Intellectual Capital The Management Interview From Brawn to Brain: In the ring with the world champion of intellectual capital

Boston-based Thomas Stewart is among those leading the quest to understand the value and importance of intellectual capital. He is the author of The Wealth of Knowledge and Intellectual Capital: the New Wealth of Organisations and last year became the editor of Harvard Business Review, arguably the world’s best-known journal of business ideas and practice.

Stewart claims that the changes taking place (in re-thinking the role of capital) are as significant as the Industrial Revolution and that intellectual capital is an indispensable asset for any organisation. His column in Fortune magazine was largely responsible for championing the concept of intellectual capital and setting this new agenda. He talked with Stuart Crainer for Management magazine.

Very few companies appear to be making intellectual capital work. The same names keep cropping up. Is this reflection on the practicality of the concept?
You’d always like to find brand-new companies doing exceptionally interesting things. But it tends to be just small number of the usual suspects.

Intellectual capital is being implemented effectively by some companies. The Scandinavians, led by Denmark, are leading the way in reporting intellectual capital. But knowledge management is being implemented inefficiently in larger number of companies. To some extent the intellectual capital agenda has been captured by knowledge management to the detriment of both.

The difference between knowledge management and intellectual capital is basically the same as the difference between management and capital. Management is something you do to get more out of capital. Knowledge management has become the domain of the technologists, which is useful but not the be all and end all.

Is intellectual capital in danger of becoming just another management fad?
Surviving fad-dom is not trivial accomplishment. The definition of fad is that people start doing something without having reason for it. study by Forrester Research found that six out of seven companies undertaking knowledge management projects failed to calculate the return on investment. That’s definition of fad.

More money has been wasted than made in knowledge management so far. When things go wrong it’s usually because it has been introduced for faddish reasons. But I see more companies looking first to discover their knowledge business, their knowledge value proposition – what they know they can sell and how to sell it profitably – and then figuring out how to manage knowledge. That approach works.

So, the faddishness is disappearing. You can see it in the diminishing advertising pages of knowledge management magazines. Just throwing technology at it is over. That’s good because it creates the real opportunity, the opportunity that I write about: let’s find the knowledge and build the organisation around it to run profitable knowledge business. Too many companies have seen knowledge as an internal matter, making sure that everyone knows what everyone else knows. That’s good, but to what end?

If knowledge management is distraction what should managers be looking at?
The real question is what is the knowledge business? And then, tracking the knowledge business, building and acquiring the assets needed to make the business more profitable and effective. The wealth of knowledge is not found internally but in the markets.

We should look at what customers are buying and ask questions. Why are they shopping in our store? Why aren’t they buying from the competition? What do people purchase from us that is unique and valuable? What is customer paying for when he or she buys from us? The answer is some set of attributes including price, quality, breadth of product line and so on. But what created that broad product line, technical expertise or quality? What allows companies to offer low prices? It’s then you uncover knowledge, the knowledge assets that produce value.

Aren’t knowledge management and intellectual capital fighting against human nature? People are simply not very good at sharing.
One of the big questions in an organisation is how you get promoted. Many organisations that talk about knowledge, reward people for hoarding rather than sharing it. Until knowledge sharing is built into the reward systems and the culture it won’t change anything.

If, in an organisation, you ask question – can you help me with this? – you need to know that it is all right to ask such questions; that you have reasonable expectation of an answer; and know the best person to approach. Before they answer, the person questioned also faces number of barriers. Who is the person asking the question? Will they try to take credit for the answer? Will I get into trouble if I provide an answer?

There are many sociological and psychological issues that organisations need to surmount before knowledge starts flowing around. You can do what you like with technology but issues like politics, permission and power are extraordinarily important.

So organisations need to change for intellectual capital to be valued and to create value?
Radical changes in the structure of organisations are required. The law and economic theory say that company is bundle of assets. Information age fact says it is really beehive of ideas. That change has profound implications for how companies are set up and run – and how they compete. Companies exist to provide purpose, to be magnet for intellectual capital, to host conversations and house tacit knowledge, to offer warranty in terms of brand and reputation, and to perform financial and administrative services.

Are organisations changing?
The best companies in every industry have begun the process of identifying themselves with their ideas more than with their assets. Companies now share assets through outsourcing. Cisco owns less than handful of factories that actually make products. Most of its products are not touched by Cisco people. There are more and more joint ventures and alliances, odd hybrid structures, professional service firms going public to gain access to capital markets. There are all kinds of fuzzying of what were once fairly clear boundaries between one company and the next.

Intellectual capital is already being measured at national level. Is this helpful?
We know that knowledge is created when smart people talk to each other. Clusters are intense places of interaction. Governments can encourage that by looking at taxation and immigration to see what they can do to attract the brightest people in the world. Human brains have always been randomly distributed.

There are profusion of models and measures of intellectual capital. Will there be one dominant and accepted measure?
I don’t believe that there will ever be one measure. Every company needs to be measuring in some way what its knowledge assets are and how well it is investing in them and exploiting them.

Some people see knowledge as packaged goods. They want to know where to sign up to get some of it. They end up with cans of soup and no can openers. The right approach is not packaged goods but to start with an understanding of what knowledge matters most. You don’t have to have the same knowledge or knowledge assets as anyone else. If you do, you’re not unique.

Describe how intellectual capital can be managed?
First, you need to identify and evaluate the role of knowledge in your organisation – as input, process and output. How knowledge intensive is the business? Who gets paid for what knowledge? Who pays? How much? Does whoever owns the knowledge also create the most value?

Second, match the revenues found with the knowledge assets that produce them. What are the expertise, capabilities, brands, intellectual properties, processes and other intellectual capital that create value? What is the mixture of human capital, structural capital and customer capital assets

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