Performance Measurement from the Intellectual Capital Perspective. A theoretical approach through a groupware-based intranet application E-Book

Vincenz M. Behn

• Herausgeber: GRIN Verlag
• Sprache: Englisch

Veröffentlichungsjahr: 2001

Beschreibung

Diploma Thesis from the year 2000 in the subject Leadership and Human Resources - Miscellaneous, grade: 1 (A), University of Paderborn (Institute for Economics), course: International Business Studies, language: English, abstract: Introduction The transformation from the industrial age to the information age(1) or knowledge society(2) represents a time of great change for business organizations as well as for individuals. Service industries replace manufacturing industries and the traditional factors of production: land, labor, and capital are replaced by intellectual assets as the scarce resources. “If there is one distinguishing feature of the new economy that has developed as a result of powerful forces such as global competition, it is the ascendancy of intellectual capital.”(3) Intellectual capital (IC) and its measurement is the main topic of this research project. The declining importance of physical assets as well as the quest for shareholder value creation have made the performance evaluation of companies that used to be solely based on financial figures inadequate. For information age companies it is essential to value performance beyond quantitative measures.(4) Practitioners like Security Exchange Commissioner (SEC) Steven Wallmann as well as academics like New York University’s Stern School of Business accounting professor Baruch Lev stress the current accounting model’s bias towards physical assets and emphasize the necessity of incorporating non-financial measures to evaluate organizational performance.(5) The Balanced Scorecard (BSC) is a performance management and measurement system that fulfills this criterion. In addition to the traditional Financial Perspective, the BSC measures performance from the Customer Perspective, the Internal Business Process Perspective, and the Learning and Growth Perspective, thereby functioning as a tool to navigate businesses in a competitive environment that is growing more and more complex. The aim of the thesis is to illustrate how the BSC can be used as a strategic management system that places a strong focus on IC and its measurement. Furthermore, it will be analyzed how information technology (IT) can be used to facilitate a BSC and its implementation. [...] ______ 1 Stewart (1997): p. 3 2 Drucker (1996): p. 67 3 Bontis (1998): p. 64 4 Eccles (1991): p. 131 5 Lev (1997): p. 1; Wallman (1997): p. 104

Leseprobe

Table of Content

1 Introduction

2 Strategic Management in the Information Age

Chapter

2.1.1 The Industry-Based View of the Firm

2.1.2 The Resource-Based View of the Firm

2.2 A New Type of Organization.

2.2.1 Characteristics of the New Organization

2.2.2 New Organizational Forms.

2.2.3 New Strategies

2.3 Value Creation in the Information Age

3 Intellectual Capital

3.1 Shortcomings of Traditional Accounting Methods

3.2 Economics of Knowledge-Based Resources

3.3 The Concept of Intellectual Capital.

3.3.1 Human Capital

3.3.2 Structural Capital

3.3.3 Customer Capital

4 Performance Measurement with the Balanced Scorecard.

4.1 Financial Perspective

4.2 Customer Perspective

4.3 Internal Business Process Perspective

4.4 Learning and Growth Perspective.

4.5 The BSC as a Strategic Management System

4.5.1 Cause-and-Effect Relationships.

4.5.2 Implementing a Balanced Scorecard

4.5.2.1 Clarifying and Translating Vision and Strategy

4.5.2.2 Communicating and Linking

4.5.2.3 Planning and Target Setting.

4.5.2.4 Strategic Feedback and Learning.

4.6 A Critical Look at the Balanced Scorecard.

5 Enabling the Balanced Scorecard

5.1 Requirements for an Automated Balanced Scorecard.

5.1.1 Strategic Requirements

5.1.2 Technical Requirements

5.1.3 A Critical Look at Automated Balanced Scorecard Solutions

5.2 NetFicient

5.2.1 NetFicient Add-Ons.

5.2.2 NetFicient Knowledge

5.2.3 eSurvey and NetFicient Project

5.2.4 A Critical Look at NetFicient to Support a Balanced Scorecard.

5.3 Conclusion

6 Outlook

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Performance Measurement from the Intellectual Capital Perspective - Content Figures Figure 1-I - Outline.....................................................................................................3 Figure 2-I - Porter’s Three Generic Strategies .......................................................6 Figure 2-II - Strategic Changes in the Business Environment ...............................8 Figure 2-III - Shifting Strategy Focus.....................................................................12 Figure 3-I - Conceptual Roots of Intellectual Capital ...........................................20 Figure 3-II - Stewart’s Three Columns of Intellectual Capital ............................21 Figure 3-III - Structural Capital .............................................................................26 Figure 3-IV - Buyer-Seller Intimacy as a Reason for IC Growth ........................28 Figure 3-V - Skandia’s Navigator ...........................................................................30 Figure 4-I - The Balanced Scorecard ......................................................................33 Figure 4-II - Core Measures of the Customer Perspective- ..................................36 Figure 4-III - The Internal Business Process Perspective’s Generic Value Chain ............................................................................................................................38 Figure 4-IV - The Learning and Growth Perspective ...........................................39 Figure 4-V - Cause-and-Effect-Relationships........................................................41 Figure 4-VI - The BSC as a Strategic Framework for Action..............................43 Figure 5-I - Systems and IT Development Focus of the BSC ...............................50 Figure 5-II - Enabling the BSC................................................................................51 Figure 5-III - Requirements for an Automated BSC ............................................53 Figure 5-IV - Strategic Requirements.....................................................................54 Figure 5-V - Connecting the BSC to Existing Back-End Systems........................56 Figure 5-VI - Gentia’s Automated BSC Solution ..................................................57 Figure 5-VII - Gentia’s Supplementary CRM Application ..................................58 Figure 5-VIII - Three Phases of the BSC Process..................................................62 Figure 5-IX - Net Ficient Add-Ons..........................................................................64 III

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Performance Measurement from the Intellectual Capital Perspective - Introduction

1 Introduction

The transformation from the industrial age to the information age1or knowledge society2represents a time of great change for business organizations as well as for individuals. Service industries replace manufacturing industries and the traditional factors of production: land, labor, and capital are replaced by intellectual assets as the scarce resources. “If there is one distinguishing feature of the new economy that has developed as a result of powerful forces such as global competition, it is the ascendancy of intellectual capital.”3Intellectual capital (IC) and its measurement is the main topic of this research project. The declining importance of physical assets as well as the quest for shareholder value creation have made the performance evaluation of companies that used to be solely based on financial figures inadequate. For information age companies it is essential to value performance beyond quantitative measures.4Practitioners like Security Exchange Commissioner (SEC) Steven Wallmann as well as academics like New York University’s Stern School of Business accounting professor Baruch Lev stress the current accounting model’s bias towards physical assets and emphasize the necessity of incorporating non-financial measures to evaluate organizational performance.5The Balanced Scorecard (BSC) is a performance management and measurement system that fulfills this criterion. In addition to the traditional Financial Perspective, the BSC measures performance from the Customer Perspective, the Internal Business Process Perspective, and the Learning and Growth Perspective, thereby functioning as a tool to navigate businesses in a competitive environment that is growing more and more complex. The aim of the thesis is to illustrate how the BSC can be used as a strategic management system that places a strong focus on IC and its measurement. Furthermore, it will be analyzed how information technology (IT) can be used to facilitate a BSC and its implementation.

The research project is based on a cooperation between Deutsche Bank AG and the Groupware Competence Center of the University of Paderborn. Along with Lotus Development GmbH, the two cooperation partners developed the product NetFicient, a groupware-based intranet application. NetFicient is marketed by the Deutsche Bank

1Stewart (1997): p. 3

2Drucker (1996): p. 67

3Bontis (1998): p. 64

4Eccles (1991): p. 131

5Lev (1997): p. 1; Wallman (1997): p. 104

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Performance Measurement from the Intellectual Capital Perspective - Introduction

department GTS/Commercial Banking Applications/eCommerce/eCommunities internally as well as externally. The increasing utilization of BSCs was the reason to examine how potential NetFicient customers could benefit from the various NetFicient functions when introducing a BSC.

The paper begins with an introduction to Strategic Management in Chapter 2. It is intended to provide a brief overview of the historical evolution of strategy in management literature. The most important frameworks are going to be mentioned, however, the center of attention are the changes in the competitive environment that organizations have to cope with nowadays. Therefore, an emphasis is placed on the strategic prerequisites companies have to accomplish in order to successfully compete in the ‘new economy’. Besides, the shifting perception about value creation will be briefly illustrated. Chapter 3 will deal with IC. The above mentioned shortcomings of traditional accounting will be explained with a focal point on economics of knowledge-based resources. Furthermore, the IC concept will be illustrated and explained. A case study about Skandia, a Swedish financial services and insurance company will be leading on to the BSC concept, presented in Chapter 4. The potential of the BSC to function as a strategic management system - focusing on performance measurement from the IC perspective by adding non-financial measures to the traditional financial ones - will be examined. In Chapter 5 enabling systems for BSCs will be discussed. On the one hand, automated BSC solutions are going to come under scrutiny and on the other hand it will be assessed how NetFicient can contribute to a BSC process.

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Performance Measurement from the Intellectual Capital Perspective - Introduction

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Performance Measurement from the Intellectual Capital Perspective - Strategic Management

2 Strategic Management in the Information Age

The word strategy has its roots in the Greek language where strategia means generalship (formed from stratos - the army). It is not a coincidence that concepts and theories of corporate strategy or business strategy go back to a military background. Strategic management professors Henry Mintzberg and Brian Quinn even start their book on ‘The Strategy Process’ with a lengthy description of the battle of Chaeronea where Alexander the Great from Macedonia defeated the Athenian and Theban troops in 338 BC by carefully analyzing the strengths and weaknesses of his own troops as well as looking at the troops of his opponents.6Robert M. Grant, another leading researcher on strategic management outlines two similarities between military and business strategy: the distinction between strategy (“the science or art of planning and directing large-scale military movements and operations”7) and tactic (“a plan, procedure, or expedient for promoting a desired end”8). According to Grant tactic is the scheme to win a specific battle while a strategy is the means to win the whole war.9He emphasizes three common characteristics of strategic decisions military as well as business-related:101. They are important. 2. They involve a significant commitment of resources. 3. They are not easily reversible.

Hence, the translation of these rather martial words into the peaceful world of business means that strategy is the ‘battle’ of a company to create a competitive edge in the market. Therefore, companies formulate visions (defined as “view of a realistic, credible, attractive future for the organization, a condition that is better in some important ways than what now exists”11) and mission statements (“a firm’s mission provides a framework for organizing and communicating its basic identity and intentions”12) as a center for their strategy. The underlying goal of any business strategy must be the creation of value (value creation will be treated later on in this chapter) by performing activities different from the competition and therefore

6Mintzberg/Quinn (1991): p. 6

7N.n. (1997): p. 778 (Webster’s Universal College Dictionary)

8N.n. (1997): p. 802 (Webster’s Universal College Dictionary)

9Grant (1998): p. 15

10Grant (1998): p. 15

11Fry/Killing (1995): p. 17 (A vision answers the question: “What do we want our business to look

like in five years from now?” Fry/Killing (1995): p. 14)

12Fry/Killing (1995): p. 17 (A mission gives the answer to: “Why are we in business?” Fry/Killing

(1995): p. 14)

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Performance Measurement from the Intellectual Capital Perspective - Strategic Management

delivering a higher value to the customer. Without activities “a strategy is nothing more than a marketing slogan that will not withstand competition”13Mintzberg/Lampel have identified ten different schools of business strategy formation since 1960 that have been treated in management literature. These schools are reinforcing each other and researchers do not hesitate to stress that strategic management is an evolutionary process. Therefore, it is not possible to address a certain school to a specific event or time.14Nevertheless, it is possible to make a distinction between two perspectives in strategic management that are gaining relevance with the rapid changes currently occurring within the business environment.

Management literature has treated strategic management from two perspectives: The industry-based view.The resource-based view.

As the aspect of strategy will be relevant for chapter four both views will be briefly discussed.

2.1.1 The Industry-Based View of the Firm

In 1980 Michael Porter’s book “Competitive Strategy”, a groundbreaking work on strategic management appeared. According to Porter the strategic focus of a company had to be on the external environment, i.e. the industry a firm was competing in. The essence of his book was the idea that industry competition was driven by five forces (see Appendix 1) and that a company had the possibility to create a competitive advantage in its industry by choosing one of three generic strategies:

13Porter (1996): p. 64

14Mintzberg/Lampel (1999): pp. 21

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Performance Measurement from the Intellectual Capital Perspective - Strategic Management

Choosing overall cost leadership as a strategy a company has to defend its low-cost position by achieving significant economies of scale and the maintaining of a relatively high market share.

The choice to compete on differentiation usually yields above-average returns by establishing, for example, a high brand loyalty and a resulting lower sensitivity to prices.

The focus on a specific market segment or product line creates a defendable market position by serving a narrow target group superior to other competitors. For the information age company this differentiation does not represent an adequate approach anymore as Porter denies that, under normal circumstances, a company can choose more than one of the three generic strategies.16Nowadays, the business environment has significantly changed. Through the World Wide Web (WWW), mobile communications and other technological breakthroughs companies are able to choose more than one of the generic strategies. Computer producer Dell’s built-on-demand strategy17is a good example of a company being able to capitalize on the advantages of mass customization achieving significant economies of scale. In other words Dell can pursue the strategies cost leadership and differentiation simultaneously while still serving the mass market.18Hence, it is not sufficient anymore to solely focus on the external environment of a company as there is an urge to take internal factors into consideration that were neglected before.

15Porter (1980): p. 35

16Porter (1980): pp. 35 and 41

17Schinzer (1998): p. 6

18Kim/Mauborgne (1999): p. 45