INTELLECTUAL CAPITAL MANAGEMENT AND ORGANIZATIONAL PRODUCTIVITY

INTELLECTUAL CAPITAL MANAGEMENT AND ORGANIZATIONAL PRODUCTIVITY

The general aim of this study is to investigate the relationship between intellectual capital management and organizational productivity.

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CHAPTER ONE

INTRODUCTION

1.1      Background of the Study

In today’s hypercompetitive world, the adage that “knowledge is power” has growing importance than ever before (Siegel, 2004). Organizations’ knowledge-based resources are becoming increasingly pivotal to their successful operation in parallel with the development of the global economy towards being more information-intensive. This implies that what an organization “knows” is often more critical than what it owns. According to the survey of corporate evolution with the 200 largest US manufacturing companies throughout the 20th century, only 28 firms have continued to exist (Louçã & Mendonça, 2002). In the 21st century, organizations encounter a more fierce and dynamic context that is described by the combination of globalization, advanced technology, shortened product life cycles, and network partnerships (Cardinal, 2001; Hayes, Pisano, Upton, & Wheelwright, 2004). Nowadays, under the new world economy, the prevailing managerial practices or techniques with a conventional strategic orientation such as cost-cutting, benchmarking, reengineering, and so forth are regarded inefficient and inadequate to reap competitive advantage (Teece, 2007). This posed an important question – what do firms do to survive?

In this respect, one important research line devotes considerable attention to intangible assets that are embedded in know-how and knowledge of manpower, databases, information technology, operating processes, customer relationship, brand, trust, and cultures (Andriessen, 2004; Kaplan & Norton, 2001). Capitalists’ basic orientation formerly was tangible assets such as land, machines, and factory. Nevertheless, an organization requires moving towards uniqueness as competition became increasingly global and intense (Andriessen, 2004). Instead of tangible resources, the uniqueness does stem from intangible assets that other competitors would not be able to readily imitate. In effect, recent accounting records have revealed that the linkage between the book value and market value of an organization has been continuously reduced (Cezair, 2008).

Every business requires resources in the form of physical, financial, and intangible assets. Lack of or inadequate resources of any kind may place a firm in a vulnerable position and might undermine its success. In this period of national as well as the global financial crisis, the study of the relevance of intangible assets has attracted much attention in the business management literature, because intellectual capital which is an aspect of the intangible asset has that exerting the influence of adding value to a firm and with its relational ability can facilitate the acquisition of other resources which promote the survival and profitability of a firm (Okafor, 2012). Intellectual capital refers to effort employees put into an entity in the form of intangible asset which includes knowledge assets such as patents, trademarks, copyrights, and other results of human innovations and thought. Collectively, it refers to all resources (human, structural and relational capital) that determine the value of competitiveness of an organization.

This underlines the role of the residuals, which are intangible resources that traditional accounting systems cannot easily capture in evaluating the achievement of the company. Knowledge-based theories, which itself derived from the resource-based view of the firm, argue that knowledge is the fundamental intangible asset crucial in gaining and sustaining competitive advantage because of its essence of non-substitutable, path-dependent, and difficult-to imitate (Alavi & Leidner, 2001; Argote, McEvily, & Reagans, 2003; Nonaka, 1994; Zack, 1999). Such stress on organizations’ knowledge, either in terms of resources embedded within an organization or those relied heavily upon its external networks, has driven entities into the public consciousness of the notion of “intellectual capital management”. Intellectual capital management (hereafter IC) encompasses the knowledge derived from the company’s manpower, from the competencies of the firm, and from the connections and interactions between an organization and its external parties such as clients, partners, and suppliers. Intellectual capital is defined as the value of organizational experience which is embedded in an organization’s process, course of actions, systems, and corporate structures (Edvinsson & Malone, 1997). Intellectual property, data accumulated in knowledge management procedure, as well as knowledge management practices which aim to capture the value of the company’s knowledge resources are also incorporated in the foregoing definition (Roos, Roos, Dragonetti, & Edvinsson, 1997).

As explained above, the effective uses of the intellectual capital management elements mainly consist of knowledge, relationships, and intellectual property is considered as the cornerstone for value creation in today’s hyper-competitive environment. Usoff, Thibodeau, and Burnaby (2002) asserted that the emergence of such critical factors induces organizations to launch innovative strategic planning approaches for the main purpose of capturing the contributions of such crucial elements. In this regard, one of the most important areas which have evolved in line with the emergence of Intellectual Capital is an organizational control system in general and Productivity Measurement System (hereafter PMS) in particular. In fact, an effective and robust Productivity Measurement System is a contributing factor to support the management team in controlling organizational performance to assess the extent to which strategic targets have been met (Usoff et al., 2002). According to Tayles, Pike, and Sofian (2007), intellectual capital is a major determinant of value creation nowadays, and therefore it is absolutely vital that the design and the nature of management accounting system need to be innovative adequately, whereby organizations would be able to capture the real value and contributions of such intellectual assets such as knowledge, associations, and intellectual property. However, there are a very few empirical studies directly on how the Intellectual capital has made a major breakthrough in the emergence of contemporary management accounting practices (mainly include design and nature of Productivity Measurement System) and practitioner-oriented literature has become a cliché (Roslender & Fincham, 2001; Tayles et al., 2007). In general, this study is aimed at connecting Intellectual Capital Management (IC) to Productivity Measurement System (PMS) (as one of the most prominent elements of the Management Accounting Control System) as well as linking both IC and PMS to organizational productivity. In other words, this research explores whether knowledge-intensive organizations have improved their PMS in parallel with the evolution of intellectual capital for the ultimate purpose of capturing the real value of such knowledge related assets. As Tayles, Bramley, Adshead, and Farr (2002) argued, managers in knowledge-intensive companies must employ innovative strategic management accounting techniques to a greater extent and place emphasis upon the assessment, valuation, and measurement of intellectual capital to prevent overlooking the firm’s most precious assets.

 1.2     Statement of the problem

Concerning the considerable significance of intellectual capital and knowledge resources as a cornerstone of competitive advantage, a variety of different academic fields have suggested the significant association between intellectual capital and productivity (Grindley & Teece, 1997; Menor, Kristal, & Rosenzweig, 2007; Subramaniam & Youndt, 2005). However, managers still experience ineffectiveness in the utilization of intellectual capital (Edvinsson & Sullivan, 1996). The absolute majority of the managers who participated in a survey carried out by the Economist and Accenture in 2003, asserted that handling intangible resources are considered as the fundamental driver towards competitive advantage. Nonetheless, most of the managers, i.e. 95 percent of the 120, contended that there is a total lack of a robust system in their companies to measure intellectual capital and the generated performance (Molnar, 2004). This issue, in turn, underlines this fact that theory and research seem to be ineffective so far in addressing how to explicate the nature of intellectual capital inside firms and the influence of the intangible resources on measurable productivity. In effect, a precise conceptualization and definition of intellectual capital still remain disputable despite the general consensus about the importance of intellectual capital as a cornerstone for value creation. For instance, Hudson (1993) narrows the scope of the concept to merely individual knowledge. Some other scholars incorporate organizational relationships, infrastructure, culture, routine, and intellectual property into the conceptualization of intellectual capital as well (Brooking, 1996; Roos and Roos, 1997).

With the above discussion and concerning the foregoing problem, unlike previous studies, this study endeavors to conceptualize the multidimensional and complex concept of intellectual capital by incorporating social capital as the fourth element along with other three general elements, namely human capital, relational capital, and structural capital. In addition, two antecedent variables or so-called drivers of intellectual capital i.e. organizational culture and trust, which originally proposed by Bontis (1999) as one of the seminal conceptualizations of intellectual capital framework, are empirically examined to determine their effect on the aforementioned four individual components of intellectual capital which in turn provides a more robust and comprehensive conceptualization of intellectual capital. In this respect, some recent scholars in the context of intellectual capital advocate the need for developing a model incorporating the antecedent conditions that are necessary for the effective intellectual capital development (Bratianu, Jianu, & Vasilache, 2011; Isaac, Herremans, & Kline, 2009; O’Brien, Clifford, & Southern, 2010).

Based on the premise of Resource-Based View (RBV) of the firm, the uniqueness of knowledge resources plays a vital part in the organization’s sustained capability to compete (Conner & Prahalad, 1996; Zander & Kogut, 1995). This, in turn, poses another central dilemma inside the organization which signifies that how to manage knowledge-related resources through which such competitive advantage driver is gained and sustained most effectively (Barney, 1991; Wernerfelt, 1984).  For example, creating competitive advantage could derive from generating and gaining new knowledge, diffusing it across the organization, assimilating it into existing knowledge, and, eventually, employing it in order to outperform competitors (Cohen & Levinthal, 1990; Kogut & Zander, 1992; Kusunoki, Nonaka, & Nagata, 1998). However, the literature suffers from the lack of sufficient understanding of such organizational procedures in relation to the handling of knowledge and intangibles. The main obstacle to achieving a more thorough comprehension can be directly attributable to the notion that knowledge resources are intrinsically intangible (Argote & Ingram, 2000). Due to the complexity in recognizing such intangible resources clearly and explicitly (Spender, 1996; Szulanski, 2000), there is an insufficient insight on how various kinds of intangible resources, and specifically intellectual capital, are managed by the organization. In the absence of such insight, nevertheless, it becomes impossible to accurately understand the procedures through which organizations expand their distinct knowledge, and consequently, the organization would largely remain a knowledge-based “black box” (Spender, 1996). This in turns raises the other concern that inspires current research. In spite of the intangible essence of intellectual capital, the organization possesses other more easily tangible characteristics which could be employed for the purpose of illuminating either the properties or exploit of its knowledge. In this respect, according to Turner and Makhija (2006), and especially helpful attribute of the organization is labeled as organizational control systems. “Regardless of how control systems are defined, they have a critical feature that has typically been overlooked in the literature: their ability to manage the flow of knowledge within the firm” (Turner and Makhija, 2006).

This, in turn, underlines the fact that organizations are not able to realize their benefits if their strategic resources, mainly include intellectual capital and knowledge assets, are not managed appropriately (Coff, 1997; Widener, 2006). According to Simons, Dávila, and Kaplan (2000), PMS, as one of the major elements of MACS, is perceived as a lever to support the management of strategic resources. Relevant information in relation to the organization’s underlying strategic assets is provided through PMS (Kaplan & Norton, 1996).  The maxim that “if you can’t measure it, you can’t manage it” (Kaplan and Norton,) signifies that organizational performance would be positively affected through the measurement of the organization’s fundamental critical success factors such as strategic assets and capacities. This implies that some of the advantages stem from intellectual capital may influence firm productivity indirectly through the emphasis put on the usage of PMS. As Kaplan & Norton (2001b) asserted, intangible assets seldom have a direct and immediate effect on productivity, instead they typically influence organizational outcomes via chains of cause-and-effect relationships involving two or three intermediate stages. Hence, it is also worth investigating the mediating role of social capital in the relationship between intellectual capital and productivity.

Furthermore, the evidence shows the inconsistencies of PMS literature findings and ambiguous results which may stem from the fact that there is considerable variability in nature and the extent to which firms apply PMS (Bourne, Mills, Wilcox, Neely, & Platts, 2000; Henri, 2006b; Usoff et al., 2002). Lee (1999) observed that more than half of the CFOs surveyed asserted that one of the major impediments to their companies’ success is attributed to their incapability of developing a systematic and robust PMS.  Usoff et al. (2002) claimed that the difference could be stemming from a firm attitude towards intellectual capital. It is argued that organizations that realize the significance of intellectual capital would employ innovative PMS to a larger extent to assist in managing and capturing such critical resources. Since intellectual capital is vital in today’s knowledge-intensive firms, it is necessary that the design and implementation of a PMS need to be innovative enough to capture the values and contributions of such intangible factors.

With all the above arguments, to conclude, this study intends to provide insights into the foregoing claim of Kaplan and Norton (1996, 2001b) and close the gap in the existing research through the collection and analysis of empirical data by examining whether there is a relationship among the level of intellectual capital, social capital, and organizational productivity within an organization.  More importantly, this study aims to investigate whether social capital would mediate the relationship between intellectual capital and organizational productivity.

Fig 1.1: Conceptual Framework showing the relationship between  Intellectual Capital Management and Organizational Productivity

Source: Edvinsson, Leif, & Malone, Michael S. (1997). Intellectual Capital: Realizing Your

Company\’s True Value by Finding Its Hidden Brainpower. Bhatti (2007) and Qureshi (2007) Organizational productivity.

This research study is consequently guided by the issues raised in the problem statement. The variables to be examined can be primarily put in two categories namely independent and dependent variables. The independent variable which will also be referred to the predictor variable in the study is intellectual capital management which is also operationalized with such dimension as human capital, structural capital, and relational capital. Literature about intellectual capital management provides several models that reflect a coincidence between authors. The most widely accepted one (Saint-Onge, 1996; Edvinsson & Malone, 1999; Petty & Guthrie, 2000; Bontis & Fitzenz, 2002; Ordóñezde Pablos,2003) shows intellectual capital management as consisting of three components: human capital; structural capital; and relational capital. On the other hand, the dependent variable which will be also referred to as the criterion is organizational productivity. This has also been operationalized with such measures as employee productivity, efficiency, and effectiveness, Bhatti (2007) and Qureshi (2007).

The moderating factor which is the social capital approach is also incorporated (Nahapiet & Ghoshal, 1998; Adler & Kwon, 2002; Macpherson & Holt, 2007; Zheng, 2010), understanding that social capital as the set of values, moral, rules, trust, and vision shared inside a group which becomes visible in the informal relationships that take place and make cooperation between members possible. Once its components have been articulated and set in motion, social capital becomes a facilitator for the knowledge creation process (Nahapiet & Ghoshal, 1998). These relationships that seemingly exist are represented in the conceptual framework as figure 1.1. 

1.3       Aim and Objectives of the Study

The general aim of this study is to investigate the relationship between intellectual capital management and organizational productivity. Furthermore, the specific objective the study intends to address includes;

• To analyze the relationship between human capital and employee productivity in an organization.
• To ascertain the extent of the relationship between human capital and effectiveness in work organization.
• To analyze the relationship between human capital and efficiency in an organization.
• To evaluate the relationship between structural capital and employee productivity in work organization.
• To evaluate the relationship between structural capital and effectiveness in an organization.
• To evaluate the relationship between structural capital and efficiency in a work organization.
• To analyze the relationship between relational capital and employee productivity in work organization.
• To analyze the relationship between relational capital and effectiveness in a work organization.
• To analyze the relationship between relational capital and efficiency in work organization.
• To evaluate the extent to which social capital influences the relationship between intellectual capital and organizational productivity in work organization.

1.4       Research Question/Hypothesis

This study will be essentially guided by the following research questions;

1. What is the relationship between the human capital dimension of intellectual capital management and employee productivity in the Port Harcourt telecommunication sector?
2. To what extent does the human capital dimension of intellectual capital management influence effectiveness in the Port Harcourt telecommunication sector?
3. In what way does the human capital dimension of intellectual capital management influence efficiency in the Port Harcourt telecommunication sector?
4. How does the structural capital dimension of intellectual capital management relate to employee productivity in the Port Harcourt telecommunication sector?
5. How does the structural capital dimension of intellectual capital management affect effectiveness in the Port Harcourt telecommunication sector?
6. How does the structural capital dimension of intellectual capital management affect efficiency in the Port Harcourt telecommunication sector?
7. How does the relational capital dimension of intellectual capital management influence employee productivity in the Port Harcourt telecommunication sector?
8. To what extent does the relational capital dimension of intellectual capital management influence effectiveness in the Port Harcourt telecommunication sector?
9. In what way does the relational capital dimension of intellectual capital management influence efficiency in the Port Harcourt telecommunication sector?
10. What influence does social capital have on the relationship between intellectual capital management and organizational productivity in the Port Harcourt telecommunication sector?

Research Hypotheses

The following hypotheses shall be postulated for validation or refutation at the end of the study;

Ho1:   The human capital dimension of intellectual capital management has no significant effect on employee productivity in the telecommunication sector.

Ho2:   The human capital dimension of intellectual capital management has no significant effect on effectiveness in the telecommunication sector.

Ho3:   The human capital dimension of intellectual capital management has no significant effect on efficiency in the telecommunication sector.

Ho4:   There is no significant relationship between the structural capital dimension of intellectual capital management and employee productivity.

Ho5:   There is no significant relationship between the structural capital dimension of intellectual capital management and effectiveness.

Ho6:   There is no significant relationship between the structural capital dimension of intellectual capital management and efficiency.

Ho7:   There is no significant relationship between the relational capital dimension of intellectual capital management and employee productivity.

Ho8:   There is no significant relationship between the relational capital dimension of intellectual capital management and effectiveness.

Ho9:   There is no significant relationship between the relational capital dimension of intellectual capital management and efficiency.

Ho10: Social capital structure does not influence the relationship between intellectual capital management and organizational productivity in the Port-Harcourt telecommunication sector.

1.5       Significance of the study

As the nation is clam shelled with uphill tasks of economic growth, organizations are in no way left out, ensuring that proper output is achieved through concerted research efforts aimed at stimulating organizational productivity in the industry. Therefore, this study is significant in the following ways:

1. It will provide organizations with information on the intangible assets as well as resources that shape long-run outcomes of organizational productivity. The aim of this study is that the outcomes, results, or findings should be beneficial to business owners, managers, and organizations especially in the locality where this study is being conducted. This is to enable them to understand the concept of motivation and its effect on productivity. It also gives an insight to managers and business owners on the importance of knowing their employees and ensuring adequate intellectual capital in their organizations.
2. It will assist managers and subordinate employees alike to be attitudinally and practically positioned to manage human capital, structural capital, relational capital, and cognitive social capital in a manner targeted at reaching the organizational goals.
3. The information from this research will add to the study of the knowledge and theories on the subject matter of intellectual capital management
4. Finally, the outcome of this study will pose a challenge for future researchers or students who may be interested in carrying out more research in this area and it will also serve as reference materials for students.

1.6       Scope of the study

The study scope shall be view in terms of content, geographical, and level analysis.

1. The content scope of the study reflects theoretical focus which is Intellectual Capital Management with its empirical referents and Organizational Productivity as well as its dimensions.
2. The geographical scope shall consider the telecommunication subsector I and 2 Port-Harcourt, Rivers State.
3. The level of analysis is macro which is the management level. The intellectual capital management is focused.

1.7       Limitation of the study

Consequently, the limitation of any field of study is magnified when realities of juxtaposing concepts and techniques of one culture into another. Although the study sample was primarily deemed to be representative of the telecommunication sector in Port-Harcourt, the generalizability of the results to another setting may be pretty difficult considering sectorial characteristics and the different regional characteristics. Furthermore, the organizational productivity measure may still not be contingent enough on the individual worker’s actual commitment, which might pore the problem of objectivity in measures in further works.

1.8       Definition of the terms

Intellectual Capital Management: Klein and Prusak (1994) defines as “packaged useful knowledge”. It mainly embodies knowledge, lore, ideas, and innovations (Sullivan, 2000). There is a strong consensus among intellectual capital researchers which intellectual capital falls into human capital, structural capital and relational capital despite the fact that they are not in agreement generally about the particular definition of IC (Bontis, 1998; Edvinsson  & Malone, 1997; Edvinsson, Roos, Roos, & Dragonetti, 1997; Edvinsson & Sullivan, 1996; Lynn, 1998; Stewart & Ruckdeschel, 1998).

Organizational Productivity: A measure of how efficiently and effectively managers use resources to achieve organizational goals. This study treats organizational productivity as effectiveness that is the degree to which a business is successful in meeting its predetermined goals or stated objectives (Mia & Clarke, 1999; Steers, 1977). Besides, productivity reflects the extent to which a company is implementing a suitable strategy successfully (Otley, 1999).

Human Capital: It is the dimension of intellectual capital which deals with human knowledge and its experience, which is based on other elements and which will influence a firm’s value by affecting the other elements. Added that human capital affects business performance through innovation capital, process capital, and customer capital.

Structural Capital: Structural capital is what remains in the organization when employees go home at night. It is another dimension of intellectual capital that is connected with the whole system of the organization (such as organizational culture and structure, organization’s operating process, and information system).

Relational Capital: Is defined as the formal and informal relations of an organization with external beneficiaries and their understandings about the organization and also the exchange of information between them and the organization. Intellectual capital is an organizational process and is critical to value-adding. Customer capital is all about the value an organization establishes for its customer; the satisfaction that turns customers on and retains their patronage.

Employee Productivity: is the rate at which employees effectively and efficiently discharge their duties.

Effectiveness: refers to a measure of how well workers’ productivity levels meet the set goals and objectives of the organization.

Employee Effectiveness: is a qualitative characteristic that indicates the extent to which job-related issues are addressed and the magnitude at which predetermined goals and objectives are achieved by an employee.

Efficiency: can be derived from the relationship between inputs and outputs, and refers principally to the degree at which outputs are realized while minimizing costs associated with the production

Employee Efficiency: refers to the ability of an employee to do what is actually produced or performed with the same consumption of resources

1.9 Organization of the study

This research work shall be organized into five chapters which are summarized as follows:

Chapter One: This is the introductory chapter that includes the background to the study, statement of problems, the purpose of the study, the significance of the study, research questions, the hypothesis that will be tested, and the scope of the research work.

Chapter Two: This chapter focuses on a different write up of scholars which will be looked into, literature reviews and various theories in the field of compensation management will be sited.

Chapter Three: In this chapter, the research methodology will be analyzed. Methods used in carrying out the research and the population size are also inclusive.

Chapter Four: This is the chapter where data collected from the questionnaire will be analyzed and it will involve the use of some mathematical calculations and statistical tools.

Chapter Five: This is the last chapter of the research work, and it includes a discussion of result, conclusions, and recommendations for future purposes.