in book and market
values comes from Intellectual Capital.
Components of S&P500® Market Capitalisation
Figure 1
Market Capitalisation and Book Value
(Source: “The Power Of Intangible Assets: An Analysis Of The S&P
500®”, Ocean Tomo White Paper, March 2006)

What is Intellectual Capital?
Intellectual Capital is usually intangible. For a typical

organisation, it includes your people, your unique way of
doing things and your business network. These are the
intangibles that give your enterprise its uniqueness and
competitive advantages. These three kinds of intangibles
are commonly referred to as Human Capital (HC),
Structural Capital (SC) and Relational Capital (RC).
HUMAN CAPITAL includes all the experience, skills,

competence and knowledge of people, for which would no
longer be accessible to your enterprise as your employees
walk out of the office at night. Traditionally retaining
Human Capital usually refers to the actions of reducing
turnover rate. Enhancing Human Capital sometimes may
associate with staff development programmes. Under this
Intellectual Capital framework as discussed in the
following chapters, there are other means of developing
and releasing values from your human capital.
STRUCTURAL CAPITAL covers many elements such as

business processes, organisational structure, policies,
procedures, culture, etc. In the words of Professor Leif
Edvinsson, it is the asset that remains when the
employees have gone home for the day. You may own the
Structural Capital of your company, but that is hardly
the case for Human Capital.
RELATIONAL CAPITAL refers to your business

relationships with any outside person or organisation. It
includes customers, suppliers, stakeholders, brand
image, product and service reputation, and many others.
It is volatile and not under your control, but when
managed carefully you can make use of these external
resources and turn them into economic values.

Figure 2
Three Kinds of Intellectual Capital with Examples
Evolution of Intellectual Capital Management
One of the first attempts in developing a framework for

intellectual capital management was made by Professor
Karl-Erik Sveiby some 20 years ago. Professor Sveiby
proposed the theory of measuring knowledge capital
and further categorised it into customer, individual
and structural capitals. In the 1990s, Mr. Thomas
Stewart coined the phrase and used it in the cover
story of Fortune. At about the same time, Professor Leif
Edvinsson developed an intellectual capital management
system for use at Skandia AFS, a Swedish insurance
company. Skandia AFS published the world’s first
intellectual capital report in 1995.
Since the late 20th century, much research and

development has been conducted in the field of
intellectual capital management, especially in Europe.
Individual national approaches to intellectual capital
management have been developed. Up to now, there are
no common standards to measure and manage
intellectual capital.

RICARDIS (a project commissioned by EC between
January 2006 and December 2007) was one of such
projects in Europe, for which the aim was to standardise
intellectual capital management methods in the
European region. Another project is InCaS. InCaS was
launched in 2007, addressing the issues learnt from a
German Wissensbilanze project (started in 2004 that
resulted in an open intellectual capital management
software) and finally came up with a guideline for
preparing intellectual capital statement.
In the Asian Pacific region, the intellectual capital
management emerged from South Korea, Malaysia, China,
Japan, as well as in Australia. For example, the Ministry
of Economy, Trade and Industry, Japan (METI) published
the guideline for intellectual assets management and
disclosure in 2005, and had extended the scope of work
to cover intangible asset-based financing.
The management of intellectual capital seems to have

extended to the national level recently. The search for
effective approaches to intellectual capital measurement
is still evolving, so is the research into a more dynamic
and eco method of value creation.

Chapter 2
Managing Intellectual Capital in Organisations
Searching for Intellectual Capital in a Company
Searching for intellectual capital is not as easy as

searching for financial figures. There is no “currency” for
intellectual capital like the monetary unit in dollar sign.
Intellectual capital is hard to be identified and measured,
whether it is in the form of ideas, diagrams or procedures,
except in the form of Intellectual Property such as patents,
trademarks or copyrights for which that could be
quantified. It takes time to set up measurement and
reporting systems, as well as putting IT systems in place
to facilitate data collection.

Before implementing any intellectual capital
management programme, many companies may choose
to conduct an exercise to uncover and measure the
performance of existing intellectual capital. In layman
terms, most companies prefer to conduct a “health check”
to unveil whether or not its business objectives and
strategies are well supported by its human capital,
structural capital and relational capital. The
measurement results will then be consolidated in a
written document, either in the form of a report or a
statement. The health check exercises in general cover
the following elements:
Taking a snapshot of the current business

environment
Identifying the growth constraints under the current

intellectual capital portfolio (i.e. the distribution of
human, structural, and relational capitals)
Determining the political and cultural landscape for

intellectual capital management implementation
Studying the desired business environment so as to

deploy the best combination of tools for a change
campaign
12 Chapter 2 Managing IC in Organisations

Start the Work by Identifying your Intellectual Capital
The first step requires identifying your intellectual capital.

It can be done through conducting surveys, interviews or
facilitating workshops. It is always helpful to create a
template and use it to search for the diversified intangible
resources of the company. The template has to be
developed based on:
(1) The core value adding processes

(2) The mission and strategic objectives of the company
The information collected

through this process sets
the foundation and serves
as the indicators to
measure and map out
the value of intellectual
capital.

Assessing Intellectual Capital
It is difficult to quantify intellectual capital. Taking

innovation as an example, it is almost impossible (or
impractical) to articulate the value-add created in
brainstorming sessions and knowledge café, although it
is well recognized that innovation is substantially created
through these kinds of networking activities. Even if data
is collected on the number of brainstorming sessions held
last year, it cannot totally reflect how “innovative” it is.
Measuring intellectual capital is not merely a “counting”
exercise. It is a relative and contextual exercise within the
business environment of the company.
You should answer the following questions when you

assess the value of intellectual capital:
How important are the intellectual capital

components to your core business? It could be a
relative measure ranking the importance among the
various components.
The performance of this intellectual capital

component in the company. You should invite the
employees to grade it on a scale.

If you take these two dimensions and perform a gap
analysis, you will have a clear picture on how you should
prioritise all your intellectual capital management
activities.
Importance Performance
1 = not at all 1 = very bad
important 10 = very good
10 = very
important
Protecting Intellectual Property 8 7
Satisfying industrial needs 3 5
Generating creative ideas 9 5
Linking up various industrial

3 3
sectors
Capturing lessons learnt from
2 3
projects
Knowledge sharing among
7 2
divisions
Documenting operational
5 8
procedures
Publications and white papers 2 7
New product development 9 2
Figure 3
Example – Assessing the Importance of Intellectual Capital Components

Analysing the Value of Intellectual Capital
to the Enterprise
At the end of the above exercise, you will see that an

enterprise would have a wide range of intellectual capital,
and yet not all components of the intellectual capital
would contribute to the value and competitiveness of the
company. This is because many components of
intellectual capital have been developed or acquired by
the enterprise in support of its stated strategic intent in
the form of Mission, Vision and Value Contribution
statements. In the course of running a business, the
operation will usually lead to a number of intellectual
capital components that the enterprise may not put to
immediate use. One of the aims of the present analysis
exercise is to identify how the various intellectual capital
components that the executives believe are important
contribute to the value-creation process of the company.
Another angle of analysis is to note how the various

intellectual capital components work together,
reinforcing each other. Again taking the case of a
reputable supermarket, its brand name is usually
reinforced by an efficient distribution network, its
supplier relationship and its in-depth knowledge of local
clientele, if it has them. On the other hand, if a weakness

is developed in any one of the above components and the
decay is not arrested in time, the brand name of the
supermarket will suffer. One may remember some years
ago how one of the so-called Big Five accounting firms
has its brand name value disappeared overnight when it
has been found not stating the irregularities in the
audited account of one of the world’s largest
multi-national companies.
It is common to conduct the analysis at three levels. At

the top level, it is necessary to re-visit the Mission, Vision
and Value Proposition statements of the enterprise, and
clarify what values it wants to bring to its various
stakeholders. At the operational level, it is useful to
identify the various programmes of activities that the
enterprise pursues in order to deliver its intended values.
At the outcome level, it is sometimes useful to categorise
the various results in short, medium and long terms, and
find out how the enterprise is doing, as well as should be
doing. Needless to say, many senior executives find even
such an exercise extremely helpful in clarifying and
communicating their visions, as well as to understand
what has been missing from their enterprise.

The next step is then to identify how the various
intellectual capital components contribute to the
performance and value of the enterprise at these three
levels. The framework of the 3 kinds of intellectual capital
has found to be very helpful here. Not only the actual
components of the intellectual capital are identified, but
it is also possible to see how these components interact to
create value for the enterprise.
At this point some enterprises cannot wait to tell the

world the values their companies stand for, and publish
reports that cover all their above findings. Alternatively
some companies may wish to publish reports to specific
groups of stakeholders, emphasising why the enterprises
should be their number one choice in achieving and
delivering the stated values.
Depending on the business situation of the enterprise,

some may choose to take a defensive stance and would
like to find out how they could protect their intellectual
capital. Some may be more aggressive in wanting to find
out how they can expand or diversify their business, and
in some extreme situations, may wish to embark on a new
business model altogether. Some examples of these are
given in the following chapters.

Chapter 3
Intellectual Capital Management Applications
Consider the following scenario. You are running a

low-cost airline that flies short to medium flights. You
already have a customer base of a few million passengers
and are adding half a million more passengers a year. The
economic climate has just gone into a downturn and the
major airlines are now offering hefty discounts that
match your offerings. Customers are expecting even lower
airfares if they are to fly with you. Your operations are no
longer profitable and you wonder what needs to be done.

You know you cannot compete with the major airlines on
financial nor physical assets, even though their low
airfare policy will not last for more than a year. Having
learned about intellectual capital management, you start
to analyse what you have:
Human Capital: You have your pilots and crew, ground

staff, maintenance people and your management team.
They are good but you have difficulties in attracting the
top talents because of your low-cost structure and image.
Structural Capital: Again you have good procedures,

corporate culture and your unique way of doing things.
Moving further in the direction of cost-cutting, however,
may be counter-productive.
Relational Capital: Nothing outstanding here except

your customer base. It has been growing at a rate much
faster than the competition. Can you capitalise (that is
turning this asset into money) on this?
One source of innovation is to look at what is happening

in other sectors of industry and see if it can be applied to
your own situation. You are fully aware that Google has
replaced Microsoft as the company with the highest
market capitalisation. The business model of an
20 Chapter 3 ICM Applications

“internet” company is to secure as many “eye balls” as
possible through free services, and then charge other
parties for the access to these “eye balls”. Why not turn
your company into an “internet” airline and fly the
passengers free of charge, but charge them for anything
extra, and charge any interested parties for the access to
these passengers?
One airline has done exactly this during one of the

previous (not the present) downturn in economy. People
fly for free. Ticketing, if done online and with online
check-in without bags, can be as low as HK$40 for a one
and a half hour flight. Seats are free seating. Passengers
will have to pre-pay for the bags they want to check-in,
and the heavier the bags the more they have to pay. Bags
exceeding the prepaid limit will attract much higher fees.
Needless to say passengers will have to pay for the
refreshment on board, and without business class,
passengers can pre-pay for the express check-in service.
All the above transactions are priced on a cost-plus basis,

and although the profit for each transaction is quite small,
the profit to the company is still substantial when you are
talking about millions of passengers. The main income,
however, is from “selling” the Customer Capital to
interested parties. For instance, the airline asks the

out-of-the-way airports to bid for the flights to land and
take off from there. After all, airports are in the business
of renting out spaces to aircraft maintenance companies,
catering companies, airline services companies and
shops. This airline would ask the airports: “how much
would millions of passengers a year worth to you?”
Similarly fast-food companies have to bid for the right to
sell their food on board, just like supermarkets would
charge for their premium shelf space in their stores.
The business model has now changed to capitalising the

Customer Capital of the airline, and this leads readily to
operational risk management. The main operational risk,
of course, is how can the airline ensure the customer
capital keeps growing? Having free flights would ensure
that the potential customer pool could be limitless. What
are the factors that would turn passengers away even
when the flights are basically for free?
The company has identified four main factors. They are

on-time flights, few flight cancellations, nearly no bag
losses, and being a clean and environmental friendly
airline. While it may be more cost effective to build such
an airline that is based on customer capital by
outsourcing everything except for the on-line ticketing
service, the airline choose instead to own its aircrafts, its

pilot and crew and its maintenance team to make sure
that it can deliver the four key performance factors
identified above. In fact, it has a policy of not flying any
aircrafts that are more than 5 years old.
The results?
The airline expects to carry 66 million passengers in
2009/2010 and growing at 15% a year. Even during the
present financial tsunami, the company remains profitable
every year in the past years. You may wonder which airline
it is, but this is not important. The above analysis is neither
to promote this airline, nor to say that this is the best
business model for an airline. The analysis is just to show
how Intellectual Capital Management can help enterprises
renew themselves through innovation, how opportunities for
growth can be identified, and how the associated risks can
be managed. In such cases of enterprise renewal and
transformation, invariably the management has to develop
new structural capital that in turn needs to be support by
information technology. As no two companies would follow
the same path to enterprise renewal, there is no prescriptive
model as to how IT systems are to be deployed. It will be up
to the reader to propose and determine how IT can be
deployed in support of enterprise renewal and innovation.

Innovation Management
For an enterprise to renew itself, it has to innovate either

its business model, ways of doing things, or its product or
service offerings, or all of the above. Many people agree
that without innovation, an enterprise cannot survive
under the present business environment. Many
consumer products would have product life cycles of no
more than 6 months (consider how soon your mobile
phone would have gone out of fashion); many service
companies have to come up with myriad of services just
to cater for the needs of their customers (think of the
number of insurance products on offer).

Innovation should not be confused with invention or
Research and Development (R&D). The nature of
invention and R&D is to bring into being concepts or
things that do not exist before. Invention, on the other
hand, is to bring out new applications based on existing
technologies, or to deploy, in new areas, applications that
are originally developed for some other areas.
Why is innovation important? In a knowledge-based

economy, knowledge has become the prime raw resources
in every product or service on offer. A me-too product or
service has very little value. But how do you turn the raw
knowledge resources into economic value? Apparently
innovation is the main management process that adds
and extracts value from knowledge. And this is true
whether innovation is to find a way to do things
differently so as to improve internal productivity, or to
come up with new products or services.
The key operative word here is that innovation is a

process, and processes have to be managed. Again many
people confused innovation with creativity. Yet creativity
is just one of the steps of innovation. Studies have been
made to understand the process of new product
development (NPD), and a typical NPD process has the
following steps:

Idea Generation,
Concept Development,
Feasibility Assessment,
Prototype or Pilot Demonstration,
Market Testing, and
Commercialisation
We may consider the case of cooking. Coming up with new

seasoning materials such as monosodium glutamate (MSG 味精)
or breeding cattle in a special way to yield fillet of beef that has a
special flavour or texture can be the result of invention or R&D.
Combining different food preparation techniques, seasoning
ingredients, and ways of cooking to create new dishes would be
the result of innovation.
One can also visualise how intellectual capital management

could be applied to a restaurant, say. The ways of cutting or
grinding or smashing raw food are commonly known and can be
standardised. The same could be said of the ways of cooking
such as boil, steam, stir fry, deep fry and broil, etc, and the list of
seasoning. These could be standardised and become one’s
structural capital. Who is good at preparing or cooking which
type of food can also be documented and become one’s human
capital. And which supplier can be relied upon to deliver fish,
meat or vegetable at which grade of quality would then form part
of the relational capital. Creating new dishes, or innovation, is
then a matter of combining the different structural, human and
relational capital to yield a desired result.

Traditionally the NPD is the responsibility of the R&D
department. Using the ICM framework, it can be easily
seen that one can make use of the three kinds of
Intellectual Capital to help with each of the NPD process
steps. Technically, innovation can be outside the confines
of the R&D department. As enterprises are under
pressure to innovate, there are strong incentives to
involve as many parties as possible in innovation,
disregard of department and ranks within the enterprise,
and even involving outside stakeholders. This is process
commonly referred to as Open Innovation that can be
backed up by Web 2.0 technology.
Kermian Al-Ali was the first to apply intellectual capital

management to innovation management in 2003, proposing
that human capital and relational capital outside the R&D
department should be engaged in innovation (Comprehensive
Intellectual Capital Management: Step-by-Step, John Wiley &
Son, Inc. 2003). The first book on Open Innovation (HW
Chesbrough, Open Innovation: The New Imperative for
Creating and Profiting from Technology, Harvard Business
School Press, 2003) was published in the same year. In 2004,
Tim O’Reilly coined the phrase Web 2.0 during a brain
storming session in a conference on internet technology.

ASML is a Dutch company making production equipment
for wafer fabrication, or the manufacture of integrated
circuits. ASML holds more than 52% shares of ASM
Pacific, a company making production equipment for the
packaging of integrated circuits that is publicly listed on
the main board of HKEx. One of the wafer fabrication
equipment is called the stepper. In 1990 ASML had less
than 10% of the market, while Canon and Nikon, both
from Japan, dominated the steppers business. Yet today
ASML controls 65%. How did they do it?
Starting in 1990, ASML considered itself to be too small

to compete directly with Nikon and Canon, with both
companies doing everything in-house. Instead, ASML
redesigned their products using a modular approach, and
farmed out the development and manufacture of these
modules to outside specialists. For instance, the
precision lens system was developed and made by Carl
Zeiss, a German company. Just focusing on system
design and integration, ASML was able to innovate faster
than the competition. ASML also took a more open
approach to maintenance. If a stepper breaks down, the
two Japanese companies would send an army of
engineers on site and put a tent over the equipment so
that nobody can see what they do. ASML would take the
opposite approach and showed customers the problem

and how it could be fixed. In the process, it allowed ASML
to collect users’ feedback on many aspects of their
steppers that in turn spurred further innovation.
Intellectual Property Management
Intellectual property (IP) is usually associated with

patents. In the field of Intellectual Capital, besides
patents, IP also refers to trademarks, copyrights, trade
secrets and even brands (brand management will be
covered in one of the following sections).
Many companies in Hong Kong, large enterprises

included, tend to ignore IPs and their management
usually consider them irrelevant to their businesses. Yet
in these days of globalisation and knowledge-based
economies, one can easily infringe upon the intellectual
properties of others, even for OEM manufacturers.
Alternatively many companies miss out on the
opportunity to commercialise their intellectual properties
that may lead to the renewal of their businesses and
enterprises.

A business has to take both the offensive and defensive
views towards the issue of infringement of Intellectual
Properties. There are at least three strategies that one can
consider. They are Encirclement, Reinforcement and
Mapping. In the case of patents, Encirclement means
filing patents to barricade a major patent filed by one of
your competitors that could adversely impact your
business. The key is to file patents that improve upon
your competitors’ patent, or that extend the use of the
original patent in associated application areas. The
competitor will soon discover that it cannot make any
improvement nor apply it to new application areas
without infringing your patents. Encirclement, if
successful, would enhance your bargaining power in
forging IP-based transactions with the market leader for a
cross-license agreement or even a joint venture.
Reinforcement is the strategy to pre-empt the competition
in encircling your primary patent. You develop a set of
supporting patents that represent improvement in

technology or extension in application areas before your
competitors do so. Mapping is a strategy to search for
patent space that has not been occupied by the
competition. The aim is to create a new business area
using platform innovations that allows you to set the
rules of the game and define industrial standards.
These three strategies also apply to trademarks,

copyrights and trade secrets. In the cosmetic industry,
say, a company may map out a new business area in the
form of whitening products. It may choose to reinforce
this with a range of trademark products with different
degree of whitening or for different skin complexion, and
its competitors will certainly bring out their own similar
trademark whitening products in encirclement. The case
of copyrights is an interesting one. Copyrights protect the
ways ideas are expressed but not the ideas themselves.
Without copying the original text or visual images, one
can express the same ideas in another form in
Encirclement or in Reinforcement. Trade secrets are by
definition proprietary knowledge not made public.
Properly documented and dated, trade secrets may help
prove that you are not in infringement of your
competitors if yours predate your competitors’ patents. In
this respect, the three strategies of encirclement,
reinforcement and mapping also apply to trade secrets.

Intellectual Properties can be commercialised by a
number of means, including technology transfer,
licensing, franchising, merchandising and copyrights
(publishing or digital rights). An enterprise may adopt a
passive, reactive or proactive stance towards
commercialisation of intellectual property rights,
depending on the nature and status of the IP. When the IP
is still under development and of little perceived value,
the company may wish to take a passive approach. When
the IP is fairly well developed but is considered to be of
core value to the business, the company may take a
reactive role and only consider commercialising it after
the company has reaped the main benefit from the IP, or
when forced to do so by market or government. A
company may take a proactive approach towards
commercialisation of its IP if it is considered to be
non-core to the company’s business, or that some
application areas covered by the IP are unlikely to be
exploited by the company in the near term due to lack of
resources or other reasons.

Branding Management
Branding is not simply the naming of a company or a

product. It is a battle for the mind of the consumers (Al
Ries and Jack Trout). It is about making and fulfilling
promises and winning consumers’ hearts. This is
particularly true in a knowledge-based economy, where
most products and services from different vendors are
very similar in terms of functionality, quality and price.
The emotional value conveyed by the brands is now the
final battleground where customers are won or lost.
Branding is important not only for products or services
that are sold directly to consumers, but also for B2B
businesses.
Again, the emotional value of a brand is not merely the

invention of a beautiful and power slogan. Which
emotional value to adopt has to be heavily researched,
selected, and designed into the products and service so as
to create the desired users experience. This calls for a
good capability to understand markets and target
customers. But which emotional value to adopt, and how
to create the necessary users experience would require a
good understanding and management of one’s
intellectual capital.

A professional service company has difficulties not in
creating sales enquiries, but in persuading their prospective
clients in accepting the level of their professional fees. Based
on ICM framework, the company comes up with a report on
their Intellectual Capital that not only states their mission,
vision and their organisational strengths, but also explains
their unique way of combining their various components of IC
in the creation of client values. In fact, the company develops
a set of computer templates that enables them to come up
with different versions of Intellectual Capital reports that
match the different value expectation of their clients. In
addition, the typical report contains a section on how the
company can still deliver excellent value to customers as
compared to the competition even when the business
environment has changed. The company has found that in
giving Intellectual Capital reports to their prospective clients,
in which the value creation and risk management processes
are described in some detail, saves them a lot of time and
resources in the price haggling exercises with their
prospective clients.

Human Resources Management
Human Resources Management (HRM) is term introduced

into Hong Kong in the 1960s by American companies, and
has by now completely replaced the old British
terminology of Personnel Management or Personnel
Department. This is a move in the right direction,
signifying that people constitute one of the hidden wealth
that an enterprise can tap into to create business results.
Yet many companies still treat their human resources unit
as operational cost centres that exist just to ensure the
compliance with the Labour Ordinance. That some
companies have now called their HR function as Human
Capital Department has not changed the situation. HR
function is still considered operational and not strategic,
not one that can help create value for the company.
Intellectual Capital Management can provide the

framework and tools for HR people to work with senior
management on business issues from a strategic view
point, by releasing values from their human capital,
thereby generating more business results for their
companies. On the other hand, HR people can use
intellectual capital management defensively to help
enterprises to prevent the possible loss of skills,
knowledge and experience to limit operational risks.

Traditionally HRM would approach the subject of
releasing hidden wealth from their staff members by
creating an attractive compensation scheme and a better
working environment and culture so that staff members
can become “fired-up”, enthusiastically contributing their
skills and talents to the creation of enterprise wealth.
This approach may gain some degree of acceptance in
enterprises that are managed by professional managers,
but to owner-bosses these HR initiatives will incur extra
costs without any quantifiable financial return.

In one design house with more than 200 professional staff,
they have an issue in their compensation scheme and in
putting their staff to work in teams. All professional staff are
highly talented and artistic, with an artist-attitude to match.
Each professional staff considered themselves to be the best,
and wonder why some of their co-workers are paid more.
They also felt bitter that they are not assigned to some of the
projects that they prefer.
With the help of external consultants, the design house adopts

the intellectual capital management framework and evaluated
their human resources holistically, including what to remain in
people as human capital, what to put down as structural
capital (so that junior staff members can be trained and take
up these activities) and what relational capital they have and
what (including soft skill) need to be further developed. The
consultants help come up with a two dimensional matrix
consisting of a list of skill inventories with their corresponding
skill maturity levels. The human capital inventory is
computerized and staff can enter their profile and have it
reviewed by their peers, all done online. With the gradual
acceptance of the system, the design house can now channel
most of their energy and resources in serving their clients and
developing their business.

The use of intellectual capital management can also help
HR to limit some of the operational risks associated with
people. For instance, an enterprise may suffer daily
losses in intellectual capital through staff retirement and
resignation, if nothing is done to arrest the situation.
Again, intellectual capital management can provide a
comprehensive framework for HR to come up with an
intellectual capital map, listing the various intellectual
capital components that are essential to an enterprise,
maybe even down to departmental or process levels.
Based on this intellectual capital map HR can then
develop various strategies in retaining the various
intellectual capital components with the enterprise.

Chapter 4
Case Studies
Wallenius Wilhemsen Logistics
Wallenius Wilhemsen Logistics (WWL) is a Norwegian

company that positions itself as a provider of global
factory-to-dealer transport solutions for the automotive,
agricultural and construction equipment industries. The
company handles about 3 million vehicles and equipment
each year.

Long before 2004, the company noticed that the major
group of its customers, the automotive industry, was
getting more and more concerned about environmental
issues. The auto manufacturers not only started
researching and building green cars, they also began to
ask their suppliers questions about various
environmental issues. The logistics companies, being big
consumers of fossil fuel with heavy carbon emission, were
the main targets. WWL sensed that its automotive clients
could not claim to be green manufacturers even if they
could come up with green cars and manufacturing
processes with low emission, if the distribution channel
they used was polluting the environment. The logistics of
transporting the vehicles from factory to dealer would
have too big a carbon footprint.
WWL itself was also very environmental conscious, and it

also believed that being a green company could help it
gain more businesses from like-minded clients. So WWL
appointed a team leader knowledgeable in Intellectual
Capital Management to come up with a solution. After
studying the various intellectual capital, the team leader
believed WWL had sufficient operational knowledge to
specify the design of a zero-emission, ocean-going, roll-on
roll-off vessel for the transport of automotives. The team
leader also believed that the human and relational capital
40 Chapter 4 Case Studies

of WWL combined with the team leader would be
sufficient to assemble a design team of naval architects,
energy conservation specialists and designers to study
how a zero-emission vessel could be built. The concept
design work began in 2004 and has been completed. The
detailed design has been on going, with the target date of
2025 being the year of the launch of the vessel.
Scaled down models of the new vessel have been built

based on the conceptual design. This new vessel has met
three major design challenges:
1. The vessel should not use fossil fuel at all. It will be

powered by solar, wind and wave energy alone,
supported by a number of energy generators or
converters including fuel cell. The vessel will have zero
carbon emission.
2. The cargo capacity should not be sacrificed because of

environmental concerns. The conceptual design
comes up with a cargo hold of 85,000 m2, roughly the
size of 14 football fields and up to 50% more space
than modern car carriers.
3. The vessel should be friendly to the ocean. The

International Marine Organisation has identified the

ballast water released by ships as one of the 4 major
threats to the world’s oceans. By adopting a special
hull design and doing away with stern propeller and
rudder, the new vessel has no need of ballast water.
With the construction of the model of the new vessel,

WWL has collected a total of 9 wins and nominations for a
broad range of environmental awards. The scaled models
also help WWL visualise its commitment to the
environment, demonstrating its capabilities in innovation
and management of complex projects. The scale models
also generated a lot of publicity that in dollar terms worth
more than the cost of the conceptual design. This
exercise helps the company to achieve a high public
profile, and as a result generate a number of new
business opportunities.

Billerud
Billerud is a Swedish company providing packaging paper

and sustainable packaging solutions. The high quality
packaging paper is produced from primary fibres that
comes from controlled wood. Part of the wood supply
furthermore has its traceability certified according to
PEFC and FSC. One line of Billerud’s product offering is
medical packaging paper, including those with microbial
barrier properties. This kind of paper has the ability to
withstand different sterilisation methods that the paper
has to be exposed to as medical packages, and after
sterilisation has the ability to guarantee the sterility of
the package right up to the time they are used.

While Billerud manufactures high quality packaging
paper, the company is always looking into new
possibilities to increase the value of the company
offering. Therefore they commissioned a study, and with
reference to intellectual capital management, they found
that they can generate a higher value from their products
if they can assist their customers to come up with
innovative products and packaging that help their
customers to expand and accelerate business growth. For
example, with proper design and choice of materials,
paper boxes can be designed so that a box of fresh food
such as fresh tomatoes can be put on freight without
suffering any damages during transit due to packaging.
This can represent a cost saving of as much as 5%. In
addition, the paper material has good runability and
printability, so that the printed packaging materials can
be put on shelves and in shop windows directly without
being wrapped up in printed plastic bags. With the same
packaging used for transit and for display in shops,
Billerud is in a position to help its customers to meet the
increasingly stringent environmental regulations in
packaging now in force in many developed countries.

Based on the intellectual capital management concept,
the study also reveals that potential customers need to be
taught how to make the best use of this new packaging
approach. In other words, new structural capital has to
be developed before the company can expand this
segment of the packaging market. A nine-step process for
the development from new product concept to packaged
product on the store shelf has been developed. This
structural capital typically can cut the time for a food
manufacturer to get a new product on store shelves from
1 – 2 years to 6 – 8 months. As this business does not
constitute the core business of paper making at Billerud,
a new company called Nine TPP (Total Packaging Partner)
AB has been formed as a joint venture with No Picnic, a
design company headquartered in Stockholm, Sweden.
One of Nine TPP’s successful contributions was the
development of a special packaging for one of the world’s
largest mobile phone company based on Billerud’s newly
launched packaging paper FibreForm®. The new paper is
expected to challenge and replace plastic materials in a
number of applications.

Printing Supplies
Printing Suppliers (not its real name) is a Hong Kong

based company founded in the early 1980s, making
consumables for printers. Its product range includes
cartridges for laser and inkjet printers, ribbon, copier
toner, ink, paper, parts, components and materials. This
consumable market has high gross margins, but is
dominated by the printer manufacturers and protected
by numerous patents. The management understands
that to remain in the market, they need to adopt an
aggressive patent strategy.
During the period of August 2004 to May 2005, the

company engaged a semi-government organisation to
train them in the use of TRIZ (Theory of Intensive Problem
Solving), a method that can enhance innovation, achieve
breakthroughs in product design and generate new
intellectual properties. At the end of this 10-month period,
the company filed 35 new patents that overcome
limitations imposed by the 200 patents held by the
competition. Also in 2004, the company introduced its
Product Development Management System. This system
helped the company to capture its inventiveness,
know-how and creativity and transform into unique,

exclusive business assets that are further protected by
intellectual property rights. The system also helped the
company to explore, create, maintain and enforce its IP
rights.
By 2009, the company has registered more than 1,000

patents in China and other parts of the world. In 2008
alone, the company file patents at an average rate of
almost one patent every day. Its IP rights not only allowed
the company to gain market share through product
differentiation and entry into new markets, but also
enabled the company to enjoy additional income streams
in the form of royalty fees.

InterQoS
InterQoS is a semiconductor IP company, a graduate of

the incubation scheme of the Hong Kong Science and
Technology Parks. Capitalising on the emerging market of
mobile multimedia, InterQoS has made breakthrough
innovation in the area of multi-core vector processing,
used to be found only in high-end workstation processors.
Its patent-pending digital signal processor (DSP) core,
called Victorus, is specially designed for the
next-generation mobile video gadgets such as Video iPod,
TV phone, etc.
The company is focusing on mass markets such as

mobile phones and netbooks. Taking an intellectual
capital management approach, it also realises that it can
branch out into other business areas by working with
suitable business partners. Therefore, it has, initially,
started to work with surveillance system design houses to
provide a turnkey solution for the wireless surveillance
market that is a niche market and does not have a
dominant chip provider. After establishing track record in
this market, InterQoS will finally move to the mass
consumer market.

The Hong Kong Science and Technology Parks

Chapter 5
Benefits of Intellectual Capital Management
Intellectual Capital Statements or Reports can help

companies, SMEs in particular, secure financial
investment. According to a European Commission (EC)
report on ‘Reporting intellectual capital to augment
research, development and innovation in SMEs
(RICARDIS)’, when making assessments for funding,
SMEs often fail to articulate their intellectual capital and
how business values are created from their intellectual
capital. Instead, information tends to dwell solely on
financial accounts, not including innovation projects or
management methods. The report argues that this failure
to provide a full picture of business value is one reason
why SMEs find it difficult to raise finance or equity from
banks or investors. In one study of the EC, investors were
asked to generate forecasts for revenue and earnings for
an SME, and come up with their recommendations on the
company stock. The investors were divided into two
groups. One group was given the company’s full annual
report, including the intellectual capital statement, while
the other group was provided with a version of the report
that excludes all non-financial information. The former

group tends to come up with a lower forecast, but is more
likely to invest in the SMEs. The SME Agency of the
Japanese Government also reports that SMEs have
higher rate of success of obtaining financial backing from
their local banks if their applications are backed up by
intellectual capital reports.
The Japanese SME Agency also reports that SMEs find

their intellectual capital reports also help them to recruit
the right people for their jobs. As young graduates have
the tendency to seek employment from large enterprises,
SMEs that publish their intellectual capital reports are
better able to inform young graduates of the nature and
challenges of their businesses, thus enabling them to
compete for the right kind of talents to join their
companies.
Sometimes the intellectual capital report can also help

internal communication. Not everyone inside an
organisation is aware of the full range of intellectual
capital that it possesses. Even seldom can staff,
sometimes even senior staff, explain the ways in which
the enterprise create value for its stakeholders. A good
intellectual capital report can help employees to work in
synchronisation much better than the simple statements
on company mission and vision.
52 Chapter 5 Benefits of ICM

Building a picture or map of one’s intellectual capital and
appropriate navigation tools can help an organisation to
aggressively seek out new business opportunity, to
defensively protect itself by minimizing its operational
risks, and to plan and be prepared for its future. For
instance, through multiplying or combining components
of human capital (e.g. choosing staff members with
certain combination of skills) with structural capital (e.g.
IP or production techniques) and with relational capital
(e.g. different potential client), one can create new
businesses, or optimise existing businesses. Similarly, a
good intellectual capital map can help an organisation to
identify which critical components of their intellectual
capital are likely to disappear from the enterprise.
Knowing what intellectual capital components one has at
one’s disposal and how these components could be
deployed to create value will give management the
confidence in facing the uncertain future.

54 Chapter 5 Benefits of ICM
Chapter 6
Concluding Remarks
Skandia has coined the term “futurize,” to distinguish an

integrated, proactive perception of time from one that
resorts more to scenarios and plan than present action.
No one can predict what the future holds for us. Planning
for the future always has an element of uncertainty. It is
for this reason that the oil company Shell comes up with
the method of scenario planning. Scenario planning has
its limitations. It is an art in conjuring up scenarios that
may bear resemblances with future events. Instead of
scenario planning, one good attribute that can help with
the future is the “sense”. One simple example may
explain what is meant by “sense”. If you are travelling
from A to B, and if you get lost while you are on your way,
you can ask for directions from the local people. They
may tell you to turn left at the next junction, then go
straight for another mile and turn right and so on. If there
is no one around who knows the direction, in that
situation, you will find that it would be very helpful if you
have a sense of direction of where B, your destination, is.

Direction is like your business plan of how you can
achieve your targets in the coming few months. Sense of
direction is what you would need in facing the future.
Knowing your intellectual capital AND how you can

create value from your intellectual capital is the sense of
direction that you need for facing the future. In
investment circles, people talk about business models.
Business models, however, is the result of carefully
designing and choosing the way various components of
intellectual capital are combined or multiplied to create
value. Some people like to collect business models like
they collect cooking recipes. Yet no two businesses are
the same, and you may not have the necessary
ingredients to execute the business model that you like. It
is your knowledge of your intellectual capital and your
skill in creating value from them that gives you
confidence in future. No matter what the future holds,
you will have the confidence that you can always generate
value from your intellectual capital.
Chapter 6 Concluding Remarks 56


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Enterprise Renewal

Manufacturing Enterprise Integration and Innovation Association Limited

Asia Intellectual Capital Alliance Limited

All right reserved. No part of this book may be reproduced in any

forms or by any means, electronic, mechanical, photocopying,

recording, or otherwise, including information storage and retrieval

systems, without permission in writing from the publisher, except by a

reviewer who may quote brief passages in a review.

Printed in Hong Kong

Manufacturing Enterprise Integration and Innovation Association Limited

Flat B, 15/F., Winsan Tower, 98 Thomson Road, Wanchai, Hong Kong

Chapter 2 Managing Intellectual Capital in Organisations 11

Chapter 3 Intellectual Capital Management Applications 19

Chapter 4 Case Studies 39

Chapter 5 Benefits of Intellectual Capital Management 51

Chapter 6 Concluding Remarks 55

Manufacturing Enterprise Integration and Innovation

MEIIA would also like to thank Asia Intellectual Capital

Wallenius Wilhelmsen Logistics, Billerud and InterQoS

The Project Steering Committee of MEIIA and a group of

Manufacturing Enterprise Integration and Innovation

MEIIA is founded in November 2006 as a not-for-profit

Furthermore, as an information platform in industrial

Asia Intellectual Capital Alliance Limited (AICA)

AICA is founded by a group of Hong Kong and Swedish

In addition, AICA aims at assisting companies to

In March 2009, the Intellectual Property Department, the

While the Consultancy Programme has been successful

Companies that have started to adopt Intellectual Capital

Why Intellectual Capital?

Running a business in an increasingly competitive

Enterprise Renewal and Innovation: A Layman’s guide To ICM 1

In modern day economies, people emphasize on the

Components of S&P500® Market Capitalisation

Enterprise Renewal and Innovation: A Layman’s guide To ICM 3

Intellectual Capital is usually intangible. For a typical

HUMAN CAPITAL includes all the experience, skills,

STRUCTURAL CAPITAL covers many elements such as

RELATIONAL CAPITAL refers to your business

Enterprise Renewal and Innovation: A Layman’s guide To ICM 5

One of the first attempts in developing a framework for

Since the late 20th century, much research and

Enterprise Renewal and Innovation: A Layman’s guide To ICM 7

The management of intellectual capital seems to have

Enterprise Renewal and Innovation: A Layman’s guide To ICM 9

Searching for Intellectual Capital in a Company

Searching for intellectual capital is not as easy as

Enterprise Renewal and Innovation: A Layman’s guide To ICM 11

Taking a snapshot of the current business

Identifying the growth constraints under the current

Determining the political and cultural landscape for

Studying the desired business environment so as to

12 Chapter 2 Managing IC in Organisations

The first step requires identifying your intellectual capital.

(1) The core value adding processes

The information collected

Enterprise Renewal and Innovation: A Layman’s guide To ICM 13

It is difficult to quantify intellectual capital. Taking

You should answer the following questions when you

How important are the intellectual capital

The performance of this intellectual capital

14 Chapter 2 Managing IC in Organisations