4

Recognizing a Firm’s Intellectual

Assets: Moving beyond a Firm’s
Tangible Resources
McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserve
 4- 3

Learning Objectives

• After reading this chapter, you should have a good

understanding of:
- Why the management of knowledge professionals and
knowledge itself are so critical in today’s organizations.
- The importance of recognizing the interdependence of
attracting, developing and retaining human capital.
- The key role of social capital in leveraging human capital
within and across the firm.
- The importance of social networks in knowledge management
and in promoting career success.
- Why teams are critical in combining and leveraging
knowledge in organizations and how they can be made more
effective.
 4- 4

Learning Objectives

• After reading this chapter, you should have a good

understanding of:
- The vital role of technology in leveraging knowledge and
human capital.
- How technology can help to retain knowledge even when
employees cannot be retained by the organization.
- The challenge of protecting intellectual property and the
importance of a firm’s dynamic capabilities.
- How leveraging human capital is critical to strategy
formulation at the business, corporate, international, and
Internet levels.
 4- 5

Ratio of Market Value to Book Value

for Selected Companies

Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies
 4- 6

The Central Role of Knowledge

in Today’s Economy
• Creation of wealth in a knowledge economy
- Effective management of knowledge workers
- Intellectual capital
- Assets such as
• Reputation
• Employee loyalty and commitment
• Customer relationships
• Company values
• Brand names
• Experience and skills of employees
 4- 7

The Central Role of Knowledge

in Today’s Economy
Intellectual capital = Market value of the firm – Book value of the firm

• How do companies create value in the knowledge-

intensive economy?
- Human capital (individual capabilities, knowledge, skills,
and experience of the company’s employees and managers)
- Social capital (the network of relationships that individuals
have throughout the organization)
- Knowledge
• Explicit knowledge
• Tacit knowledge
 4- 8

Human Capital: The Foundation

of Intellectual Capital

Exhibit 4.2 Human Capital: Three Interdependent Activities

 4- 9

Question

Do you agree with this statement, “hire for attitude,

train for skill”? Explain.
 4- 10

Attracting Human Capital

• Hire for attitude, train for skill

• Emphasis on
- General knowledge and experience
- Social skills
- Values
- Beliefs
- Attitudes
 4- 11

Attracting Human Capital

• Sound recruiting approaches

- Scanning pools of available candidates
- Challenge becomes having the right job candidates, not the
greatest number of them
• Networking
- Current employees may be best source of new ones
- Incentives for referrals
 4- 12

Example

• The top 5 MBA Employers in 2007, according to

Fortune Magazine
1. Google
2. McKinsey & Company
3. Goldman & Sachs
4. Bain & Company
5. Boston Consulting Group

Source: www.fortune.com
 4- 13

Developing Human Capital

• Train and develop at all levels

- Training is not the sole responsibility of the human resource
department
• Encouraging widespread involvement
• Transferring knowledge
• Monitor progress and track development
• Evaluate human capital
- Employees must share knowledge and work together,
collectively, to reach organizational goals
- Firms often use 360-degree evaluation and feedback systems
- Managers’ success cannot compromise the organization’s core
values
 4- 14

360-Degree Leadership Assessment

• Has developed and communicated a clear, simple,

Performance Criteria

customer-focused vision/direction for the

organization.
of “Vision”

• Forward-thinking, stretches horizons, challenges

imaginations.
• Inspires and energizes others to commit to Vision.
Captures minds. Leads by example.
• As appropriate, updates Vision to reflect constant
and accelerating change affecting the business
Ten Characteristics of Leadership
Vision Shared Ownership/Boundary-less
Customer/Quality Focus Team Builder/Empowerment
Integrity Knowledge/Expertise/Intellect
Accountability/Commitment Initiative/Speed
Communication/Influence Global Mind-Set
Adapted from Exhibit 4.4 An Excerpt from General Electric’s 360-Degree Leadership Assessment Chart
Source: Adapted from R. Slater, Get Better or Get Beaten (Burr Ridge, IL: Irwin Professional Publishing, 1994), pp. 152-155.
 4- 15

Retaining Human Capital

• Provide mechanisms that prevent the transfer of

valuable and sensitive information outside the
organization
- Identify with organization’s mission and values
- Strong alliance to organization (strategic intents)
• Challenging work and stimulating environment
 4- 16

Retaining Human Capital

• Financial and Nonfinancial Rewards and Incentives

- Rewards are a vital organizational control mechanism
- However, money may not be the most important reason
why people take or leave jobs
- Exodus of employees can erode a firm’s competitive
advantage
 4- 17

Enhancing Human Capital:

How Diversity Benefits the Organization

1. Cost argument
2. Resource acquisition argument
3. Marketing argument
4. Creativity argument
5. Problem-solving argument
6. System flexibility argument
 4- 18

The Vital Role of Social Capital

• Attraction, development and retention of talent is a

necessary but not sufficient condition for creating
competitive advantage
• Knowledge workers often are more loyal to their
colleagues and profession than to their employer
 4- 19

How Social Capital Helps

Attract and Retain Talent
• Hiring via personal (social) networks
- Some job candidates may bring other talent with them
- Emigration of talent from an organization to form start-up
ventures
- Can provide mechanism for obtaining resources and
information from outside the organization
 4- 20

Microsoft Employees Who Have Left the

Company for Other Businesses

Exhibit 4.6 Microsoft Employees Who Have Left the Company for Other Businesses
Source: Reprinted by permission of the Wall Street Journal, Copyright ©2000 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License number 397221136576.
 4- 21

Knowledge of Social Networks

• Implications that an understanding of social networks

has on one’s career
- Closure
- Bridging relationships
• From an individual’s perspective, social networks
deliver three unique advantages
- Private information
- Access to diverse skill sets
- Power
 4- 22

The Potential Downside of Social Capital

• Groupthink
• Cost of financial resources
• Managerial commitment
 4- 23

Example

• Debunking myths about groupthink in the Old truths for the

new economy from Business Week
- Teams don't have to constantly work together to be
effective.
- Teams should not attempt to avoid conflict.
- Team members are encouraged to work independently to
achieve team goals.
- Conflict is essential to prevent groupthink.

Source: Business Week, Old Truths for the New Economy, November 17, 2000
 4- 24

Using Technology to Leverage

Human Capital and Knowledge
• Sharing knowledge and information
- Conserves resources
- Develops products and services
- Creates new opportunities
• Technology can leverage human capital and knowledge
- Within the organization
- With customers
- With suppliers
 4- 25

Using Technology to Leverage

Human Capital and Knowledge
• Using networks to share information and develop
products and services
- E-mail
- Electronic or Virtual teams
• Enhance speed and effectiveness with which products are
developed
• Can be applied to new business ventures
 4- 26

Using Technology to Leverage

Human Capital and Knowledge
• Codifying knowledge for competitive advantage
- Tacit knowledge
• Personal experience
• Shared only with the consent and participation of the
individual
- Explicit (codified) knowledge
• Can be documented
• Can be widely distributed
• Can be easily replicated
• Can be reused many times at low cost
 4- 27

Question

Which of the following is NOT an advantage of e-

teams?
A) Facilitate communication.
B) They have the potential to acquire a broader range of
human capital.
C) They can be effective in generating social capital.
D) They are less flexible in responding to unanticipated
work challenges.
 4- 28

Creating Value Through Human

Capital, Social Capital, and Technology

Human Capital
Recruiting “Top-Notch” Human Capital

•Does the organization assess attitude and “general make-up” instead of

focusing primarily on skills and background in selecting employees at all
levels?
•How important is creativity and problem solving ability? Are they
properly considered in hiring decisions?
•Do people throughout the organization engage in effective networking
activities to obtain a broad pool of worthy potential employees? Is the
organization creative in such endeavors?

Adapted from Exhibit 4.8 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.
 4- 29

Creating Value Through Human

Capital, Social Capital, and Technology

Human Capital
Enhancing Human Capital through Employee Development
•Does the development and training process inculcate an “organizationwide”
perspective?
•Is there widespread involvement—including top executives—in the preparation
and delivery of training and development programs?
•Is the development of human capital effectively tracked and monitored?
•Are there effective programs for succession at all levels of the organization—
especially the top-most levels?
•Does the firm effectively evaluate its human capital? Is a 360-degree evaluation
used? Why? Why not?
•Are mechanisms in place to assure that a manager’s success does not come at the
cost of compromising the organization’s core values?
Adapted from Exhibit 4.8 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.
 4- 30

Creating Value Through Human

Capital, Social Capital, and Technology

Human Capital
Retaining the Best Employees
•Are there appropriate financial rewards to motivate employees at all levels?
•Do people throughout the organization strongly identify with the organization’s
mission?
•Are employees provided a stimulating and challenging work environment that
fosters professional growth?
•Are valued amenities provided (e.g., flextime, child-care facilities,
telecommuting) that are appropriate given the organization’s mission, strategy, and
how work is accomplished?
•Is the organization continually devising strategies and mechanisms to retain top
performers?

Adapted from Exhibit 4.8 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.
 4- 31

Creating Value Through Human

Capital, Social Capital, and Technology

Social Capital
•Are there positive personal and professional relationships among
employees?
•Is the organization benefiting (or being penalized) by hiring (or by
voluntary turnover) en masse?
•Does an environment of caring and encouragement rather than competition
enhance team performance?
•Do the social networks within the organization have the appropriate level
of closure and bridging relationships?
•Does the organization minimize the adverse effects of excessive social
capital—such as excessive costs and “groupthink”?

Adapted from Exhibit 4.8 Issues to Consider in Creating Value through Human Capital, Social Capital, and Technology
Source: Adapted from G. G. Dess and J. C. Picken, Beyond Productivity (New York: AMACON, 1999), pp. 63-64.
 4- 32

Creating Value Through Human

Capital, Social Capital, and Technology

Technology
•Does the organization effectively use technology to transfer best practices
across the organization?
•Does the organization use technology to leverage both human capital and
knowledge both within the boundaries of the organization as well as
among its suppliers and customers?
•Has the organization used technologies such as e-mail and networks to
develop products and services?
•Has the organization effectively used technology to codify knowledge for
competitive advantage?
•Does the organization try to retain some of the knowledge of employees
when they decide to leave the firm?
 4- 33

The Central Role of Leveraging Human

Capital in Strategy Formulation
• Leveraging human capital and business-level strategy
(Chapter 5)
- Sustainable over time
• Integrate primary and support activities in the firm’s value
chain
• Leveraging human capital and corporate-level strategy
(Chapter 6)
- Manage businesses to create synergy
- Create more value by working together across business
units
 4- 34

The Central Role of Leveraging Human

Capital in Strategy Formulation
• Leveraging human capital and international-level
strategy (Chapter 7)
- Achieve economies of scale
- Adapt to local market needs
- Facilitate the flow of information and knowledge between
business units in different countries
 4- 35

The Central Role of Leveraging Human

Capital in Strategy Formulation
• Leveraging human capital and entrepreneurial
strategies (Chapter 8)
- Create value through technology
- Lower costs
- Enhance customer service
- Improve performance